Sale of business as of 10/1 (stock sale) and ADP test

[Pammie57]

A small business client has a 401k Plan that has to pass the ADP test for 2018.  They are not Safe harbor.

As of 10/1 the 100%  owner  is selling the stock to  two previously  rank and file employees .  The plan has always passed the ADP test  in prior years because the owner only deferred 2 percent more than these employees did.  

So my question is this - as of the end of the year - who is considered an  HCE for the ADP test??.  Do the two new owners join the former owner in the HCE group?? - or does the previous owner  become part of the NHCE group for ADP testing?    There are 3 other eligible  NHCE"s who defer nothing.   Any way around this for the year of sale?  It looks like a possibility of the plan failing ADP.  There is no match to consider.

[C. B. Zeller]

Assuming both of the 2 new owners are >5% owners, all 3 are HCE for 2018 and 2019.

[Lou S.]

I'm assuming this is a calendar year plan. You look at the highest percentage ownership at any point in the year in 2018 to determine HCEs.

You are likely going to fail ADP and have to refund all deferrals if you have no NHCEs contributing.

Now might all be a good time to see if this plan is going to be top-heavy for 2019 and suggest making it a safe-harbor for next year.

 

[Pammie57]

The new owners will own the business 50/50 so yes they are greater than 5% owners...

We did highly suggest a safe harbor plan for 2019, but these guys didn't see the big picture and only heard that the safe harbor contribution would be Required each year and be 100% vested.   .....    We suggested the match since so few participate and got a No.   I don't think they realize they are limiting themselves so much......

[Lou S.]

Make sure they know about the top heavy minimum for 2019.

[Jim Chad]

Suggest the "maybe safe harbor"?

[Larry Starr]

13 hours ago, Pammie57 said:

The new owners will own the business 50/50 so yes they are greater than 5% owners...

We did highly suggest a safe harbor plan for 2019, but these guys didn't see the big picture and only heard that the safe harbor contribution would be Required each year and be 100% vested.   .....    We suggested the match since so few participate and got a No.   I don't think they realize they are limiting themselves so much......

And you recognize that IF the plan is top heavy (IS IT?), the match safe harbor doesn't work but the non-elective 3% does?

[Tom Poje]

going forward (e.g. for 2019), if the only contributions are deferrals and safe harbors then 

if the card isn't good enough, then the Code

416(g)(4)(H) can be used

(H) Cash or deferred arrangements using alternative methods of meeting nondiscrimination requirementsThe term “top-heavy plan” shall not include a plan which consists solely of—

(i)

a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13), and

(ii)

matching contributions with respect to which the requirements of section 401(m)(11) or 401(m)(12) are met.

[QP_Guy]

Given the results, perhaps a suggestion around timing and structure of the sale of the company would be in order.  In other words, maybe a 10/1 sale date with a "damn the testing torpedoes" approach is not best.