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Hiring someone during the year with large salary and immediate entry


Jakyasar
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Hi

Here is a new one for me.

New 401k plan, effective 1/1/2021 (no short plan/tax year)

They decided to hire a new employee on 9/1/2021 and will pay 350k salary for calendar 2021. This employee will have an immediate entry of 9/1/2021, a special entry date amendment otherwise plan has 21/1 and dual entry for eligibility.

For 401k deferrals, profit sharing allocation and testing compensation, what needs to be prorated? Assume no hour requirements for ps and 401k.

Thank you

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Nothing needs to be prorated for this individual. If that is $350K salary in 4 months he will hit the 401(a)(17) limit of $290K. If his salary is $350K annually and he's being paid 4 months he'll be under the comp limit and HCE limit in 2021 and not an HCE for 2022. 

If $350k w-2 salary, unless they are an owner, they will be a NHCE for 2021 and HCE for 2022 which could have implications for your 2022 test if you test statutory exclusions separate. I suppose it's possible he's not an HCE because he's not in the TPG and the plan applies that election though it would be unusual.

 

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Hi Lou

Thank you for the additional information but not worried about next year yet. Plan only covers HCE's anyway so 2022 is not an issue neither is 2021. Sometimes we need those plans with no testing issues.

Much appreciated.

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On 8/20/2021 at 1:15 PM, Jakyasar said:

Actually let me change the above to a DB plan, again with all the above provisions, would I need to prorate the accrued benefit?

What are the conditions for accrual in the document and does the participant meet those?

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