2 plans with 2-year eligibility

[Bri]

Just want to make sure I've thought this through properly:

Company has 3 employees.  2 owners employed since 2015 or so, and staff person hired May 2020.  Staff person is a decade older than the owners, so cross-testing is not a consideration.  [Edit:  Dang, I wish I hadn't posted this in the cross-tested section then, I suppose.]

Generous CB plan has 2 year eligibility, so it has been owners-only so far.  401(k) plan has 2 year eligibility for company contributions, 1 year for 401(k).

For 2021, prior TPA was allocating only 3% to the staff person, as a nonelective top heavy minimum (listed as profit sharing on their report).   But 6% each PS to the owners.

The nonelective test has me thinking.  Even though the staff person is nominally only eligible for the 401(k), the TH requirement is forcing her to get a nonelective contribution, one that is not going to pass when compared to the owners' amounts.  (As in, it doesn't matter if staff person hasn't met the normal eligibility for a nonelective contribution, the top heavy requirement made her eligible anyway, and now she's subject to her rate against theirs.)

If they give her 6%, I suppose they could be done.  She's not eligible for the CB plan at all.  And the DC plan would have a uniform allocation rate, so each plan passes coverage/nondiscrimination separately.

Or are they indeed okay with just the 3?  The allocation to the staff person is the greater of the plan's "normal" formula, or the top heavy formula.  (Since her share would legitimately have been zero.) And the plan would pass coverage if she were not considered benefiting, because she's not "normally" part of the coverage test anyway, having not gotten the 2 years of service yet.  (Thinking 1.401(a)(4)-2(b)(4)(vi)(D)(3) here)

Thanks.  (Never mind that they didn't get any deferrals out of the staff person, so I've got other reasons to think about the 3% and how it's not enough of a QNEC if they allocated it that way.)

--bri

[CuseFan]

If both plans - PS & CB - have two-year eligibility, but NHCE gets a TH because of earlier 401(k) eligibility, could you not parse out the NHCE as otherwise excludable?

And regarding cross-testing, if the NHCE is substantially older than the owners, do not overlook cross-testing combined plans on the basis of contributions.

[Bri]

Unfortunately you can't use the otherwise excludable rule on someone who has the standard 1, but not 2, years of service.  

The contributions basis won't work - her contribution rate was already lower than the owners'.  I had thought about if she were to get the same 6, then they're good with a uniform contribution rate, at least.  (And as the DB plan is still non-PBGC unless/until she enters, the 6 plays nice with the deduction limit still.)

(If the "greater of normal/TH" formula argument allows her "well, it's more than zero" to be nondiscriminatory even though it's less than the owners' amount, then my only problem may indeed be the failing 401k test.  Ahh, takeovers.)

[Mike Preston]

If a regular ps then testing with permitted disparity the nhce should end up with less than 6%.