Under what circumstance do both HCE tests apply?

The circumstances under which both Highly Compensated Employee (HCE) tests apply involve the company's status in relation to prior years of operation. Specifically, when a company existed in the previous year, it must apply both HCE tests to ensure compliance with the non-discrimination requirements of retirement plans, particularly 401(k) plans.

The HCE tests are designed to ensure that compensation and deferral percentages do not disproportionately favor higher-paid employees over lower-paid employees. These tests help protect plan eligibility and maintain tax-advantaged status. If the company has been operating under the same plan structure for the prior year, it must adhere to these tests to assess compliance for contributions made in the current year.

In contrast, new start-ups may not have to apply both tests initially, as they are often given some leeway in the early stages to establish their plans. Planning for substantial benefits or matching contributions does not directly relate to the requirement of applying both HCE tests unless tied back to a company's operational history and its ability to refer to prior year’s data. Therefore, the key factor in the correct choice is the continuity of the company's existence from the previous year.