HCE threshold

[Guest non-tax pro]

Please confirm which HCE threshold is used for 2005 tax year ADP Test. 2004 gross wages are used for HCE determination, but it's unclear whether 2004's $90K or 2005's $95K is to be used.

I got a response from IRS 401K department. However, they didn't seem confident in their response. It's hard to tell what the original 414 (q) (1) $80K base year was because that threshold remained constant from 1997 through 1999.

ASIDE: also, if you know...why did the threshold drop drastically from $100K in 1996 to $80K in 1997? 2006's $100K is quite low compared to the current job market wages high escalation (a lot of line staff, non-management, in oil & gas field are exceeding that with big 2006 raises needed just to keep necessary staffing levels).

[stephen]

To determine HCEs for 2005 you look back to 2004 compensation and 2004 compensation limit. Thus, if an employee earmed more than $90,000 in 2004 they are an HCE for the 2005 plan year.

Most adoption agreements allow for the employer to elect top 20% rule which limits your plan to 20% HCEs. For example a firm that has 100 employees half of which earn more than $100,000 is only required to include 20 of them as HCEs if they make this election. Note, this is a very simple example and can only be made prospectively.

Also, if the company is already making an employer contribution of some knid they may want to consider a safe harbor plan as this would allow them to avoid ADP, ACP and Top Heavy Testing for years in which they are safe harbor.

I only have the last 10 years CODA posted at my desk and 1997 was $80,000.

[Archimage]

If I am not mistaken, SBJPA changed the limit for plan years starting in 1997.

[Guest non-tax pro]

IRS Publication 560 clearly states that preceding years compensation of more than $95,000 is the criteria.

Please advise if this IRS publication is not what the IRC's require. Stephen seems convinced that it's $90,000 (2004 HCE threshold) so this is confusing.

[stephen]

I stick by my previous post. Perhaps the IRS made a mistake in Publication 560 (page 4-5) and this should be $90,000 (instead of $95,000) from a previous year or in reference to 2006 returns.

[Dan]

It sounds like everyone is right, but the communication is complicated.

As Stephen said, if you are testing for the 2005 plan year, the HCE compensation threshold is based on 2004 earnings. So anyone who earned $90,000 or more in 2004 would be classified as an HCE for 2005.

Likewise, for a 2006 plan year, the HCE compensation level is $95,000 earnings in 2005.

Current year wages have no effect on the definition of HCE. The year immediately preceeding the one you are viewing is often called the look-back year. The compensation-component of the definition of a HCE being determined by earnings in the look-back year.

This can be a confusing concept. When you see a HCE compensation amount associated to a year, like $95,000 for 2005, that means if you earn $95,000 in 2005, you will be a HCE for 2006.

If the IRS didn't seem confident in their answer, sometimes they do not understand what we ask. Other times, they really don't know.

I hope I didn't muddy the waters.....

[Bird]

IRS Publication 560 clearly states that preceding years compensation of more than $95,000 is the criteria.

Because it's a 2006 publication. I agree with Dan and Stephen.

[stephen]

The odd thing is the Publication 560 (copy attached) on the cover states "For use in preparing 2005 Returns"

Then on page 5 - 6:

"Highly Compensated Employee. A highly compensated employee is an individual who:

Owned more than 5% of the interest in your business at any time during the year or the preceeding year, or

For the preceding year, recipient received compensation from you of more than $95,000 and if you so choose was in the top 20% of employees when ranked by compensation. This $95,000 amount increases to $100,000 in 2006."

I still say I am correct-

p560.pdf

[Guest non-tax pro]

More than that it carries back the current tax year threshold through 2002 Pub 560's (haven't taken time to look back further).

Because the base period being inflating is anchored at September 30, 1996 (i.e. $80K is already determined in lookback year for 1997). Then the Treasury publishes the threshold in October of the prior year even though they call it the next year's threshold.

...more confused. I'll keep digging because it's making a big difference for this year (wages have jumped dramatically).

[WDIK]

You might want to take your shovel and head over to 1.414(q)-1T, Q&A-3(c )(2).

