Granting prior service

Seems ok, but smells funny. Medical practice hires a new Doctor, NOT as an owner or partner. Plan has 1-year eligibility for everything but they want to let this Doctor in immediately. Amends plan to credit service with prior employer so that Doctor enters immediately.

This Doctor will not be a HCE for 2021, as there is no lookback year comp, so it doesn't technically seem discriminatory. Thoughts?

Agree on both counts - doesn't look kosher but seems to follow letter of the law. 

I don't know, just posing the question, if you count this doctor's past service with unrelated employer for eligibility, would you have to use that for lookback year compensation which could then make him/her an HCE and thereby create a discrimination issue? I don't think so, but looking under all the stones for gotchas.

25 minutes ago, CuseFan said:

Agree on both counts - doesn't look kosher but seems to follow letter of the law. 

I don't know, just posing the question, if you count this doctor's past service with unrelated employer for eligibility, would you have to use that for lookback year compensation which could then make him/her an HCE and thereby create a discrimination issue? I don't think so, but looking under all the stones for gotchas.

As long as the doctor's prior employer isn't affiliated with his/her new employer under 414, you would not take the prior employer's compensation into account for determining HCE status in the first year of the new employer's plan.

See 1.414(q)-1T, Q&A 3: 

For purposes of the year for which the determination is being made (the determination year), a highly compensated active employee is any employee who, with respect to the employer, performs services during the determination year and is described in any one or more of the following groups [owner/comp over limit in prior year] applicable with respect to the look-back year calculation and/or determination year calculation for such determination year. 

If the prior/new employers are affiliated under 414, the doctor's prior compensation would count under 414(q)(7) and 1.414(q)-1T, Q&A 6.

You'll also need to grant service to any other employee that was employed with that other practice.

Here’s a quote from IRS Treas. Reg. Section 1.401(a)(4)-11(d)(3)(B)(1) and (2) that may apply here: 

“(B) Legitimate business reason -

(1) General rule. There must be a legitimate business reason, based on all of the relevant facts and circumstances, for a plan to credit imputed service or for a plan to credit pre-participation service for a period of service with another employer.

(2) Relevant facts and circumstances when crediting service with another employer. The following are examples of relevant facts and circumstances for determining whether a legitimate business reason exists for a plan to credit pre-participation or imputed service for a period of service with another employer as service with the employer: whether one employer has a significant ownership, control, or similar interest in, or relationship with, the other employer (though not enough to cause the two employers to be treated as a single employer under section 414); whether the two employers share interrelated business operations; whether the employers maintain the same multiple-employer plan; whether the employers share similar attributes, such as operation in the same industry or the same geographic area; and whether the employees are an acquired group of employees or the employees became employed by the other employer in a transaction between the two employers that was a stock or asset acquisition, merger, or other similar transaction involving a change in the employer of the employees of a trade or business. Other factors may also be relevant for this purpose, such as the plan's treatment of service with other employers with which the employer has a similar relationship and the type of service being credited (e.g., vesting service as compared to benefit service or accrual service). A legitimate business reason is deemed to exist for a plan to credit military service as service with the employer.”

On 2/10/2021 at 2:01 PM, Belgarath said:

Plan has 1-year eligibility for everything ...

Maybe this is the central problem.  Just sayin'.

Thanks all. Helpful comments.