When it comes to your employee benefit plan, there are countless terms and acronyms thrown around, whether it be by HR, your third-party administrator (TPA), investment advisors or your auditors. One term you may come across is QNEC. This term is not very well-known, as many plans do not come across QNECs, but it’s important to know what a QNEC is in the event your TPA or auditor recommends making one.
QNEC stands for qualified non-elective contribution. A QNEC is a fully-vested payment paid by the employer to the plan on behalf of the employee, and typically results from a missed deferral opportunity. For example, if it is determined that a plan participant did not properly have deferrals withheld from all their eligible plan compensation, a QNEC would be made to compensate the employee for the mistake. QNECs can also be used to satisfy an ADP (actual deferral percentage) test failure. QNECs made to non-highly compensated employees can bring a plan back into compliance with the ADP nondiscrimination test.
The amount of the QNEC for missed deferral opportunities is calculated by adding:
- 50% of the employee’s missed deferral amount
- 100% of any employer matching contributions that were missed out on
- Adding any potential investment gains that were missed out on
Regarding the 50% correction on employee’s missed deferrals, there are certain criteria that, if met, allow the employer to pay only 25% or 0% in different situations. These criteria hinge on the timing of the QNEC in relation to the error. Typically, errors are not discovered until an audit or well after the error occurred; therefore, the 50% correction is the most common used in QNECs.
Bonus pay is defined as eligible compensation in the plan document, and it was discovered that no 401(k) withholding was made on a participant’s bonus of $5,000. The participant’s deferral percentage election is 4% and the employer matches 100% of all deferrals up to 3%. Lost earnings were calculated to be $15.
Correction needed: The employee’s missed deferral amount is 4% x $5,000 = $200. The QNEC will reimburse 50% of that amount = $100. For the employer match, 3% x $5,000= $150 must be reimbursed. The $15 of lost earnings will also be included. The total QNEC comes to $100+$150+$15 = $265.
If you do come across the need for a QNEC, consult with your TPA and auditor to ensure it is calculated correctly.
Brad Sinko, CPA