Jump to content

Timing of Deposit of 401(k) Salary Deferrals


Guest ubpMR

Recommended Posts

Guest ubpMR

I read something resently that was contrary to what I have been instructing my 401(k) clients regarding the depositing of employee salary deferrals. I thought the DOL's instruction was that salary deferrals were to be deposited into participants accounts "as soon as administratively feasable" but no later than the 15th business following the month that they were deducted.

However, I read in the March 4, 2002 issue of RIA's Pension & Benfits Week that the DOL is cracking down on small plans and they want the money in by 7 days after the payroll date. Anyone hear about this? This seems like a significant administrative burden on clients.

Link to comment
Share on other sites

Guest JCatt

More power to them! There are some egregious offenders - just last week we received salary deferrals from October of last year.

I believe the DOL considers seven days to be a reasonable timeframe for the "administratively feasible" requirement. I concur.

Link to comment
Share on other sites

There is a problem because some employers who use both salary reduction contributions as well as payroll taxes as a cash flow device to make ends meet. If the company tanks the employees lose the the earnings as well as the contributions. In todays world of EFTs there is no reason for contributions to be delayed after the pay date.

mjb

Link to comment
Share on other sites

Guest dmj1998

we have multiple payrolls throughout the month and all are remitted at the same time - once per month. we are a large employer (>20K EE's), but cash flow is a problem with any business. if the ER only has one payroll and it is more frequent than monthly, than it might be difficult to defend why deferrals are being aggregated and deposited monthly. if every other aspect of paying an employee is done weekly, why isn't the 401k taken care of at that time as well unless the ER is keeping control of the assets for other business reasons?

as to the 7 days, i think the 15 business day limit is the guide you should use until the law is changed. the law is currently written to allow ERs to use these funds as cash flow devices for a period of time - it may not be the most equitable way of running the plan, but it is legal. either way, it is more important to develop a consistent track record (ie, always deposited on the 4th business day of the month following). at least that way it looks like the ER is planning around the expense of making the deferrals.

Link to comment
Share on other sites

Guest FREE401k

I also had seen/heard that the DOL was cracking down on the timely remittance of 401(k) contributions. I attended a Sungard Corbel seminar in Sept. 2000 where the speaker was an attorney from Denver who has worked for the DOL and the IRS. He advised us that the DOL was "on a rampage" about this. He said that the 15 business days had been the outside limit acceptable, and that it really isn't acceptable anymore as the DOL now thinks that a company should deposit their 401(k) cons as timely as they deposit their payroll taxes. So if they have a payroll every Friday and deposits taxes the following Wednesday, they should make their 401(k) con at that time also. We (a TPA) have advised all of our clients accordingly.

Link to comment
Share on other sites

dmj1998: I disagree with the following statement in your post:

>>>i think the 15 business day limit is the guide you should use until the law is changed. the law is currently written to allow ERs to use these funds as cash flow devices for a period of time <<<

The 15 business day limit is NOT a safe harbor on which the plan sponsor can rely. If the sponsor is using 401(k) contributions as a cash flow device, the sponsor will be subject to penalties if and when the DOL arrives.

The 15 day limit is an outside limit. The examples following the regulations make it clear that, absent unusual circumstances, the deadline will actually be much sooner.

Link to comment
Share on other sites

Guest dmj1998

steve72 - we are not on opposite sides of the fence. i did not use the term "safe harbor" because i do agree with you on that point. personally, i think 401k contribs should be posted the same day a participant gets a paycheck, but some employers/recordkeepers have administrative barriers to that. my point was that a small employer should have a defined process for remitting these contribs. (ie, pay EE's on the 15th and 31st and post contribs on the 3rd Bus day of the following month - every month).

if the DOL is "on a rampage" about this, i find it to be very disappointing. this is clearly the low-hanging fruit of the 401k world - participant funds spend more time invested in the account than actually getting into the account. enron, lucent, global crossing, and all the other infamous employee groups did not have a problem with their employers using participant deferrals for cash flow purposes. instead of pushing around the little guys, i think the DOL should direct more of an effort to helping all participants by improving investment education and making investment managers lower their fees. unfortunately, mary's tool&die shop in skokie,il is an easier target the wall street.

