May a Safe Harbor 401(k) plan with a cross tested profit-sharing allocation use the safe harbor 3% contribution and an additional 2% nonelective contribution with allocation restrictions such as a last day or 1,000 rule to satisfy the 5% gateway test?
Rev. 12/01/05, E-mail Alert 2005-24


Generally, the answer is no. If there is a last-day or 1,000 hour requirement on the 2% non-safe harbor allocation and an employee leaves before satisfying either requirement (and, thus, is not eligible to receive the additional 2% allocation), and, therefore, only receives the safe harbor 3% NEC, then the 5% gateway test cannot be passed because all benefiting nonhighly compensated employees (NHCEs) did not receive the 5% required to satisfy the 5% gateway. The options for the employer are as follow:

1. If it is still during the plan year in question, the employer may amend the plan to either:

A. Remove the last-day or 1,000 hour rule so that the 2% nonelective allocation may be provided and the 5% gateway passed, or
B. Increase the safe harbor allocation to a 5% NEC. This may be more expensive for the employer because of the full vesting requirement.

2. Alternatively, the safe harbor NEC of 3% to all eligible participants could be used to meet the 3-times gateway test, which would allow the highly compensated employee (HCE) with the largest contribution to receive an allocation of no more than 9% of compensation.

MHCO Note: It is important to remember that a participant receiving any nonelective contribution, be it safe harbor or top-heavy minimum is subject to the gateway test.