Gateway minimum for terminated participants

[Cynchbeast]

We have a PS 401(k) plan with deferrals, 3% SH NEC and New comp Profit Sharing allocation. The plan requires 1,000 hours for PS, with no year-end requirement.

There are about 3 participants who terminated in 2013 with less than 1,000 hours and so are not eligible for PS; however:

• These participants still receive 3% SH
• The SH allocation is considered part of the PS contribution for the 401(a)(4) General test
• Without the additional PS allocation, these participants are in the general test getting 3% and therefore the plan does not pass the gateway minimum allocation test and therefore fails 401(a)(4)
• The gateway test would pass if these terminated participants get an additional 1.38%, but they are not eligible to get any PS allocation (since they had under 1,000 hrs for the year)

How should this be handled?

[Lou S.]

Check to see if the Plan has "fail-safe" gateway language that bring up all participants who receive an employer allocation up to the required minimum gateway regardless of other plan conditions.

If it doesn't you probably need an 11(g) amendment to allocate these participants an additional contribution to satisfy the gateway and it probably needs to be a vested contribution to satisfy the IRS's economic benefit rules.