Gap Earnings on Corrective ADP excess

[Guest Juice]

I have a client who just started with our 401(k) service, and after reviewing their prior plan years I have found that they failed the 1998 ADP testing. I have been in contact with the companies prior recordkeeper, and i have been trying to get them to give me the earnings associated with the Excess Contributions and any GAP earnings. The other recordkeeper claims that GAP earnings must be calculated from the 1st day after the plan year until the day the excess contributions are removed. I am under the impression that you only include Gap earnings from March 15th forward. If anyone can give me some guidance or point me to the right section of the code, I may be able to resolve this situation.

[MWeddell]

The gap period refers to the period from the end of the plan year until the date of distribution. Investment earnings credited for the gap period are refunded only "if the plan so provides." Treas. Reg. 1.401(k)-1(f)(4)(ii)(A). Hence the answer is that you have to read the plan document to determine whether gap period earnings are owed on corrective distributions of excess contributions.

The date 2-1/2 months after the plan year ends (March 15 for calendar plan years) is relevant for determining the participant's tax consequences and whether the plan sponsor must pay an excise tax but doesn't affect gap period earnings computations (or at least I've never read a plan document where that date affected the gap period earnings computations).

[Ervin Barham]

If the plan document requires gap period income, there are 3 methods of calculating it under Treas Reg. 1.401(k)-1(f)(4)(ii), paragraphs B,C, & D.

You must include earnings for the year in question (1998) plus gap period income from the beginning of the plan year until distribution.

I think the rule that is causing the confusion is the 10 percent method. Under that method, you calculate 10% of last years earnings for each month in the gap period. If distribution occurs prior to the 15th, you ignore that month.

If this is a daily plan, there's no reason you can't use the actual earnings through date of distribution.

Have fun!