Key Employees: Definition and Their Influence

Key Employees

Factors that determine key employees

While key employees are typically those who perform at a high level, there are a number of additional factors that can be taken into consideration to more accurately identify your company’s key personnel. These characteristics tend to characterize key employees within an organization:

What are key employees?

Key employees, also known as keymen or key personnel, are those who play a significant ownership or decision-making role within an organization. They essentially have a significant role in a companys operations. Employees who consistently go above and beyond the call of duty are referred to as key personnel.

Key personnel frequently receive high salaries or other forms of compensation. Employers occasionally provide key workers with special benefits to entice them to join the company or to motivate them to stay with it. They might be given extra perks like the chance to save for retirement or work-life balance, both of which might keep them interested in their company.

What is a highly compensated employee?

Key employees and highly compensated employees share a number of characteristics in many jurisdictions. In fact, a large number of highly compensated workers can be regarded as key workers. However, compared to key employees, highly compensated workers typically have a lower threshold for compensation.

The federal government uses a compliance test to assess whether a company treats all of its employees equally with regard to their 401(k) plan by looking at the contributions made by highly compensated employees, just like it does with key employees. The IRS defines highly compensated employees as follows:

How does the IRS define key employees?

Key employees are defined somewhat differently by the IRS and other government agencies. Particularly in relation to company-sponsored contribution retirement plans, the IRS uses the term. According to the IRS, a key employee is someone who satisfies one of the following criteria:

The aforementioned standards, also known as nondiscrimination tests, are used by retirement plans to make sure that businesses provide benefits proportionately to a large group of employees and not just to the highly compensated or key employees of the sponsoring company. It’s important to note that the IRS refers to all other employees as non-key employees if they don’t meet any of these requirements. Former key employees are those who once held the title but are no longer employed.

Why is it important to identify key employees?

You can tell if a key employee has a 401(k) retirement plan that is top-heavy when you identify them. When key owners hold more than 60% of the value of the plan’s assets as of the last day of the most recent plan year, the 401(k) is said to be top-heavy. The employer has a lot to fix if key employees develop a top-heavy strategy. This means they have to create a balance. Employers typically must pay at least a 3% benefit to the accounts of the non-key or lower-paid employees still employed on the last day of the plan year if the top-heavy ratio exceeds 60%.

How does a key employee affect a company?

Key employees can have an impact on a company’s performance and overall operations because of their significant role within the organization. Key personnel can have the following effects on a business:

Securing capital

A company’s key employees may be able to raise capital through their employment or personal connections. For instance, if a key employee is a high-performing salesperson with a role related to a company’s sales channels, their performance may help the business maintain investor, shareholder, and customer interest.

Maintaining business operations

Some employers may view a key employee’s role as essential to their operation and overall infrastructure even if they don’t play a particularly visible role in relation to the general public or external business operations. For instance, a business may view a senior developer who is working on a brand-new product that is anticipated to generate significant sales as a key member of their team. In other words, the company wouldn’t make as much money without this important employee.


What is considered a key employee?

An individual who plays a significant ownership or decision-making role in the company is considered a key employee. Key employees are typically well-paid, either financially or in terms of benefits, or both. Special benefits for key personnel may also be offered as an inducement to work for the business and to remain with it.

Who is a key employee for 2021?

A Key Employee is someone who, during the prior plan year*, satisfied one or more of the following requirements: an officer of the company earning $185,000 or more annually; a 1% owner earning $150,000 or more annually; and a 5% (or more) owner regardless of salary.

What is a key person in an organization?

The term “key employee” or “keyman” refers to a significant employee or executive who is essential to the operation of the business and whose passing, incapacity, or absence could have disastrous effects on the business or organization.

Who is a key employee for 2022?

A 1-percent owner of the employer who receives more than $150,000 in annual compensation, or a 5-percent owner of the employer.

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