Calculation of Lost Earnings

[rcline46]

Under Rev Proc 2003-44, Appendix B, 3.01(3) (b) and © it gives optional methods for determination of rates of return for the fund. One of the methods given is a pro-rata portion of the fund return.

There is a discussion in our office as to the precise meaning of the statement, to wit:

The fund return is the return of the fund in the plan (read specific mutual fund(s) selected), or;

The fund return can be taken from published sources (annual, year-to-date) and a pro-rata alloction of the published return.

Obviously calculating the return vs. taking published returns creates a BIG difference in time and cost.

How have others been treating this option?

Is there any known guidance, official or unofficial, on this method?

Thank you all.

[Archimage]

We always use the published rates of return. I don't think there is any published guidance. I do either is a fair way to calculate earnings but as you said it would be too much of an administrative burden to calculate the actual return.

[Leopurrd]

I think there was mention of this at the Q&A at ASPPA, in regards to using the EBSA calculator as a safe harbor???

I guess what I'm really trying to say is that you should be OK by using their calculator and wouldn't have to rely on calculating individual rates of return.......Can anyone else from the conference confirm or deny this? There were SO many things to absorb, I'm afraid I forgot some things already!

Vicki

[Tom Poje]

that would be my understanding. the calculator is at

http://www.askebsa.dol.gov/vfcpcalculator/

the instructions are there as well, but maybe it depends why you are calculating lost earnings. I know late deposits of deferrals is covered, not sure what else.

[Guest BXO]

Is the IRS concerned with the late remittance of deferrals? If so, would they accept the DOL's calculation of earnings? I ask because of the EPCRS earnings calculation methods differ.

[Guest Pensions in Paradise]

The IRS has confirmed they will accept the DOL's method of calculating lost earnings.

April 6, 2005 Federal Register regarding the VFC Program states "The IRS has indicated to the Department

that the federal tax treatment of a breach and correction under the VFC Program (including the federal income and employment tax consequences to participants, beneficiaries, and plan sponsors) are determined under the Code and that, based on its review of the revised Program, except in those instances where the fiduciary breach or its correction involve a tax abuse, a correction under the VFC Program for a breach that constitutes a prohibited transaction under section 4975 of the Code generally will constitute correction for purposes of section 4975 and a correction under the VFC Program for a breach that also constitutes an operational plan qualification failure generally will constitute correction for purposes of the IRS's EPCRS program."

[Guest Chaffee]

Based on a discussion I had with a DOL Senior Investigator, it is my understanding that the EBSA Calculator (in the "New VFCP") is only available to use for those Plans that make the VFCP filing.

If not doing a VFCP filing (and simply putting in lost earnings and filing Form 5330), then the Plan would still have to use the "Old VFCP" methodology, with the highest returning fund also needing to be considered in the determination of lost earnings. She basically indicated that the elimination of the highest return option was an incentive to get Plans to file under the VFCP.

With respect to the IRS acceptance, it would appear that in order to comply with the EPCRS, you would need to use the highest returning fund if a VFCP filing is not made.

Is this consistent with what others have heard or seen in practice?