[Guest mjb]

IRS notice 2005-75 states the HCE limit in IRC 414(q)(1) increases from 95,000 to 100,000 in 2006. 414(q)(1)(B) states that the term HCE means any employee who for the preceeding year had compensation in excess of (80,000) increased by as provided by the IRS for cost of living which is 100,000 in 2006. Therfore an HCE in 2006 is any employee who had compensation in excess of 100,000 in 2005. Q356 of Tax Facts concurs with the same answer. For 2005 the HCE comp amount was more 95,000 paid in 2004. What pub 560 is saying is that for the 2005 tax /plan year an HCE is an employee who earned more than 95,000 in 2004.

[WDIK]

And yet the same Q356 indicates that "[t]he applicable dollar amount for a particular determination or look-back year is the dollar amount for the calendar year in which the determination year or look-back year begins," which is from the temporary regs. (emphasis added)

[Guest non-tax pro]

Reading the actual HRA and amendments shows that the original $80K was set for 1996 lookback basis compensation comparison (1997 tax year), but got listed as the 1997 HCE threshold (1996 HCE threshold was actually $100K). Inflation is applied to this 1996 COLA basis just like the present $170K 415 DB limit and $14,000 457 deferral limit. The HCE threshold was raised to $95K in October 2004 for the 2005 tax year lookback (if you keep the years in order -- the COLA tables are confusing because the threshold is always shown for the pertinent tax year and therefore appears to miss one year of inflation if you use corresponding years listed in COLA tables; i.e. 2004 threshold for 2004 compensation).

I believe that the original basis premise has been forgotten and the COLA tables are being misunderstood. Unfortunately, there aren't many Plan Administrators around that go back that far -- at least they aren't doing the Testing and Reporting services.

Thanks for the leads, but this is becoming a lot of work for a novice. I would like to research further without a shovel!

How do I find Tax Facts Q356 online? Somehow I keep getting erroneous information. GUIDANCE APPRECIATED!

Thank you.

[Guest mjb]

WDIK: Will you please explain the significance of the reg you quoted.

Non tax: I dont see what is the difficulty in understanding the statutory languge of 414q1B- in any year the previous year's comp is used to determine who is an HCE. For 2006 an HCE's comp must exceed 100kpaid in 2005; for 2005 it was 95,000 paid in 2004. Since the 2005 pub 560 is intended to be used in preparing tax returns for 2005, the 95,000 amount is used to determine who was an HCE in 2005.

Tax Facts can be purchased from the National underwriter co by contacting them online. The temp regs are obsolete because they were issued before 414q was amended to mandate that HCE comp was determined by the prior yrs comp.

[Guest Pensions in Paradise]

Sorry MJB, you're wrong on this one. Please refer to the Pension Bible...ur...The ERISA Outline Book, under definition of Highly Compensated Employee.

[Guest mjb]

PP: I refer you to IRC 414(q)(1)(B). Do you have a citation of authority for your position. Could you please tell me why you (not some author) disagree with the IRS?

[Guest CharlieLaur]

I agree with Stephen & Dan (also with Sal Tripodi) that an employee would be considered an HCE in 2006 if he/she has compensation in excess of $95,000 in 2005.

If the regulations under 414(q) no longer have any merit, then I wonder why Tax Facts cites them in Q&A 356. Tax Facts also cites the information letter to Kyle N. Brown dated 12/9/99 which has always been one of my primary sources for my understanding of how to apply the annual COLA adjustments.

[Guest non-tax pro]

Can anyone forward a copy of the December 9, 1999 Information Letter to Kyle N. Brown? I'm hoping that it's a clear definitive answer from the Treasury.

There seems to be a lot of confusion in the industry. Non-Treasury authors/authorities and IRS tax assistants also seem full of erroneous information that can't be backed up (i.e. conjecture).

PP: please attach pertinent section of ERISA Outline Book and section author to clarify.

Here's my take from readily available history. Please educate me if you know otherwise or if you have more definitive documents (attachments appreciated).

The original Act's wording starts with $75K HCE threshold in 1987 (tax year; AKA determination year). After that it's indexed for inflation and given a a determination year value to compare with look-back year.

The 1997 HRA changed amount to "...preceding year....$80,000". The look-back or preceding year was 1996 compensation. But the HCE threshold was given as $80,000 which is the value for 1997 determination or tax year. Applying this forward would agree with IRS Pub 560 that 2004 compensation must be below $95,000 known by COLA tables as the 2005 HCE threshold. The 2005 label appears given even though the indexing is done in 2004 and stated in October 2004 as a value for that year, but called the determination year's threshold (started as $80,000 basis in October 1996 although labelled 1997 threshold). Following H.R.3448 Section 1431's wording forward from 1997 the $80,000 becomes $95,000 for 2005 determination year. The key words at the bottom of this section are "...except that the base period shall be the calendar quarter ending September 30, 1996." So the $80,000 thought of as the 1997 threshold is actually tied to the look-back year and indexed from it, not the determination year.

