QNEC & Profit Sharing contributions

[Guest jim williams]

We have a client with a 401(k) plan who contributes 12% in the form of a profit sharing contribution. Upon conducting the 2003 ADP test, the plan fails and one corrective measure would be to contribute a 5% QNEC on behalf of the NHCE only.

Can we reclassify part of the 12% profit sharing contribution as a QNEC on behalf of the NHCEs without violating Sec 401(a)(4) with regards to discriminating in favor of HCEs?

[Guest Bud]

As long as there is one plan (that is the 401k and profit sharing components are part of the same plan) and the 12% contribution is discretionary, I think you can. The QNEC regs describe how to do. Go for it!

[Tom Poje]

I am not 100% sure on that. I thought QNECs were a seperate animal from nonelectives - the documents I have seen would have them listed as different animals- rather than "I choose to treat some of the nonelectives as QNECs"

In fact, you can have different eligibility requirement for a QNEC than from a nonelective. In this case you must, since you are not given the HCEs a QNEC.

By the way,even if it is possible to do what you desire, you would need to run an a(4) test excluding the QNECs

[jquazza]

I think you have a problem if you give a 5% QNEC to the NHCEs, because now, your PS contribution gives 12% to the HCEs and 7% to the NHCEs. Can you do that in your plan? Unless you have a new comp allocation formula, you probably can't.

And Tom is correct, you will have to pass the General Test with and without the QNEC.