Deposit Benefit Contributions on Time!
23 June 2014
The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) continues to focus heavily on safeguarding employee contributions to 401(k), health care, and other contributory plans. The DOL has conducted civil and criminal investigations into situations in which employers improperly delayed depositing employee contributions to the appropriate plans—or simply converted the contributions to other “non-plan uses,” such as their own personal use or to cover business expenses.
“You can avoid a DOL audit and problems with the IRS simply by making your plan contributions on time and not borrowing your employees’ money to fund your business,” says Eric Rigby, principal and financial planner at Rigby Financial Group. “But we also know that sometimes these mistakes are inadvertent—there might be a change of personnel or a clerical error—and we can help you take corrective action.”
The Regulations on Employee Contributions
The Employee Retirement Income Security Act (ERISA) requires employers to deposit employee contributions (both deferrals and loan payments) on the earlier of:
- The earliest date the employer could have segregated the deferrals from its own funds; or
- The 15th business day of the month following the month the employer withheld the deferrals.
To comply with the regulations, you should ensure that you remit contributions to the plan as soon as possible and on a consistent schedule. So, for example, if you demonstrate that you can get the contributions to the plan in three business days, the DOL could consider a contribution made five business days after the payroll date to be a late contribution.
If you have a smaller plan (fewer than 100 participants), the DOL provides you with a “safe harbor” of seven business days after you receive the contributions. Any deposit later than that is considered late.
Correcting Late Deposits
What should you do if you’ve made a late deposit of employee contributions? All is not lost. First and foremost, deposit any late contributions immediately. In addition, you’ll need to deposit any lost earnings on the late contributions. If you’d like help calculating your lost earnings, please give us a call.
To correct a late deposit of employee contributions, you must file Form 5330 (Return of Excise Taxes Related to Employee Benefit Plan) and pay a 15% excise tax on the value of the amount involved—which is the amount of lost earnings.
Another option is the DOL’s Voluntary Fiduciary Correction Program (VFCP), which is designed to encourage employers to voluntarily comply with ERISA by self-correcting their late contributions. The VFCP program is free and relatively simple to use. If you file an VFCP application (there’s no filing fee) and satisfy certain conditions, you’re exempted from paying the excise tax and don’t have to file Form 5330.
Furthermore, the DOL generally won’t audit you for delinquent contributions if you’ve filed a VFCP application. However, you must file an application before the DOL opens an audit—so time is of the essence.
In addition to paying the excise tax and filing Form 5330, you must report delinquent participant contributions (which the IRS considers non-exempt or “prohibited” transactions) on Form 5500, line 4a of Schedule H or I, as applicable, for the year in which the contributions were delinquent and for each subsequent year, until the year after the violation has been fully corrected.
You’ll also have to attach a supplemental “Schedule of Delinquent Participant Contributions” detailing the delinquent contributions and their status (corrected, not corrected, or pending correction) before filing your Form 5500.
Timing of Other Contributions
Note that the rules governing the timing of matching contributions or other employer contributions are different from those for elective deferrals. To get a current tax deduction, you must meet the following rules:
- You can make contributions to match deferrals at the time of the elective deferral contribution or later, but not later than the filing deadline of your income tax return, including extensions.
- You must make contributions that aren’t tied to elective deferrals by the filing deadline of your tax return, including extensions.
Review your plan document for the timing and amount of your matching and other employer contributions.
Rigby Financial Group offers extensive services in the areas of human resources and benefits consulting. Please contact us for advice and assistance in reviewing your benefits plans.
The information presented here is not specific to any individual’s personal circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.