Start a 401k on 12/31/20 for 2020 Year

An advisor approached me on 12/31/20 with a potential case. Company with no existing plan. Owner, mother, father and two FT employees that would be eligible under even the most stringent eligibility. He asks me to do a 401k/PS plan document so that the owner could participate and defer $19,500 on 12/31. I immediately think this is not allowed. Where is the chance for the other employees to participate? Even if there was an actual payroll on 12/31 for everyone, this certainly doesn't sit right with me on a BRF basis. Definitely violates the spirit of many of these discrimination rules. If the owner participates and no one else does, the Plan is TH and ADP fails so there would need to be an employer contribution anyway (QNEC and TH) which would be very high if it worked at all. I offered a cross-tested PS option but the FA said he found another TPA that provided him with what he wanted. The case is lost to me so it doesn't matter now but I am curious. Is there a specific reg that would be violated by starting the 401k on 12/31? 

I think you have a problem with effective availability with respect to the NHCEs since presumable they won't be able to make any deferrals but I'm not sure there is any specific reg that is violated.

I know in the past we have put in 401(k) plans in December with prior year testing to allow the owners to put in 5% of annual pay + catch-up if over 50 but there was always the understanding that at least 3% TH minimum would be made for all employees and NHCE would be offered the plan for the final payroll(s) of the year if they wanted to contribute.

With SECURE I suppose they could have put in a 4% non-elective safe harbor and got the full 402(g) limit for 2020. Though again you might have an effective availability problem since effectively only the owners could make deferrals.

Just now, Lou S. said:

I think you have a problem with effective availability with respect to the NHCEs since presumable they won't be able to make any deferrals but I'm not sure there is any specific reg that is violated.

This is exactly what I was concerned about. Maybe one could do prior-year or a 4% SH but every bone in my body suggested that this wasn't "fair" to the other EEs. Yet I am curious if a different TPA would have really done this and not seen a problem.

59 minutes ago, Lou S. said:

With SECURE I suppose they could have put in a 4% non-elective safe harbor and got the full 402(g) limit for 2020. Though again you might have an effective availability problem since effectively only the owners could make deferrals.

The 401(k) portion of the plan still has to be in effect for at least 3 months to be able to use a safe harbor. SECURE didn't change that.

You are spot on about the BRF issue. The reg that is violated is 1.401(a)(4)-4. The right to make an elective deferral (at any rate) was not available to the NHCEs. It was available to HCEs. Boom - instant current availability failure.

Good catch on the 3 month rule, I did miss that so SH would not work for 2020 under any scenario.

1 hour ago, Lou S. said:

I think you have a problem ... 

Not trying to be snarky, but let's be clear who has the problem: the advisor who show up at the last minute.  The recordkeeper / TPA should not accept fault.

17 hours ago, david rigby said:

Not trying to be snarky, but let's be clear who has the problem: the advisor who show up at the last minute.  The recordkeeper / TPA should not accept fault.

I agree. I should have worded it better in that "the client has a problem with effective availability"

22 hours ago, Gadgetfreak said:

FA said he found another TPA that provided him with what he wanted. The case is lost to me so it doesn't matter now

Good on you for trusting your gut. You dodged a bullet.