QNEC's and the Gateway...

[TBob]

I know that if a NHCE receives an allocation of SHNEC, QNEC, or Top Heavy Mandatory, they will also need to receive the gateway minimum. I can find pleanty of posts that discuss that in detail.

Does the QNEC in turn satisfy the gateway? Let's assume that a plan fails the ADP test for 2003. In order to pass the test, the employer needs to contribute a 5% of comp QNEC to each eligible NHCE. Does this 5% also automatically satisfy the gateway as well or is there some obscure cite that says you can't get the double benefit out of the QNEC?

For simplicity sake, let's assume that all of the employees have met the statutory entry requirements and are all eligible for all contributions...that way we won't get off on an "otherwise excludible" tangent (as fun as that would be...).

Thanks in advance!

[Tom Poje]

my understanding of the rules (and they certainly could be wrong) would be as follows:

Before plan can test under a(4) each employee must receive at least 5% (or 1/3 the rate of the highest HCE)

This 5% consists of all nonelectives contributions. I have yet to come across an exception saying 'except nonelectives used in the ADP or ACP test'

so, I would say yes they count toward satisfying the gateway. however...

now you can a(4) test.

1.401(k)-1(b)(5)(i) and (ii) and also 1.401(m)-1(b)(5)(i) and (ii) require plan to satisfy a(4) with and without the QNEC.

I would find it hard to believe plan can pass a(4) without the QNEC.

I have heard others argue you can't use QNECs to satisfy gateway precisely because you end up in the a(4) test and now you have people who might not have received a full gateway. (e.g. they received 3% profit sharing and a 2% QNEC but when testing without the QNEC they now only have 3% - which obviously doesn't satisfy gateway.

Again, it depends on how you interpret the statement (this is from the preamble in the Federal Rehister 6/29/01)

Gateway for Cross-Testing

"Under the final regulations, as under the proposed regulations, a plan satisfies the minimum allocation gatewayif each NHCE in the plan has an allocation rate that is at least one third of the allocation rate of the HCE with the highest allocation rate, but a plan is deemed to satisfy the gateway if each NHCE receives an allocation of at least 5% of the NHCEs compensation (within the meaning of section 415©(3))."

Did a person receiving a QNEC receive 5% allocation rate?

I vote yes.

Therefore I have crossed the gateway and can now cross test, following the cross testing rules.

or is it

I am cross testing, I need to check to see if the NHCE receives the 5% and without the QNEC he doesn't...so I can't cross test.

[Blinky the 3-eyed Fish]

I agree with Tom with the logic that the receiving the gateway minimum is just necessary to get to the cross-testing. Once you are there, the test is run under those rules, i.e. with and without the QNEC.

I liken the QNEC to a key needed to get into a building, but once you're in, the key serves no purpose other than to jingle around in your pocket annoying those trying to work while you stroll the halls in your everlasting attempt to seek out victims of your tirades.

(I had to edit your to you're so y'all don't think I is ignurent)

[Tom Poje]

gee whiz Blinky,

you have your line of products and you are a poet-philosopher on top of all that!

[TBob]

Thanks all for the help.

My understanding was that the QNEC would satisfy the gateway but Tom cleanly chopped the legs out from under me by pointing out the obvious flaw in my logic (though not so ovbious to me - obviously) that the plan would have to satisfy the testing with and without the QNEC.

Blinky needs to go to work for the IRS as a consultant when they are drafting notices, regs, rulings and such. At least then they will be interesting to read! I think the whole key in the door thing should be written verbatim into the Regs!

[Blinky the 3-eyed Fish]

I wanted to revive this post. Tom I was agreeing with you before that the QNEC satisfies the gateway, but then the (a)(4) testing then must be done with and without it. However, it appears TBob's last post went unrefuted when he stated the QNEC would not satisfy the gateway.

So it's a year later. Care to clarify Tom or offer any updated knowledge?

[Tom Poje]

Dang it Blinky, my brain hurts enough as is. I've a deadline to meet to throw some stuff together for the Coverage Nondiscrim Answer Book and its been real fun changing all the reg cites to match the final regs. Plus you haven't told me who to write at the IRS to correct the math error in one of the examples of the regs!!!!

I'd still hold the QNEC gives you permission to hop through the gateway, but then at that point the actual nondiscrim test has to be run twice. Maybe if I had an extra eye I could see through this stuff.

[Blinky the 3-eyed Fish]

Thanks and may your brain be repaired post haste. As for who to write, just mail it out To Whom It May Concern and hope for the best.

