Late deposit during blackout

[austin3515]

401k plan is going into blackout and cannot process a deposit until after blackout is over.  Therefore one payroll will be a week late.

Will that deposit be considered late, or is there a facts and circumstances component to this?   My thought is late is late but I have come across differing opinions out there, so curious to see what others thing.  I have a feeling the DOL would agree with me FWIW..  Thoughts?

[Peter Gulia]

Treating an amount as plan assets does not necessarily mean the amount must be immediately invested in its ultimate-destination investment.

 

Would an experienced fiduciary considering “the circumstances then prevailing”—including the blackout (if that decision was not a breach)—find it prudent to hold the pent-up amounts in a temporary account?

 

Is it feasible to pay the amounts from the employer’s account and into an account the plan’s trustee holds (whether directly or through its agent)?

 

After the blackout clears, the plan’s fiduciaries would allocate the temporary-holding amounts to investments as the participants directed (or as the plan otherwise provides).

[MoJo]

We literally this month had an auditor of one of our plans raise this issue and "demand" it be corrected (and the box on the 5500 checked) before issuing their opinion.  Theoretically, I agree - late is late, but 1) the rule is as soon as practicable (and that is open to debate as to what constitutes practicable) and 2) the rule requires segregation from corporate assets - as Peter says, and not "investment" - so the temporary account seems to be the best approach (although, IMHO, that is really rather stupid - as the change in recordkeeper or other reason for the blackout is pursuant to a "fiduciary" decision where their are benefits that should outweigh a slight delay - in other words, "practicable" is, and should be a FIDUCIARY decision....)

[Alonzo Church]

Auditors will demand you report contributions delayed during a blackout as late. I believe the AICPA guidance that governs benefit plan audits would require that. Without DoL guidance to  contrary, you will lose this battle every time.

[austin3515]

For us, and as is the "norm" absent a jumbo plan, the recordkeerper would not take the deposit out of normal systems.  I did ask, but we were denied.

In my case Alonzo, interestingly enough, it was me who said it should be late, and the auditor who said it would not be.  I'm surprised the DOL has never said something publicly along the lines of "a blackout is not the participant's fault" so late is late.  

Without question the path of no risk is to do the interst calc.  But alas that is a pain the @$$... so I did not argue the point!

[Alonzo Church]

Can I have your auditors? Would this approach survive partner review?  

If you got your money into some kind of interest bearing account with your trustee (an approach I have used in blackouts), you do avoid the problem. But the hassle may not be worth it just to avoid the annoying but easy enough to do filing.

[austin3515]

16 minutes ago, Alonzo Church said:

Can I have your auditors? Would this approach survive partner review? 

Not my problem... This was a manager so not concerned.

 

16 minutes ago, Alonzo Church said:

f you got your money into some kind of interest bearing account with your trustee (an approach I have used in blackouts), you do avoid the problem. But the hassle may not be worth it just to avoid the annoying but easy enough to do filing.

Agreed, but this is very impractical without cooperation of the recordkeeper.  Not going to go out and open a checking account for one deposit.  So it seems we agree on this point! 

[MoJo]

3 hours ago, Alonzo Church said:

Auditors will demand you report contributions delayed during a blackout as late. I believe the AICPA guidance that governs benefit plan audits would require that. Without DoL guidance to  contrary, you will lose this battle every time.

Well, we bring in dozens of large filers a year and have never had an auditor question this before - and so far, this year, I've only seen the one.

The real problem is the determination of what is "late."  The DOL has no safe harbor for large filers, and the regs say "as soon as practicable."  The auditor's refusal to back down doesn't make them right.

That said, I'm not sure it's a battle worth fighting.....

[Patricia Neal Jensen]

Choice of a vendor or a secure place to timely deposit this money is the plan sponsor's responsibility.  Setting up all the details of this conversion should have included this issue.  The vendor is pushing your client around because no one went over this with them when the deal was done (before they were hired).

PNJ

[BG5150]

Is the auditor insisting the sponsor pay the excise taxes, too?

[MWeddell]

It seems to me

- if it is reasonable to retain this trustee

- the trustee will not accept a contribution during a black-out period and

- the length of the black-out period is reasonably short,

then "the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets" and transmitted to the trustee is the first full business day after the black-out period ends regardless of the employer's previous history of being about to transmit contributions sooner under a different set of circumstances.

Whether the plan auditor will accept that argument, I do not know.

[MoJo]

17 hours ago, BG5150 said:

Is the auditor insisting the sponsor pay the excise taxes, too?

