Starting a 401k this late in the year

[DP]

We have a 3-employee group where the father is the sole proprietor. The other employees are his HCE son and a secretary who works less than 1000 hours a year. The father wants to start a 401k this week, effective 1/1/99 so he can defer $10,000 for 1999. There is only one pay date left for the son during 1999. Can this be done this late in the year, or is it discriminatory to the son?

[MWeddell]

Obviously, you'd want to urge the employer to make 100% sure that the secretary has never earned 1,000 or more hours of service during any year.

A cash or deferred election can only be made on cash not yet currently available. Hence, it could apply only to paydates between the effective date of the plan and the end of the year. You can use compensation earlier in the year to meet 415 and 404 limits, but no more than 100% of remaining compensation (less FICA, etc.) could be deferred.

You'll want a resolution or something else authorizing deferrals.

[Dave Baker]

This sort of design seems clever to me -- I guess the ability to put in a last-minute deferral feature, which HCEs can take advantage of more easily than non-HCEs, is a big reason why the IRS has special rules for SIMPLE IRA plans (can't be put in after October 1 for a given calendar year). But I don't think there would be any such rule for your basic 401(k) plan.

Heck, I understand that 401(k) plans used to be written to allow deferrals ONLY from bonuses, before it was clear that salary deferrals would be acceptable to the IRS. (I was barely out of high school then, though, and thinking about other things, so I'm not sure.)