8786 / Who are considered key employees for purposes of the nondiscrimination requirements that apply to Section 79 plans?
For purposes of the nondiscrimination requirements that apply to IRC Section 79 plans (see Q 8785), a key employee is an employee who, at any time during the employer's tax year was:
(1) an officer of an employer having annual compensation greater than $235,000 in 2026. No more than the greater of (a) three individuals or (b) 10 percent of employees need to be treated as officers, but in any event no more than 50 individuals may be considered officers;
(2) a more-than-5 percent owner of an employer; or
(3) a more-than-1 percent owner, determined without considering those employees who are not counted in testing for discriminatory eligibility, having an annual compensation from an employer of more than $160,000 in 2026 .1
A key employee also is any former employee who was a key employee when he or she retired or separated from service.2
For purposes of determining corporate ownership, the attribution rules of IRC
Section 318 apply. Rules similar to the attribution rules apply to determine non-corporate ownership. In calculating attribution from a corporation, a 5 percent ownership test will apply rather than a 50 percent test.
In determining the percentages of ownership, only the particular employer is considered; other members of a controlled group of corporations or businesses under common control and other members of an affiliated service group are not aggregated. They are aggregated for purposes of determining the employee's compensation and in testing for discrimination.3
1. IRC §§ 79(d)(6), 416(i).
2. IRC § 79(d)(6).
3. IRC § 414(t); see also Temp. Treas. Reg. § 1.79-4T, A-5.