New Company Starts Plan

[Earl]

Company started in May 2016. Owner is only employee until September.

Is it ok to design plan excluding employee?

I seem to remember something (that I can't find) about applying most liberal eligibility requirements in first year for the/a coverage test. And since the only NHCE would be excluded I would have a problem.

Any basis in fact or did I dream that one up?

Thanks

[Lou S.]

I think you would be OK with something like 4 month eligibility first of the month following and base compensation on full year.

That way owner enters 10/1/16 and employee enters 1/1/17 if I've got the dates right.

I think where you might have an issue is if you make the eligibility less liberal in the future. You might have some testing issues in the transition year.

I think were you might also have a problem is if you have something like 1 year wait but anyone employed as of May 1 (or whatever the start date of the company is) is immediately eligible. That's where the "most liberal eligibility" condition might come back to bite you.

[imchipbrown]

Earl

This is from the FT William NonStandarized 401k Adoption Agreement

8.Special Participation Date

a.[ ] Allow immediate participation for all Eligible Employees employed on a specific date. All Eligible Employees employed on shall become eligible to participate in the Plan as of

b.[ ] The Plan provides conditions or limitations on immediate participation:

NOTE: If B.8b applies (B.8a is selected) and is selected, describe the conditions or limitations and indicate for what purposes (e.g., Elective Deferrals, Matching, etc.) the conditions or limitations apply. The conditions/limitations must be objectively determinable and may not be specified in a manner that is subject to discretion.

I've used this provision many times in the past. I can't say that I've been audited and questioned about the provision.

[Bird]

Reg § 1.401(a)(4)-5 Plan amendments and plan terminations talks about a "pattern of amendments" possibly discriminating in favor of HCEs. While it's not literally an amendment, a special participation date has the effect of 1) adopting the plan with no eligibility, and 2) amending to require some service.

I don't think it's a problem if you use that language to bring in some people immediately, as long as there are some NHCEs included. But if it is used to just bring in an HCE, well, if we are being honest, it is discriminatory.

I've always tried a workaround as Lou S. described.