Late deposits

[ESOP Guy]

Has anyone come up with a practical cost effective way to deal with this situation.

In the last 48 hours we have had a client who had 8 late deposits in 2010 and total lost interest is 12.98 and one that had one total lost interest is <$10.

As far as we can tell you have to compute the lost interest, divide it up amoung the people, file the 5330. In short they are paying us hundreds of $ for less the $15 in impact. The clients just aren't happy.

I realized part of the anwer is just make the 4k deposits in 7 days.

Any insights will help.

I could not find a prior thread, but suspect it is out there. I have not fully mastered this board's search function.

[ESOP Guy]

Ok how do I control which forum this is put under. I didn't mean to put this under the non-qualified forum, but retirement.

[Guest Sieve]

Moved to 401(k).

[Jim Norman]

On the IRS teleconference call today on Form 5330, they reiterated that there is NO de minimis amount for the 5330 for late deferrals. So you've got it right, lots of work for a trivial amount of tax.

[ESOP Guy]

One of the firm partners has suggested we just over guess the lost earnings and have the client put that in based on the ratio of the ytd 4k def, in this case put in $100 in lost earnings. If one reads the rules the DOL rate is a minimum rate of interest you can clearly reimburse more. The problem was it appeared in the case of the client I am working of the 8 late payrolls the owner only def in 2 of them. He gets paid monthly everyone else is every 2 weeks. So the person most hurt by the late deposits is the owner’s wife. She defers the most and gets paid every 2 weeks like the rest of the employee.

Our fear is over benefitting the owner. I guess you could put the earnings in and give the owner none of them. Even if you have them pay the excise tax on the $100 of earnings you still only have $15 excise tax. Total cost $115. That would be less then what we would charge to do the correction the correct way.

Like I said has anyone else found a cheap way to get the client in compliance.

As far as I can tell this isn’t a disqualifying defect. These small amounts might be just right to play the audit lottery.

[Jim Chad]

Is there any option for self correction here like in EPCRS?

If not, get we get ASPPA and NIPA to talk to EBSA about such a program?

[Bird]

I know ASPPA has asked for relief and the DOL doesn't care to bend. There's some kind of regulatory relief initiative in process and I just suggested to ASPPA GAC that if there was one thing to pick to fix, this would be it.

[PFranckowiak]

Okay - I have a situation where the client made the contribution on the 8th day - not the 7th business day. This intest is going to be less than $1.00 as the amounts are not large. Since the 7th day is only a "safe Harbor" What are people doing with the ones that are a day late?

Pat

[Francis]

We have a similar issue. A small loan repayment was sent in a couple of weeks late resulting in $0.35 of lost earnings to the participant per the VFCP calculator. The 35 cents has been added to make the participant whole. Is 5330 now required and if a tax/penalty is due, how is the amount calculated? Also it looks like the VFCP Model Application Form may be required, too. Anyone out there have insight on this? thank you!

[ESOP Guy]

We have a similar issue. A small loan repayment was sent in a couple of weeks late resulting in $0.35 of lost earnings to the participant per the VFCP calculator. The 35 cents has been added to make the participant whole. Is 5330 now required and if a tax/penalty is due, how is the amount calculated? Also it looks like the VFCP Model Application Form may be required, too. Anyone out there have insight on this? thank you!

I struggle with this as I started this thread, but...

I think you can get out of the VFCP for such a small amount. See PTE 2002-51. The DOL has a de minimis amount, but not the IRS.

So I think 15% of $.35 is due the IRS, or $.05 in tax is due.

I know I am glad the deficit will be reduced by the huge amount.

Oh wait it will cost more to process then sent in...

[Bill Presson]

Okay - I have a situation where the client made the contribution on the 8th day - not the 7th business day. This intest is going to be less than $1.00 as the amounts are not large. Since the 7th day is only a "safe Harbor" What are people doing with the ones that are a day late?

Pat

We recently have had clients go through an IRS and a DOL examination (different clients). Both reps said to view the amounts in conjunction with the latest date the deposit is allowed (15th day of the month following, etc) and make a reasonable decision.

If I was faced with what you have, we would recommend to the employer not to report the amount as a late deposit.

[D Lewis]

At the 2011 Mid-Atlantic Benefits Conference in Philadelphia on May 5-6, the issue of the excise tax was discussed at one of the "Ask the Experts" sessions.

Someone asked if there was a de minimis amount where one did not need to file the excise tax return. Someone else said that they had heard that if the tax was under $100 it did not need to be filed.

George Brim and Michael Sanders of the IRS said there was no set number. But they clearly stated that if the cost to calculate, fill out, and file the 5330, PLUS the cost of the IRS to process it (who would know what that amount is?), was more than the excise tax, they didn't want it filed. Instead they said to calculate the tax, and add it to the lost earnings, and give it to the participants.

