What is the maximum percentage of compensation that QNECs allocated to a participant can be, in order to be considered eligible for inclusion in the ADP test?

The maximum percentage of compensation that Qualified Non-Elective Contributions (QNECs) allocated to a participant can be, in order to be considered eligible for inclusion in the Actual Deferral Percentage (ADP) test, is 5%.

This rule is established to ensure equitable treatment of contributions and to promote compliance with nondiscrimination requirements in retirement plans. QNECs are contributions that an employer makes on behalf of employees, and when these contributions exceed 5% of compensation, they are not included in the ADP test calculations. The ADP test aims to prevent highly compensated employees from benefiting disproportionately compared to non-highly compensated employees from deferrals into the 401(k) plan. Therefore, setting this cap at 5% maintains the integrity of the plan and helps ensure it adheres to specific regulatory requirements.

Understanding these limits is crucial for plan sponsors and administrators. They must structure contributions in a way that not only meets the needs of their employees but also complies with the legal standards established by the Internal Revenue Service (IRS).