Using DOL Online Calculator Without VFCP Application?

[Guest hybrid2148]

Does anyone know whether the DOL takes the position that, in correcting for late deposits of participant contributions, the DOL's online calculator is only authorized for use if the plan sponsor is making an application through VFCP? That is, if the plan sponsor just wants to calculate and contribute the late amount plus interest and pay the 5330 taxes, without coming in to the DOL under the VFCP--can it still use the online calculator for purposes of determining the interest?

[John Feldt ERPA CPC QPA]

The IRS seems okay with this, but the DOL says you only get the "relief" to use their interest rate if you file VFCP. For a plan that owes a small amount of interest, filing a VFCP is a ridiculously expensive exercise.

[austin3515]

FWIW, we always use it and never file under VFCP. We've definitely used it when responding to DOL letters regarding late deposits, closing DOL audits, and even scenarios where the participants have complained to the DOL. They have not made us go back and recalculate actual investment returns. I can think of only one exception to that and it was by far the biggest and most egregious situation that has come under scrutiny (it was a large company, depositing monthly, and even then was not always hitting the 15th business day window which we of course no is basically not a real timeline anyway). In that situation, we were made to use actual returns. That was probably 6 years ago now!

[Guest Macomb]

Where is the authority for the proposition that if a Plan does not use VFCP, it must provide interest on untimely elective deferrals at the greater of the DOL VFCP calculator rate, and the participants' actual lost earnings rate? I can't find it.

The rate in the calculator is obviously not always a "relief" especially in periods when the market rate is in negative territory.

[Guest TBick]

In our experience with the local DOL office, they have accepted the calculator for VFC submissions, but they have not accepted the calculator when a plan is going through corrections as the result of an investigation/audit. They have required "real world" earnings calculations.

So therein may lie your answer!

[MoJo]

At the risk of opening a can of worms, from the IRS' perspective (at least as I read 2008-50) the "correct" approach to lost earnings calculation is 1) use the actual earning experience of the affected participant(*s) AND ONLY IF DOING SO IS IMPRACTICABLE, then 2) use the highest returning fund in the plan as the proxy, AND ONLY IF DOING SO IS IMPRACTICABLE; 3) use the DOL calculator. Now, as a practical matter, in my experience, the cost of having a record keeper calculate actual earnings is exorbitant relative to the error (hence, rendering it impracticable); the use of the highest earning fund is so far out of the range of the typical or average earnings as to be an extreme windfall (i.e. in this investing environment, it isn't unusual to see a 20%+ return for the highest fund when most of the affected participants are primarily in a SVF with a few other options returning 2 or 3%), so, the DOL calculator is used. BUT, is it not necessary to go through the analysis (at least as far as the IRS is concerned) before getting to the calculator (and of course, documenting the analysis)? That is what I recommend (and in virtually all cases, the calculator is used).

[John Feldt ERPA CPC QPA]

And that satisfies the IRS. However, when the DOL investigation begins, and they have not been consistent on this, we've found that some DOL investigators will not allow the interest rate from the DOL VFCP online program to apply if the employer did not file a VFCP application.

Now, suppose the calculator says the additional interest due is something like $67. How is it justifiable to spend gobs of time to prepare a VFCP application? Maybe that will protect you from paying an extra $18 of possible lost earnings if you get investigated later perhaps? How much does it cost you to prepare the VFCP filing? Does that cost justify the value of any protection you've gained by doing the filing?

So here it's important to communicate to the employer how our DOL and IRS play together - explaining that the IRS is okay fine with using the DOL online calculation (see Rev Proc. 2008-50). BUT, if the employer does not file a VFCP application and later the DOL investigates, the DOL may require the employer to cough up some extra lunch money to put into the plan because the DOL agent might not accept the use of their own DOL online calculator.

If the employer understands that there is a risk with no VFCP filing, and they understand the cost benefit to remove that risk, they can make an informed decision.