QNEC – Grasping at Straws

[buckaroo]

Client has a calendar year plan which has failed the 2007 ADP/ACP test. They were provided with a QNEC number which they were going to contribute. They were under the impression that they had until 12/31/2008 to make the QNEC to correct. While this is correct, they only had until 10/15/2008 (corporation with Fiscal Year = Calendar Year and taxes on extension) to make the contribution to be counted under the 2007 415 limit. Since they have not made the contribution, it now needs to be recalculated for those participants who term’d in 2007 and have no comp in 2008. The QNEC is increased 3.5 times the original figure. As usual, the client is upset and wants to know what can be done. We have been brain storming and have come up with many off the wall ideas. The one most interesting is as follows: Make the original QNEC amount to the original group of participants. The argument is that the 2008 415 test does not get run until after the end of the year and we would not know who would violate 415 until that point. What if all of the people who were terminated were re-hired in 12/2008? If not, then we would simply process the 415 violations through EPCRS and process distributions.

I firmly believe that this cannot be done, but I wanted to get some opinions/confirmations. As it says above, this is grasping at straws, but I wanted to explore every avenue and see what everyone else thought. Thanks in advance.

[Guest Sieve]

To count a contribution for purposes of IRC Section 415, the contribution must be made by 30 days after the extended due date--see Treas. Reg. Section 1.415-6©(7(ii). You have until 11/15/08.

But, you've missed the deduction deadline for 2007 (which was 10/15/08), so the deduction limitation will be based on 2008 compensation numbers and will occur on the 2008 return.

[Blinky the 3-eyed Fish]

Sieve, he said it's a corp, which has a 9/15 deadline.

Buckaroo, I don't think that argument holds even a thimble of water. You could go with the allocation and then correct the 415 violation via EPRSC. It might be cost effective.

[Guest Sieve]

Blinky -- I wish I had a 3rd eye & a built-in excuse for missing critical facts here and there. But I don't. However, I will trade you a 10/15 corp. tax deadline for an EPRSC!!

buckaroo -- Would the one-to-one correction method of EPCRS work in this case? It has more flexibility (although you would have to make returns to the HCEs).

[fiona1]

I don't think the One-to-One should be a consideration. They're still within the 12 months prescribed correction period. They have until 12/31/08 to correct the failed ADP/ACP test. The One-to-One involves both refunds being made in addition to a QNEC of the same amount. They're still able to just issue refunds and not do a QNEC at all.

Sounds like the plan sponsor wants to avoid refunds all together and fund a QNEC in lieu of refunds.

Has the client considered just issuing the refunds?

[Bill Presson]

Has the client considered just issuing the refunds?

Do refunds and use the "QNEC" money to pay bonuses to the HCE's to let them defer back in to the plan.

[buckaroo]

Thank you for allof you repsonses.

Blinky,

I don't know that I understand your response. It seems that you think it is not a viable solution, but then you say to do exactly what I am proposing. Maybe I am just being dense, but can you explain. (Hoping to not be "purple monkey dishwashered")

All:

We considered the 1-to-1, but that would involve re-running the test as it was originally run with the carveout of the early NHCE entrants. We did the quick estimate and the refunds would be much higher and the QNEC would be higher than the original calculated number.

Any more ideas or anlysis???

[Blinky the 3-eyed Fish]

Oops, I obviously didn't read your post well. I am saying what you are proposing.

[fiona1]

Again, the One-to-One should not be a consideration. The One-to-One involves refunds being made IN ADDITION to a QNEC of the same amount. Since you're still within the 12 month correction period - you can still just issue refunds to correct the test. Why would you choose the One-to-One and issue refunds AND do a QNEC? It makes no sense at all. The One-to-One is only when you are past the 12 month correction period, which you are not.

As for what you proposed, I agree with Blinky that you can probably fund the QNEC to the ptps who have no compensation and just correct the 415 failures. Here is an exerpt from the ERISA Outline Book in which a similar thought is made:

1.d.5)Administrative considerations. Given the treatment of QNECs under §415, as expressed in IRS Notice 98-1, an employer that uses the QNEC approach to correct violations of the application nondiscrimination tests might want to routinely extend its tax return each year to give itself the longest period of time possible under the section 415 crediting deadline to treat the QNECs as prior-year annual additions. If IRC §415 has been violated for a prior year because of the crediting deadline rule, the employer should use the corrective mechanisms under its plan to cure the §415 violation, as outlined in Parts D and E of this Section II. The IRS' correction procedures under the Employee Plans Compliance Resolution System (EPCRS) are available to protect the plan's qualification when proper corrective action is taken.

[buckaroo]

fiona1,

Thanks for the section from ERISA outline book. Can you specify chapter and page? Much appreciated.

[fiona1]

You bet. It's in Chapter 5, Section II, Part C.1.d.

The section is titled "Timing of QNECs"