Prevailing Wage as QNEC

[Guest Rutager]

I have an employer with a 401(k) plan that has a prevailing wage feature. The prevailing wage contribution is used (up to the extent allowed by the code) in the ADP testing.

The plan fails the APD testing and one of the HCE's who is required to get a refund has only prevailing wage money as a contribution. He is an HCE and is eligible for and contributes Prevailing Wage to the plan. He does not contribute 401(k) money but his entire Prevailing Wage is included in the test.

He is over age 50 - but I assume prevailing Wage is not eligible for "catch-up" provisions? Is that correct? If correct, am I required to refund prevaling wage contributions under the ADP testing?

I may be missing something here - I don't know - this has never come up in any prevailing wage plan I've worked with as I've never had an HCE even contribute prevailing wage money.

Any help is greatly appreciated.

[Mike Preston]

I would check the document very carefully for the definition of QNEC under your plan. It is most unusual to have any QNEC be made on behalf of an HCE.

Assuming that you do, indeed, have a provision that calls for this HCE to receive an allocation of QNEC monies, keep in mind that the QNEC needs to satisfy non-discrimination as if it were the only contribution under the plan. Does it do that? I think you'll find that it doesn't (but I could be wrong on that one, you have to run the numbers, of course). Hence, you will first need to correct the QNEC itself. Once you do, you may find that the ADP test is now satisfied and the only problem you really had was a QNEC problem.