Our client, a medical practice, has decided upon a $15000 profit sharing allocation for 2006. The plan document (volume submitter new comp) designates the two Doctor/Owners in their own group. The plan has made 3% SHNEC each payroll throughout the plan year, but, of course, some errors were made and a true-up is needed. Two employees entered at mid-year and the 3% SHNEC did not cover the TH Minimum due. Thus, the $15000 contribution less the SHNEC true-up and top heavy minimum leaves approx $10,000 left for allocation. Of course the doctors want as much of the $10k split amongst themselves.

On first glance it appears that we can allocate the 2.27% ($220000*2.27%=$5000) to each of the Dr's. Their total allocation adding in the 3% SHNEC is 5.27% (highest HCE alloc %) while all other eligible participants not in the Dr/Owner group (including a couple of other HCE's) get ONLY the 3% from the SHNEC. This covers the gateway. Ran the 401(a)(4) test and it passes.

However, the question has arisen of whether this is a legitimate allocation. When considering 410(b) coverage test, are the NON-Dr/Owners considered benefitting in the profit sharing (non-elective) because they received the SHNEC? If the SHNEC is not considered, the profit sharing allocation obviously fails the ratio percentage test and the average benefits test on its own.

Thanks in advance for any input!

see 1.401(k)-3(h)(2).
a SHNEC is not subject to the same restrictions as a QNEC
that is, you do not have to perform 2 nonelctives tests. even in that case, for purposes of coverage ees qho receive QNECs only are still considered to be benefiting for coverage purposes.

coverage merely asks "did so and so receive a nonelctive contribution?" it does not matter what form that nonelective is.

The SHNEC has multiple magical powers.

Thus the phrase "Holy SHNEC Batman!". Robin was, I've heard, a cross tester.