Safe Harbor and Profit Sharing - Testing

Hi, 

I'm going to apologize ahead of time.  I'm a small business owner, and in no way a benefits expert.  

Our company has only 8 people in the plan.  5 of those 8 have ownership above 5% and thus are HCE as I understand it.  One more has a salary in excess of 150k, thus also an HCE.  We offer a 100% on the first 3% and 50% on the next 2% for our match.  We also have a profit sharing component to the plan.  

My understanding is that because we have the safe harbor plan, we're exempt from testing (ADP, top-heavy, etc) for the primary 401k.  However, our TPA is informing us that there is testing associated with the profit sharing component.  Is this correct?  We're looking to max out our portion as owners, and provide a different but equal amount to the two non-hce's and a 3rd amount to the one HCE that is a non-owner.  

My further understanding of the profit share is that we can only "share" up to 25% of the total compensation of all eligible employees, but that the money is pooled.  eg, 8 employees each making 100k, we would have no more than 200K that could be put into the profit share portion, and no single employee could crest the 69k combined threshold (unless with catchup contribution).

I'm hopeful someone here can provide some additional insight for me.  If we make a "profit share contribution" to all employees, HCE and Non, are we subject to testing?  If so, is there anywhere where I can plug in our numbers and understand my options?  Additionally, do we need to provide the same to all non-owner or non-hce's?   

Thanks for helping me through this.  Not my forte, and I struggle at times with our TPA's ability to explain our options and the laws we must follow.

Your plan document will also say whether or not everyone can be allocated "something different" compared to a uniform formula (same percentage, typically)

8 minutes ago, Bri said:

Your plan document will also say whether or not everyone can be allocated "something different" compared to a uniform formula (same percentage, typically)

which can be amended if needed as long as the prior method is protected for 2024....

The calendar shows that we are in November with 50 days left in 2024.  Assuming you have a calendar year plan, there are two initial questions to ask your TPA ASAP:

1. Which of our objectives are attainable under the provisions of the existing plan document and with our projected demographic and compensation data for 2024?
2. Which of our objectives are attainable if we adopt permissible amendments to our plan document effective January 1, 2025 based on projected demographic and compensation data for 2025?  (You will have the most flexibility if the plan is amended before the start of a new year.)

@truphao is correct that this is not a DYI exercise and an in-depth look likely will incur some cost.

There is a third question to ask - what can we do to optimize our benefits and our deductible contributions?

Given your demographics, there is a very good possibility that adding a defined benefit or cash balance plan as a second plan could greatly increase the contributions for some participants well above the $69K annual additions limit for the 401k plan for both 2024 and beyond.  Ask your TPA to think outside the box.  Time is of the essence.

On 11/9/2024 at 5:59 PM, SMB_VT said:

Our company has only 8 people in the plan.  5 of those 8 have ownership above 5% and thus are HCE as I understand it.  One more has a salary in excess of 150k, thus also an HCE.  We offer a 100% on the first 3% and 50% on the next 2% for our match.  We also have a profit sharing component to the plan.  

Having 8 people in the plan can mean very different things. Testing, especially for profit sharing contributions, might have to include all employees, or employees who are eligible but not participating, in the plan. How many employees you have this year (even part-time or short service) can be an important determining factor, even if you don't want them to receive any profit sharing into the plan. When you send your data to your TPA make sure to include everyone - even if you don't think they are eligible. 

I would hope that any owners that are interested in the maximum overall contribution starts by maximizing their own deferrals. If that is not occurring - that is definitely step one. Beyond that your TPA can do the calculations for maximizing profit sharing, seeing is a discretionary match is feasible (typically restricted to 4%) etc. If the owners are similar in age to the NHCE,  the testing will look very different than if the owners are older than the NHCE.