QNEC Testing

[justatester]

We have a plan that is union only plan. The plan makes a QNEC contribution to its members/employees. The plan is currently not passing the ADP test. If I bring test the entire QNEC for both HCEs & NHCEs, the plan still does not pass. If I test the QNEC for NHCEs only it will pass.

Is this possible? Since it is a union plan, it is not subject to coverage or other 401(a)(4) testing.

Thanks!

[ETA Consulting LLC]

We have a plan that is union only plan. The plan makes a QNEC contribution to its members/employees. The plan is currently not passing the ADP test. If I bring test the entire QNEC for both HCEs & NHCEs, the plan still does not pass. If I test the QNEC for NHCEs only it will pass.

But the resulting QNEC to the HCEs only will fail.

Is this possible? Since it is a union plan, it is not subject to coverage or other 401(a)(4) testing.

Thanks!

This is not entirely correct. It "IS" subject to testing, but only with respect to members of that CBA. So, within that one CBA, you'll have only the HCEs who receive a QNEC while no NHCEs received it (since the QNECs were tested in the ADP test).

Good Luck!

[justatester]

Ok...So this is a union plan that is subject CBA. So, would 401(a)(4) testing be required on the remaining QNEC?

[ETA Consulting LLC]

Ok...So this is a union plan that is subject CBA. So, would 401(a)(4) testing be required on the remaining QNEC?

True. The QNECs provided to that CBA must pass 401(a)(4); which is typically the case since it's allocated as a uniform formula. When you utilize a part of the QNECs in the ADP test, then they are not included in the testing for the regular formula (which not creates a non-uniform formula in the test). In your case, the rate for HCEs exceeds the NHCEs in all instances. Under the "old rules" (prior to the bottom up rules being adjusted), you could move the QNECs for 30% of the NHCEs to the ADP test; leaving you a coverage ratio of 70% for the allocation formula and an additional increase in your ADP test. The rule being applied is that the QNEC cannot be used in both tests.

You may still do this, but must satisfy the "targeting" methodology applied when attempting to use QNECS for only a portion of the NHCEs.

Good Luck!

[MWeddell]

Yes, this is possible assuming that the plan document language permts it. You can move the QNECs for just the NHCEs into the ADP test.

1) Because this is a union group, no 401(a)(4) testing on the QNECs not moved into the ADP test.

2) Shouldn't have a problem with the rules on targeted QNECs.

It does feel too good to be true, so I would caution the client that it is an agressive position so check with legal counsel.

[ETA Consulting LLC]

1) Because this is a union group, no 401(a)(4) testing on the QNECs not moved into the ADP test.

So, you're saying that you can have a plan covering a union, where you provide a nonelective contribution to only the HCEs of that union? The only exemption from non-discrimination testing for unions that I'm familiar with is from ACP and 410(b) with respect to exclusions of employees 'not covered under that particular collective bargaining agreement'. To that particular CBA must satisfy non-discrimination with respect to HCEs and NHCEs within that CBA.

Please verify.

[ESOP Guy]

Can we clarify one point real quick?

Are any of the HCE's subject to the CBA? I know it is possible for a union member to make over the HCE comp limit but I thought I would ask to just make sure.

But it is also common for all the HCEs in a company to me the non-union executives. And the way the original question is asked it isn't clear to me if the HCEs are CBA members.

[MWeddell]

Yes, that's what I am claiming. Treas. Reg. Sections 1.401(a)(4)-1(b)(5) and 1.410(b)-2(b)(7). There is no 401(a)(4) testing for the collectively-bargained employees.

If I'm wrong, then I will have learned something new which is a good thing, but so far I don't see where I went wrong. There is always the kind of provision in Treas. Reg. Section 1.401(a)(4)-1©(2) which makes me believe that if a discrimination testing tactic feels aggressive, then it is aggressive, but I don't yet see why you believe my position to be wrong.

[justatester]

Yes, the HCEs are union employees and are part of the CBA. (at least that is what we are being told by the client)

It has always been my understanding that unions are exempt from coverage and 401(a)(4) testing since the benefit is part of the CBA. It makes sense they are still subject to ADP since that is the individual's contribution.

Thanks for all the help. I will definitely let the client know it is aggressive and to check with counsel.