EPCRS

[Nassau]

My client has failed both ADP and ACP testing for 2006 and is past the Correction Period. They will be responsible for funding a QNEC to all non-highly compensated participants as part of the correction method. The question I have is can they use forfeiture as the plan does not allocate and uses to reduce employer contributions. I have found other questions on the database that say yes to a QNEC regarding missed contributions and earnings but I want to be clear that in a testing failure situation this rule would still apply.

[BG5150]

I think EPCRS says that you can either do a QNEC enough to pass the test --OR-- do refunds and a one-to-one QNEC on the gross refund amounts.

However, you cannot separate the plan into two component parts--excludable and non-excludable. Everyone gets tested together to determine the refunds and QNEC's.

(See EPCRS Appendix A Sec 03 and Appendix B Sec 01)

[Guest Sieve]

I would consider going in under VCP and describing your correction method as using forfeitures to fund part of the correcting QNEC, and see what the IRS is willing to accept. I suspect that such a correction method would be acceptable. Remember that the suggested corrections in EPCRS as just that--suggestions (albeit the ones in EPCRS are deemed to be acceptable methods).

If you are going to self-correct, read the document carefully to see if you can reasonably interpret the plan to permit such a use of forfieutres. I would suspect so.