New Targeted QNEC rules

[fiona1]

I'm going to stay on the topic of Targeted QNEC's...

What's the easiest way to determine a plan's representative contribution rate?

Let me just use an example to make this easier. Let's say I have 24 NHCE's and 10 HCE's. They all make ED contributions and those are matched. So the ED contributions are tested in the ADP test and the matching contributions are tested in the ACP test. To make it simple - there are no other contributions.

We'll say the ADP test fails. The HCE average is 12% and the NHCE average is 4%. So in order to pass the ADP test I need a NHCE average of 9.6%. That means a 5.6% QNEC (9.6% - 4%) to 24 NHCE's which equals a 134.40% QNEC.

The new rules say I can give the greater of 5% or the plan's representative contribution rate. If I give all 24 NHCE's 5%, then I'm only at 120%. So that won't work.

Here is where I'm stuck. How do I determine what the plan's representative contribution rate will be?

I know that the plan's representative rate is equal to the greater of:

1) the lowest contribution rate of any eligible NHCE among a group of eligible NHCE's the consist of one-half of all eligible NHCE's for the plan year or

2) the lowest contribution rate among all eligible NHCE's under the arrangement who are employed on the last day of the year.

So I'll start with the #1. I'll work with the formula of:

12x + 2(12x) = 140%

12x + 24x = 140%

36x = 140%

x = 3.89

2x = 7.78

12(3.89) + 12(7.78) = 46.68 + 93.36 = 140.04

So if I give half of the group a 7.78% QNEC and the other half a 3.89% QNEC, then I should meet the requirements of #1.

I think I'm making this way more difficult then it should be though. Anyone want to help me out?

[Tom Poje]

the logic sounds correct, but there are too many possibilities to reduce to a simple equation. my understanding would be:

with 24 eligible nhces, 1/2 that is 12.

so you needed to raise 134.4.

you could provide that to 12 nhces, or 11.20 to those 12 and 0 to the other 12.

I suppose this might be less expensive depending on comps

but given those conditions I would make make the plan safe harbor for 1/1/2006.

it would certainly be more cost effective.

good grief. the SNHEC is only 3%

[fiona1]

Thanks Tom...I guess there could be a million different combinations. Guess I'll try to make buddies with a programmer to help me come up with an application that will determine the lowest possible QNEC that will 1) equal 134.40% and 2) satisfy the new rules!!

[fiona1]

Well, wait a minute.

Tom, you said that it's possible to give 12 NHCE's 11.20% and the other 12 0.00%. 11.20% x 12 = 134.40%, so that satisfies the QNEC percentage needed to pass the test.

But I don't think it satisfies the new rule. The definition of "representative contribution rate" is: the lowest contribution rate of any eligible NHCE among a group of eligible NHCE's the consist of one-half of all eligible NHCE's for the plan year.

Therefore, in the example above, the lowest contribution rate is 0.00%. I think we need to at least give half the group 3.89%. Then the other half can get 7.78%.

I don't think giving half of them 11.20% and the other half 0.00% satisfies the new rule.

[Tom Poje]

well, I don't read the new regs to say the largest QNEC can only be twice the QNEC of any NHCE, thus each NHCE must be given something.

I read the regs to say pick a group of 1/2 the NHCE and what is the lowest rate amongst that group. half the group of 24 is 12. I gave all 12 11.2%. the lowest rate of that group is 11.2% so I don't see where that fails.

If you had to look at every possible arrangement of 1/2 the NHCEs, then you would have someone with 0%, true. but that would imply you could have no eligibilty restrictions on QNECs (hours, etc)

[Guest Carolyn_Bedard]

What if there are only 3 NHCE, what would be considered half?

[PensionPro]

2. The plan's representative contribution rate is the lowest rate of the group that includes at least 50% of the all eligible NHCEs.