In my case, yes.

[MoJo]

15 minutes ago, MWeddell said:

Whether the plan auditor will accept that argument, I do not know.

In my case, no.

[austin3515]

I could see the DOL saying, "why wouldn't it be *reasonable* to accept a deposit during blackout?  You need to find a better recordkeeper if they can't even take a deposit!"

I place asterisks around *reasonable* because I want to make it clear this is not the Webster definition of reasonable, but rather the DOL version of reasonable. Bottom line is, count on the DOL to apply the Webster-definition of reason at your own peril.

OK not peril, but don;t count on them to agree...  The CPA auditor for MoJo is taking their cues from the DOL.

[Peter Gulia]

What do BenefitsLink people think about these questions:

 

1.    Which recordkeeper/custodians accept a pending-blackout deposit?  Which don’t?

 

2.    How much about this point should a plan’s fiduciary check before selecting a recordkeeper?

 

3.    Is there a plan size so small that even a prudent fiduciary would be unlikely to find a recordkeeper willing to accept the pending-blackout deposits?

[acm_acm]

On 8/14/2020 at 12:26 PM, Peter Gulia said:

What do BenefitsLink people think about these questions:

 

3.    Is there a plan size so small that even a prudent fiduciary would be unlikely to find a recordkeeper willing to accept the pending-blackout deposits?

 

I don't see how plan size gets you out of or more lenience from DOL/ERISA  requirements.  Plus, I would think the issue of getting what are supposed to be plan assets separated from corporate assets in a timely fashion would be even more of concern with smaller employers.   

[Belgarath]

I don't read Peter's question # 3 as addressing the issue DOL lenience or enforcement. Rather it is a question about whether a prudent fiduciary might find it difficult or impossible to find a recordkeeper who would accept the pending-blackout payment, for a very small plan. I'll leave it to Peter to clarify he thinks it is necessary.

[Peter Gulia]

My three questions are open-ended, and I don’t presume or predict a conclusion.

 

I really would like to see what BenefitsLink people say, particularly about questions 1 and 3.  About the problem austin3515 described, I don’t know what service is (or isn’t) offered to a plan without purchasing power.

 

A plan’s size does not remove the plan’s fiduciary from ERISA’s commands, but might sometimes affect what a prudent fiduciary would do in reacting to a situation.

 

Consider ERISA § 404(a)(1)(B):  [A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and— . . .  (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]

 

Imagine, for discussion, circumstances in which even a prudent-expert fiduciary, even if she did an exhaustive search, would find for a micro plan no recordkeeper willing to accept a pending-blackout deposit.  That information might affect how a fiduciary reacts to having participant contributions and loan repayments that need to be segregated from the employer’s assets.

 

Sometimes, it might lead to transferring those amounts into a bank account under a plan trustee’s, rather than the employer’s, control.

 

Let me ask again:

Are there recordkeeper/custodians that don’t accept a pending-blackout deposit?

[austin3515]

3 hours ago, Peter Gulia said:

Are there recordkeeper/custodians that don’t accept a pending-blackout deposit?

Here's the deal.  If they are doing a default enrollment, where everyone is being mapped to QDIA, most can/will accept the deposits before the transfers.  The issue comes up where they want to map over a participant's investment elections from the prior recordkeeper.  The recordkeepers physically can't do that until those elections are provided, and they are provided as a matter of necessity only with the transfer files (i.e., to ensure that they are the most up to date elections).  Part of getting the plan out of blackout is loading those elections.  Hence, they can't process contributions until the plan is out of blackout.

I hope that clarifies why some can vs cannot process contributions before the blackout.  And the question is definitely not whether or not the delay is justifiable enough to avoid treatment as a prohibitted transaction.  I personally think that it is.  The question is whether the DOL would agree!

I think for those of us not in the recordkeeping business it is easy for us to underestimate how complex it would be to process a deposit on a recordkeeping platform when the money is already held by the recordkeeper.  I assume it requires quite a bit of manual manipulation - hence they won;t even go there except for a jumbo plan.  Especially since the consequence of delay is so insignificant.

[Peter Gulia]

austin3515, thank you (!) for this helpful information.

I remember the difficulties and issues from my experiences, inside 1984-2005, and outside counsel to a few recordkeepers from 2006.  My experiences working for a plan's sponsor/administrator are with plans big enough that, if a blackout isn't done within a weekend, the recordkeeper/custodian would hold the money for not-yet-processed contributions and loan repayments in some temporary account, and allocate the amounts later.

