Late Contributions

[Guest moorhan]

A client mailed employee deferrals for a 401(k) Plan timely for all 12 months of the plan year. The custodian deposited these funds timely for 11 of 12 months. One month was one day late going into the trust. Are there any exceptions to filing the Form 5330 and restoring the plan when it is not the fault of the plan sponsor, or is the rule when the funds go into the trust?

[pmacduff]

It is the date deposited, not the date of the check or the date the check is received by the investment firm.

[R. Butler]

A couple of things stand out to me:

1. If payroll periods are more frequent than monthly the employer is likely late on several payroll periods. Contributions must be remitted as soon as they can reasonably be segregated from the employer's assets. In no event will a reasonable time exceed the 15 business day of the next month rule. The DOL has taken the position that contributions can generally be remitted within a few days of each payroll period.

2. Did the custodian receive the check timely and just fail to invest it? If the custodian received the check timely and did not invest the money timely, the contribution was not late. There may be other issues in this case, but not a late deposit issue.

[pmacduff]

R. Butler - I'm not sure if I agree with your #2. response. Although I agree the sponsor could have an issue with the custodian, the DOL in an audit situation will not care about a "he said, she said" situation. They will look at the actual date of the deposit of the funds (this is from experience, not guesswork). If a sponsor is not at fault and the investment firm or custodian did, in fact, make an error on their end and not timely deposit, perhaps a request should be made to correct the deposit dating in the records to reflect the actual date.

[R. Butler]

Employee deferrals merely must be segregated from the employer's assets. If the employer can show that the money was in fact deposited with the custodian on particular date, the fact that it wasn't invested by the custodian is irrelevant in determing whether the contribution was remitted timely.

The question is whether or not the custodian received the check timely? I do agree pmacduff that the employer is on shaky ground if there was simply a delay in the mail.

[Steve72]

I disagree. The money becomes plan assets on the date it may be segregated. If the check is not cashed by the custodian, then plan assets remain in the general accounts of the employer, and there is a prohibited transaction.

[Guest moorhan]

I posted this question originally. Due to all of our conflicting opinions, I posted this question to an IRS agent via the helpline. He indicated that one could argue that the check was in the hands of the custodian, the Plan Sponsor had done everything they were required to do, and it was a one-time occurance for that Plan year.

It still seems that the right thing to do would be to file a Form 5330, restore the plan, and move on. The agent was not sure that filing was the best idea, but did not give a clear opinion one way or the other.

?????

[pmacduff]

I had to add one final note...I can see where the "kinder/gentler" IRS agent had the response he did, but I think the worry in recent times is the DOL not the IRS. My opinion is that the DOL would advise what you are suggesting, file the 5330, restore the plan and move on. Isn't it ironic in a field such as ours that there are so many things that are open to different interpretations, including by the governing bodies!!?? In any event, good luck with your situation.

[R. Butler]

I agree with Moorhan's decision to just file the 5330. The penalty is generally nominal so it is better to error on the side of caution.

I am kind of puzzled why some of us think that a check must be cashed before the deposit can be considered made. My understanding is that contributions are generally considered made when they are mailed. Case in point are profit sharing contributions. I am unaware of any DOL guidance that would suggest a different rule 401(k) contributions.