What IRS or ERISA penalties for failure to deposit SEP withholdings

[Moe Howard]

A business has a SEP plan which allows employees to contribute through payroll withholdings. The employer's fat bookkeper withheld the proper amounts from employees for a whole year... but she never deposited any of the amounts withheld into the employees' SEP accounts. The employer says that she stole the money and that there is nothing that he can do.

The employees intend to sue the employer in state court for breach of contract .... However ....

.... MY QUESTION: Are there any IRS or ERISA penalties that the employer is subject to, for failure to deposit the withholdings (timely) ?

I realize that a SEP is not a qualified plan under ERISA. If anyone can direct me to any specific IRS or ERISA code sections which explain what the employer penalties (criminal or $monitary) might be regarding a SEP ... I'd appreciate it.

[Gary Lesser]

It all depends on how fat the bookkeeper is. Was this a SARSEP? This SEP may be subject to the bonding requirements of ERISA (see below) -- So I'd also contact the DOL. Criminal penalties (under ERISA) may also apply.

Under Section 4(a) of the Employee Retirement Income Security Act of 1974 (ERISA), only employee benefit plans within the meaning of ERISA Section 3(3) are subject to Title I of the act (regarding the protection of employee benefit rights), provided the plan is established or maintained by an employer engaged in commerce or in any industry or activity affecting commerce, or by an employee organization or organization representing employees engaged in commerce or in any activity affecting commerce, or by both.

The term employee benefit plan includes an “employee pension benefit plan.” [ERISA § 3(3)] Most SEPs (and SARSEPs) are employee benefit plans under ERISA. Many exclusions and exceptions apply, however. Also, the protection afforded by ERISA may not extend to certain governmental plans or to church plans. [ERISA § 4(a), (B)]

Section 3(2) of Title I of ERISA defines the term employee pension benefit plan as follows:

Any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program—

(A) provides retirement income to employees, or

(B) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.

Plans without employees are not covered under Title I of ERISA. [DOL Reg § 2510.3-3] Thus, for purposes of Title I, the term employee benefit plan does not include any plan, fund, or program under which only a sole proprietor or only partners are participants covered under the plan. An individual and his or her spouse will not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, that is wholly owned by the individual or by the individual and his or her spouse, and a partner in a partnership and his or her spouse will not be deemed to be employees with respect to the partnership.

BONDING

In most cases, an employer that handles funds or other property that belong to an ERISA plan is required to be bonded. The basic standard is determined by the possibility of risk or loss in each situation; thus, it is based on the facts and circumstances in each situation. The amount of a bond is determined at the beginning of each year. It may not be less than 10 percent of the amount of funds handled, and the minimum bond is $1,000. Yet contributions made by withholding from an employee's salary are not considered funds or other property of a SEP IRA plan for purposes of the bonding provisions so long as they are retained in, and not segregated in any way from, the general assets of the withholding employer. Because employer contributions are made into SEP IRAs established by each employee (which are outside the control of an employer once made) bonding would not generally apply. [ERISA §§ 404©, 412; DOL Reg §§ 2510.3-3, 2550.412-5]