SH QNEC and additoinal NEC

[justatester]

I have a plan that provides for a 3% SH Profit Sharing contribution to all employees. In addition, they provide for an additional ps contribution that has 1000 hours/last day requirement. Based on their formula, General Testing is required. My question is when performing the rate group test, do I include both contributions or just he additional contribution? Also, since the additional contribution requires a last day/hours requirement, must it pass coverage separately or can it be aggregated with the SH Contribution?

Any help would be greatly appreciated!

[BG5150]

I believe that coverage would be satisfied, because the SH is an employer contribution and you'd have 100% coverage as long as there are no excluded employees.

And, I also believe that the rate group test would include both the SH and regular PS. But remember, you cannot impute disparity to the SH portion, if you are testing that way.

[justatester]

So when calculating the "rates" some employees will have only the SH contribution and some with have both the SH and the regular contribution. Is that ok?

[BG5150]

So when calculating the "rates" some employees will have only the SH contribution and some with have both the SH and the regular contribution. Is that ok?

Don't forget the gateway. In order to be able to cross-test the allocation, you must provide a gateway for the NHCE's. And, if an NHCE is benefiting in any way (eg SH or Top Heavy), then that NHCE is eligible for the gateway.

So your rate would include the SH and the gateway plus any PS.

(I'm assuming you are cross-testing using the average benefits test. If you are not, never mind about the gateway)

[Tom Poje]

see 1.401(k)-3(h)(4)(2) use of SHNECs to satisfy other nondiscrimination tests

basically, this says despite the fact that SHNECs are 'QNECs', they are not subject to the limitations of QNECs - eg. that you have to pass nondiscrim with and without QNECs. you only have one test including all nonelectives.

[justatester]

So one coverage and one rate group test?

[justatester]

Ok one additional question, if the SH QNEC and the reg NEC are based on a reduced definition of compensation that passes 414(s), would you use total compensation (415 Gross) to determine the rate groups?

[Tom Poje]

only one test.

gateway has to be on a definition of comp that satisfies 415, but can be from date of participation.

testing has to be done on a definition that satisfies 414(s). if you limit comp (e.g. exclude bonuses) but that passes the 414(s) comp test, then you could use that in testing.

[justatester]

Ok, I have another question. If the plan has a 3% SHNEC and a additional 6% contribution to only those with 1000 hours and employed on the last day of the year. Since not everyone is getting the additional 6%, would rate group testing be required? Do you have the option of testing the two contributions separately for coverage?

Another situation: Plan has a 3% SHNEC, they are/want to be a new comp plan and give an additional 6% contribution only to the HCEs, is this ok?

[Tom Poje]

the famous last words, as long as you can pass nondiscrim you are ok.

since the max anyone receives is 9%, then the 3% safe harbor is enough to satisfy the gateway.

now, lets suppose only 70% of the NHCE receive the additional 6% while all the HCE receive the additional 6%.

if you were test on an allocation basis, the plan would pass - technically I guess you could say you don't need to do rate group testing since the formula is uniform and at least 70% of the NHCE received the same rate as the HCEs, but it is a moot point, since if you tested rate group on an allocation basis you arrive at the same square. so when the govt says you don't need to test its because you would pass if you tested anyway.