Noncalendar year Plan

[Guest RJF]

Plan year ends 3/31/2006. In determining HCE's using the compensation test for a non owner/officer, the lookback year is the plan year. Therefore, anyone making over 95k is used in this example? If the lookback is the calendar year, it would also be 95K?

[Archimage]

That is correct.

[austin3515]

That was refreshing. Anyone who followed a similar topic last week knows exactly what I'm talking about...

[Guest Pensions in Paradise]

Should we ask mjb for his opinion on this topic??

[Guest mjb]

You already have my opinion. What is the issue that you think I would have in determinating HCE comp in a fiscal yr plan that begain in 2005?

[GBurns]

But what is your determination as to the amount of compensation?

[Guest mjb]

If you had read my numerious posts you would know my position that the look back amounts for 2005 and 2006 are the amounts promulgated in IR 2005-120 as the cumulative cola increases for IRC 414q1B. Since you have not done so why dont you give your opinion as to what the lookback comp $ amount is for 2005 and 06 and the basis/authority for your opinion.

[Guest Pensions in Paradise]

hehe, it's like throwing fuel on the fire!!

[Guest mjb]

No its more like "Go ahead, make my day."

[Guest Pensions in Paradise]

Only in this case Dirty Harry doesn't have any bullets left in his gun.

Needless to say, we will have to agree to disagree on this issue.

[Guest mjb]

PP: Can we agree on the following premises:

1. The look back year comp amounts under IRC 414q1B are the cumulative amounts listed in IR 2005-120.

2. The cumulative look back amount under 414q1B applicable for 2006 as stated in the IRS white paper for calculating the cola increase was $100,080, which is rounded to $100k. (the white paper info was published by non tax pro).

3. The 1999 info letter (as well as statements made by IRS officials at professional meetings in reliance on the info letter) lack any authority under the IRC as an interpretation of how the look back rule applies to cola increases under IRC 414q1B because the info letter states that it is not ruling under the IRC and cannot be relied on as such.

4. Each advisor has to make their own determination of whether to use 95k or 100k as the lookback amount for 2006 calendar year plans based on the above three factual statements.

feel free to disagree.

[Guest Pensions in Paradise]

mjb - may I ask you if you have ONE client who is operating their plan in accordance with your conclusion? Because every plan I administer uses the industry-accepted lookback amount. In fact, I've had numerous plan audited by the IRS over the last five years and in every case the IRS agreed with our definition of HCE.

[Guest mjb]

I will answer your question when you respond to my post. My premises were framed to require using the IRS's own statements on this issue as the basis to determine the correct answer without inserting my own opinion. If you do not agree that the first three premises are correct (even though they were all issued by the IRS) then the only way 95k can be the correct LB amount for 2006 calendar year plans is by creating an alternative interpretation that the 414q1B effective date/ 1996 cola base period in Section 1431(a)/(d) was not applicable until 1997. I am open to any theory that would explain how this could occur.

When it comes to audits the IRS isnt going to object if the plan uses a lower look back comp threshold then required under 414q1B because there is no prohibition in 414q1B against using a lower lookback comp threshhold than the maximum permissbile amount ("HCE had comp in excess of 80,000"). In your next audit ask the IRS agent whether the plan can use 100k as the lookback amount for 2006 as stated in IR 2005-120. No harm, no foul. The confusion on this issue results from the failure of any professional group to confront the IRS with the specific question of how the application of the cola increase stated in the information letter is consistent with the provisions of 1431(a)/(d) of SBJPA and the cumulative cola limit published in IR 2005-120.

I have a final Q for everyone on this issue: Have you ever thought that you have treated as mushrooms (kept in the dark and covered with manure) on this issue by the IRS.

PP: Final Q for you- do you feel lucky today?

[Mike Preston]

When it comes to audits the IRS isnt going to object if the plan uses a lower look back comp threshold then required under 414q1B because there is no prohibition in 414q1B against using a lower lookback comp threshhold than the maximum permissbile amount ("HCE had comp in excess of 80,000").

...

No harm, no foul.

"Just when I think I'm out, they d...r...a...g me back in!"

