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.
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.