3806 / What is a qualified nonelective contribution (QNEC)? Can QNECs be taken into account in determining whether a defined contribution plan satisfies the ACP test?

A “QNEC” is any employer contribution (other than elective contributions and matching contributions) with respect to which the employee does not have an election to receive the amount in cash and that satisfies the nonforfeitability and withdrawal restrictions applicable to elective deferrals to qualified cash or deferred (401(k)) arrangements ( Q 3753 and Q 3797).¹ Elective and qualified nonelective contributions (“QNECs”) may be taken into account in determining whether a plan satisfies the ACP test, provided certain requirements are met.²

Employer matching contributions that are treated as elective contributions for purposes of the actual deferral percentage (“ADP”) test applicable to cash or deferred arrangements ( Q 3802) are not subject to the ACP test above and may not be used to help employee contributions or other matching contributions to satisfy this test. Similarly, a QNEC that is treated as an elective contribution is subject to the ADP test and is not considered as a matching contribution for purposes of the ACP test.³ Essentially, a QNEC is a supplemental employer contribution that is tested as if it were an elective deferral for purposes of the ADP test.

Under limited circumstances set forth in regulations, an employer may elect to include certain elective contributions and QNECs in computing the contribution percentage.⁴ To be considered in the calculation of the ACP for a year under the prior year testing method, a QNEC must be contributed no later than the end of the 12 month period following the applicable year, even though that year is different than the plan year being tested.⁵

On July 20, 2018, the IRS published regulations that modify the definitions of QNEC to allow employers to use forfeitures in order to pass nondiscrimination testing that applies to qualified plans. This amendment generally broadens the definition of contributions that qualify as QNECs and permits plan sponsors that allow the use of forfeiture accounts to offset future employer contributions under the plan. Therefore, the final regulations would require that QNECs be fully vested and subject to certain distribution restrictions only when they are allocated to the participant’s account, rather than when they are first contributed to the plan. The changes apply to taxable years ending on or after July 20, 2018.⁶