QNEC

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A qualified nonelective contribution (QNEC) is a contribution made to correct a 401(k) plan's ADP or ACP testing failure.

Restrictions on Use to Pass ADP and ACP Tests

The final 401(k) regulations place severe restrictions on the use of QNECs. A QNEC for an NHCE that exceeds 5% of compensation can be taken into account for the ADP test only to the extent the contribution, when expressed as a percentage of compensation, does not exceed two times the plan's "representative contribution rate."

The plan’s representative contribution rate is defined as the lowest contribution rate (i.e., the sum of QNECs made and QMACs taken into account for an employee divided by the employee’s compensation) among a group of NHCEs that is half of all the eligible NHCEs under the arrangement (or the lowest contribution rate among all eligible NHCEs under the arrangement who are employed on the last day of the year, if greater).

The same QNEC cannot be taken into account under both the ADP and ACP tests.

Guidance

See 401(k) plan.

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