QNEC AND TESTING

[Dougsbpc]

We administer a cross-tested 401(k) plan that will fail the ADP test. The employer may want to provide a 2% QNEC to all NHCE's to pass the ADP test. Can the QNEC be considered in meeting the 5% minimum gateway? Is the QNEC considered for purposes of passing the rate group portion of the 401(a)(4) test?

Thanks.

[Dougsbpc]

I found a prior post that directly answers my questions.

[AndyH]

Would you point us to it please?

[Guest Richard Scheer]

I don't know where the prior post is, but to answer the questions----

1) The QNEC can be included in determining the minimum gateway (it is an emploer non-elective contribution)

2) The (a)(4) test must be passed with the QNECS and without the QNECS

[AndyH]

Thanks. I agree with #2 but I'm not sure about #1. I remember prior discussion of this, but not the outcome.

[KJohnson]

http://benefitslink.com/boards/index.php?s...t=0entry79841

[AndyH]

Thanks, Ken. As I remembered, very good discussion. But I'm still not sure of the answer! Calling Mike.....

[Guest Richard Scheer]

From the 2001 Final Regulations:

(vi) Minimum allocation gateway--

(A) General rule. A plan satisfies the minimum allocation gateway of this paragraph (b)(1)(vi) if each NHCE has an allocation rate that is at least one third of the allocation rate of the HCE with the highest allocation rate.

(B) Deemed satisfaction. A plan is deemed to satisfy the minimum allocation gateway of this paragraph (b)(1)(vi) if each NHCE receives an allocation of at least 5% of the NHCE's compensation within the meaning of section 415©(3), measured over a period of time permitted under the definition of plan year compensation.

(vii) Determination of allocation rate. For purposes of paragraph (b)(1)(i)(B) of this section, allocations and allocation rates are determined under Sec. 1.401(a)(4)-2©(2), but without taking into account the imputation of permitted disparity under Sec. 1.401(a)(4)-7.

According to 1.401(a)(4)-2©(2), all employer contributions and forfeitures that are allocated to the employee are taken into account in determining the allocation rate.

Since QNECs are Employer contributions, why shouldn't they be used for the Gateway?

[AndyH]

If they are not allowed, it would be because the QNEC is given characteristics of employee deferrals, and employee deferrals cannot be used towards the gateway. But I for one am still on the fence about this.

Haven't heard Mike's take on this. So let's go with Tom's. But what is Tom's take?Blinky?

[Mike Preston]

There is no question that they ARE taken into account for the gateway. None. The only question is whether a QNEC which is taken into account remains a QNEC. I'm leaning towards the conclusion that says since the k regulations were not updated at the same time that the a4 regulations were changed to reflect gateway requirements that the satisfaction of 1.401(k)-1(b)(5)(ii) is to be determined without recongition of the gateway requirements. But I don't think the specific question has been answered in the Grey Book or at an ASPA conference, although I haven't done an exhaustive search.

It would seem incongruous to me to require a 7% gateway in the case where a QNEC was 2%.

But I don't have anything hard and fast to hand my hat on.

While it isn't much consolation, the only possible negative result is that the ADP test you thought you were curing remains uncured. To the extent you relied on the QNEC's in the a4 testing that isn't changed.

[KJohnson]

I agree with Mike that it is included for Gateway purposes.

However, I also think that you lose the benefit of the QNEC on the 401(k) side. I think the k regs are specific that in order to be a QNEC for ADP (or ACP) purposes you have to satisfy 1.401(a)(4)-1(b)(2) both with and without the QNEC. You can't satisfy 1.401(a)(4)-1(b)(2) in a cross-tested plan without making the gateway. Therefore if you can't meet the gateway without the QNEC then your QNEC really becomes just another non-elective contribution. I would note that the proposed (k) regs (issued after the (a)(4) reg gateway modifications) read just like the current (k) regs with regard to this point. Maybe this is something where the ASPA should submit a comment, but I don't see any other interpretation of the (k) regs.

[Mike Preston]

I think KJohnson and I are saying the same thing... almost. I'm reading the regulation the same way he is. I'm just thinking that the IRS didn't really mean it that way! So, I'm leaning one way, and KJohnson is leaning (way over) the other way.

I agree that this would be a fine question for the IRS at some point.

[could be me maybe not]

Can vegetarians eat hamburgers?

[Mike Preston]

Sure, if they are made from tofu.