New plans and immediate eligibility vs 1-yr service

[TPApril]

Startup Plan has owner and spouse, both employed over 1 year.

Their 3 employees have less than one year of service.

I'm curious which of these approaches is preferred:

• Immediate eligibility for all 3
• Immediate eligibility only if already worked one year of service, so that the 3 employees will not be in the plan for the first year.

[Lou S.]

It depends what the client wants to do.

Are the 3 ees NHCEs or HCEs?

Is the client putting the plan in primarily because the employees want it or the owners want the tax deduction?

Is Top heavy a consideration?

Will the Plan be safe harbor (match/non-elective)?

Do they want future hires to come in quickly or keep them out as long as possible?

Are they trying to get Secure 1.0 or 2.0 start up credits which require covering NHCEs?

What I've seen done often (but not always) with the new small plans is they have the eligibility they want going forward (2 months, 6 months, 1 year whatever it is) but make everyone employed on the effective date of the plan (or signing date of the plan sometimes) immediately eligible. That's typically when they want to reward current employees or not have awkward conversations at least why they aren't eligible for the new plan and most of the folks coming in are NHCEs so you don't have testing issues with the early entry.

[TPApril]

Lou:

plan is mainly for owner tax deduction, the 3 are NHCE, the plan will be safe harbor NE and top heavy.

they were recommended for immediate entry for all, then setting up a future 1-year service requirement.

The startup credit issue though likely decides the issue.

[Lou S.]

If they want them in then I'd likely do 21/1 dual entry with eligibility waived for anyone employed on X date where X equals some date that brings in the 3 NHCEs.