Interest on Late Profit Sharing Plans

Good morning everyone!

I just took over a client that hasn't made their required Profit Sharing Contributions (it's used in conjunction to a Cash Balance Plan).  It turns out the client hasn't made their Profit Sharing Contributions since 2017, and there are also receivables from prior to that.

The client didn't take the deduction on their tax returns, if that matters.

Has anyone had this experience and how have you handled the lost interest since these contributions are clearly late?

Thanks everyone!

Sound to me like they have either a significant operational failure which is uncorrected for more than 2 years, or a demographic failure; either way, the correction is VCP. Earnings should be calculated at the plan's actual rate of return.

That was my thought.  Thanks!

3 hours ago, C. B. Zeller said:

Sound to me like they have either a significant operational failure which is uncorrected for more than 2 years, or a demographic failure; either way, the correction is VCP. Earnings should be calculated at the plan's actual rate of return.

The client had someone else tell them that since these are Profit Sharing contributions, and not 401(k), that allocating lost interest is not necessary.  Is there anything I can cite to back up to them that it's required?

Rev Proc 2019-19 6.02(4)(a) (emphasis added)

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 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.

What interest rate would everyone recommend using? I don't have all of the earnings for prior years, since we just took over the client.

Thanks!

On 3/22/2021 at 2:16 PM, C. B. Zeller said:

Rev Proc 2019-19 6.02(4)(a) (emphasis added)

 

Rev Proc 2019-19 Appendix B section 3 offers some simplified methods of calculating earnings.

13 minutes ago, C. B. Zeller said:

Rev Proc 2019-19 Appendix B section 3 offers some simplified methods of calculating earnings.

Thanks!  I was thinking of just using the VFCP Calculator at:

https://www.askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx?_ga=2.83674198.1102150085.1618583545-685162085.1585297162

Would that be acceptable?

This is what EPCRS has to say about it, RP 2019-19 sec 6.02(5)

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(5) Special exceptions to full correction. In general, a failure must be fully corrected. Although the mere fact that correction is inconvenient or burdensome is not enough to relieve a Plan Sponsor of the need to make full correction, full correction may not be required in certain situations if it is unreasonable or not feasible. Even in these situations, the correction method adopted must be one that does not have significant adverse effects on participants and beneficiaries or the plan, and that does not discriminate significantly in favor of highly compensated employees. The exceptions described below specify those situations in which full correction is not required.

(a) Reasonable estimates. If either (i) it is possible to make a precise calculation but the probable difference between the approximate and the precise restoration of a participant's benefits is insignificant and the administrative cost of determining precise restoration would significantly exceed the probable difference or (ii) it is not possible to make a precise calculation (for example, where it is impossible to provide plan data), reasonable estimates may be used in calculating appropriate correction. If it is not feasible to make a reasonable estimate of what the actual investment results would have been, a reasonable interest rate may be used. For this purpose, the interest rate used by the Department of Labor's Voluntary Fiduciary Correction Program Online Calculator is deemed to be a reasonable interest rate. The calculator can be found on the internet at http://www.dol.gov/ebsa/calculator.

The VFCP calculator is a last resort. Even though it may be "inconvenient or burdensome" to determine the actual rate of return you still have to do it, or use one of the simplified methods I mentioned in my previous post, unless it is absolutely impossible to obtain the necessary information. Even then, I think that using the plan's earnings as reported on the 5500 to calculate an estimated rate of return would be more reasonable than the VFCP calculator.