HCE threshold

[Kevin C]

... since the IRS has already made its position public in pub 560.

At the bottom of page 3 of Pub 560, it says:

"What this publication does not cover. Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it does not contain all the rules and exceptions that apply to these plans. You may also need professional help and guidance."

That doesn't sound like IRS guidance to me.

This thread has been amusing, but I'm out of here, too.

[Guest non-tax pro]

I contacted the IRS and received the following White Paper on COLA indexing. Using it with HRA 3448 2001 revision it appears that the Pension Handbooks are wrong and missing a year's indexing for HCE threshold.

Publication 560 appears correct (i.e. original $80,000 HCE threshold becomes $95,000 for 2005 tax year using 2004 gross income for the look-back year compliance test).

For history buffs...the original act appears to use 1986 for look-back year compensation with 1997 $75,000 HCE threshold. So it looks like the Pension Handbooks have been wrong for years. Always count on Academic's to misapply things!

2006_Section_415_White_Paper.pdf

[stephen]

I still don't buy it-

The attachment refers to the 2005 limit for HCE determination as $95,000. However, it does not discuss the fact that when looking at HCE compensation you look at the look back year 2004 and use $90,000.

I stand behind my original post.

[ERISAnut]

In order to be successful in any operation, you must have a process by which potentially complicated issues are made simple. It this forum, it seems as if a rather simple issue has been made complicated.

In any HCE determination, you must first define the significance of a "Lookback Year" and how it is used in making the determination. The "Lookback Year" is simply the 12 calendar months prior to the 1st day of the plan year.

Secondly, you must define what the requirements are for the "Lookback Year" (in the case of compensation or ownership) and the Current Year (in the case of ownership). All amounts from the $80,000 to the currently indexed amount of $100,000 applies to when that year is the "Lookback Year".

How is this complicated?

[WDIK]

How is this complicated?

Because the government is involved.

[ERISAnut]

The term "government involvement" would seem to endorse a concept based primarily on rhetoric; not reality. The rules aren't complicated; but detailed.

Algebra used to be difficult; until I learned it. This same concept applies to any craft. Pension plans are not an exception. Try taking a little time to piece the rules together.

[WDIK]

Actually, the term "government involvement" would seem to endorse a concept based primarily on humor;

[ERISAnut]

I've often wondered about the difference between humor and sarcasm.

Another useless debate

[Guest non-tax pro]

In order to be successful in any operation, you must have a process by which potentially complicated issues are made simple. It this forum, it seems as if a rather simple issue has been made complicated.

In any HCE determination, you must first define the significance of a "Lookback Year" and how it is used in making the determination. The "Lookback Year" is simply the 12 calendar months prior to the 1st day of the plan year.

Secondly, you must define what the requirements are for the "Lookback Year" (in the case of compensation or ownership) and the Current Year (in the case of ownership). All amounts from the $80,000 to the currently indexed amount of $100,000 applies to when that year is the "Lookback Year".

How is this complicated?

So what's your point? You're about as clear as mud. Please explain in terms of 2005 calender plan year. (i.e. you would use 2004 compensation vs. $95,000 or $90,000; the forum tends to believe $90K, but the HRA language and indexing factored to the original $80K yields $95K for 2005 plan year testing which in turn uses 2004 compensation per the IRC's wording -- I think where most people lose it is that they tie the indexed $80K to the look-back year's tabular threshold value instead of the correct plan year's threshold value). But I'm open to being corrected, just not conjecture.

[ERISAnut]

My point is that the answer is so simple and never presented itself as a problem to me. Everyone has a choice as to whether things will be easy; or real easy.

I didn't put too much into answering the question as we are looking a over 3 pages of information on one of the simplest topics in the pension industry.

[Guest mjb]

ENut: If the topic is so simple what is the lookback amount in the 2006 plan year? Or if you prefer, 2005.

[ERISAnut]

The lookback year is the 12 month period immediately preceding the first day of the new plan year. The limit that would apply would be the limit in place on the 1st day of the lookback year.

Hence, in any plan year that begins in 2006, the 1st day of the lookback period would have began back in 2005. The limit for 2005 is $95,000.

When you apply this same concept to the 2007 plan year, the 2006 limit will be $100,000.

Is it getting simple to you yet?

[Guest Pensions in Paradise]

ERISAnut, are you related to FLMaster by chance?

