QNEC and Prior Plan Year

[PMC]

Small plan with 5 HCEs and 1 NHCE. Prior year testing. 5-1 to 4-30 plan year. Come to find out the NHCE didn't make any elective deferrals for the 2007, 2008 or 2009 plan years - ADP = 0% meaning the HCEs ADP fails and wouldn't be allowed to make deferrals (other than catch-up). No corrections have been made yet.

Do you agree that since any correction for the 2007 and 2008 plan years would be later than 12 months after the applicable plan year, EPCRS would allow a QNEC to the one NHCEE in an amount need to pass each year's ADP (plus earnings) without any distribution to the HCEs? Don't want to go the one-to-one route.

But what about for the 2009 plan year. 12 months haven't passed yet since the end of the 2009 plan year (4-30-10) and since this plan uses prior year testing, it seems if they wanted to correct before the end of the 12-month period, corrective distributions to the HCEs is what has to be done. Rather than that, couldn't the employer just wait until the 12 months has passed and make a QNEC on behalf of the NHCE for the 2009 plan year avoiding distribution to the HCEs?

[Tom Poje]

under Appemdix A .03 of Rev Proc 2008-50 (EPCRS) a QNEC may be made as you described.

under 4.04 of the same program you must have 'established practices and procedures' to prevent such events from happening - otherwise you can't self correct.

can you do what you want and get away with? - that is a different question.

If I was an auditor (boy, talk about a fairy tale) and found you self corrected in Aug 2010 for plan years of 2007 and 2008, and then again you self corrected in 2011 for 2009, I would say you obviously don't have established practices to prevent things from happening since the same error occurred again - and disallow all corrections. (but then no body says I was a nice guy)

you did not indicate if top heavy has been satisfied. (granted HCEs and Key ees are possibly different)

but if top heavy hasn't been made, then you might be able to get aroung part of your problem by providing a top heavy in the form of a QNEC and using it in ADP testing.

[PMC]

Thanks for the response. Yes the Plan is top heavy but the T-H minimum has been satisfied by a PS contribution.

[BG5150]

under Appemdix A .03 of Rev Proc 2008-50 (EPCRS) a QNEC may be made as you described.

So, if you are beyond the 12-month window, a QNEC-only approach (as opposed to the 1-to-1 + distribution) is allowed? Then what happened to the rule that QNECs can't be used after 12 months after year of the ADP calculations?

And, as a side note: according to section .03 in Appendix A, you must use ALL the NHCEs int he QNEC, and cannot break the test down into excludable/non-excludable groups. This may affect the amount given in a QNEC.

[PMC]

BG - that's kind of what I thought and what prompted the question - can't use a QNEC during the first 12 months after failure but wait until after 12 months and can use a QNEC (not a 1-to-1) to correct? The case I was originally referring to has only 1 NHCE whose salary is relatively low. The Plan Administrator just failed to include that person in the test with a 0% deferral rate for a couple of years. They failed ADP for the 5-1-09 to 4-30-10 plan year. Rather than refund all the elective deferrals for the HCEs (minus what could be considered catch-up) why not just wait until 5-1-11 (more than 12 months after PYE) and then make an inexpensive QNEC just for that one NHCE?

Granted, most 'ERs may want to refund excesses during the 12 month period after PYE rather than wait until after 12 months especially if there are several NHCEs who need the QNEC but waiting seems to work for this Plan where only one NHCe is getting the QNEC.

[austin3515]

Been a while, but I though the 1 to 1 was you do a QNEC in the same amount as the ADP refunds? I didn't think you were able to avoid the refunds? But it's definitely been a long time since I've had to look at this...

[austin3515]

Example from EPCRS (SECTION 2. CORRECTION METHODS AND EXAMPLES)

On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with § 401(k)(8)©, $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and $2,937.50 to Employee Q. It is determined that the earnings on the assigned amounts through June 30, 2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the earnings are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their compensation for 2005 (subject to § 415 for 2005).

[Guest 2much2no]

If there is only 1 NHCE whose pay is relatively low and the plan is Top Heavy, why not just make the plan a 3% Nonelective Safe Harbor?

[BG5150]

Austin, from what I am reading, Appendix A says you can do the QNEC to all participants int he amount to satisfy the test. Appendix B allows for an alternate correction, which is the 1-to-1 QNEC paired with the distributions.

[K2retire]

If there is only 1 NHCE whose pay is relatively low and the plan is Top Heavy, why not just make the plan a 3% Nonelective Safe Harbor?

Because the SH provision had to be in the plan BEFORE the plan year started.

[austin3515]

Right, I remember now that the original EPCRS only had that option (the huge QNEC for everyone), and we all rejoiced when they added the one to one...

[BG5150]

So is ti jut the targeted QNECs that aren't allowed after the 12 months?

[Tom Poje]

again, you are doing this under self-correction. it's suppose to be for situations which arise despite your 'established practices' being in place to prevent such things from happening. If you are doing this every year an IRS auditor may disallow such practice.