QNECS

[Guest chris4013]

Can't we pretty much allocate a QNEC to whoever we want to to pass ADP testing, and just make a corrective amendment?

Can someone also confirm my understanding of the effective date of the bottums up QNEC allocation rules. I believe they are effective for plan years beginning in 2006, is that correct?

[Tom Poje]

bottom-up QNEC become darn near impossible to use in testing for plan years begining 1/1/06.

1.401(k)-2(a)(6)(iv) of the new regs

[KJohnson]

Also I don't know about your corrective amendment. For example, like a QNEC you don't have to make a discretionary profit sharing contribution for any year. However, on these Boards you will find an extensive discussion on whether you can change the allocation formula for any profit sharing contribuiton that will be made after a particpant has done everthing to "earn" an allocation for that contribuiton (last day, 1,000 hours etc.). Thus if you have a QNEC provision that says you will make a QNEC for all NHCEs who are eligible to defer on a comp to comp basis, I am not sure whether you could change this formula to a bottom up formula retroactively since the NHCE has done everythin neccesary to be entitled to a QNEC under the old formula.

There might be some exception with regard to QNECs but I am not sure why it would be treated differently from a profit sharng contribuiton.

[Kirk Maldonado]

KJohnson:

Every plan that I've reviewed that contained language authorizing QNECs made them optional, not mandatory.

[Blinky the 3-eyed Fish]

The ability to change the QNEC formula after accrued is an interesting one. With a PS allocation, most (with the exception of one person on this board) would agree with the TAM, or at least follow it, and not change the formula after accrued. The QNEC is a little different though, as Kirk mentions, in that it's not the only means to get the job done, i.e. to correct a failing test. The HCE's could simply return dollars. So, to say that a QNEC would not be done by a client if made on a comp to comp basis for everyone but that it would be done if bottoms up is probably a fair statement in many cases. Thus, is there a cutback if the formula was changed?

Now compare this with the switching of the testing method from say prior to current year, but making the switch after the plan year. Is this any different from the above scenario in the potential for a 411(d)(6) violation?

I just seems to me as if the first case is one where the prevelant thought is it cannot be done, while the second case has a different mindset amongst practitioners. No answers here, just throwing out some comments.

[Guest Giovanni]

Why not list several different methods of allocating the QNEC in the document and say that any one of these methods could be used?

[jquazza]

IMHO, you can't pick and choose, unless your document tells you you can (which I doubt it will, otherwise, you wouldn't be asking.) I actually was looking into this just last week, we use the PPD doc which has under the QNEC section language that allows reverse allocation or similar method.

We checked with PPD to see what was intended by "similar allocation", and it's definitely not a pick and choose method. An example of what was acceptable was to do a reverse allocation but instead of capping the allocation at the 415 max, we capped it at the top heavy minimum (kill two birds with one stone,) which apparently will still be acceptable post-2005 since the percentage is low enough.

[Kirk Maldonado]

You must have very different clients than I have if they would chose anything but a bottoms-up QNEC. They must have money to burn.

Those are the type of companies that I'd like to have as clients. Do any of them need ERISA counsel?

To demonstrate how much you can save by using a bottom's up QNEC, for one of my clients a $50,000 contribution allocated as the same percentage of compensation of all non-highly compensated employees was not enough to bring the plan into compliance with the ADP test, but we brought it into compliance for a measly $1,800 by allocating those funds on the bottom's up basis.

Admittedly, that was pretty cheap because the client had a lot of turnover in its workforce; actual savings may vary.

[jquazza]

No, it's just they needed to make a top heavy minimum contribution to all the non-key anyway, so might as well use it in the ADP. What I was trying to do at first was make the top heavy minimum as a QNEC only to those participants who are already 100% vested (we ended going a different way.) What complicated the matter was the fact there were HCEs who were non-key (and HCEs were excluded from QNECs.)

We ended up making a reverse QNEC to top heavy minimum (not 415) to few NHCEs to pass ADP. Making the additional top heavy minimum to all other non-key employees (which passed nondiscrim w/o the QNEC by a nudge.)

So, no, our clients are not much different from yours, they just don't want to contribute more than they have to.

And if you're talking about example, I just did a plan that avoided 30k of refunds with a $63 QNEC (they must be thinking we are absolute geniuses.)

[Kirk Maldonado]

I have only a few top-heavy plans, which is why my clients opt for the bottom's up approach. Yours is a very different scenario.