Negative Earnings

[Guest stacy1]

Under EPCRS how should you take into account negative earnings when reducing 401(k) participant account balances where several participants received employer matches that were greater than provided for under the plan?

[Guest EBer]

Have been told by IRS/EPCRS people that the participants get the benefit of a windfall when there are negative earnings (i.e., over the last few years). Thus, employer must put in the principal amount that should have gone in for the match; the earnings -- since they were negative -- will not be calculated against that contribution. If the employer simply self-corrects, this is the IRS-approved procedure.

If the employer wants another result, the employer must go in for a formal correction.

[Guest stacy1]

Thanks!

[KJohnson]

The following is from the " correction principles" in 2002-47 (I beleive the same wording was in 2001-17).

(a) Corrective allocations under a defined ontribution plan should be based upon the terms of the plan and other aplicable nformation 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 (including losses) and forfeitures

that would have been allocated to the participant's account if the failure had not occurred. The corrective allocation need not be

adjusted for losses. See section 3 of Appendix B for additional

information on calculation of earnings for corrective allocations.

[Guest EBer]

To KJohnson and others:

Yes -- have read Rev Proc, but I have the situation where there have been 3 straight years of losses (therefore, the principal to be contributed by employer would essentially have been wiped out completely, and employees then get nothing?). The IRS says this is NOT fair to employees who did not receive their proper employer contributions way back when.

What has been your experience, specifically with these past few years, where returns have been negative -- does the employer get the benefit of not having to contribute anything now (just because the market bottomed), when in fact, it had owed a contribution to all its employees?

[KJohnson]

I guess you could as why isn't it fair since you are putting them right back into the situation that they would have been if you had made the contribuiton.

On the other hand, when you are dealing with a situation that might also constitute a fiduciary breach, DOL is pretty clear in the VFC program that you have to give them the greater of the earnings or interest at the 6621 rate.

All that said, my experience has been that it is so difficult to get someone to go back and figure out exact losses for a participant with four or five investment choices that if you can ascertain that earnings would be negative, I have just advised the employer to put in the principle and not "fool" with any losses.