It is the employer’s responsibility to ensure that tax-deferred contributions collected from employees’ paychecks are transferred into the plan’s trust account on time, whether it be a profit-sharing, 403(b), 401(k), or another defined contribution plan. It is the employer’s task to perform these deposits within a quick and reasonable time, otherwise, it can be very costly. The Department of Labor (DOL) views non-compliance with remittance rules as a major issue and missing these deadlines can carry significant penalties. Although it may seem like a simple task, it can be challenging to determine how quickly the employer must do so.
Employee Deferral Deadlines
The DOL has stated that employee deferrals must be remitted no later than the 15th business day following the month it’s withheld. Depending on whether a plan sponsor is a small employer (filing a Form 5500-S/F) or a large employer (filing a Form 5500 with an annual audit), they must:
- Small employers: make their deposits within seven business days to be considered timely.
- Large employers: make contributions as soon as administratively reasonable after they are withheld.
Reasonable: What Is it?
The term “reasonable” can vary according to the circumstances of the company. The process may be completed within a few business days for companies with streamlined operations. In some cases, however, the maximum time for a reasonable turnaround may be eight days for companies with multiple locations. Although there are some companies that outline remittance schedules in the plan document, the DOL will evaluate the deposit history of the plan to determine if remittances have been made timely regardless of whether the plan follows a remittance policy or not.
Steps to Correct Late Deferrals
It is not uncommon for plan sponsors to miss their remittance deadlines, even with the best intentions and safeguards in place. A late remittance is a breach of the plan sponsor’s fiduciary responsibilities. As such, it is treated as a prohibited transaction by the DOL. Taking immediate action is essential to correcting the issue through either one of two ways below:
- Self-correction
- DOL’s Voluntary Fiduciary Correction Program (VFCP)
Understanding the steps involved in correcting a late deposit is essential before selecting one.
Make a Deposit First
After discovering the late contribution, plan sponsors must transfer the amount to the plan as soon as administratively possible. It is critical for plan sponsors to determine how much earned income the participants should have received if the funds had been deposited on time.
Plan sponsors can calculate lost earnings using a calculator provided by the DOL. This calculator is not required, but it can be used as a helpful tool. While self-corrections are an option, plan sponsors should note that the DOL may not recognize or accept the amounts calculated by the calculator. In addition, the calculator is only designed for plan sponsors applying through the VFCP correction method.
To avoid prohibited transactions spanning several years, it is important to correct the transaction immediately. Until the earnings have been credited, a prohibited transaction is considered incorrect, requiring one to act quickly.
The Right Forms
Form 5500, Schedule H, Line 4a should be used to report late remittances. Within a few days of filing Form 5500, the DOL will send the plan administrator a letter with information regarding the VFCP.
Correcting the mistake requires the employer to pay all associated correction costs, rather than the plan itself. Following the remittance of overdue deposits, employers are required to submit IRS Form 5330 for payment of the 15% excise tax on the lost earnings related to the late remittances. The lost earnings and the applicable excise tax should both be paid from the Plan Sponsor’s assets, and not Plan assets.
Self-Correction vs. VFCP: Which is better?
Plan sponsors who follow the VFCP protocols are protected from potential DOL audits or enforcement actions if they choose to use the VFCP. The IRS often relieves plan sponsors from paying penalties and excise taxes associated with missed earnings. It is also worth noting that the lost earnings calculations based on the VFCP are usually lower than the return rate of the plan.
VFCP requires plan sponsors to make corrections to their plans and then apply to the program indicating that they have made the corrections. Following approval of the corrections, the DOL will issue a “no action” letter that will remove the organization from potential enforcement actions in the future.
Some plans choose self-correction because of how tedious and costly the VFCP process can be. The self-correction process is much quicker, however, in some instances it can be more expensive. Sponsors typically use either the actual return rate of the plan or the IRS’s underpayment rate to calculate the lost earnings. In addition, plan sponsors who use the self-correction method lose the chance to waive the associated excise taxes.
Conclusion
Employee deferrals continue to be a priority for the DOL. Employers can ensure that their plans remain compliant by familiarizing themselves with the DOL’s regulations, establishing appropriate procedures, and monitoring the remittance process. However, if an employer has missed a remittance deadline, they can correct it by using the self-correction method or VFCP. Self-correction may be appropriate when deadlines are missed that have fewer transactions. The VFCP may be appropriate in cases where multiple errors have occurred, a problem has lasted more than one year, or if the plan sponsor wishes to avoid the DOL investigating the plan after corrections have been made.
For more information regarding contribution remittance schedules, please reach out to Aviance Williams at aviance@dhw.cpa or 828.322.2070