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Highly Compensated Employee (HCE)
Practical Law Glossary Item 9-501-8255 (Approx. 4 pages)
Glossary
Highly Compensated Employee (HCE)
For employee benefits purposes, any employee who either:
- Was a 5% owner of the employer at any time during the year or the preceding year.
- Had compensation in excess of $150,000 in 2023 for determinations in 2024, or in excess of $135,000 in 2022 for determinations in 2023, and, if the employer so elects, was in the top-paid group of employees for the preceding year.
Special rules apply for aggregating entities for determining the employer, the compensation to be used in the determination, treating former employees as highly compensated and for excluding certain types of employees (26 U.S.C. § 414(q) and 26 C.F.R. § 1.414(q)-1T).
For model HCE language to be included in a qualified plan, see Standard Clause, Plan Language, Definition of Highly Compensated Employee.
For Fair Labor Standards Act (FLSA) purposes, an employee classification exempting certain highly paid employees from the FLSA's minimum wage and overtime pay requirements.
To qualify for the highly compensated employee (HCE) exemption under the FLSA, each employee must satisfy the following:
- The employee must earn a total annual compensation of at least $107,432, which must include at least $684 a week paid on a salary or fee basis. Total annual compensation:
- may also include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period; and
- does not include board, lodging, or other facilities, payments for medical or life insurance, contributions to retirement plans, or the cost of other fringe benefits.
Employers may make one final catch-up payment during the last pay period of, or within one month after the end of, the 52-week period if the employee's total annual compensation for that period does not equal at least the required minimum. - The employee's primary duty includes performing office or non-manual work.
- The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee (also referred to as the EAP exemptions).
On April 23, 2024, the DOL announced a final rule to increase the standard salary level for the EAP exemptions and the total annual compensation threshold for the HCE exemption. Two incremental increases are scheduled to take effect July 1, 2024 and January 1, 2025, with subsequent updates at three-year intervals. For more on the DOL's final rule, including prior rulemaking and legal challenges to the final rule, see Minimum Salary for the Executive, Administrative, and Professional Exemptions Under the FLSA: DOL Rulemaking Tracker.
For more information on the exemption requirements for highly compensated employees under the FLSA, see FLSA White Collar Exemptions Checklist: Highly Compensated Employee Exemption.
State or local law may provide for the same or a similar exemption or may prohibit certain exemptions. For more information on state wage and hour laws, see Wage and Hour Claims Toolkit and Wage and Hour Laws: State Q&A Tool.