What the Heck is a QNEC?

Posted by Stacey Snyder

Disclaimer: All blog posts are valid as of the date published.

You may have asked yourself the title question after hearing ‘QNEC’ or ‘QMAC’ in a discussion related to ADP/ACP testing.

I’ll first start by defining the acronyms mentioned above:

QNECs and QMACs are available corrections when a 401(k) plan fails the required ADP/ACP testing. The ADP/ACP tests limit the disparity in deposits between highly compensated employees (HCE) and non-highly compensated employees (NHCE) within a plan, by comparing the average deferral/contribution percentage of HCEs to the average deferral/contribution percentage of NHCEs. The difference between the two tests is that ADP considers the employee’s deferrals, while ACP focuses on the employer matching contributions. If the plan is deemed to have failed either of these tests, a correction must be made by:

• returning excess deposits to the HCEs, or
• making either a QNEC or a QMAC (sometimes both) to all eligible NHCEs, in order to increase their average percentage deferrals or match in comparison to the HCEs.

QNECs are immediately vested contributions made by the plan sponsor to a participant’s account. QNECs are calculated based on a percentage of the participant’s compensation, which is limited to 5%. An exception, however, is if the plan has implemented a representative contribution rate, which is the lowest percentage of compensation the NHCE can receive from a QNEC. In this case, the maximum percentage of compensation the NHCE can receive cannot exceed two times the representative contribution rate.

QMACs are immediately vested matching contributions made by the plan sponsor, calculated based on a percentage of the employee’s elective deferral. Similar to QNECs, the total amount the NHCE receives from the QMAC cannot exceed: 5% of their compensation, two times the plans’ representative matching rate, or the total amount of the NHCE’s elective deferrals.

Both of these corrective contributions are always 100% vested and follow the same distribution requirements as employee deferrals. The contributions must be made by the last day of the plan year following the ADP/ACP testing failure, and cannot be paid with forfeitures. Generally, QNECs are treated as employee deferrals and are used to satisfy the ADP testing requirements, while QMACs are used to satisfy ACP requirements. However, QNECs may be used to also satisfy the ACP test and QMACs may be used to satisfy the ADP test, as long as the same contributions are not used in both tests.

Still confused? There’s a solution! By implementing a safe harbor plan feature into a 401(k) plan, as explained in K.I.S.S.: Keep It Simple and Straightforward with Safe Harbor Plan Designs, the plan can avoid ADP/ACP testing altogether, and you will never have to wonder what the heck a QNEC is, ever again!