QNECs, 401a4 & TH

[zimbo]

I have a situation where an employer has a Target Benefit Plan with a class exclusion but where a separate 401K plan covers everyone (no class exclusions). Since the plans together are TH, they must contribute 3% to all non keys in the K who do not get their TH min in the Target (all of the class exclusion people who are not in the Target but ARE in the K). There are no other employer contributions in the K plan.

The K also failed the ADP Test. So, I intend to use the 3% TH also as a fully vested QNEC which is permitted. This helps me pass the ADP test. Problem is that 1 of the 5 people getting the TH minimum is an HCE non–key. I really don’t want his TH minimum treated as a QNEC in the ADP Test for obvious reasons .

But if I don't treat the HCE's TH minimum as a QNEC would I have a discriminatory situation since the only PS contribution which is NOT a QNEC is for the HCE? Or, is it OK since that PS contribution is a mandatory TH minimum and that would not cause a 401a4 failure?

[J Simmons]

I think you're okay. The QNEC is just for NHCEs, to correct ADP and happens to also satisfy the TH min. That leaves just a need for a TH min contribution for your non-key HCE. You may have to make a TH min for any of the 4 NHCEs that may have entered mid-year if the plan limits compensation to just that while a participant.

[Tom Poje]

the regs require a plan pass a(4) testing both with and without those QNEC used in the ADP/ACP test. see 1.401(k)-2(a)(4)(ii).

you would end up aggregating the plans, conceivably you could run into minimum gateway issues (you can't count the QNEC - unlike a safe harbor it can't serve extra duty)

[zimbo]

the regs require a plan pass a(4) testing both with and without those QNEC used in the ADP/ACP test. see 1.401(k)-2(a)(4)(ii).

you would end up aggregating the plans, conceivably you could run into minimum gateway issues (you can't count the QNEC - unlike a safe harbor it can't serve extra duty)

So are you saying that even though one of the plans is a 401a4 safe harbor Target Benefit Plan and the other is a 401K Plan, I would be subject to the Gateway? I'm having trouble figuring out why. Is it because the 401K plan (ignoring the Target Plan since I do not aggregate these for coverage testing) ends up with an employer contribution, net of QNECs, of ONLY the 3% TH minimum and only for a single HCE? Of course, I am forced into that situation by 416, but maybe it really is a trap.

So, if you believe that is the case, then I guess I would have to include the HCE non-key's 3% TH minimum as a QNEC to avoid that?

[Mike Preston]

This is the first you have commented on the fact that the Target is a safe harbor. Even if it is a safe harbor, if the only ER contributions to the k plan are the QNEC/THMins, if you subtract out the QNEC, you are left with a single, solitary 3% THMin contribution for a single, solitary HCE. That won't pass anything, so you'll have to aggregate with the Target to pass non-discrimination, which means that even if the Target *was* a safe-harbor, the aggregation of the Target and the K plan is NOT a safe-harbor. Whew!

Since the target will no doubt find it easier to satisfy a4 on the basis of cross-testing (it might also pass on contributions, you should check), you have gateway issues once you go through this process.

[zimbo]

This is the first you have commented on the fact that the Target is a safe harbor. Even if it is a safe harbor, if the only ER contributions to the k plan are the QNEC/THMins, if you subtract out the QNEC, you are left with a single, solitary 3% THMin contribution for a single, solitary HCE. That won't pass anything, so you'll have to aggregate with the Target to pass non-discrimination, which means that even if the Target *was* a safe-harbor, the aggregation of the Target and the K plan is NOT a safe-harbor. Whew!

Since the target will no doubt find it easier to satisfy a4 on the basis of cross-testing (it might also pass on contributions, you should check), you have gateway issues once you go through this process.

So I now conclude that it is probably more cost effective and just downright easier to include the HCE in the QNEC and suffer a slightly larger ADP test failure than carving him out of the QNEC. The results are still far better treating all of the TH minimums as QNECS than treating none of the TH minimums as QNECS. Thanks for the insight.

[K2retire]

So I now conclude that it is probably more cost effective and just downright easier to include the HCE in the QNEC and suffer a slightly larger ADP test failure than carving him out of the QNEC. The results are still far better treating all of the TH minimums as QNECS than treating none of the TH minimums as QNECS. Thanks for the insight.

Just make sure your document allows HCEs to receive a QNEC. Some limit them to only NHCEs.