QNEC and Gateway

[Rob P]

My issue is that I have two terminated participants that received a 5% QNEC in order for the plan to pass the ADP Test. The plan is also cross-tested, has individual allocation groups, and requires a participant to be actively employed on the last day of the plan year (no hours requirement). Assume the Gateway minimum is 5%. Must these participants receive an additional 5% under the plan's non-elective provision, or does the 5% QNEC cover the Gateway? Does it matter if one of the terminated participants has less than 500 hours of service (if I exclude from the General Test do they receive the Gateway).

I've read several threads on this topic (the more recent ones differ from the earlier answers), but besides the IRS Q&A comment at the 2006 ASPPA Conference I could not find anything definitive. The issue has arisen because I just read a newly restated EGTRRA VS document and there is a paragraph under the Gateway definition which clearly states that QNECs can be used to offset the Gateway minimum requirements.

Any thoughts would be appreciated.

[Tom Poje]

as I recall, the basis for the IRS comment was as follows:

A SHNEC can be used to satisfy everything under the sun, becuase the regs say so (e.g. it can be used in nondiscrimination testing)

A QNEC is slighlty different because the regs clearly says you have to do a(4) testing with and without the QNEC, and I believe that is the basis for the IRS statement that you can't use the QNEC to satisfy the gateway.(on the other hand the gateway rules were written after the QNEC rules, so its hard to say.)

my own misguided logic would say the following-

I run a test with the QNEC -did the ee receive a nonelective, yes, therefore it should count toward the date way

I run a test without the QNEC - lets suppose the ee received a 3% nonelective. can I use the QNEC to satisfy gateway? no, because I am not using the QNEC under these testing conditions. Therefore he would need more to satisfy the gateway. carrying my misguided logic further, if the ee received no other nonelective, it would seem you have an argument he doesn't deserve the gateway when looking at the testing that excludes QNECs.

of course, all that is an opinion which may be incorrect. You also have a document that says you can count the QNEC toward testing which implies IRS approval (or an item they missed when reviewing) In addition, remember that views expressed at the ASPPA conference do not necessarily reflect an actual Treasury position.

[Rob P]

Thanks Tom. Usually I would just take a conservative approach and give the extra gateway, but after I saw the provision in the document I'm thinking we maybe able to save the client some money (not too many clients like to give away money to terminated employees).

From past experience I know you cannot always rely on a document's "approved" language. I was hoping someone had run across more definitive guidance out there.

I appreciate your time.

[DMcGovern]

Thanks Tom. Usually I would just take a conservative approach and give the extra gateway, but after I saw the provision in the document I'm thinking we maybe able to save the client some money (not too many clients like to give away money to terminated employees).

From past experience I know you cannot always rely on a document's "approved" language. I was hoping someone had run across more definitive guidance out there.

I appreciate your time.

Sorry to find this months later, but I was wondering what document you have? The Corbel EGTTRA prototype document would exclude any QNEC used in ADP/ACP testing from gateway. There is one exception to the 5% gateway in which you can use the QNEC if it is the ONLY employer contribution and it equals or exceeds the gateway requirement. Other documents may word this differently.