QNEC Question

[Stash026]

I know there are certain circumstances where you can reclassify a discretionary contribution to something else, after the fact, but I can't remember if QNEC is one of them.

The plan makes a 4% contribution to all eligible participants, regardless if they defer or not, but unfortunately failed their ADP Test for the first time. Can a portion of the ER contribution be reclassified as a QNEC to correct for the failure?

[Jim Chad]

My first thought would be no. But I can't tell you why except for there is nothing authorizing you to do it.

Also once you did, would your discretionary pass coverage and nondiscrimination testing?

[Stash026]

Yes, the QNEC would correct for the ADP Test, so the Plan would pass.

[Kimberly S]

I think Jim was asking if it would also pass 410(b) and 401(a)(4) after the reclassification.

[Tom Poje]

coverage shouldn't be a problem because a nonelective is still a nonelective whether it is in the form of a QNEC or discretionary.

however, if a QNEC is used in the ADP test, then you have a(4) testing. you must run 2 tests. you must pass with and without the QNEC. 1.401(k)-2(a)(6)(ii). in addition, the QNEC can not count toward the gateway minimum if you have to cross test.

[Stash026]

Sorry about that. Yes, it would still pass the Gateway, as well as 401(a)(4). Testing is not the issue, I just wasn't sure if you were allowed to or if the client had to go back into their pocket for the correcton

[Tom Poje]

that is another issue indeed.

I am assuming you document allows you to make a QNEC. Lets further assume, that the QNEC goes to NHCEs only.

therefore, I don't think you can simply reclassify part of the nonelective as a QNEC, because in that case you have given the HCE 4% nonelective and lets say the NHCE 3% nonelective and a 1% QNEC.

I don't think documents read that way.

on the other hand, if your document allocates a QNEC to all employees, then there is certainly nothing alloacting 3% nonelective to all and a 1% QNEC to all.

My understanding is that you don't have to use the QNEC in the ADP (therefore you don't use the HCE QNEC)

however when you test a(4) you test all nonelectives and also test all those nonelectives NOT used in the ADP test. That is where the HCE would end up with a slightly larger contribution than the NHCEs.

or at least that is how I understand it to work.