Late Deposits of Plan Participant Contributions
By Ethan Heck, QKA
How quickly must retirement plan sponsors deposit participant contributions?
Plan sponsors generally must deposit participant contributions as soon as possible. The Department of Labor (DOL) states that participant contributions are to be deposited as of “the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” Small plans with under 100 participants at the beginning of the plan year have a reliable safe harbor of seven business days to receive participant contributions following the day on which participant contributions are withheld from pay. Plan administrators and trustees should develop and maintain deposit procedures to ensure that the DOL’s standard is met. Adhering to this best practice ensures that late deposits can be quickly discovered and corrected before they become much larger problems.
What are the consequences for late participant contributions?
Late participant contributions may result in lost earnings to the plan and the employer owing excise taxes to the IRS. Late participant contributions are considered prohibited transactions under Internal Revenue Code Section (IRC Sec.) 4975. The prohibited transaction penalty is equal to at least 15 percent of the lost earnings on late deposits due for any taxable year. Once lost earnings have been calculated and deposited to the plan, the penalty is paid and reported to the IRS on Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.
The DOL offers the Voluntary Fiduciary Correction Program (VFCP) as an option for plan sponsors to obtain a limited exemption to the prohibited transaction penalty. Employers may qualify for this exemption for one “transaction” every three years. A “transaction” can be a single late deposit or a series of consecutive late deposits that share a common cause. No exemption will be granted for any deposit that is made more than 180 calendar days after the withholding occurred. For example, if a series of four bi-weekly elective deferral deposits were made later than the employer’s standard time to deposit, but within 180 days, all four deposits could be counted as a single transaction potentially exempt from excise tax. If eligible, the VFCP provides a free application that could save employers money on the excise taxes they would otherwise owe.
How would regulatory agencies discover late participant contributions?
While late contributions could be discovered in a random audit or reported to the DOL by a participant, neither of these are common occurrences. By far, the most common way that the DOL discovers late participant contributions is from Form 5500, Annual Return/Report of Employee Benefit Plan. Each year, plan sponsors must self-report late participant contributions. Because all information reported on the Form 5500 is signed by a plan fiduciary under penalty of perjury, a failure to report known late deposits may be subject to steep fines and other consequences.
In recent years, plan sponsors reporting late participant contributions on Form 5500 have received a letter from the DOL’s Employee Benefits Security Administration (EBSA) to encourage use of the VFCP. This program is not mandatory, but plan sponsors who have not corrected the late participant contributions by this time should consider applying.
Has the DOL made any changes to its deposit requirements in response to the COVID-19 pandemic?
Alongside other COVID-19-related guidance released this year, the DOL acknowledged that the COVID-19 outbreak may cause delays in participant payments and withholdings sent to the plan. EBSA Disaster Relief Notice 2020-01 grants only minimal leniency on the deposit of participant contributions and loan repayments. The EBSA formally announced in the notice that it “will not—solely on the basis of a failure attributable to the COVID-19 outbreak—take enforcement action with respect to a temporary delay in forwarding such payments or contributions to the plan.”
This leniency is heavily determined by facts and circumstances and does not replace the general standard to deposit participant contributions as soon as possible. For delinquencies not solely attributable to the COVID-19 outbreak, the VFCP remains available, and the EBSA continues to process applications. The general correction method remains unchanged, including the requirement to restore lost earnings to the plan and pay applicable excise taxes.
