Correction Amount

(1) The correction amount equals the sum of the excess benefit and interest on the

excess benefit. See Treas. Reg. 53.4958-7(c).

(2) The amount of interest is determined by multiplying the excess benefit by the

appropriate interest rate. See Treas. Reg. 53.4958-7(c).

a. Interest should be compounded annually.

b. Interest should be computed from the date the excess benefit transaction

occurred to the date of correction.

c. The interest rate should be at least equal to the applicable federal rate

(AFR), compounded annually, for the month when the excess benefit transaction occurred.

d. The period from the date the excess benefit transaction occurred to the date

of correction is used to determine whether the appropriate AFR is the federal short-term rate, the federal mid-term rate, or the federal long-term rate. See Section 1274(d)(1)(A).

(3) If the excess benefit transaction arises under a contract that has been partially

performed, it isn’t required that the contractual relationship be terminated to correct. However, to avoid future excess benefit transactions, the parties may need to modify the terms of any ongoing contract. See Treas. Reg. 53.4958-7(d).