Late Elective Deferral Contributions To A Retirement Plan

By Anthony L. Scialabba IV, Esq., QKA

 

When must elective deferral contributions (“contributions”) be deposited?

 

The Department of Labor (“DOL”) requires employers to deposit contributions as soon as they can be reasonably segregated from the employer’s general assets. In no event can contributions be deposited later than the 15th business day of the month following the month in which they are withheld or received by the employer. Retirement plans with less than 100 participants (i.e., small plans) have a safe harbor rule in that contributions must be deposited within seven business days of withholding or receipt by the employer.

 

What about the establishment of trends?

 

A subjective determination is used to determine when contributions can be reasonably segregated. If an employer evidences that the contributions can be provided in a plan quickly (e.g., two to three days), the employer can become held to that standard.

 

What happens if contributions are not timely deposited?

 

If contributions are not timely deposited, the DOL can sue a plan fiduciary for a breach of the fiduciary duty to operate the plan in a prudent manner and the duty to operate a plan for the exclusive benefit of plan participants and beneficiaries. In addition to being sued for a breach of these fiduciary duties, an employer could subject a plan to the DOLs civil penalties.

 

The failure to segregate contributions from an employer’s general assets and timely forward them to the plan’s trust allows the employer the prohibited use of plan assets. This can result in a plan fiduciary engaging in a prohibited transaction for which it can be assessed an excise tax. In this regard, the Internal Revenue Service requires a 15 percent excise tax on lost earnings. To pay this excise tax, an employer must use Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.

 

What program may be used to correct late contributions?

 

The DOL offers a program to correct the late contribution defects which is known as the Voluntary Fiduciary Correction Program (“VFCP”). To use the VFCP, an employer must correct the untimely deposit error. Subsequently, an employer must file an application with the DOL which describes (among other things): (1) the amount of each late contribution and when it was corrected; (2) the amount of any lost earnings due with regard to the late contributions and when they were contributed to the accounts of affected participants; and (3) the circumstances around the late contributions.

 

How can late contributions be avoided?

 

A clear procedure should be implemented to ensure that contributions are deposited as soon as they can be reasonably segregated. An employer should coordinate with a payroll provider to determine when that date may generally be.

 

RetireWell Administrators, Inc. can perform payroll upload services for your plan to help ensure contributions are timely deposited. If you have any questions or comments with regard to late contributions, please call 856-396-0499 or email clientservices@retirewelltpa.com.