QNEC and Employer contributions

[Gary]

The below post was submitted on the 401k board as well.

An employer sponsors a 401k plan and a profit sharing plan.

The plan has two HCEs and 5 NHCEs.

2007 was the first plan year.

No 401k deferrals were made by any employee and no employer contributions were made to the above two plans for the HCEs.

1 of the NHCEs terminated during 2007 after the completion of 1000 hours and had met the plan's eligibility requirements at the time of plan inception (1/1/07).

The challenge is addressing the 1 terminated employee.

The employer contributed 3% of compensation for the 4 active NHCEs to the 401k accounts and 4.5% of comp for the 4 active NHCEs to the profit sharing account.

The profit sharing contribution can clearly exclude the terminated employee due to the last day requirement.

The 3% that went into the 401k plan is allegedly a QNEC.

Can a QNEC be made even if not needed to pass ADP test?

If the answer to the above question is "yes", then the terminated employee would not need a QNEC to pass non discriimination and thus would not receive a contribution.

If the answer is "no" then does the 3% QNEC need to be transferred to the profit sharing plan and deemed an additional non elective profit sharing contribution?

And finally, can a QNEC impose a last day requirement, like the profit sharing contribution can?

Of course a 401k safe harbor non elective contribution cannot impose the last day requirement.

Come to think of it I believe the former employee could just be excluded from the plans as long as tests are passed.

Thank you.

[Kimberly S]

What is the reason for the QNEC? It does not appear to be needed to pass ADP testing. Was it intended to be a make up for missed deferral opportunities?

[Gary]

The QNEC or alleged QNEC was intended to be a profit sharing contribution to meet the 7.5% gateway required. The two plans are combined with a DB plan to pass non discrimination.

However, instead of it being a straight profit sharing contribution the client (thinking he had to make a 3% 401k safe harbor contribution) contributed 3% to the 401k accounts of the 4 employees.

This left me with the following basic questions:

1. Can a QNEC be made even though not eeded to pass ADP?

2. Can a QNEC (as opposed to a 401k safe harbor) require last day of plan year employment as a requirement to be able to receive the QNEC?

Thanks.

[Bird]

1. Can a QNEC be made even though not eeded to pass ADP?

Yes

2. Can a QNEC (as opposed to a 401k safe harbor) require last day of plan year employment as a requirement to be able to receive the QNEC?

Yes. But whether or not this plan may do so should be dictated by the plan document.

FWIW, if it were me, I'd rather move the money (to PS) than try to treat it as a QNEC.

[Tom Poje]

this is a reminder to all folks out there:

if the QNEC was used in ADP testing, then the plan would have to pass nondiscrim woth and without the QNEC.

in addition, that means, when testing without the QNEC you would not meet the gateway.

I believe in this case with no ADP test you are in the clear.

[Gary]

It doesn't make sense that a QNEC would not apply to the gateway when a non elective PS contribution would count towards gateway. After all the only apparent difference between the QNEC and the PS non elective contribution is that the QNEC is 100% vested immediately.

I suppose if QNEC isn't used for ADP then it can apply for gateway, but if used for ADP it cannot apply to gateway. If my understanding is correct. I guess the lawmakers feel if it is used to pass ADP then it shouldn't get the double bang for the buck, unless it were a safe harbor.

Thanks.

[Bird]

I think the logic is that a QNEC (which is used in testing) is really a deferral that is made by the employer, and tested as such.

[Gary]

Bird,

Your comment is very helpful.

So then if the QNEC is not used for ADP compliance then can it be applied to meet gateway?

From a practical perspective, moving the QNEC (this one time) that is not needed for ADP, to the profit sharing plan to be applied to gateway, has no real impact.

Perhaps the QNEC can stay in 401k account, but be considered a non elective PS contribution and be tracked as such (kind of a hassle), to avoid the need to have client move the money out of 401k and into PSP, etc.

Thanks.

[Bird]

So then if the QNEC is not used for ADP compliance then can it be applied to meet gateway?

I think we're all agreed on that.

I guess the moving/not moving money and special recordkeeping that might or might not be involved just boils down to whichever of the somewhat unattractive, but legit, choices you want to take.