For the 1% owner test, what compensation threshold must an individual exceed to be considered a key employee?

To determine whether an individual qualifies as a key employee under the 1% owner test, it's important to look at the compensation threshold set by the Internal Revenue Service (IRS). A key employee is generally defined as one who owns at least 5% of the business or has a certain level of compensation that differentiates them from other employees.

For the 1% owner test specifically, the threshold that must be exceeded is $150,000 in compensation for the prior plan year. This figure is significant as it helps to define the group of employees who hold substantial decision-making power or influence within the organization. The reason the $150,000 threshold is particularly relevant is that it represents the IRS's established cutoff for identifying highly compensated individuals within a 401(k) plan context, ensuring that only those employees who contribute notably to the company are classified as key employees.

Understanding this threshold is crucial for compliance purposes, particularly when measuring retirement plan contributions, eligibility, and nondiscrimination testing under regulations governing qualified retirement plans.