I have a calendar year Profit Sharing 401k plan, 3% non-elective Safe Harbor, and a last day rule. We have several participants that terminated 12/31/05. Each of these participants received a full contribution for 2005.

Since they worked through 12/31/05, they each received a substantial paycheck in January 2006 which included vacation pay.

Even though these participants didn't actually work any hours during 2006, wouldn't they be entitled to at least the 3% Safe Harbor contribution on their 2006 compensation? This usually causes us to have to do a second distribution if they have already been paid out their 12/31/05 balance.

Now if they had a Cross-Tested contribution formula with no last day rule, wouldn't these terminated participants have to receive the Gateway Allocation for 2006 along with the Safe Harbor contribution?

Thanks.

If they were allowed to defer from the final paychecks (which I assume they were) then they must get the 3% safe harbor. This happens all the time due to the final pay-check.

Assuming the 3% safe harbor was not enough to satisfy the gateway, then yes, they would need to receive the gateway minimum. This is the case regardless of whether or not the Plan has a last day rule on the new comp formula. Make sure you got your "topping off the tank" amendment executed (this is the amendment that lets you bring people up to the gateway if they are not otherwise eligible for an allocation)

Couldn't you exclude an employee from the gateway test if they terminated and had less than 501 hours of service for the plan year?

Nope. A participant is only excludable if they DO NOT receive an allocaiton on account of their termination and or failure to work a minimum number of hours. These people received an allocation, so they are not excludable.