410(b) testing with Safe Harbor Non-Elective

This is probably something I knew in the past but have long ago forgotten.  My brain can only handle so much regarding 410(b).

I have a four person plan.  3 HCE's and 1 NHCE who terminated employment during the year.  The plan was set up as cross tested with everyone in their own rate group.  In order to receive a profit sharing contribution, you must be employed on the last day of the year.  This means that the NHCE will only be entitled to receive the 3% SHNE.  If they want to do Profit Sharing on a cross tested basis then we would need to provide an additional 2% to meet the gateway.

The 5% contribution to the NHCE will only allow a very small profit sharing contribution for one of the HCE's (youngest participant in the Plan).  The owner is not happy about the situation.  He does not want to amend the Plan to allow for additional profit sharing for the terminated HCE since he is angry that she quit.

If I allocate the Profit Sharing Contribution on a Comp to Comp basis in order to avoid the general test, will the 3% SHNE to the NHCE be sufficient for "benefitting" under 410(b)?  My first thought is NO since the NHCE is benefitting at a lesser level but I need find some sort of cite that I can show the Owner. 

Can one of my more knowledgeable peers help me out?  

You'd pass 410(b) BUT would still need to pass 401(a)(4) since the benefits aren't uniform.

Thanks Bri... I thought I was missing something.

Hi Bri,

I hope you can respond to a follow-up question.

A plan utilizes a comp to comp allocation for a Plan Year (even though the Plan Document states that it has a cross tested formula).  There are ten NHCE's.  One is terminated and is not eligible for a Profit Sharing Contribution but is entitled to the SHNE.  The 410(b) coverage is 90% if we classify the terminated participant as not benefitting.  Based on you earlier statement, are we still forced to pass 401(a)(4) since the terminee is not eligible for the same contribution?

Or, are we only forced to pass 401(a)(4) when the 410(b) test is under 70% after we carve out the NHCE's who receive a lesser benefit.

You will pass the 401a4 specifically because the HCEs each will have a 90% rate group.  (Not cross-testing, just using the uniform allocation rate.)

Even if the formula's not defined as a safe harbor, the results will still look like it had been.

So, using that logic... Any Plan that uses one of the IRS Safe Harbor Allocation Method like Comp to Comp  or Integrated is subject to 401(a)(4) testing if there are any conditions on the profit sharing contribution and there is a terminated participant.  

I guess any plan that provides a Top Heavy minimum would be in the same predicament and need to treat TH only participants as not really benefitting.