Allocation of Corrective QNEC (missed deferrals)

[401QUE]

When the employer funds a QNEC to correct a missed deferral situation, how is the deposit allocated?

I am being told that the 50% (of missed deferral) portion is allocated to the participant's Deferral Source, the 100% match portion is allocated to the match source, and only the earnings portion is allocated into the QNEC source.

If the whole correction is referred to as the QNEC, shouldn't it all be allocated into the QNEC source? Aren't there certain restrictions on QNECs that requires them to be separately recordkept?

Any IRS guidance/citations would be most appreciated. Spent more time than I could afford to already in rev proc 2008-50

thanks!

[ETA Consulting LLC]

No. No. No.

QNECs have their own definition under the terms of the plan, and are legally required to have distribution restrictions beyond what is allowed for the 401(k) source of funds. So depositing the amounts in the 401(k) source would undermine the recordkeeping requirements for the QNEC with respect to required withdrawal restrictions. Just because the QNEC is made because of a missed deferral doesn't make the QNEC a deferral; it's still a QNEC.

Good Luck!

[K2retire]

The match, however, is still a match.

[ETA Consulting LLC]

The match, however, is still a match.

"Like"

[401QUE]

So the deferral portion and earnings go into the QNEC Source, and the match portion goes into the Match Source - Thanks!

The match, however, is still a match.

[MoShawn]

I respectively disagree. See Rev. Proc. 2008-50 Apendix A.05(2):

© If the employee should have been eligible for but did not receive an allocation of employer matching contributions under a non-safe harbor plan because he or she was not given the opportunity to make elective deferrals, the employer should make a QNEC on behalf of the affected employee.

(d) If the employee was not provided the opportunity to elect and make elective deferrals ... The required QNEC on behalf of the excluded employee is equal to ... (ii) the matching contribution that would apply based on the missed deferral.

(f) If the employee was improperly excluded from an allocation of employer matching contributions because he or she was not given the opportunity to make after-tax employee contributions ... the employer must make a QNEC on behalf of the affected employee.

Match related to missed contributions is also treated as a QNEC.

[BG5150]

K2, I respectfully disagree.

From EPCRS:

© If the employee should have been eligible for but did not receive an allocation of

employer matching contributions under a non-safe harbor plan because he or she was

not given the opportunity to make elective deferrals, the employer should make a QNEC

on behalf of the affected employee. The QNEC is equal to the matching contribution the

employee would have received had the employee made a deferral equal to the missed

deferral determined under section .05(2)(b). The QNEC must be adjusted for earnings to

the date the corrective QNEC is made on behalf of the affected employee.

Says the missed match is a QNEC also.

[ETA Consulting LLC]

You're both right. IF the deferral were missed early during the year AND the matching contribution were calculated at year end, THEN it would be a match and not a QNEC. HOWEVER, IF both the deferral AND the matching contributions were missed, THEN they would both be a makeup QNEC.

So, a QNEC is a QNEC is a QNEC; and should be treated as such. The determination would be made based on whether the match was an actual match, or a QNEC used to make up a missed matching contribution.

Good Luck!

[BG5150]

So, everyone is right!

[GMK]

So, everyone is right!

Half of the people can be part right all of the time

Some of the people can be all right part of the time

But all of the people can’t be all right all of the time

I think Abraham Lincoln said that

- Robert Allen Zimmerman

http://www.bobdylan.com/us/songs/talkin-world-war-iii-blues

[MoJo]

So, everyone is right!

Half of the people can be part right all of the time

Some of the people can be all right part of the time

But all of the people can’t be all right all of the time

I think Abraham Lincoln said that

- Robert Allen Zimmerman

http://www.bobdylan.com/us/songs/talkin-world-war-iii-blues

It's the 60/40 rule. 60% of the time I'm 40% correct. Or vice versa....

[K2retire]

It's the 60/40 rule. 60% of the time I'm 40% correct. Or vice versa....

"LIKE"

[Guest MonicaS]

A related question. As we are all in agreement that these corrective contributions are QNECs can they be included in ADP testing?

We have a client who, after review of 2012 annual data, realized they were using incorrect compensation to calculate deferral amounts. They are going back to correct and funding the required QNEC but are also failing ADP for the year.

We are wondering if we can use these contributions to help soften the failure, although they will more than likely still receive refunds.

Any thoughts would be appreciated.

[Jim Chad]

FWIW I think they can count the QNECs in the ADP test.

[Guest MonicaS]

After posting I read this excerpt from the ERISA Outline Book.

I concluded that corrections of ADP/ACP failures should come first.

It would be helpful to have someone else's interpretation as well if you have a chance to give it a read.

Thanks.

Chapter 15: Tables, Checklists, and Quick Reference Guides -Section VI (Plan disqualification and IRS resolution options):Part C.¶4.b. (Specific correction methods - exclusion of eligible employee/failure to implement elections) had made the maximum matchable contributions permitted under the plan for the plan year. Seesection 2.02(1)(a)(ii)(D)(2) of Appendix B.

(vi) Correction of ADP/ACP failures first. The correction for failing to implement an employeeelection may not be made until after correction of the ADP or ACP test, if either test was failedby the plan, but only if the plan is subject to ADP or ACP testing. For a safe harbor 401(k) plan,the correction needed for a failure to implement an employee’s deferral election would not beaffected by tests that are waived by virtue of the plan’s safe harbor status. To determine if theADP or ACP tests passed for purpose of the rule in the first sentence of this paragraph, the planmay rely on a test performed without regard to the employees whose elections were not properlyimplemented (or without regard to the portion of the year, if applicable, that an election was notimplemented). See section .05(d) of Appendix A and section 2.02(1)(a)(ii)(A), (B), © and (D). The purpose of a requirement to first determine if the applicable ADP or ACP test has beenpassed is to ensure that an HCE does not receive a QNEC with respect to a missed deferralamount that would not be permissible because of the ADP test for that year, or a missedmatching contribution that would not be permissible because of the ACP test for that year. Therequirement wouldn’t impact the make-up contributions with respect to an NHC, whose misseddeferral and matching opportunities wouldn’t be directly affected by whether the plan passedthe ADP or ACP test for that year. This latter issue would enable the employer to safely correctthe failure to implement an NHC’s deferral election during the plan year, rather than waitinguntil after the ADP and ACP tests are run for that year. (based on © Copyright 2012 TRI Pension Services15.677X