Aren't government regs great! I'm glad they've simplified the Code. Hopefully someone can produce a determining Treasury document. Does anyone work at EPTEGE Division?

So far I've just seen opinions. Isn't there anything definitive. The history appears to disagree with all but MJB.

[WDIK]

WDIK: Will you please explain the significance of the reg you quoted.

As a "non-lawyer" my opinion certainly cannot be relied upon to interpret language as complex as that found in Internal Revenue Code and Regulations. That being said, the previously cited regulation appeared pertinent because it seemed to be saying that you apply the dollar amount in effect for the calender year in which the look-back year begins for look-back year purposes.

Perhaps it is a lack of self-confidence, but I am always inclined to question my own understanding of an issue. It is troubling to me that there is not a consensus on this topic among sources that I consider reputable, such as The Pension Answer Book, Tax Facts, IRS Publication 560, McKay Hochman website, etc.

[Guest pensionadmin]

Corbel's Pension Library cites Reg. 1.414(q)1T,A3 as the source for determining the dollar threshhold. That paragraph says:

"(2) Applicable dollar threshold. The applicable dollar amount for a

particular determination year or look-back year is the dollar amount for

the calendar year in which such determination year or look-back year

begins. Thus, the dollar amount for purposes of determining the highly

compensated active employees for a particular look-back year is based on

the calendar year in which such look-back year begins, not the calendar

year in which such look-back year ends or in which the determination

year with respect to such look-back year begins."

Does that convince anyone that the dollar limit is the one for the look back year?

[Guest non-tax pro]

That is the confusing part of the exact wording of Reg. 1.414(q)1T,A3. Plus all the guidebooks just repeat it.

But the actual HRA was developed using the determination year HCE threshold values to replace the $80,000 or $75,000 (depending on which year's Act you're using, original or 1997 version) to compare with look-back year's compensation. Hence my confusion.

Plus employees are really questioning it because Pub 560 clearly states 2004 comp above $95,000 is the HCE qualifier. So a definitive answer is required. I was hoping the Kyle Brown letter might address this if someone can attach a copy -- much appreciated.

[Guest mjb]

There is nothing confusing about how the IRS applies the HCE $ amount for the lookback year if you read IRS guidance issued after the definition of who is an HCE was changed in 1996. See IRS notice 97-45 example 1:For determination year beginning April 1, 2000, the lookback year is the 12 month period from April 1, 1999 to March 31, 2000. In the 2006 determination year, an HCE is anyone who earned more than $100,000 in the lookback year that began in 2005, as stated in Pub 560. Also see Pension Answer book Q 3-3.

[stephen]

The Pension Answer Book Question 3:3 refers you to Q 3:7 and Q 3:8 (amongst others)

The section below is from Q 3:8.

"Thus, for plan years that began in 2005, the look-back year began in the 2004 calendar year, and the compensation limitation for determining HCE status was therefore $90,000. The compensation limitation for determining HCE status is $95,000 for plan years beginning in 2006, based on the look-back year beginning in 2005."

[Guest non-tax pro]

97-45 just says $80,000 (as adjusted). I need an example where the actual threshold is shown for a unique year where it changes (i.e. the 1997 threhold held @ $80 for several years, so the examples don't ensure whether the look-back or determination year threshold is applied).

Some Plans use $90,000 maximum and others like yourself and Pub 560 use $95,000 maximum for 2004 compensation as HCE threshold.

FYI, it was the IRS 401K department that said Pub 560 is in error.

I don't have Pension Answer Book. What does Q-3-3 specifically say? Does it list indexed thresholds in it's examples?

[stephen]

Pension Answer Book Q 3:8 attached

HCE_Determination.pdf

[WDIK]

mjb:

Your points would be more convincing to me if your choice of source material didn't seem so selective.

[Guest Pensions in Paradise]

Attached is the pertinent section from The ERISA Outline Book.

mjb - to answer your question, I'll side with Sal Tripodi any day of the week. Considering he probably knows the Code and Regulations better than the IRS itself.