What makes you think this is a "no harm, no foul" situation?

Take 2006 for example. Let's say my plan sponsor decides that everybody earning more than $95,000 in 2005 is an HCE for 2006. Your plan sponsor decides that the threshold must be $100,000.

Let's say there is an individual that makes $97,500 in 2005, and this person, by reason of the class he is in, receives no contribution (note: the class is not based on him or her being an HCE or an NHCE). On my non-discrimination test, this person is an HCE and the test passes. On your non-discrimination test, this person is an NHCE and the test fails.

How is this a "no harm, no foul" situation?

[austin3515]

RJF - do you realize that the dollar limit for the lookback year your referencing is the 2004 thresshold? I'm not sure when it increased to $95,000. Because the look-back year ends 3/31/05, it began in 2004, and the limits apply plan years beginning in the applicable calendar year.

[Guest mjb]

Mike: I specifically used 2006 because it is an open year and the plan can change from 95 to 100k without any liability issues. (I dont understand how the plan can can fail the adp test in an open year). I dont accept you implication that ignorance is acceptable since it is more likely people making 97.5k will be making 401k contributions as they will be in at least the 25% tax bracket. Are you now suggesting that you dont want to know the correct answer because it would lower your clients ADP % instead of allowing employees earning between 95-100k the opportunity to contribute up to 15k toward their retirement and thereby raise the adp % for nhces? I think that is a fiduciary question for the plan administrator to answer, not a consultant, e.g. the obligation to administer the plan in accorance with its terms, not in ignorance of its terms. Do you plan to inform the plan administrator of this issue?

Austin: I am puzzled by your response. Why do you think I disagree with A?

[Mike Preston]

Mike: I specifically used 2006 because it is an open year and the plan can change from 95 to 100k without any liability issues. (I dont understand how the plan can can fail the adp test in an open year). I dont accept you implication that ignorance is acceptable since it is more likely people making 97.5k will be making 401k contributions as they will be in at least the 25% tax bracket. Are you now suggesting that you dont want to know the correct answer because it would lower your clients ADP % instead of allowing employees earning between 95-100k the opportunity to contribute up to 15k toward their retirement and thereby raise the adp % for nhces? I think that is a fiduciary question for the plan administrator to answer, not a consultant, e.g. the obligation to administer the plan in accorance with its terms, not in ignorance of its terms. Do you plan to inform the plan administrator of this issue?

I think you are looking at the ramifications of this issue in a myopic manner. If the only issue was adp/acp testing, I might agree with you that using the higher threshold is very likely to help the testing, as those between the higher threshold and the lower threshold are likely to be high level contributors.

But once the plan sponsor has determined HCE status, that is used for much more than just adp/acep testing.

It is random as far as direction goes when we are dealing with the non-discrimination tests (other than adp/acp, although even those are not set in concrete). That is, in my prior message, I could just as easily have described a situation where the use of the lower threshold caused the plan to fail non-discrimination and the higher threshold would have allowed the plan to pass the tests. Whichever way you go, there is the possibility that had you gone the other way, the plan sponsor would need to provide larger contributions for the NHCE population in order to satisfy the 401(a)(4) or 410(b) tests.

I will not buy into the red herring that the administrator making a determination as to which is the correct interpretation falls into the trap of a fiduciary violation by making the decision which reduces an employee's ability to defer. That is just bunk.

There is a correct and an incorrect way of doing things. The IRS is inconsistent in their communication as to which is the correct way of doing this particular thing.

I hope that once the IRS recognizes that their communication has been faulty in this area they issue something which gives plan sponsors comfort no matter which way they have done it through a given time frame and then they clarify which way they want the determination to be made from that point forward.

[Guest mjb]

Mike: The IRS has only been inconsistent in statements made at professional seminars which are not binding interpertations of the tax law. It has been consistent in the publishing the cumulative cola notice for retirement benfits for the last few years which is an authortative statement of the limits for retirement plans. The problem is that benefit professionals have ignored the cumulative notice and chosen to rely on the info letter as authority for how the cola increase applies, even though the info letter is not an authorative intrepretation of the tax law.

