Targeted QNEC's for 2008 Failed ADP Test

[msmith]

If the non-HCE's are classified as "not otherwise excludable" or "all" and the "not otherwise excludable" group provides a better ratio (2.39% as opposed to 1.9% for all) would I start my targeted QNEC calculations using the lowest paid in the "not otherwise excludable" group?

[zimbo]

As long as your plan permits and as long as the targeted QNECs meet the limitations under the 401k final regs, then yes you may provide them only for the non excludable NHCEs. Usually the targeted QNEC is limited to 5% of pay when all is said and done.

[MWeddell]

I agree with zimbo.

The plan document must state a "definite predetermined formula for allocating the contributions made to the plan." Treas. Reg. 1.401-1(b)(1)(ii). A change to that formula typically is a discretionary amendment, which must be made by the end of the plan year in which it is effective. Rev. Proc. 2005-66, Section 5.05(3). Given that you are running your final year-end set of ADP/ACP tests, presumably the plan year has already ended, so you must allocate the QNECs in accordance with the written document.

Plan documents often state multiple methods for allocating QNECs. It's questionable whether that complies with the definite formula requirement mentioned above, but it sure is handy! Hence, especially if you already have a favorable determination letter approving the written document as constituting a qualified plan, you may have some choices within the plan document for how to allocate the QNECs.