What is the maximum number of HCEs allowed in the top-paid group election based on rank by compensation?

The maximum number of Highly Compensated Employees (HCEs) allowed in the top-paid group election is indeed 20%. This designation is particularly significant because it helps plan sponsors determine which employees qualify as HCEs under the IRS rules when conducting nondiscrimination tests.

In a 401(k) plan, the top-paid group is often selected based on compensation rank, and it is meant to ensure that the plan remains compliant with nondiscrimination requirements. By limiting the top-paid group to 20%, the IRS aims to prevent plans from disproportionately favoring higher compensated employees when measuring benefit levels and contribution rates against non-HCEs.

This percentage ensures that a balance is maintained, allowing a structured method for analyzing whether plans are indeed providing equal benefit opportunities across all employee categories. The choice of 20% aligns with regulatory guidelines that promote equitable access and participation in retirement plans across different employee groups.