[Archimage]

I see the final regs now refer to SHNECs as QNECs. How would this affect a safe harbor cross-tested plan? Before the final regs, they safe harbor contributions were not refered to as QNECs.

[Tom Poje]

personally, I think they messed up using those terms.

though they call them QNECs and QMACs

1.401(k)-3(h)(2) says these contributions are not subject to the limitations on QNECs under 1.401(k)-2(a)(6)(ii)

so I don't think it changes anything, but if you didn't have the prior Notice to look at, I think you would be baffled.

no actually, it doesn't matter. I am baffled anyway.

[KJohnson]

I think my prior conclusion was that you can use the QNEC to satsify the gateway but then you lose the beneift of the QNEC in the ADP and/or ACP test because of the regs that Tom cites.

1) You have to pass (a)(4) without and without the QNEC in order to use the QNEC in ADP and ACP.

2) The only way you can pass (a)(4) is with cross-testing

3) The only way you can use cross-testing is with the gateway

4) If you need the QNEC to make the gateway and you exclude it then you cannot use cross-testing and therfore cannot pass (a)(4)

5) Therefore you cannot use the QNEC in your ADP/ACP testing

Here is a prior discussion (that links to another discussion)

http://benefitslink.com/boards/index.php?s...c=22403&hl=qnec

[Tom Poje]

I'm not convinced of point 4.

I understand it to work as follows.

To get into Dizzy Land I have to buy a ticket at the gateway.

once I buy the ticket, I can choose what time I want to ride the Nondiscrimination Ride of Death, though the owner is going to make me take the ride once with a box of QNEC munchies, and another time without a box QNEC munchies. And I must be able to survive both rides.

see alse ERISA Outline Book, page 9.36 (2003 edition)

...although QNECs are used to pass separate discrimination tests, QNECs are still part of the 'plan'. which consists of the employer's nonelective contr. Plan must past a(4) with and without QNEC. If using cross testing then an ee who only receives a QNEC must receive the gateway as well.

[KJohnson]

I agree that if you get a QNEC you must get the gateway but the QNEC can be part of the gateway.

Where I still have a problem is how can you then use the QNEC in your ADP and ACP tests? You must pass (a)(4) with and without the QNEC in order to do so. If the only way you can pass (a)(4) is through cross-testing and the only way you can use cross-testing is with the gateway, and the only way you can make the gateway is by adding in the QNEC then how can you meet this requirement?

The (k) reg sends you back to 1.401(a)(4)-1(b)(2). I think the analysis has to be, how do I satsify this reg section excluding the QNEC? Through a safe harbor, through general contributions testing, or through cross-testing? If cross-testing then you have to meet the gateway without the QNEC.

Again, I don't view it as a gateway question but as an ADP/ACP test question.

[Guest quinn the car fixer]

our gateway amendment has language that specifically excludes qnecs from satisfying it.

[Blinky the 3-eyed Fish]

FWIW, this exact scenario was posed today at the LA Benefits Conference and Holland, while not totally sure, said that he thought the QNEC's used in the ADP would also satisfy the gateway.

[KJohnson]

Blinky,

My question has not been whether they could be used to meet the gateway, but whether they could still be used as QNECs under 1.401(k)-1(b)(5)(ii) and also 1.401(m)-1(b)(5)(ii). Did he address this?

[Blinky the 3-eyed Fish]

I assume by those cites, which I don't have handy, that you are asking if the QNEC can be used in the ADP or ACP tests if also used to satisfy the gateway. I was trying to convey that yes, he thought they could.

[buckaroo]

I am going to attempt to revive this very old post to be sure that I understand. Plan has elective deferrals, match, SNHEC, and profit sharing. The profit sharing has a last day requirement and is a new comp that needs to be cross tested. The match does not satisfy the safe harbor and the ACP test must be run. THe plan fails the ACP. The plan sponsor wants to correct via a QNEC.

I have two NHCEs who term prior to the EOY. They are getting the SHNEC. In order to satisfy the ACP, they are also going to be provided with a NEC. My question is if they are given the QNEC to satisfy the ACP, can this count towards the gateway. I know that I have to pass (a)(4) with and without the QNEC, but didn't know if the QNEC still counted for gateway and then needed to be tested for (a)(4) with and without QNEC.

Bottom line is can I use the QNEC for gateway and then test (a)(4) without the QNEC?

Any help is greatly appreciated.

[Tom Poje]

the original thread was started early 2004, a few years later

at the 2006 ASPPA Conference the IRS indicated (Q and A #6) [in true Grinch fashion]

NO, a QNEC cannot be used to satisfy the gateway.

bless their little hearts.

[buckaroo]

Thanks Tom.