Employer sold part of business and wants to establish new plan effective mid-year for just the remaining three employees. How to test for 410(b) etc.?

[Guest tkay]

Dr. N and Dr. M sold off a major part of their practice effective June 30, 2003. They are continuing to run a smaller office with only themselves and one employee. All the other employees either terminated employment or are now working for Dr. K, who purchased the practice. Dr. N and Dr. M's corporation sponsored a 401(k) plan, which is now partially terminated as a result of the sale. This plan still exists, and the doctors now want to make an employer discretionary match (allowed by plan) for only themselves and their one remaining employee. I told them they can't, since excluding the other participants who are now with the new Dr. would cause the plan to fail ACP, 401(b), etc. I know it's shocking, but they didn't like my answer. Now they want to know if they can set up a new plan, effective July 1, 2003 (short plan year), and cover only themselves and their one current employee. I can't wrap my brain around this. Wouldn't they have to aggregate both plans for testing purposes? Old plan has a testing year of Jan thru Dec, 2003, new plan would have a short testing year of July thru Dec. Don't the old employees get thrown into the testing pool for the new plan, for 2003? Am I totally off base?

[Guest pensionadmin]

The 401(k) regulations say that if a HCE is covered under more than one plan of the same employer then the HCE's comp and deferrals are aggregated for purposes of ADP testing so I don't think it would help to set up the second plan. You'd have to include the HCE numbers for both plans in the testing for the first plan.