compensation used in a QNEC

Company is starting a calendar non-safe harbor 401k plan, document to be signed 11/15/17.  The plan is effective retroactively to 1/1/17.  401k is effective 11/15/17.  415 limits therefore are not prorated.  We will use current year testing.

The owners, due to December bonuses, could deposit $10K+ in 401(k) contributions before end of 2017. Giving them a high ADR.  The NHCEs would not be that high.

A QNEC is being considered, which will cost $$$, but the question is whether the QNEC uses full year compensation as a basis or just the compensation from 11/15-12/31?  This would obviously make a big difference in the QNEC.  Hoping that 11/15-12/31 can be used.

Thanks for any comments

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Your provision is saying that the plan (and the 401(k) deferrals provision) is effective on January 1st, while deferrals will not be allowed until 11/15.  So, eligibility for deferrals will be determined by the respective entry dates for that source (i.e. 1/1 $ 7/1 assuming semi annual); so that will be  used to determine your eligibility for them.  I don't see where it would be reasonable to use anything other than full year.

Good Luck!

We would have the participants entry date for the PS 1/1/17.  For the 401(k), we would have a special entry date of 11/15 or even 12/1 if we simply have monthly entry dates.  In which case particiants could only defer for a month out of the year.  Would the QNEC have to be full year?  The 401(k) test would be based on compensation from 12/1-12/31.  Shouldn't the QNEC compensation be based on the same period?

Since this is a new plan why don't you elect Prior Year Testing and take advantage of the 3% deemed deferral and match rates for the NHCEs (allowing 5% deferral and 5% match rates for your HCEs)?

The plan is not going to pass the 2017 ADP test using either prior or current year testing.  So the QNEC is how they want to pass.  Which leads to the compensation on which the QNEC is based.  full year comp will cost a lot more than 1 month worth of compensation.

let's say ee makes $1000 month. if you are testing using comp from date of participation, and you give a 2% QNEC is $20. Now when you run the test  based on comp from DOP it would show as 2% (20/1000) on the test.

hmmm. first year of plan, plan fails ADP test. this smells like plan would also end up being top heavy, and you have to use full year comp for top heavy, even if not all of it is a QNEC

If you limit the HCEs to 5% 401k and give them a 5% match the plan will pass 2017 testing using the special first year rule even if none of the NHCEs contribute a dime, but, as noted it will be top heavy triggering a 3% non-elective contribution.

What is intended is that the owners bonus themselves around $25,000 each from now to year end.  Each owner would defer $18,000 each.  There is 1 NHCE who will not want to put anything in.  So the ADP test would be HCEs = 72%, NHCEs = 0%.  FAIL!

So if we can provide a QNEC to the NHCE on compensation from now - 12/31, even one at 72%, it might only amount to $2,000.  That would be acceptable to the owners.  Even if we have to provide an additional 3% on whole year compensation to satisfy top heavy, that is still an overall good deal for the owner.

 They would want to avoid doing a 72% QNEC on whole year compensation for obvious reasons.

We can use partial year compensation ADR calculation.  But can we use partial year compensation for the QNEC as well? 

We need to have a 12 month plan year in order to not have to prorate the 415 limit.  But the 401(k) effective on 11/15.

the QNEC is what is needed to pass testing, so based on whatever comp you used on the test (unless I suppose you have a document that says base it on full year comp.

but using your example of a 72% QNEC (=$2000) so that would mean a comp of 2777.77.

lets say that is one months comp. so for the year that would be 33,333.33 in comp

so now I give him a 6% QNEC based on full year comp which = 2000 and since I use comp from DOP he still ends up at 72% for testing.

Personally, I would also make the plan safe harbor beginning next year so top heavy is not issue if no other contributions are made and no ADP testing.

Tom - I'm not sure I understand your example.  If we base the QNEC on whole year compensation, can we still test it in the ADP test based on 1 month compensation?

 Safe harbor for 2018 and beyond is a definite.

you can always test on DOP compensation.

this comes up quite often in cross testing as well.

person enters midyear, receives a top heavy, but you can still test on a definition of comp that satisfies 414s. so it sort of doubles the e-bar

wouldn't surprise me if you have done cross testing and this happened.

Thanks Tom.  I think I understand.  My concern was centered on what the date of participation actually is.  By making the plan effective retroactive to 1/1/17, everyones DOP into the plan is 1/1/17.  But that pertains only to the PS eligibility.  Since no one can make 401(k) contributions until 12/1/17, would that allow them to use 12/1-12/31 comp for both ADP testing and QNEC contribution?  It sounds like the answer is yes.

Thanks