QNEC in Average Benefits - A Real Doozy...

[austin3515]

Two people, HCE and NHCE.

-Plan is integrated at taxable wage base.

-NHCE terminated (no break) and does not qualify for a contribution.

-Plan is failing ADP test and a small QNEC would pass the ADP test.

As it turns out, the QNEC would allow us to pass the average benefits test as well.

The question is, do I have a nondiscrimination problem, in light of the fact that I need to pass (a)(4) testing with and without QNEC's. I maintain that I have a design based safe harbor allocation, which is being adhered to, and is therefore stil in tact. I failed the ratio percentage test but passed Avg. Benefits. I am only yusing Avg. Ben. for COVERAGE, not for (a)(4) testing, and to the best of my knowledge, I am not required to pass coverage with and without QNECS. So am I OK?

OR does that fact that NHCE is getting a nonelective contribution (i.e., the QNEC) that is less than HCE's mean that I now need to satisfy rate group testing?

Sometimes when you finish writing a question, you change your mind about what the answer is... And in this case, I think I just convinced myself that I do indeed have an (a)(4) problem because QNEC's are not exempt from (a)(4) testing. Thoughts?

[Tom Poje]

I would agree. Unlike a SHNEC a QNEC isn't allowed to perform extra duty and serve both satisfying ADP test and included in a(4) testing. IRS officials have implied such at the ASPPA Conference

[Guest Ron Sevcik]

But if you have an integrated plan, why would you need an a(4) test? It seems to me your first thought was correct, you have a design based safe harbor, so no a(4) test, and you need to only pass 410(b).

[austin3515]

Once you throw othenr contributions in the mix, the design based safe harbor evaporates. QNEC's must pass (a)(4) as well (i.e., there is nothing excluding them from the non-elective portion fo the plan).

[BG5150]

Why are HCE's getting a QNEC? I thought it was to help pass the ACP test.

[Tom Poje]

ok, lets review the facts, because some things are apparently not being understood or missed or something.

Plan failed ADP test, and QNEC was provided to NHCE to pass testing.

NHCE terminated but worked over 500 hours so is treated as includable for purposes of nonelective contributions.

But plan does not provide for a contribution to terminees. the HCE recevived a nonelective contribution the plan.

the regulations (1.401(k)-2)a(6) require one to test a(4) both with and without QNECs.

therefore, when performing the test without a QNEC the HCE received and the NHCE shows up with a big fat 0.

so "Austin Space" needs to provide an additional amount to the NHCE to pass testing (I assume a corrective amendment)

or at least that is the way I see the situation

[BG5150]

Just do a refund!

[austin3515]

PArt of the confusion (indeed my original confusion) is that you referenced the need to pas a(4) with and withhout. The crux of it is, why are we testing a design based safe harbor under (a)(4) in the first place?

And the answer is because (As Tom already pointed out) (a)(4) must be passed with and without QNEC's. In this little twist of events, (a)(4) is actually FAILED when QNECS are INCLUDED, because rate group testing is failed, and because the design based safe harbor is blown (i.e., two different contribution rates for HCE's and NHCE's). (a)(4) is actually PASSED if QNEC's are EXCLUDED, because the design based safe harbor is in tact. I think it usually would work the other way around, which is why I find this scenario more interesting.

But regardles, the BOTH requirement is failed, and tehrefore, the QNEC's cannot be included in the ADP test. It makes no difference (in my situation) that the plan passes coverage, because I am not able to my QNEC's in the ADP test, which was an important part of the strategy.

[austin3515]

Just do a refund!

You;'ve just violated the unspoken code of a TPA. NEver EVER do a refund that you don't have to!! Even if you make 10 cents on the dollar when you add up all the tiome you spent

[Tom Poje]

ha ha

never do a refund if you don't have to.

once had an ADP test fail, refund was $3. Then under the leveling method had to split that bewteen two other people. yeh, $1.50 a piece.

I told the guy, well, you are suppose to refund this. end discussion.

course my eyesight aint want it used to be, and my memory is slipping, there is always a chance I will miss seeing if it ever was done. or something like that.

maybe my memory is so bad it never really happened.

[ESOP Guy]

Just do a refund!

You;'ve just violated the unspoken code of a TPA. NEver EVER do a refund that you don't have to!! Even if you make 10 cents on the dollar when you add up all the tiome you spent

You have different clients then when I used to do alot of 401(k)s that had refunds. Those people so resented giving their employees any more money they would always take the refund.

This was back in the days when you could really abuse the cross-tested rules (early '90s) and those people were the reason we now have the cross-tested rules we have.