HCE_Definition.pdf

[Guest mjb]

Here is the IRS authority: Notice 97-45 example 1(b) states that compensation under IRC 414(q)(1)(B) is based on compensation during the lookback year which preceeds the determination year in excess of $80,000 (as adjusted). IRS notice 2005-75 states that effective January 1, 2006 the limitation used in the definition of HCE under IRC 414(q)(1)(B) increases from 95k to 100k. Therefore for 2006 the look back amount in IRC 414(q)(1)(B) for determining an HCE is comp in excess of 100k in 2005. This is consistent with the definition of HCE in Publication 560 which states that an HCE is person who receives more than 95k in the preceeding year which increases to 100k in 2006. Pub 560 states that it is to be used in preparing 2005 returns for which I interpret the preceding year for HCE determination to be 2004 so that HCEs in 2005 were employees who earned more than 95,000 in 2004. The use of 95k in comp earned in 2004 as the lookback amount for determining who was an HCE in the 2005 plan year is consistent with other 2005 limits cited in Pub 560 e.g.,42K Dc max, DB max 170.

If you disagree with my conclusion then please provide citations of IRS authority for your answer.

[stephen]

mjb,

Perhaps you missed the above comment from non-tax pro when they said,

FYI, it was the IRS 401K department that said Pub 560 is in error.

[Guest non-tax pro]

Yes, but the IRS contacts weren't completely sure of themselves when they saw Pub 560. We spoke to three different sources in Pension dept. One agreed with MJB's (and my assessment because I think all the handbooks forgot that the $80K was a look-back value for 1997; i.e. determination year COLA table value is actually the original look-back year inflated like the other Index Table values; corrected in 2001, but still misapplied in interps). But one senior staff and one frontline assistant disagreed -- I could give names, but that doesn't seem appropriate.

Tripodi appears a solid source and his interp gives a concrete application of how 2004 comp vs. 2004 threshold should be used. Thanks, PP. [i still think they missed a year of inflation since the first $80K value was for 1996 comp / 1997 look-back, but called it 1997 threshold. However, if this is what the IRS/Treasury stated in the 1999 letter to Brown then we'll have to live by that. A copy of the letter would be nice, since Tripodi is still an independent author, especially if it doesn't restate $80,000 (adjusted). Anyone have it or the BNA article to attach?]

[Guest mjb]

I have problem with an IRS employee stating that information the IRS has provided to taxpayers in an IRS publication is incorrect, since as anyone who has attended a meeting in which IRS employees have spoken knows no IRS employee can provide an interpretation of the tax law that can be relied on by a taxpayer. If the statement of who is an HCE in 2005 or 2006 is in error then the simple solution is for the IRS to issue a Notice or announcement stating what the correct answer is. (The correct answer may be more complicated than anything discussed so far.) You will note that I am relying on the IRS's application of the lookback amount for 2006 as stated in IRS Notice 2005-75, not pub 560. If you are correct its more than just one mistake.

[Guest Pensions in Paradise]

mjb - Notice 2005-75 does NOT state that the $100,000 limit is used for the 2005 year to determine HCEs for 2006. If you think otherwise, please provide the cite in the notice, because I've read it and it doesn't say that. So that means you are "interpreting" what the notice says. Thats fine.

Can I provide a clearer citation from the IRS which defends my interpretation? No. But in addition to the Pension Answer Book and The ERISA Outline Book, I can provide material from Technical Answer Group (TAG) and AON. All of these sources state the same position.

TAG.pdf

AON.pdf

[Bird]

mjb, 2005-75 just says the HCE limit is $100,000 in 2006...which it is; 2006 is the look-back year for 2007. I don't see how you can cite that as authority for your position.

Just do a google search on "highly compensated employee look-back year" and you should find lots of charts, with footnotes saying what the rest of us are saying.

I don't think Pub 560 is "wrong" although it is terribly misleading, since the cover says it is for preparing 2005 tax returns. The text refers to "the preceding year" when it cites the $95,000 limit, but it doesn't say 2004. But seriously, that is the ONLY "cite" (if you can call it that) that supports your position.

[WDIK]

It is my opinion that either Publication 560 is wrong or the other sources referred to (such as the Pension Answer Book) are wrong.

