Its a new world with all the negative earnings!
Everything I know and have read on correcting Missed Deferrals and Match says to "include earnings" but my question is: does this also include losses?
I have a plan where a person was missed from 7/1/08-12/31/08...obviously an "earnings" would be in the negative...do I calculate and have the client reduce the QNEC due to the plan?
Thanks.
Full Version: Calculating Losses on Missed Deferrals
I do not know a cite. But I would put in the full contributions and maybe include money market earnings. I should say that is what I would recommend to the Plan Sponsor.
The basic principle underlying EPCRS is to restore the plan to the same position it would have had absent the operational error. I can't remember if you're allowed to reduce the contribution by losses, but I cannot imagine that there is anything in the Rev. Proc. that would require the employer to kick in some earnings when under the appropriate earnings calculation methodology in the Appendix the employee would have suffered a loss.
No, you do not reduce for losses. The PT rules require lost earnings even if there is a loss in the plan. You have to restore at least the fair market value of the use of the funds.
Rev. Ruling 2006-38 includes a discussion of the "amount involved". It references Temporary Reg. 141.4975-13, which says that Reg 53.4941(e)-1 controls for terms appearing in both 4941(e) and 4975(f). "Correction" appears in both those sections, too.
Rev. Ruling 2006-38 includes a discussion of the "amount involved". It references Temporary Reg. 141.4975-13, which says that Reg 53.4941(e)-1 controls for terms appearing in both 4941(e) and 4975(f). "Correction" appears in both those sections, too.
QUOTE
53.494-1(c)(4) Use of property by a disqualified person
(i) In the case of the use by a disqualified person of property owned by a private foundation, undoing the transaction includes, but is not limited to, terminating the use of such property. In addition to termination, the disqualified person must pay the foundation --
(a) The excess (if any) of the fair market value of the use of the property over the amount paid by the disqualified person for such use until such termination, and
(b) The excess (if any) of the amount which would have been paid by the disqualified person for the use of the property on or after the date of such termination, for the period such disqualified person would have used the property (without regard to any further extensions or renewals of such period) if such termination had not occurred, over the fair market value of such use for such period.
In applying (a) of this subdivision the fair market value of the use of property shall be the higher of the rate (that is, fair rental value per period in the case of use of property other than money or fair interest rate in the case of use of money) at the time of the act of self-dealing (within the meaning of paragraph (e)(1) of this section) or such rate at the time of correction of such act of self-dealing. In applying (b) of this subdivision the fair market value of the use of property shall be the rate at the time of correction.
(i) In the case of the use by a disqualified person of property owned by a private foundation, undoing the transaction includes, but is not limited to, terminating the use of such property. In addition to termination, the disqualified person must pay the foundation --
(a) The excess (if any) of the fair market value of the use of the property over the amount paid by the disqualified person for such use until such termination, and
(b) The excess (if any) of the amount which would have been paid by the disqualified person for the use of the property on or after the date of such termination, for the period such disqualified person would have used the property (without regard to any further extensions or renewals of such period) if such termination had not occurred, over the fair market value of such use for such period.
In applying (a) of this subdivision the fair market value of the use of property shall be the higher of the rate (that is, fair rental value per period in the case of use of property other than money or fair interest rate in the case of use of money) at the time of the act of self-dealing (within the meaning of paragraph (e)(1) of this section) or such rate at the time of correction of such act of self-dealing. In applying (b) of this subdivision the fair market value of the use of property shall be the rate at the time of correction.
There is no indication that a pt is involved here. The poster described the situation as "missed deferrals," not "late deposits."
It feels like Monday. I read it twice and didn't see it that way. Until now, that is. With no PT, it appears you can, but are not required to, adjust for losses.
QUOTE
Rev Proc 2008-50, Section 6.02(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 (including losses) 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. See section 3 of Appendix B for additional information on calculation of earnings for corrective allocations.
(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).
(d) In the case of a defined benefit plan, a corrective distribution for an individual should be increased to take into account the delayed payment, consistent with the plan's actuarial adjustments.
(e) In the case of a defined contribution plan, a corrective contribution or distribution should be adjusted for earnings (including losses) from the date of the failure (determined without regard to any Code provision which permits a corrective contribution or distribution to be made at a later date).
(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 (including losses) 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. See section 3 of Appendix B for additional information on calculation of earnings for corrective allocations.
(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).
(d) In the case of a defined benefit plan, a corrective distribution for an individual should be increased to take into account the delayed payment, consistent with the plan's actuarial adjustments.
(e) In the case of a defined contribution plan, a corrective contribution or distribution should be adjusted for earnings (including losses) from the date of the failure (determined without regard to any Code provision which permits a corrective contribution or distribution to be made at a later date).
What are "missed deferrals"? I can't think of anything other than deferrals that were not deposited when they should have been. That would make them late, would it not?
Missed opportunity for deferrals, perhaps?
Assuming that WDIK is right, and you're talking about excluding an eligible employee from making elective deferrals under the plan, Section .05 of Appendix A to Rev. Proc. 2008-50 (EPCRS) describes the correction methods generally available. As far as earnings go, Rev. Proc. 2008-50 Section 6.02(4)(e) provides that "In the case of a defined contribution plan, a corrective contricution or distribution should be adjusted for earnings (including losses) from the date of the failure...."
QUOTE (BTG @ Apr 1 2009, 03:47 PM) 
Assuming that WDIK is right, and you're talking about excluding an eligible employee from making elective deferrals under the plan, Section .05 of Appendix A to Rev. Proc. 2008-50 (EPCRS) describes the correction methods generally available. As far as earnings go, Rev. Proc. 2008-50 Section 6.02(4)(e) provides that "In the case of a defined contribution plan, a corrective contricution or distribution should be adjusted for earnings (including losses) from the date of the failure...."
