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HCE threshold


Guest non-tax pro

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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

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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.

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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?]

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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.

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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

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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.

Ed Snyder

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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.

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

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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 :)

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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.

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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.

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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.

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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.

Ed Snyder

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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.

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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.

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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

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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.

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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

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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.

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