Daily testing method for coverage

A client we had established a plan in 2018. 

Here are the relevant plan provisions:

1) Plan effective date: 1/1/2018

2) Plan does not exclude comp prior to participant entering plan

3) Eligibility for profit sharing contributions was Age 21, 1000 hours in a 12 month period, entry each 1/1 and 7/1

4) To receive a profit sharing allocation a participant must be employed on the last day of the plan year

5) Method to correct coverage failures for nonelectives is to "Add Just Enough"

6) Profit Sharing formula was discretionary, "New Comp - One Group per Participant"

7) There is no one year hold out rule for eligibility or vesting

8] There is no 5 year rule of parity rule for eligibility or vesting

The client gave us a census with 14 individuals who were employed at some point during 2018. There were 3 eligible HCEs (1 of which was not an owner), and 4 eligible NHCEs. Before the end of the year the sponsor terminated employment of all eligible NHCEs. The termination wasn't nefarious, a large project ended and no longer needed these employees. The owners, of which there were 2 gave themselves each a 30k profit share on 12/31 of that year. There were no other contributions. Using the annual coverage testing method the plan fails coverage and requires pulling back into the allocation several employees who had terminated (because of the employed on the last day rule). General testing required that those employees collectively receive an additional 42k in allocations to pass nondiscrimination. The partial plan termination didn't help the situation either.

If the plan uses the daily testing method for coverage on the last day of the plan year when the allocation was made, it passes coverage because there were no eligible NHCEs on the last day. Because of this there is no nondiscrimination issues. 

Is this allowable or am I missing something?

I don't think that works. Even if you are doing daily testing, you still determine whether or not the employee is benefiting based on whether or not they satisfied the conditions to receive a contribution for the year.

There is not a lot to go on, but here is what it says in 1.410(b)-8:

(a) Testing methods—(1) In general. A plan must satisfy section 410(b) for a plan year using one of the testing options in paragraphs (a)(2) through (a)(4) of this section. Whichever testing option is used for the plan year must also be used for purposes of applying section 401(a)(4) to the plan for the plan year. The annual testing option in paragraph (a)(4) of this section must be used in applying section 410(b) to a section 401(k) plan or a section 401(m) plan, and in applying the average benefit percentage test of §1.410(b)-5. For purposes of this paragraph (a), the plan provisions and other relevant facts as of the last day of the plan year regarding which employees benefit under the plan for the plan year are applied to the employees taken into account under the testing option used for the plan year. For this purpose, amendments retroactively correcting a plan in accordance with §1.401(a)(4)-11(g) are taken into account as plan provisions in effect as of the last day of the plan year.

(2) Daily testing option. A plan satisfies section 410(b) for a plan year if it satisfies §1.410(b)-2 on each day of the plan year, taking into account only those employees (or former employees) who are employees (or former employees) on that day.

(3) Quarterly testing option. A plan is deemed to satisfy section 410(b) for a plan year if the plan satisfies §1.410(b)-2 on at least one day in each quarter of the plan year, taking into account for each of those days only those employees (or former employees) who are employees (or former employees) on that day. The preceding sentence does not apply if the plan's eligibility rules or benefit formula operate to cause the four quarterly testing days selected by the employer not to be reasonably representative of the coverage of the plan over the entire plan year.

(4) Annual testing option. A plan satisfies section 410(b) for a plan year if it satisfies §1.410(b)-2 as of the last day of the plan year, taking into account all employees (or former employees) who were employees (or former employees) on any day during the plan year.

(5) Example. The following example illustrates this paragraph (a).

Example. Plan A is a defined contribution plan that is not a section 401(k) plan or a section 401(m) plan, and that conditions allocations on an employee's employment on the last day of the plan year. Plan A is being tested for the 1995 calendar plan year using the daily testing option in paragraph (a)(2) of this section. In testing the plan for compliance with section 410(b) on March 11, 1995, Employee X is taken into account because he was an employee on that day and was not an excludable employee with respect to Plan A on that day. Employee X was a participant in Plan A on March 11, 1995, was employed on December 31, 1995, and received an allocation under Plan A for the 1995 plan year. Under these facts, Employee X is treated as benefiting under Plan A on March 11, 1995, even though Employee X had not satisfied all of the conditions for receiving an allocation on that day, because Employee X satisfied all of those conditions as of the last day of the plan year.

Wow that makes sense, I suppose I didn't read the example closely enough. Thank you for your help, I think you nailed it.