A new employer started business on July 15, 2003 and began a 401(k) plan effective for 2003. No deferrals were made the first year. For 2004 calendar year plan, there is one HCE (the 100% owner). He deferred $13,000 out of a $60,000 salary, no employer contributions.
Here's the fun part.
The disaggregation rules say that all of the HCEs can be tested with the non-excludable NHCEs (current year testing on this plan) If we take this rule at face value, in theory, the single HCE ends up in a test by himself and gets an automatic pass even though he is also an excludable employee (remember nobody has a hire date prior to 7/15/03).
If this works, new employers who start a 401(k) right away would get a free pass for the first year, maybe even the second year of the plan. I can't believe this works.
When I started to peer review this plan and saw what the administrator had done, I thought "no way", but then after thinking about it, I am not sure that it doesn't work. I sure don't want to pass on it without some feed back from the experts though.
Thanks!

No one has expressed an opinion on this, maybe its because this wasn't news to anybody but me . Anyway, I checked with our resident experts in house, and they assured me that this was perfectly OK, in case anyone was wondering.