Can a company adopt a 401(k) plan in December to be effective retroact

[Guest A. Rostosky]

Can a company adopt a 401(k) plan in December to be effective retroactively to the beginning of the calendar year and take advantage of the first plan year adp non-highly compensated 3% deferral rate for testing?

[KJohnson]

A CODA cannot be adopted retroactively. In other words, while the "profit sharing" portion of the Plan could be retroactive to 1/1/00 the cash or deferral portion of the plan cannot be.

[Guest Mr. X]

I am not sure that I agree. While obviously, you cannot defer compensation already paid, I don't see why the effective date of the 401(k) cannot be retroactive. Do you have any cites for this, as I am willing to learn?

I assume the retroactive entry date is wanted to lessen the highly's deferral percentage (i.e use the full year's compensaton), but be wary that if there was a lot of turnover, 410(B) could be an issue.

[KJohnson]

Mr. X I think you are right, I misundstood what A. Rostosky was getting at. It is simply the cash or deferred election that cannot be retoractive.

As to use of the first year rule, I think the "first year" was defined as the first year the plan provides for elective contributions. Accordingly I don't see any reason why you couldn't use first year rule.

What if for the first year you only allow deferrals out of bonuses and only HCEs get bonuses. Could HCEs, in effect, defer 5% of the whole year's comp and you would have no ADP problems? Would this be a 401(a)(4) BRF problem?

[Guest A. Rostosky]

The latter scenario is the one that we are shooting for. Thanks for your interest and assistance.