Failed coverage - QNEC allocation

[Trisports]

It was discovered that the coverage testing has been done incorrectly for several years (more than 5). Plan fails coverage and there is no fail-safe language so we are proposing an 11(g) amendment and to file the correction under VCP.   The TPA's suggestion is to allocate a QNEC contributions to the lowest paid participants sufficient to pass the AVB.   While QNEC for ADP testing needs to be limited to no more than 5% or twice the representative rate, there doesn't appear to be any limitations for purposes of the QNEC for ABT.

Tres Reg 1.401(a)(4)-11(g)(vii) states that the QNEC should be equal to the NHCE's compensation multiplied by the ADP and/or the ACP  so I'm afraid that allocating a QNEC contribution to the lowest paid employees might be considered discriminatory by the IRS.   It does not appear to me that they would pass the reasonable classification test.

Is it permitted to target the QNEC allocation? Is there any guidance on how to allocate the QNEC?

 

 

 

 

 

[Lou S.]

Targeted QNEC can be allowed in the plan document.

But the situation you are describing, 5+ years of failures does not appear to be a situation you can correct with a targeted QNEC.

You can suggest it to the IRS in a VCP filing to correct but I do not think it is a method the IRS will approve. Though perhaps someone with more VCP experience can comment.

[BG5150]

I thought the targeted QNEC was to correct failed ADP/ACP testing. 

In our document, the coverage remedy is to allocate to those employed at EOY with greatest # of hours.  If, after that, it still fails, then allocate to termed EEs with greatest number of hours.

The fail safe language mandates that contributions are made.  absent that election, you are allowed to use the ABT.  However, if ABT fails, I believe you have to resort to the remedy above.  maybe with a VCP filing you can try something else with an 11(g) amendment (can you even do one more than 9 mos after EOY?) and cross your fingers.

[Mike Preston]

I have always thought that the targeted QNEC language was intended to limit aounts that could be taken into account for purposes of non-discrimination testing.  Whether that be ADP/ACP or amounts testing.  I would have no hesitation presenting a targeted QNEC approach in a VCP filing.  The worst they can do is turn you down.

[BG5150]

Side note:  is there a Profit Sharing allocation with everyone as his own group?  You MAY not have the ABT available for coverage at all.

As with many things in our world, the facts and circumstances will bear it out.

[Mike Preston]

Another myth.  The mere fact that the plan calls for everyone in their own group doesn't, by itself, exclude the ABT.  The plan sponsor must have exercised the right to make at least one participant who is otherwise eligible for an allocation to define that participant's allocation as zero.

[CuseFan]

and what is the "plan" that failed coverage - is it non-elective, 401(k) and/or 401(m)?

[BG5150]

1 hour ago, Mike Preston said:

Another myth.  The mere fact that the plan calls for everyone in their own group doesn't, by itself, exclude the ABT.  The plan sponsor must have exercised the right to make at least one participant who is otherwise eligible for an allocation to define that participant's allocation as zero.

That's why I put "MAY" in my post.  I'll go back and edit it to highlight.