What happens to the QNECs that exceed 5% of compensation?

The correct answer is that QNECs (Qualified Non-Elective Contributions) that exceed 5% of compensation can indeed be included in the ADP (Actual Deferral Percentage) test. QNECs are contributions made by an employer to eligible employees’ accounts, which are not subject to the same restrictions as elective deferrals.

The 5% threshold refers to a limit regarding how these contributions are treated in relation to testing. When these contributions are within the permissible limits, they are factored into compliance tests like the ADP test, which helps determine whether the plan is discriminatory in favor of highly compensated employees as compared to non-highly compensated employees. This means that even if QNECs exceed 5% of compensation, they still have relevance in determining compliance with nondiscrimination requirements.

In contrast, contributions that do not meet certain criteria would not be eligible for inclusion in the tests or would be disregarded, which is why the alternate options do not accurately reflect the treatment of QNECs that exceed the threshold.