Early entry of soon-to-be HCE

Calendar year plan eligiblility 1 YOS, dual entry.

Hire new non-owner today who will earn $1M in 2018 comp. (not HCE for 2018 but will be HCE for 2019).

Can we safely amend plan to allow early entry for deferrals and employer contributions for 2018 without any discrimination issues since NHCE for 2018?

Would we need to again amend to exclude this employee during the first half of 2019 (period prior to “normal” 7/1/2019 entry) to avoid discrimination issues?

I wouldn't.  Especially if you know he's going to be an HCE.

Why do you want to risk a potentially discriminatory pattern of amendments so one employee making seven figures can defer taxes on $18.5K  (or $24.5K) of income?

I can't tell you how strongly I disagree with the last two posts.  Life is difficult enough without us creating adverse rules that don't exist. Fact: Identified individual is an NHCE. Fact: An amendment which loosens eligibility in order to advantage an NHCE is not discriminatory. Fact: The natural operation of plan provisions (such as those that turn the NHCE into an HCE in a future year) can not be discriminatory.

Strong letter to follow.

I am not sure it is as clear cut as Mike says.  Here are the regulations about non-discrimination in regards of amendment and there is a facts and circumstances rule.

https://www.law.cornell.edu/cfr/text/26/1.401(a)(4)-5

I think there is a risk making a one year amendment that clearly benefits a person who will become an HCE and then get rid of that amendment.  Not saying it is a slam dunk no you can't do it but it isn't a slam dunk yes either. 

I agree with Mike Preston.  However, I also agree with Flyboyjohn that the first six months of the next year can be problematical, and to be safe he should be excluded for those six months.

ON THE OTHER HAND, I don't know why the client is spending any time, let alone money, to consider amending the plan and how to amend the plan, and then amending it, to make this person immediately eligible.  If they are going to pay him a million dollars than they can afford to compensate him in some other way to make up for the lost tax deferral on $18,500/$24,500 and any lost employer contributions.   

All,

MIke is right; no question.  And the first six months of the second year are immaterial (he is already a participant in the prior year and THAT amendment met all the requirements of being non-discriminatory.  There is NO pattern here to look at.

Let's not find problems for clients where none exist; that will bring problems for YOU when the client decides to hire someone like MIke or me to challenge that determination.

It is not immaterial.  See 410(b) regulations addressing dual eligibility requirements.

I mean, alternative eligibility requirements.

of course prior to 1997 this wouldn't have happened because your comp in the current year determined if you were an HCE. but someone out there in the industry begged to the IRS to make our life easier by using prior year comp to determine who is an HCE in the current year.

and if the IRS is too dumb not to write the rules better, and give us a loophole, well dog gone it, lets take advantage of it.  for all the years before did I ever consider amending the plan for anyone else? nope.

I wouldn't do it, apparently I am in the minority, and others are glad to take the business from me.

5 hours ago, jpod said:

It is not immaterial.  See 410(b) regulations addressing dual eligibility requirements.

There are a lot of them, do you have any particular subset in mind?

FWIW I had the opportunity to talk to a well known "guru" in these matters and he agrees with MP & LS that this structure is acceptable, no second amendment is required and he goes so far as to write into the plan eligibility provisions that, for example,  "non-owner physicians" (or whatever class of favored employees) are immediately eligible upon hire but less favored employees are subject to a typical eligibility waiting period.

Happy to learn about a creative plan design but sad that it came at the tail end of my career.

Flyboyjohn: So, you actually now had THREE well known "gurus" say the same thing.  

Tom Poje is pretty Guru though and he says no...  Although I am better known as an International MAn of Mystery (as opposed to a pension guru) I too eventually learned that you either are an HCE today or you are not.

But when "the Tom Poje" says he wouldn't do it, it certainly gets my attention!

Larry, no slight intended and understand and acknowledge your guru status as well as Mike, Tom and others on this message board.

And the fact that one guru might feel a position is a little too aggressive for his taste is also very understandable and all comments deeply appreciated.

I for one am relieved that everyone is being properly respectful of "well known gurus."

