QNECs and 401(a)(4)

[KJohnson]

A Plan excludes one of several plant locations (all NHCEs) from the profit sharing portion of the plan but these employees do participate in the 401(k) and 401(m) portions. (There is no 410 problem) Based on the Plan documents, these NHCE employees while not eligible for NECs would be eligible for QNECs.

If a QNEC needs to be made do we now have a 401(a)(4) problem since aggregated NECs and QNECs have to pass 401(a)(4) under k regs? The profit sharing plan has a safe harbor allocation, does the addition of these NHCE employees who receive QNECs but no NECs blow the safe harbor? Is a general test now requried?

The alternative of excluding these NHCEs from the QNEC makes no sense from a policy standpoint.

[MWeddell]

If you're amending the plan document, be aware that the IRS believes that amending the QNEC allocation formula after an employee has satisfied the conditions to earn an allocation (which occurs no later than the end of the plan year) isn't permitted because the retroactive cutback violates 411(d)(6). This is sort of documented by looking in the definition of "other right or feature" near the end of Reg. 1.411(d)-4. I think the IRS might have issued some other weaker form of authority more clearly setting forth its position.

However, because the IRS allows multiple types of contributions each with their own allocation formula, you can probably add a new class of QNECs with its own allocation formula. It's an aggressive position: I think it works but check with your (or your client's) attorney. On its face, it's a benefit enhancement, not a retroactive cutback, so doing it for effective for a plan year that has already ended will work.

[MWeddell]

Well, you have a 401(a)(4) general testing situation, but I wouldn't consider it too much of a problem. If both the NEC and the QNEC contributions are allocated in proportion to compensation, you'll have two rate groups: one for employees receiving both the NEC and the QNEC and one for employees receiving only the QNEC. The first rate group probably passes readily because you stated that there is no 410 problem (prior to the decision to allocate the QNEC) and the employer nonelective portion of the plan is subject to separate 410(B) coverage testing. In general, the same arithmetic used to show the plan passed coverage testing is now used to show that the NEC+QNEC rate group passes 401(a)(4) testing.

If you exclude this group of employees from the QNEC, make sure that decision complies with the plan document, which generally shouldn't allow for employer discretion of this sort unless your plan has multiple types of QNECs each with its own allocation formula.

[KJohnson]

THANKS MWEDDELL--I GUESS I WAS IN A 'FOREST FOR THE TREES' MODE--YOU'RE RIGHT IF PRE-QNEC PROFIT SHARING PORTION PASSES 410(B) THEN BY DEFINITION WE SHOULD BE O.K UNDER 401(a)(4) AND WE JUST NEED TO DOCUMENT THE GENERAL TEST.

AS TO PLAN DOCUMENT ISSUES, I AGREE AND EMPLOYER WAS CONSIDERING AN AMENDMENT OF THE QNEC ALLOCATION PROVISIONS.