A question that almost always arises when we consult on correcting retirement plan errors is, “Can we use the DOL (Department of Labor) calculator to determine earnings?” Compared to the alternatives, the DOL calculator provides a definite, quick solution that is not administratively onerous. I wish my answer to the question could always be a simple “yes,” but in typical lawyer fashion, the answer is often “maybe.” The journey to yes or no starts with who will oversee the correction.
Corrections through the DOL make calculating earnings easy. The Employee Benefits Security Administration of the DOL has provided an “Online Calculator” for its Voluntary Fiduciary Compliance Program (commonly referred to as either the VFCP calculator or DOL calculator). VFCP provides plan fiduciaries the opportunity to correct breaches of fiduciary responsibilities, such as depositing deferrals late to the plan. Required corrective contributions will include the principal amount involved in the prohibited transaction, plus any earnings that would have been earned on the principal amount for the period of the transaction. The DOL calculator can always be used to determine lost earnings when correcting plan errors through VFCP (a list of VFCP covered transactions can be found here).
Corrections for operational errors that are governed by the IRS calls for more analysis. The IRS’ Employee Plans Compliance Resolution System (Rev. Prov. 2021-30 or EPCRS) correction principles generally require failures to be fully corrected to restore the plan to the position it would have been in had the failure not occurred. Full correction usually means that the plan administrator must perform manual calculations to calculate the earnings based on the investment results that would have applied to the corrective contribution or distribution if the failure had not occurred. In other words, the DOL calculator, which calculates earnings based on applicable factors over the relevant time period of error, does not comply with EPCRS principles.
There are exceptions to the full correction general rule. The IRS correction procedures provide specific exceptions to the general rule (e.g., for administrative convenience, the fund with the highest rate of return may be used to calculate earnings if most employees being corrected are non-highly compensated employees) and rules when the general rule is not applicable (e.g., when an employee is to receive a corrective contribution but has not yet directed any investments in the Plan).
Most importantly for this topic, the IRS provides an exception which actually blesses the use of the DOL calculator. Full correction is not required in certain situations if full correction would be unreasonable or not feasible. In those situations, a reasonable interest rate may be used, and EPCRS states that the interest rate used by the DOL calculator is appropriate. However, the IRS instructs that full correction cannot be avoided merely because it is inconvenient or burdensome. What is reasonable or feasible will be based on the particular facts and circumstances of each situation. The answer is not always black or white, and in those situations the plan sponsor will have to weigh the competing interests and ultimately make the final call.
Plan errors can happen to even the most diligent of fiduciaries, so understanding plan corrections is one of the necessary tools for plan administration. If you have any questions on plan error corrections or need assistance when you discover an error, please contact any of the attorneys in our Employee Benefits group.
