Corrective Procedures for Late deposit of Deferrals

[Guest ScottB]

I remember there being a % or table that you had to use in determine lost earnings on late deferrals as well as the 10% penalty. Anyone know that % and ruling?

[austin3515]

Never heard of such a thing. What's more, I can't see how its possible, since based on the DOL's correctiion program (VFCP, Voluntary Fiduciary Correction Program), the lost earnings is the greater of actual earnings that would have been earned or the underpayment penalty rate under IRC 6621(a). The former changes constantly, and the latter changes quarterly (or monthly?) Take a look at this program - it will have some good examples. A quick internet search should turn it up.

Remember, the PT Excise tax is ONLY on the lost earnings - not the total amount of the late deposited deferrals. Read the instructions to Form 5330. There is an excellent example on how to calculate excise taxes on loans (which is what depositing deferrals late would be).

[Guest Mbrockway]

I believe what you are wanting is the Underpayment Rate. This is the Federal Short Term Rate plus 3.00%. This will determine your lost earnings.

The 10% penalty is paid on Form 5330, Section 4975. To determine the interest on the loan use the following calculation:

((Loan Amount(Prime Rate for month loan was taken+2.00%))*days out of the plan/365)

The 10% penalty is paid on the interest of the loan.

I also would have to agree with Austin's response.

[Steve72]

I agree with Misty, except the return is the greater of the underpayment rate she describes or the actual return for that period.

[Guest Mbrockway]

I agree w/Steve. It will be the greater of the two rates for each deposit. (Each deposit is looked at on an individual basis). Thank you for clarifying Steve.

Also, the penalty reported on Form 5330 is a 15% excise tax.

[KJohnson]

Where did you get prime plus 2 as the rate to use in calculation the interest upon which to base the excise tax? I have always just gone ahead and used the applicable 6621 rate as the "reasonable" rate of interest for purpose of calculation of the excise tax as well as calculation of the "base" amount to be restored to participants accounts.

I have a "heck" of a time getting the TPA's to make the caluculation of what the account "would have been" based on the participant's investment elections if the deferrals would have been deposited in a timely fashion.

This actually got relatively easy when everyone's account was going down. I would typically see if there were any investments in the plan that made money during the period of the "delinquency" and then see which participants were invested in any of those accounts. This would be the first "cut." Everyone else got the 6621 rate.

Then I would look at the weighting of the investments of the participants that had investment choices that made money during the period of the delinquency. Most of these were in cash or or cash equivlaents and the rate of return on the cash would be less than the 6621 rate. In most cases I would only need actual investment returns run for, at most, a handful of participants.

Of course some investment choices are actually making a decent return now and this "winnowing" of those that you need actual investment return data for will not be as effective.

[Guest Mbrockway]

I would have to research to confirm this, but, if memory serves correct, the 2% is added to prime because of it being a "loan". I believe you use the interest specified in the loan program for the plan. If the plan does not allow loans - adding 2% to prime is the conservative approach.

[Guest Mbrockway]

The ERISA Outlie indicates that the amount involved is the greater of the fair market interest rate or the interest paid for the use of the money. It is my opinion that adding 2% to the prime rate for that period would be a fair market interest rate.

[KJohnson]

That makes sense. I think the 6621 rate also makes sense if that is the minimum that DOL thinks will make a participant "whole". I think it just needs to be a reasonable rate of interest.

[RCK]

On one point, I think that I disagree with Steve72, and am pretty sure that I disagree with KJohnson.

My recollection is that you have to compare the underpayment rate with the actual rate every month for the period, not just for the entire period. Otherwise, I agree with what seems to be the consensus here.

RCK

[Guest Mbrockway]

Lost earnings are the greater of

- Amount that would have been earned on deferrals from loss date to recovery date, had the deferrals been invested during such period, less actual net earnings or realized net appreciation (or, if applicable, plus any loss to the plan as a result of the transaction).

- Amount that would have been earned on deferrals at an interest rate equal to the underpayment rate defined in Code Section 6621(a)(2), less actual net earnings or realized net appreciation (or, if applicable, plus any net loss to the plan as a result of the transaction).

In addition, if the date on which the lost earnings is paid to the plan is a date after the recovery date, payment must include an additional amount that is the greater of -

- The amount that would have been earned by the plan on the lost earnings if it had been paid on the recovery date, or

- The amount that would have been earned on the lost earnings at an interest rate equal to the underpayment rate defined in Code Section 6621(a)(2).

Loss earnings amount for participant directed DC Plans may be calculated using ROR of investment alternative that earned the highest ROR among the designated broad range of investment alternatives available under the plan during the period.