New Business New Plan

[abanky]

A guy starts a company on 1/1/2010 and is the only employee on that day... 1/12/2010, he hires several employees.

Wants to start a plan, effective 1/1/2010, with 1 year of service age 21, dual entry, but anyone employed on 1/1/2010 is in the plan... can he have the plan by himself for the first year?

[AndyH]

My vote would be no, based I guess on discriminatory timing of amendments considering facts and circumstances, but how about a provision that all employees become participants on the first day of the plan year coincident with or next following their date of hire?

[david rigby]

... all employees become participants on the first day of the plan year coincident with or next following their date of hire?

Is that a different result under a facts and circumstances test?

[AndyH]

Sure smells less worse.

[John Feldt ERPA CPC QPA]

What about coverage?

If the lowest age/service entry requirement that can be applied for any employee for the plan year is "none", no age or service (because that's the requirement for the HCE), then those other people hired after January 1 are not exlcudable from testing, isn't that right? If so, then that makes coverage fail?

[Kevin C]

My vote is no. And I don't think the other suggested option works any better. The timing issue under 1.401(a)(4)-5(a) is based on the effect of the amendment. Both options would have the same result, so I don't see how their effect could be different.

[david rigby]

If you are going to use a facts and circumstances test, be sure to use all the facts, not just some of them.

Note the discussion in 1.401(a)(4)-5(a)(2) uses the phrase "...has the effect of discriminating significantly..."

IMHO, it is relevant to consider whether the proposed plan design/timing is both discriminatory and significant. For example, if the benefit formula uses all service, then the eventual benefit received by the NHCEs (assuming they reach a non-zero vesting at some later date) is exactly the same as if the plan had existed prior to their hire date, with a possible conclusion that there is no discrimination.

[Belgarath]

Could you make it a money purchase plan for year one, with a beginning of year plan anniversary date, waiving eligibility for anyone employed on the first day of the plan year? Then amend to a PS for year 2?

The waiver of eligibility for people employed on first day of plan year was, I know, permitted in IRS GUST prototypes. At least it was in ours. I don't know if they still allow it in EGTRRA prototypes, because I haven't seen a money purchase EGTRRA prototype. I think many (maybe most) providers no longer sponsor them. We don't. Perhaps worth a look, anyway.

[PensionPro]

What if the service requirement was only 6 months? Or the plan recognizes predecessor service that results in only the owner being eligible the first year? Would that still be considered discriminatory?

[Lou S.]

My vote would be no, based I guess on discriminatory timing of amendments considering facts and circumstances, but how about a provision that all employees become participants on the first day of the plan year coincident with or next following their date of hire?

What if the service requirement was only 6 months? Or the plan recognizes predecessor service that results in only the owner being eligible the first year? Would that still be considered discriminatory?

Personally I don't see a problem with either of these methods, the other people simply don't meet the entry conditions. Where you would run into a problem would be having an amendement to the plan in a "relatively short time after adoption of the plan" that then raised the entry to 21/1 dual entry. That in my opinion would be a pattern of amendments designed to favor HCEs and would fail testing.

Though the predecessor service would most likely be a discriminatory providion favoring HCEs as I don't think there was a predecessor business in this case so you'd be picking up service from an unrealted business for just the owner as I understand it here. Though maybe I'm making a faulty assumption.

[AndyH]

What about coverage?

If the lowest age/service entry requirement that can be applied for any employee for the plan year is "none", no age or service (because that's the requirement for the HCE), then those other people hired after January 1 are not exlcudable from testing, isn't that right? If so, then that makes coverage fail?

Isn't this one of the big un-answered questions, the question about whether coverage testing of otherwise excludables is based on statutory maximums or a plan's entry date? I have to admit I've always sided with the use of statutory maximums.

I admit I'm not sure about whether this would fly or not, which is why I commented in the form of a question. But I think it might.

[PensionPro]

Anybody have a cite for the practice of waiving eligibility requirements for employees employed on a certain day such as the plan effective date? (I realize the practice is common, and the IRS has been approving documents with those provisions for a long time).

[Lou S.]

I'm pretty sure it is all covered in 410(b)(4)(A)-©

And If you have an age and service condition that applies uniformly to all ees that 410(b)(4)(A)(i) - (ii) pretty explicited states its OK to excluded those people from testing.

It is 410(b)(4)© that becomes problematic IMO if you bring in, or cover, people who don't meet the plan's general eligibility condition, such as an "anybody employed on the effective date is eligible" or "any one who is a participant prior to making eligibility more restrictive is still a participant" that you can run into testing problems in operation. They may or may not be discriminatory but it would be based on ee population.

[AndyH]

A guy starts a company on 1/1/2010 and is the only employee on that day... 1/12/2010, he hires several employees.

Wants to start a plan, effective 1/1/2010, with 1 year of service age 21, dual entry, but anyone employed on 1/1/2010 is in the plan... can he have the plan by himself for the first year?

Andrew, the moral of the story is that upon audit or review, the IRS agents won't know all this stuff. They'll just slap a 'Your Out" tag on you, and leave it to you to argue that you slid in under the tag. Not really worth it.

[abanky]

A guy starts a company on 1/1/2010 and is the only employee on that day... 1/12/2010, he hires several employees.

Wants to start a plan, effective 1/1/2010, with 1 year of service age 21, dual entry, but anyone employed on 1/1/2010 is in the plan... can he have the plan by himself for the first year?

Andrew, the moral of the story is that upon audit or review, the IRS agents won't know all this stuff. They'll just slap a 'Your Out" tag on you, and leave it to you to argue that you slid in under the tag. Not really worth it.

Lol, thanks Andy... I told the client I wouldn't touch it with a 10 foot pole... He finally agreed that the benefit of the plan to him way out weighed the cost he had to pay to his employees.