Gap period income

[J. Bringhurst]

We have a client who has recently discovered that they failed their ADP test for 2000 and 2001. In determining which correction methods to use, we've decided to use the "one-to-one" method for the 2000 plan year (this is one of the correction methods outlined in Appendix B of Revenue Procedure 2002-47 and provides for a distribution to HCEs and a corresponding QNEC in the same amount to NHCEs) and a distribution to HCEs (without any corresponding QNEC to NHCEs) by 12/31/02 for the 2001 plan year.

Since both correction methods include a corrective distribution to HCEs, we are trying to determine how to allocate applicable earnings/losses.....the plan document (prototype) does not appear to provide for the allocation of "gap period" income/loss and the regulations state that gap period income can only be allocated if the plan so provides. Since the market has been such a bear (pardon the pun) lately, we are concerned whether HCE account balances are large enough to withstand the corrective distribution. Any thoughts about being able to allocate earnings and mainly losses through the date of correction?

Rev. Proc. 2002-47 only seems to address the allocation of earnings on corrective contributions, rather than distributions.