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If there is a doubt about whether an asset is a qualifying or nonqualifying plan asset, here’s another opportunity: A plan’s administrator might take protective steps as if the asset is nonqualifying. That includes paying for whatever extra fidelity-bond insurance would be needed. Acting as if the asset is nonqualifying might be less expensive than getting a lawyer’s advice that the asset is a qualifying plan asset. On a different point, a plan’s administrator, trustee, and every other fiduciary might take steps to satisfy all of them that “the indicia of ownership of [all] assets of [the] plan [are within] the jurisdiction of the district courts of the United States.” ERISA § 404(b), 29 U.S.C. § 1104(b). Asking whether the plan’s trustee or § 3(38) investment manager sufficiently analyzed whether the asset is a prudent investment might be a point you prefer not to mention. This is not advice to anyone.

Agree with @David D - including the 1099 situation not appearing correct unless something else going on. Are the owners each single member LLCs that own the company and company then pays the LLCs via 1099s. Even so, the LLCs would be either incorporated (C or S) or not (sole prop) and pay their owners via W2 or K1, respectively. Then (I think) the LLCs are disregarded entities and their earned income should count for 401k plan. If that's not the case then that whole 1099 situation is wrong IMHO - but I'm not an accountant.

What you stated in your original question is why typically when you have a 401k plan with a cash balance not subject to PBGC, it is better to have a Safe Harbor Non Elective plan than a Safe Harbor Match plan in regards to staying within the deduction limits when trying to pass 401a4 testing.

I think clarification is needed on this. If the owners of the company are sponsoring a 401k plan, it's either an incorporated business for which they are not being paid wages, therefore cannot defer, or it's unincorporated in which their income should pass through to their Schedule C or K-1 as self employment income. Typically the business would pay independent contractors via 1099, but it doesn't seem right that the owners of the business would qualify as independent contractors. It seems to me they are already eligible for the plan they sponsor unless specifically excluded. The only potential qualification issue is if they sponsor a Safe Harbor Non Elective 401k plan and were entitled to Safe Harbor Contributions based on their SE income and did not make that contribution.

Additionally, practitioners should note that the 80/120 rule is administrative and regulatory in nature. It is NOT a statute; thus, not appropriate to assume its application extends to anything else.