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Earnings for a missed deferral election -Always DOL Calculator?


Loves401(k)

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If we miss an increase in deferral, we put in a QNEC for the missed deferral plus a QNEC for earnings.  My question is about calculating the earnings.  We have always used the DOL Calculator.  Is this what everyone else does?

Are there any times when actual investment returns are required?

How about if the market drops?  Are we allowed to put in zero earnings if the actual investment return was negative?

 

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The DOL calculator is available for calculating lost earnings due to a prohibited transaction corrected under VFCP. The error you are describing would, I believe, be corrected under EPCRS and not VFCP. Therefore you should use the method of calculating earnings described in Rev. Proc. 2016-51, which states:

3.01(3) Earnings Rate. (a) General Rule. For purposes of this section 3, the Earnings rate generally is based on the investment results that would have applied to the corrective contribution or allocation if the failure had not occurred.

and then goes on to list permissible simplifying assumptions.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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FWIW    REV Proc 2016-15    EPCRS on Page 31 paragraph a - under reasonable estimates allows the DOL calculator.  

"For this purpose, the interest rate used by the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator (“VFCP Online Calculator”) is deemed to be a reasonable interest rate. The VFCP Online Calculator can be found on the internet at http://www.dol.gov/ebsa/calculator."

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Fair enough! Although the bit you quoted is preceded by the sentence "If it is not feasible to make a reasonable estimate of what the actual investment results would have been, a reasonable interest rate may be used." My take on that is that the "reasonable interest rate" determined by the VFCP calculator may not be used if it is feasible to make a reasonable estimate of the actual investment results.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Good Point !  I did notice that when I reread the paragraph.  And that is what I am struggling with now.

I can tell the investment platform to calculate the earnings.  But I will not have anything to show someone, to prove it was done correctly.  I am not comfortable with this.

Thoughts anyone?

 

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45 minutes ago, C. B. Zeller said:

My take on that is that the "reasonable interest rate" determined by the VFCP calculator may not be used if it is feasible to make a reasonable estimate of the actual investment results.

Whether a certain correction is reasonable and appropriate is a case of  facts and circumstances (2016-51 6.02 (2)) so I don't think it is correct to say that a certain correction "may not be used if...".  To simplify things, certain corrections are deemed reasonable.

FWIW, I have never experienced (or even heard of) the IRS disallowing the use of the calculator when it was also corrected under VFCP.  In other words, I have never heard of anyone having to do a different correction for EPCRS if they also filed VFCP using the calculator. 

I think your interpretation is reasonable if VFCP is not filed, but again, facts and circumstances.

 

 

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I've never heard that the IRS cares whether you filed under VFCP or not. At the very least, I can say that we have never had an IRS problem, and most of ours are NOT filed under VFCP. That's a DOL issue, not an IRS issue. While we usually use the DOL calculator for lost interest unless the amounts are substantial, we sometimes use plan rates if available and possible to calculate without an undue expense. Last week we did one using the S&P 500 return, because the amount was substantial, but getting the vendor to calculate plan rates for multiple late deposits would have been time-consuming and expensive, so we used the S&P as "reasonable."

We always use the DOL calculator in a fairly typical situation like one payroll deposit was 6 days late, and the total amount of interest using the DOL calculator is $1.72, or something similarly absurd. No way in heck are we messing with trying to figure out plan rates, nor are we filing under VFCP, for foolishness like that. Unless, of course, the regulatory authorities force us to.

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Just to clarify, I am really talking about the IRS accepting or not accepting the DOL Calculator.  Specifically, in the case of missed election forms that increase a deferral rate. So we actually know the investment choices of the Participant.

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Right, but knowing the specific investments and trying to get the information to calculate multiple deposits to multiple investments, for almost no money, can be an "unreasonable" expense if the time involved is excessive, which it can be. Again, we've never had the IRS question the use of the DOL calculator, but we also haven't used it "unreasonably" (yet, apparently). This could change...

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1 minute ago, Loves401(k) said:

Just to clarify, I am really talking about the IRS accepting or not accepting the DOL Calculator.  Specifically, in the case of missed election forms that increase a deferral rate. So we actually know the investment choices of the Participant.

If you want to be 100% sure that your correction is reasonable and appropriate, use the correction method spelled out in EPCRS as "deemed reasonable". But any method is allowed as long as it is reasonable and appropriate.

 

 

 

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Most fund companies have a rate of return on the participant website or on the quarterly statements. For a correction involving <10 people, it is not a big deal to figure it out using participants' actual rate. 

We do not use the DOL on-line calculator for any EPCRS corrections, unless there are NO records available. 

If it involves a lot of people, multiple funds, no HCEs, pick the rate of return for the fund with the highest rate, or use an overall rate of return for the Plan. If there are losses, we do not typically adjust for the losses....but there is always an exception based on facts and circumstances.

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We've used the DOL calculator in a number of VCP filings. The difficulty in not using it comes when several dozen mutual funds may be involved and it is difficult to calculate an accurate rate of return over time (especially with investment switches from fund to fund). But if you have a loss, you may want to try calculate the return not using the DOL calculator. 

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Here is what I found in regards to losses.....

(4) Principles regarding corrective allocations and corrective distributions. The following principles apply where an appropriate correction method includes the use of corrective allocations or corrective distributions:

(a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for Earnings and forfeitures that would have been allocated to the participant's account if the failure had not occurred. However, a corrective allocation is not required to be adjusted for losses. Accordingly, corrective allocations must include gains and may be adjusted for losses. For additional information, see Appendix B section 3, Earnings Adjustment Methods And Examples.

Emphasis mine.

This is page 29

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  • 1 year later...

Good afternoon to all,

Our firm is reading this thread with great interest today because we are grappling with this same issue.  Specifically, we are focusing on small clients who have few employees and are only a few days late on their deposits.  Using the DOL calculator comes up with tiny amounts to be deposited, and we have to bill the client at least 1-2 hours of time for the person who does the calculation.  We are not using the VFC program.

A colleague suggested that we pick an interest percentage, like say, 10%, and give it to all the late deposits in gross without doing a detailed analysis.  This results in the participant getting more than they would have if we had done the actual calculations, and we don't have to send the client a bill for 2 hours of our time.

How do you feel about that?  What are you doing in your shops?

Thanks as ever for sharing solutions.

 

 

 

 

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19 hours ago, ldr said:

How do you feel about that? 

I think you run the risk of putting in "too much" and the extra should theoretically be treated as a contribution.  I'm not sure that picking a random interest rate saves that much time over using the DOL interest rate, which, for short periods, is just a fixed rate anyway.  

Ed Snyder

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