QNEC Explanation

[dmwe]

My son works for a large grocery store chain, was full-time and now part-time, and I took a look at his participant statement and it showed a QNEC of almost $900. Given his small salary I assume they must've really screwed something up. The plan does have auto enrollment and auto escalation. I can only figure that maybe they didn't escalate him when they should've or something like that.

Do you think if he'd ask them for the reason behind the QNEC and the calculation of his contribution, that they have any obligation to share that with him?

Thanks

[Lou S.]

No, they don't have to tell him why they gave him a $900 fully vested contribution.

[QDROphile]

A common condition of correction under EPCRS is that persons who are affected by the correction be notified. I don't see how a notice can be given effectively without some explantion. QNECs are part of other kinds of corrections and adjustments. I think a fiduciary has to explain account entries, especially extraordinary ones, when asked. A participant has a right to know if the particpant is getting proper contribution credit. I would not advise an ERISA fiduciary to refuse to explan an account entry.

[K2retire]

Keep in mind that some statements label safe harbor contributions as QNECs as well. If that is the case, it may not be a correction at all.

[Bird]

Do you think if he'd ask them for the reason behind the QNEC and the calculation of his contribution, that they have any obligation to share that with him?

I don't suppose they have to tell him, if it's just a testing correction*. But if it's a correction of some other failure*, maybe they do. But if it's a large chain I doubt that whomever you/he would ask would have any more of a clue about it than you do.

*You probably don't know what we're talking about, but here's a quick and dirty summary - 401(k) plans have to run a non-discrimination test to prove that highly paid employees aren't benefiting too much more than non highly paid employees. If that test fails, one way to fix it is to have the company throw some money in for the non-highly paid. (To be honest, I doubt that's what's happening.) Another failure might be, as you suggest, failure to follow an auto enrollment or escalation. (I kind of doubt that's it either.) Another possibility suggested is a "safe harbor" QNEC, and I'd guess that's what it is - the company makes a 3% contribution for everyone. The actual deposit might lag quite a bit, so if it just showed up on a statement, it might be for last year...$900 is 3% of $30,000, so if that's what he made in 2011, that's probably what it is.

[dmwe]

I think it might have to do with auto escalation of his deferral percentage. He was autoenrolled at 3% but it was supposed to go up 1% each year. They just finally bumped him to 6% so I think maybe the QNEC was a correction for the missed increase to 4% and then to 5%.

That's why I don't like annual auto escalation. It sounds good for participants but it can be an administrative nightmare.