New Comp Profit Sharing As QNEC

[Guest Lawrenceg]

Plan fails ADP test . Instead of refunds, employer wants to use part of new comp PS allocation as 100% vested QNEC with remainder of New Comp allocation remaining as is. Is this within the guidelines?

[austin3515]

Got to pass 401(a)(4) with AND without QNEC's. There's some controversy about whether or not QNEC's can be included in the gateway, I'm not sure if there is a concrete answer on that.

[Tom Poje]

I think (if I remember correctly) at the ASPPA conference last year it was indicated you don't say

"Did everyone reason the gateway, ...yes...ok so now I test with and withou the QNEC"

but rather

I can only run my test without QNECs if those remaining contributions are enough to pass the gateway

and

I can only run my test with QNECs if all those contributions are enough to pass gateway.

[Guest Lawrenceg]

Joe:

You have me confused!!

The gateway was 5% and also the amount allocated and the QNEC to correct for the failed ADP would be 3.5%.

Can I therefore apply 3.5% of the gateway to the QNEC and still use all of the 5% for the gateway?

[Mike Preston]

Seems like you have 3.5% for the gateway. Is that enough? Is so, I think you are fine. As long as the document allows a 1.5% QNEC and a 3.5% NEC.

[austin3515]

Tom -

It;s late, but your last two statements seem to contradict each other. Would you elaborate?

[Bob R]

I think what Tom was stating is: In order to use a QNEC in the ADP test, the plan must pass 401(a)(4) both with and without the QNEC. That's why you get what may appear to be conflicting info regarding whether the QNEC can be used to satisfy the gateway. In testing for 401(a)(4) by counting the QNEC, you'll be fine because the QNEC plus the NEC is at least 5%. But, in testing under 401(a)(4) without the QNEC, you only have a NEC of 3.5%. That's less than 5% - but if you can pass using the 1/3 gateway, then it's ok (assuming you pass the rest of the nondiscrim testing).

I actually think the bigger issue is what Mike was alluding to - the plan must permit this. So, I wouldn't describe this as recharchterizing a ps contribution as a QNEC. Rather, the plan permits a QNEC to correct a failed ADP test - that would go to NHCEs. Then, the plan permits a ps contribution will some allocation method. You then make the profit sharing contribution and allocate it in accordance with the terms of the plan. If that gets you to a point where all NHCEs have 1.5% as a NEC and the QNEC for the failed test is 3.5%, then you only have to worry about the issue above (the 5% gateway effectively is not met).

Also, I believe the contribution must be designated as QNEC when it is made to the plan. That shouldn't be an issue assuming the contributions haven't already been made to the plan.

[austin3515]

So in laymen's terms, QNEC's cannot be included in the gateway (assuming you want to use them in the ADP test)?

[Mike Preston]

There is no substitute for non-layman's terms here. Pass a4 both with and without. Think restructuring.

[austin3515]

So Mike, at the risk of beating a dead horse, you would NOT include QNEC's in the gateway?

[J Simmons]

I think the 401a4 nondiscrimination testing must be performed--and pass--twice.

First, test the employer contributions excluding the QNECs. In this stage, you cannot count the QNEC toward satisfying the gateway or otherwise.

Then, 401a4 test all employer contributions, including the QNECs. This time, the QNECs can be counted towards the gateway necessary.

[Mike Preston]

Right.

[austin3515]

Okay, but only NHCE's are getting QNEC's (to the extentt hat they are being used to pass the ADP test) so it's harder to pass the gateway without QNEC's.

So I'll ask one last time and then I quit - You should exclude QNEC's from the gateway?

For all you die hard laymen out there, I believe the consensus is that you should exclude the QNEC's from the gateway test.

However, I still maintain that this has not been specifically addressed. The distinction is that the gateway contribution simply opens the door to allow you to run the testing based on EBARS, and is not necessarily part of the test (i.e., the rate group testing). I've heard people much smarter than me rationalize including QNEC's in the gateway in this way.

[Tom Poje]

dug back through my notes from last years ASPPA conference

what the IRS had said was that a QNEC can not serve double duty (help ADP test and gateway) - only in a safe harbor 401k would that be possible.

[austin3515]

At last...

Thanks Tom!!!

[Tom Poje]

remember, that is simply how they answered the Q and A. might not reflect an actual position of the Treasury, but at least it is a guideline.