How to max HCE contributions for new late in year 401k?

[Guest Ed Walker]

Client wants to set up a 401k at dec 1, 2000, effective January 1, 2000 for 415 purposes, allow all employees to defer up to 100% of dec salary and depend on the 3% non hce rule in the first year to allow the HCE to defer up to $8,500 (170,000 x.05) I don't see why it is not ok, but would like some feed back

[Guest JBarn]

Two issues come to mind:

1.Plan document must allow it-most Standardized Prototypes do.

2. Any Top Heavy problems?

[Guest Kevin Plymyer]

I assume you are using the prior year testing method, which is why you mentioned the 3% non hce first year rule. I agree with Jbarn that, depending on participation you may have a Top Heavy issue to watch for. Also, when you perform your discrim test for 2001 will you switch to current year testing? The reason I ask, if you stay on prior year chances are your % for nhce will be very low and therefore, will limit the hce for the 2001 year. Then if you want to ever switch back to prior year testing you need IRS approval. Am I looking at this right?

[Guest Ed Walker]

Good points thanks