Let's change the facts a bit. In my situation, we have a profit sharing only plan. The employer missed an eligible participant with respect to employer nonelective contributions in 2008. The missed contributions have been made up, but we need to determine if any gains or losses are required. The plan, like virtually all other plans, suffered significant losses last year. Do the rules governing crediting gains/losses on missed deferrals also apply to employer nonelectives?
Thanks, everybody. Very helpful line of responses!
Thank you everyone for your input...very helpful.
QUOTE (PJ2009 @ Apr 2 2009, 10:13 AM)
QUOTE (BTG @ Apr 1 2009, 03:47 PM)
Assuming that WDIK is right, and you're talking about excluding an eligible employee from making elective deferrals under the plan, Section .05 of Appendix A to Rev. Proc. 2008-50 (EPCRS) describes the correction methods generally available. As far as earnings go, Rev. Proc. 2008-50 Section 6.02(4)(e) provides that "In the case of a defined contribution plan, a corrective contricution or distribution should be adjusted for earnings (including losses) from the date of the failure...."
Let's change the facts a bit. In my situation, we have a profit sharing only plan. The employer missed an eligible participant with respect to employer nonelective contributions in 2008. The missed contributions have been made up, but we need to determine if any gains or losses are required. The plan, like virtually all other plans, suffered significant losses last year. Do the rules governing crediting gains/losses on missed deferrals also apply to employer nonelectives?
Thanks, everybody. Very helpful line of responses!
PJ, Since Rev. Proc. 2008-50 Section 6.02(4)(e) states that it applies to corrective contributions "in the case of a DC plan," I see no reason to make a distinction between a pure profit sharing plan and one with a 401(k) feature (or a stand alone 401(k), for that matter). All of them are DC plans.
I agree. Thank you for the citation. Just one more question - how would you determine the "loss" to be applied to the corrective contribution? Would it be based on the plan's rate of return or the participant's experience in his/her own account? Or some other alternative method?
Again, many thanks!
pj
Let's change the facts a bit. In my situation, we have a profit sharing only plan. The employer missed an eligible participant with respect to employer nonelective contributions in 2008. The missed contributions have been made up, but we need to determine if any gains or losses are required. The plan, like virtually all other plans, suffered significant losses last year. Do the rules governing crediting gains/losses on missed deferrals also apply to employer nonelectives?
Thanks, everybody. Very helpful line of responses!
PJ, Since Rev. Proc. 2008-50 Section 6.02(4)(e) states that it applies to corrective contributions "in the case of a DC plan," I see no reason to make a distinction between a pure profit sharing plan and one with a 401(k) feature (or a stand alone 401(k), for that matter). All of them are DC plans.
Again, many thanks!
pj
QUOTE (BTG @ Apr 2 2009, 01:37 PM)
QUOTE (PJ2009 @ Apr 2 2009, 10:13 AM)
QUOTE (BTG @ Apr 1 2009, 03:47 PM)
Assuming that WDIK is right, and you're talking about excluding an eligible employee from making elective deferrals under the plan, Section .05 of Appendix A to Rev. Proc. 2008-50 (EPCRS) describes the correction methods generally available. As far as earnings go, Rev. Proc. 2008-50 Section 6.02(4)(e) provides that "In the case of a defined contribution plan, a corrective contricution or distribution should be adjusted for earnings (including losses) from the date of the failure...."
Let's change the facts a bit. In my situation, we have a profit sharing only plan. The employer missed an eligible participant with respect to employer nonelective contributions in 2008. The missed contributions have been made up, but we need to determine if any gains or losses are required. The plan, like virtually all other plans, suffered significant losses last year. Do the rules governing crediting gains/losses on missed deferrals also apply to employer nonelectives?
Thanks, everybody. Very helpful line of responses!
PJ, Since Rev. Proc. 2008-50 Section 6.02(4)(e) states that it applies to corrective contributions "in the case of a DC plan," I see no reason to make a distinction between a pure profit sharing plan and one with a 401(k) feature (or a stand alone 401(k), for that matter). All of them are DC plans.
QUOTE (BTG @ Apr 2 2009, 01:37 PM)
QUOTE (PJ2009 @ Apr 2 2009, 10:13 AM)
QUOTE (BTG @ Apr 1 2009, 03:47 PM)
Assuming that WDIK is right, and you're talking about excluding an eligible employee from making elective deferrals under the plan, Section .05 of Appendix A to Rev. Proc. 2008-50 (EPCRS) describes the correction methods generally available. As far as earnings go, Rev. Proc. 2008-50 Section 6.02(4)(e) provides that "In the case of a defined contribution plan, a corrective contricution or distribution should be adjusted for earnings (including losses) from the date of the failure...."
Let's change the facts a bit. In my situation, we have a profit sharing only plan. The employer missed an eligible participant with respect to employer nonelective contributions in 2008. The missed contributions have been made up, but we need to determine if any gains or losses are required. The plan, like virtually all other plans, suffered significant losses last year. Do the rules governing crediting gains/losses on missed deferrals also apply to employer nonelectives?
Thanks, everybody. Very helpful line of responses!
PJ, Since Rev. Proc. 2008-50 Section 6.02(4)(e) states that it applies to corrective contributions "in the case of a DC plan," I see no reason to make a distinction between a pure profit sharing plan and one with a 401(k) feature (or a stand alone 401(k), for that matter). All of them are DC plans.
Yet another question:
Section 6.02(4)(a) states as follows: "However, a corrective allocation is not required to be adjusted for losses. See section 3 of Appendix B for additional information on calculation of earnings for corrective allocations." What is the diffference between a corrective allocation in (a) and a corrective contribution in (e)? As you can see, one requires that losses be taken into account while the other does not.
Thanks and have a great weekend!!!
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