QNCE calculated for missed deferrals should be included in ADP\ACP test??

[swam]

I have a client who has 401k plan and realized in 2017 plan year that they missed deferrals for a participant in 2015 and 2016 plan year. Now they have calculated missed deferrals and match amount along with earnings.

Question is:

1. Can this QNEC amount be included in ADP\ACP test?

2. If yes for above, can 2015 and 2016 QNCE amounts be included in 2017 ADP\ACP tests or only can be included in their respective plan year testing. In this case as they have already completed 2015 and 2016 testing thus these amounts are not included in any testing year, is it ok or IRS has some guideline for the same. 

[Tom Poje]

EPCRS Appendix A .05 (2)(g) says

(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded.

 

so does the term 'may' be it is optional, you can include the people and rerun the test?  I don't think so - there is no mention anywhere of rerunning the tests. The problem with the English language is 'may' can be understood different ways. there are other times in the regs in which 'may' is not meant to be understood as optional, but rather 'normally you can't do this, but in this situation you are allowed (and in fact you must do this)'

 

somewhere in the ERISA Outline book is a discussion on the term 'may' - not in regards to this issue but another one. maybe it was in the case of related match to an ADP failure. the regs say the related match may be forfeited. not to mean it is optional but you don't have to, but rather, even if the match was 100% forfeited  you are permitted to forfeit it to be in compliance with other rules.

[RatherBeGolfing]

I agree with Tom.  The term "may" in this context means you rely on the ADP test result that excludes the improperly excluded employee, even though you would normally have to include any eligible employee in that test.  It also says that you have to correct ADP and ACP test failures before you apply the correction for the improperly excluded employee.  So you get to exclude the $0 deferral and match for the improperly excluded employee from the ADP/ACP tests, but you do not get to rerun the tests after you allocate a QNEC for that failure.