ADP Failure/SCP/Reverse (Bottom Up) QNECs

[Dawn Hafner]

Few questions regarding what may be permissible for fixing failed ADP test from 12/31/2000 currently.

1) Is correction using reverse QNEC method available under SCP?

2) If so, does document have to specifically provide for reverse QNECs, and if so when does that provison need to be in the plan?

Old document (in the basic document) provides for QNECs to NHCEs based on Comp to any NHCEs that met allocation requirements. (1000 and EOY)

GUST document (in the basic document) provides that the ER may operationally elect to allocate QNECs prorata on comp, flat dollar, or reverse method. Again only to particiapnts that met any allocation requirements (1000 and EOY). There is no special effective date for this provision, and we have used a restated date for GUST docufment of 1/1/1997.

Can we use this reverse method to fix the 2000 test since that is the document in place when fix is being done, and that is the method provided in the document?

3) If reverse QNEC can not be done under SCP, does filing under VCO need to be done for reverse QNEC? Are there any issues wtih the above topic (which plan document can be effective) if we file?

Any other thoughts on this topic? We are obviously trying to minimize cost through use of reverse QNECs rather than full QNEC. I realize that the IRS has stated they will be coming up with documentation limiting use due to new 415 limits under EGTRRA. The reverse QNEC in this case is not quite as severe due to the fact the particiapants that receive it must work 1000 hours and be employed on last day of plan year, so it is not the least cost reverse QNEC that could exist.

Any experiences recently on the IRS correction programs apreciated. I also understand a new Rev Proc is expected in 2002, possibly as soon as June. Does that change any actions suggested?

Thanks.

Dawn

[Dawn Hafner]

Anyone have any thoughts on this?

[KJohnson]

See the following: (if the link doesn't work its Q&A 156 in the correcting plan defects Q&A column.

http://www.benefitslink.com/cgi-bin/qa.cgi...qa_plan_defects

I would expect to see something soon saying you cannot have bottom-up QNECs. For a deferral only plan with the revision in the 415© limit you might be able to, say, make a 100% of comp

QNEC to a particpant making a few thousand dollars a year and really skew your ADP test.

[Tom Poje]

my guesses

both 2000-16 and 2001-17 said that ADP failures are corrected by QNECs (not bottom-up) regardless of document language.

my guess is that won't change even with a new rev proc, especially since the new 415 limit makes a sham out of bottom-up QNECs.

now, (at least according to the Plan Correction Answer Book) under the old VCR program, a bottom-up QNEC was permitted. And if your document said you could allocate bottom-up QNECs, you may have a leg to stand on in arguing for the bottom-up QNEC. If not acceptable under a future audit, the book says at least you made a good effort to correct the problem, and maybe (ugh) sanction will be lower.

Is the amount so bad that the one-to-one method of correction is extremely high?

[Scuba 401]

can anyone update the status of where we stand on this topic. can you make a bottom up qnec even if your plan document does not provide for it?

[Kirk Maldonado]

Scuba 401:

Wouldn't allocating a contribution using a formula that is not set forth in the plan be a separate violation of the qualification requirements? (Failing to operate a plan in accordance with its terms?)

[Scuba 401]

the plan document is silent as to allocating qnecs with the exception of the fact that they must be allocated to non highly compensated employees.

[Mike Preston]

I hope you are right. But something tells me that you aren't. The QNEC language usually has a reference of sorts that at least implies how the allocation is supposed to be handled. Care to post the language from the plan?

[Scuba 401]

i was wrong. i located the language in the plan. basically, the employer has the choice and one method is the bottom up.

[Mike Preston]

You have restored my faith in plan documents.

[Scuba 401]

my adminstrator is questioning the use of the bottom up method. she thinks that with out 415 it seems unfair. you can basically give the contribution to one person. i see there is in fact some legislative history that is telling treasury to address this problem. has it been addressed and if so not does anyone have any thoughts on how to handle this while there are no regs?

[Mike Preston]

It has not been addressed. I think it would be very difficult to do anything other than to follow the terms of the plan document.

[jaemmons]

If the plan allows for the bottom up QNEC then the plan administrator is following an allowable allocation method written into the plan. The Rev procs don't stipulate how the QNEC is to be allocated (except to provide "acceptable" examples of how to apply it to the current year of allocation), so I would assume that whatever allocation method applies to the plan's operation during the year of failure is allowable.

My office uses the Corbel volume submitter document which also allows for a bottom up qnec as an allowable method of adjusting ADP percentages to pass testing.

[Guest Kconsultant]

If the plan allows for a QNEC will this eliminate having to refund the money to an HCE for a failed test?

Also, what is the method for spreading the dollars to the non-HCE's? Does it have to be spelled out in the document?

Finally, any plan design suggestions on ways to help a client pass their tests in the future -- they have no compnay match but allow for a discretionary PRSH (which has not been made in recent years).

Thanks!