Coverage Testing for 401(k) Plan

[Guest asire2002]

A plan has a 401(k) component, a 401(m) component, and a non-401(k)/non-401(m) component. The non-401(k)/non-401(m) component consists of regular nonelective contributions, QNECs and top heavy minimums. The regular nonelective requires 1000 hours and last day of employment. The QNEC has no accrual conditions. The top heavy requires employment on the last day. In performing 410(b) coverage testing, can I exclude persons who terminate during the year with less than 500 hours? Or does the fact that the QNEC has no accrual conditions prevent me from doing that?

[Mike Preston]

Normally, a QNEC is taken into account as if it were an elective contribution. 1.401(k)-1(b)(5). If so, then it isn't a non-elective contribution for purposes of 410(b). Hence, those people who get the QNEC are not treated as benefitting under your non-401(k)/non-401(m) plan. Since they aren't benefitting, they are excludable.

If the QNEC isn't taken into account as an elective contribution, then they would be benefitting and therefore not excludable.

[Guest asire2002]

Treasury Regulation 1.410(b)-9 provides that QNECs are not part of the 401(k) plan for purposes of coverage testing. To clarify my prior post, there were no top heavy minimum or QNECs made for the plan year in question. My question really goes to whether, if one component of the non-401(k)/non-401(m) plan has no accrual conditions (i.e., the QNEC), then can any terminated employees be disregarded in determining who benefitted under the plan for the year?

[Mike Preston]

Don't have time to do a complete search this morning, but there are lots and lots of plans out there that have QNEC provisions which would have their 410(b) testing modified if what you imply were in fact true. Something tells me the IRS has addressed this point at some time in the past. Anybody else have it at their fingertips?