Calculating "lost earnings"

[SMB]

Ineligible expenses paid from Plan. Employer to make a restorative payment plus lost earnings. Lost earnings in this case must be calculated using the DOL 6621(a)(2) "underpayment rate" approach (i.e., applicable federal short term rate + 3%). That much has been determined - but I don't have a clue as to how to actually do the calculation.

Suppose, for purposes of this example, $10,000 was incorrectly paid from the Plan January 2, 2004 and repaid by the employer July 15, 2004. Do I calculate using each month's annual AFT (+3%)?

For example, January 2004's short-term annual AFR was 1.71% Is the calculation $10,000 x 4.71% / 12 = $39.25? Do this for each month and add up the pieces? Or what?!

Thanks for any and all responses.

(Read a quote last week that seems to apply- at least in my case: "There is often a wide chasm between reading the map and hiking the trail."!)

[SMB]

O.K. - what gives? 2 days, 34 "views" and not a single reply! Is it really that difficult - or so obviously simple that I shouldn't have posted the original message?

[Bird]

I don't think there are published rules for this. In your case, where the term is less than a year, I'd just calculate each month separately and add them up.

[BFree]

The VFCP guidelines on late deferrals and lost earnings may give you some guidelines. The PWBA published a FAQ with sample calculations.

[Guest Gregory]

Under EPRCS, I believe you'll end up using the highest rate of return of all investments offered to the participants during the calculation period. I've used this approach for years and any plans audited by IRS have always come out clean. Sure it may cost more, but the cheap way out is sure to raise eyebrows.

If this is not a participant directed plan, I've used the higher of the actual plan performance during the period or the "underpayment rate".