Missed Deferrals - Earnings Calculation

[Vlad401k]

A participant chose to enroll in the plan 3 years ago. Let's say they chose to defer 4% of comp. From my understanding, a QNEC of 50% of that (2% of comp) needs to be made by the employer for these 3 years as well as any missed match/profit sharing.

My questions is this: the IRS states that this amount must be adjusted for the earnings. How do you calculate the earnings? There are two possible scenarios for this plan:

1) Use the earnings for the fully managed model the participant selected and calculate the returns for each contribution. This will take significant amount of work on the part of the TPA.

2) Use the VFCP Calculator for each pay-date. This will be a lot simpler to calculate.

Is there any guidance from the IRS as to which method is correct? What do you think is the correct method?

[rcline46]

EPCRS describes in detail the methods that can be used to calculate lost earnings. It is up to you and your client to determine which method you will use. I use the attached signed by the client.

Lost Earnings.doc

[g bennycon]

This seems to be an area of great confusion. I can only provide the information that I have found. The Revenue Procedure cited in the attachment Revenue Procedure 2013 - 12 is the latest version of EPCRS, in that document the IRS states that in matters involving excise tax if the revenue procedure does not specifically address the situation, then EPCRS cannot be used. The failure to deposit salary deferrals and loan payments is a violation of IRC Section 4975. The lending of money between the plan and the employer is a prohibited transaction loan. This prohibited transaction can only be corrected by repayment of the amount involved and the filing and payment of excise tax on the form 5330. The IRS issued Revenue Ruling 2006 -38 to deal specifically with the issue of late deposits and their correction. In that Revenue Ruling the IRS states that using the Section 6621(a)(2) rate is appropriate to calculate the amount involved. The Department of Labor calculator uses the cited code section for it's calculations.

Based upon everything that I have been able to find, the use of the DOL calculator seems appropriate. A recent review of the 401(k) Fix-It guide indicates that EPCRS correction procedures would only be appropriate if your plan document contains a provision that specifically states the number of days by which the deposit must be made. In that case the violation is a failure to follow the plan document and the lost earnings section of the procedure would be applicable.

[BG5150]

These aren't "late" deferrals, they are "missed" deferrals--they were never taken from the paychecks to begin with.