Earnings Allocation - Late Deposits

[WesleyT]

There are clear instructions on how to calculate the earnings on late deposits of 401(k) contributions. However, I have not seen anything which stipulates how these earnings are to be allocated. I am dealing with a plan that has assets invested in a pooled account. Would you agree that, if all participants would normally share in any investment earnings, these earnings should be allocated to all participants and not only to the specific participants affected by the late deferrals? Can you point me in the direction of anything that confirms this method?

Thanks!

[Blinky the 3-eyed Fish]

I can point you to my strong opinion against this method. Ask yourself what is the point of the lost earnings? Answer yourself that it is to make the participants whole due to the fact that their 401(k) deferrals were not in the plan sooner than they should be.

Now let's examine the plan. Even though it's a pooled account, participants with 401(k) deferrals are allocated a proportionately higher share of the earnings (and losses) due to their deferrals.

Thus, the respective earnings should be allocated appropriately to only those with late deferrals.

[Bird]

I'm not so sure. Had the money been in the plan on time and earned exactly the lost earnings, it would have been shared by all (according to the gain allocation basis, which probably pro-rates deferrals made during the year)7. We're working on one of these now and are still pondering it.

[Kevin C]

Take a look at Section 3 of Rev. Proc 2006-27. It lists the acceptable methods for allocating income on corrective allocations. Basically, you can go back and allocate income as it would have been done if the corrective amounts had been deposited timely, or allocate the gains attributable to the corrective allocation only to those receiving the correction. There are two other methods that are a combination of the first two.

I would still allocate it only to those receiving the correction. Besides being a logical way to do it, it is the easiest method to explain. Also, you wouldn't have to explain why someone who terminated, received a distribution and was not part of the correction got an additional allocation as a part of the correction.

[Bird]

Thanks Kevin, for the cite and comments. That makes a lot of sense.