Ask the Experts January 5, 2021

QNEC for a Prior Year and the 415 Limit

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning retirement plan administration and regulations.

Reported by

“We made a qualified nonelective contribution (QNEC) in 2020 to correct a missed 403(b) deferral opportunity for one of our employees in 2019. Is the QNEC considered to be a 2019 or a 2020 contribution for 415 limit purposes? Also, since we are making up for a missed elective deferral opportunity, does the QNEC count toward the 402(g) elective deferral limit?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

This is yet another example that we find of the correct answer not always being the most logical answer! Though one might think that a QNEC might count for 415 limit purposes in the year in which it is contributed, that is not the case. The QNEC counts toward the 415 limit in the year to which the contribution related (i.e., the year of the original error) and NOT the year of contribution. Thus, in your case the QNEC would count toward the 2019 415 limit for the participant in question.

From the Employee Plans Compliance Resolution System (EPCRS):

“SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY .02 Correction principles.

(4) Principles regarding corrective allocations and corrective distributions. The following principles apply where an appropriate correction method includes the use of corrective allocations or corrective distributions:
(b) A corrective allocation to a participant’s account because of a failure to make a required allocation in a prior limitation year is not considered an annual addition with respect to the participant for the limitation year in which the correction is made, but is considered an annual addition for the limitation year to which the corrective allocation relates.”

 

As for the 402(g) limit, the QNEC is NOT treated as an elective deferral for 402(g) limit purposes, even though the QNEC is to correct a missed elective deferral opportunity. We note that even though the QNEC is an employer contribution, if an employee maxes out his 402(g) contributions in spite of the missed opportunity, no QNEC would be required.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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