You seem to miss the disclosure issue as you say "after the plan sponsor has determined HCE status" which requires an interpretation of the plan by the plan administrator. The PA/fids needs to know that there is an issue of who is an HCE in order to make an informed decision (after consulting with counsel) as to whether the HCE limit should be 95k or 100k so that the decision can be documented in the event of any claims by participants. The plan will have a problem if the PA does not make an informed decision of the HCE amount, on the advice of counsel based on all the information available, not because of what decision is made.

[Mike Preston]

Most people think that following what the IRS tells us at conferences is at least arguably the correct thing to do.

[GBurns]

I know that this is not my area, but I do have the ability to read and understand posts and to find any cites given.

However, this thread and the other thread seem to have something in common. There seems to be 2 interpretations for which sides have been taken, but those on 1 side seem to have no or very little actual audit experience, while the opposing side seems to have. In other words 1 side relies on their interpretation and theory whereas the other side relies on not only their interpretation but on field tested audit experience.

An old adage comes to mind, "The proof of the pudding is in the eating".

[Guest mjb]

The issue has nothing to do with auditing experience but everything to do with statutory interpretation of the applicaton of the cola increase in Section 1431(a) of the SBJPA to the HCE threshold. Once the proper $ amount for HCEs has been determined then the plan can be audited to determine if all of the tests in which the HCE definition is used has been made correctly. As noted in prior posts IRS auditors will not object to the plan using a look back $ amount for a plan year that is less than the amount allowed under IR 2005-120. You are welcome to give your opinion as to what the threshold $ amount is for any look back year from 1996 to 2006 as well as the recipe for your favorite pudding.

[WDIK]

Baked Lemon Pudding

1 cup sugar

3 tbsp flour

3/4 cup milk

juice of 2 lemons, strained

1 tbsp butter or margarine, melted

2 tsp grated lemon peel

2 eggs, separated

In a medium bowl, combine the sugar and flour. Stir in the milk, lemon juice, butter, and lemon peel until blended.

In a small mixing bowl, beat the egg yolks; add to the lemon mixture. Beat the egg whites until stiff peaks form; fold into the lemon mixture.

Pour into a greased 1 quart baking dish; set in a larger pan with 1/2" of water.

Bake, uncovered, at 350 for 55-60 minutes.

[Belgarath]

Wow, that sounds good! A lot better than crow, which is what I normally seem to eat.

[Bird]

mjb,

As noted in prior posts IRS auditors will not object to the plan using a look back $ amount for a plan year that is less than the amount allowed under IR 2005-120.

What are you saying here, that we could use $40,000 if we want to, because the IRS will always like having more HCEs?

[Belgarath]

While I generally agree with MJB's reading of the statutory and regulatory language on an absolutely technical basis, I don't agree with his assertion that:

"When it comes to audits the IRS isnt going to object if the plan uses a lower look back comp threshold then required under 414q1B because there is no prohibition in 414q1B against using a lower lookback comp threshhold than the maximum permissible amount ("HCE had comp in excess of 80,000")."

If you are going in for a technical reading on things, I believe that 414(q)(1)(B)(i) is absolutely crystal clear. It says "...in excess of $80,000,..." - it does NOT say that the threshhold can be lower. Suppose, as Bird has asked, you use $40,000. Or $10,000 for that matter. Now you exclude a few of them, and your HC percentage is now doodley, so you hardly have to cover any NHC. I'm sorry, but I don't believe any IRS auditor around who is competent will let this fly. Do you disagree?

MJB - other than the quirk above, while I think I agree with your technical reading of statute/regulation, can I ask you this: in "real life" as opposed to a bunch of of us qualified plan weenies on a message board, do you really think there is a problem with using the 95,000? And are all your clients actually using the 100,000? I can honestly say that I have neither seen nor heard of an actual plan that is not using the 95,000 interpretation. I'm doubtful that the IRS will disqualify virtually every qualified plan in the country due to this. Conversely, if using your 100,000 argument, even if the IRS does dispute it, (and I'm not convinced they would) I'm betting you'd win in tax court. So I'm not sure it ultimately matters which one is chosen.

