Are nonresident aliens considered employees for HCE determination?

Nonresident aliens are not considered employees for the purpose of Highly Compensated Employee (HCE) determination. The determination of HCEs is based on the employee’s compensation and related factors predominantly concerning U.S. citizens and resident aliens. Nonresident aliens generally do not fall under the same evaluation criteria, as their compensation may not be fully taxable or included in the same context for benefits under U.S. tax law and retirement plan regulations.

The HCE definition typically focuses on individuals who own more than 5% of the business or earn above a specific compensation threshold within the current year or the preceding year. As nonresident aliens are not treated the same as resident employees, their compensation is generally excluded from the HCE calculation, ensuring that the determinations reflect only those employees who have a significant presence and compensation in the U.S. workforce.

This understanding is critical in ensuring compliance with plan testing and maintaining the tax-advantaged status of retirement plans, as it helps avoid unnecessary discrimination testing issues.