Deposit Deadlines for Elective Deferrals
By Sheila Pawlicki, QKA
Does it matter when elective deferrals are deposited into participants’ accounts?
Yes. If deferrals are not deposited into participants’ accounts by the Department of Labor’s (DOL’s) deposit deadline, the deposits are considered late. This failure may result in a prohibited transaction.
When is the deposit deadline for elective deferrals?
DOL Regulation 2510.3-102(b) provides that assets withheld from a participant’s pay become plan assets as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets. Generally, the DOL will review the timing of past deposits when determining the earliest date on which such contributions can reasonably be segregated from an employer’s general assets.
The deposit date cannot be later than the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash. For example, deferrals withheld on any date in September must be deposited by the 15th business day of October.
Employers whose plans are subject to ERISA and who fail to make timely deposits in accordance with the timeframes stated above are considered benefiting from plan assets: a violation of ERISA Section 406 and Internal Revenue Code Section 4975.
Is there a safe harbor deposit deadline?
Yes. The safe harbor deposit deadline is found in DOL Reg. 2510.3-102(a)(2). The safe harbor applies only to small employers (those with fewer than 100 participants at the beginning of the plan year.) Under the safe harbor, employers are deemed to have deposited deferrals as soon as administratively possible if they deposit the deferrals within seven business days after withholding from the participant’s pay.
What if an employer deposits deferrals after the deposit deadline?
If an employer deposits deferrals after the deposit deadline, a fiduciary breach and subsequent prohibited transaction, may occur. The employer will need to make the participants whole by calculating and providing lost earnings. Theemployer may choose to correct late deposits by going through the Voluntary Fiduciary Correction Program (VFCP), which was designed to encourage the voluntary correction of fiduciary violations by permitting fiduciaries to avoid potential civil actions and civil penalties. Employers that correct through VFCP must file an application and meet other requirements.
One potential advantage of using the VFCP is that, if fiduciary violations are properly corrected, the DOL’s Employee Benefits Security Administration (EBSA) will issue a “no-action letter” to the employer. This provides assurance that there will be no fiduciary breach penalties assessed for the corrected violation and that the EBSA will not take civil enforcement action against the employer regarding the breach. Furthermore, those who correct through VFCP are not required to pay the otherwise-mandatory 15 percent excise tax.
Employers that do not wish to file under the VFCP may instead use a DOL online calculator to perform a “better of“ calculation in order to determine the amount of lost earnings that must be restored to the plan. Under this method, the employer must calculate both the actual earnings on the plan’s investments for the failure period and the underpayment rate determined by the DOL online calculator. The employer must then deposit the deferral contributions plus the lost earnings—determined by the using the better of the two calculated return rates. Employers using this method must generally file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and pay a 15 percent excise tax.