[stephen]

mjb,

QUOTE

As noted in prior posts IRS auditors will not object to the plan using a look back $ amount for a plan year that is less than the amount allowed under IR 2005-120.

What are you saying here, that we could use $40,000 if we want to, because the IRS will always like having more HCEs?

Then let's just set the HCE limit at $0.01. Thus, everyone would be an HCE and no testing would be required. Now that would be pension simplification!

[Guest mjb]

I still havent had any response at to whether anyone agrees/disagrees with the four premises that I posted on May 23rd as to the correct analysis of the cumulative cola increases since 1996 which indicates that the audience expects the IRS to tell them what is the correct answer (ignoring the cola amount for 2006 as reported in the cumulative cola increases in IR 2005-120). If you reject my theory that a plan can elect the use either 95 or 100k for 2006 (but no other amounts) then the question is whether you are going to inform the plan sponsors of this issue since if the HCE limit is 100k instead of 95k the plans could be DQed for 2006 for the failure to operate in accordance with their terms, i.e., for incorrectly counting NHCEs as HCEs. (I will leave it to you to consider application of the failure to operate the plan in accordance with its terms rule to prior years where the cumulative cola amount was correctly reported by the IRS since the info letter is not precedent for premise that it has been applied to, i.e., that the annual cola increase does not apply until the year following the year for which the cola increase is effective.) Given the risks involved do you think the client should make the call (after consulting with counsel) as to whether to use 100k or 95k as the lookback amount for 2006 or rely on your judgment that the correct LB amount for 2006 is 95k?

[Bird]

I still havent had any response at to whether anyone agrees/disagrees with the four premises that I posted on May 23rd

Well, I WAS sitting here poking myself in the eye with a sharp stick, but continuing this discussion seems just as fruitful...

PP: Can we agree on the following premises:

1. The look back year comp amounts under IRC 414q1B are the cumulative amounts listed in IR 2005-120.

I would re-phrase as "The IRS posted cost of living adjustments in IR 2005-120."

2. The cumulative look back amount under 414q1B applicable for 2006 as stated in the IRS white paper for calculating the cola increase was $100,080, which is rounded to $100k. (the white paper info was published by non tax pro).

From the bulletin: "The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $95,000 to $100,000." I don't give a crap what the unrounded amount was.

3. The 1999 info letter (as well as statements made by IRS officials at professional meetings in reliance on the info letter) lack any authority under the IRC as an interpretation of how the look back rule applies to cola increases under IRC 414q1B because the info letter states that it is not ruling under the IRC and cannot be relied on as such.

That's a true statement...but considering that there is no other IRS interpretation of the issue, I'm quite comfortable following that interpretation. What, exactly, is your premise to "prove" that this is wrong? I still don't get it.

4. Each advisor has to make their own determination of whether to use 95k or 100k as the lookback amount for 2006 calendar year plans based on the above three factual statements.

Well, one number is right and one is wrong. Whether 99.9% of the industry is right and you are wrong, or vice versa, hasn't been proven without a doubt yet. But you've implied that there is discretion, and I disagree. You also implied in an earlier message that the IRS seems to like to see more HCEs and wouldn't mind if we used a lower number for the threshold, and I disagreed. As long as we're noting a lack of reponses, I thought I'd mention that you haven't responded.

feel free to disagree.

Done.

[Guest mjb]

2. The cumulative look back amount under 414q1B applicable for 2006 as stated in the IRS white paper for calculating the cola increase was $100,080, which is rounded to $100k. (the white paper info was published by non tax pro).

From the bulletin: "The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $95,000 to $100,000." I don't give a crap what the unrounded amount was.

3. The 1999 info letter (as well as statements made by IRS officials at professional meetings in reliance on the info letter) lack any authority under the IRC as an interpretation of how the look back rule applies to cola increases under IRC 414q1B because the info letter states that it is not ruling under the IRC and cannot be relied on as such.

