Can someone tell me the appropriate dollar amount used for the compens

[k man]

Can someone tell me the appropriate dollar amount used for the compensation test when determining HCE's. for example, if we are in 2000 and the idexed amount is 85,000 for 2000, would you use 80,000 for the lookback year since that was the level of compensation in 1999 or would you use 85,000 since that is the indexed amount?

[david rigby]

Hope this is what you mean:

For the PY beginning in 2001, HCE determination is based on the comp earned in the PY beginning in 2000. If 2000 comp is more than $85000, then the EE is an HCE for 2001.

[k man]

it might be.are you saying that you use the limit that was in place for 2000 (85K) or the equivelant of the amount idexed for 2001?

[Dave Baker]

Here's something on point, I think:

http://www.benefitslink.com/benefits-bin/q...atabase=qa_401k

[IRC401]

The correct answer is actually quite complicated, and the Q&A that Dave linked you to is not accurate.

If you read the law, the indexed number for plan years beginning in 2000 is $85,000, which means that anyone who had compensation in excess of $85,000 in 1999 is an HCE for 2000. Unfortunately, the IRS can't read the law and doesn't recognize Congress' right to override its regulations.

Relying on an obsolete regulation, the IRS took the position that the $85,000 amount doesn't apply until 2001, and that is the position in the Q&A. To the best of my knowledge the IRS has NEVER presented its position in any form that can be considered to be authority. The IRS explained its position in a letter to an actuarial firm, and at the end of the letter explicitly stated that the recipient was not entitled to rely on the letter. Therefore, there is no authority for the position stated in the Q&A, which runs contrary to what appears to me to be the clear language of the statute. Nevertheless, plan administrators appear to be taking the position in the Q&A as a path of least resistance.

For those of you who doubt the validity of my position, I would like to point out that the regulations on family aggregation were issued at the same time as the regulation cited in the Q&A and are still on the books. Why aren't you following the family aggregation regulations when determining who is an HCE? If your answer is because Congress changed the law, that is my response to why the compensation regulation is also not applicable.

[Guest]

At the ASPA conference, Sal Tripodi points out the following:

Current Developments (Treasury regulations and IRS pronouncements)

© Copyright 2000 TRI Pension Services

Page 2

# Increase in compensation requirement first applies to lookback years which

start in the calendar year in which the increase is effective [Citation: General

Information Letter on Dollar Increase to Compensation Requirement for HCE Determination,

December 9, 1999, reprinted in CCH Pension Plan Guide, ¶17,202D]

In a general information letter to a taxpayer, the IRS confirms that the increase of the dollar requirement

under the compensation test for highly compensated employee (HCE) status applies to lookback years (not

plan years) which start in the calendar year in which the dollar increase takes effect. See Treas. Reg.

§1.414(q)-1T, Q&A-3©(2). Recently, IRS announced that the compensation requirement rises from

$80,000 to $85,000 effective January 1, 2000. This increase, however, does not apply to HCE

determinations for plan years which start in 2000, but to a plan year with a lookback year which starts in

2000. That means, the increase generally doesn't have any effect until plan years beginning in 2001 (i.e.,

the 2001 plan year).

Example - calendar year plan. A plan has a plan year which ends December 31. For the plan year

starting January 1, 2001, the plan will look at compensation for 2000 to see who satisfies the compensation

test. An employee's 2000 compensation will have to exceed $85,000 to satisfy that test. However, for the

plan year which starts January 1, 2000, the $80,000 test still applies because compensation for 1999 is

used.

For a noncalendar year plan, the first plan year that the $85,000 limit is effective depends on whether a

calendar year election (see Notice 97-45) applies to determine the lookback year for the compensation

test.

Example - noncalendar year plan with no calendar year election. A plan has a plan year which ends

June 30. A calendar year election is not in effect to apply the compensation test for the HCE determination.

