"Lost Opportunity" Correction

[Christine Roberts]

My understanding from RP 2006-27 is that making the "lost opportunity" correction (50% of the ADP) is appropriate only when the participant wrongfully has been excluded entirely from making pre-tax deferrals or after-tax contributions to a plan. The exclusive nature of this correction method is stated in RP 2006-27 at Part III, Section 6.02(7), titled "Correction for exclusion of employees for elective contributions or after-tax employee contributions," stating: This correction principle applies solely to this limited circumstance."

So I would not apply it if, for instance, an employer was making restorative contributions to reflect that employee salary deferrals were improperly based on a definition of contribution that was narrower than that stated in the plan document. I would apply the employee's actual deferral percentage to the additional compensation to correct that operational failure, and add earnings calculated on the best rate.

I would be interested in whether readers agree that the "lost opportunity" correction is as narrow as I read it to be or if people successfully have used it in situations other than total exclusion of a participant from pre-tax deferrals or after-tax contributions.

Thanks much.

[Christine Roberts]

In fact, using the lost opportunity cost correction would likely be available in this situation.

[mariemonroe]

I am using EPCRS to fix this same problem (employer applied a more narrow definition of compensation than that provided in the plan document).

I used the "lost opportunity" correction method (50% of ADP) in my VCP filing and the agent seemed fine with it. I stated in my submission that I was using it because it was analagous to my situation.

My principal fight with the agent has to do with calculation of earnings.

There was recently something on the IRS website about most common operational errors and how to fix them and this error was actually one of them. However, there wasn't any useful information for my particular situation, but you might want to check it out.

Hope this helps.

[401 Chaos]

I have a somewhat similar question. What if we have an individual that was properly given chance to enroll in plan and made a deferral election but the employer / plan administrative failed to log in the deferral election so the individual missed out on elective deferrals for the last 6 months.

Company just discovered the error and participant is irate that full amount (plus match) was not deferred. Of course, he says he didn't question lack of 401(k) deductions because he didn't look at his paycheck stub.

Company would be willing to provide full deferral amount here even though that means a windfall to participant. Company would rather cough up the bucks than argue with participant even if it has basis for not providing full amount. Is there any problem in doing that and not applying the 50% factor or in not using the average deferral percentage instead of participant's actual deferral percentage?

(In this case, the participant is a NHCE and his deferral percentage was higher than average for other NHCEs so seems to me correcting him at higher rate would not be a problem.)