That's a true statement...but considering that there is no other IRS interpretation of the issue, I'm quite comfortable following that interpretation. What, exactly, is your premise to "prove" that this is wrong? I still don't get it.

4. Each advisor has to make their own determination of whether to use 95k or 100k as the lookback amount for 2006 calendar year plans based on the above three factual statements.

Bird: You ignore the fact that IR 2005-120 is the official interpretation of the cola increase for all qualified plan cola provisions for all years beginning 1989. Perhaps this presentation incorporating the cola increases from the IR will help you understand how the cola limit applies for each determination year beginning with 1997, the first det year after the amendment of 414q1B under SBJPA.

DE yr 97 98 99 00 01 02 03 04 05 06

LB yr 96 97 98 99 00 01 02 03 04 05

LB $ 80 80 80 85 85 90 90 90 95 100

The application of the LB year to each determination year beginning 1997 is taken From Notice 97-45, using the effective date of 1996, the first LB year after the amendment of 414q1B by SBJPA as provided under section 1431(d) of SBJPA. The base period for cola increases was the quarter ending in September 1986 as provided in 414q1B. Under Notice 97-45, example 5 there is no way 80k could be the look back amount for the 2000 determination year as stated in the info letter issued in 1999, since the first 5k cola increase applied in 1999, the fourth LB year after 1996, the first LB year under 414q1B after amendment. In another post Mike Preston agreed with this analysis.

[Kevin C]

MJB,

I guess I'm a glutton for punishment. I bailed on the previous thread, but it refuses to die.

If the 1997 threshold has the SBJPA cola applied to it, how does the effective date for SBJPA 1431(d) make any sense? If the $80,000 threshold already applied to 1996, why would they need a special provision for determining HCE's in 1997?

(

d) Effective Date.--

(1) In general.--The amendments made by this section shall

apply to years beginning after December 31, 1996, 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.

The IRS's guidance also appears to disagree with you. IR 96-43 released the 1997 cola amounts. Here is what is says about the HCE threshold:

The limitation used in the definition of highly compensated employee under section 414(q)(1)(B), as changed by section 1431 of the Small Business Job Protection Act of 1996, is $80,000.

Contrast that with IR 97-41 announcing the 1998 amounts:

The limitation used in the definition of highly compensated employee under section 414(q)(1)(B) remains unchanged at $80,000.

Or the 2000 amounts in IR 1999-80:

The limitation used in the definition of highly compensated employee under section 414(q)(1)(B) is increased from $80,000 to $85,000.

Of course, you still need 1.414(q)-1T to determine the appropriate amount to use for the lookback year calculation. You say it is no longer applicable, but I disagree. Notice 2000-3 says:

D. Effect on Regulations

Because of the amendments made to §§401(k), 401(m), and 414(q) by SBJPA, as well as by other recent legislation, certain portions of §§1.401(k)-1, 1.401(m)-1, 1.401(m)-2, and 1.414(q)-1T of the Income Tax Regulations no longer reflect current law. However, these regulations continue to apply to the extent they are not inconsistent with the Code, Notices 97-2, 97-45, 98-1, and 98-52, this notice, and any subsequent guidance.

I see you edited out a statement in your last post about lookback calculations not applying in 1996, so I guess you will admit it did. I don't see anything in SBJPA that changes the method for the lookback year calculation, it only changes thresholds and the items that need to be calculated. If you see something in SBJPA that would make the applicable part of the temporary reg inconsistent with current law, please provide a cite.

[Guest mjb]

I dont see any thing you cited disagrees what with I have said. The language in 1431 was necessary to change to LB comp amount of 80 from current yr comp when 414q1B was amended effective 1997. For the 1997 plan yr ( the det yr) Congress decreed in 1431 that the threshold amount for being an HCE in 1997 was 80k of comp earned in 1996. Prior to 1997 HCE was determined by using current yr comp which was 100k in 1996. Under the amendment to 414q1B the base period for measuring future cola increases to the 80 LB amount commenced with the quarter ending in Sept 1996. Therefore each measuring period for cola increases were successive 12 month periods ending on sept 30. The first cola increase was to be determined by the % difference in the cost of living index from Sept 30, 1996 to the cost of living index for the qtr ending Sept 30, 1997 multiplied by 80,000 and then rounded to next lowest 5k increment.

