Late matching contribution (but not too late!) - provide earnings?

[Guest timb]

A plan makes matching contributions on a monthly basis. However, due to an oversight, several employees (but not all) have not yet received their 2001 matching contributions. The terms of the plan document allow the employer to contribute the matching contribution as late as is allowed by law (i.e. the filing of the tax return).

Since most employees received their matching contributions each month, is the sponsor required to provide earnings to the few employees who will receive their match "late" (but within the legal time frame)?

This does not appear to be covered under EPCRS. It's not a failure to follow the plan document, but results in disparate treatment of certain participants.

Thanks in advance for any comments/thoughts.

[Demosthenes]

Do the right thing!

An error has occurred, regrettable but they do happen. How you recover from that error can be more important than the fact that the error happened in the first place.

Here you have two groups of employees that have been treated differently through no fault of their own. In good faith, the participants should have the lost earnings restored to their accounts.

Be prepared to file for a prohibited transaction exemption for the earnings contribution, or if it's a small amount, file a 5330 and pay the excise tax. The participants have been treated equitably, the IRS is happy, and as someone once said "If you can write a check for it, it's not a problem, it's an expense"

Fail to make up the earnings and you could end up with employees who are not happy with their Company, not happy with the Plan (which should be a benefit, not a burden), and possibly more problems down the road.

After all, what happens if an employee drops a dime to the DOL and alleges that it isn't an error but intentional discrimination? Stranger things have happened.

[Guest timb]

Agreed. Thanks for your reply.

We plan to make the correction, but it's always nice to have some support for what you're doing and how to do it. Note that the majority of those affected are HCE's.

In light of the market's performance, some of the individuals would have suffered losses. For these individuals, we plan to rely on the earnings calculations from the EPCRS procedure, which allows the plan to ignore losses (but not earnings) when computing corrective contributions.

We never considered the excise tax ramifications. How would the tardy 2001 matching contributions be a prohibited transaction, and how would the excise tax be computed? It wouldn't be worth the cost to file a PTE applicaiton.

[Disco Stu]

While I'd agree restoring lost earnings is a good idea, I'm not sure I agree with the assertion that this is a prohibited transaction.

The fact is that these are matching contributions, not salary deferrals and they were deposited within the proper time period. Even if the DOL came in and looked things over, I don't think they could get too upset about this unless they could prove the method in which the match was funded discriminated in favor of HCEs. Maybe it does & maybe it doesn't. It probably isn't in anyone's interest to try to figure that out.

The company should make up the earnings because it's the right thing to do and because they don't want to have to defend what happened to the DOL. I would ask Demosthenes to explain the rationale behind declaring this as a PT though.

[Guest IWIS]

Disco Stu is right. Under the circumstances you describe, the late matching contributions do not constitute a prohibited transaction since there was no extension of credit between the plan and a party in interest. The key here is that, under the terms of the plan document, the contributions were not late. If the plan document required monthly contributions, then you might have a problem.

I think the DOL would come to the same conclusion if they were to become aware of the situation.

[Demosthenes]

No disagreement on the matching contributions, they will not constitute a prohibited transaction.

However, the deposit of missed earnings will, in the eyes of some DOL reviewers, constitute a prohibited transaction. The DOL's stance seems to be that dollars are being deposited to the Plan in a manner not contemplated by the plan doc.

I've seen ay least two cases where DOL reviewers have stated that the Plan made a good correction and at the same time submitted thier findings to the IRS with a demand for payment of the excise tax. Both were cases where the DOL became involved because of late contributions to the Plan. One case was being appealed, the other elected to pay the excise tax because the amount was minimal.

In effect the DOL seems to be saying, "You did the right thing, now I'm going to smack you for it!"

As a public policy , this is counter productive, rather than encouraging Plans to take corrective action, the DOL is encouraging Plans to hope they don't get caught.

[Guest IWIS]

Demosthenes, I'd be interested in the details of the cases you're referring to. I can't imagine the DOL characterizing the "lost earnings" in timb's example as a prohibited transaction.

It seems to me that, in order to have a PT, you need to establish that plan assets are involved. I don't see it in this case, where the plan documents allow the matching contributions to be deposited for a given year no later than the tax filing date for the corporate sponsor, typically 8 1/2 months after the end of the year.

