QNEC Question

[Guest Rosebud]

Our current document provides that:

The Employer may make Qualified Nonelective Employer Contributions. The Employer shall contribute on behalf of all eligible Non-Highly Compensated Participants eligible for an allocation, a contribution equal to the amount, if any, as necessary to satisfy the Actual Deferral Percentage limitation and/or Contribution Percentage limitation. Such contribution shall be allocated first to the lowest paid Non-Highly Compensated Participant up to 25% of Section 415 Compensation, then to the next lowest paid Non-Highly Compensated Participant until the Actual Deferral Percentage limitation and/or Contribution Percentage limitation is satisfied.

Is it possible to amend the document to provide that "such contribution shall be allocated first to the lowest paid Non-Highly Compensated Participant up to 100% of Section 415 Compensation..." or would that exceed the overall deduction contribution limit?

[Mike Preston]

Well, it has little to do with the deduction limit. The deduction limit is 25% of total pay and you are not likely to be bumping up against that limit.

There are two issues to be concerned with:

1) Timing of amendment. There are some that believe you can not modify the QNEC language except prospectively. It depends on who is eligible for your QNEC, but if nobody is eligible for it with respect to 2004 then you should be ok doing so for 2004. Otherwise you might have to wait for 2005. I can't imagine the IRS being very happy with somebody trying to do this to a document for 2003, although you might find a few that think it is ok.

2) The IRS has stated that the increase in the 415 limit from 25% of pay to 100% of pay pushes the "targeted QNEC" from "acceptable" to "gee, we really don't like it". So, while it may still be available now, don't expect it to last very long. Watch for the finalization of new 401(k) regs to see whether they will scuttle the use of targeted QNEC's on only a go-forward basis, or whether they will find a way to scuttle such a provision retroactively.

/ramble mode on/The proposed regs have an interesting theme on this issue. IIRC, they allow targeted QNEC's only if more than 50% of the NHCE's are receiving a certain threshold benefit. Sort of like the concept that currently exists in the gateway regs that allows a plan to escape gateway if more than 50% of the NHCE's have a DB benefit that is greater than their DC benefit. /ramble mode off/

[Kirk Maldonado]

Mike Preston:

I hadn't heard of anybody saying that QNECs could only be added on a prospective basis. Do you recall what argument they propounded supporting that position?

[Mike Preston]

I was talking about a plan that already provides for QNECs. The issue was the timing of an amendment to the already existing provisions.