QNEC & Catch-up

Hello,

I plan fails ADP test, instead of doing refunds they decided to make a QNEC.  My question is when calculating the QNEC can I also re-characterize some of the HCE's contribution as catch up.  For example if one HCE,over 50, has $5000 in contributions can I re-characterize this as catch up too bring the HCE avg ADP down and use that # to calculate the QNEC, or do I have to use the HCE ADP avg with all contributions under $18k

Thanks,

nope, unless that 5000 is the highest amount deferred by any HCE

in other words, you run your test and it fails

you calculate your refund and if it belongs to an HCE that can be treated as a catch uo.

lets say you provide a 2% QNEC before any refund. you now run your test and it fails. if any of those refunds belong to catch up eligible HCEs then you treat those amount as catch up.

but based on your comments, it doesn't sound like that is what is taking place. the way you worded thing almost sounds like you have HCEs with more than 5000, and the refund (or catc up) is based on top down by who deferred the most

I agree with Tom.  When you re-test ADP after QNEC, you'll want the test to show a refund to HCE(s) that will qualify for the catch-up treatment (up to $6,000).  It seems the HCE's in your example may be limiting their contributions to try to pass ADP.  If not, you'll need to be wary of any HCE's who have already contributed catch-up in excess of the $18,000 limit (2017).

If failure and QNEC is frequent, the sponsor may want to consider a safe harbor type of plan (?!)

The document could also set a lower cap for the HCEs. Say $5,000 as an example and then allow $11,000 deferrals for those over age 50. This could be a way to help them get the most in deferrals based on test results.