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You wouldn't pass the reasonable classification portion of the eligibility test (i.e., the safe harbor percentage or unsafe harbor w/ facts/circumstances) without any NHCEs. That would cause the HCEs (everyone in this case) to lose the Section 125 safe harbor from constructive receipt (i.e., be taxed on their contributions). Prop. Treas. Reg. §1.125-7(b): (b) Nondiscrimination as to eligibility. (1) In general. A cafeteria plan must not discriminate in favor of highly compensated individuals as to eligibility to participate for that plan year. A cafeteria plan does not discriminate in favor of highly compensated individuals if the plan benefits a group of employees who qualify under a reasonable classification established by the employer, as defined in §1.410(b)-4(b), and the group of employees included in the classification satisfies the safe harbor percentage test or the unsafe harbor percentage component of the facts and circumstances test in §1.410(b)-4(c). (In applying the §1.410(b)-4 test, substitute highly compensated individual for highly compensated employee and substitute nonhighly compensated individual for nonhighly compensated employee). Prop. Treas. Reg. §1.125-7(m): (2) Discriminatory cafeteria plan. A highly compensated participant or key employee participating in a discriminatory cafeteria plan must include in gross income (in the participant's taxable year within which ends the plan year with respect to which an election was or could have been made) the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable benefits offered.

Well this is how I see it: (E) sets the beginning number alone. The beginning number alone is 150% of the 2024 catch-up limit. After 2024, the reference to 2024 is moot. Why? Because (C)(i) says the amount in paragraph (E) is adjusted for inflation. I actually don't where the other view would come from?

Is everyone in their own group for profit sharing? That would be the typical method of accomplishing this.

If everyone is $160k+ you would want to use the top-paid group (top 20%) election for the cafeteria plan, which I'm assuming they are already doing for the 401(k) (unless it is safe harbor). Then you would have NHCEs and therefore likely no issues. Prop. Treas. Reg. §1.125-7(a)(9): (9) Highly compensated. The term highly compensated means any individual or participant who for the preceding plan year (or the current plan year in the case of the first year of employment) had compensation from the employer in excess of the compensation amount specified in section 414(q)(1)(B), and, if elected by the employer, was also in the top-paid group of employees (determined by reference to section 414(q)(3)) for such preceding plan year (or for the current plan year in the case of the first year of employment). Treas. Reg. §1.414(q)-1, Q/A-9(b)(2)(iii): (iii) Method of election. The elections in this paragraph (b)(2) must be provided for in all plans of the employer and must be uniform and consistent with respect to all situations in which the section 414(q) definition is applicable to the employer. Thus, with respect to all plan years beginning in the same calendar year, the employer must apply the test uniformly for purposes of determining its top-paid group with respect to all its qualified plans and employee benefit plans. If either election is changed during the determination year, no recalculation of the look-back year based on the new election is required, provided the change in election does not result in discrimination in operation.

Yeah the regs have been proposed forever, but that's all we have to work with given that the statute is generic. They're still easily accessible in the Federal Register: https://www.govinfo.gov/content/pkg/FR-2007-08-06/pdf/E7-14827.pdf The rules here piggyback on the coverage testing rules by imposing the nondiscriminatory classification test. Basically there's the safe harbor ratio percentage, and the unsafe harbor ratio percentage that requires the facts and circumstances test. See the table on page 3 here: https://www.govinfo.gov/content/pkg/CFR-2012-title26-vol5/pdf/CFR-2012-title26-vol5-sec1-410b-4.pdf I don't see how you could pass either with exclusively highs given that the applicable ratio percentage is is determined by dividing the percentage of non-HCPs benefitting from the plan by the percentage of HCPs who benefit. Seems to me zero divided by anything non-zero will always be zero. That's why I was saying the top-paid group (top 20%) approach would be needed and the easy workaround.

At this point, I agree, why not do individual PS groups and just give a 3% PS to the HCEs they want. If vesting is wanted, make the PS 100%. This would even give some flexibility to do 0-9% for any HCE provided you can pass cross-testing.

