New Comparability without HCEs

Hi to all and Happy Father's Day weekend to all the Dads!

We have a prospect who has a work force of non-owner, non-HCE employees.  In the profit sharing component of their potential 401(k) plan, they would like to favor a manager with a higher contribution than the other employees.  Our thinking at least initially is that since there are no HCEs and no Keys, they should be free to do this.  What are we forgetting to take into consideration?  We are so accustomed to thinking in terms of plans that have both HCEs and Keys as well as non-HCEs and non-Keys that we don't remember if there is anything to conform to when this is not the case.  There must be something - otherwise they might give the favored employee a contribution and nothing to those they don't like.....

Any thoughts will be appreciated!

There is no discrimination without an HCE to discriminate in favor of.  So, there are no issues.  Just ensure the plan's formula allows the flexibility to allocate the contribution at a different level.

Good Luck!

I agree with ETA consulting. 

the only time I have seen it be an issue was a plan that typically only does deferral and SH Match, AND the plan was top heavy. The HCEs deferred (they were also the keys), but received no other contributions. The SH Match, as the only ER contribution, under the terms of the pre-approved doc, was deemed to satisfy the TH min.

One year the employer wanted to give 3 managers an additional contribution. But doing so meant the SH match was no longer the only ER contribution, and the full regular TH minimums would apply. It would mean a number of NHCEs who were not deferring would have needed to receive a 3% TH minimum, which they did not want to do. 

The employer ultimately decided not to do the contribution to the 3 managers. 

ldr, your client might want your advice about how to write the plan's document to express the profit-sharing contribution's allocations.

Not clear from the OP:  Is this employer part of a controlled group?

(Based on  a few previous answers to that question, it is possible the questioner should find more than one way to address that question to the employer.  I'm just sayin'.)

If some NHCEs receive zero allocations, they are treated as excluded from the plan, so be sure you aren’t inadvertently violating the maximum age/years of service exclusion. For example, if the decision is made to only allocate to participants with five years, then the plan isn’t meeting the requirements unde IRC 410(a).

Don't forget about the deduction limit, if you're giving large contributions to people with lower comp it can sneak up on you.