Waiver of eligibility requirements & discrimination

So I'm a pretty junior tpa (I've been doing this for about 3 years) and while I've learned *a lot* I recognize that there are things (probably many of them) that I still don't know. This is one of those things.

So I was asked to do a profit sharing calculation on a plan that is just starting up, it's a calendar plan year with the first year being 2019. This plan has fairly average eligibility rules all around (18, 1 yos (1,000hrs), dual entry) but the business was not started until 7/6/2018 so not surprisingly most everyone won't be eligible until 1/1/2020.

Now the way the census is looking the two owners have a DoH of 7/6/18 and most everyone else has a DoH of 7/20/18.

Here's where my question arises. I was asked to write in a waiver of eligibility for the Profit Sharing source for employees employed on 7/6/18, which obviously will only be the owners. Meaning they'll be able to receive a profit sharing in 2019 and everyone else will have to wait until 2020 when they're eligible This should pass testing as well (it's a fixed class based pro-rata) as long as the owners stay under 25% of the payroll. Now I suspect this is likely perfectly fine, but it sorta "feels" discriminatory in favor of the owners in terms of the waiver of eligibility... so just wondering if this is something that should maybe be questioned or not? Either way I appreciate everyone's feedback and for taking the time to read this.

Do you need to edit any of the dates in your post?

3 minutes ago, david rigby said:

Do you need to edit any of the dates in your post?

Yep, good catch. Waiver is for employees employed on 7/6/18 *not* 19

I would not do it. Though I know there are some out there that would.

The amendment for the waiver date makes them eligible for 2019. A retroactive corrective amendment to bring someone into the plan is allowed - if it otherwise satisfies non-discrimination (this does not, it only brings in HCE), and it is used to correct a defect. 

Was any money already deposited in 2019? If not - there is no defect to correct. 

If this conversation was a year from now - and we were talking about making them eligible for the 2020 plan year, I might have a different answer because the SECURE act allows adoption of a plan after year end. The analysis would be different. But we aren't. Your question pertains to 2019. 

20 hours ago, justanotheradmin said:

Was any money already deposited in 2019? If not - there is no defect to correct. 

There has been no deposits into this plan as of yet. *sigh* So I feel the same as you and (Yay for me) for the exact same reasons. The issue is this is all coming from my boss, the owner of the company I'm employed with. I suppose I can try to gently hint to him that we may be discriminating in favor of HCEs with this waiver he's suggesting.. hopefully he takes that well.

This would be discriminatory in practice whether it was baked into the plan from the start or done as an amendment; doing it as an amendment just shines a light on it.  Would anyone be in the plan without the amendment?  If the company started 7/6/18 I don't see how, unless there were other employees that had prior service credited.

You don't say what kind of entity it is but it's often not a stretch to say that the business started much earlier than some official date, i.e. when the "partners" started talking about it and laying the groundwork.  In a perfect world that would all be established before the plan is written and eligibility would be set up ab initio to allow the owners to participate in year 1.  

21 hours ago, Puddleglum said:

So I was asked to do a profit sharing calculation on a plan that is just starting up, it's a calendar plan year with the first year being 2019.

 

When was the plan document adopted?  Everyone is assuming it was adopted in 2019, but "just starting up" makes me wonder.

The rules for determining if the timing of an amendment, including the establishment of a new plan, is discriminatory are in 1.401(a)(4)-5.