QNEC - Top Heavy

[Guest JimD]

3% QNEC to NHCE used to pass ADP. However, plan is top heavy and there are 2 non-key HCE's who must receive the 3% minimum top heavy contribution. The QNEC can be used to satisfy the top heavy contribution. Does the top heavy contribution to the 2 HCE's have to satisfy 401(a)(4) by excluding the QNEC to the NHCE's?

[Blinky the 3-eyed Fish]

401(a)(4) has a broad brush. Can you provide more details? Is there a PS contribution? Is it a non-safe harbor designed allocation formula? It sounds as if the answers to the last 2 questions are yes, but I wanted to confirm before going further.

[Tom Poje]

1.401(k)-1(b)(5)(i) basically says run the a(4) using all nonelective contributions plus those qualified nonelectives used in the ADP test

1.401(k)-1(b)(5)(ii) basically says run the a(4) excluding those QNECs treated as elective contributions.

(similar argument applies if QNECs used as a match)

and you need to pass both.

so, if there are no other nonelectives AND the QNEC provided to the HCEs was not used in the ADP test, you would fail a(4) testing because under (ii) the only people with a contribution would be HCEs

[KJohnson]

Tom, it may be a chicken and the egg question, but wouldn't you actually pass (a)(4) but fail ADP because the QNEC does not satisfy the requriements of being a QNEC?

[Tom Poje]

actually, that one has puzzled me. I am not really sure.

Do I have to use a QNEC in either the ADP test or the ACP test, or can I simply designate some of the elective contributions as QNECs and not use them in either test?

Why would I want to would be beyond me, except in this case where your document might force you to provide a QNEC to HCEs.

hmmm. 1.401(k)-1(g)(13)(iii) [definitions]

says

...qualified nonelective contributions must satisfy © [100% vested] and (d) [distribution rules] without regard to whether the contributions are actually taken into account as elective contributions under the ADP test.

the definition under the (m) regs simply references you back to the (k) regs.

I could easily read that to say I can provide a QNEC and not use it in the test.

But I have been wrong before.

[rcline46]

Tom, using a QNEC is an often inexpensive way to avoid Top Heavy. Just an off the wall QNEC which just happens to bring the % to under 60. NIIIIICCCCEEEE

[KJohnson]

It would seem to me that the analysis woudl be that you are giving all non-keys a top-heavy contribution so that you would meet the 401(a)(4) safe harbor. However, then you are taking that top-heavy contribution and designating it as a QNEC only for NHCEs--That's were you get the problem. You can't do that under the (k) regs so you can't include it in your ADP test. You therefore are fine under (a)(4) but fail ADP.

[Tom Poje]

lets suppose I have a document that allows both nonelectives and QNEC(To all nonkeys)

deferrals:

HCE(key) 10%

HCE(nonkey) 0%

NHCE 0%

I fail ADP test, and make a 3% QNEC. I choose to 'only use' the NHCE QNEC in the ADP test. I now pass ADP test.

I test a(4) with all nonelectives.

That would pass since the NHCE avg > HCE avg.

I now test a(4) without QNECs used in the ADP test.

I now have an HCE at 3% and no NHCEs so I fail.

as far as I can tell all of the above follows the regs. in fact, I think that is why the regs are written the way they are, so as to prevent someone from taking advantage of this situation.

Now lets modify the above

HCE(key) 8%

HCE(nonkey)0%

NHCE 0%

I now only need a 2% QNEC to pass testing. However, this would be insufficient if the plan is top heavy. I could provide a 1% nonelective, but then the HCE(key) would receive, and he is trying to put the absolute minimu in the plan.

Therefore I still make a 3% QNEC but only use 2% of the NHCE in the ADP test.

Now when I test a(4) using alll nonelectives not used in the ADP test I have:

HCE(key) 0%

HCE(nonkey) 3%

avg 1.5%

NHCE 1%

1 / 1.5 = 66.67% almost enough to pass the 70% test. but this was testing on an allocation basis. I might very well pass if I test on an accrual basis.

[KJohnson]

Tom, in the first example I agree that you fail. My only point was that you fail ADP you don't fail (a)(4). Whether you can use the QNEC under the (k) regs requires "super (a)(4)" testing which is distinct from "normal" (a)(4) testing. I think you satisfy "normal" (a)(4) testing because the only non-elective you are making is the top-heavy minimum. If you had such a situation, the distinction may be important because an ADP failure may require different corrective action than an (a)(4) failure.

[Guest JimD]

Thank you for all your responses. There are no other employer contributions. I was hoping I was missing some way the qnec could do double duty. So the top-heavy contribution must made (or I suppose a profit sharing of 3% to all so the keys share). Then, in addition, a qnec can be made to NHCE's to satisfy ADP and if not ADP refunds are done.