The $80,000 amount is still used to apply the compensation test for the plan year which starts July 1, 2000,

and ends June 30, 2001, because the lookback year for that plan year (i.e. July 1, 1999, through June 30,

2000) begins in 1999. The $85,000 test will first apply to the plan year ending June 30, 2002, when the

lookback year for such plan year will begin in 2000.

Example - calendar year election made by noncalendar year plan. Assume in the prior example that

the employer makes a calendar year election to determine the lookback year for the compensation test.

In that case, to determine which employees satisfy the compensation test for the plan year which starts July

1, 2000, the $85,000 amount is used because the lookback year is calendar year 2000.

.......

I know IRC401 disagrees with the above, my only comment would be to disagree with his statement

'appears to me to be the clear language of the statute'

If it is so clear, why do so many others keep asking?

[IRC401]

My response:

1. The letter to the taxpayer that you reference states that the taxpayer may not rely upon it.

2. The correct answer may not be obvious to you, but I doubt that you could reach the opposite result looking at only the statute. Every practioner that I am aware of reached the opposite result until Jim Holland stated the current IRS unofficial position at an ASPA program (which was about 10 days after an ALI-ABA program at which he didn't state a postion).

3. No one (as far as I know) has explained why a reg. issued under prior law has any more relevance than the regs on family aggregation.

4. There would be a lot less confusion if the IRS read the law or practioners expected the Service to pay attention to Congress. Unfortunately, most practioners appear to believe that their job is to relay the latest IRS gossip to their clients than to interpret the law.

[MWeddell]

Replying to the points as numbered in the preceding post:

1. The letter stating the IRS's interpretation that one should apply the $80,000 threshold to 1999 compensation when identifying who are HCEs in 2000 is a general information letter. It states "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." The request and the IRS response did not purport to be binding on any particular taxpayer. The IRS used the letter as a vehicle to announce its general position. If one advises a client to use the $85,000 figure instead, one should make the client aware that the IRS has announced that it believes a different interpretation is correct.

2. Prior to the general information letter's being issued, I agreed with IRC401's interpretation. However, my recollection is that BenefitsBoard contributors mostly seemed to agree with Jim Holland's unofficial comments, which became the IRS position. I tried to do a search on old messages, but I didn't seem to be able to access them.

3&4. What's the "correct" answer? My clients generally want to know what is the IRS's likely position and whether they can obtain a favorable determination letter, not what a court might say after spending plenty of time and money litigating the issue. Some of them are interested in our opinions about whether the IRS's positions are well-founded but most are not. Hence, for the bulk of clients I work with, the right answer is use the $80,000 threshold for 1999 compensation when identifying 2000 HCEs. My job is to help clients, not to "relay IRS gossip" and not to "interpret the law" without any regard for well-publicized IRS positions.

This is in fact a common dilemma. The IRS often announces rules that cannot be found in the Code. For example, a plan designed to satisfy the 401(k) and 401(m) safe harbor rules does not satisfy the 401(m) safe harbor if (in addition to the safe harbor contribution) the employer has discretionary match totalling > 4% of pay. Where is that rule found? Not in the Code. It's in IRS Notice 98-52, as modified by IRS Notice 2000-3, documents that are binding on the IRS but not binding on taxpayers. In that situation, I'd express disagreement with the IRS position, but tell the client if they want to be sure to meet the safe harbor, don't have discretionary match > 4% of pay.

My point is that if one wants to ignore IRS pronoucements, there are plenty of times when the IRS seems to disagree with or go beyond what's in the Code. The HCE issue isn't the only example of that.

[R. Butler]

Everyone in this particular thread is much more intelligent, or at least more analytical, than me. Having said that, I agree with Tom Poje. I have always interpreted the dollar amount for a "look back year" to be the dollar amount for the calendar year in which "look back year" begins. For 2000 the look back year is 1999. At the beginning of 1999, $80,000 was the threshold. It just seems to interpret it otherwise means that the definition I rely on for the "look back year" is incorrect.