re-characterization of minimum contribution to pass ADP test

[Guest mdelin]

Plan has "Fixed" Contribution equal to 5.7% of compensation and 5.7% of excess Compensation - 100% vested

Plan Also has "Match" Contribution equal to 100% of elective contribution up to 5% of compensation - 2/20 Vesting

Plan Also has "Minimum" Contribution equal to 3% of compensation minus the fixed contribution for the year. If fixed exceeds 3%, then no minimum made

- 100% vested

Plan uses Prior Year Testing

Plan Document does not speak to a designated QNEC for correction of a failed ADP test

Question:

Should the plan fail the ADP test, can the Minimum contribution be re-characterized as a QNEC to pass the ADP test?

[Lou S.]

Using prior year testing the contibutions would have need to have been made by plan year end to satisfy the 12 month rule.

I'm not sure I follow what the actual contributions are, it seems like regular fixed contribution is always going to be greater than the minimum unless there are some allcoation conditions and the 3% is just the TH minimum.

If you are trying to designate the first 3% as QNEC to NHCEs I think you may be creating a potential nondiscrim problem with the rest of the contribution since you can't double count the QNEC as part of your intergrated uniform contribuion formula.

[Guest mdelin]

Thank you Lou. That is what I thought.

You are correct that the fixed contribution will always generally be higher. This is an outside document and I assume that the language for the 3% minimum was put in there for TH purpose. Thus, the 3% minimum would only be triggered if a participant does not meet allocation conditions for integrated contribution but would be required to receive TH.

[Tom Poje]

in addition to whether the plan document even allows it (and even ignoring the fact the problem with a plan being integrated), if a QNEC used in the ADP test (or ACP test) the plan must pass 401(a) (4) testing with and without the QNEC. (1.401(k)-2(a)(6)(ii) this would mean of course the HCEs have now received a larger nonelective when you test without the QNEC. (which then I think gets you back to the issue of how you are going to do that if it relates to a prior year)

so, for example, if the plan wasn't integrated but a flat 5.7% and you treated 3% of the NHCE as a QNEC, you now have to test 2.7% NHCE vs 5.7% HCE as nondiscrim. that barely passes the gateway minimum. by the time you add in the integrated piece you probably would fail the gateway.

[MWeddell]

Modifying a bit Tom Poje's idea, you may have to move any QNECs to HCEs that exceed 8.1% (that's 2.7% times 3) into the ADP test too. It'll hurt the ADP test a little bit but satisfy the 3x comparability gateway allowing you to run a 401(a)(4) cross-test on the portion of the employer nonmatching contribution that is not shifted into the ADP test. Even more so now, you'll have to check whether the plan document permits that.