start up company & start up plan

[Earl]

Thought this would have been discussed but I sure can't find anything.

New Company starts a plan in 2008.

I want to use Prior Year Testing and use the "Early Participation" rule and thereby exclude the otherwise excludibles but add back the HCE (owner).

I think the test becomes void as the HCE is tested against no one. Pass.

2009

Prior year testing, I am again looking at a null set of NHCEs so year 2, the only HCE (Owner) is tested against nothing (rather than 0). Pass again

2010

Safe Harbor as there are actually a lot of employees and now they are in the regular test.

Sound right?

[K2retire]

The first year of a plan using prior testing you are allowed to assume 3% for the NHCE prior year.

[J Simmons]

2009

Prior year testing, I am again looking at a null set of NHCEs so year 2, the only HCE (Owner) is tested against nothing (rather than 0). Pass again

Is it tested against "nothing (rather than 0)" for NHCEs if you have NHCEs in year 2?

[Tom Poje]

this sounds like one of those unintended consequences of the law.

New Company (and it is late in the year)

thus no one has a year of service.

but under the regs, you can treat the HCE as having met the 1 year wait. so you compare the HCE to prior year NHCEs. since there are none, there are only HCEs and so the plan passes.

in 2009, assuming the new company began after 7/1/08 no one will have 1 year of service, so the same thing happens.

it appears the HCE stands alone again.

[ERISAnut]

True, but Earl should provide a few more details on the NHCEs. Are there any employees other than the owner? You may draft the plan to state the one year service applies to only those employees hired after a certain date; everyone else is immediately eligible. If you're NHCE is hired AFTER 7/2/2008, then your entry date in the plan will not be until 1/1/2009.

I am assuming the provision 'coincident with or next following' being used with the semi-annual entry date.

[Earl]

I am thinking that the eligibility requirements don't matter since, for testing, I can assume 21 & 12 - and entry dates that have been a subject of other threads. For sure plan does not actually require a year of service because then no one would be eligible.

Under the otherwise excludible and early participation testing the NHCEs are not includible until 1/1/2010. So am going with a 2 year free pass. (And Top Heavy is not an issue in this case.)

Thanks for the responses.

[ERISAnut]

(And Top Heavy is not an issue in this case.)

Cannot sneak that one in. Top heavy is an issue if there are NHCE early entrants. There are many ways to deal with your situation, but Top Heavy implications should be considered since there is no free-ride.

[Earl]

By not an issue I mean the % will be about 10%. Top Heavy is not an issue that I need to worry about, is what I meant.

And ADP is an issue when top heavy is not because of the miracle of S-Corp payroll tax evasion. (But that is another thread...)

[John Feldt ERPA CPC QPA]

By not an issue I mean the % will be about 10%. Top Heavy is not an issue that I need to worry about, is what I meant.

Only the owner was in the plan, so how is the top heavy percentage only 10%? Is there another plan, or am I missing something?

[Earl]

I have lots of people eligible. The topic is about ADP/ACP testing using the otherwise excludible and early participation options. This does not keep them out of the Top Heavy test.