use of QMAC and QNEC

[Gary]

generally all of the 401k plans I have done non discrimination testing have been safe harbor 401k profit sharing plans.

I recently observed a non safe harbor 401k plan that did not pass ADP test or the ACP test.

While I am not responsible for correcting the failure I want to have some understanding of what can be done.

For example, if the sponsor makes a QNEC for $1,000 for a given participant is it potentially permissible to divide the $1,000 in any desired way to apply to ADP and ACP tests?

For example can $500 be applied to ADP test and $500 to ACP test or any combination including all $1,000 to ADP test? Of course the $1,000 cannot be double counted for both tests. Curious if that is a way it can be utilized. This way the plan doesn't have to make QMACs potentially and can make contributions for participants who did not defer as well.

Thanks

[ETA Consulting LLC]

You are correct. The QNEC may be split between the ADP and ACP test. The same is true for a QMAC.

Of course, the other contingencies apply, but (to answer your question), you are allowed to split without double counting the same "Qualified Employer Contribution" amount to more than one test. Really, QNEC and QMAC is only a reference to how it the calculated, they are both Qualified Employer Contributions with stringent withdrawal restrictions (and immediate vesting) and are used the same way.

Hope this helps.

[Tom Poje]

the absolutely most important item is "What does the document say"

there are lots of possibilities under the regs which are permissable, but not all documents permit them.

[ETA Consulting LLC]

the absolutely most important item is "What does the document say"

This is, definitely, one of those contingencies

[fiona1]

the absolutely most important item is "What does the document say"

This is, definitely, one of those contingencies

There are a lot of contingencies. The plan document is definitely the most important. You also have to consider the testing method. It's pretty difficult to fund a QNEC if the test uses the prior year testing method, due to the timing rules. There are also the disproportionate rules that went into effect back in 2006. You cannot test a QNEC that is greater than 5% (10% for Davis Bacon) or two times the "representative rate". This is to restrict allocation methods such as the bottom-up QNEC.