Prohibited Transaction if 401(k) deposits aren't made timely?

[Guest MattNewman]

It seems as though an employer which doens't timely make 401(k) deposits (i.e., 15 day rule) is a fiduciary who has engaged in a prohibited transaction. Is that correct. Does the IRS actually assert the excise tax in those situations?

What if, as in my client's case, the employer hired an employee to do this job, but that employee botched it, unbeknownst to the employer (i.e., the owner of the business).

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Matthew B. Newman, P.A.

ERISA Law Firm

<http://www.erisapro.com>

[Dave Baker]

Yup, I think it would be. Once the time for making the contribution has passed, the funds are considered "plan assets." Hence the employer is "using" plan assets by definition ... they're still part of the employer's general assets, and vulnerable to being taken by some creditor or bankruptcy trustee.

Here are the final regs (click)-- issued under the ERISA definition of "plan assets."

From the preamble to those regs: "ERISA's fiduciary responsibility provisions also prohibit certain transactions involving plan assets. ERISA sections 406-407, 29 U.S.C. 1106-1107. In particular, ERISA section 406(a)(1)(D), 29 U.S.C. 1106(a)(1)(D), provides that a plan fiduciary shall not cause the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by, or for the benefit of a party in interest of any assets of the plan. The employer of employees covered by the plan is a party in interest with respect to the plan. ERISA section 3(14)©, 29 U.S.C. 1002(14)©. Violations of ERISA's prohibited transaction provisions subject the fiduciaries and parties in interest to liability for the plan's losses and other relief. In the case of pension plans qualified under the Code, the parties in interest (referred to as disqualified persons) are subject to excise taxes under IRC section 4975. In the case of other employee benefit plans, particularly welfare plans, the parties in interest are subject to civil penalties under ERISA section 502(i), 29 U.S.C. 1132(i)."