Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

What is a qualified non-elective contribution – QNEC

QNEC, non-qualified elective contribution, employee benefit plansWhen 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.

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The amount of the QNEC for missed deferral opportunities is calculated by adding:

  1. 50% of the employee’s missed deferral amount
  2. 100% of any employer matching contributions that were missed out on
  3. 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.

Example

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