One of the most basic duties of a defined contribution plan sponsor is to ensure that that there is no delay and participants’ salary deferral elections are correctly and timely deposited into the retirement plan. Not only is this duty necessary for proper administration of the plan, it is also part of a plan sponsor’s fiduciary duties under the Employee Retirement Income Security Act (ERISA).
When must salary deferrals be deposited?
ERISA requires that employers must deposit their employees' salary deferrals into the plan trust as soon as the deferrals can reasonably be segregated from the employer's general assets, but no later than the 15th business day of the month following the payday. This same rule applies to loan repayments. In today’s tech-enabled environment, this time period is often very soon. A more definitive rule applies to plans with fewer than 100 participants at the beginning of the plan year. These plans have a safe harbor of seven-business day following the payday in which to deposit the deferrals.
For 403(b) plans not subject to ERISA, IRS regulations provide that contributions must be deposited within a period that is not longer than is reasonable for the proper administration of the plan. The regulations go on to say the plan can provide a specified time period with the example being within 15 business days following the month is which these amounts would otherwise have been paid to the participant.
Same due date for employer contributions?
Employers have more leeway with depositing employer contributions. For deduction purposes, the contributions must be made by the filing deadline of the employer's tax return for the year, including extensions and are limited to 25% of participant compensation. For Internal Revenue Code (IRC) §415(c) (total annual additional limit) purposes, however, the deadline is 30 days following the extended tax filing due date to be treated as an annual addition for the prior year. Otherwise the contribution will apply to annual additions for the current year. Finally, the regulations associated with 401(k) testing provide that the following contributions may be made up to 12 months following the close of the plan year:
- Matching contributions subject to the Average Contribution Percentage (ACP) test
- Safe harbor match and nonelective contributions
- Qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs)
None of these provisions trump each other, so they do not work together in perfect harmony.
What happens if deposits are late?
If a plan sponsor realizes that salary deferrals were not deposited in a timely manner, the most important step to take is to deposit the late amounts as soon as possible. In addition, the plan sponsor should calculate lost earnings attributable to the late amounts calculated from the earliest date it is determined the deferrals could have been deposited and pay that amount into the affected participants’ accounts as well. The Department of Labor (DOL) provides an online calculator that plan sponsors can use if they go through its Voluntary Fiduciary Correction Program (“VFCP”), which is explained below. If the plan sponsor chooses to not go through the “voluntary program,” they must use the earnings rate of the highest performing fund during the period of the delay.
A late deposit is considered a prohibited transaction under ERISA. This means that IRC §4975 imposes a 15% excise tax on the lost earnings, attributable to the late deposit. The excise tax payment should be reported to the IRS on a Form 5330. Like the calculation of lost earnings, there is no de minimis amount of excise tax for which you can forgo paying the tax and filing a Form 5330.
In addition, the plan sponsor will need to report the late contributions on its Form 5500 under Compliance Questions.
Department of Labor’s Voluntary Fiduciary Correction Program
While the DOL’s program is “voluntary,” the DOL takes the position that late deferrals cannot be self-corrected and that plan sponsors need to go through VFCP to correct the error. Our experience is that plan sponsors that have to report the deferrals as late on their Form 5500 and who do not go through the DOL program end up receiving a letter from the DOL strongly encouraging participation in the program. Failure to go through the program after notification may result in a DOL audit.
VFCP also gives plan sponsors who would like to avoid the 15% excise tax a way to request a waiver of the excise tax. VFCP along with PTE 2002-51 allows fiduciaries to correct certain specified prohibited transactions (including late contributions) and seek a waiver for the excise tax.
A Plan sponsor may use the VFCP excise tax relief only once every three years. The plan cannot be under investigation by the DOL. The level of VFCP documentation requirements will depend on the amount of the contributions involved and the time frame in which the correction was made. The correction will also require a notice to “interested parties” within 60 days following the VFCP submission, unless the amount of excise tax would be less than or equal to $100.
Self-correction is coming
In late 2022, the DOL announced a proposed amendment to the VFCP and Prohibited Transaction Exemption (PTE) 2002-51 that will allow self-correction of late deposits by filing a notice of correction with the DOL, instead of going through DFCP when the “lost earnings” due to the plan are $1,000 or less. The proposal also removes the once per three-year limit on use of the correction. While the DOL subsequently reopened the comment period for the amendment through April 17, 2023, recent statements by DOL officials suggest final rules may be forthcoming in the next few months.
According to the DOL’s news release, the proposed self-correction can be used if the following conditions are met:
- Participant contributions or loan repayments to the plan must be remitted no more than 180 calendar days from the date of withholding or receipt.
- Lost earnings must not exceed $1,000 calculated from date of withholding or receipt.
- The plan or self-corrector must not be under investigation as defined in the program.
- Self-correctors must use the program’s online calculator to calculate lost earnings and an online web tool to complete and file the self-correction component notice. Self-correctors must also complete and retain the self-correction retention record checklist.
The amendment should be welcome relief for plan sponsors, as late contributions are one of the most common mistakes made by plan fiduciaries. In addition, the change should significantly ease the correction process and better align the DOL’s VFCP with the IRS’s Employee Plan Compliance Resolution System (EPCRS) in allowing common plan compliance issues to be self-corrected.
If you want to discuss any concerns you may have about late deposits or any other compliance issues, please reach out to any of the attorneys in our Employee Benefits group.
