Recharacterizing deferrals as profit sharing?

[Mleech]

I've run into an issue testing one of the plans that came on with us this year. I don't know who wrote their plan document but they absolutely should be a safe harbor, but they aren't. It's just 5 people , three of which are owners (one of them is the owner's son who didn't actually work at all or make anything though). Anyway, the ADP/ACP is... bad. The two owners deferred 23k and 12k (40% and 23% respectively I believe) and as such the ADP is roughly 17.5% vs 1.06% for the NHCEs. The options are either a QNEC, which would be roughly 7.5k in order to pass, or returning almost all their deferrals to them. 

So here's our proposed creative solution: The only HCEs who need money returned are both owners of the company who choose their own pay, and as such the line between their money and the business's money is really just up to how they want to receive it. Because it's only the two owners, we want to do a "corrective distribution" on paper so they pass ADP/ACP, then use that money to do a profit sharing contribution to give both the owners that exact amount back (obviously, we'd discuss this with the owners before actually doing it). As the plan is new comp / cross tested and there's only 2 NHCEs, the cost they'd need to give to them would be far less than a QNEC and the owners would still get to keep the money they put in.

So, my questions: From a legal standpoint, is this iffy? It seems fine to me as it's no different than distributing that money back and then the employer "deciding" to do a year end profit sharing, except we don't actually buy and sell those assets. Second: One of the two owners is over 50. The IRS page on ADP ACP corrections says that "If the Plan provides for catch-up contributions, the refund may be recharacterized as a catch-up contribution (up to the catch-up limit)". How would this rule factor in / be utilized to solve this?

And yes, we're already in the process of writing an amendment to make them a Safe Harbor NE for this year, we just can't retroactively do that. 

[Bri]

Iffy's not the word.

But why not adopt a 4% SH at this point for last year?

[Mleech]

1 hour ago, Bri said:

Iffy's not the word.

But why not adopt a 4% SH at this point for last year?

Is it possible to retroactively amend the plan document for that? My assumption was that you can't amend a plan document after the plan year has ended but I'm fairly new to this industry as a whole, hence me running anything questionable by the smart folks here when I can.

[Bri]

yeah, they let you now.....well, depending on what you're doing!  

(hence my reference to 4% as the safe harbor nonelective, rather than 3%)

[Mleech]

Well, that makes this a world easier (and less legally sketchy), thanks!