Can first year 3% rule for ADP apply in second year of plan?

[Guest CHRISTA]

I have a 401(k) plan that was effective 1/1/00, but they made no contributions during this year. They began deferrals as of 1/1/01, and I am working on their testing for plan year ended 12/31/01. Can I use the deemed 3% rule for the NHCEs, even though it technically is not the first year of the plan?

[MWeddell]

If employees were eligible to make deferrals in 2000 but nobody choose to do so, then you can't use the first year plan year in 2001. If there was a plan in 2000 but for some reason no one was eligible to make elective deferrals in 2000, then you've got a stronger argument.

An alternative is to use the current year method because you sure don't want to compare 2001 HCE percentages to 2000 NHCE percentages, which are 0%.