Targeted QNEC

A 401(k) plan excludes some compensation for allocation purposes.  414(s) passes the ratio test, but ADP results, although failing using gross and net comp, are better using gross comp.

Here is the question.  

Suppose a participant's gross comp is $40,000, and for extremes let's say allocation comp is $10,000.  Let's say we give the participant a QNEC of 20% of allocation compensation, which is 5% of gross compensation.  This the only ee getting a QNEC so the representative rate would be 0.

If we are using gross compensation in the ADP test, are we allowed to use the full $2000 QNEC (as 5% of testing compensation) in the ADP test, or are we limited to 5% of allocation compensation, even though we are not using allocation compensation in the ADP test?

Thanks very much.

If I'm understanding the question correctly, I think you are asking if you are required to use any particular definition of compensation when determining if QNECs are disproportionate under 1.401(k)-2(a)(6)(iv)? The section only refers to "compensation" which in the context of that reg means testing compensation. I would think you would use whatever definition of compensation you are using to perform the ADP test.

Hey thanks CB, that was my question.