Which of the following statements is true regarding key employee definition?

The correct answer states that there are compensation and ownership criteria for defining a key employee. Under IRS regulations, a key employee is someone who meets certain thresholds regarding either ownership in the company or their compensation level. Specifically, key employees generally include those who meet one of two conditions: they own more than 5% of the business, or they are among the highest-paid employees in the organization, typically limited to the top 1% or top 40 highest-paid employees, whichever is less.

This definition is important for compliance with nondiscrimination rules in retirement plans, such as 401(k) plans, as key employees may be subject to different treatment in terms of plan contributions, benefits, or coverage testing. The focus on specific compensation and ownership criteria ensures a more nuanced evaluation of which employees hold significant influence or financial stake in the organization, thereby categorizing them appropriately.

This understanding makes it clear why the other options don't hold true. While some might think that only officers would qualify or that anyone with an ownership stake is considered a key employee, these assertions do not encompass the complete regulatory framework that includes compensation requirements. Additionally, the notion that only employees with more than 10 years of service qualify overlooks the broader criteria based on ownership and compensation levels that