Two plans with different eligibility

We have an LLC taxed as an S Corp with a PS plan - no 401k feature.  2 year wait with dual entry next.  PS only - everyone in their own group.  Seven 2025 participants.

They haven't made a PS contribution in a number of years but would like to for 2025 (on extension).

We just found out that they installed a 401k plan effective 1/1/2024 with their payroll provider (sigh).  It has a 3 month wait with 1st of the month entry.  EACA with 4% SHM (calced each payroll).  It has a discretionary pro rata PS with no allocation conditions.  There are 4 additional participants in this plan that do not have 2 YOS.

The PS only plan is top heavy.  I don't have the 12/31/2024 balances of the 401k plan yet, but I'm assuming it will still be top heavy.

They want to maximize a PS contribution the PS only plan for 2025.

Can this be done?  If so I assume they have to be tested together, but I'm not sure what that looks like.

Someone from my organization said the PS formula in the 401k plan supersedes the groups formula in the older plan and we have to use the pro rata formula, but I don't think that is true since they are separate plans.  I think the problem is can it be tested with the different eligibility provisions.

Since the THM is needed - we can exclude the non statutory participants from the TH I think, but what about those who have over 1 YOS, but not 2?  

I don't know what I don't know here.  I've never had this situation before.  They didn't come to us when they decided to install the 401k.  Any guidance would be appreciated.

The allocation formula is only dependent on which plan they put the contribution into.  Sure if they put it into the new plan, they'd have to follow that plan's pro rata formula.  And if they put it into your plan, they get to do it that plan's way.

THM would apply to the 1-but-not-2 years people since the statutory exclusion rule only excludes the <1 people (notwithstanding entry dates).

What if "your" plan did what it would normally do...Then you provide a THM if necessary under the new plan to anyone swept up in between years 1 and 2.  See if that plan automatically forces the THM when not otherwise provided.  Actually that plan would need to also guarantee gateway since they'd be tested together.  Sometimes a document will have THM/gateway sort of "override" the plan's typical allocation rules.

Purely from the perspective of managing compliance, it may help to look at this as if it is one plan with 401(k), SHM, and profit sharing with 2 formulas.

The 401(k) and SHM features should be okay across the board.  The profit sharing could get even more messy than one might imagine depending on demographics primarily because of the interplay among the Top Heavy Minimum rules, the profit sharing eligibility provisions and coverage rules, the profit sharing allocation formulas, and the difference between the definitions of Key Employees and HCEs.

A good starting point will be to gather all of the census and contribution data for both plans and use that to guide next steps.  I do suggest that you discourage the client if they are considering treating the plans as unrelated or they are considering having the payroll company do any of the compliance work.