Not really a good option: The Online Calculator is convenient, and also inexpensive, so…use it for the HCEs!
Practitioners tend to use the DOL’s online calculator for late deferral deposits, since EPCRS permits estimates, but to the extent one is being practical and making participants whole, the cheaper result of the online calculator should not prevail over the participant’s, the plan’s, or the default investment alternative’s actual rate of return or some of the other alternatives presented below, EXCEPT, if the error affects mostly the highly compensated employees (HCEs). The regulators will always accept a cheaper alternative when it involves HCEs. For the rest of the participants, unless you are using the DOL’s Voluntary Fiduciary Correction Program (VFCP), do your best to do better! Please read on….
Option 1: Apply the actual earnings based on each participant’s investment choices.
This option undoubtedly makes a participant whole, but it could be impractical, or even impossible to implement when an error affects numerous participants. In these situations, the Employee Plan Compliance Resolution System (EPCRS) allows plan sponsors to make reasonable estimates.
Option 2: Use the rate of return for the best-performing fund in the plan.
Nobody loses under this option. However, using the highest rate of return for the entire period (not separately for each plan year) of failure could prove to be very costly when the correction applies to numerous participants. To be fair, it is not realistic to assume that each participant would have chosen to invest the omitted contribution in the best-performing investment option offered by the plan. More reasonable is to….
Option 3: Use the weighted average rate of return for the plan as a whole.
As reasonable estimates go, using the plan’s rate of return is a very justifiable approach, when it is impractical to compute each individual account’s actual return. In some cases, the plan sponsor knows exactly what investment option would have been used. In those cases, it is most appropriate to…
Option 4: Automatic Enrollment Omissions: Use the plan’s default investment alternative.
When participants are automatically enrolled, their allocations are invested in the plan’s default investment alternative, often a target date fund. In this case, it is logical to apply the rate of return for the investment option the sponsor makes on behalf of automatically enrolled participants, except when the sponsor knows that the default investment alternative experienced a loss. EPCRS requires the corrective contribution to be made completely, without applying a loss, or a gain. When the default investment alternative lost money during the period of failure, no rate of return is applied to the corrective contribution. Nada!
Option 5: A 0% ROR Can Also Apply to Distributions of Excess Contributions
When amounts must be removed from an NHCE’s account because of a miscalculation of an employer match or profit-sharing contribution, the participant can keep the earnings. Employers who strive for the perfect correction can choose to use the fund with the lowest rate of return in the case of NHCEs, but not for HCEs. For HCEs, the actual rate of return must be removed from each individual account.
Unfortunately, EPCRS is silent regarding corrections of excess contributions after an NHCEs account has experienced a loss. To be consistent with the goal of enhancing retirement readiness for NHCEs, and to be conservative, a common practice in the industry is to apply losses in the case of NHCEs, while reducing HCE accounts by the entire excess contribution without any adjustment for losses.
Option 6: If You Must…the DOL’s Online Calculator Will Do!
EPCRS does allow the use of the DOL’s Online Calculator if the probable difference between the actual earnings and the Online Calculator is insignificant, and the administrative cost of the actual calculation would significantly exceed the probable difference. Establishing that the difference would be insignificant implies that a calculation is possible, yet EPCRs allows the use of the DOL Calculator, acknowledging that paying the service provider for a precise computation could outweigh the benefit of a small difference.
Impossible as it may seem with automation, sometimes even the best service providers cannot even come up with a ballpark estimate for an insignificant difference between the actual return and using the DOL’s Online Calculator. For example: a) some plans allow each participant to open his/her own brokerage account; b) 403(b) plan participants often have separate individual accounts; c) statements may no longer be available if the plan sponsor is bankrupt or out of business; d) changes in service providers often lead to lack of cooperation from the terminated entity; e) natural disasters can result in lost records. All of these infrequent situations would render impossible to make compute the plan’s actual returns or even ascertain the best-performing fund. Even for experts, it’s possible for some tasks to be impossible. In those cases, and when using the DOL’s Voluntary Fiduciary Correction Program (VFCP), you may use the DOL’s Online Calculator. In every other case, I would advise reading the options above so you can, in the interest of plan participants and retirement readiness,
Do Your Best to Do Better!