What I wish I had thought of at the time, would be to ask about the DOL. My understanding is that if a sponsor receives a letter from the DOL about late deposits (usually triggered by the question on the 5500), and if the sponsor has corrected the late deposits AND has paid the excise tax, the sponsor can get a letter of no action from the DOL without filing under VFCP.

So if we do what the IRS informally said is ok, and give the excise tax amount to the participants, is that good enough for the DOL to get the no action letter, or do we now have to file under VFCP?

Not sure.

edit to add the year of the mid atlantic benefits conferenece

[K2retire]

It won't help in all situations -- but for the outrageously small example above, since the forms direct you to round to the nearest dollar, could you not take the position that the nearest dollar is zero?

[TPApril]

I'm looking to do the right thing in a similar situation, but again it seems a bit excessive. 2013 had exactly 1 401(k) deposit that was 1 day late (8th day). Lost earnings just over $1.

I believe based on this thread that an acceptable approach is, have the sponsor deposit the $1 + 10% of that into the trust to affected participants, then report it on the 5500 and do not file vfcp or 5330?

What is current belief system on this?

[BG5150]

Instead they said to calculate the tax, and add it to the lost earnings, and give it to the participants.

This is what we do.

[Belgarath]

Question - let's say you are talking about just a few dollars in interest. And suppose you take the informal approach discussed where you calculate the excise tax and allocate it to participants, and don't file a 5330.

What is the potential downside for penalties? If the PT has been corrected, then is there just liability for the excise tax plus interest - in which case, if it comes up three years later on audit and there's another (pick a number - a few bucks) due, is that the end of it? Or are there additional "bad boy" penalties for willful violations or some such crapola? My point being if it is just the excise tax plus interest, doesn't seem like a big deal. But that seems too easy, so I'm sure there is a reason it can't be done!

[rcline46]

The method described comes with rules from the DOL - it must be done within 6 months of the failure, the plan participants must be notified of the failure, and I think those are the biggies - oh yeah, and you must file with the DOL using their forms.

[ESOP Guy]

What I still find interesting (and now funny that I don't work on any 401(k) plans just ESOPs) is how much mental effort all of you are putting into getting out of the excise tax return. That is the least time consuming part of the process often times. Or at least it was for me. But I never did many 401(k)s so maybe I am slow.

In my original question there were 8 late payroll payments. This client had 6 employees including himself. So I had to go to the DOL calculator and input around 48 amounts and dates to get the lost earnings. The numbers had to be put into a spreadsheet to get each person's total correction. Someone had to double check it all to make sure I did not typo any of it. That had to be communicated to the client and I had to talk to John Hancock to make sure it all got deposited correctly.

That took way more time then the silly excise tax form.

I guess if it was really just one late deposit with very few employees the tax return will take more time but still. When we computed the final bill of my time if we had charged full price this client would have owed hundreds of dollars in fees and the tax return was a very small part of the cost.

If we would have taken the partner's idea of just throwing $100 in the plan and call it the lost earnings and given it to the NCHEs and completed the tax return based on that the total cost would have been less then what it was even though the lost earnings was around $12 per the DOL calculator. The Dr. would have gladly agreed to put the $100 in the plan and give it to the staff to keep his bill down.

To me the effort still needs to be to get them to come up with a simple, practical way to compute the lost earnings not get out of the excise tax return. Not that I am opposed to not having to file an excise tax form that says one owes a couple of bucks. But the effort to save time and cost seems misplaced to me.

[chc93]

To me the effort still needs to be to get them to come up with a simple, practical way to compute the lost earnings not get out of the excise tax return. Not that I am opposed to not having to file an excise tax form that says one owes a couple of bucks. But the effort to save time and cost seems misplaced to me.

This is the "issue" for us. Filing the 5330 is not the problem, it's the amount of the excise tax. In the few instances we actually filed a 5330, the excise tax was less than $5.00. In one case, it was $1.38. The client thought we were crazy to have them do this... right or not.

[Peter Gulia]

If a significant part of the problem is using a human being's time to compute the amounts of the restoration and its allocations among participants' accounts, should we ask SunGard Relius and other software developers to make this a routine function? Or is it already a routine computerized function?

[rcline46]

The IRS in the EPCRS recognizes the time to calculate their detailed answers and permits more streamlined versions. Then they take it way by saying the answers must be comparable to the detailed calculations. I cannot figure out how to prove the results are comparable without doing the long way. So I let the client choose (with cost estimates or my time).

Most of them it is very clear that the cost of my time will almost always exceed the cost of the correction when a detailed calculation is done.