For employer-sponsored, tax-advantaged retirement plan purposes, anyone who is a 5% owner of a company or who received more than $110,000 in compensation in 2010 (the compensation limit is adjusted annually). If the employer chooses, a highly compensated employee may also be defined as any employee whose pay is in the top 20% of compensation for that company.

When a company contributes to a defined-benefit or defined-contribution plan for its employees and those contributions are based on the employee's compensation, the Internal Revenue Service wants the company to minimize the discrepancy between the retirement benefits received by highly compensated and lower compensated employees. If the difference is too great, the company can lose the tax deduction it gets for the retirement plan.