Late 401(k0 Contributions

[Guest mich823]

BEFORE I TELL THE PLAN SPONSOR...IT IS MY UNDERSTANDING THAT SALARY DEF.'S MUST BE DEPOSITED WITHIN 15 BUSINESS DAYS OF THE SALARY DEF. THE CLIENT WAS 4-20 DAYS LATE FOR SIX STRAIGHT PERIODS. ALSO, ISN'T THE PENALTY 15% TIMES EACH EVENT, I.E. $20,000 X .15=$3,000 X6=$18,000?

THANKS FOR YOUR HELP!!!

[BTH]

I believe that Department of Labor regulations require that 401(k) deferrals be transmitted by the earliest possible date that they can be segregated from the employer's assets, but no later than the 15th business day of the month following the month in which the amounts at withheld from the employee's paycheck.

I don't know the specific penalties that might be involved, but from what I have read, the DOL is fairly strict on compliance if you were to get audited. To avoid problems, we always recommend to our clients to make the contribution immediately.

BTH

[Guest galdridge]

The 15% excise tax calculation should be based on the lost earnings amount, not the late salary deferal amount.

Glenn Aldridge, CPA

Audit Manager

Bennett Thrasher PC

Atlanta, GA

[Guest IWIS]

Per DOL regs, salary deferrals must be deposited as soon as administratively feasible, but no later than 15 business days following the close of the month during with the contributions were deducted from employees' pay.

In some cases, the DOL has held sponsors to a stricter standard when the sponsor has demonstrated, in the past, its ability to deposit contributions faster. For example, if the sponsor has a history of depositing employee contributions two weeks from the date of withholding, but then for whatever reason starts depositing them later, but still within the deadline imposed the regulation, the DOL has deemed those contributions to be "late" and characterized the resulting extension of credit as a prohibited transactions.

Many sponsors and TPAs think this DOL policy is unreasonable. I happen to agree, unless there's some indication that the sponsor is intentionally taking advantage of the plan participants.

Bottom line -- if there are legitimate business reasons for having deposited the contributions later than usual, yet the deposit is still made within ultimate deadline and the amount of lost interest is relatively immaterial, it is extremely unlikely that the DOL or the IRS is going to pursue any sort of action or excise tax assessment. I guess it could happen, theoretically, but I've never seen it.

The excise tax is the 15% times the amount of interest lost -- NOT the total amount of the late contribution. Because of this, and unless the late contributions were very large and very late, the amount of the excise tax is usually de minimis (pennies, a few dollars).