Disaggregation of plan for new employer

[ccassetty]

A new employer started business on July 15, 2003 and began a 401(k) plan effective for 2003. No deferrals were made the first year. For 2004 calendar year plan, there is one HCE (the 100% owner). He deferred $13,000 out of a $60,000 salary, no employer contributions.

Here's the fun part.

The disaggregation rules say that all of the HCEs can be tested with the non-excludable NHCEs (current year testing on this plan) If we take this rule at face value, in theory, the single HCE ends up in a test by himself and gets an automatic pass even though he is also an excludable employee (remember nobody has a hire date prior to 7/15/03).

If this works, new employers who start a 401(k) right away would get a free pass for the first year, maybe even the second year of the plan. I can't believe this works.

When I started to peer review this plan and saw what the administrator had done, I thought "no way", but then after thinking about it, I am not sure that it doesn't work. I sure don't want to pass on it without some feed back from the experts though.

Thanks!

[ccassetty]

No one has expressed an opinion on this, maybe its because this wasn't news to anybody but me . Anyway, I checked with our resident experts in house, and they assured me that this was perfectly OK, in case anyone was wondering.