Earnings on Late Roth Deferrals

[Guest saotampa]

We have a plan that had 2 late deposits in 2009 and we have calculated lost earnings and prepared Form 5330. Some of the lost earnings are for Roth deferrals in addition to the pre-tax deferrals. Do we deposit the earnings to the Roth deferral source or should all earnings be deposted to the pre-tax source? I haven't been able to find any guidance on it and we have differing views here in the office. Any thoughts are appreciated.

[Guest Matthew Gouaux]

Your aim in correcting plan errors generally is to place the parties back in the same position they would have been in had the error not occurred. In your case, I think that means depositing the lost earnings amount into the account that would have earned the earnings (i.e., the Roth account with respect to late Roth deferrals and the non-Roth account with respect to the late pre-tax deferrals).

[Guest saotampa]

that was my thought as well, but others aren't in agreement with that logic in my office. They feel that the lost earnings are "er" $$ and that those funds won't be taxed upon distribution. I disagree because some income would be taxable if they don't satisfy the 5 year qualified distribution from the roth portion.

[Bird]

that was my thought as well, but others aren't in agreement with that logic in my office. They feel that the lost earnings are "er" $$ and that those funds won't be taxed upon distribution.

Overthinking. As noted, the idea is to make the parties whole; that means putting the money into the Roth source where is would have been absent the error.