As explained in Section II, a Highly-Compensated Employee (HCE) is generally defined as any employee who is a more-than-5 percent owner of the business in the year of testing or the preceding year and/or an employee with compensation in excess of the specified dollar limit for the preceding year (this figure is indexed periodically by the IRS). The five percent owner rule applies to certain family members such as spouses, parents, children, and grandchildren (who work for the company regardless of pay level) because they are deemed through their relationship to share in ownership (Family/Entity Attribution). For more information, refer to IRC Section 318(a)(1) through (3).
A Non-Highly Compensated Employee (NHCE) is defined as one who does not meet the criteria of a Highly Compensated Employee.