Link to comment
Share on other sites

Guest ubpMR

Funny thing is that from what I read this only applies to small clients (under 100 participants) so the large clients have more flexibility. We still suggest ASAP but it seems the DOL understands that larger companies have adminstrative burdens that make it difficult to deposit in seven days (i.e. multiple payrolls, multiple locations, etc.)

Link to comment
Share on other sites

I guess I am a little skeptical as to why big employers with multiple payrolls and locations cant deposit the contributions in 7 days since they are paying their employees by electronic transfers to banks and are required to send the witholding taxes to the IRS by EFT ( usually by the next business day) as well as state tax withholding. What administrative problems prevent sending each payroll's 401(k) contributions to the fund provider by EFT at the same time? All of the 401(k) vendors have EFT procedures to accept funds.

mjb

Link to comment
Share on other sites

Guest dmj1998

the administrative problem is more of a people problem than a process problem. while there are definitely cost ramifications to processing payroll contributions more frequently (at least 6 times a month in our case - 4 weekly and 2 semi-monthly- if you use the next business day method), the issue is changing the existing processes. Some of these processes have been in place for almost ten years and the work involved in changing them has not been justified when it comes time to planning annual dept. budgets.

Link to comment
Share on other sites

Our firm generally handles small plans and recently had a client audited by the DOL because of late deferrals. During the audit, the reviewer gave some insight on what the DOL tries to look at as far as late deposits.

We figured that they would determine how quickly contributions could be made (the as soon as administratively feasible standard), and then compare that to when deposits were actually made.

However, what they seem to do is try to establish a "pattern" of the 401(k) contributions to see what is normal for that firm. For instance, if on average deposits are made within 10 days of the paycheck, they will use that as the benchmark. If, then, a particular contribution is deposited 30 days after a paycheck, it would be considered late by 20 days.

We suggested that the client begin wiring or FEDEXing the deposit the next day after the payroll. The reviewer said that would not be a good idea because it would establish a pattern, and if a deposit was not made within that time frame, it would be considered late! So you could have a situation where the client sends in the check the next day after payroll each time, but then has a deposit that goes in 5 days after payroll and would be late. But the same client who consistently makes deposits 10 days after payroll would not be late. Go figure.

Link to comment
Share on other sites

What is the deposit timing requirement for a self-employed individual who is making a $10,500 deferral all at year-end? Is it January 15, as soon as administratively feasible after December 31, or the due date of the individuals return, including extensions?

Dean Huber

Link to comment
Share on other sites

The deferral becomes a plan asset as soon as it is administratively feasible to segregate it from the employer's assets, which date can be no later than 15 busioness days after the end of the month in which the deferral is made.

So, for a contribution made Dec 31, 2002, the $10,500 must be in the plan as soon as it is administratively feasible to get it there, no later than January 21, 2003.

Link to comment
Share on other sites

At first I thought the same thing, the 15th business day in January or as soon as administratively feasible, whichever is sooner. But if you read the DOL rules (CFR §2510.3-102) it talks about deferrals which are withheld from an employees paycheck or paid to the employer by the participant. A slef-employed individual's deferrals are not withheld from a paycheck or paid to the employer. Thus I don't think the DOL ruling on employee deferrals applies to them. If it doesn't apply, then the IRC treats a self-employed individual as an employee for qualified plan purposes and treats deferrals made by employees as employer contributions. For tax deduction purposes, an employer contribuiton must be deposited by the due date of the tax return. Does this sound logical?

Dean Huber

Link to comment
Share on other sites

BTH wrote:

However, what they seem to do is try to establish a "pattern" of the 401(k) contributions to see what is normal for that firm. For instance, if on average deposits are made within 10 days of the paycheck, they will use that as the benchmark. If, then, a particular contribution is deposited 30 days after a paycheck, it would be considered late by 20 days.

