Need help with the following example

X made $100,000 in 2004, $110,000 in 2005 and retired on 12/31/2005.

For the 2005 determination year, X is an HCE and is ranked 22 for the restricted HCE rule using $100.000. There are no ties in the top 25 group. If X had not retired, his $110,000 would have ranked 23 for the 2006 determination year.

For the 2006, determination year, X is now a former HCE. What is the right pay to use to rank X in 2006?

The regulations are not clear. I would like to argue that $100.000 is the proper pay amount. It is the pay used for his HCE determination in the last year he was an HCE. When he became an FHCE, the lookback concept for HCE determination does not apply. Therefore you look to the highest compensation used when he was an active employee.

Any comments or cites are much appreciated.

First, the definition of restricted employee in 1.401(a)(4)-5(b)(3)(ii) refers to the "25 nonexcludable employees and former employees with the largest amount of compensation in the current or any prior year". It does not reference compensation within the context of determining who is a highly compensated employee, so the use of the lookback year is irrelevant. That being said, $110,000 was his highest salary and should be used to determine if he is one of the highest 25 paid. I am not sure why you are ranking it year by year though since it is an all-time determination.

The client has very narrow range pay bands that cause may ties in the top 25 list. The rankings are important for that reason. Thank you for the comments.

I was just pointing out that it's the top 25 paid all-time, not the top 25 paid each year. I may have misunderstood your original post though.