[ERISAnut]

Yes.

[Guest non-tax pro]

The lookback year is the 12 month period immediately preceding the first day of the new plan year. The limit that would apply would be the limit in place on the 1st day of the lookback year.

Hence, in any plan year that begins in 2006, the 1st day of the lookback period would have began back in 2005. The limit for 2005 is $95,000.

When you apply this same concept to the 2007 plan year, the 2006 limit will be $100,000.

Is it getting simple to you yet?

Okay, thank you. Now I clearly understand your opinion basis is status quo.

But check out the law's wording and indexing basis. I think you'll find you're missing a year's inflation by applying the look-back year's threshold when the law clearly states to use the index times $80K for the evaluation year. There's nothing in the law that says you're to use the look back year's threshold vs. the look back year's compensation (this would make intuitive sense, but the $80K basis is a plan year threshold indexed and restated in the plan year -- i.e. the first year using $80K was 1997 and the compensation compared to it was from 1996; so how did we evolve from that to using 2004's $90K vs. 2004's compensation for a 2005 plan year test?)

I'm finding that this is a common misapplication of monkey see monkey do (must be Business majors . I've also found that most plan administrators can't or won't think for themselves or are too lazy to research. It's much easier and safer to accept the lower amount for plan administrators (although they're missing out on commissions for the amounts returned which for our company was significant). With the recent higher inflation more plans keep failing because if you use the look-back indexing you're a year behind the curve and not rising quick enough with current rates. The plan customers would sure like the higher threshold's that should be applied. The sad part is that Congress dropped the threshold from $100K in 1996 and we're just getting back there. $100K ain't highly compensated in our market.

I was hoping to get a better education. But I guess I'll have to wait for the official Treasury response.

[ERISAnut]

I see your point.

If you look at the $80,000 limit in 1997, that limit applied to 1998. From the onset, it was $80,000 for a while. So it never jumped. When you see the 100,000 for 1996, that was for the 1996 determination. It was then the law changed to use the lookback year (SBA '96). So, 1996 would look like 100,000/80,000 where 100,000 was used for the 1996 determination and 80,000 was used for the 1997 determination.

But that 80,000 was in effect for several years afterward.

[Guest mjb]

Q 1 Why isnt 1997 the effective date for the 414(q)(1) amendments to determine the look back year amount of $80,000 as provided in the statute? In any succeeding year the change in the look back amount effective for that year would be applied to the prior plan year, e.g., in the 2000 plan year the look back amount was raised to 85,000 for the prior year (1999).

Q2 Why are you opposed to the using 95k as the look back amount in 2005 plan year and 100k in 2006 as provided in pub 560?

Q3 Why would the IRS provide a cola amount effective in 2006 for the look back year that would not apply until the 2007 plan year? I dont know of any other cola amount, income, estate or pension published by the IRS that is not effective for the same year.

[stephen]

Q4 Why is the 415 limit used the one effective at plan year end not plan year beginning as all of the other limits? (Perhaps because not all things in the complicated world of pernsion law make sense.)

It's a good thing this is complicated. I think of it as job security.

[Guest non-tax pro]

I see your point.

If you look at the $80,000 limit in 1997, that limit applied to 1998. From the onset, it was $80,000 for a while. So it never jumped. When you see the 100,000 for 1996, that was for the 1996 determination. It was then the law changed to use the lookback year (SBA '96). So, 1996 would look like 100,000/80,000 where 100,000 was used for the 1996 determination and 80,000 was used for the 1997 determination.

But that 80,000 was in effect for several years afterward.

John Heil at the Treasury is responsible for the indexing. He can give you a full explanation. But the short answer is the threshold doesn't go up until it hits at least $5,000 for HCE. It may take several years cumulation to surpass this.

P.S. The static years caused a lot of confusion for me because you couldn't tell when the indexing was applied to look-backs, etc. or started. I think this is where people started getting off track. The White Paper helped clear this up.

