Bottom-up QNEC's & IRS Warning on Discriminatory Practices

[Gruegen]

Even though bottom-up QNEC's are on their last legs given the July 17, 2003 proposed 401(k) regulations, I've always felt that bottom-up QNEC's are still permissible until those regulations become final and effective.

However, how does the IRS' new guidance on discriminatory practices (October 22, 2004 memo from Carol Gold) effect bottom-up QNEC's used to cure failing ADP or ACP tests? Do people think that bottom-up QNEC's are still permissible?

[Tom Poje]

of course personal opinion don't account for much so the following could only be taken for what its worth.

supposedly the final regs will be out soon, I would think they really want to get them out so things are in effect by 1/1/2005, but who knows. until that time, I think there is little that can be done to stop the use of bottom up QNECs.

never did a bottom up QNEC, never had that written into a document, and certainly that would be a requirement, you can't simply make one if the document simply calls for a QNEC. (e.g. most say to all NHCE eligible)

as for the memorandum, I'm not sure it would apply in this case.

The memorandum talks about hiring practices that excludes a number of NHCEs, or providing large benefits to a select few NHCEs who won't vest, or were short time hirees.

if the plan you are talking about has been failing the ADP test every year, and has excluded a number of NHCEs from deferring, as well as including some short time ees, then I could see there being problems.

but again, my opinion only

[MWeddell]

I agree that bottom-up QNECs are still available. Now's the hey-day of bottom-up QNECs, so enjoy them while they last! The proposed regulations show the IRS is clearly aware of them and the delayed effective date shows they are permitted. The October 2004 guidance, in my opinion, doesn't change this.

The proposed 401(k) regulations said they'd be effective for plan years beginning 12 months after they are finalized, so if the final regulations don't come out soon, we're looking at a January 2007 implementation date instead of January 2006. Of course, the IRS could decide to speed that timetable up by changing the effective date in the final version of the 401(k) regulations.