DOL Calculator & VFCP Submission re Late Contributions

[Guest ggbrock]

Has the DOL actually opined to say its appropriate to use the DOL Calculator to calculate lost earnings on a late contribution for purposes of the VFCP? There doesn't seem to be a consensus on this issue. The IRS clearly states that the underpayment rate is the appropriate rate to use to calculate the excise tax; the DOL provides a calculator for a stated purpose of calculating lost earnings on late contributions based on the underpayment rate (Example 1 in the instructions to the calculator); but as far as I can tell, the DOL's formal guidance (i.e., the VFCP) says you need to use the "higher of" best invsetment earnings in plan and underpayment rate.

We've generally used the calculator, but I'm now questioning the appropriateness of this technique. Please, any thoughts?

Thanks

[ERISAnut]

In many instances, the higher rate may result in excessive earnings for a huge jump in the value of a particular investment. Anyone who knows the investment game understands that hind-sight is 20/20. So, you would not provide an excessive earnings rate in case a particular fund performed exceptionally well during the specific slow payment window; while providing an underpayment rate in the event the fund tanked during the window.

This premise is to replace the damages to the plan for deposits that are not timely. However, it must guard against an un-reasonable windfall to the plan due to specific market timing issues. Because of these situations (that have actually occurred and have been documented with the DOL), the 'higher rate' is being challenged.

Let's face it, an employer shouldn't be expected to pay $20,000 for a $100,000 deposit that was made two days late, just because a particular fund in the plan performed exceptionally well during that particular two day period. That would be the equivalent of picking the winning lottery number the day after the drawing (and claiming the prize).

So, your risk manager should factor this into their decisions.

[Guest ggbrock]

Sorry if I confused anyone. It appears that I was looking at the 2002 VFCP. The updated 2006 VFCP actually says to use the underpayment rate to calculate lost earnings. And the 2006 updated VFCP clarifies that you can use the calculator so long as facts and circs dont dictate otherwise. So all is consistent now!

[Guest gingerstaffauditor]

Hello Everybody:

I have been assigned a lost earnings project and understand that the DOL Lost Earnings Calculator may be used. I also understand that the 15% excise tax is assigned to the current year only. Then a 100% tax is assessed to the principal for the next year.

What I am unclear about is the following:

The late deferrals were late each year from 2004 until 2008 and not paid until 2008. If there were 10,000 in late deferrals each year, beginning in 2004 and ending in 2008, how does the excise tax apply to the lost earnings? Are the lost earnings for 2004 added to the 2005 principal? Then recalulate the lost earnings for 2005 using the 2004 balance and the 2005 late deferrals? And assess a 15% excise tax on that amount (pyramid effect)?

The examples show only for 2004 not paid until 2005. There are no examples showing the tax calculated on each year and the next year with the current year late deferrals.

Any help or advice on understand how to apply the excise tax calculation would be appreciated.

[austin3515]

1) The 100% tax basically never applies. Take a look at the defintiion of "taxable period" - at first read you assume it is a 12 month period, but it is actually determined based on the relevant facts. I was hung up on this myself at one point, but if you read the 5330 instructions carefully, and in particular focus on the taxable period definition you'll see what I mean.

2) See the following example (assume 6% interest, and assume that the late deposits were due on 1/1 and paid on 12/31):

2004 Late Deposits

2004: $10,000 is late, lost interest is $600.

2005: Lost interest from 2004 was $600, which is now worth $636 (600 x 1.06).

2006: Total lost interest through 2005 was $636, whcih is now worth 674 (636 x 1.06)

2005 Late Deposits

2005: $10,000 is late, lost interest is $600.

2006: Lost interest from 2005 was $600, which is now worth $636 (600 x 1.06).

So, the total lost interest is 674 dollars, related to the 2004 late deposits, and 636 related to the 2005 late deposits for a total of $1,310. The key is to calc lost earnings for each individual late deposit separately, which is exactly how the DOL's web-site does it.

[Guest gingerstaffauditor]

Thank you. This information was very helpful.

[Guest gingerstaffauditor]

One more thing.

Do you calculate the 15% excise tax on each year's lost earnings? Or do you just calculate it on the cumulative total in the yaer that all lost earnings are paid? Do you have to file a Form 5330 for each year or can you file one for all years? Thank you for all your help so far.

Ginger

[Guest gingerstaffauditor]

Thank you for this information. It was very helpful. I have posted one more question about the way the 15% excise tax is treated. If you could shed some light on the tax, I would appreciate it.

Ginger

[BG5150]

I believe you file a 5330 for each year, including the interest.