Does anybody else see the fallacy in this methodology? By definition, if a plan sponsor does not deposit the deferrals on the same, exact day each and every cycle, there will at least one cycle where the deposit is late. This method seems to guarantee that absolutely every DOL audit will punish the plan sponsor. If it is a true representation of the DOL's position it is an example of government at its worst.

Link to comment
Share on other sites

It is totally illogical, because it creates a sliding scale that rewards late depositors. My experience in DOL examinations is that the DOL tends to set a standard based on the capacity of the company's payroll processing system to generate the "information" that would allow the company to transmit the funds to the trustee. The actual track record of depositing the funds is not very relevant to setting the standard, unless the company can show that it lagged the system's information flow for plan-related reasons.

Phil Koehler

Link to comment
Share on other sites

Good point. If that were really the position, I would suggest to every client that they deposit all of their deferrals other than $1 in a normal processing period (somewhere between 1 and 20 days), then I they would deposit that $1 as late as they could, maybe 45 days later. Even if it rises to the level of a PT, the costs incurred would be more than offset by the reduction in punative interest charges the DOL might otherwise apply. This would make the "average" period for deposits more than 20 days, thereby rendering the DOL's mthod meaningless.

Now, i'm not suggesting this as a serious alternative, just that illogical governmental actions beget illogical private sector responses.

Link to comment
Share on other sites

As crazy as that sliding scale may sound, that's what we've encountered when some of our plans have been audited. They say they're looking at what is "as soon as administratively feasible." We had a client who was really good at getting their deferrals in a few times during the year, and the DOL's attitude was that if they were that good a few times, they could be that good every time (3 days after payroll).

I still think the 15th day standard is becoming the very outside. This has been such an issue for them, I can't believe they'd let you go beyond the 15th day rule just because you established that pattern. Again, I think the 15th day rule has become the outside rule, not the safe harbor.:confused:

Link to comment
Share on other sites

So what is the rule? If a client can get the deposit in a few times year within a day or two after payroll then it must do so the rest of the time? If a client consistently sends in the contributions by the 15th of the following month even if it is administratively feasible to do so sooner there is no penalty?

mjb

Link to comment
Share on other sites

I'm not sure anyone knows what the "official" rule is. This is just what we've experienced. I had heard at one point that DOL was going to put some guidance out, but it doesn't seem that anything will be coming soon.

Link to comment
Share on other sites

Payroll systems whether vendor-based or proprietrary in all but the most primitive, "green eye shade" record-keeping and processing environments can produce all the information that is necessary to compute the amounts withheld from individual employee paychecks within a matter of 7-10 business days on average at the absolute outside, even allowing for the occaisional misstep. ADP, for example, boasts of a 24-hour turnaround following the payroll cycle processing date to prepare a report that details the employee salary deferral breakdown. How much more information does the employer need to cut the check to the trustee? As far as the 15th day rule is concerned (which by the way is actually the 15th "business day" rule and ends up being as much as 52 calendar days from a first day of the month pay period end) it is merely the date beyond which the employer would technically have strict liability for a failure. Prior to that date, the employer can avoid liablity by showing that its payroll system was incapable of producing the information sooner or, if it did, the deposit lagged this date for plan-related reasons. A burden only the most uncommon fact patterns imaginable could satisfy after 10 business days, e.g. hundreds of locations with different systems, etc. (and even that may be too generous).

As a practical matter, for the vast majority of plan sponsors, the 15th-day rule should be ignored. It will never apply to them. The magical date on which payroll deductions are transmuted into the "plan assets" for ERISA Title I purposes will simply have to be determined on facts and circumstances basis, but given the emerging uniformity in payroll processing software and payroll cycle regimes, there will rarely be wide discrepancies between similarly situated employers. The employer who fails to deposit by that date has engaged in a prohibited extension of credit from the plan at the very least. Several other "per se" PTs might well apply, as well as self-dealing theories, were the employer is extremely negligent. Some parties who wilfully diverted these funds are now guests of a federal correctional institution.

Phil Koehler

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...