Two of the first things the Department of Labor (DOL) looks at when auditing a 401(k) plan are the sponsoring employer’s payroll records and the plan’s trust records to determine whether the employer has timely contributed employee contributions to the plan. The Employee Retirement Income Security Act (ERISA) provides, with a couple of exceptions, that plan assets must be held within a qualified trust. Employee contributions to a 401(k) plan and repayments of plan loans become “plan assets” under these rules on the earliest date they can be reasonably segregated from the general assets of the contributing employer. The ERISA rule continues by stating that under no circumstances should the contributions be made later than the 15th day of the month following the month they were received by the employer or would have been paid to the employee had they not been contributed to the plan.
Beware of prohibited transactions
Previously, most employers assumed that the 15-day rule referred to above provided a “safe harbor” for employers to contribute their employee contributions. The DOL strongly disagreed with this assumption and has aggressively and successfully pursued claims of this nature against many companies. Besides violating ERISA, failing to make the deposits on a timely basis creates two problems:
- Participants in the 401(k) plan miss out on the interest or other income that would have been earned had such amounts been timely contributed to the plan.
- The employer receives a direct or indirect “benefit” from the use of the same “plan assets” during the period that such assets should have been held in the 401(k) plan.
This improper benefit to the company is commonly referred to as a “prohibited transaction” and requires the company to reimburse the plan for the lost earnings, file an excise tax form and pay an additional excise tax.
How fast do elective deferral contributions and loan repayments need to be contributed to the plan? The determination of what is reasonable for these purposes is based upon the applicable “facts and circumstances” relating to the employer and the applicable plan. Normally, for larger companies, the DOL generally assumes that they can make the contributions to the plan within one or two business days. However, under special circumstances, such as a small division on a separate and out-of-synch payroll, special payrolls out of the ordinary course of business, or power failures or other unanticipated business shut-downs, the facts and circumstances may support a longer time as being deemed to be reasonable.
Some good news
The good news for plans that have fewer than 100 participants as of the beginning of their plan fiscal year is that the DOL now provides them with a seven-day “safe harbor”. The safe harbor permits such smaller plans to deposit elective deferrals and loan repayments by no later than the seventh business day following the day such elective deferrals would have been paid to the employee or the loan repayment is received by the employer. The DOL has indicated that they will not go after small plans that make their contributions within the safe harbor period. Unfortunately, the seven-day safe harbor is not available for larger plans. Thus, plans with 100 or more participants (for these purposes, a participant is basically anyone who is eligible to make or receive contributions or who has an account in the plan) are still subject to the more stringent rules being enforced by the DOL.
Review your records
What does this mean for you and your company? If you have not already done so, you should review your payroll records and plan trust records to see how long it has taken to make the contributions to your plan. If you find that you have potentially violated the plan asset rules in the past or that you are not meeting the rules now, you should take action to correct the violation. The correction would include a contribution to the plan for the amount of lost income and the submission of excise tax forms to the Internal Revenue Service. In addition, if you have had problems timely making contributions, you will want to work with your payroll and plan trustees to implement changes to your contribution process so future contributions are contributed on a timely basis. Like other permitted self correction methods for fixing plan errors, these actions are best taken before the DOL contacts you or shows up at your door for an audit.
For more information, please contact:
John M. Wirtshafter
Benefit programs should be a win-win for employers and employees. We strive to accomplish that goal in the design, implementation and operation of sophisticated benefit and executive compensation programs – qualified and non-qualified retirement programs and health and welfare plans. Our employee benefits team has a long track record of working to maximize the efficiency and economic feasibility of each program.
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