In reviewing prior Publications 560, I noticed a change in the IRS's wording. Looking only at those years where there was the dollar amount was incremented I discovered the following with respect to the definition of a highly compensated employee.

For 2000 tax year (from Pub. 560 for 2000):

"For the preceding year, received compensation from you of more than $80,000 ($85,000 for certain non-calendar year plans making a calendar year data election described in Notice 97–45 in Cumulative Bulletin 1997–2) and, if you so choose, was in the top 20% of employees when ranked by compensation."

This does not correspond with mjb's opinion.

For 2002 tax year (from Pub. 560 for 2002):

"For the preceding year, received compensation from you of more than $85,000 and, if you so choose, was in the top 20% of employees when ranked by compensation."

This also does not correspond with mjb's opinion.

For 2004 tax year (from Pub. 560 for 2004):

"For the preceding year, received compensation from you of more than $90,000 and, if you so choose, was in the top 20% of employees when ranked by compensation. This $90,000 amount increases to $95,000 in 2005."

Adding the last sentence to this definition makes it somewhat ambiguous but in my opinion, tends to correspond more with mjb's opinion.

As has already been cited, I think that the 2005 Pub. 560 does correspond with mjb's opinion.

It is curious to me that the according to the publications, the application of the limitation seems to have changed. Whether this was intentional or not I cannot say.

[Guest non-tax pro]

Read HR3448 and amendments closely. If I remember correctly, it changed in 2001 to MJB's point of view. Then the Pub 560's follow suit starting in 2002. Stephen posted 2005 Pub 560, read it and MJB's take is correct. But the IRS reps dismissed Pub and said IRC overrules it.

Since some very knowledgeable people can't come to consensus on what should be a simple issue (although PP has shown the most definitive explanation) I finally broke down and put a message in for xxxxxIRSxxxxEPdept. I wonder if I'll get a call back.

Anybody know Secretary Snow

[WDIK]

Then the Pub 560's follow suit starting in 2002.

This does not seem consistent with the wording of the publications above.

[Guest mjb]

PP: I dont know how you can come to the conclusion that my interpretation is incorrect without providing some citation of authority from the IRS. Notice 2005-75 states effective Jan 1 2006 " the limitation used in the definition of HCE under 414(q)(1)(B) is increased from 95k to 100k". IRC 414(q)(1)(B) states that for the preceeding year the [HCE] had compensatation in excess of $80,000" which shall be adjusted in the same maner as under IRC 415(d). As used in the notice the 100k amount can only be inserted as preceeding yrs comp effective Jan 1, 2006. If your opinion was correct the definition of HCE comp for the preceeding year in Pub 560 would read "This $95,000 amount increases to 100,000 in 2007 (instead of 2006)."

Bird: If you disagree then come with your own analysis using IRS's citations that support your view. Google cites are not accepted authority for interpreting the tax law. Maybe I am wrong but I dont know what year other than 2004 would be the preceeding year for qualified plan compliance limits in 2005 cited in Pub 560, e.g, 415 limits, comp limit of 210 but maybe you could cite some authority that mandates another year (2003/2006?).

Non taxpro: I dont think anyone will will speak for attribution on this issue since the IRS has already made its position public in pub 560.

[Guest non-tax pro]

What about attaching a copy of 1999 IRS letter to Brown and CCH article? I need something to pass the time while I wait for IRS to call back.

Notice 2004-72 gives contact info for IRS if one has questions. I thought I'd give it a try. It just goes through to an answering machine.

[Guest Pensions in Paradise]

This is my last post on this topic. The IRS website has a whole page of corrections to their forms/publications, hence they are not perfect (although we all knew that already). Should I rely on an ambiguous IRS Notice and a questionable IRS publication? Or should I rely on material from the Pension Answer Book, The ERISA Outline Book, ASPPA, Technical Answer Group, AON, Corbel, ASC, etc. My money's on the latter.

[Bird]

The quote below is from a discussion with the American Bar Association and the IRS - the IRS - the IRS (question 11). Here's the link if you want to see the whole thing...

aba link

# §401(a)(17) – Compensation Limitation

Assuming that all qualified plans have calendar plan years, if an employee earned $81,000 in 1999, is he "highly compensated" for 2000?

Proposed Answer: No. According to the statute he needed to have compensation in excess of $85,000 in 1999 to be "highly compensated" for 2000. Treas. Reg. §1.414(q)-1T Q&A-3©(2), which may cause some people to reach a different conclusion, became obsolete with the passage of the 1996 Tax Act.

