How is interest calculated when plan sponsor is late contributing sala

[John A]

I am trying to determine what interest rate must be used when an employer is late contributing salary deferrals to a plan. It seems appropriate to look for DOL Reg 2510.3-102 for guidance. That reg seems to say that the rate used must be the highest rate of any plan investment over the applicable time (or the federal rate + 3 if greater).

Let’s say a plan has only 2 investments, and Fund A earns 100% over the applicable time, and Fund B earns 0% over the applicable time, and the federal rate + 3 = 7.5%. Further, there are only 3 participants in the plan. Participants X and Y are invested 50% in Fund A and 50% in Fund B. Participant Z is invested 100% in Fund A.

Participant X is deferring $100 per paycheck, Y $200 per paycheck, and Z $250 per paycheck.

The due date for the employer depositing the deferrals was June 10, 2000. The employer missed that date and is planning on making the plan whole, including interest, as of July 1, 2000. What amount of interest, in addition to the $550 in deferrals, should the employer contribute? How is the answer calculated?

Does the answer to a question like the above differ if the plan is a daily plan or a balance forward plan? How would a balance forward plan calculate interest from say, May 29, 2000 to June 15, 2000, if valuations are only done annually?

[Guest]

I suggest you act as if the contribution was really made on June 10 and calculate the interest going forward. Create a spreadsheet that shows the money being deposited on June 10 into the specific investments chosen by the participants. Use the prices from June 10 to determine the number of shares each participant should have purchased in each investment. Then, using the prices for July 1 (when the become available), determine the value of each account on that date. The difference would be what you spread as earnings.

Note, though, that it's possible the value of the accounts has gone down instead of up, depending on the investments involved. Typically, I do not spread losses, if there are any.

I would follow this same process regardless of whether the plan is daily or balance forward, since the deposit should have been made on June 10 and would have been invested as such, regardless of how the plan is being administered.

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Carol J. Ringwald

President

CJR Consulting Group, Inc.

[Guest dancass]

See memo below written by my firm's ERISA counsel regarding this issue that affected one of our clients recently. It's more complicated than you think. If you have any questions, contact me.

Dan

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U. S. pension regulations require that participant 401(k) contributions be remitted to the plan trust fund as soon as such contributions can reasonably be segregated from the employer’s general assets. However, in no case will remittance more than 15 business days after the end of the month in which the withholding occurred be considered reasonable. Reg. 2510.3-102(B).

The following is a description of the Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) procedures for correcting delinquent remittance of participants’ 401(k) contributions.

First, the principal amount of delinquent contributions must be remitted to the trust fund.

Second, lost earnings must be credited to participants’ accounts. Lost earnings is the amount that each participant would have earned on the principal amount, measured from the earliest date on which the contributions reasonably could have been segregated by the employer from its general assets through the date the delinquent contributions were remitted. Instead of calculating each individual participant’s earnings for the period, the plan sponsor may apply the highest rate of return earned by any of the investment alternatives under the plan during the period.

If there were no earnings during the period, the sponsor must still pay interest to the plan. The interest is calculated under Section 6621(a)(2) of the Internal Revenue Code. (For the first calendar quarter of 1999 this interest rate was 7%, and for the remainder of 1999 through the first quarter of 2000 was 8%.)

Third, lost earnings must be credited on the amount of lost earnings calculated under the second step (assuming the lost earnings are remitted sometime after the principal amount of contributions are restored).

Fourth, a penalty excise tax should be paid to the IRS on Form 5330. This excise tax is calculated as though the delinquent contributions were a prohibited loan by the plan to the employer, and is relatively small in amount. The excise tax equals 15% for each calendar year multiplied by the Section 6621(a)(2) interest rate multiplied by the principal amount of delinquent contributions.

Finally, filings should be made with the DOL and a notice of the problem and correction sent to participants in accordance with the DOL’s Voluntary Fiduciary Correction Program (“VFC”). No tax is due to the DOL under VFC, but if DOL audits and finds a delinquency outside of VFC, the DOL assesses a tax equal to 20% of the amount recovered for the plan.

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[Guest Tim Finn]

Can anyone point me to something that states that interest must be paid to the plan even if the plan lost significant income during the period when the employer held the employees contributions.

I have had discussions with the IRS and they have indicated that if there was a loss in the account, no additional interest is required because the employer has already saved them money (albeit unknowingly).

I have also reviewed Rev Proc 2001-17 and don't believe this scenario is addressed.

Any help would be appreciated.

[KJohnson]

Delinquent deferrals implicate both the Code and ERISA. Even though it is a Code Section, the "obligation" to credit accounts based on the 6621 rate (even if the accounts would have had negative earnings) comes from the DOL's Voluntary Fiduciary Correction Program that was made permanent in late March of this year. Try this link--

http://www.benefitslink.com/DOL/volfiductext.pdf

Also, in your situation if you actually use the VFC program (and the deferrals are not more than 180 days late), there is a prohiibted transaciton exemption so that the 4975 tax (reported on the 5330) would not actually be due. Use of this PTE actually requires some disclosure.

However some people find actual use of the VFC program to be more trouble than it is worth. And, since the 4975 tax is often very small in these situations they just go ahead and pay the excise tax under 4975 and use the VFC program as a "guideline" of how DOL wants things corrected but do not go through all of the paperwork and documentation that DOL requires for a VFC filing.