Start-up Plan

[Guest RJF]

Can a Co. who incorporates lets say June 30th start a new plan as follows:

Owner is obviously an employee from day 1. Can a plan be drafted where anyone employed on 7/1/06 be automatically eligible for the new plan and any EE's hired afterwards would go through normal eligibility - 1yr for example. So, what if the hire date of the few Employees of the new Company have a hire date of 7/5/06. Therefore the only one eligible for the first plan year and second plan year would be the owner.

Problems?

[Bird]

I think it's a problem; it's obviously discriminating in favor of an HCE. There's an argument that since you can (typically) do this in a standardized prototype - that is, there's often a box you can check saying "anyone employed on xx/xx/xxxx is in the plan on that date" - that it's deemed to be non-discriminatory. I disagree. There's something in the 401(a)(4) regs prohibiting an amendment or series of amendments that result in discrimination and I think that's what applies here.