ADP/ACP - QNEC question

An employer sponsors a non-safe harbor 401(k) plan, 1/1 plan year, prior year testing method. The plan provides for a QNEC (3% of pay), allocated to both HCEs and NHCEs. In terms of including the QNEC in the ADP test, ACP test, or not at all - are there any best practices (especially given that the prior year testing method is used)?

For example, can the QNEC be included in the 2025 plan year ADP test, but not included in the 2026 plan year ADP test? If this were to occur, the 2026 test would include a HCE average that does not include the QNEC, but the 2025 NHCE average (used in the 2026 test) would have the QNEC included. I assume this is not allowed? Or, perhaps it is allowed as long as 401(a)(4) requirements are met. 

Thoughts?

What? Why are they contributing a 3% QNEC and still choosing to be subject to the ADP test?

To answer your question though, in order to count a QNEC towards the NHCE ADP, it has to be contributed for the same plan year as the NHCE deferrals being tested. Right now it’s 2026 and you’re doing the 2025 ADP test. With the prior year method, you’re using the 2024 NHCE ADRs in the test so you could only take into account 2024 QNECs (which could have been deposited as late as 12/31/2025). Hence why it’s generally not feasible to correct a prior year ADP test using QNECs.

Now in your unusual situation, where they did actually contribute a QNEC during the prior year, you still have to take nondiscrimination into account. 401(a)(4) has to pass both with and without the QNECs that were applied to the ADP test taken into account. If you are including all of the NHCE QNECs in the ADP test then 401(a)(4) will fail since you’ll have contributions going only to HCEs after backing out the QNECs used towards ADP. If you calculate just the minimum amount of QNEC needed to pass ADP and leave some over to be included in 401(a)(4), then you can try to see if it would pass using cross-testing or another method. But if it fails, you now have a failure for 2024 that you would need to back and correct somehow.

In short, if you’re using prior year testing, plan on correcting via refunds.