While it may not be "fair" for the employees who didn't get their match as quickly as some of the other employees, I don't see a PT. I'm not sure I even see a general breach of fiduciary duty. Aside from the timeliness issue, the sponsor is acting in its capacity as a settlor, not a fiduciary, in making contributions to the plan. Don't you think?

[Demosthenes]

The only piece of this transaction that will be considered for a PT and excise tax is the income. Forget about the matching contributions and their timing, whiel important, they are not the root of the problem.

Both DOL cases involved late contributions to the plan. In both cases the deposits were missed and made up before the DOL became involved.

However, here's the crux of the issue: In both cases the DOL also said that by depositing the lost earnings the Plan had engaged in a PT and subjected the earnings contributed to the Plan to the excise tax. In the interests of client confidentiality, I can't provide details on the clients, but here's the closing letter the DOL uses: http://www.dol.gov/dol/pwba/public/program...ual/cp34fg5.htm

I'm not trying to argue that it's fair, reasonable, or good public policy, just that it happens.

[Guest IWIS]

> Demosthenes said:

> The only piece of this transaction that will be considered for

> a PT and excise tax is the income. Forget about the matching

> contributions and their timing, whiel important, they are not

> the root of the problem.

In my experience, what you're saying is essentially true, but mainly with respect to employee contributions, not employer contributions. That's because, by regulation, employee contributions become "plan assets" within the short time period prescribed by the reg. If they're not deposited in a timely manner, then the plan has effectively extended credit to the sponsor, and that is the essence of the PT. It is the underlying extension of credit that constitutes the PT, not the interest. The interest is part of the correction.

I do understand that the IRS assesses excise tax with respect to the amount of the interest, but that's just the way the tax is computed on that particular type of PT (i.e., sales and exchanges are treated differently).

> Demosthenes said:

> However, here's the crux of the issue: In both cases the DOL

> also said that by depositing the lost earnings the Plan had

> engaged in a PT.... I'm not trying to argue that it's fair,

> reasonable, or good public policy, just that it happens.

I don't doubt you, but I find this astonishing. The deposit of lost earnings is part of the PT or fiduciary breach correction, but it is not a PT in and of itself. If you're saying that that your clients had delinquent employee contributions, then I understand the problem. But if it was an employer contribution issue, then I am confused. In my opinion, that is the crux of the issue.

That's not to say that late employer contributions can't be considered PTs. I think they can, under certain circumstances. But not under those described by the initial poster in this thread, imo.

[Disco Stu]

The DOL is taking the postition that any deposit of lost earning is a PT? That's a pretty harsh stance. I'm curious if you could share the circumstances that led to the deposit of lost earnings in the cases you dealt with. Did that have ANY bearing on their position?

For the set of facts given to us...and if it were my plan... I think I would make up the lost earnings and be done with it. You'd be making a reasonable, good faith correction, and there doesn't seem to be any CLEAR guidance that something like this is a PT.

If the DOL is going to take this kind of position, I would make them come in and find the problem for themselves.

I'm wary of declaring a PT unless it is absolutely certain that one has occurred. I had a client that declared a PT based on the advice of their auditors (and against my advice). The dollar amount involved was quite small & my client didn't want to waste their time arguing the point with their auditors. But...the PT flagged them for an IRS audit. Once the auditor arrived, he stated that he didn't feel that the transaction in question was a PT. However he did turn up an unrelated problem that turned out to be quite expensive for my client.

The lesson my client took from this was that you'd better be sure you're doing the right thing before you stick your head up out of the foxhole.

[austin3515]

Okay, same situation as above, except now the contributions were deposited well after the date they were due. Say a year. I used to believe that there was a clear prohibited transaction here but now I'm not so sure.

According to the ERISA Outline book, and a couple of other summaries of court cases I've read, employer contributions to a plan are not plan assets unitl contributed - even if the Plan is subject to the minimum funding requirements of IRC 412. See link to an EBIA article that talks about a case regarding this matter:

http://www.ebia.com/weekly/articles/2002/E...815Cadegan.html

Therefore, if delinquent employer contributions are not plan assets, there cannot be a prohibited transaction because a prohibited extension of credit must include plan assets!

I know, I know, the DOL would not agree, but is it a defensible position? I tend to agree with the thread above saying don't report a PT unless its clearly a PT.

By the way, the delinquency was purely an administrative oversight, and management intedns to correct with earnings.