missed deferral opportunity at start of plan - no NHCEs deferred

Got a call from a financial advisor who thinks he's got a plan with a problem.  Plan was started in December 2025; the owner deferred, but because all employees work <1,000 hours per year, they were told that the employees are all ineligible.  But upon review of the adoption agreement, it was selected that all employees on the effective date are eligible.  And of course they weren't given the opportunity to defer.

Note: the business only started in 2025, so at least they can be exempt from mandatory automatic enrollment for now.

So kudos to the advisor for finding this and looking for help.  We discuss missed deferral opportunity and QNECs and he agreed to send me data.

Here's my problem: what is the base QNEC?  There is no average deferral rate of the NHCEs because they were all improperly kept out.  EPCRS talks about the rate to use for plans with a safe harbor (Appendix A.05), but I don't see an option for a plan with no safe harbor (because why would you put in a safe harbor with no eligible NHCEs? *sigh*).

Any guidance?  Thanks.

In sorting through potential corrections, it might matter who told whom that an employee with fewer than 1,000 hours of service is not eligible for elective deferrals.

Figure out the passing QNEC level and figure even if they'd all been auto-enrolled at something lower, they would have needed more corrective amounts anyway to pass the ADP? 

Obviously going for a "this feels like a reasonable correction" approach

The "exclude employees > 1,000 hours" exclusion is usually in the definition of Eligible Employee and is NOT an eligibility condition.  So if eligibility requirements were wiaved, that does not eliminate an exclusion.

You have no ADP issues because the plan can carve out HCe's even if the are OE's into the ADP test, and in your case only one HCE exists.

But then we get to coverage. There is no early participation rule for coverage testing.  So now we need to bring in a bunch of people to pass coverage. Your plan is top-heavy so they all need the 3% THM.  Then you also have a missed deferral opportunity for those people as well.  I would go with 3%.  So that's 6% for them.

This is just back of a napkin, but what a mess. Hopefully it's a small number of employees. 

I believe the QNEC for the missed deferral is zero.  Since the plan made everyone eligible on the effective date, that overrides the ability to put those people in the otherwise excludable group for testing.  You will not have a coverage problem, but you may have an ADP problem depending how the doc was written.  You would also have a top heavy minimum in these calcs in which your QNEC for the ADP failure can go towards that as you are not making a QNEC for missed deferrals.

The way I read the initial post, the excluded employees are not excluded because they did not meet eligibility - they were excluded as a class.  The "initial eligibility waivers" do NOT waive excluded class provisions.  

Hopefully the OP can clarify because this is a super critical distinction.  If they are eligible for the plan, everyone has a missed deferral.  If they are not eligible for the plan you only need to bring enough people to pass coverage which might be a way smaller group.

On 8/5/2026 at 12:56 PM, AlbanyConsultant said:

But upon review of the adoption agreement, it was selected that all employees on the effective date are eligible.

I read the problem AlbanyConsultant describes as someone having administered a plan under an assumption different than a provision of a document that might be or have been a document governing the plan.

BenefitsLink mavens, if that's the situation, does it lead you to different observations?

Austin 3515, I read it as all employed on a specific date were in, but the employer took it as well, if you don't work 1000 hours, that does not mean you.  I agree, the language is super critical.

David D - In every document I have ever seen, the waiver is regarding Initial Eligibility (i.e., wait and service provisions).  If someone elects to exclude union people, but they waive eligibility, that never means all of the union people are eligible on the first day just because they were employed,  The waiver means any non-union employees who have not met age and service are eligible right away.

Two key statements:

"The owner deferred, but because all employees work <1,000 hours per year, they were told that the employees are all ineligible"

"the business only started in 2025"

If the business was new in 2025, the only way the owner is eligble but not the employees is if the "Exclude" option was used to Exclude part-timers with less than 1,000 hours.

So I think someone had a pretty cool idea on plan design AND communicated the design correctly, but failed to realize that coverage would never pass.  I hope Albany tells us which one it was :).

Austin3515 - Definitely depends on how the doc reads.  If they are excluded under eligible employees they would be excluded, but the ASC doc that I see most often has this:

EFFECTIVE DATE OF MINIMUM AGE AND SERVICE REQUIREMENTS. The minimum age and/or service requirements under AA §4-1 apply to all Employees under the Plan. An Employee will participate with respect to all contribution sources under the Plan as of his/her Entry Date, taking into account all service with the Employer, including service earned prior to the Effective Date.
To allow Employees hired on a specified date to enter the Plan without regard to the minimum age and/or service conditions, complete this AA §4-4.
Deferral
Match
ER



An Eligible Employee who is employed by the Employer on the following designated date will enter the Plan on the designated date without regard to minimum age and/or service requirements (as designated below):
 (a) the Effective Date of this Plan (as designated on the Employer Signature Page).
 (b) the date the Plan is executed by the Employer (as indicated on the Employer Signature Page).
 (c) [insert date no earlier than the Effective Date of this Plan]
An Eligible Employee who is employed on the designated date will enter the Plan on the designated date without regard to the minimum age and service requirements under AA §4-1. If both minimum age and service conditions are not waived, select (d) or (e) to designate which condition is waived under this AA §4-4.
 (d) This AA §4-4 only applies to the minimum service condition.
 (e) This AA §4-4 only applies to the minimum age condition.
The provisions of this AA §4-4 apply to all Eligible Employees employed on the designated date unless designated otherwise under subsection (f) or (g) below.
 (f) The provisions of this AA §4-4 apply to the following group of Employees employed on the designated date:
 (g) Describe special rules:
[Note: An Employee who is employed as of the designated date described in this AA §4-4 will enter the Plan as of such date unless a different Entry Date is designated under subsection (g). The provisions of this AA §4-4 may not violate the minimum age or service rules under Code §410 or violate the nondiscrimination requirements under Code §401(a)(4).]

I'm not following how that document is written so can;t comment.  The waiver talks about "Employees" (not Eligible Employees) so it seems to me that if you use this document to exclude Union Employees but then use this waiver, the Union people would be eligible.  I can;t imagine anyone would want that.  So maybe I'm missing something.

Although:

"To allow Employees hired on a specified date to enter the Plan without regard to the minimum age and/or service conditions,"

It doesn;t say without regard to the Eligible Employee Definition.  Boy if I were them I would have used the words Eligible Employee though in that section. 

I guess I quit now. I think we are on the same page.

I had the same reaction when I first came across it, but each line where you can make a choice starts out with:  An Eligible Employee....  (which are defined earlier with Union, non resident and all the rest)

Been too many years, I don't remember why the inconsistent language   

We wait on Albany Consultant to hopefully shed some light.