HCE and Initial Plan Year

[Guest Tara Curran]

How are HCE's determined in initial year of a 401(k) plan? The Company was in existence in the prior year, but they maintained a SEP. Are we correct in saying there is no lookback year even though the Company existed in the prior year?

[R. Butler]

No you are not correct. The lookback year is the 12 month period preceding the first plan year.

[Guest 1950]

What if the employer had not been in exisitence in prior years? That is, what if the plan were adopted immediately after the formation of the employer?

Strictly speaking, there would be no employee who, in the look-back year, had enough compensation to be an HCE. If no one was a 5% owner, then it seems there would be no HCEs. Does that mean it automatically passes all tests: coverage, ADP, ACP, the general test, etc.???

I'm having a hard time believing this, but can't find anything to refute it. Anyone know the answer?

[Tom Poje]

yep, for a newly formed company that puts in a plan immediately, you might not have HCEs

[Guest 1950]

Tom:

Are you saying "MIGHT not have any HCEs" because of the 5% owner rule? Seems to me that an employer that didn't exist before its first plan year could not possibly have any HCEs.

You agree?

And if that's right, certainly seems like it could present the opportunity for a lot mischief.

Thanks.

[R. Butler]

If the employer has a 5% in owner in the current year than there would be an HCE.

[Guest 1950]

I misspoke... sorry.

I meant it could not have any HCEs if it had no 5% owners.

Am I the only one that finds this odd?

[R. Butler]

It beats the old way. I started in 1996, learned the old rule and then one year later they change it. I wish they would have changed it in '96 & I would have never had to go thru the agony of learning the old way.

[2muchstress]

I started in 98 and I don't have a clue about the old rules (except for when you old timers mention the good ol days)

[Kirk Maldonado]

I started in 1978 and I've lost track of how many times they've changed the rules.

[Earl]

"chage the rules" is redundant