IRS Answer: The IRS disagrees with the proposed answer. Notice 97-45 supplements the regulations, which endorses the application of the indexed dollar limit to the lookback year of 2000. The determination of highly compensated employees in 2000 plan years should be based on pay in 1999, using the limit in effect for 1999. In response to a question from the floor, the IRS noted this answer is consistent with a general information letter issued December 10, 1999 that was reported in the trade press.

While looking for this, I found many sites supporting the argument that the comp limit is indexed for the lookback year; not one - zip, zippo, zilch, zero, zed, nada, none, nary a one, nil that supports mjb's position.

[Guest mjb]

Bird: Your research has two obvious flaws:1. you are reporting the IRS position in 2000 which was 6 years ago and is different from its position in 2005 as indicated by Pub 560. (If you read Q11 you will note that it applies to calendar years plans and not to fiscal year plans. ) 2. ABA-ALI statements are not precedent which can be cited by the IRS in an opinion of the tax law. General information letters have nada value as precedent which is why they are not available to the public. Obviously the IRS has changed its position for the last two years as previously posted by WDIK. It is untruthful and incorrect to say there is nothing that supports "my position" when the IRS has on its own initative stated its interpretation to taxpayers as it is required to do by law. You are also misconstruing what I have reported as my position when I am just the messenger who brought the language in pub 560 to your attention. I would have no problem if the IRS issued an authorative statement to taxpayers which clarified/corrected what it has stated in Pub 560 and for what year the look back year increase applies when the COLA increases are published.

FYI: the 2003 version of pub 560 for HCE definiton states: "for the preceeding year received compensation from you of more than 90,000 and if you so chose, etc ..."

This is not the only area in which there is confusion on the application of the tax law. There is uncertainty on whether the increase for user fees is effective as of Feb 1 or July 1.

[Bird]

So you think the IRS is going to make a policy change simply by changing the wording in Pub 560? Gimme a break.

I'm done here.

[R. Butler]

That is the confusing part of the exact wording of Reg. 1.414(q)1T,A3. Plus all the guidebooks just repeat it.

But the actual HRA was developed using the determination year HCE threshold values to replace the $80,000 or $75,000 (depending on which year's Act you're using, original or 1997 version) to compare with look-back year's compensation. Hence my confusion.

Plus employees are really questioning it because Pub 560 clearly states 2004 comp above $95,000 is the HCE qualifier. So a definitive answer is required. I was hoping the Kyle Brown letter might address this if someone can attach a copy -- much appreciated.

Maybe I am missing it, but I don't the confusion -- Reg. 1.414(q)-1T, Q&A-3©(2) states that the applicable dollar amount for a particular determination year or look-back year is the dollar amount for the calendar year in which such determination year or look-back year begins. Thus, the dollar amount for purposes of determining the highly compensated active employees for a particular look-back year is based on the calendar year in which such look-back year begins, not the calendar year in which such look-back year ends or in which the determination year with respect to such look-back year begins..

There have been posts above that cite instances where the IRS has attempted to clarify. I understand that Publication 560 may create confusion, but depsite what some may believe, a Publication is solely for taxpayer assistance, it is not law & may not be relied upon as law. Although regs. are not law, they are often given the full defernce of law. When you combine the Reg. with the other informal guidance, the preponderence of information suggest the conclusion that you should use $90,000.

[Kevin C]

Here is the IRS letter to Kyle Brown:

IRS Information Letter, December 9, 1999.

IRS: Highly compensated employee (HCE): Compensation limitation. --

The IRS has issued an information letter explaining that the increase in the compensation limit from $80,000 in 1999 to $85,000 in 2000 effectively applies to plan years beginning in 2001.

DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224

Mr. Kyle N. Brown

Watson Wyatt & Company

Research and Information Center

6707 Democracy Boulevard, Suite 800

Bethesda, MD 20817-1129

In re: General Information Request

Dear Mr. Brown:

This letter is in response to your letter dated October 28, 1999, concerning the application of the increase in the compensation limit from $80,000 to $85,000, in determining highly compensated employee (HCE) status based on compensation. Specifically, you inquired whether the increased compensation limitation of $85,000, effective January 1, 2000, applies for purposes of determining who is an HCE for plan years beginning in 2000.

