Calculating earnings on ADP refunds

[Guest cohenron]

I understand that there are two "reasonable" ways to calculate earnings on refunds for ADP test failure. I understand the "gap" method where you just take 10% of the earnings rate for the plan year times the number of months in the gap period, where before the 15th of the month you can essentially round down the number of months and after the 15th you must include the current month when counting. The second method, we call the fractional method, where you calculate the earnings for the gap period up to the time you do the distribution. We have also used the 15th as the break point so before the 15th we use the earnings to the end of the last month. Is there any real guidance when using the fractional method? Can you just calculate the earnings rates up to the day before you do the distribution, and use that as the earnings for the gap period?

[Mike Preston]

Usually the document tells you what to do.

[Guest cohenron]

The document just says any "reasonable" method, and does not address how the earnings are calculated or when they are valid.

[Mike Preston]

If the document really says that, then a "stab" at actual earnings seems perfectly reasonable. Is that what you are doing?

[Harwood]

I think what you call the gap method [10%] is the "safe harbor" method of §1.401(k)-1(f)(4)(ii)(D). It has the 15th day of month cut-off language.

Just prior - §1.401(k)-1(f)(4)(ii)© - has the fractional method. It is governed by the General Rule in (A) which says that the gap period goes through the date of distribution.

It appears only the "safe harbor" method allows the splitting of the month.