Reverse QNEC's

[Guest KD40]

Will someone please provide some basic information regarding a "reverse QNEC". I thought I read some information at one point that stated these are not even allowed anymore.

[Archimage]

A reverse QNEC would be called a CENQ. (Sorry for the terrible Friday humor.) Seriously, this is a QNEC that is given to the lowest paid NHCE. The total QNEC would be the amount needed to pass the test or the 415 limit. If that still isn't enough to pass the test then you go to the next lowest paid NHCE, and so on.

There is no regulation preventing reverse QNECs but with the 415 limit increased to 100% of comp, I think you will see some regulation regarding this fairly soon.

[MGB]

Long before the 100% of compensation was passed, IRS and Treasury officials have stated publicly in professional meetings that these are abusive methods of compliance.

They DO have regulations already written to outlaw them. It was supposed to be issued early last year as part of an omnibus regulation on 401(k) that pulls together all guidance on 401(k)s. It appears to have moved to a back burner recently in order to deal with other pressing issues.

[david rigby]

Another term used to describe this is "bottom-up QNEC".

[Blinky the 3-eyed Fish]

That is the term Adam Rich would prefer.

[RCK]

We made a 'bottom-up" QNEC yesterday. I mean, I have a friend who made one yesterday. A generally reasonable guy, he only raised the contributions to 25% instead of 100%

I have a hard enough time complying with proposed Regulations. I do not have a hard time ignoring phantom proposed regs.

RCK

[MWeddell]

If one allocates bottom-up QNECs to 25% of pay, make sure the plan document's allocation formula matches. If the plan document says "up to the 415 limit" then you've got to allocate up to 100% of pay before moving onto the new lowest paid NHCE.

The method is still permitted until the IRS changes its regulations. In the meantime, taxpayers are entitled to rely on the regulations. Note that the regulations are not inconsistent with the law: EGTRRA's legislative history merely directed the Secretary of Treasury to consider the issue (I'm paraphrasing very liberally).

[Guest mgkerisa]

It is my understanding that reverse QNECs are no longer permissible under the IRS cross-testing regulations issued in 2001 (Treas. Reg. Sec. 1.401(a)(4)-8). This is because bottom-up QNECs rely on the cross-testing rules to satisfy nondiscrimination. The new cross-testing regs., in turn, require a cross-tested arrangement to satisfy the "reasonable classification" test in the 410(B) regulations. In the IRS' view, a classification is not considered reasonable unless it is based upon bona fide classifications, such as employees working in a particular division of an employer, employees at a particular geographic location or employees in a particular job description. Typically, a bottom-up QNEC could not satisfy this requirement since it selects its NHCEs based on who has the lowest compensation for the year. In other words, you might have two employees working in the same division of the employer, at the same plant facility and with the same position and job description but, because one was earning a higher salary, he would not get the NHCE QNEC contribution, whereas the employee with the lower salary would. It is my understanding that, under the current rules, the employer has to commit to give all similarly situated employees the minimum NHCE contribution--for example, all employees in a given job title--as opposed to distinguishing solely on the basis of which employees have the lowest compensation.

[MGB]

Bottom-up QNECs are typically used for ADP testing, where the cross-testing is irrelevant.

[KJohnson]

QNEC's must satisfy 401(a)(4) testing under 1.401(k)(1)(B)(5)(i) and (ii).

However, if the only person getting the QNEC is one or more NHCEs, where is the 401(a)(4) problem? You can even still meet the 401(a)(4) safe harbor under 1.401(a)(4)-2(B)(vi)(D)(2).