IR 96-43 noted that under the SBJPA amendment to 414q1B, the LB yr amount for the 1997 det.yr would be 80k instead of the 100k that has been in effect in the 1996 plan yr. Under 1431 1996 was the LB yr for 1997. The 80k LB amount remained unchanged for the 1998 det yr as noted in IR 97-41 because the cumulative % increase in the cost of living index for the 12 month period ending in Sept 1997 was not sufficient to raise the cola amount by the minimum 5,000 amount when rounded to the lowest 5,000 increment. At the end of the three yr period for the quarters ending between Sept 1996 and Sept 1999 the cost of living index had risen 6.3% which resulted in a cumulative change of 6.3% or $5040 which was rounded down to $5,000 for the fourth look back year which began in 1999 (since 1996 was the first LB yr) which was duly noted in IR 1999-80.

I dont understand your reference to the 1.414q-1T reg since as was noted in your quote the cola increase for the LB amount was to be determined as provided in Notice 97-45 which I cited above as authority. see Example 5 of the Notice.

I edited out the post about 1996 because It prevented displaying a uniform graph of the cola increases in columns for each year due to formatting in the softwear. IR 2005-120 notes that for 1996 the HCE threshold was 100k. There was no LB amount for 1996 because the HCE comp was determined by using the current yr (1996) amount. I dont understand why a LB amount would apply in 1996 for these individuals as you imply. Please explain.

I dont understand what you mean by there being no change in the method for the look back yr calculation from the temp regs since both 1431 and the Notice made changes which have been applied in performing the cola increases, eg. base period. Perhaps you can explain what you mean. I agree that the LB year is the 12 month period preceeding the determination year.

I have no idea what you mean in your last sentence.

[Bird]

This is from the IRS letter to Kyle Brown:

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.

I have no idea how you can conclude that anything in it is wrong. I am angry at myself for getting sucked into this again and will not waste any more time on this topic.

[Kevin C]

No lookback calculation for 1996???

l 1996, Small Business Job Protection Act of 1996 (P.L. 104-188)

P.L. 104-188, §1431(a):

Amended Code Sec. 414(q)(1). Effective for years beginning after 12-31-96, except that in determining whether an employee is a highly compensated employee for years beginning in 1997, this amendment shall be treated as having been in effect for years beginning in 1996. Prior to amendment, Code Sec. 414(q)(1) read as follows:

(1) IN GENERAL. --The term "highly compensated employee" means any employee who, during the year or the preceding year --

(A) was at any time a 5-percent owner,

(B) received compensation from the employer in excess of $75,000,

© received compensation from the employer in excess of $50,000 and was in the top-paid group of employees for such year, or

(D) was at any time an officer and received compensation greater than 50 percent of the amount in effect under section 415(b)(1)(A) for such year.

The Secretary shall adjust the $75,000 and $50,000 amounts under this paragraph at the same time and in the same manner as under section 415(d).

1.414q-1T says how the lookback calculation is done, including which year's HCE $ amount to use in the determination. You said in the previous thread that it is irrelevant because SBJPA changed the law. I disagree because portions of it are still consistent with current law. I provided a cite that says it still applies to the extent it is consistent with current law and current guidance and asked you to provide some sort of cite to support your claim that the entire reg no longer applies.

If you read something in Notice 97-45 example 5 that says which year's HCE $ amount to use in the HCE determination, I can see that further discussion is pointless.

