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Missed earnings for late deposits


cathyw

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Absent a plan document provision requiring elective deferrals to be deposited within x days of the payroll date, the late deposit of deferrals is not an operational failure and therefore does not fall within the guidelines of EPCRS. The late deposit is a presumptive prohibited transaction (loan to the employer) and fiduciary breach.  Corrective action requires payment of an excise tax of 15% of the "amount involved" which is based on the value of the use of the funds or the disgorgement of profits.  

Every auditor and tax preparer that I know has traditionally calculated the missed earnings and resulting excise tax using the DOL calculator, and prepared Form 5330 accordingly, regardless of the actual earnings of the participants' accounts.  However, I am aware that others say you can't use the DOL calculator to determine missed earnings if you don't file an application under the DOL's VFCP. 

What authority is there that the IRS method(s) of calculating missed earnings contained in EPCRS should apply to late deposits?    

 

 

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A plain reading of 4975(f)(5) supports that you would use the actual rate of return:

Quote

(5) Correction

The terms “correction” and “correct” mean, with respect to a prohibited transaction, undoing the transaction to the extent possible, but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified person were acting under the highest fiduciary standards.

If the earnings determined by the DOL calculator are less that the plan would have earned had the contributions been deposited timely, then that would put the plan in a worse financial situation, and therefore the PT would not be corrected.

However, I'm also aware of Rev. Rul. 2006-38 which notes:

Quote

For purposes of calculating the § 4975 excise tax on a timely filed Form 5330 for a failure to transmit participant contributions or amounts that would have otherwise been payable to the participant in cash, under the authority of § 7805, the interest rate for underpayments described in § 6621(a)(2) on the date of the prohibited transaction is an appropriate rate used to calculate the amount involved.

So I think you could argue it either way. Personally, I will usually calculate it both ways and use the larger one.

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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10 hours ago, C. B. Zeller said:

Personally, I will usually calculate it both ways and use the larger one.

I've know people to do this, but why?  What if the accounts lost money?  Would you still give the participants a 3.5% per annum interest?  Now the correction is merely punitive instead of compensatory.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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By doing at least the amount calculated by the DOL calculator, you could still file VFCP if you decide you want to.

I would have a hard time giving the participants less than was actually withheld from their paychecks, even if the plan had a loss.

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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Just now, C. B. Zeller said:

I would have a hard time giving the participants less than was actually withheld from their paychecks, even if the plan had a loss.

I wouldn't either.  If there is a loss, I just allocate the principal with zero earnings.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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CB Zeller -- Your citations seem to offer alternatives, but I think they actually address two different issues.  Section 4975(f)(5) deals with the correction and supports using the actual investment returns.  The Rev. Rul. deals with the calculation of the excise tax.  Is it possible that the plan sponsor should use the actual investment return to contribute the  missed earnings, but use the DOL calculator to compute the excise tax? 

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Would you file a 5330 in that case? Or file it with $0 due? It doesn't seem right that the sponsor should avoid the excise tax merely because the plan had a loss.

Would it be reasonable to use the DOL calculator rates to calculate the excise tax, but use the actual rate of return (not less than zero) for purposes of making up the loss to the plan?

edit: cathyw, you posted at almost the same time I did, and I think we are coming to the same conclusion based on the sources. It does seem like it might be a reasonable approach, but I am not aware of any practitioners currently doing it that way.

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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If the "amount involved" is zero, I don't file a 5330.  The participants didn't lose out on any investment experience.  If anything, they got a (small) windfall in the case the principal is greater than what would have been has the deposits been made timely.

 

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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But the "amount involved" is the interest accrued on the use of the money from the impermissible loan from the plan to the sponsor.  That shouldn't be zero even when the RoR on the late deposits was zero or negative.

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If there is a series of mutual fund investments and an investment manager involved, we have gotten them to list the returns for each mutual fund over the late period and then we chose the highest one. In one case, last year, that was the client's gold fund (because everything else was tanking) ! Just a thought....

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16 hours ago, Bri said:

But the "amount involved" is the interest accrued on the use of the money from the impermissible loan from the plan to the sponsor.  That shouldn't be zero even when the RoR on the late deposits was zero or negative.

I thought the correction was to add "lost earnings" to the late deposit.  Not earnings gained by the employer's bank account.

What is the exact reg that details the correction of late deposits?  I only found 2510.3-102 which is the definition of participant contributions as plan assets and the timing of them.  Where does it say lost earnings must be applied?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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From 4975(f)(5)

 

  • The term “correct” means, with respect to a transaction—
  • (I)
  • to undo the transaction to the extent possible and in any case to make good to the plan or affected account any losses resulting from the transaction, and
  • (II)
  • to restore to the plan or affected account any profits made through the use of assets of the plan.
 
So:  in the fist case, there are no losses to the plan or accounts if the assets would have lost value had they been deposited timely.  In the second case, you would need to look at the employer's bank account to see what the "profit" was.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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