Targeted QNECs

[Guest philc]

Final 401(k) regs., generally effective for plan years beginiing on and after 1-1-06, change the way targeted QNECs are determined. But when is this change effective?

For example - plan year is calendar 2005 and the employer will make a QNEC to correct a failed 2005 ADP. Can they do a targeted QNEC under old rules since it is for a failed 2005 plan year test? Or since the QNEC will be made in the 2006 plan year for the 2005 failure, they must follow the new QNEC rules?

[Guest Bob K]

Since the testing you are referring to would be attributable to the 2005 year, the current rules would be used. The QNECs contributed to the plan in 2007 but attributable to the 2006 year would fall under the new rules.

This is my understanding based on hearing comments from Treasury reps at the annual NIPA conference and the recent ASPPA NE Area conference.

[fiona1]

So with that line of thinking - if a test fails the 1/1/2006 to 12/31/2006 ADP/ACP tests and uses the Prior Year Testing method......then the new QNEC rules don't need to be applied since the NHCE percentage is attributable to the 2005 plan year, correct?

[Guest Bob K]

I am not sure that I agree with that conclusion. Since, as you state, the test if for the 2006 Plan Year how can we rely on the current rules instead of the new ones.

I believe the criteria is that the plan year being tested is 2006.

Of course, since the regulations do not include any examples, I cannot say for sure.

Let's see if this question is raised at any of the upcoming conferences this year.

Bob

[Tom Poje]

the regs say 'for plan years begining 1/1/06'

why would using prior year testing make a difference, the plan year itself still begins 1/1/06.

or at least that is how I would see it.

In addition, QNECs are next to impossible using prior year testing. that was one of the arguments against usiing prior testing and why current year testing is better.

personally, I'd rather forget the QNECs and test with prior year, but that is only my opinion.

[fiona1]

Forgot about the fact that, like you said, it's nearly impossible to use the prior year method and QNEC's. My bad...

[E as in ERISA]

I've heard IRS say same thing as Bob K did. You can use it for testing of the 2005 plan year.