[Guest mjb]

Enut: your simplistic analysis of the effective date for the look back $ amount in your 4/27 4:54 post would be correct if it was consistent with the effective date language for the revisions to IRC 414q that were made in 1996. However, Sect 1431(d) of the SBJPA provides that the amendments to section 414q1 shall be effective for 1997, except that in determining whether an employee is a highly compensated employee for years beginning in 1997, such amendments shall be treated as having been in effect for years beginning in 1996. Thus for the 1997 plan yr the initial lookback amount was 80,000 of comp paid in 1996 (as amended by 414q1B), since under the effective date language the 80k look back amount was in effect for 1996, not 1997. In 1998 the look back amt was 80k comp paid in 1997, in 1999 the lookback amount was 80k comp paid in 1998, in 2000 the lookback amount was 85k comp paid in 1999 (after cola increase) and so on for each suceeeding year to 2006 when the look back amount is 100k paid in 2005.

This is why IRS notice 2005-75 states that the cost of living adjustments effective for 2006 used in the definition of HCEs under 414q1B is increased from 95k to 100k. q1B defines the look back amount for 2006 which is 100k comp in 2005 and is consistent with the HCE amounts published in pub 560.

[ERISAnut]

Enut: your simplistic analysis of the effective date for the look back $ amount in your 4/27 4:54 post would be correct if it was consistent with the effective date language for the revisions to IRC 414q that were made in 1996. However, Sect 1431(d) of the SBJPA provides that the amendments to section 414q1 shall be effective for 1997, except that in determining whether an employee is a highly compensated employee for years beginning in 1997, such amendments shall be treated as having been in effect for years beginning in 1996. Thus for the 1997 plan yr the initial lookback amount was 80,000 of comp paid in 1996 (as amended by 414q1B), since under the effective date language the 80k look back amount was in effect for 1996, not 1997. In 1998 the look back amt was 80k comp paid in 1997, in 1999 the lookback amount was 80k comp paid in 1998, in 2000 the lookback amount was 85k comp paid in 1999 (after cola increase) and so on for each suceeeding year to 2006 when the look back amount is 100k paid in 2005.

This is why IRS notice 2005-75 states that the cost of living adjustments effective for 2006 used in the definition of HCEs under 414q1B is increased from 95k to 100k. q1B defines the look back amount for 2006 which is 100k comp in 2005 and is consistent with the HCE amounts published in pub 560.

Wow. If you think the compensation limit for an HCE where 2005 is the lookback year is $100,000, then you will obviously never be an HCE in our industry.

[Guest non-tax pro]

Wow. If you think the compensation limit for an HCE where 2005 is the lookback year is $100,000, then you will obviously never be an HCE in our industry.

That's a problem with our company....about a third of our staff is over the HCE threshold and we're not small. We're in a high paid modest benefits industry (benefits have been trimmed to remain competitive with off-shore labor, so safe harbor attributes are out; and there's no pension plan so there's a strong interest to maximize 401k).

The government's ADP testing has made this far too complicated. There's already a maximum 401k elective deferral amount that prevents HCE's from putting an unfair amount in just to reduce tax burden. [Personally I'd rather see the Canadian system where it's unlimited and who cares what you make -- you can sock it away or pay the taxes.]

[Mike Preston]

Unlikely to satisfy mjb, but here is another nail in the coffin of his interpretation:

IRS Q&A – 2005 ASPPA ANNUAL CONFERENCE

Q34: We had thought the compensation threshold for Determining HCE status was settled a long time ago but noted some recent IRS publications seemed to throw open the issue once again. For purposes of defining who is an HCE in 2005, without regards to the ownership portion of the definition, is it still the case that you examine the lookback year (2004) compensation and use the threshold in effect IN THE LOOKBACK YEAR? For example, anyone who earned at least $90,000 in 2004 is HCE in 2005 (assume no top paid group election ). In other words, does the IRS still agree that the $95,000 comp threshold for determining HCE would only be effective for the the 2005 lookback year and therefore would only be used when testing HCE status for the 2006 year?

A. Yes.

[stephen]

Hmmmmmmmm. Perhaps they are referring to the error in Pub. 560...

[Guest mjb]

Mike-If the IRS was so sure in 2005 that the lookback amount in 2005 is 90 why did they repeat the mistake made in the 2004 edition of Pub 560 which in the 2005 edition uses 95k as the previous year's comp to determine an HCE (and increases to 100k in 2006).

Why is the unattributable information (for which no cite was provided) that you receive at ASPPA meetings more reliable than information that the IRS provides in taxpayer publications?

Have you ever considered that mayble your IRS information is merely different than the information provided to other persons instead of being correct since you cant rely on it?

The question is are you nailing yourself in a coffin by relying on unattributable statements made by the IRS as authority for doing calculations involving HCEs?