minimum gateway for safe harbor and terminated participant

[eilano]

A 401(k) plan that provides a 3% safe harbor nonelective contribution is also a cross tested plan. In order to receive the profit sharing contribution, you have to be employed on the last day of the plan year. A terminated participant receives the 3% safe harbor nonelective contribution. Would he also have to receive a 2% profit sharing contribution to pass the gateway test even though he terminated employment?

[Tom Poje]

by law, if a participant recives any non elective contribution then they must also recevive the gateway.

if your document does not contain the gateway language, then you would have to put in a corrective amendment to bump the individual up to the gateway.

if you are past the deadline for a corrective amendment then....

[Guest Beachgirl]

I believe it would depend on the highest allocation rate to an HCE. If the highest HCE allocation rate is 9% or less, then the terminated participant would not have to receive an additional contribution in order to pass the minimum allocation gateway as you would be passing the gateway using the 1/3 test. However, if the highest HCE allocation rate is above 9%, then I believe the terminated ee would have to receive an additional contribution such that when added to the 3% safe harbor, his allocation rate is equal to the lesser of 1/3 of the HCE rate or 5% of compensation.

For document purposes, we always add one last class in the document stating that that class consists of any participant who is not an eligible participant but who is otherwise treated as benefitting under the Plan for purposes of Section 401(a)(4) of the Code. This is to clarify for minimum gateway purposes that a terminated participant in a plan that has 1000 hours and/or last day rule to share in the profit sharing contribution nontheless is eligible for a gateway contribution regardless of the 1000 hours/last day rule.

[Madison71]

I know this has been discussed in many forums but I am still confused. If the plan provides for immediate eligibility for elective deferrals and the 3% safe harbor nonelective contribution, is the minimum gateway required if the eligibility for the profit sharing contribution is age 21 and 1 year of service? I do know that if the participant has met the eligibility for the profit sharing (21 and 1 year of service) and terminates before the end of the year, that this participant is still owed gateway even if there is a last day employment requirement or 1,000 hour rule.

The other issue is what plan compensation do I use to determine employer contributions? The plan provides that compensation is excluded for nonelective contributions for compensation prior to entry into the plan. Lets say a terminated employee was eligible for the profit sharing contribution on 7/1 and terminated 10/1 of the same year. Is compensation based on the 3 month period or the entire plan year for safe harbor nonelective and profit sharing purposes?

Thank you!

[Tom Poje]

Think of the St. Louis gateway arch and just beyond it is the world of cross testing.

before you can enter into the land of cross testing, you have to pass under (or provide) the "gateway".

now, if you are testing otherwise excludable folks separately, and there are no HCEs in that group, then you don't need to cross test that group, and therefore no gateway is required for that particular group.

as for the 2nd part of your question...

well probably muddy waters. however, ignoring the issue of gateway for the moment, the IRS has said even though you provide someone a top heavy contribution based on full year's comp, you could use comp from date of participation in testing. I'm not sure that would follow through because for purposes of the safe harbor nonelective you have an entry date different than for other nonelective contributions. I would hold in that case you have to use the earlier of the two entry dates.

This is different than having a 7/1 entry date but using comp based on full year because you don't have another entry date.

[pmacduff]

ok - I have a termed participant in a cross tested plan that does not have a last day rule but does have 1000 hour rule for profit share. Participant termed with 31 hours. They are receiving the 3% SH non elective. Per Tom's post I don't have to bump participant up to the gateway if I test the otherwise excludables separately and there are no HCEs in the otherwise excludable group?

thanks in advance....

Edit to scratch this post - this participant was active until 2015 when she termed so she isn't in the "otherwise excludable" group. She needs to get the bump up to the gateway.