Search the Community

We were recently made aware of a late contribution issue with one of our clients when the company was purchased and the new owner started submitting their 401(k) deposits. Due to a payroll software issue, deferral and loan payments have been consistently submitted 2 weeks late since 2006. This is a small plan and the deposits have not met the 7-business day safe harbor. After interviewing the sponsor, we have determined it would be very difficult to make the argument that deposits were made as soon as administratively feasible. With a little extra work, the new owner is using the same payroll system and is now submitting deposits timely. No late contributions have been reported on the plan’s 5500s, nor has the sponsor filed 5330s. The new owner wants to correct the late deposit issue and we are trying to provide some guidance/assistance. Obviously, this situation is a candidate for VFCP, but neither we nor the plan sponsor have data prior to 2014. The sponsor may be able to produce individual payroll data for the last couple of years, but we would need to propose some simplifying assumptions given individual payroll data is not available for more than a few years. This would seem reasonable given that deposits have consistently been 2 weeks late for the entire period. The IRS has been open to less than full corrections where data was unavailable in VCP filings we’ve done. We haven’t had to do any VFCPs where a full correction was not possible. We are wondering if the DOL is open to less than full corrections and some simplifying assumptions with VFCP filings. Given these facts, we have a couple of questions for the group: Has anyone used the VFCP when a full correction is not possible because the data no longer exist? Since we don’t have individual payroll information for all years, is the DOL open to using annual deposit information and assumed annual interest rates for calculating interest due on the late deposits? Other insights? Thanks in advance for any insights.

If a late deposit of elective deferrals is corrected under VFCP, the employer qualifies for PTE 2002-51 (as amended), and the 15% § 4975©(2) excise tax is waived. It seems like there is no need to file Form 5330 at this point, but I'm getting pushback on that decision. If there is no excise tax, why go to the trouble and expense of filing the 5330? Thanks for any wisdom. Cheers.

Anyone else find this alarming?! Seriously? What if i'm a small plan sponsor and I've done my own lost earnings calc and deposited to the participant accounts, I've done an amount involved calc and filed and paid excise tax with the Form 5330. Seriously, the DOL is going to come after me for also not filing a VFCP?! ARA article: https://www.napa-net.org/news/technical-competence/regulatory-agencies/ebsa-threats-of-alternative-enforcement-actions-trigger-ara-response/ Letter from the DOL (see the last paragraph in particular): https://www.napa-net.org/wp-content/uploads/letter-from-DOL-4.27.2018-002.pdf ARA letter to DOL: https://www.napa-net.org/wp-content/uploads/18.06.07DOLEnforcementFinal.pdf

So say you have a fairly large 401(k), 100's of employees, a few million dollars in deferrals ever year, $100k or so in deferrals each payroll period. CPA says that employee contributions should have been made, say, within 2 days of payroll date. That's reasonable. Most were, but some were made 3, 4, 5, or in one case 8 days later. Out of 24 payroll dates, maybe 10 have a problem. You calculate the lost interest and it is, say, in the 10's of dollars for each payroll, maybe $1,000 for the entire year. DOL's VFCP Notice says the correction is to contribute the "Lost Earnings," but does not elaborate further. So good, you contribute the $1,000. My question is, how do you allocate it? The lost earnings arguably should be allocated as of each payroll date that had a late contribution, to the accounts of the participants who deferred on that date, in proportion to their deferrals. This will result in hundreds of separate allocation amounts, many less than one dollar. The administrative expense of doing that may easily exceed the amount being allocated. And some of the participants will have left and already cleared out their accounts. Assuming your plan document can be interpreted to permit this and it passes nondiscrimination, can you do something different, like allocate per capita to anyone who (a) deferred during the applicable year, e.g. 2017, and (b) still has an account in the plan? I am aware of the recent EBSA regional office letter urging employers to use the formal VFCP process, even for small amounts, rather than self-correcting, so my question is not directly about that, although maybe that is involved because if you go through the VFCP process you could get your short-cut allocation method approved by EBSA? If you've heard this one before and it's got an answer, just point me to it. Thanks in advance.

Appears that DOL Philadelphia Region has started another round of letters inviting participation in VFCP based on transgressions reported on 5500s filed "within the past 2 years" (sample attached). They're also offering free webinar workshops on VFCP that are open to all and are well worth attending. Sample DOL VFCP invitation letter 07-17-18_16660886(1).PDF

VFCP filing will be prepared for overcharged participant fees to participants and overcharged fees to plan sponsor as a result of systematic error. Once the principal amount and lost earnings are restored to the plan, does the plan sponsor also have to amend the Form 5500 for prior years? Overcharged fees are approximately $50,000 and the error goes back to 2014.

