Key Employee


Key employee, in U.S. Internal Revenue Service terminology, is an employee classification used when determining if company-sponsored qualified retirement plans, including 401 defined benefit plans and 401s, are considered “top-heavy” or, in other words, weighted towards the company’s more highly compensated individuals.

Key Employee

What is a ‘Key Employee’

A key employee is an employee with a major ownership and/or decision-making role in the business. Key employees are usually highly compensated. They may also receive special benefits as an incentive both to join the company and to stay with the company.

Explaining ‘Key Employee’

“Key employee” is also a term used by the Internal Revenue Service in regard to company-sponsored defined contribution retirement plans to refer to an employee who owns more than 5% of the business, owns more than 1% of the business and has annual compensation greater than a certain amount or is an officer with compensation greater than a certain amount. There are other IRS and government rules that have different definitions of “key employee” for different purposes.

Further Reading

  • Method for combining loan with key employee life insurance – [PDF]
  • Is customer participation in value creation a double-edged sword? Evidence from professional financial services across cultures – [PDF]
  • The influence of the financial revolution on the nature of firms – [PDF]
  • Firm‐specific knowledge resources and competitive advantage: the roles of economic‐and relationship‐based employee governance mechanisms – [PDF]
  • When Congress Says' PIP Your KERP': Performance Incentive Plans, Key Employee Retention Plans and, Chapter 11 Bankruptcy Resolution – [PDF]
  • An empirical comparison of published replication research in accounting, economics, finance, management, and marketing – [PDF]
  • Governance, employees and CSR: Integration is the key to unlocking value – [PDF]