1545-1550_supporting_statement_2019

SUPPORTING STATEMENT

Internal Revenue Service

Notice 97-45

Highly Compensated Employee Definition

OMB Control Number 1545-1550

1. CIRCUMSTANCES NECESSITATING COLLECTION OF INFORMATION

Section 1431 of the Small Business Job Protection Act of 1996 ("SBJPA") revised the definition of highly compensated employee ("HCE") under § 414(q) of the Internal Revenue Code ("IRC"). Under § 414(q)(1) as in effect before 1997, an employee was an HCE if, during the year or the preceding year, he (A) was at any time a 5-percent owner, (B) received compensation from the employer in excess of $100,000 (for 1996), (C) received compensation from the employer in excess of $66,000 (for 1996) and was in the top-paid group of employees for the same year, or (D) was an officer who received compensation greater than $66,000 (for 1996). The top-paid group consists of the top 20 percent of employees when ranked on the basis of compensation for the year. In addition, under preSBJPA §414(q)(6), members of an HCE's family working for the same employer were in some cases aggregated with the HCE and treated as a single, highly compensated employee ("family aggregation").

The previous definition of HCE was criticized for being too complicated and for classifying many middle-income workers as HCEs. In addition, family aggregation prevented family members working in the same business from being considered individually for pension purposes.

After revision, § 414(q)(1) defines HCE as any employee who (A) was a 5-percent owner during the year or the preceding year, or (B) for the preceding year (i) had compensation from the employer in excess of $80,000, and (ii) if the employer elects the application of this requirement, was in the top-paid group of employees for the preceding year ("top-paid group election"). In addition, the family aggregation rules are repealed.

Under the notice, HCE status under § 414(q)(1)(B) is generally determined on the basis of employees' compensation and the top-paid group, if applicable, for the preceding plan year ("look-back year"). However, because employers generally record compensation on a calendar-year basis, the notice permits an employer to make a "calendar year data election," thus treating the calendar year beginning with or within the look-back year as the look-back year.

In general, the definition of HCE is used in applying the nondiscrimination requirements to a qualified employee benefit plan under § 401(a) of the IRC and is not contained in the actual plan document. However, in some cases, a plan contains a definition of HCE because HCE status actually affects an employee's contributions or benefits under the plan. For example, the plan terms might place a limit on plan contributions made for HCEs.

The revised statutory definition under § 414(q) renders plan documents that contain the old definition obsolete. In order to keep the plan document current, the notice requires a plan that contains a definition of HCE to be amended to reflect the revised definition, including any applicable top-paid group or calendar year data election. Later changes to a top-paid group or calendar year data election will also have to be implemented by amending the plan. However, the notice does not require an employer (business and other-for-profits) to file notification with the Internal Revenue Service ("IRS") to make or change a top-paid group or calendar year data election. In addition, the notice provides the same period for amendments to reflect the new HCE definition as provided for other SBJPA amendments, that is, until the last day of the first plan year beginning on or after January 1, 1999 (and later for governmental plans).

2. USE OF DATA

The definition is used to determine which employees are HCEs for purposes of administering employee benefit plans. In order to keep the plan document current, the notice requires a plan that contains a definition of HCE to be amended to reflect the revised definition, including any applicable top-paid group or calendar year data election. The notice does not require an employer to file notification with the Internal Revenue Service ("IRS").

3. USE OF IMPROVED INFORMATION TECHNOLOGY TO REDUCE BURDEN

Because there are no reporting requirements associated with Notice 97-45, electronic filing is not provided. IRS Publications, Regulations, Notices and Letters are to be electronically enabled on an as practicable basis in accordance with the IRS Reform and Restructuring Act of 1998.

4. EFFORTS TO IDENTIFY DUPLICATION

The information obtained through this collection is unique and is not already available for use or adaptation from another source.

5. METHODS TO MINIMIZE BURDEN ON SMALL BUSINESSES OR OTHER SMALL ENTITIES

There is minimal or no burden on small businesses or HCE employees by this collection due to the requirements of the authorizing statute under section 414(q)(1).

6. CONSEQUENCES OF LESS FREQUENT COLLECTION ON FEDERAL PROGRAMS OR POLICY ACTIVITIES

HCE is define as “any employee who (A) was a 5-percent owner during the year or the preceding year, or (B) for the preceding year (i) had compensation from the employer in excess of $80,000, and (ii) if the employer elects the application of this requirement, and was in the top-paid group of employees for the preceding year ("top-paid group election")”. Less frequent collection would not allow IRS to identify or determine which employees are HCE. In addition, the IRS does not collect this information, the information is to be retained by the employer.

7. SPECIAL CIRCUMSTANCES REQUIRING DATA COLLECTION TO BE INCONSISTENT WITH GUIDELINES IN 5 CFR 1320.5(d)(2)

There are no special circumstances requiring data collection to be inconsistent with Guidelines in 5 CFR 1320.5(d)(2).

8. CONSULTATION WITH INDIVIDUALS OUTSIDE OF THE AGENCY ON AVAILABILITY OF DATA, FREQUENCY OF COLLECTION, CLARITY OF INSTRUCTIONS AND FORMS, AND DATA ELEMENTS

In response to the Federal Register notice dated June 3, 2019 (84 FR 25337), we received no comments during the comment period regarding Notice 97-45.

9. EXPLANATION OF DECISION TO PROVIDE ANY PAYMENT OR GIFT TO RESPONDENTS

No payment or gift has been provided to any respondents.

10. ASSURANCE OF CONFIDENTIALITY OF RESPONSES

Generally, tax returns and tax return information are confidential as required by 26 USC 6103.

11. JUSTIFICATION OF SENSITIVE QUESTIONS

No personally identifiable information (PII) is collected.

12. ESTIMATED BURDEN OF INFORMATION COLLECTION

Section VII of the notice requires plans that contain a definition of HCE to be amended to reflect the statutory changes to §414(q) and any top-paid group or calendar year data elections (or changes to those elections).

Authority	Description	# of Respondents	#Responses per Respondent	Annual Response	Hours per Response	Total Burden
IRC §414(q)	Notice 97-45	218,683	1	218,683	.3	65,605

13. ESTIMATED TOTAL ANNUAL COST BURDEN TO RESPONDENTS

To ensure more accuracy and consistency across its information collections, IRS is currently in the process of revising the methodology it uses to estimate burden and costs. Once this methodology is complete, IRS will update this information collection to reflect a more precise estimate of burden and costs.

14. ESTIMATED ANNUALIZED COST TO THE FEDERAL GOVERNMENT

To ensure more accuracy and consistency across its information collections, IRS is currently in the process of revising the methodology it uses to estimate burden and costs. Once this methodology is complete, IRS will update this information collection to reflect a more precise estimate of burden and costs.

15. REASONS FOR CHANGE IN BURDEN

There is no change in the paperwork burden previously approved by OMB. We are making this submission to renew the OMB approval.

16. PLANS FOR TABULATION, STATISTICAL ANALYSIS AND PUBLICATION

There are no plans for tabulation, statistical analysis and publication.

17. REASONS WHY DISPLAYING THE OMB EXPIRATION DATE IS INAPPROPRIATE

We believe that displaying the OMB expiration date is inappropriate because it could cause confusion by leading taxpayers to believe that the notice sunsets as of the expiration date. Taxpayers are not likely to be aware that the Service intends to request renewal of the OMB approval and obtain a new expiration date before the old one expires.

18. EXCEPTIONS TO THE CERTIFICATION STATEMENT

There are no exceptions to the certification statement.

Note: The following paragraph applies to all of the collections of information in this submission:

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.