EPCRS/VFCP Crossover Issue

[Christine Roberts]

Sponsor of 401(k) plan discovers that in last 18 months it has made salary deferral and matching contributions based on a definition of compensation that is narrower than that provided in the plan document: Contributions were made on base pay & overtime, but not on "other" types of compensation such as PTO, jury duty pay, bereavement pay, etc.

Sponsor proceeds to self-correct by calculating additional amounts that would have been deferred and matched on the basis of the excluded compensation amounts.

Sponsor calculates earnings on both amounts using best rate method referenced in Rev. Proc. 2006-27, Appendix B, Section 3.01(3)(b).

Presume corrective contributions are made/allocated.

For overlapping time period Sponsor also had several late deposits of employee salary deferrals. Sponsor identifies payroll periods and amounts involved and calculates earnings using the Dept. of Labor Online Calculator recommended under the Voluntary Fiduciary Correction Program.

Sponsor calculates these amounts based on what was actually deposited (late) in the 401(k) plan, NOT on what "should" have been deposited if the Sponsor correctly had calculated deferrals (i.e. base pay & overtime PLUS PTO, jury duty pay, bereavement pay, etc.).

Query: if Sponsor calculates earnings on late deferrals based on hypothetically correct deferral amounts (based on total pay not just base pay & overtime) will participants get earnings calculated twice, given the concurrent EPCRS correction?

Shouldn't the DOL correction be based on what was actually deposited, and the "incorrect definition of compensation" problem be addressed exclusively under EPCRS?

Just wondering if anyone has encountered a similar situation.

[Guest B2Randolph]

If I'm not too late - Late deferrals are amounts withheld from a participant's paycheck and not timely remitted for investment. The additional deferrals based on the corrected compensation definition don't meet that definition, therefore, they are not part of the equation with the DOL. They also are getting earnings based on the IRS method.

Only those actually late should receive the DOL calculated earnings.

By the way, just for everyone's information, don't ever try to use the DOL method with the IRS under VCP - they won't buy it at all!

Good luck.