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HCE threshold


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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?

The IRS Q&A's are questions posed by ASPPA members and answered by high ranking officials at the IRS. Thus, I do not consider them unattributable. It is my understanding that any of the Q&A's that are answered in writing the IRS stand behind while the Q&A's answrewed from the podium are generally not as clear cut.

It seems this is one of the clear cut answers form the IRS.

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Guest mjb

Stephen: the IRS can only enforce/apply precedents that are legally published in accordance with IRS prodedures: regulations, Rev. rulings, notices, etc. The IRS cant enforce/stand behind any statements made in ASPPA publications because they are not documents issued by the IRS to the public but are materials published and edited by a private party that is not part of the IRS.( IRS officials cannot speak on behalf of the IRS at private meetings.) If you think about what you just said it would mean that in return for paying a fee to ASPPA you will receive inside information on taxation at ASPPA meetings not available to other taxpayers which is contrary to IRS policy. If you want to rely on the IRS you are better off downloading IRS publications for free.

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mjb, I agree with stephen that the ASPPA Q&A's are usually pretty well thought out.

Frankly, the wording of both the Code and the IRS guidance on this issue is so dramatically imprecise. I guess this sort of thing is inevitable when the change is foisted upon us and then the threshold is not modified for a number of years. The initial $80,000 threshold applies for three years, so the newness of the rule sort of evaporated before the uptick became important.

As I understand mjb's opinion the threshold for determining whether an individual is an HCE incremented to $85,000 "for 2000" such that compensation in 1999 of $85,000.01 was required to be an HCE "in 2000". I can tell you that my experience is that plans used $80,000.01 as the threshold of compensation needed in 1999 to be an HCE in 2000. Calendar year plans in all cases.

I have fired off an general information request to the IRS and, in about 1 or 2 milleniums, I'll post what the response was.

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Guest mjb

While I appreciate your attempt to get clarity on this difficult issue from the IRS, any explaination from the IRS will be worth bupkis if it does not incorporate the effective date language of section 1431(d) of SBJPA to look back years effective for 1996 (which was the problem in the 1999 info letter which relied on pre SBJPA regs and not the effecitve date language of 1431(d)). There is a simpler solution. In the cola notice for 2007 the IRS could state whether the 414q1B amount is intended to apply when 2007 is the determination year or when it is the lookback year. The statement of the 414q1B amount "effective" January 1, 2006 in the Notice 2005-45 is ambiguious to say the least.

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While I agree that your simpler solution would be best, if I get a letter saying that Pub 560 is wrong and that the threshold of compensation to be used in a lookback year (say, 2004) is the threshold as published for that year ($90,000) for the determination as to whether an individual is an HCE in the determination year (say, 2005) then I will be a happy camper, whether you are or not.

Actually, I'm already a happy camper, because I am 99.99999% sure that the above is accurate.

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Guest mjb

If u r a betting man I will take your odds for $10. Deal or no deal? As one of the more famious Californians recently said in a TV commercial aired on the East coast "go ahead, make my day. " Seriously, do you really think the IRS is going to issue one non binding document that reduces a tax benefit permitted in another IRS document issued to taxpayers for the last two years (in an election year no less)? I dont think there will be any definite answer until the IRS issues regs on the SJBPA amendments to 414q1B because of the potential revenue loss involved.

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Ah, the more things change, the more they stay the same. I just came across this discussion and quickly determined I agreed with Mike and didn't with mjb (mbozek). I didn't even know this was a questionable topic anymore despite the pub errors.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Aw, heck yeah! We ARE talking Monopoly money, right? How many sets do I have to supply you with to get up to 100 mil?

And we are talking about what the IRS thinks the right answer is (notwithstanding what the technically correct answer is).

You asked why the IRS threshold is not used until the next year, in that no other limitation is published in this manner.

This is because the compensation is a "lookback" year compensation, not a current year compensation.

Look at it this way, the whole purpose of the lookback year compensation was so that employers would know and be able to determine who is an HCE without surprises.

My guess is that the Blue Book has something to that effect. although I don't have time to check.

When push came to shove, the IRS decided that the only way to live up to the spirit of the rules was to make the lookback year compensation known at the beginning of the lookback year. In order to do that, we need to know that the $100,000 threshold just recently published is the lookback compensation for the 2006 year (that is, for the 2007 determination year).

I think, by the way, that if you look at the law itself, without this rationale, you do come up with your conclusion. In fact, it is somewhat trivial - if the base period was 9/30/96 and that applied to $80,000 for the 1997 detemination year, then crawling all dates forward by precisely 9 years results in a base period ending 9/30/2005, a published figure of $100,000 for the 2006 determination year.

