Correcting Improper Distribution Amounts

[Guest dflin]

A plan sponsor discovered that a terminated participant received a lesser 401k plan distribution that he was entitled due to using an incorrect vesting percentage. The plan sponsor would like to correct the distribution. The investment return has been negative since the initial payout. Should the plan pay to the participant the principal amount of the shortfall as of the date of distribution, or should the plan sponsor attempt to calculate the investment loss attributable to the shortfall, and reduce the distribution accordingly?

[Richard Anderson]

The correction must be "reasonable and appropriate" for the failure. I would think that losses should not be applied to the distribution. If the participant had gotten the correct amount in the first distribution, he or she would not have suffered the plan losses. If the correction was for an allocation shortage and the participant was still in the plan, then I think it might be OK to consider the losses.