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Which year's top-heavy contribution can a QNEC contribution be applied


John A

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My understanding is that QNEC contributions for NHCEs can always be used towards satisfying top-heavy minimum contributions. Is that correct?

Which year does the QNEC contribution get applied to for satisfying the top-heavy minimum contribution in the following situations:

Plan year is calendar year and plan is top-heavy every year.

Plan fails the ADP test for 1998.

To satisfy the ADP test, QNEC contributions are made to NHCEs as of:

1) September 15, 1999

2) December 31, 1999

3) March 31, 2000 (with interest under APRSC)

In each of these 3 cases, does the plan sponsor have a choice of which year's top-heavy contribution to apply the QNEC contribution to, or is there a specific year each QNEC contribution must be applied to?

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I will assume by your comments that key ees are excluded from top heavy minimums, otherwise you have other problems.

you indicated the plan is top heavy AND failed the ADP test, so the QNECs are doing double duty.

And it looks like you are making up for 1998 failed test. I can't tell from your notes if the company also failed to contribute the top heavy or not for that year.

Are you saying you want the QNEC to apply to the ADP test for one year but to cover top heavy in another year? I don't think you can do that.

Another issue you didn't raise, is the issue of current year or prior year testing involving QNECs - I know there are some good examples in the regs that explain that as well.

I think there is (or may be) another issue as well. suppose you alloacte the QNEC for year end 1998. do I now include this in my top heavy determination for 1999. If these contributions are only going to the NHCEs (assuming NHCEs = only non keys) is it possible my plan gets kicked out of top heavy down the road?. I am not sure on that issue when make up contributions are involved. After all, the top heavy is a required contribution, and as your note indicated, you are making them up with interest, as if they 'had been made' back then.

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Tom,

Yes, Key employees are excluded from top-heavy minimums. And while I think I know the answer to this, if keys were included, what would the other problems be?

For purposes of the question, assume the company is looking at how much of a top-heavy contribution they have to make on the date specified, and will make that amount on that date.

For September 15, 1999, it is pretty clear that a contribution can be treated as if it was made on December 31, 1998. But I am not aware of any rule as to whether a QNEC contribution should be used for the 1998 top-heavy requirement.

For December 31, 1999, this is clearly within the allowed time for making a QNEC to satisfy the ADP failure, but some practitioners would say it was past the due date for the 1998 top-heavy contribution, while others would argue that it is the due date for the 1998 top-heavy contribution requirement. Again, I do not know if there is anything that would say the QNEC can be used to satisfy the 1998 top-heavy requirement, or if it is possible that it could be used to satisfy the 1999 top-heavy requirement due to the due date difference of top-heavy and ADP correcting contributions (similar to the way a contribution may be used to satisfy minimum funding in one year and yet be deductible in a different year).

For the March, 2000 APRSC correcting contribution, I am not aware if the QNEC contribution could be used towards a 1998 top-heavy contribution failure also, or if it could be used towards a 1999 or 2000 top-heavy requirement.

And you're right about the additional issue - I also do not know how the QNEC contributions affect the top-heavy determination for any particular plan year.

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The issue that comes up with key vs non key is QNECs can be used in the ADP test.

Lets suppose I use the QNECS for NHCEs in the test, but I don't for the keys. Then, if my understanding of the regs is correct, you have a 401(a) issue.

Or put another way, you have a 'ps' contribution for the keys (assume = hce) but nothing for the nhces.

Note, this is different than the safe harbor non elective which can cover everything.

see the Q & A under correcting plan defects (#144) - in another week or two there should be another post indicating whether to use APRSC or VCR. while maybe this Q and A is not exactly the same as yours, it might help.

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