Can QNECs be allocated based on whether a participant has deferred?

QNECs, or Qualified Nonelective Contributions, are contributions made by an employer to a participant's account regardless of whether the participant has made salary deferrals. In a 401(k) plan, QNECs are intended to satisfy certain non-discrimination testing and to enhance the plan’s compliance with IRS regulations.

The correct understanding is that QNECs must be made on a basis that does not discriminate in favor of highly compensated employees. They are established to help support compliance with the 401(k) plan's testing requirements, and as such, they cannot be allocated based on a participant's decision to defer. This means that even if a participant does not make any salary deferrals, they still must receive QNECs if they meet the eligibility requirements specified in the plan.

This is why the allocation of QNECs cannot be conditional upon whether or not the participant has deferred. Instead, the contributions need to be based on factors that apply uniformly to all eligible participants, ensuring that the plan operates fairly and meets regulatory guidelines.