Adding 401(k) component to 2-year eligibility PS Plan

[SMB]

A client (consisting of business owner and 1 employee) has maintained a PS Plan for years. PS Plan has a 2 Years of Service requirement for eligibility to participate, with 100% immediate vesting. Employee (thus far) has never been credited with 1,000 Hours of Service. Consequently, only the business owner has been covered by the PS Plan to date.

Owner is appproaching retirement age and is considering adding a 401(k) component to maximize/optimize her contributions from here on out. I realize that eligibility to participate in the 401(k) component cannot exceed 1 Year of Service, although the plan will continue to require 2 Years of Service for the "profit sharing" component.

I am going to recommend that this client go safe-harbor 401(k), using the 3% safe-harbor non-elective contribution only for NHCE participants (i.e., to both eliminate ADP testing and meet T-H minimum contribution requirement). Then, IF her employee were ever to complete 1 Year of Service (she's been getting closer and closer to the magic 1 ,000 hours mark) and become eligible for the 401(k) and employer 3% safe-harbor components, I am assuming (hoping?) that there would be no non-discrimination or other issues with the profit sharing component, since the employee had not completed the 2 Years of Service requirement for same?

In other words, if the employee were to become eligible for 401(k) and safe-harbor - no biggie. Profit sharing, however, would be an entirely different story.

Seems obvious - but I've been tripped up by the seemingly obvious before!

Thanks for any and all input.

[Guest Sieve]

Your analysis is correct. PS portion of the plan could continue with the 2-yr eligibility requirement, and the other employee could become eligible for the SH 401(k) contribution without being eligible for a PS contribution.