Christopher Wilson Posted May 19, 2021 Share Posted May 19, 2021 Hello, I hope this post finds everyone happy and healthy. I'm relatively new to prevailing wage plans, so I have a few questions. My understanding is that a prevailing wage contribution is treated as a non-elective contribution, so it's included in the gateway and it counts towards top heavy. In this particular situation, the prevailing wage contribution has no eligibility or allocation requirements and it's immediately and fully vested. The ADP test is failing, so to what extent, if any, can the prevailing wage contribution be treated as a QNEC and be included in the ADP test? Can an immediately fully vested prevailing wage contribution be treated as a safe harbor non-elective contribution and, if so, can this be done operationally or does it need to be stated in the plan document? Link to comment Share on other sites More sharing options...
Bri Posted May 19, 2021 Share Posted May 19, 2021 Well, instead of the usual 5% cap for bottom-up QNEC purposes, Davis-Bacon amounts can be used up to 10% before the "representative rate" rule kicks in. You can use the prevailing wage amounts as safe harbor, if indicated in the document. Just obviously, if they're not 3% of pay for someone, then the employer would need to top them off. I presume that second question was theoretical, since you're running an ADP test. Luke Bailey 1 Link to comment Share on other sites More sharing options...
Doc Ument Posted May 19, 2021 Share Posted May 19, 2021 QNECS are subject to both 100% vesting and the distribution restrictions of Regulation 1.401(k)-1(d). To amplify Bri's response, the PW contributions also would need to be subject to the distribution restrictions in order to be treated as a QNEC (or as an ADP safe harbor contribution). That is why there is typically a specific election when drafting a document to treat such contributions as a QNEC (which would generally include treating them as an ADP safe harbor contribution). Bri and Luke Bailey 2 Link to comment Share on other sites More sharing options...
Christopher Wilson Posted May 19, 2021 Author Share Posted May 19, 2021 Thank you for your input. It's greatly appreciated. The document states that Prevailing Wage Contributions will offset QNECs. Therefore, to be crystal clear, I reduce each participant's QNEC that results from the failed ADP test by his/her prevailing wage contribution, correct? No participant is receiving a QNEC greater than 10%. If Prevailing Wage Contributions would be used to offset a SHNE, then it seems that would be provided for under 25.b.iii., correct? 25. Prevailing Wage a. [ ] In addition to any other Profit Sharing Contributions otherwise provided in the Plan, an amount necessary to meet the Company's requirements under an applicable prevailing wage statute shall be allocated. The formula for allocating Profit Sharing Contributions shall be specified in the Prevailing Wage Addendum to the Adoption Agreement. The addition of such Addendum shall not be considered a modification to the volume submitter document. The prevailing wage allocation offset: i [ ] None ii. [ ] The prevailing wage allocations will offset any other Profit Sharing Contribution allocations that would otherwise be made to a Participant iii. [ ] Other: b. [ X ] Qualified Non-Elective Contributions (in addition to any non-elective contribution made pursuant to D.18 and Section 4.04) shall be allocated in an amount necessary to meet the Company's requirements under an applicable prevailing wage statute. Allocations will be made in an amount necessary to meet the Company's requirements under an applicable prevailing wage statute. The formula for allocating Qualified Non-Elective Contributions shall be specified in an Addendum to the Adoption Agreement. The addition of such Addendum shall not be considered a modification to the volume submitter document. The prevailing wage allocation offset: i. [ ] None ii. [ X ] The prevailing wage allocations will offset any other Qualified Non-elective Contribution allocations that would otherwise be made to a Participant. iii. [ ] Other: ______________ [ ] Exclude ____________ from receiving benefits under an applicable prevailing wage statute under this Plan.Other: Link to comment Share on other sites More sharing options...
Doc Ument Posted May 21, 2021 Share Posted May 21, 2021 Sorry for the delay, I wasn't on the forum yesterday. What you describe certainly looks good to me, but out of an abundance of caution, I would maybe do an electronic search for "prevailing" on the AA and make sure there is not any other election that seems pertinent. I am perhaps thinking of a document I saw where there was an election to use prevailing wage as an offset to any other nonelective contribution (which would include a QNEC or an ADPSH NEC) but there was a separate election to treat the PWC as a QNEC, and I advised a drafter to check that other box before applying the PWC toward a QNEC (or ADPSH NEC). Of course, that plan might have had something in the BPD that covered that generic "offset" election, but it just seemed like the best advice to check two AA options rather than just the "offset" one. If there is no such box for the plan you have, you should be good to go. I think it's pretty clear that the plan you describe is not the one I am thinking of so I am probably being unnecessarily thorough. Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now