QNEC to Satisfy Failed ADP Test

[Guest ELS]

If a client decides to make a QNEC rather than distributing excess deferrals to correct a failed ADP test, may HCE's receive a portion of the QNEC? If yes, then does the HCE portion of the QNEC need to be included on the ADP test?

If the HCE's may receive a portion of the QNEC and it needs to be included on the ADP test, how do you calculate the QNEC? It seems like it would be mathematically impossible to calculate, but I may be missing something.

[Guest]

you would have to follow the terms of the document. if it is a standardized plan, then HCEs would get a QNEC, and yes, it is used in testing. thus, if HCEs get a QNEC, it rarely hepls the test.

[MWeddell]

A QNEC must either

1) Be tested under 401(a)(4) like any other employer nonmatching contribution or

2) First be tested under 401(a)(4) and then after shifting all or part of it into the ADP/ACP tests, include the part shifted into the ADP/ACP tests in those tests and then retest the portion left behind under 401(a)(4).

If your QNEC is allocated to all employees, not just NHCEs, it doesn't help your testing as much. You'll need a large QNEC to get it to pass. However, if whoever is doing your testing is creative, you can still leave just enough behind to still pass 401(a)(4) testing and move some of the QNEC allocated to NHCEs into the ADP/ACP tests.