Most HR conversations about "key employees" are really about retention. Who are the people we can't afford to lose, and what will it take to keep them? Those are fair questions, but they aren't what the law means by the term. Under ERISA and the Family and Medical Leave Act, "key employee" is a precise legal designation with specific thresholds and specific consequences. Conflating the two leads to compliance mistakes and retention conversations that miss the point.
How ERISA Defines a Key Employee Under Internal Revenue Code Section 416, a key employee is an employee who, at any point during the year, is one of the following: an officer making more than a specified threshold ($230,000 for 2026), a 5% owner of the company, or a 1% owner making more than $150,000. The test applies to qualified retirement plans and determines whether a plan is top-heavy.
If more than 60% of plan benefits belong to key employees, the plan is top-heavy and has to meet additional vesting and minimum benefit requirements. Small companies hit top-heavy status often because owners and executives make up a large share of total plan assets.
How FMLA Uses the Key Employee Designation Under FMLA , a key employee is a salaried employee in the top 10% of compensation at a worksite. The designation matters because employers can deny job restoration after FMLA leave for key employees in narrow circumstances, specifically when restoring them would cause substantial and grievous economic injury to the company.
The denial isn't automatic. Employers have to notify the employee of their key employee status when they request leave, explain the potential consequences, give the employee a chance to return to work, and demonstrate the economic injury. Most employers don't use the key employee exception because the threshold is high and the documentation burden is real.
What Counts as Substantial and Grievous Economic Injury? Substantial and grievous economic injury isn't just the cost of temporary replacement. It's the cost of permanently restoring the employee, measured against the ongoing damage that restoration would cause. Courts read it narrowly. A temporary hardship is not enough.
Why the Two Definitions Matter Together The overlap between the ERISA and FMLA key employee definitions is small but real. A senior executive might qualify under both: as a top-10% earner at their worksite for FMLA and as an officer over the $230,000 threshold for ERISA. That doesn't mean the two designations trigger together. They apply independently, for different purposes, with different consequences.
The retention meaning of "key employee" has nothing to do with either law. A mid-level engineer who holds institutional knowledge about a critical system might be a key employee in the retention sense and not meet either legal threshold. HR teams need to be clear which definition is at issue in any given conversation.
Applying the Key Employee Framework to 2026 Compliance The 2026 thresholds for key employee status under ERISA are $230,000 for officers and $150,000 for 1% owners. Those numbers get adjusted periodically for inflation and sit alongside the separate highly compensated employee threshold of $160,000 used in other non-discrimination tests. Check the IRS retirement plan cost-of-living adjustments each year to confirm current thresholds.
For FMLA purposes, the key employee test runs at the worksite level: top 10% of salaried employees at the specific worksite, not companywide. Employers that want to preserve the option to deny restoration need to identify key employees at the start of each leave request and provide the required written notice. Skipping the notice forfeits the defense. The DOL FMLA compliance page has the current regulatory details.
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