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Earnings on EPCRS corrective contributions - Deductible?


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Plan makes a corrective allocation under EPCRS for a missed deferral and missed match in the form of a QNEC to the plan, plus attributable earnings.  The RK is partly responsible for the error and offers to cover the cost of earnings on the QNECs involved.  

Question - Can the RK fund the earnings directly to the Plan or should the RK reimburse the Plan Sponsor/Employer for the earnings amount by other means outside the Plan?  Clearly, a corrective allocation must come from employer non-elective contributions (including forfeiture account if the plan allows "use to reduce" method) but unclear part is whether the earnings attributable to the corrective allocation should also be required to be funded from ONLY employer non-elective contributions (including forfeitures).  Any help is greatly appreciated. Thank you!

From Rev.  Proc. 2021-30, page 31/140:

(4) Principles regarding corrective allocations and corrective distributions.  The following principles apply where an appropriate correction method includes the use of corrective allocations or corrective distributions:  (a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for Earnings and forfeitures that would have been allocated to the participant's account if the failure had not occurred.  However, a corrective allocation is not required to be adjusted for losses.  Accordingly, corrective allocations must include gains and may be adjusted for losses.  For additional information, see Appendix B, section 3, Earnings Adjustment Methods and Examples.  (b) A corrective allocation to a participant's account because of a failure to make a required allocation in a prior limitation year is not considered an annual addition with respect to the participant for the limitation year in which the correction is made, but is considered an annual addition for the limitation year to which the corrective allocation relates.  However, the normal rules of § 404, regarding deductions, apply.  (c) Corrective allocations should come only from employer nonelective contributions (including forfeitures if the plan permits their use to reduce employer contributions).  For purpose of correcting a failed ADP, actual contribution percentage (“ACP”), or multiple use test, any amounts used to fund qualified nonelective contributions (“QNECs”) must satisfy the definition of QNEC in §1.401(k)-6.

 Page 26/140:

.04 Earnings.  The term “Earnings” refers to the adjustment of a principal amount to reflect subsequent investment gains and losses, unless otherwise provided in a specific section of this revenue procedure.

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The route that the corrective contribution follows into the plan is unimportant. What matters is that, from whatever source the contribution comes, it is classified as an employer nonelective contribution and is subject to the rules that apply to contributions of that type. If the recordkeeper remits funds directly to the plan, the transaction will be constructively a payment to the employer followed by the employer's contribution to the the plan. The paper trail is simpler, however, if the recordkeeper pays the employer and the employer pays the plan.

Tom Veal

ERISA Cavalry PLLC

www.ERISACavalry.com

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ERISAGooroo, the rubric for your question seems to ask about deductibility as well, although your actual question does not. I think the payment is deductible by the RK, either way, as a business expense. If paid to sponsor, then the sponsor has income offset by a contribution deduction.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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