Using Prior Year testing in First Plan Year

[Guest JeffRed]

If a plan is started in Nov. but made effective going back to 1/1 can an HCE still defer 5% of annual compensation? It seems that the NHCEs would only defer a very small percent of their annual comp and I just want to make sure I can use the annual comp for the owner.

[401king]

If a plan is started in Nov. but made effective going back to 1/1 can an HCE still defer 5% of annual compensation? It seems that the NHCEs would only defer a very small percent of their annual comp and I just want to make sure I can use the annual comp for the owner.

Subject to the limitations of the plan document, all employees (HCE & NHCE alike) should be able to defer 100% of their compensation related to paydates up to 12/31/2010, up to the IRS limitations. They cannot go back and defer from prior payrolls, though, because the withholding must come through payroll.

[Lou S.]

If a plan is started in Nov. but made effective going back to 1/1 can an HCE still defer 5% of annual compensation? It seems that the NHCEs would only defer a very small percent of their annual comp and I just want to make sure I can use the annual comp for the owner.

Yes, you can do that.

Though you'll probably want to amend to current year testing for the second year and you would then be locked in to current year testing for 5 years.

Also if it is a small plan, watch out for top-heavy.

edit: also if you have multiple HCEs the HCE average could be 5% and if you have HCEs over 50 they can make cacth-up contributions too probably.

[Guest JeffRed]

Thanks Gentlemen,

Going to SH for years moving forward and making a PS contibution for year one so we'll be alright with the Top Heavy for this year and testing for future years.