Otherwise Excludable EE

[Guest Mike Schwing]

My prototype plan document allows the employer to utilize a bottoms up QNEC to pass a failed ADP / ACP test.

I have a plan using current year testing. The plan allows for early entry into the 401(k) / match portion of the plan.

The plan fails the ADP / ACP testing for 2002 based on all eligible employees. I ran the testing using the "early participation" rule and the plan still fails the test.

My question involves how I allocate the bottoms up QNEC.

My plan document specify's I give the QNEC to the lowest paid employee. Can I assume that this would mean the lowest paid employee in the "early participation" version of the test?

In essense the lowest paid employee in one test is not the same as the lowest paid employee in the other test. The document is silent on the issue.

Any help would be appreciated.

[MWeddell]

To answer this question, one would have to interpret your plan document. That's hard for us to do through an internet bulletin board.

[Guest Mike Schwing]

I understand, and thanks anyway.

[Tom Poje]

In addition, my understanding is the IRS was not wild about bottom-up QNECs especially with the new rules beginning in 2002.

since a low paid ee could end up with a 100% of pay QNEC it can really get 'artificial' as far as testing is concerned. I don't recall exactly what they said, if they were now considered a no-no or not.

[Guest Mike Schwing]

The 2002 ERISA outline book states the following:

5.c.3) Treasury has authority to restrict use of reverse QNEC method. In the EGTRRA Conference Report explanation of EGTRRA §632, the Congress notes that, with the increase in the IRC §415©(1)(B) limit to 100% of section 415 compensation (up from 25%), it intends that the Treasury will use its authority to address situations where QNECs are targeted to certain

participants with lower compensation in order to increase the ADP of the NHCs. Congress is concerned that with a very small dollar amount, the ADP can be substantially increased, even for relatively large employee populations.

5.c.3)b) Is this prohibited in absence of Treasury guidance? There is nothing in the current regulations to preclude a reverse QNEC allocation of this type, provided the §401(a)(4) requirements are satisfied with respect to the nonelective contributions, as escribed in 1.c. above. It would seem that the Treasury will need to issue restrictions on the use of reverse QNECs before it can legally attack an example like the one in 5.c.3)a) above. If treasury intends to attempt retroactive application of restrictive rules on the use of reverse QNECs, it will need to provide for a retroactive effective date in proposed regulations or other

guidance. Generally the Treasury does not prescribe retroactive effective dates. Also, retroactive effective dates could be subject to legal challenge.

[MWeddell]

I agree that one can rely on the existing IRS regulations that permit QNECs and don't preclude a bottoms-up allocation of QNECs since it is not inconsistent with current law (merely inconsistent with EGTRRA legislative history) and hasn't been revoked.

[mbozek]

Under IRC 7805(B), in the absence of congressional authorization IRS regs generally cannot be effective earlier than the the date the proposed regs appear in the fed register.