EPCRS - Self Correction - Allocation of Investment Losses

[Guest ANNEBV]

I am making a corrective contribution for a client of mine who failed to allow eligible participants to enter their 401(k) plan in 1999. I have been using Revenue Procedure 2001-17 as my reference for these calculations.

I have calculated QNCs for lost 401(k) & 401(m) contributions in conjunction with Rev Proc 2001-17. I am now calculating lost investment earnings for 1999, 2000 & 2001. I am using an "average plan rate of return", per Rev Proc 2001-17, to calculate the lost investment earnings and this return is negative for 2000 & 2001. Do I allocate losses on the corrections for these 2 years?

Does anyone have any practical experience in this area? Am in urgent need of some advice, before I make a judgment call of my own, because the total correction for 1999 has to be made by 12/31/01.

Hope someone can help!! Thanks!

[Guest dmj1998]

Are you still working on this? I hope you have been successful.

I have seen this done in the past using the best performing fund for each year - this may be a little generous, but I think that applying negatives goes against the spirit of the corrective measure.

[Guest ANNEBV]

I AM still working on this, but sadly have not gotten a lot of feedback. I decided to go ahead and NOT allocate losses, because, as you said, it seems to go against the spirit of a corrective contribution. I decided to use an overall plan "average" return since 1999 had such incredible returns (one technology mutual fund had an 87% return) and that didn't seem fair to use either. But the 2000 & 2001 return averages were negative and that created my problem. So, I am taking the position that I will allocate only gains for these corrections and hope that the IRS or DOL agree if/when they ever audit the plan! Thanks for your input! I really appreciate it!

[Erik Read]

One response that I've seen numerous times is to use the interest rate posted for calculations under GAAP/GATT for DB plans - somewhere between 6 and 8%.