Leaving MEP to start own plan

We have a new client who came to us.  They were part of a MEP as of 6/1/16 and have decided to terminate their participation in the MEP and want to start their own plan this year.

We have conflicting thoughts in office as to what is the effective date of the new plan.  I say this is a new plan and its effective date should be 2019.  My reasoning for a 2019 date is that this if the first time that the employer has sponsored their own plan.

Others are saying the effective date of the plan should be the date they entered the MEP as a participating employer.  

Can anyone provide some guidance?

Agree with you - they were not the sponsor of the MEP and this is a brand new plan. There is no basis on which to use that as effective date. Furthermore, doing that would show a 2016 effective date for a plan for which you started filing 5500's in 2020 (for 2019 - the actual start date) - an invitation for IRS/DOL questions.

if they had a 401(k) plan in the MEP, by starting a "new plan" now, can they use the 3% deemed prior year ADP and ACP for the NHCEs if using prior year testing?

The effective date of the new document should be in 2019.  The original effective date of the plan will depend on whether the new document is done as a restatement of the MEP document they previously adopted or as a new plan document.   

They were a sponsor of the MEP, so a new plan will be a successor plan under 1.401(k)-2(c)(2)(iii).  That means  a new plan won't qualify for a short initial plan year for a safe harbor plan 1.401(k)-3(e)(2).  Having the new document be a restatement that mirrors the current safe harbor provisions avoids having a short initial plan year in 2019.  Being a successor plan also means a new plan won't qualify for the deemed 3% ADP/ACP if it uses prior year testing  1.401(k)-2(c)(2). 

Hopefully, the MEP isn't going to offer distributions to active participants since the "new plan" would also be an alternative defined contribution plan under 1.401(k)-1(d)(4)(i). 

Piling on I would say 2019 for all of the issues listed.  I don't think this could be a restatement of the MEP given the original post, but maybe I missed something.  BTW, the recommended way to withdrawal from a MEP as an Adopting Employer is to establish a new plan into which balances are rolled, then terminate that plan if the intention was to have no plan going forward.  I do quite a few MEPs and I do NOT use that approach, but I mention it since it says establish a new plan, meaning 2019 is your effective date.

We had exactly the same situation in 2015 and were advised at that time to make a new plan effective the first day of the month after the client was not a member of the MEP, (5/1/15) created a short plan year (5/1/15-12/31/15) and did all testing an calculation of the SHNE on an annual basis using full    W-2 for 2015.

Thread is in here somewhere.