Employee Returns to a tiered DB Plan

[Dougsbpc]

We administer a 1 participant / 1 employee DB that was adopted and effective 1/1/00. The owner (100% shareholder) sold his old company to another firm that purchased the assets of the company. The 3 employees he had, terminated employment in 1999 before his new corporation adopted the DB plan. The income he is using to fund the plan is flowing into his corp from the sale of his old business. Payments stopped in 2001 so we amended his plan to reduce the benefit to prevent any funding requirement in 2002 (the year he will have less income). We changed the benefit from 60% of FAC to 10% of FAC.

He now wants to somehow provide a benefit to one of his former nhce/ non-key employees. I thought perhaps we could amend the plan to get rid of eligibility and change accrual to one hour of service. He could then hire his former employee for one day and provide the tax-deferred benefit he wants. We could acheive this by having a benefit formula for non-owner employees of say 50% of FAC. FAC is defined as the highest 3 consecutive years of all years including years with a predecessor employer. I dont see a problem passing 401(a)(4) in 2002 as we should pass using the annual method.

He will terminate the plan in early 2003.

Anyone see a problem with this?

Thanks