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How Retirement Plans Can Fix Contribution Mistakes

Employers sometimes make mistakes when they put money into a 401(k), profit sharing plan or other defined contribution plan. If they correct the mistake by making a contribution to the plan, the contribution is called a QNEC or Qualified Non-Elective Employer Contribution.

Here are some examples of a QNEC (pronounced cue-neck).

Companies sometimes fail to include all of their eligible workers in a 401(k) plan. Once this mistake is discovered, the employer can make a QNEC for the excluded employee or employees equal to ‎one-half the average contribution made by all non-highly paid employees, plus any employer contributions made during a year.

Another common error is when an employer does not take all of an employee’s earnings into account when figuring out how much to put into a profit sharing plan. For example, an employer that contributed 5 percent of pay to a profit sharing plan‎ may overlook the fact that an employee had received a $500 bonus. The QNEC would be for the employer to contribute the same percentage of the bonus amount into the employee’s account.

QNECs are also used when employers put too much into a 401(k) plan for their highly-paid employees compared to the amounts contributed for their lower-paid employees. Gener‎ally, sufficient QNECs are contributed for some nonhighly-paid employees so that the average amounts contributed for the highly-paid is not more than 125% of the average amounts contributed for other employees.

‎Generally, a QNEC has to include an estimate of the investment earnings the plan would have provided if no mistake had been made.