Early participation

[Belgarath]

Plan allowed someone to participate early. Deferrals were refunded, rather than amending plan to allow early participation. Investments selected by participant lost money - no earnings. Employer paid the participant full amount of incorrect deferrals - the reduced amount  in the plan, plus a make-up outside the plan, through payroll. So, for example, $100.00 deferred, $80.00 left at time of correction. Participant received full $100.00.

IRS is saying that the participant is owed interest on the deferrals. This doesn't seem reasonable to me, (the amount is meaningless - a dollar or two, but for future reference I'm trying to determine if there's any "proof" that earnings aren't required when there is a loss in such a situation) - I'm sure I've looked right at it, but it is eluding me. Anyone recall where (if) in 2016-51 it specifically says that earnings aren't required? Or is the auditor correct? I can find where corrective ALLOCATIONS need not be adjusted for losses, but I'm not finding what I'm looking for in this situation.

Thanks.

[MoJo]

In my mind, there is an issue of what would the participant had earned had the money remained in his or her possession OUTSIDE of the plan.  The fact is, through the employer's error, the employee lost the "time value" of the money while it was in the plan.  Now, why that is the IRS' concern surrounding the plan, I'm not sure.

[Belgarath]

Thanks for your thoughts. Yeah, I thought of that as well. If this was an automatic enrollment, I could see a valid reason to include "earnings" - but in this case, the participant ELECTED to defer, and chose the specific investments. So the participant is already receiving a "windfall" to the extent the participant is not suffering any loss.

As I said, in this particular situation, turns out it is less than a dollar, so it is utterly meaningless - I'm just trying to wrap my head around it for future reference. Oh well.

Another auditor might have a different opinion, who knows...