Is there a regulation that states that all eligible employees are entitled to a QNEC, or can you exclude the otherwise excludables from the calculation?

Not sure I understand your question. How can you be eligible and excludable? It's friday and my brian is tired, be kind.

I did not divulge the reason for making the QNEC. The QNEC will be used to correct ADP failure. We test plans, & sometimes dissaggregate the plans to produce a better NHCE rate. In my situation, the plan I am testing uses the current year method. The client would like to prevent refunds, so we are offering the QNEC as a solution.
My question is, if the plan is still failing, must we use all eligible employees in the QNEC calculation, or can we use only the Non-Excludables?

I guess if the document says 'all NHCEs receive' then I don't think you have a choice - regardless of testing method used.

You use the same group you used in the failed test.

I know that one of the statutory requirements is that the formula must be a definite allocation formula. The client's document states that the QNEC will be allocated first to the NHCE Participant who has the lowest eligible pay. This tells me that all eligibles would be included in the calculation.

I would like to go a step further & find out if one could create a document that allows a QNEC to be calculated based on only Nonexcludables in the calculation, leaving out the Otherwise Excludable class. Anyone know why this can or cannot be done?

the formula you cite sounds like one for failure of coverage rather than ADP. that is if you fail coverage you bring in the NHCE with the XXX hours or comp or whatever. that is known as fail safe language.

as for if if it is possible to have a plan that only provides QNEC for those statutory includables, that should be possible, I would expect language similar to that used in safe harbor 401k plans, though I suspect it may take special language to do so

The document could say "if the sponsor elects to disaggregate the plan into two plans pursuant to 410b.whatever, then the QNEC only goes to the nonexcludables."

This is still a definite allocation formula. The same logic applies to the gateway contribution when cross-testing. The way it was explained to me (as to why it's still a definite allocaiton) is because the QNEC is designed to pass nondiscrimination testing, and the decision to disaggregate is an operational one. Something like that anyway.

The full passage of the reg states that the QNEC must be allocated under a definite allocation formula, as required for all contributions to a profit sharing plan. This is what gets me. If you run a pro rata PS allocation, you cannot carve out EEs (at least I think you can't). Should not the same rules apply for a QNEC, which is also considered to be a Non-elective contribution?

I hear ya, and I agree. But I have seen documents that say what I wrote, so it must be true!