Pro Rata QNEC and Bottom Up QNEC

[austin3515]

I have client that does 8% of pay every year. They only need to give 5% to the staff to max out the owners at the full $50,000.

We're failing the ADP test, and a 3% QNEC allocated pro rata substantially reduces the refunds to the owners. Add in a couple of the lowest paid people with a bottom up QNEC and, hey we're passing.

Any issues with using both allocation methods in one year? We use the Corbel Prototype 401k.

[Kevin C]

Will the prototype allow you to elect both methods for the same year?

Our VS document has a modified bottom-up QNEC allocation it calls a targeted QNEC, but you have to pick either targeted or salary proportional. You can't do both.

IF the document says you allocate the QNEC that way and IF the disproportionate QNEC rules in the regs let you count it in the testing, I think it works. But, I think the plan document will be the biggest problem. If the document works, you may find that the bottom-up QNEC allocation method will have you allocate amounts to some NHCEs that can't be used in the test. Either way, it's an interesting idea.

[BG5150]

have you asked your document provider what they think?

[MoShawn]

Why is this using both methods? Why can't you "target" the bottom group for up to 5% and the rest for up to 3%? The whole thing would be a targeted QNEC with the population being everyone in the test.

[austin3515]

Document provider says it's definitely ok under the law, document not very specific, but he thinks it would be ok.

So I'm doing it!

[Kevin C]

SMMoran, It depends on the document language. The targeted QNEC language in our VS document was designed to be as close as possible to the old bottom-up QNEC's and still have it count in the test. With the allocation method it uses, there is no way to give all NHCEs a 3% QNEC and then give a few of them more.

[MoShawn]

I'm used to documents designed as loosely as possible. Doesn't specify who needs to receive it or in what percentages/ratios. As long as it fit under the targeted QNEC rules in the regs, any allocation was fair game.