Correcting ADP Test Failure Under EPCRS

[Madison71]

Hello All -

Can someone confirm if I am understanding the correction under EPCRS appropriately?  Small non-safe harbor 401(k) Plan with eligibility of age 21 and 1 YOS with at least 1,000 hours worked in a plan year. For several years, the HCEs were the only ones deferring into the Plan (no match offered in the Plan).  The ADP Tests run for these years were automatically passing as none of the NHCEs were eligible - not shown to work at least 1,000 hours in any Plan year.  It is now discovered that the hours were calculated incorrectly for these year and several NHCEs should have been eligible.  My understanding is that the ADP Test would have to be corrected first.  The Sponsor is correcting by making a QNEC to each eligible NHCE.  A 7% QNEC (plus earnings?) will have to be contributed to each NHCE for each Plan Year to correct the failed ADP Test.  I'm having trouble reconciling this with the correction if the initial ADP Tests were passed and an NHCE employee was not given the opportunity to defer.  Depending on timing, the correction would be a QNEC of either 25% (or 50%) of the missed deferral (whatever the average deferral percentage on the ADP Test) plus earnings.  Am I understanding correctly that because no NHCEs were given the opportunity to defer, then an appropriate correction is a QNEC to these NHCEs to correct the failed ADP Test.  There is no 25% (or 50%) QNEC of the missed deferral?

Thank you

 

[K2retire]

A QNEC to pass ADP testing is subject to different rules than a QNEC for a missed deferral opportunity. The required percentage is based on what it takes to pass testing.

[Madison71]

Thank you.  So, if for example, there were 2 HCEs deferring an average of 9% in the ADP Test and 5 eligible NHCEs deferring 0% (none of the NHCEs were given an opportunity to defer), that one approved correction would be to make a QNEC of 7% of compensation for each of these 5 NHCEs.  Because these 5 NHCEs also were not given the opportunity to defer, then they are also given a QNEC of 50% of the missed opportunity deferral (50% of 7%) plus earnings?

[Madison71]

It would seem the correction I outlined above would make no sense.  As I understand it, if you need to correct the ADP Test and also have an error where there are participants who were not given the opportunity to participate, you first correct the ADP Test.  You correct the ADP Test only using those that were given the opportunity to defer.  You then correct those participants who were not given the opportunity to defer, by contributing 50% of the average deferral percentage. I'm not sure how you correct an ADP Test that fails because none of the NHCEs were given the opportunity to defer other than pulling them all in the test and providing a QNEC to all those not given the opportunity to defer to correct the failing test.  This would then take care of correcting the failed ADP Test and also the missed opportunity to defer