Updated October 1, 2026. Quick answer: For 2026 the pay threshold in the highly compensated employee (HCE) definition stays at $160,000. IRS Notice 2025-67 says it remains $160,000, and the test looks at the prior year’s pay: an employee is an HCE if they owned more than 5% of the business at any time in the year or the year before, or earned more than the threshold the year before.
2026 plan-testing figures
| Item | 2026 amount |
|---|---|
| Highly compensated employee pay threshold | $160,000 |
| Key employee (top-heavy test) threshold, up from $230,000 | $235,000 |
| Annual compensation limit, up from $350,000 | $360,000 |
Notice 2025-67 says “The threshold used in the definition of “highly compensated employee” under section 414(q)(1)(B) remains $160,000.” It also says “The threshold under section 416(i)(1)(A)(i) concerning the definition of “key employee” for top-heavy plan purposes is increased from $230,000 to $235,000.”
Who counts as highly compensated
The Internal Revenue Code defines the term as “was a 5-percent owner at any time during the year or the preceding year”, or who, for the preceding year, earned more than the threshold and, if the employer chooses, “was in the top-paid group of employees for such preceding year”. The top-paid group is “the top 20 percent of the employees when ranked on the basis of compensation paid during such year”. For the 2026 plan year, 2025 pay decides the pay test. Publication 560 states the threshold is $160,000 for both 2025 and 2026.
Why it matters for your 401(k)
The IRS says “If you are a manager, owner, or highly compensated employee, your plan might need to limit your deferrals to pass nondiscrimination tests.” That plan limit can be lower than the $24,500 federal deferral limit. Check your plan’s testing results with the administrator before assuming you can defer the full amount.
Common mistakes
- Using this year’s pay. The test looks at the preceding year’s compensation.
- Assuming only high earners qualify. A 5% owner is highly compensated at any pay level.
- Treating the federal limit as your plan’s limit. Testing can cap an HCE’s deferrals lower.
Related: the 2027 highly compensated employee page, the 401(k) limits page, the 2026 retirement numbers hub, and the 2026 401(k) limits.
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Answer againSources
- IRS Notice 2025-67, 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living: https://www.irs.gov/pub/irs-drop/n-25-67.pdf
- 26 U.S.C. 414, definitions and special rules (U.S. Code text, Cornell Legal Information Institute): https://www.law.cornell.edu/uscode/text/26/414
- IRS Publication 560, Retirement Plans for Small Business (edition for 2025 returns): https://www.irs.gov/publications/p560
- IRS, Retirement topics: 401(k) and profit-sharing plan contribution limits: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Sources: the primary documents linked above, read on October 1, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.