One of the most common mistakes we see when auditing retirement plans is a lack of compliance with the handling of late employee contributions. Many plan sponsors are mistaken in thinking they are compliant with the Department of Labor (DOL) with regard to how often they are remitting their employee contribution deferrals. This has been a hot topic item for the DOL over the last several years; the big question is: how often should employee contribution deferrals be transmitted from the plan sponsor’s assets to third party administrators? Take note that this explanation applies only to employee contributions; employer contributions do not have a remittance time constraint against them.
Generally speaking, we recommend that employee contribution deferrals be transmitted as soon as possible. You may have read the official language that states “in no event can the deposit be later than the 15th business day of the following month,” but, in practice, this is simply too late. Beyond administrative complications, participant accounts could be otherwise accruing interest. I would personally want that money in my participant account, no matter how large or small it was, ASAP, and I doubt I’m alone! The DOL provides a seven business day safe harbor rule for plans with fewer than 100 participants. This means: if you’re a small plan (again, less than 100 participants) and want to be considered in compliance with DOL standards, then employee contribution deferrals withheld from employees' pay should be deposited within seven business days. If a small plan is being given seven business days to remit, then what should a larger employer with more resources and more employees be given? Employee contributions should be remitted as soon as they can be reasonably segregated from the general assets of the plan sponsor. If your company consistently demonstrates that employee contributions can be remitted in three business days, then this should be your company’s standard of a timely contribution remittance, and anything over should be considered late. Furthermore, if your payroll taxes are being remitted within several days then why aren’t your employee’s contributions as well? There isn’t a good reason for one taking longer than the other. Compare the dates of deposits of employee contributions to the date they were withheld from employees pay to determine how long your remittance period is.
So, what should you do if you have determined that your company’s employee contribution remittances have been submitted late? You found a mistake, so now it’s time to fix it. We always suggest trying to fix the mistake through the DOL’s Voluntary Fiduciary Correction Program (VFCP). Violations can be correctly resolved through this program. Also, make sure you are making your third party administrator aware of the late contributions, and they can potentially help you through the correction process. Once you calculate lost earnings on those contributions, you will need to remit these lost earnings into the plan. The calculation of lost earnings is based on the date of the loss, the date of its recovery, and the final payment date. For example, if your company usually remits within three business days, then you should consider the date of the loss to be three days after the payroll check date. The final payment date would be the date you plan to remit the lost earnings into the plan. The recovery date is when the contributions were submitted to the plan. These lost earnings should be allocated to the participants of the plan. Take note that IRS Form 5330 should be filed for the contributions that were not remitted timely. This Form is used to report and pay any excise tax penalty incurred for not remitting timely employee contribution deposits. After correcting the issue, consider implementing internal controls to help ensure that employee contribution remittances are done timely in the future.
Management of late plan contributions is a common issue, and it’s one that should be rectified as soon as possible. Be sure to talk with your financial advisors to ensure that you’re handling this component of your retirement plan correctly.