calculation of lost earnings

[Guest semitek]

----Client had payroll withholding for employee 401(k-1) contributions and employee loan payments on 6/30/2005. Client finally remitted the contribtution and employee loan payments one year later 6/2/2006.

How do I calculate the lost earnings to compute the 15% excise tax? Also client has not yet put the "lost earnings" amount into the plan.

Plan year and sponsor year is 12/31. Will I need to prepare a 5330 for 2005 and 2006?

Thanks, Shelley

[Tom Poje]

here is the DOL's website calculator

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

[Blinky the 3-eyed Fish]

Tom, in your opinion don't you think there's more to it than just using the DOL calculator if not going under VFCP?

[rcline46]

Also note - the calculation of the 'lost earnings' to be added to the participants' accounts, and the calculation of the 'amount involved' for preparation of the 5330s is different, although both of them can be done on the DOL calculator.

[Guest P-Jay]

Lost earnings are calculated at the *higher of* the best performing fund rate or the IRC Underpayment Rate (the rate used in the DOL calculator). Remember to calculate the interest on interest--that is, to determine not only the interest due on the late remittance, but also interest on that interest.

Revenue Ruling 2006-38 addresses how to calculate the prohibited transaction excise tax under Section 4975.

[Guest Pensions in Paradise]

If you submit under VFCP you can use the DOL online calculator. Otherwise, you have to use the higher rate of return as stated by P-Jay.

[rlb64]

This new guidance just makes this calc even more burdensome. It makes no sense to have one calc for determining the penalty and another for corrections. It also doesn't make any sense that corrections under VFCP may rely on the DOL calculator, but not corrections via the 5330 route.

It also drives us nuts trying to calculate lost earnings on employer contributions, such as the match on these late deferrals. One has to refer to EPCRS for guidance for that which says use plan rate only, but no losses.

I think all of this is insane. Does anyone else? Why can't we just say the DOL calculator can be used for any earnings adjustments and penalties and be done with it???

[austin3515]

I think it's interesting that there was a lot of talk that there would be a "safe harbor" for timely deposit of 401(k) contributions out by the end of the summer. Nothing yet! I take this as a sign that the DOL is butting heads with the powers that be in defending their insanely aggressive pursuit of timely deposit of deferrals. I've done the math regarding weekly vs. monthly deposits, and the difference is not significant. So maybe things will get easier in the future, but then again, maybe not...

We've taken the approach of using the DOL calculator to calc lost earnings on late deposits, simply because it's cheaper. Then take your chances that the Plan doesn't get audited, and if it does get audited, hope they don't make an issue about it. And 99/100 times, that's worked.

We've had DOL audits where the DOL has completed the on-line calculator for us, and told us that this is what is owed to the Plan (within the last 3 months)!