of Labor Position on 401(k) Elective Deferral Deposits
Sheldon M. Geller
2006 - The U.S. Department of Labor (DOL) has revised the
instructions to IRS Form 5500 to require plan auditors to
review the deposit of 401(k) elective deferral contributions
and to confirm that the plan sponsor has deposited these contributions
in a timely manner. The DOL is using plan auditors to enforce
this regulatory requirement, placing greater pressure on plan
sponsors to comply with the deposit requirement as well as
to correct any late deposits. The requirement begins with
the 2003 plan year.
time period described by the regulations requires that a
plan sponsor deposit 401(k) deferral contributions on the
earliest date the employer can reasonably segregate the
contributions from its general assets, but in no event later
than the 15th business day of the month following the month
in which the employer withheld the contributions from the
plan sponsors and practitioners have mistakenly interpreted
the DOL regulation to permit them to wait until the 15th
business day of the following month to deposit 401(k) elective
deferral contributions, even if they could have segregated
the funds earlier. Other employers and practitioners have
mistakenly interpreted the regulation to permit them to
have 15 business days following the point at which the employer
could have segregated the deferrals and deposited same into
the plan’s trust. This confusion resulted from prior
versions of IRS Form 5500 attachments that asked whether
the employer had deposited the contributions within the
“maximum” time period permitted in the regulations.
The DOL removed the word “maximum” from Schedules
H and I of IRS Form 5500 with the 2002 plan-year forms.
plans that are not subject to the audit requirement need
to comply as well, even though no outside plan auditor is
reviewing the timeliness of deposits and disclosing their
determination in their audit report in accordance with generally
accepted auditing standards (GAAS).
one investigation, the DOL took the position that a plan
sponsor had the ability to remit employee contributions
to the plan within 14 calendar days (or 10 business days)
following the date on which the contributions were withheld.
The DOL took the position that remittances made to the plan
more than 10 business days after the contribution withholding
dates failed to comply with DOL regulations and that these
untimely remittances of employee deferral contributions
to the plan and the retention thereof violated Employee
Retirement Income Security Act (ERISA) guidelines. Furthermore,
the DOL took the position that the plan sponsor needed to
compensate the plan for lost opportunity earnings associated
with the delinquent employee contributions in accordance
with DOL regulations, which prescribe a method for determining
compensation for delinquent contributions.
requires the DOL to assess a civil penalty against a fiduciary
who breaches a fiduciary responsibility under, or commits
any other violation of, ERISA, including the late deposit
of 401(k) elective deferral contributions. The penalty under
ERISA is equal to 20% of the “applicable recovery
amount,” meaning any amount recovered from an ERISA
fiduciary or other person with respect to the breach or
violation. Furthermore, any ERISA violation may be the subject
of legal action taken by third parties, including plan participants
or other governmental agencies.
employers deposit participant contributions late and therefore
fail to execute their fiduciary duties, they should take
the following corrective action:
Correct the late deposit of participant contributions
by filing under the Voluntary Fiduciary Correction Program
(VFCP) and comply with the requirements of Prohibited
Transaction Exemption 2002-51;
Pay the excise tax; and
Footnote the Schedule H or I of IRS Form 5500 to indicate
to the DOL that the correction has taken place.
an employer corrects the late deposit of participant contributions
by filing under the VFCP, the employer does not have to
pay the prohibited transaction excise tax. The employer
must correct the prohibited transaction and pay the excise
tax via Form 5330. Because the excise tax is nominal, many
employers correct using the methodology of the VFCP but
do not file under the program. Employers are well advised,
however, to file under the VFCP program and to pay the excise
if the employer qualifies for the excise tax exemption,
the employer must report the late deposits in IRS Form 5500.
The DOL continues to focus on the timeliness of the remittance
of participant contributions, and this remains an enforcement
initiative of the Employee Benefits Security Administration.
sanctions and penalty taxes of substantial amounts may be
imposed by the IRS and the DOL even if the failures are
unintentional administrative errors. The IRS has emphasized
that sanctions will be imposed for failure to follow the
terms of the governing plan document, even if the plan’s
operation otherwise complies with the qualification requirements
of the IRC.
the most carefully administered plan may experience a potentially
disqualifying defect that may be timely discovered by the
implementation of self-protection procedures and the conduct
of an annual self-audit. The sanctions associated with disqualification
can penalize a plan sponsor for inadvertent and unintended
infractions of the very complex rules of federal pension
DOL has dramatically deferred to plan sponsors by enabling
them to correct violations through self-correction mechanisms
to avoid significant monetary sanctions and fiduciary liability.
The DOL encourages plan sponsors to conduct self-audits
of actual plan operation concerning the level of compliance,
and to find and correct any qualification failures. Voluntary
compliance is a relatively new and rapidly changing area
of the law.
M. Geller, Esq., is managing director of the Geller
Group Ltd., New York, N.Y.