Interest calculation for late contributions?

[Guest susan w]

What are acceptable methods of calculating interest on late contributions? Rate of the best performing fund? or the plan as a whole? Treasury Rate?

[KJohnson]

You have three "interest rate" issues. Self-correction in the IRS's view, volunatry correction in DOL's view, and the interest rate to be used to calculate the amount of a prohibited transaction in any 4975 excise tax.

I believe that the IRS says you must look to the investments of each participant. Or, if the contributions are going primarily to NHCE's you can use the best performing investment. The IRS says that you can, but don't have to, adjust for losses.

DOL has a slightly different view. You have to give "interest" even if the accounts would have had negative earngs. Although it is a Code Section, the "obligation" to credit accounts based on the 6621 rate (even if the accounts would have had negative earnings) comes from the DOL's Voluntary Fiduciary Correction Program that was made permanent in late March of this year. Try this link--

http://www.benefitslink.com/DOL/volfiductext.pdf

Also, if you actually use the VFC program (and the deferrals are not more than 180 days late), there is a prohiibted transaciton exemption so that the 4975 tax (reported on the 5330) would not actually be due. Use of this PTE actually requires some disclosure.

However some people find actual use of the VFC program to be more trouble than it is worth. And, since the 4975 tax is often very small in these situations they just go ahead and pay the excise tax under 4975 and use the VFC program as a "guideline" of how DOL wants things corrected but do not go through all of the paperwork and documentation that DOL requires for a VFC filing.

I have typically gone ahead and used the 6621 rate as the interest rate to use in calculating the prohibited transaction amount used to calculate the excise tax.