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Cross-tested 401k plan uses QNECs to pass the ADP test. Are the QNECs


Guest greggi39

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Guest greggi39

the question is: cross tested 401k plan with qnecs to pass the adp test. are the qnecs in the general test? sal's book says no(from how i read it) but relius support says that qnecs are in it, and the reports include them. In prior versions thye did not, and the old FDP software did not. did the regs change?

please cite the applicable regs.

thanks

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which version of Sal's Book?

p 9.21 of the 2001 edition says plan must satsify 401(a)(4) when QNECs are combined with other nonelectives, and also when the other nonelectives are tested separately.

see 1.401(a)(4)-1(B)(2), 1.401(k)-1(B)(5) and 1.401(m)-1(B)(5)

read especially the examples

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based on the evidence, I would say yes and no, if that kind of answer makes any sense

Sal's answer is in the section on 'safe-harbor' (not to be confused with safe-harbor 401k)

so if you don't pass safe-harbor, what would you test?

Cross test with the QNECs, which seems like a circular argument to me

probably more importantly, if you cross test, you can not impute disparity on the QNEC piece

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  • 7 months later...

Tom:

Let's take the following example:

ADP test fails

Current year testing applies

QNEC of $20,000 will satisfy ADP test

ACP test already passes

PS allocations are based on employee classification and must satisfy 401(a)(4) and the gateway requirement

There are no accrual requirements to receive any allocations

Participants receive the following allocations in the form of a discretionary employer PS contribution:

Owners: 12% of compensation

Others: 3% of compensation

Question:

Can the QNEC of $20,000 (assume that $20,000 = 1% of NHC compensation) that is allocated to all NHC's that are included in the ADP test also be used in satisfying 401(a)(4) and the gateway requirement (i.e. the employer PS + QNEC = 4% allocation rate which is 1/3 of the highest HCE allocation rate and the 1% QNEC is necessary to satisfy 401(a)(4) - it will not pass without including the QNEC)?

Thanks,

Bill

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my understanding would be yes.

QNECs are still NECs (nonelectives) with a Q (Qualified). That means that they are simply 100% vested, can be used in ADP or ACP test, subject to deferral distribution rules. But they are still nonelectives. And as such, can be used to satisfy gateway minimum since the gateway is satisfied by nonelectives. In cross testing you can not impute disparity on the QNEC, however.

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Guest DFerrare

Tom;

If 1.401(k)-1(b)(5) (the 'old' 401(k) regs) says that 401(a)(4) for nonelective contributions must be satisfied by both including and excluding the QNECs treated as elective contributions, how can you satisfy the gateway when you are testing the nonelectives without the QNECs under -1(b)(5)(ii)?

David

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I base my comments on ERISA Outline Book, in particular the examples on 9.18 and 9.19.(2003 edition)

I read this to say the reason for testing the nonelective bot with the QNEC and without the QNEC is to determine whether the plan satisfies a safe harbor only formula (with and/or without the QNEC). Or, put another way, to determine if you would even need to test under 401(a)(4)

the final example speaks of a scenario where the plans would not be safe harbor and therefore must test using the rate group method. This would seem to fit the case of a cross tested plan.

I could of course be way off on this one.

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I think I would agree with Andy H. I suppose conceptually you would meet the gateway under the 401(a)(4) regs, but they could not be treated as QNECs under the 401(k) regs.

)

I don't see Tom's limitation as to (k) reg only applying to a 401(a)4) safe harbor because the (k) reg refers you back to 1.401(a)(4)-1(b)(2) in general and not to the 1.401(a)(4)-2(b) safe harbor.

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Guest DFerrare

I think the examples you are referring to are showing whether a safe harbor allocation formula plan can continue to satisfy (a)(4) on a safe harbor basis when a QNEC formula is added. In the first two examples, the safe harbor is satisfied because of the multiple formula rule. In the last example it's not so the (a)(4) testing must be done on a rate group basis. The rate group testing must be satisfied with and without the QNECs.

See Chapter 9, Section IV, Part C.3, #3.a.2) (or page 9.56 of the 2003 edition).

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Circling back for a moment, KJohnson's point is one that I meant to make.

It's the QNEC requirement that would be violated, not the a(4) test. To be a QNEC, the a(4) test must pass with and without it. If it doesn't, then I would think you still might have a passing a(4) test but still have whatever problem led you to do the QNEC in the first place. In other words, the intended QNEC would be nothing but a regular nonelective contribution.

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ok, suppose an ee receives a 1% QNEC only.

he is not eligible for the profit sharing, but the plan is cross tested. and HCEs received 12%.

now, do you bump him up to the gateway minimum. it looks like he received a nonelective contribution.

if so, how much? if you say 3% then you are saying you include the QNEC in the gateway.

If you say 4%, then it is as if he didn't receive a nonelective since you gave him a full 1/3 of the HCE.

Of course, the biggest problem is that the gateway minimum rules was written after all the others.

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Guest DFerrare

If the participant is not eligible for a profit sharing contribution because of age/service, you might be able to avoid giving him the gateway using the otherwise excludable rules.

Testing with and w/o the QNEC is only for 401(a)(4). Anyone who gets a QNEC is benefitting in either case.

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so the conclusion would be(?)

Yes, QNECs are included in determining whether the gateway minimum is satisfied.

(see also Federal Register preamble which says the gateway is determined under 1.401(a)(4)-2© and 'a plan is permitted to cross test once it passes a gateway minimum)

QNECs are used in the avg ben % test, though of course, no imputing disparity.

When cross testing you must run two rate group tests.

One with the QNEC and one without QNEC. (See example as cited by DFerrare)

In the example that started this discussion, the plan fails rate group testing without the QNEC and would need to take corrective action.

What is interesting, I suppose, is that when testing without the QNEC, an ees actual allocation rate did not satisfy the gateway minimum. But that doesn't matter, since the regs simply say once you pass the gateway minimum you can now cross test.

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Guest DFerrare

I don't think the QNECs are used to satisy the gateway contribution, when you are testing w/o QNECs. The (a)(4) regs allow you to use QNECs in testing, but it is the (k) regs that say if you want to use the QNECs in the ADP test, you must satisfy (a)(4) with and w/o. When testing w/o, I don't think the QNECs are used for any purpose under (a)(4). That's how I read the regs, anyway.

For the ABT, I still believe that there is always one average benefit percentage for the plan, determined under 410(b), and it always includes QNECs.

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Guest DFerrare

If the highest percent to an HCE is 12%, I think the gateway is 4%, without the QNEC.

As for who is benefitting, the definition of "employee" in the (a)(4) regs says an employee who benefits under the plan for the year "within the meaning of 1.410(b)-3". So even when testing (a)(4) w/o QNECs, anyone receiving a QNEC is still benefitting under 1.410(b)-3 and must receive the gateway (ignoring otherwise excludable testing).

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