Have other BenefitsLink people seen different experiences?

 

[MoJo]

13 hours ago, Peter Gulia said:

austin3515, thank you (!) for this helpful information.

I remember the difficulties and issues from my experiences, inside 1984-2005, and outside counsel to a few recordkeepers from 2006.  My experiences working for a plan's sponsor/administrator are with plans big enough that, if a blackout isn't done within a weekend, the recordkeeper/custodian would hold the money for not-yet-processed contributions and loan repayments in some temporary account, and allocate the amounts later.

Have other BenefitsLink people seen different experiences?

 

Peter:  First, keep in mind that a "weekend conversion" is a rarity - and the ultimate determinant of whether it is possible isn't the size of the client - but the willingness of the "current" provider to do so.  True, the larger the client, perhaps the more "leverage" they *may* have in getting the incumbent to cooperate, but for the vast majority of plans, the current is losing the business, and is not inclined to do the work necessary in the time frame required for a weekend conversion to be possible.

Second, holding unallocated assets in an "account" can itself be problematic.  Where is it held?  Is it interest bearing (if not, that could be a different problem). The problem is that in many cases, the recordkeeper doesn't have any type account to hold the money.  We are a "pure" recordkeeper with no "accounts" to even open.  It would be up to the trustee to do so (Matrix) and they don't just have a "banking" type account available.  It would have to be a custodial account  and that itself adds complications.  Our other "business model" is group annuity based - and the same applies for "holding accounts."  Having an "outside" account is often the only option, and that requires the plan sponsor to open it....

[Bird]

14 hours ago, austin3515 said:

Here's the deal.  If they are doing a default enrollment, where everyone is being mapped to QDIA, most can/will accept the deposits before the transfers.  The issue comes up where they want to map over a participant's investment elections from the prior recordkeeper.  The recordkeepers physically can't do that until those elections are provided, and they are provided as a matter of necessity only with the transfer files (i.e., to ensure that they are the most up to date elections).  Part of getting the plan out of blackout is loading those elections.  Hence, they can't process contributions until the plan is out of blackout.

This is exactly correct.  I think it is worth noting that the reason recordkeepers prefer to do mapping is that it is easier* - they just suck everything out the prior recordkeeper's system and don't have to bother with enrollment materials or anything until after the conversion.  *At least, easier than starting from scratch and having everyone re-enroll; a default conversion is of course pretty easy.  In my perfect world, we re-enroll with new elections, make sure there is a seamless and timely change of deposits from old to new, and the conversion of existing money can happen later.  But my perfect world involves more work that recordkeepers would like to do in the environment where everyone wants computers to do everything.  And my world is small plans.

14 hours ago, austin3515 said:

And the question is definitely not whether or not the delay is justifiable enough to avoid treatment as a prohibitted transaction.  I personally think that it is.  The question is whether the DOL would agree!

This is where we disagree; I see no reason that a change in recordkeepers should justify a delay, given that there are ways around it.  Granted one of the ways is pretty silly (setting up a checking account to hold money for a few days or weeks).

[austin3515]

12 minutes ago, Bird said:

This is where we disagree; I see no reason that a change in recordkeepers should justify a delay, given that there are ways around it.  Granted one of the ways is pretty silly (setting up a checking account to hold money for a few days or weeks).

That solution would not be "administratively feasible" is the point.  But I think the DOL thinks more like you which is why if up to me, I do the lost interst and treat as late!

[Peter Gulia]

MoJo, thank you for your information and observations.  I appreciate your help in filling-in gaps in my experiences.  Bird, thank you for your observations about different kinds of recordkeeping conversions.

 

About situations in which the directed trustee or custodian that comes with a recordkeeper is unwilling to hold money not yet allocated to individuals’ accounts, I assume it is the plan’s sponsor/administrator, acting as an agent of a trustee—perhaps an additional trustee beyond a bank or trust company trustee, that would open a bank account to hold unallocated amounts.

 

Whether that account should be credited interest (or use what would be interest against bank fees) is a fiduciary decision.  Likewise, whether gross or net interest (if any) should be allocated among participants’ accounts or used for plan-administration expenses is a fiduciary decision.

 

I recognize that the range of practical choices is fewer with smaller plans.

 

While it might seem a nuisance to set up a bank account for a few days or weeks, segregating amounts from the employer’s assets is an important purpose.

 

austin3515, thank you for helping us see a weakness in the ways small plans arrange services.