I would need to do the actual calculations (from 9/30/1996 to 9/30/2005) under 415 to see if it results in a figure of just over $100,000 to see if this actually holds true.

But even if it does, as I said, the IRS has interpreted the law to mean that an employer should know the compensation that needs to be paid in the lookback year prior to the beginning of the lookback year.

My guess is that if a given employer chose to follow your line of reasoning and use, for example, $100,000 as the 2005 lookback year compensation for determining who is an HCE in 2006 that the IRS would have a hard time challenging it. Especially given the language of Pub 560.

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Guest mjb

If the IRS was so sure that the lookback rule was as you claim it is it would be a simple administrative procedure within the power of the IRS to issue a notice or rev rul stating this interpretation (and change the language in pub 560.) The fact that the IRS has not issued any pronuncement to that effect that is a binding intrepretation of the law in 6 years since the cola limits began to increase indicates that the IRS is not sure of how the cola provision applies since 414q1B was amended effective in 1996 (and the cola provisions of 415(d) were amended in 2001.) You need to consider another point. The IRS is conflicted - one group in the IRS believes the cola increase is to be applied as stated in Pub 560 and the IRS has a duty to inform the public. The other group believes as you do that the cola increase applies only when the year the cola increase is effective for becomes the look back year but isnt sure that the statutory language supports such a position. The elephant in the room is the IRS's failure issue any authorative pronouncement that concurs with your intrepretation.

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The better question is what reference are auditors using to determine the HCE limit for prior years. Reg. 1.401(k)-2 defines HCE with reference to 414q. 414q defines HCE under pre 96 regs which have not been amended for the change in determining the effective date for the look back year and the quarter ending in sept 1996 as the base period for future cola increases. The annual IRS Cost of living notice is to say the least ambigious as to the effective date for the lookback amount, leaving as the only authority Pub 560 and the 1999 information letter. However, the info letter incorrectly stated the effective look back year of the first cola increase as 2000 instead of 1999 because it appearently ignored the statutory effective date of the first lookback year as 1996. (The cola increase for the three year period from the end of the base period (sept 96) to sept 1999 was 6.3% which resulted in a $5000 increase effective for the fourth look back year.) Since under Sect 1431(d) of SBJPA 1996 was the first LB year (for the 1997 plan year), the 4th LB year was 1999 which results in 85k as the look back $ when 2000 was the determination year, not for the 2001 plan/determination year based on look back years beginning in 2000 as stated in the info letter. Moving the cola nos forward, in 2006 the look back amount is 100k for comp received in 2005.

If you disagree with my conclusion then provide your own analysis, not a reference to a book that doesnt provide any analysis as to how the lookback amount is calculated under the cola provision as amended by SBJPA.

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Guest Pensions in Paradise

Lets see, do I go with the analysis of one ERISA attorney, or do I go with what is written in EVERY SINGLE PENSION PUBLICATION I have ever seen? I'm amazed this thread is still alive.

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Lets see, do I go with the analysis of one ERISA attorney, or do I go with what is written in EVERY SINGLE PENSION PUBLICATION I have ever seen? I'm amazed this thread is still alive.

I think what mjb is saying, is that you should do your own analysis and then decide what to do for yourself.

It took me many messages before I decided to whip out the code and do my own analysis. To my amazement, there is no question that mjb's analysis is technically correct. In fact, it is trivial to confirm it, if you decide to do so.

However, I'm equally convinced that the IRS has decided that his analysis is incorrect for pension purposes and will be hard pressed to change what they have consistently communicated since 1999/2000, the first year when the threshold increased.

I think the best resolution would be a release from the IRS that says a plan sponsor is/was free to do it either way until plan years beginning a certain date XXX days after publication of the release, whereupon it switches to the proper methodology.

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This one rates a WOW.

mjb needs to come clean on this and admit he is wrong. Like Blinky said, any such ambiguities were clarified years ago. Yes, at conferences. Which lead to printed clarification in the text books we all rely upon.

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This one rates a WOW.

mjb needs to come clean on this and admit he is wrong. Like Blinky said, any such ambiguities were clarified years ago. Yes, at conferences. Which lead to printed clarification in the text books we all rely upon.

Andy, have you looked at the law and done your own analysis?

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Andy: You want me to admit that the substantial authority to determine the amount of comp for the lookback year under Sections 1431(d) of SBJPA and the Cola provisions of IRC 415(d) are incorrect because information provided by IRS officials at professional meetings which do not represent an official position of the IRS has been duly included in various text books. You, Blinky and the rest continue to ignore one glaring problem: there is no substantial authority under the IRC for limiting the cola amount as you believe is the law since the info letter is not authority, the annual cola notice does not support this position and the 414q regs have not been amended for SBJPA. The texts all replicate the same error by ignoring the effective date provision for the lookback year that was enacted in section 1431(d) of SBJPA.

