lost earnings calculation on late deposits

[Guest MHopkins]

How does one apply a negative rate of return to a late deposit? The plan is daily valued and the record keeper uses the participants actual rate of return to determine lost interest on a late deposit. The total lost interest is a ($500). So in this scenario, a salary deferral of $10,000 is withheld from pay but not deposited to the trust. When discovered, the deferral is now worth $9,500. If the employer deposits only $9,500, don't they benefit from the difference between the amount withheld from pay and the actual deposit? Is this permissible?

I've received one opinion that states under VFCP, the correction is made by applying the greater of the corporate underpayment rates for taxes under Code §6621 and not actual plan earnings and losses, unless the plan earnings are higher.

Thank you for any guidance!

[ETA Consulting LLC]

The DOL website has a calculator the does this for you. The idea is that even if the plan's earnings are negative, the earnings on the late deposit should be positive (as the late deposit is treated similiar to a loan that bears a reasonable rate of interest). Hence, it's treated like a prohibited transaction in that the employer took a loan from the plan (in the amount of the late deposits). That's just a way of looking at it.

Good Luck!

[Guest MHopkins]

Believe me, I agree with you! But the current record keeper is arguing that guidance suggests the online calculator should only be used if the actual rate of return is not easily calculated. I am having difficulty wrapping my mind around the idea that essentially the employer is benefitting from their own mistake. I just need to find guidance with will sway the record keeper to my way of thinking.

Thank you!

[QDROphile]

The record keeper in not in charge unless the record keeper is a fiduciary with respect to the matter. Show some spine.

[rcline46]

Rev Proc 2008-50 is clear on the earnings calculation. THe DOL rate is the floor. The actual rate, or the highest performing investement is measured against the floor. Appx B 3.01 is very clear on an INCREASE.

[ESOP Guy]

Not my strongest point of knowlege but Rev rule 2006-38 requires one in this case to use the DOL rate.

The ERISA book seems to be saying the same thing.

http://www.irs.gov/pub/irs-drop/rr-06-38.pdf

Edit:

Like always willing to be told I am wrong, but like I said the ERISA book cites above Rev Rule on the interest rate.

[ETA Consulting LLC]

The recordkeeper, in this instance, should position themselves to lose this client. In too many instances, the recordkeeper who is mis-informed speaks as an authority without being open to a discussion on why their position appears unreasonable.

The "MOST" valid point is the one made by MHopkins saying "I am having difficulty wrapping my mind around the idea that essentially the employer is benefitting from their own mistake."

This says it all. Explain to me how you can have a late deposit (and then actually deposit less than the amounts withheld). At the very least, be open to depositing the amounts actually withheld.

When a recordkeeper rejects that notion, then they should lose the client. If an employee of the recordkeeping firm rejects that notion, then they should be fired; and then the recordkeeper should lose the client.

Obviously, there are some items that clearly do not make sense but have valid explanations. For example, explain to me how an employee deferral is an employer contribution. Answer, as unreasonble as it appears, it's an employer contribution made pursuant to the employee's election. <-- Just making a point.

For a recordkeeper to fail to engage in this discussion goes beyond incompetence; but that unique combination of arrogance and ignorance that represents the lowest level of service our clients rely on us to provide.

Thanks for allowing me to vent.

Good Luck!