Just because I express an 'opinion' doesn't make it correct one way or the other.

there are some things that perhaps are 'legal' but that doesn't make it 'right'. a good example, I suppose, would be slavery, which was certainly considered 'ok' at one time and protected by the law.

so, I guess, at least for me, there is also an 'ethics' that come into the play. again, the fact that no thought of amending the plan for an nhce was ever considered before, and now an obvious hce, only considered an nhce at the momment because of the way the regs are written, well...

interesting example of a takeover case for us. cross tested - well, not cross tested - just everyone in their own group.- to avoid the gateway the prior admin provided a 15% contribution to a few NHCEs, the same contribution % as the HCE received. Mathematically this was sufficient to pass nondiscrim testing. this one was really bad in my opinion. the 6 lowest paid NHCEs were chosen. 3 of them were terminated and only 20% vested to make matters worse!

Even the iRS has said such plans don't pass the 'smell' test.

This is just a short blurb from the IRS, but basically the comments include using the lowest paid folks, those withiout vesting, etc.

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1(c)(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

Page Last Reviewed or Updated: 01-Apr-2016

[https://www.irs.gov/Retirement-Plans/Discriminatory-Plan-Designs-Using- Short-Service]

conclusion of the story, we were worried the client was going to be angry because we allocated a gateway to all NHCEs which was more expensive though not that bad.. turns out the client liked out allocation better than what was done in the past.

On 2/8/2018 at 6:56 PM, Flyboyjohn said:

FWIW I had the opportunity to talk to a well known "guru" in these matters and he agrees with MP & LS that this structure is acceptable, no second amendment is required and he goes so far as to write into the plan eligibility provisions that, for example,  "non-owner physicians" (or whatever class of favored employees) are immediately eligible upon hire but less favored employees are subject to a typical eligibility waiting period.

Happy to learn about a creative plan design but sad that it came at the tail end of my career.

Interesting -- I'm accustomed to seeing a provision but excluding non-owner doctors or dentists from participating in the plan at all. Almost the opposite of what you're trying to accomplish.

With the early participation for the Doctors only I would be afraid that if an IRS auditor saw that plan design, they would insist on seeing that TRA 86 restatement or something like that to punish you for being so obnoxious.  Anyone else have a similar reservation?  You are somewhat beholden to them under audit and they have every right to ask a lot of questions that can be time consuming.  Perhaps that design is the basis to expand their audit to be much more extensive than it might otherwise have been... 

On 2/10/2018 at 2:58 PM, Flyboyjohn said:

Larry, no slight intended and understand and acknowledge your guru status as well as Mike, Tom and others on this message board.

And the fact that one guru might feel a position is a little too aggressive for his taste is also very understandable and all comments deeply appreciated.

Don't misunderstand: Tom P is indeed entitled to GURU status as well (and he is a long time and good friend of mine).  That doesn't mean we haven't disagreed a few times over the years, and everyone is entitled to be wrong sometimes (even Tom! :-) )

And Austin: we simply do not let auditors abuse us.  In a situation like this, if the auditor brought it up, I would be very strong and succinct on explaining the law and, if he insisted it was a problem, immediately move to "request" (he has no option to refuse) technical advice.  He actually won't do that; he'll go back to his boss and request advice before they ever go for tech advice. Tech advice requires that they write out their opinion on the issue for national office to prove why they are right and if they aren't right, it makes them look very bad so they don't do it often.   We had to do this just recently with a very novice reviewer on a plan termination who was insisting that one of our compliance amendments was faulty (in fact, it was a RELIUS amendment and it was not faulty). They came back and said "well, THIS TIME, we'll let it go". HA HA.  They had no choice and they will "let it go" anytime it shows up!!!! But that was their method of saving face.

I still think if this will get them going, I'd advise my clients not to poke the bear :)

9 minutes ago, austin3515 said:

I still think if this will get them going, I'd advise my clients not to poke the bear :)

If we go back to the original question. it was obviously important to the client.  If it's legal (it is), and the client wants to do it (they do), then I think it is incumbent on me to tell him the truth and make the modification.  I am not concerned about poking the bear when I know the rules and how they work and this is not even a close call (for me). FWIW.

Not going to dig and provide a cite, but don't you have a 410(b) problem if in 2019 this individual is eligible for the first six months and there is at least one NHCE who is not equally eligible?  

6 hours ago, jpod said:

Not going to dig and provide a cite, but don't you have a 410(b) problem if in 2019 this individual is eligible for the first six months and there is at least one NHCE who is not equally eligible?  

Go back and read from the beginning; this was the issue thoroughly discussed in earlier posts.