QNECs

[Dawn Hafner]

I have a client that wants to contribute a fixed dollar amount per employee $500, regardless of compensation. Because they also have a hard time passing their ADP test, they also want to designate this as a QNEC. The selections available in their prototype document read to allow the employer to contribute QNECs as a percentage of total compensation of all participants, a percentage of profits, or an amount needed to met the ADP test. It will allow for language to then allocate that amount on the basis of compensation limited to $1.00 per participant, which will enable me to end up with the same dollar amount per participant. My problem is: Am I violating plan terms then becasue I am not limiting my QNEC to what is actually needed to pass the ADP test? Another alternative may be to allocate only what is needed as a QNEC as such, and the remainder as a traditional nonelective contribution. It may be difficult to explain to employees why some employer contributions are 100% vested, and other employer contributions are subject to vesting though? Any suggestions? Thanks.

[Tom Poje]

does the document allow for putting a limit on compensation to be considered for compensation? for instance, a QNEC of 100% of compensation, up to $500 worth of compensation.

[Dawn Hafner]

No, the percent of comp selection does not have this choice. It is just a percent of compensation.

[stephen]

It seems to me that you could calculate the percentage of compensation for all participants that would equal $500 per participant then allocate it $500 per participant.

Example:

You have 10 employees whose total eligible compensation is $500,000. You need 1% of the $500,000 to equal $500 per participant.

[LCARUSI]

In answer to Dawn's question:

"Am I violating plan terms then becasue I am not limiting my QNEC to what is actually needed to pass the ADP test?"

I believe you would be and I don't have a clever suggestion to get around your problem easily. Can the plan be amended?

Also, I don't think Stephen's suggestion will work. In his example, he calculates an aggregate contribute of $5,000 to be allocated among 10 participants. He then gives $500 per capita. But that's the problem, the plan document does not allow a per capita allocation - it must be done in proportion to compensation. Ann allocation according to the current terms of the plan will result in an AVERAGE allocation of $500 per participant, but each participant's actual allocation will be different based on his or her compensation.

[Guest Susan]

Would the following work:?

If one of the options for determining a QNEC amount is: "a percentage of total compensation of all participants" (Does the percentage have to be specified in the plan document, or can it be discretionary?), then, as has been suggested, calculate a percentage of total compensation (compensation of all plan participants) that would result in a total QNEC contribution amount that, IF allocated in an equal amount among all plan participants, would result in each plan participant getting an allocation of $500. As in a previous example, if there are 10 participants and the compensation of these 10 participants totals $500,000, then a 1%-of-total-compensation contribution would be a $5,000 QNEC. Then, how will this QNEC be allocated? IF one of the options for allocating the QNEC is "on the basis of compensation limited to $1.00 per participant", and if that's the selected option in the plan document, then, as long as each plan participant has at least $1 of compensation, wouldn't each participant get an equal share of the $5,000 QNEC (since everyone's compensation for purposes of the allocation is the same: $1), which would amount to $500 allocated to each participant? IF "the amount needed to ... the ADP test" is just one of several options that may be selected to determine how the QNEC amount to be contributed to the plan is to be calculated, then, assuming that option is not selected, why would it be violating plan terms if the QNEC amount exceeds the amount necessary to pass the ADP test?

[Dawn Hafner]

The only problem with using the percent of total compensation is that n% of total compensation might meet my goal this year, but next year may not. The goal this year is $500/participant. The goal next year is??? I suspose they could amend this provision, but if they amend it after the participants have earned the right to that contribution, and they are going to reduce the contribution amount, that will cause a problem. The answer may be to go on a document that has more flexibility if they want this to be a part of their plan design. Thanks for your comments.

[LCARUSI]

Susan -

Dawn indicated in her initial posting that she cannot do the allocation on compensation limited to $1.00. That option is only available if the QNEC is being allocated for an ADP test failure.

So she can determine the $5,000 contribution as you suggest, but she must then allocate it according to total compensation because she doe not have a failed test. That would not give the desired result of $500 per person.

[This message has been edited by LCARUSI (edited 09-25-98).]

[Guest Susan]

I see. But from my reading of the original message posted, it's not clear to me that the sentence in the message that reads: "It will allow for language to then allocate that amount on the basis of compensation limited to $1.00 per participant, which will enable me to end up with the same dollar amount per participant." was meant, by the author of the message, to apply only if the option selected for determining the total QNEC amount to be contributed to the plan, is the third option mentioned in the message: "an amount needed to met the ADP test." Just from my reading the message posted, it sounded to me like there were 3 selections mentioned in the message, for a method of determining the total QNEC: (1) "to allow the employer to contribute QNECs as a percentage of total compensation of all participants", (2) "a percentage of profits", or (3) "an amount needed to met the ADP test". It sounded to me like the next sentence in the message (referring to "...allocate that amount on the basis of compensation limited to $1.00 per participant...") was an option that could be selected to go along with whichever of the QNEC options mentioned in the sentence before that, was selected.

Another question: can the "n" in "n% of total compensation" (from 9/25 a.m. message) be discretionary (so that perhaps "n" could vary from year to year without having to amend plan?) or would "n" have to be specified in the plan document?

[richard]

The next-to-last sentence in Dawn Hafner's reply is particularly useful -- "the answer may be to go on a document that has more flexibility if they want this to be a part of their plan design."

This is usually my preference for several reasons.

(1) It clarifies any qualification issues, because all of the questions in this thread would be moot.

(2) It would save the consultant time/client money if this discussion doesn't have to happen.

(3) It would save the consultant time/client money since the consultant wouldn't have to revisit this issue each year ("What did we conclude last year?" Is there anything that would change this for the current year?")

There are two negatives:

(1) the cost of changing the plan (although this is less than the cost/time in (2) and (3) above or the risk in (1) above.

(2) the politics of the situation (you may be using a document that cannot be changed due to a relationship with a broker, insurance company, etc.) You have to decide on this one.

[Guest RJM]

We have Dawn's problem also. The Client amended the Non-Standardized prototype plan to allow discretionary contributions and QNECs to be allocated "in the same dollar amount for each eligible Participant". The amended plan will be filed as an Individually Designed plan. Employees are tickled to death to get contribution, even if they aren't always 100% vested.