Use caution with late deposits of employee deferrals to benefit plans

 Megan Broomfield, The Daily Record Newswire

We see it quite frequently during plan audits — employee elective deferrals and loan repayments to a plan are deposited to the plan’s trust later than the time period allowed by the Department of Labor. Collectively, we refer to these as “late deposits.”

DOL rules require that the plan sponsor deposit employee deferrals and loan repayments to the trust as soon as the sponsor is able, but no later than the 15th business day of the following month. This so-called “15 business day rule” is not a safe harbor. Small plans with fewer than 100 participants do have a safe harbor of seven business days, but the safe harbor is not available to large plans (e.g., plans that require an audit).

It is the plan sponsor’s policies, procedures and internal controls that dictate the amount of time it should take to segregate the employee elective deferrals and loan repayments.

A good way to determine whether deposits were made timely is to periodically evaluate all of the remittances that were made to the plan (or should have been made to the plan). For each remittance that would ordinarily have been made, the plan sponsor should determine the earliest date that the assets could have been segregated from the general assets of the plan sponsor (which may be as soon as the payroll withholding date) and compare that date to the actual deposit date.

If any deposits exceed the time period the plan sponsor determined to be reasonable, the remittance is considered late and is considered a prohibited transaction. This is an area our clients frequently consult with us about. Once the sponsor has made a general determination of timeliness, the sponsor should consider formalizing this as the plan’s remittance policy. As with all policies, this policy should be adhered to once set.

Correction of the late deposits includes several steps. The plan sponsor must make each affected plan participant whole by making an additional contribution to the plan that reimburses the participants’ accounts for the lost earnings on the late deposits that were not invested in a timely manner.

Such late deposits need to be reported on the Form 5500, Annual Return/Report of Employee Benefit Plan, and included in a supplemental schedule attached to the audited financial statements. Additionally, for non-403(b) plans, a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, must be filed by the plan sponsor to pay an excise tax equal to 15 percent on the amount of the lost earnings restored to the plan (e.g., the plan correction). There are two different methods for correcting the late deposits: DOL Voluntary Fiduciary Compliance Program or self-correction.

VFCP option

The VFCP is a program that allows a plan sponsor to report and correct late deposits to the DOL. In exchange, the plan sponsor obtains a “no action” letter from the DOL, which states that the DOL will not recommend the plan be audited for this issue.

What are the advantages to using VFCP? The DOL online calculator is used to determine the lost earnings needed to make plan participants’ accounts whole. The interest rates in the DOL online calculator are set at the Internal Revenue Service interest rates for underpayment (generally around 3-6 percent), which, depending on market conditions, may be less than the actual earnings for the plan and therefore more favorable to the plan sponsor.

Other advantages of VFCP include 1) no required filing of Form 5330 if the excise tax is less than $100, and 2) waiver of excise taxes over $100 provided notice is given to the participants.

Why would VFCP not be preferable? Many plan sponsors decide to forgo the VFCP procedures because payment of the excise tax can be less costly than the time incurred to prepare the VFCP-required paperwork and due to the participant notification requirements.

Self-correction option

Use of VFCP is not required — in fact, most late deposits are corrected without going through VFCP. Rather, a plan sponsor may elect to self-correct by remitting a corrective contribution to the plan to make participants’ accounts whole. The downside to self-correction is that the restoration to the plan must be the greater of the plan’s actual rate of return or the IRS underpayment rate that is used in the DOL online calculator.

The plan sponsor is not automatically eligible to use the DOL online calculator to determine the lost earnings on late deposits. Depending on the plan’s actual rate of return for the years involved in the correction, the required corrective contribution to the plan may be considerably larger than the correction under VFCP automatically based on the DOL online calculator. The use of unreasonable rates of interest has recently been identified by the IRS as a recurring error in plan corrections.

Reporting of late deposits

As noted above, late deposits are reported on the Form 5500 (and disclosed in the audited plan financial statements and supplemental schedules). The late deposits must continue to be disclosed every year, including the year in which they are fully corrected.

Keep in mind that a late deposit is not considered fully corrected until the plan sponsor files a Form 5330 or obtains a waiver through VFCP. If there are amounts reported that are not ultimately corrected, this may be a red flag to the DOL.

Plan sponsors should monitor the timeliness of deposits throughout the year and ensure any corrections are made appropriately. They should also ensure appropriate policies; procedures and internal controls are implemented to avoid recurrences.

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Megan Broomfield, CPA, is a partner at Mengel, Metzger, Barr & Co. LLP and may be reached at Mbroomfield@mmb-co.com.

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