Plan Sponsor applied an incorrect match % to certain employees for a 3 year period (in addition to failing ADP/ACP). All employee defferrals were prcessed timely and properly. Correction for the incorrect matching % is being done via VCP. Would this also require a VFCP filing? My take would be yes, since a prohibited transaction occured as a result of the incorrect match (and not corrected with the year) and for the lost earnings. However, I do not see any applicable boxes on the VFCP model application. Any suggestions?

Greetings, I am in the process of preparing a VCP for the below described errors. Where I'm at a loss (despite extensive review of the forums) is (a) Can the correction for the use of the incorrect match be limited to just those participants making deferral (those with "account balances") by using a QMAC instead of a QNEC correction; and (b) If a prohibited transaction occurred as a result of the incorrect match % and the loss earnings, thus requiring a VFCP. FAILURES: 1. Failure to correctly apply the Plan's matching contribution provisions to employees during 2012 and 2013 (Plan Sponsor applied lower matching % to all new employees, despite the Plan language limiting this to only acquired Company A employees) 2. Corrections necessary to pass the non-discrimination tests for 2013 and 2014 due to the three tier matching contribution formula (Plan Sponsor used the wrong matching % in performing tests) Proposed Correction under VCP A. For those participants that received the smaller incorrect match AND that had "account balances" (i.e., limiting the correction only to those participants making elective deferrals). a QMAC (as opposed to a QNEC) could be made under VCP. [i know there's a strong argument this correction should go to all eligible participants - even those not deferring - but such a correction would be astronomically higher] B. Since the incorrect employer match was used, resulting in lost earnings, I believe this would be a prohibited transaction (outstanding match % became plan assets when PS filed tax return) and thus I would propose a VFCP be filed with the DOL (meaning no filing of Form 5330 Return of Excise Taxes). However, looking at the VFCP Application, there is no box to check for "missed employer matching contributions/earnings" Any insight would be most appreciated. Thank you...

Who is considered an "interested person" for purposes of the VFCP notice under PTE 2002-51 (as amended in 2006)? Has anyone taken the position that (or asked the DOL whether) it is limited to only those participants and beneficiaries affected by the failure, or must the notice be given to all participants/beneficiaries in the plan (like the determination letter NIP)? I could not find any guidance on this, so just wondering about other practitioner's thoughts/experiences.

Issue: A loan made to a “disqualified person” (owner/participant) that; 1) exceeds the maximum amount permitted under Code section 72(p), and 2) exceeds the maximum payment period under Code section 72(p). Because the loan was made to the owner (“disqualified person”) over the maximum amounts there is also a prohibited transaction. So, there are two issues. 1. Violation of 72(p) which results in a deemed distribution and can only be corrected under EPCRS/VCP where the maximum period for repayment of the loan has not expired. To permit the Plan Sponsor to report the loan as deemed distribution in the year of the correction instead of the year of the failure or to request relief of reporting the loan as a deemed distribution at all is only available upon request in the VCP application. 2. Fiduciary violation under ERISA where correction is permitted under the DOL’s VFC Program. In addition, the Applicant (Employer), can request relief of the excise tax under IRC section 4975(a). Upon receipt of a compliance letter from the EBSA, the EBSA will not impose the penalty under section 502(l) of ERISA on the amount repaid to the plan. I understand the correction method under EPCRS and the VCP application. My main questions are regarding the VFCP and coordination of these two correction programs. 1. Can you confirm that a Form 5330 would be required for each year of the loan failure. Example; loan originated 2014 and was corrected in 2016. Would there be a Form 5330 in 2014 for 15% excise tax and then an additional 100% since the PT was not corrected in taxable year and the same for 2015 and 2016? 2. When correcting loan failures in regards to the VFCP application are the correction methods set forth in EPCRS Section 6.07 appropriate? Are there any additional earnings calculations that are required? 3. Should the VCP application be done and a compliance statement be received from the IRS prior to submitting the application for VFCP? How does one coordinate these applications? 4. In order to request exemption for the excise tax under 4975(a), I understand that a notice to interested parties within 60 calendar days of the application must be provided; do I also prepare all Forms 5330s showing the amount for the exemption (but not submit them to the service w/payment)? 5. Is there anything that I am missing? For example; is there excise tax besides the one under 4975(a)? Thank you!

We have been using the DOL calculator without filing VFCP. If you do not file VFCP it seems to be unclear what performance should be used. Does highest performing fund need to be used or can the overall plan return be used? It seems like there are stories of DOL auditors upon auditing using highest performing fund? If you use plan return is there the possibility upon audit that would be changed to highest fund return? In 2012 a health care funds for example returned over 30%. This year returns are very good too. Has anyone had any bad experiences with the DOL doing a VFCP? It seems fairly straightforward. Do you prepare for you clients? Time commitment does not seem that bad although a few of the narrative questions (#4 & #5) seem a bit too much. Is everyone in agreement that if you self-correct, the DOL calculator can be used as the basis for the 5330 excise tax? Thanks!