Nondiscrimination testing for new corporation

[Guest CWells]

Imagine a company that was newly formed in 2004 and began operation of a cafeteria plan in Nov., 2004. How does one determine the number of HCEs for (1) the short first year, and (2) the 2nd year?

Wouldn't all employees be NHCEs since the previous year's salary is either not applicable (no 2003 salary for look back) or less than the threshold amount (in 2004)?

It seems to me that the first nondiscrimination test that would produce a valid result will not be performed until after open enrollment for the 2006 plan year.

[WDIK]

Ownership still applies in determining highly compensated participants.

[Guest CWells]

Let's narrow this down to just DCAP and assume that the plan can satisfy the eligibility test, the contributions and benefits test, and has no one owning more than 5%. That just leaves us with the 55% Average Benefits Test. We're just looking at salaries when the initial plan year is only 2 months long. How can we perform a "look back" if there's no previous year salary information? It seems to me that there are no HCEs during the 2 months of the 1st plan year.

For the 1st full plan year, there would still be no HCEs because no one made more than $90,000 in the initial short plan year. For the 2nd full plan year, we can determine the HCEs using the previous year.

I feel like I'm missing something. I'd greatly appreciate hearing from someone who's dealt with a similar situation.

[Guest rocnrols2]

Please note that the benefits-related income exclusion sections have different definitions of highly compensated and do not necessarily use the 414(q) definition used for qualified plans. In Section 125, discrimination in favor of "highly compensated participants" is prohibited. Such term is defined in Section 125(e) as an officer, a more than 5% shareholder, (the ever circular and useless) highly compensated, or a spouse or dependent of any of the foregoing. The bottom l ine is that you would always have at least a 5% owner and an officer in the first year.