12/31/2006 valuation for a 1 man plan. Contributions were made in Feb of 2006.

Does interest HAVE to be applied to those prepaids?

Could you please state the regs on whether or not interst must be applied?

Any and all assistance you are able to give is much appreciated.

Interest is required in 412 computations. No IRS information has even contradicted this, and all their examples of 412 reflect it.

Interest is not reflected in 404 deduction issues, but the maintenance of amortization bases and the "equation of balance" only make sense if you keep both methods consistent in using the pre-contribution interest.

However, the interest only helps you, since it lowers the minimum funding requirement and does not hurt the maximum deduction allowed. Maybe you could explain why you would not spend/deposit a $20 bill you found on the sidewalk, since that is a similar analogy.

Of course, as previously discussed on these boards in the initial plan year situation, is the non uncommon occurrence where the FSA interest credit on the contribution is larger than the actual earnings of the plan during the year, leading to a negative 412 asset amount (imagine $1,000 being dumped into a plan in December to a checking account)...