HCE Limitations

[Jilliandiz]

I'm confused for some reason...

In 2003, an employee gets paid over $90,000, therefore HCE in 2004.

In 2004, an employee gets paid over $90,000, therefore HCE in 2005?

In 2005, an employee gets paid over $95,000, therefore HCE in 2006?

What are the limits, I'm confused.

[JanetM]

You have it right. If you exceed the limit during the year you are HCE in next year.

[Brian Gallagher]

No.

The limit for 2005 is $95,000. That means, for the 2005 plan year, anyone who made more than $95,000 <b> in the previous plan year </b> is an HCE.

Likewise, for the 2004 plan year, anyone who made more than $90,000 <b> in the previous plan year </b> is an HCE.

(and don't forget those pesky 5% owners and attribution rules!)

[Guest qualified plan]

IMHO, Janet has it right. Brian is wrong.

[Brian Gallagher]

OOOOOOOOOPPPPPPPPPPSSSSSSSSSSSSS!!!!

I am way totally utterly unqualfiedly WRONG!!!!

Never mind that abomination of a post of mine above!!

I know better than that.

Post Redsox victory hangover of sorts. But I do have a question about something I read in the Pension Answer Book last year and this post reminded me of...(see next post)

[Brian Gallagher]

From the Pension Answer Book 2003 ed. Q 3:8:

"Thus for plan years that began in 2002, the look back year began in the 2001 calendar year, and the compensation limitation for determining HCE status was therefore $85,000. The compensation limitation for determining HCE status is $90,000 for plan years beginning in 2002, based on the look-back year beginning in 2001."

The first sentence seems to be saying that for 2002 plan years the limit is $85k because of the look-back year of 2001.

The second sentence says it is $90k becasue the look-back year beginning in 2001.

Does anyone else see the contradiction? Or am I missing something?

[Belgarath]

I agree with QP. You are applying the compensation limit in effect for lookback years that begin in a given calendar year. See 1.414(q)-1T, Q&A-3©(2).

[Guest KB]

Brian Gallagher - I think you had it right the first time, even with the hangover. The HCE dollar limit for any plan year applies to compensation earned in the lookback year.

See 414(q)(1)(B): "Highly Compensated Employee ...for the preceding year-(i) had compensation from the employer in excess of $80000, and..."

For the 2005 plan year that begins 1/1/05, if you insert the 2005 HCE limit of $95000 into the Code section above in place of $80000, that means anyone who earned in excess of $95000 in the preceding year, or in 2004, is considered an HCE in 2005.

[WDIK]

For the 2005 plan year that begins 1/1/05, if you insert the 2005 HCE limit of $95000 into the Code section above in place of $80000, that means anyone who earned in excess of $95000 in the preceding year, or in 2004, is considered an HCE in 2005.

I disagree. It is my understanding that the applicable dollar amount for a look-back year is the dollar amount for the calendar year in which the look-back year begins.

(As Belgarath noted and cited)

[Blinky the 3-eyed Fish]

KB, I can see the thought behind your reasoning, but in the first year the change took effect there was no limit published for the lookback year. The IRS has consistenly opined that the indexed limit applies for determining the HCE for the year at hand, i.e. for determining a 2005 HCE you look at the 2004 limit of $90K, not $95K.

[jquazza]

Here is the cite that should put an end to this nonsense:

1.414(q)-1T (Q&A-3©

(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.

So, every one is right except KB, Brian was wrong for a short while but he did a marvelous flip-flop