Failed ADP test -QNEC & TH contribution relationship

[Pammie57]

We have a plan that failed ADP (deferrals only).  The HCE is due a corrective distribution as it stands of $7376.78 plus earnings.  They are also Top=heavy and the amount due for TH is $23,300.05.

The QNEC required to pass the ADP is $27101.19

IF they want to put in the $27101.19 - as long as it is vested 100% - can this count for both TH and meeting ADP test and avoid the corrective distribution? 

Would LOVE feedback!!!!

[ETA Consulting LLC]

There is an option to allocate a QNEC and merely have the plan fail by a lesser amount.  Also, depending on who the HCE is (perhaps the owner), you may provide the Top Heavy and then analyze the level of contributions that may be allocated to this HCE in a manner that would pass 401(a)(4). 

At the end of the day, it boils down to ensuring the plan document contains the language to do what it is you want to do. Whatever formula you allocate must be definitely determinable.  So, whether or not your document has QNEC language that supports an QNEC given to only the TH minimum group should be considered. 

You know the TH minimum 3% allocation is definitely determinable as soon as the Key Deferred at 3%.  If you have a class allocation method (i.e. everyone in their own group), then you may consider giving the individual an Employer Contribution (perhaps at 9%) and see if this passes 401(a)(4) while excluding everyone else.  My main point is that you have to ensure that whatever you do is supported by the language in the plan.

Good Luck!
 

[NJ Mike]

I though Pammie57 just wanted to know if the QNEC can also be used to satisfy the Top Heavy required minimum contribution.  The answer is yes.  From Treas. Reg. 1.416-1:

M-18 Q. May qualified nonelective contributions described in section 401(m)(4)(C) be treated as employer contributions for purposes of the minimum contribution or benefit requirement of section 416?

A. Yes. This is the case even if the qualified nonelective contributions are taken into account under the actual deferral percentage test of § 1.401(k)-1(b)(2) or under the actual contribution percentage test of § 1.401(m)-1(b).

 

Mike

[Tom Poje]

so yes it can do double duty, be used in the ADP test and also be applied to top heavy.

the only cautionary note, somewhat alluded to above, a plan has to pass (a)(4) testing with and without the QNEC.  1.401(k)-2(a)(6)     while this is usually not a problem, there could be HCEs who are not key who wouldn't get the QNEC but would be due the top heavy. there could be terminated NHCEs who  receive the QNEC but don't get the additional to satisfy top heavy.

[Pammie57]

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Thanks all for the replies.  It does help.