941 and 945 deposits aggregated requiring EFTPS processing

[Guest J. David Wright]

A small client with a 12 participant plan has a large payroll and is required to make 941 deposits by EFTPS. In 2003, three participants were paid out with two rolling and one cashed out with $ 3000 mandatory withholding. The Trust maintains all funds in a Brokerage account. On distribution the issue arose of how to make the 945 deposit. The client does not have authority to initiate EFTPS payments from the Brokerage Firm's account. Having the brokerage firm issue a check for the 945 deposit payable to the plan sponsor could be construed as an illegal reversion of trust assets to the plan sponsor. There is no provision for the plan sponsor to recover 945 tax deposits paid from and processed through the company's EFTPS processing, so the only viable alternative seemed to be for the brokerage firm to issue a check for the 945 withholdings payable to a Federal Depository and make the deposit on an 8109 coupon. The deposit was made the same day the check was received from the brokerage firm.

The IRS issues a Federal Tax Deposit Notice suggesting that because the $ 3,000 deposit was not made by EFTPS and as the result, a 10% penalty tax is being assessed.

The 941/945 commingling seems to be diametrically opposed since the trust funds are not employer assets and therefore should not be commingled or required to be aggregated for depositing purposes. In fact IRS regluations preclude such commingling of Trust assets with employer assets. Certainly I can see if the State of New York pension plan distributes for instance $ 500,000,000 in benefits and has $ 100,000,000 of 945 withholdings it would be reasonable to require EFTPS for the this Trust in that instance. A plan of this size typically uses an independent trustee who makes distributions and has facilities to withhold and EFTPS deposit 945 withholdings. On the other hand, a plan with less than $ 1,000,000 total assets held in a brokerage account and has no plan checking account and never distributes gross more than $ 30,000 in a year and only has $ 3,000 of 945 withholdings, aggregating and requiring those deposits by EFTPS is unreasonable and is overkill.

Not only is it unreasonable, it is impractical, and I simply don't see how in a typical small balance forward plan not utilizing the services of an independent trustee penalties for failing to use a sysgtem that will not work is enforceable. It sounds as if one division of the IRS EP/EO and the Tax guys are getting their IRS regulations confused.

Has anyone encountered a problem of this type? If so, how did you handle it?

[Harwood]

I thought the Form 945 Instructions and Publication 15 made it clear that there is no commingling of 941 and 945 funds for purposes of determining the deposit schedule.

And, for 945 funds, you are only required to use EFTPS in 2004 if:

The total deposits of such taxes in 2002 were more than $200,000 or

You were required to use EFTPS in 2003.

[pmacduff]

J. David - we have many small employers who ran into the same problem. What we ended up doing was filling out an SS-4 form and assigning the Trust an EIN number. That way the Plan is the only filer for the plan distribution tax deposits and the 1099-R forms. This alleviated the elec filing requirement. Hope this helps. Patti