Qualified Nonelective Contributions (QNECs)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 11, 2023

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What Are Qualified Nonelective Contributions (QNECs)?

Qualified Nonelective Contributions (QNECs) are employer contributions made to a 401(k) or other qualified retirement plans on behalf of non-highly compensated employees (NHCEs) to help meet compliance with nondiscrimination testing requirements.

These contributions are separate from employee elective deferrals and are fully vested when made.

QNECs serve as a tool for employers to maintain compliance with the Internal Revenue Service's (IRS) nondiscrimination testing requirements for retirement plans.

These tests ensure that retirement plans do not disproportionately benefit highly compensated employees (HCEs) over NHCEs.

If a retirement plan fails nondiscrimination testing, employers can use QNECs to bridge the gap between the contributions made by HCEs and NHCEs, thus bringing the plan back into compliance.

Background and Legal Framework of QNECs

Origins of QNECs

The concept of QNECs originated from the Internal Revenue Code (IRC) Section 401(k) and the Tax Reform Act of 1986. These regulations introduced the need for nondiscrimination testing in retirement plans and established the framework for QNECs.

Overview of Nondiscrimination Testing

To ensure fair treatment of all employees in a retirement plan, the IRS requires two types of nondiscrimination tests: the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test.

  • Actual Deferral Percentage Test: This test compares the average salary deferral percentages of HCEs and NHCEs. The test ensures that the deferrals made by HCEs are not disproportionately higher than those made by NHCEs.

  • Actual Contribution Percentage Test: This test examines the combined employer and employee contributions made to the plan. It ensures that the total contributions made on behalf of HCEs do not exceed certain limits in relation to NHCEs.

IRC Section 401(m) and QNECs

IRC Section 401(m) provides the definition and conditions for QNECs. This section also outlines the role of QNECs in the ACP test, which evaluates the proportion of total contributions made to the retirement plan.

Features of QNECs

Fully Vested Contributions

QNECs are fully vested when made, meaning that employees have immediate ownership of these contributions.


QNECs are funded solely by the employer and are not subject to employee elective deferrals.

Allocated to Non-Highly Compensated Employees (NHCEs)

QNECs are allocated to NHCEs to help satisfy the nondiscrimination testing requirements.

Not Subject to Withdrawal Restrictions

QNECs are not subject to the same withdrawal restrictions as other types of contributions, allowing employees more flexibility in accessing these funds.

Features of QNECs

Calculating and Implementing QNECs

Determining the Need for QNECs

Employers must first identify if their retirement plan has failed nondiscrimination testing and assess the gap between HCEs and NHCEs regarding deferrals and contributions.

Calculating the Required QNEC Amount

Employers can use the ACP test to calculate the necessary QNEC amount to bring their retirement plan back into compliance. This involves identifying the relevant NHCE group and determining the appropriate contribution levels.

Implementing QNECs in the Retirement Plan

Once the required QNEC amount is calculated, employers must allocate the contributions to eligible NHCEs.

Timing is crucial, as QNEC deposits must be made within specific deadlines to satisfy compliance requirements. Employers must also ensure proper reporting and disclosure of QNECs.

Advantages of QNECs

Maintaining Plan Compliance and Avoiding Penalties

Using QNECs to meet nondiscrimination testing requirements allows employers to maintain their retirement plan's compliance with IRS regulations, thus avoiding potential penalties and plan disqualification.

Boosting Retirement Savings for NHCEs

QNECs can increase retirement savings for NHCEs by providing additional employer-funded contributions, potentially improving their overall financial well-being in retirement.

Enhancing Employee Morale and Loyalty

By ensuring that retirement plans are non-discriminatory and providing additional contributions to NHCEs, employers can foster a sense of fairness and inclusivity, which may enhance employee morale and loyalty.

Potential Tax Benefits for Employers

Employers may be eligible for tax benefits when making QNECs, as these contributions are generally tax-deductible.

Advantages of Qualified Nonelective Contributions (QNECs)

Alternatives to QNECs

Safe Harbor 401(k) Plans

Safe Harbor 401(k) plans to offer an alternative to QNECs, as they are exempt from certain nondiscrimination testing requirements. However, these plans have mandatory employer contributions and specific contribution and vesting requirements.

Safe Harbor 401(k) plans to provide a more streamlined approach to nondiscrimination testing compliance. However, they may only be suitable for some employers, as they require mandatory contributions and may limit plan design flexibility compared to QNECs.

Plan Design Modifications

Employers can also consider adjusting their retirement plan design to minimize the need for QNECs and enhance overall plan compliance.

Adjusting Contribution Formulas

Employers can modify the contribution formulas in their retirement plans to better align with the ACP test requirements and reduce the likelihood of failing nondiscrimination testing.

Implementing Automatic Enrollment

Introducing automatic enrollment in a retirement plan can increase participation among NHCEs, potentially improving the plan's compliance with nondiscrimination testing requirements.

Promoting Financial Education and Plan Awareness

By providing financial education and increasing awareness of the retirement plan's benefits, employers can encourage NHCEs to participate more actively, which may help improve the plan's compliance with nondiscrimination testing.


Qualified Nonelective Contributions (QNECs) are employer contributions made to a 401(k) or other qualified retirement plans on behalf of non-highly compensated employees to meet compliance with nondiscrimination testing requirements.

QNECs are fully vested when made, employer-funded, allocated to NHCEs, and not subject to withdrawal restrictions.

The main advantages of QNECs include maintaining plan compliance and avoiding penalties, boosting retirement savings for NHCEs, enhancing employee morale and loyalty, and providing potential tax benefits for employers.

Employers can calculate and implement QNECs by determining the need, calculating the required amount, and allocating contributions to eligible NHCEs.

Alternatively, employers can consider Safe Harbor 401(k) plans, plan design modifications, implement automatic enrollment, and promote financial education and plan awareness.

Qualified Nonelective Contributions (QNECs) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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