[Guest mjb]

I agree that there was a look back yr for the 1996 determination yr but that LB yr(95) was for the 96 det year when the LB amount was 100k. Effective 1997 the lookback amount was reduced to 80k for the 1997 det year (and the $ amount was only applied for a LB year) which is consistent with the 1996 IR which noted the change in the LB amount to 80k effective for 1997. You seem to be fixated on a reg that describes that the LB yr as the 12 months preceeding the determination yr which I agree with. ( I am sitill unclear as to what provison in the -1T reg that you and I disagree on.)What is ignored in every response is for what year the measuring period for the cola increase begain which under SBJPA was the qtr ending in sep 96. At the end of the three year period for measuring cost of living increases in Sept 99, the cumulative cola % increase of 6.3% from Sept 96 to Sept 99 resulted in a 5,000 increase in the LB yr amount which would take effect for the following LB yr (the4th LB yr) which would be 1999 since 1996 was the first LB yr under SBJPA. Therefore the cola increase applied to the 2000 det yr not the 2001 det yr as stated in the info letter. As example 5 of Notice 97-45 confirms, for the 2000 det yr the LB amount for 1999 comp is 80k as increased for cola which would be 85k under the cola increase declared in 1999. What no one has been able to explain is how the info letter can state that the cola increase declared for the 2000 det year (4th year since 1997) can skip over 1999 as the LB year for the 2000 det year and apply when 2000 is the LB yer for the 2001 det yr. The operating assumption in the info letter appears to be that the cola increase for the next tax yr applies when the det yr for which the cola increase is effective becomes the LB year but provides no citation under 414q1B or the regs for this conclusion.

The determination that 85k was the LB amount for the 2000 det year is confirmed by the cumulative cola increase in IR 2005-120 since in order for the info letter to be correct the LB amount for 2000 would have to be 80k instead of 85. The 100k amount used in the cola increase table as the LB amount for 2006 is consistend with the amount calculated in the IRS white paper of cumulative cola increases for 2006 under 414q1B which is reported in Pub 560.

The problem with all of the objections that have been posted is that they cite various authorities for specific rules on some aspects of this issue but dont provide a complete analysis that explains how the cola increases can be deferred in the manner described in the info letter and be consistent with the applicable provisions of the SBJPA. I would welcome such a response.

While I believe there is substantial authority for using 100k as the LB amount for the 2006 det yr based on my analysis, I would not object if the IRS determined that a lower amount was appropriate as long as that amount was determined under the procedure for issuing a rev rule or reg and not by a midlevel official who has no authority to make a policy decision of this magintude without citing any authority for his rationale. Of course such a change would have to be applied prospectively.

[E as in ERISA]

I don't know if anyone mentioned this but at the May 2006 ABA the IRS said it might provide guidance clarifying that you use 95000 to see if someone is an HCE in 2006.

http://www.abanet.org/jceb/2006/JCEBQAwithIRSfor2006.pdf

Q. 41

[Guest mjb]

The IRS response is inconsistent with previous statements that the current years HCE limit (100k) applies to fiscal yr plans that use calendar yr comp. It is also inconsistent with the reporting of the cumulative COLA increases in IR 2005-120 which provides that the LB $ amounts for tax/plan yrs beginning in 1997 to be comp earned in the prior tax yr (e.g, for 1997 tax yr the LB amount is $80,000 comp paid in 1996 not the 100k amount for the 1996 tax yr.) In order for the IRS statement at the 2006 ABA meeting to be correct the 2006 COLA amount for 414(q)(1)(B) in IR2005-120 should read $95,000 instead of $100,000 since for 2006 95k would be the LB amount for comp eaned in the prior yr (2005). The problem with the IRS response is that it does not tie together the disparate reporting of the cola limits in other guidance provided to taxpayers. The guidance referred by the IRS to is the revisions to the 414q regs.

[WDIK]

The IRS response is inconsistent

Now we're making headway.

[Mike Preston]

Did anybody notice that our good friends at EP:EO seem so have won the day. Pub 560 for 2006 has language that is startlingly clear and completely consistent with the Kyle Brown letter, but totally inconsistent with prior years' Pub. 560's (and, of course, the law). Here is the language from 2006 (for preparing 2006 tax returns):

"For the preceding year, received compensation from you of more than $95,000 (if the preceding year is 2005, $100,000 if the preceding year is 2006 or 2007) and, if you so choose, was in the top 20% of employees when ranked by compensation."

To remind everybody, this is what the 2005 version stated (for preparing 2005 tax returns):

"For the preceding year, 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."

Now isn't that just peachy?