Does a QNEC contribution allocation formula need to be definitely dete

[Richard Anderson]

Does a QNEC contribution allocation need to be definitely determinable? Or, if the QNEC goes only to NHCEs, can the document not state the allocation formula, and state only that the QNEC goes only to NHCEs? The allocation if made to only NHCEs, cannot be discriminatory.

[MWeddell]

Yes, Treas. Reg. § 1.401-1(B)(1)(ii) requires that the plan state an allocation formula for allocating any type of profit sharing contributions, which includes QNECs. I've often seen the IRS issue favorable determination letters on documents which don't have a definite allocation formula, but that doesn't prove much.

If you've got access to back issues of various periodicals, a good discussion is Rovell, “Legal Update: Reverse Compensation Allocation Formula Provides More Bang for the QNEC Buck”, Panel Publishers 401(k) Advisor (April 1996).

[Richard Anderson]

What I want to do is allocate the QNEC to only new participants who entered the plan mid year and terminated shortly thereafter. I want to allocate the QNEC to those with the least comp after plan entry. The QNEC allocation will be the 25% of 415 comp, but testing will use comp from date of entry. This creates QNEC contributions that greatly exceed the testing comp. This creates considerably more leverage than the 25% of a bottom up QNEC.

I'm not sure how to word the allocation formula in the document. Could the document say that the QNEC will be allocated first to the participant who will have the greatest ADP testing percentage? Next, to the participant who will have the second greatest %, continuing until the plan passes the ADP test?

[MWeddell]

Yes, the allocation formula could contain the language you suggest, but to avoid having employer discretion, you'd have to specify in the plan all of the variables that affect how actual deferral ratios are calculated.