Missed Opportunity QNECs in Avg. Benefit & General Test

[Laura Harrington]

Working on a plan that excludes a classification of employees. Plan has salary deferral, safe harbor nonelective and profit sharing. Profit sharing allocation formula is New Comparability. They want to maximize the partners to the 415 limit and only provide what is necessary to pass the rate-group test to the other employees.

There are 12 HCEs (all benefiting) and 23 NHCEs (8 benefiting). Eligibility provisions for all sources is age 21 and 1 year of service, so otherwise excludable is not an option. The ratio percentage test and the nondiscriminatory classification test both fail (for both the salary deferral and nonelective portions of the plan), so the only way to correct the coverage violation is to do a retroactive amendment to cover more individuals. Since we are correcting the 401(k) coverage test by retroactively making individuals eligible, a missed opportunity QNEC must be calculated.

My question is how to treat the missed opportunity QNEC when I do the average benefit percentage test and the rate-group test. Should it be included or excluded? From one, or both? I'm familiar with the rule that says the rate-group test must pass both with and without QNECs, but my understanding is that is referring to QNECs made to correct ADP or ACP testing.

I am calculating the cost of correcting the coverage failure both using the ratio percentage test and the average benefit percentage test, inconjunction with calculating their profit sharing contribution under the new comparibility formula. Oh, and I should mention they have self-employed invidiauls with net earnings that fall under $245,000 and they needed their profit sharing numbers yesterday (even though that is when they gave us the K-1s)! Yeah, this one is a ton of fun!

Any thoughts?

Thanks!

[Tom Poje]

well, since you asked for thoughts and not logic I'd lean toward the following...

and using nondiscrim as an example

before I can test nondiscrim I have to satisfy the gatewa

so before I can ADP test I have to pass coverage

I fail, but I can pass by 'making inelegible people eligible' by giving them a QNEC = to the avg of the NHCE. In effect I am adding them to my test, and my ADP % does not change because I have provided a QNEC = to that avg.

But now I have tossed the people on the test with a QNEC, and once I do that, then I think you are back to the starting point of testing with and without the QNEC

but remember, that is only my reasoning, which is certainly suspect at times.