I don't think anyone mentioned the bold text below? 414(v)(2)(C). Doesn't that suggest COLA adjustments? (C) Cost-of-living adjustment (i) Certain large employers In the case of a year beginning after December 31, 2006, the Secretary shall adjust annually the $5,000 amount in subparagraph (B)(i) and the $2,500 amount in subparagraph (B)(ii) for increases in the cost-of-living at the same time and in the same manner as adjustments under section 415(d); except that the base period taken into account shall be the calendar quarter beginning July 1, 2005, and any increase under this subparagraph which is not a multiple of $500 shall be rounded to the next lower multiple of $500. In the case of a year beginning after December 31, 2025, the Secretary shall adjust annually the adjusted dollar amounts applicable under clauses (i) and (ii) of subparagraph (E) for increases in the cost-of-living at the same time and in the same manner as adjustments under the preceding sentence; except that the base period taken into account shall be the calendar quarter beginning July 1, 2024.

Just don't forget that counting hours generally means tracking LTPT which is no bueno. I caution clients in the starkest of terms away from dealing with those rules. They are absolutely impossible to comply with. I dont care who you are, what recordkeeper, etc. They are 100% infeasible. It's laughable they even wrote it into law.

I greatly appreciate the feedback but past dealings with post-billing have been overwhelmingly positive especially with small plans with recurring annual work. This particular TPA was a reasonably good payer for 10 years and contacts at the TPA were diligent and compentent. Assuming they had business issues that I eventually picked up on but don't regret doing the work, if only for the experience. CCA is having an ethics webinar tomorrow where I hope to be able to bring this up.

But if an employer has not made a top-paid group election for any employee-benefit plan and all employees are classified as “highly compensated” within the meaning of Internal Revenue Code § 125(e)(1)(C), does this mean a § 125 plan does not discriminate “in favor of” highly-compensated participants or individuals because there are none other?

First, consider what provisions the documents governing the plan state. RTFD, Read The Fabulous Documents. But next, consider that a plan’s administrator often interprets a plan’s documents to anticipate provisions that might become retroactively applicable by a remedial amendment. RTFD, Read The Future Documents. Further, some plans’ administrators interpret the current documents, the anticipated documents, or both not strictly for what either text states but rather for what makes sense to fit with the Internal Revenue Code and sensible interpretations of it, including the Treasury department’s legislative and interpretive rules (to the extent a rule is not contrary to law). Yet, one should not discern a plan’s provision by looking only to the tax Code and regulations. A required beginning date and a minimum distribution can vary not only with: whether the plan mandates a distribution sooner than a § 401(a)(9) required beginning date. whether the plan allows or precludes periodic payments; whether the distribution is (or is not) an annuity, or life-expectancy payments; whether the beneficiary is the participant’s surviving spouse or someone else; whether the beneficiary is an eligible designated beneficiary; but also with which optional provisions the plan states or omits (or is deemed to state or omit); and which elections the plan permits or precludes. 26 C.F.R. § 1.401(a)(9)-3(c) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-3#p-1.401(a)(9)-3(c). Remember, that a plan could state a provision without tax-disqualifying the plan does not by itself mean that the plan does have that provision. This is not advice to anyone.

Passage of time typically means that the participant becomes eligible after a period of time without regard to any service or breaks in service. It's similar to elapsed time, but without the service spanning rules - or rather, if the service spanning period were forever, instead of 12 months. Say an employee was hired on 11/6/2025, works for 2 months and quits on 1/6/2026. Then they show up again a year later and are re-hired on 3/1/2027. They are in the plan immediately on 3/1/2027, because more than 6 months have passed since their original date of hire. Contrast that to elapsed time, where they wouldn't get credit for their period of severance (because it was more than 12 months) and would have to work another 4 months after being re-hired in order to have earned a total of 6 months of elapsed time. It's probably a good idea to keep the 1000 hours failsafe in the document. While I can't think of a situation where it would override a 6 month passage-of-time requirement, maybe there are some class exclusions that it would be needed for. It also gives you some assurance, because it sounds like this passage-of-time provision is custom language added to the document. So, on the off chance that the IRS finds issue with it on audit, then at least you have the standard language to fall back on. As far as applying break-in-service rules, I don't think they would apply. But ultimately the interpretation of the plan document is up to the Plan Administrator, so they should abide by their best judgement, taking into account what has been communicated to participants about the rule, and probably with they lawyer's advice.