QNEC satisfying ADP Test - What about coverage?

[Guest Mbrockway]

I'm allocating a QNEC to correct an ADP Test. The QNEC is to be allocated to all participants, including HCE's. There is 1000 hour/last day requirement on all employer contributions. Since the QNEC is tested in ADP - is it also tested under the 401(k) provision for 410(b)?

I had to suspend allocation conditions for the 401(m) to pass 410(b). If the QNEC is tested under the 401(a) provision for 410(b) I'll have to suspend allocation conditions - which increases the employer cost...again!

Thoughts and/or comments are appreciated.

[Blinky the 3-eyed Fish]

Is the QNEC the only nonelective contribution being made for the year?

[Guest Mbrockway]

Yes.

[Tom Poje]

A QNEC is still a 'non elective' contribution. therefore, for purposes of 410(b) it is tested as a nonelective, despite being used in the ADP test. 1 test only under 410(b)

however,

the a(4) test for nonelective contributions must pass with and without the QNECs.

.........

I am really curious to see the numbers you are running if the QNEC is being given to the HCEs as well as the NHCEs. good grief, if you fail the 2 test then that means you are providing enough QNECs to raise the NHCEs to at least 8% just to get to the point of using the 1.25 multiplier. (Unless you have at least 1 HCE who will fail to receive a QNEC.

[Guest mmc]

Most plan documents allocate QNEC only to NHCE? It defeats the purpose to allocate to the HCE as well.

[Guest Mbrockway]

I agree with you mmc....the plan should not have been designed to give the QNEC to all participants....but, the ER wants everyone, including the HCEs, to benefit.

If I am interpreting everything correctly, I can carve out the NHCEs QNEC and apply that to the ADP test. But, this will fail the 401(a)(4) because the only nonelective contributions remaining are the QNEC's allocated to the HCE's.

Tom, from what I have read, you have to disregard the QNECs used in the ADP test when testing the 401(a)(4).

The end result is that the QNEC is a double edged sword in this particular instance. Discrim passes/Coverage fails. Refunds are the way to go as well as changing the plan design to allocate the QNEC to NHCE's only.

[Tom Poje]

see 1.401(k)-1(b)(5)(i) ...amounts including QNECs....satisfy 401(a)(4)

(ii) ...amounts excluding QNECs satsify 401(a)(4)

so you have to both. Normally QNECs only go to NHCEs so a(4) is not an issue when you include them.

On a side note

All that is one of the reasons why it is important to treat safe harbors as SHNECS rather than QNECs