Client has a 401(k) plan using the safe-harbor matching contribution design. Plan also allows for profit sharing contributions allocated using a new-comparability design to participants who satisfy the 1,000 hour, last-day rule.

Don't ask why, but, none of the participants have ever made any deferrals - not even the owner. Instead, the owner makes profit sharing contributions every year. Now the situation arises where there are non-key HCEs eligible for a PS contribution. It seems OK to not give them any allocation at all if the cross-testing passes and top-heavy minimums are not required by virtue of the safe-harbor design (the key has >60% of the benefits). Wacky, yes, but is anything being overlooked?

Safe Harbor Plans are only deemed top-heavy compliant if there are no other ER contributions other than Safe Harbor contributions. Since the New Comp formula is not Safe Harbor you'd have to do normal top-heavy testing & if top-heavy the 3% minimum.

I would also be questioning the sponsor to ensure they are giving out safe harbor notice. Don't see how everysinge employee including the owner are passing up more employer money. This one doesn't pass the smell test.