How to identify key employees and HCEs for 2025 non-discrimination testing
Learn how to identify key employees and highly-compensated individuals for 2025 non-discrimination testing using the latest information from the Internal Revenue Service.
2025 Non-discrimination Testing
Mid-Year Sampling
For sponsors of Section 125 Premium Only Plans and/or Health Reimbursement Arrangements, to conduct 2025 non-discrimination testing is not required until the end of the plan year — but it is usually a good idea for employers to conduct a sample test mid-year. That leaves time to adjust anything that might be starting to head in the wrong direction.
Whatever timing an employer chooses to conduct non-discrimination testing, knowing how to identify the following two classes of employees is important for accurate testing.
Key Employees
A Key Employee is one who in the prior plan year* met one or more of these criteria:
- An officer of the company earning $230,000 or more annually;
- A 1% owner with a salary of $150,000 or more; and,
- A 5% (or more) owner regardless of salary.
*If your plan is in its first year, use the current plan year for determining Key Employees.
Highly-Compensated Employees
The Plan may not favor Highly-Compensated Employees (HCEs). An HCE for 2025 is defined as:
- An officer in the prior year;
- A 5% (or greater) shareholder in the current or prior year;
- An employee paid $160,000 or more in the prior year; and,
- An employee whose salary is in the top 20% of all employees.
2025 Plan Year
Looking ahead to 2025 plan year definitions, the Key Employee salary increases to $230,000 while the salary for HCEs rises to $160,000.
More help to conduct 2025 non-discrimination testing
You will find this and other non-discrimination testing information in your Section 125 or Health Reimbursement Arrangement plan document package.