From audit perspective IRS agents will not object if the plan uses 90k as the lookback $ amount for the 2005 plan year. Converesly IRS agents cannot object if the plan uses 95k as the lookback amount for 2005 because there is no substantial authority for the IRS to require the lower $ amount. Each client needs to decide which number to use for plan testing.

Finally the IRS has plausible deniability to a charge of not informing the benefits community as to what is the correct lookback year amount because it has been publishing each year's lookback amount in pub 560.

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I don't mind the intellectual debate (and mjb might win that if Mike says so), but I just think it is "bad form" to answer such a major question in a manner that is contrary to the interpretation used by 99.99% of the pension community unless you clearly disclose that your interpretation is very much a minority one.

p.s. Maybe I'm not looking in the right place, but I'm not seeing an "error" in Pub 560. I see ambiguity.

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mjb

You quite often make statements similar to this one, "From audit perspective IRS agents will not object if ..." and it makes me wonder if you have actually been involved in many audits. Have you?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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It took me many messages before I decided to whip out the code and do my own analysis. To my amazement, there is no question that mjb's analysis is technically correct. In fact, it is trivial to confirm it, if you decide to do so.

However, I'm equally convinced that the IRS has decided that his analysis is incorrect for pension purposes and will be hard pressed to change what they have consistently communicated since 1999/2000, the first year when the threshold increased.

I think the best resolution would be a release from the IRS that says a plan sponsor is/was free to do it either way until plan years beginning a certain date XXX days after publication of the release, whereupon it switches to the proper methodology.

Mike: while I repect you opinion on this matter I disagree with your opinion that the IRS has decided that my analysis is incorrect and "will be hard pressed to change what they have consistently communicated since 1999/2000, the first year the threshold increased". In fact the IRS has been consistently using the correct LB amounts under SBJPA (e.g 85k for the 2000 determination year) in the cumulative annual cola increrase for 414q1B but no one has noticed. While the IRS annual cola increase notice is ambigious as to what year the 414q1B increase applies, the cumulative cola increases which are reported in IR 2005-120 correctly and unambigiously state the lookback amount for each plan year since 1996 in accordance with section 1431(d) of SBJPA. In 1996 the HCE threshold was 100k based upon the pre SBJPA compensation for the current year. For the 97,98 and 99 determination years the look back amount was 80k for the respective look back years of 96, 97 and 98. For the 2000 determination year the LB comp amount for 99 (the fourth LB year under SBJPA) increased to 85k and has incresed in sucessive look back years until 2006 when the LB amount is 100k for comp paid in 2005. The problem is every one has ignored the notice and chosen to rely on the incorrect language in the 1999 information letter to Kyle Brown as authority for delaying the LB year cola increase until the year following the year for which the notice is effective. This mistake has has been repeated by IRS personnel at countless ASPPA meeting and ABA meetings who have relied on the info letter as authority (the IRS does not have to revoke an info letter because it has no precedent as an interpretation of the tax law). The 2005 and 2006 look back amounts of 95k and 100k respectively, published in publication 560 are taken from the LB year amounts reported in IR 2005-120 for those years. What you are proposing is to convince the IRS that they have been consistently wrong in communicating the calculation of the LB year cola increase since 2000 as reported in the cumulative cola increases.

Good night and good luck.

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In fact the IRS has been consistently using the correct LB amounts under SBJPA (e.g 85k for the 2000 determination year) in the cumulative annual cola increrase for 414q1B but no one has noticed.

As noted in a previous post on this thread (Mar 27, 2006, 4:27pm), at least with respect to Publication 560, I do not think the IRS has been consistent in its communication of the look back amounts.

...but then again, What Do I Know?

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WDIK - you still dont get it. The LB numbers in pub 560 are based on the cumulative cola increases in IR 2005-120. Are you stating that IR 2005-120 incorrectly reports the cumulative LB year cola increases for tax years from 2000 to 2006?

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WDIK - you still dont get it.

The story of my life in more ways than one.

Are you stating that IR 2005-120 incorrectly reports the cumulative LB year cola increases for tax years from 2000 to 2006?

No. What I am stating is that Publication 560 for 2000 defined a highly compensated employee as

"an individual who...For the preceding year, received compensation from you of more than $80,000...",

not the $85,000 which is the limit in effect for 2000.

...but then again, What Do I Know?

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