As competition for employees increases in our tightening labor market, companies are looking harder for ways to attract and retain workers. Providing a retirement plan is one of the most popular enticements. But if your company offers a retirement plan or is considering establishing one, a word of caution: take care to transmit employee contributions to the plan on time.
Not doing so can cost you the time and expense of calculating corrective contributions and potentially dealing with a U.S. Department of Labor audit and financial penalties. Late funding of employee contributions is one of the most common issues we see in our retirement-plan consulting practice.
The DOL defines participant contributions as amounts withheld from wages by an employer for deposit to the plan. This includes employee elective deferrals, employee after-tax contributions and participant loan repayments.
The DOL regulations state that participant contributions must be deposited to the plan by the earlier of:
• The 15th business day of the month following the month the contribution was withheld from the employee’s paycheck, or the earliest date the contributions can be reasonably segregated from the employer’s general assets.
Under a plan audit, the DOL may consider the following items in determining the earliest date that the contributions could reasonably be segregated from the employer’s general assets:
• Payroll frequency.
• Number of payroll centers or locations.
• Time it takes employer to deposit FICA withholding.
• Deposit history.
Review your payroll procedures to ensure that deposits are being made in a timely manner and that the timing is consistent from payroll to payroll. If deposits are generally made within five business days but there is one deposit during the year made in three business days, the DOL might view this as proof that five business days is not the earliest reasonable date of deposit.
In 2010, the DOL created a safe-harbor deadline for deposit of participant contributions to small plans (those with less than 100 participants on the first day of the plan year). Under the safe-harbor deadline, deposits are considered timely if made within seven business days following the payroll date. Plans filing Form 5500 as a small plan under the 80/120 participant rule would not be eligible for the safe-harbor rule if the participant count is 100 or more on the first day of the plan year.
Failure to timely deposit participant contributions is considered a loan from the plan to the plan sponsor and is prohibited. The failure is reportable on Form 5500-SF, line 10a (small plans) or on Schedule H of Form 5500, line 4a (large plans) for each year through the year the failure is fully corrected. Full correction consists of deposit of the contributions and earnings calculated through the date of full correction.
Earnings are calculated using the greater of the actual rate of return, or the IRS 6621(a) underpayment rate (currently 5 percent). A 15 percent excise tax is due on the amount involved in each prohibited transaction for each year through the year of full correction. The amount involved is based on the earnings on the late contributions and is paid by filing Form 5330. 403(b) plans are not subject to the excise tax.
The DOL takes deposit of participant contributions very seriously. The timing of deposits to the plan needs to be given the same level of importance as depositing payroll withholding taxes. An ongoing history of late deposits could subject your plan to a DOL audit.
Diane M. Caron is a director in the retirement and benefit plan services group at CBIZ & MHM New England, which has offices nationwide, including in Providence and Boston.
