Non-Highly Compensated Employee (NHCE)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 15, 2024

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Definition of Non-Highly Compensated Employee (NHCE)

A Non-Highly Compensated Employee (NHCE) is an employee who does not meet the income and ownership thresholds defined by the Internal Revenue Service (IRS) for Highly Compensated Employees (HCEs).

NHCEs play a significant role in employee compensation and benefits.

Understanding the definition of an NHCE is crucial for employers when designing compensation packages and ensuring compliance with regulations.

NHCEs are a vital component of the workforce, contributing to the success of an organization. Ensuring fair and equitable compensation for NHCEs is important for retaining talent, maintaining employee morale, and promoting a diverse and inclusive work environment.

Employers must recognize the importance of NHCEs in employee compensation to foster a thriving and productive workforce.

Purpose of Determining NHCE Eligibility

Income Threshold

The income threshold for determining NHCE status is established by the IRS and is subject to change annually. Employees who earn below this threshold are classified as NHCEs for the purposes of retirement plan testing and benefit eligibility.

Understanding the income threshold for NHCEs helps employers ensure compliance with regulations and provide equitable benefits for all employees.

Participation in Employee Benefits

NHCEs are eligible to participate in various employee benefits, including retirement plans, health benefits, and performance-based compensation.

Ensuring equitable access to benefits for NHCEs is essential for maintaining compliance with discrimination testing and promoting a fair work environment.

Employers should actively involve NHCEs in benefit plans to foster employee satisfaction and retention.

Role of Discrimination Testing

Discrimination testing is a process used to ensure that employee benefit plans do not disproportionately favor HCEs over NHCEs.

These tests play a crucial role in maintaining compliance with IRS regulations and ensuring that all employees have access to equitable benefits.

Employers must understand the role of discrimination testing in maintaining a compliant and inclusive workplace.

Purpose of Determining Non-Highly Compensated Employees (NHCE) Eligibility

NHCE Contributions to Retirement Plans

Types of Retirement Plans

NHCEs can participate in various types of retirement plans, including 401(k) plans, 403(b) plans, and SIMPLE IRAs. Each retirement plan has different features and requirements, making it important for employers to select the most suitable plan for their workforce.

Providing NHCEs with access to retirement plans promotes long-term financial security and employee satisfaction.

Contribution Limits for NHCEs

The IRS sets annual contribution limits for NHCEs participating in retirement plans. These limits are subject to change and are designed to prevent discrimination in favor of HCEs. Employers must be aware of these limits and ensure that their retirement plans adhere to them.

Understanding contribution limits for NHCEs is essential for maintaining compliance with IRS regulations and providing equitable benefits.

Matching Contributions for NHCEs

Some employers choose to offer matching contributions for NHCEs participating in retirement plans, providing an additional incentive for employees to save for retirement.

These matching contributions must adhere to specific rules and regulations to ensure compliance with non-discrimination requirements.

Employers should consider offering matching contributions for NHCEs to encourage retirement savings and enhance employee benefits.

NHCEs and Stock Options

Definition of Stock Options

Stock options are a form of employee compensation that grants employees the right to purchase company stock at a predetermined price, typically within a specified time frame.

Stock options can be an attractive benefit for employees, as they provide the potential for financial gains if the company's stock price increases.

Offering stock options to NHCEs can help attract and retain talent, as well as incentivize employee performance.

Stock Option Plans for NHCEs

Employers can offer stock option plans to NHCEs, allowing them to participate in the company's growth and financial success.

These plans must be designed to comply with regulations and ensure equitable access to stock options for all employees, regardless of their income level or position within the organization.

By including NHCEs in stock option plans, employers can promote a more inclusive and diverse workforce.

Importance of Stock Options for NHCEs

Stock options can provide NHCEs with an opportunity to share in the company's financial success, potentially increasing their overall compensation and encouraging long-term commitment to the organization.

Offering stock options to NHCEs demonstrates an employer's commitment to employee well-being and financial growth.

Incorporating stock options into the compensation packages of NHCEs can enhance employee satisfaction and retention.

NHCEs and Performance-Based Compensation

Definition of Performance-Based Compensation

Performance-based compensation is a form of employee remuneration that is tied to an individual's job performance, productivity, or the achievement of specific goals.

This type of compensation can be an effective motivator for employees, encouraging them to strive for better performance and results.

Offering performance-based compensation to NHCEs can help drive productivity and improve overall company performance.

Performance-Based Compensation Plans for NHCEs

Employers can design performance-based compensation plans for NHCEs that provide financial rewards for meeting or exceeding performance goals. These plans must be carefully crafted to ensure fairness, transparency, and compliance with regulations.

By implementing performance-based compensation plans for NHCEs, employers can encourage a culture of high performance and achievement within their organization.

Advantages of Performance-Based Compensation for NHCEs

Performance-based compensation can provide NHCEs with an opportunity to earn additional income based on their job performance, fostering a sense of ownership and responsibility in their work.

This type of compensation can also promote a results-oriented culture within the organization, where employees are motivated to contribute to the company's success.

Incorporating performance-based compensation for NHCEs can lead to increased job satisfaction, productivity, and employee retention.

NHCEs and Health Benefits

Eligibility for Health Benefits

NHCEs are typically eligible for employer-sponsored health benefits, including medical, dental, and vision coverage. Ensuring equitable access to health benefits for NHCEs is important for maintaining compliance with regulations and promoting a healthy workforce.

Employers should provide comprehensive health benefits for NHCEs to support their well-being and productivity.

Health Benefits Options for NHCEs

Employers can offer a variety of health benefits options for NHCEs, such as Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), or High Deductible Health Plans (HDHPs).

By providing a range of options, employers can help NHCEs select the most suitable coverage for their individual needs and circumstances.

Offering diverse health benefits options can improve employee satisfaction and contribute to a healthier workforce.

Employer Contribution to Health Benefits for NHCEs

Employers often contribute to the cost of health benefits for NHCEs, helping to make coverage more affordable and accessible. These contributions must adhere to specific regulations to ensure that health benefits do not disproportionately favor HCEs over NHCEs.

By contributing to health benefits for NHCEs, employers can demonstrate their commitment to employee well-being and promote a healthier work environment.

Conclusion

It is evident that NHCEs, or non-highly compensated employees, are integral to the success and prosperity of an organization.

By implementing effective compensation strategies that prioritize fairness and inclusivity, employers can create an environment where NHCEs feel valued and supported.

One of the key aspects of NHCE compensation is ensuring equal access to retirement plans. By providing robust retirement benefits, employers can help NHCEs secure their financial futures and ensure a sense of stability and security.

Stock options and performance-based compensation further incentivize NHCEs to perform at their best, promoting a culture of meritocracy and rewarding their contributions.

Additionally, offering comprehensive health benefits is vital in supporting the physical well-being of NHCEs. Access to quality healthcare can contribute to their overall satisfaction, productivity, and retention within the organization.

By addressing the specific healthcare needs of NHCEs, employers demonstrate their commitment to the well-being of all employees.

Non-Highly Compensated Employee (NHCE) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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