Failsafe QNEC Clause Samples

The Failsafe QNEC clause is designed to ensure that a retirement plan remains compliant with IRS nondiscrimination requirements by allowing for the automatic correction of certain testing failures. In practice, this clause authorizes the plan sponsor to make Qualified Nonelective Contributions (QNECs) to affected employees if the plan fails nondiscrimination tests, such as the Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) tests. By including this provision, the plan can quickly and efficiently remedy testing failures, thereby protecting the plan’s tax-qualified status and minimizing administrative burdens.
Failsafe QNEC. (A) The Employer, in its sole discretion, may contribute to the Plan for allocation to the Nonelective Contribution Accounts of those Participants (who, in accordance with Section 2.1, have satisfied the Plan's eligibility criteria applicable to the Section 401(k) feature) entitled under (B) below to receive an allocation, such amount as it determines appropriate to satisfy the nondiscrimination tests of section 401(k)(3)(A) and 401(m)(2) of the Code for a Plan Year. Any such contribution shall be allocated as of the last Accounting Date for the Plan Year for which the Employer makes the contribution. (B) Only Participants who are Eligible Employees at any time during the Plan Year and who are not Highly Compensated Employees with respect to the Plan Year shall be qualified to receive an allocation of any contribution under (A) above for a Plan Year; provided that any such contribution shall be allocated by making the maximum permissible allocation permitted under Article 4 beginning with the Participant with the least Compensation for the Plan Year and continuing such maximum permissible allocation to each such Participant in order of Compensation (least Compensation to highest Compensation) until the entire contribution is allocated. The types of contributions under this subsection (b) may be referred to in the Plan as a qualified nonelective contribution. This type of contribution is nonforfeitable when made (see Section 6.1(c)) and is subject to the withdrawal and distribution limitations of Section 7.7.
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