Calculation of earnings

[Carol V. Calhoun]

I am getting mired in what should be a very simple problem:  Whether the employer has an obligation to contribute earnings in a situation in which an employee's entire after-tax contribution for the year is correct, but the timing of it is wrong.

Example:  Susie has regular compensation of $345,000, plus a $50,000 bonus she receives on January 15.  She elects to make an after-tax contribution of 5% of compensation.  The employer erroneously fails to treat the bonus as compensation for purposes of the plan.  This has no effect on the total amount of her after-tax contribution for the year, because her compensation in excess of $345,000 would have been disregarded.  However, if the bonus had been taken into consideration,  a $2,500 after-tax contribution would have gone into the plan in January, and then contributions would have stopped in late October.  Presumably, the employer has no obligation to make a QNEC, because total after-tax contributions for the year would have been correct.  However, is it obligated to make up earnings for the period from January 15 through when contributions would otherwise have stopped?

Rev. Proc. 2021-30 does provide that:

Quote

the Plan Sponsor may treat the date on which the contributions would have been made as the midpoint of the plan year (or the midpoint of the portion of the plan year) for which the failure occurred.

So presumably we could treat the date on which contributions would have been made as July 1, even though we know that they would actually have been made on January 15.  But we still have the issue of whether the sponsor is required to make up earnings for the period July 1 through end of October.

[Peter Gulia]

For other participants who had a bonus (and had compensation smaller enough that counting the bonus would not exceed the § 401(a)(17) limit):

Did the employer apply a participant’s specified percentage, whether for an elective deferral or an employee contribution, to the payroll that was or included the bonus?

Or did the employer uniformly not take participant contributions from the bonus pay?

[Carol V. Calhoun]

The employer uniformly did not take participant contributions from bonus pay. For the other participants, Rev. Proc. 2021-30 is clear that they are to be provided with QNECs plus earnings from the date the contribution should have been made.

The uncertainty arises only with respect to those whose contributions are limited by 401(a)(17) or 415. That group presumably isn't owed QNECs because their contributions for the year were correct. But the question is whether they are still owed earnings. 

[Peter Gulia]

For reasons other than tax law, a plan’s fiduciary might consider treating Susie no less favorably (yet also no more favorably) than other similarly situated participants.

On your description, that might mean estimating investment changes as if Susie’s 5% contribution had been made on January 15 and as if contributions stopped following a § 401(a)(17) cutoff in late October. Likewise, for someone affected by a § 415 cutoff.

If the employer/administrator has a good relationship with its recordkeeper, one might get the recordkeeper to run the as-if calculations. Some can do it as a routine function.