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Compliance Corrections in Your 401(k) Plan

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What are compliance corrections in a 401(k) plan?

Compliance corrections help to ensure that employees receive the retirement benefits they are entitled to when a plan error occurs. Common corrections include:

  • QNEC (Qualified Non-Elective Contribution): An employer contribution made to correct plan failures, including replacing the opportunity to a participant who wasn’t permitted to make an elective deferral.  The QNEC is allocated to employees regardless of their participation. These funds are immediately 100% vested.
  • QMAC (Qualified Matching Contribution): A corrective employer match given to eligible employees, also immediately 100% vested. The QMAC cannot be forfeited assets. 
  • Lost Earnings: Additional contributions made to compensate employees for missed investment growth due to errors in plan administration or contributions.

What are QNECs and QMACs in 401(k) plans?

Qualified Nonelective Contributions (QNECs): QNECs are employer contributions made to employees' 401(k) accounts, regardless of whether the employees are actively deferring a portion of their salary into the plan. These contributions are immediately 100% vested and subject to the same distribution restrictions as elective deferrals. QNECs are typically used to correct certain compliance issues within the plan.​

Qualified Matching Contributions (QMACs): QMACs are employer matching contributions made to employees' 401(k) accounts based on the employees' contributions. Like QNECs, QMACs are immediately 100% vested and subject to the same distribution restrictions as elective deferrals. They are commonly used to address specific compliance requirements in the plan.

When are compliance corrections required?

These corrections are needed when a plan error occurs, such as:

  • Missed deferrals: An eligible employee was not enrolled on time or did not have their elective deferrals properly deducted.
  • Incorrect employer match: An employee did not receive the full employer match they were entitled to under the plan's terms.
  • Late contributions: Employee contributions or employer matches were not deposited within the required Department of Labor (DOL) timeframes.

Employers may also utilize QNECs and QMACs to correct compliance issues related to nondiscrimination testing failures in their 401(k) plans. If a plan fails tests such as the Actual Deferral Percentage (ADP) test or Actual Contribution Percentage (ACP) test, QNECs and QMACs can be allocated to eligible non-highly compensated employees (NHCEs) to bring the plan back into compliance. These tests help ensure that the plan benefits employees equitably and does not disproportionately favor highly compensated employees (HCEs).

Can Betterment help process compliance corrections?

Yes, Betterment can assist in processing compliance corrections for a fee of $150 per hour, as outlined in your service agreement.

  • Our team will create a statement of work outlining the necessary corrections and projected fees.
  • Our compliance team will calculate the total QNEC, QMAC, or lost earnings and create a task in the dashboard for the plan sponsor to approve and fund the correction.
  • Once approved, the correction process typically takes about 10 business days.

Ensuring timely corrections helps maintain plan compliance and protects employees’ retirement savings.