Section 414(q)(1)(B)(i) of the Internal Revenue Code (Code), as amended by the Small Business Job Protection Act of 1996, Pub. L. 104-188 (SBJPA), provides in relevant part that an HCE includes any employee who, for the preceding year, had compensation from the employer in excess of $80,000. This limitation is adjusted at the same time and in the same manner as under §415(d) of the Code, except that the base period is the calendar quarter ending September 30, 1996.

Notice 97-45, 1997-2 C.B. 296, provides guidance relating to the definition of an HCE under §414(q) of the Code, as amended by the SBJPA. The notice describes the determination year and the look-back year. The determination year is the applicable year of the plan or other entity for which a determination is being made, and the look-back year is the preceding 12-month period.

The HCE regulations under §1.414(q)-1T specifically address how to apply the change in compensation limits in determining HCE status. These regulations were first effective prior to the SBJPA changes, so some of the provisions relate to pre-SBJPA law. In addition to providing guidance on how to apply the dollar limit for a determination year (no longer relevant after the SBJPA changes in determining HCE status based on compensation), the regulations state how to apply the limit with respect to a look-back year, which is how an HCE based on compensation is generally determined after the SBJPA changes.

Section 1.414(q)-1T, Q & A 3©(2) provides that the dollar amount for purposes of determining the highly compensated active employees for a particular look-back year is based on the calendar year in which such look-back year begins, not the calendar year in which such look-back year ends or in which the determination year with respect to such look-back year begins.

Thus, except as noted below, for plan years beginning in 2000, the look-back years begin in the 1999 calendar year, and the compensation limitation for determining HCE status is therefore $80,000. The compensation limitation for determining HCE status is $85,000 for plan years beginning in 2001, based on look-back years beginning in 2000.

It should be noted that if a special calendar year data election described in Notice 97-45 is made, the calendar year beginning with or within the look-back year is treated as the look-back year for purposes of determining whether an employee is an HCE based on the employee's compensation for a look-back year. This election does not change the look-back year for calendar year plans. However, making this election does change the applicable compensation limitation used in determining HCE status for plans with non-calendar plan years beginning in 2000, because the look-back year for these plans is the 2000 calendar year. Thus, if the calendar year data election is made for a plan with a non-calendar plan year beginning in 2000, the compensation limitation for determining HCE status is $85,000.

We hope this general information is of assistance to you. Please note that this letter is not a ruling and cannot be relied upon as such. If we can be of further assistance in this matter, please contact John Heil at 202-622-7383.

Sincerely yours,

Martin L. Pippins (ID# 50-05722)

Manager, Actuarial Group 2

[Guest mjb]

RB, Bird, PP,et al:There is a very simple solution for those of you who think Pub 560 is incorrect: Request a general information letter to clarify the application of the look back year rule as stated in Pub 560. If, as you believe, Pub 560 incorrectly states the law it will be a no brainer for the IRS to answer using the citations previously noted and the the IRS will be on record as stating that Pub 560 is wrong. You should also ask the IRS why after 2000 Pub 560 ceased distinguishing between calender year plans and fiscal yr plans that use calender yr comp for the effective date of the look back rule that was the basis for the Kyle Brown letter. After you get the letter you can publish it on the board. General information letters are easy to prepare and can be submitted by any taxpayer.

[stephen]

mjb-

Since PiP and Bird have left the discussion I suggest you follow your own advice above and use the

very simple solution

yourself as the responders to this post (except for non-tax pro) have sided with the NUMEROUS publications that all say what I said in my orginal post on this topic.

Once you get a reponse from the IRS please post it here for all of us to see.

As for me I am sticking with my original post (and the PAB, EOB, Brown Letter, TAG, etc.) by continuing to administer plans in accordance with the law (not what I believe to be a missprint in Pub. 560).

Thank You,

Stephen

[Guest mjb]

I dont contact the govt unless I am paid to do so, and I dont have any problem with Pub 560. I think you dont want to find out if there is another way to determine who is an HCE.

[R. Butler]

Similarly I won't be contacting the government. I'm comfortable with the interpretation already reached.

[WDIK]

I dont contact the govt unless I am paid to do so

If we could get all registered members (currently 14,988) to send in a dime, would that cover your fees?

[Guest mjb]

It would cover the initial retainer.