Jump to content

Late Plan Contributions and DOL VFCP?


Ananda

Recommended Posts

 A client of less than 100 participants made late plan contributions in 2020, meaning participant elected deferrals were deposited into the plan a few days after 7 business days. This was reported on Form 5500 and only involved around $10,000 in total late contributions with lost earnings and interest calculated to be around $80. The DOL sent the client a letter suggesting use of the DOL Voluntary Fiduciary Correction Program to correct the error. My understanding is that given the late plan deposits, the 4975 excise tax of 15% would be calculated on the lost earnings of $80 not on the $10,000. Therefore, if the excise tax is only around $14 why not just pay the excise tax on the Form 5330 and not bother with a VFCP application? The counter argument is that by filing VFCP the plan would avoid a DOL investigation over the matter and the VFCP filing and resolution would satisfy the IRS. Any thoughts or suggestions?

Link to comment
Share on other sites

Separate issues.  The 5330 "reports" and collects the excise tax for the prohibited transaction involved in not segregating plan assets from the employer's.  The VFCP reports, and at least in the DOL's eyes, and is necessary to fully correct the fiduciary breach inherent in not abiding by the exclusive benefit rule.  One would think that by making participant's whole, the breach is cured, but the DOL  "insists" on confessing your sins to be fully exonerated.

Link to comment
Share on other sites

19 minutes ago, Riley Britton said:

Go Brandon! 

What does this have to do with anything?

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

Link to comment
Share on other sites

25 minutes ago, Riley Britton said:

Go Brandon! 

I guess we can forgive you for being a relative newbie - but the DOL's insistence on a VFCP filing - as known by for those with more experience - goes back a good decade or more.

If that was meant as a political statement, then you clearly are in the wrong place....

Link to comment
Share on other sites

Whatever one likes or dislikes about the VFC program, I’m curious:

Have recordkeepers and third-party administrators developed assembling a VFC submission into a standard service that is (or could be) routinely offered?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

10 minutes ago, Peter Gulia said:

Whatever one likes or dislikes about the VFC program, I’m curious:

Have recordkeepers and third-party administrators developed assembling a VFC submission into a standard service that is (or could be) routinely offered?

We considered this internally a few years ago. We ended up abandoning the idea, mostly because we were worried it would send the wrong message to our clients — e.g., my TPA charges me $X for late deferrals, and it would cost me $Y to fix my process and avoid the late deferrals, so if X<Y then just leave things as they are and keep doing them late. As it stands, I think some plan sponsors already engage in this type of calculus, at least with respect to the IRS excise tax. But by continuing to treat late deferrals as an exceptional circumstance, it opens the door for a conversation with the client about the problem and a chance to remind them about their fiduciary duties.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

Link to comment
Share on other sites

25 minutes ago, Peter Gulia said:

Whatever one likes or dislikes about the VFC program, I’m curious:

Have recordkeepers and third-party administrators developed assembling a VFC submission into a standard service that is (or could be) routinely offered?

We don't (normally) - but do offer prep of the 5330.  The reason we don't do VFCP filings is it really requires the plan sponsor to compile a lot of information - and write a narrative (as a fiduciary) - and once they do that, what's the point of us charging them to type it in.  Our RM's of course, disagree and keep trying to get my team to do them (without charging clients, of course)....

Link to comment
Share on other sites

Thank-you for your responses. I understand that even if the prohibited transaction excise tax penalty of $80 is paid on the Form 5330, the DOL could still claim that there was an exclusive benefit violation requiring correction through VFC Program. However, I would contest the exclusive benefit violation claim since the delayed contribution to the plan was quickly corrected and the participant was made whole by being reimbursed for any lost earnings. Further, while the employer held on to the delayed contribution funds it was held in a non-interest bearing account and the employer obtained no financial or other benefit. Thus, this is clearly distinguishable from typical exclusive benefit violations where the employer obtains a finanila benefit through use of plan assets.  Nonetheless, even if the DOL claimed an exclusive benefit violation occurred, what is the penalty. It seems that there are no penalties under ERISA Section 502, so for example the 20% applicable  recovery amount penalty does not apply since there is no court ordered recovery amount returned to the plan and there is no Section 409 fiduciary breach since the plan has already been made whole. It would seem the IRS could try to argue disqualification but this could  be corrected under SCP. Am I missing something here that definetly requires a VFC Program filing??

Link to comment
Share on other sites

12 minutes ago, Ananda said:

Am I missing something here that definetly requires a VFC Program filing??

No, the need for a VFCP "no-action" letter application is what was being bandied about up above, that the corrective action is prohibitively expensive vs the correction itself, but the DOL did refuse to include a threshold below which no filing was necessary when they finalized the program requirements.  At amounts of this level, the cost-effective action is to calculate the earnings, pay the excise tax on a 5330, and report the breach on the 5500.  The DOL will eventually question it, but you can more easily respond to their compliance check letter than complete and track the VFCP application and supporting documentation.  Just make sure that the lost earnings were corrected under the precepts of EPCRS, the DOL calculator is only appropriate when you will be filing a VFCP application; and if this happened in 2020, then the 3% from the calculator is possibly far short of the actual applicable return.

Link to comment
Share on other sites

  • 2 weeks later...

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...