late deferrals for key employees

[Beemer]

I have a client that was late once with a 401(k) deposit. Is it possible to have the key employees wave their right to lost earnings (and also pay less of a prohibited transaction penalty by only considering the non-key participant's deferrals late)?

[stephen]

I believe that in order to self-correct you will have to pay earnings to all affected participants.

The penalty is on only the lost earnings. For one deposit is it worth considering asking for lieniency?

[Beemer]

You are right. It wouldn't be worth the trouble. I have had the good fortune to have clients who are very reliable about their 401(k) deposits so I didn't realize the penalty was only on the lost interest.

Thanks for your help.

[Guest B2Randolph]

This is a Voluntary Fiduciary Correction issue (DOL), not an EPCRS self-correction one (IRS). We have probably all made that mistake at least once.

There is no true "self correction" mechanism under VFC, but I know of almost no one who has used VFC (at least prior to its recent revisions). Everyone just "corrected" by providing the additional earnings and completing the 5330.

Unless there is some special language in your plan document that would allow, in the event of late deposits, that the key waive earnings, I don't believe you can exclude them.

[Beemer]

We are going to have them contribute the lost earnings and will prepare a 5330. They won't have to pay that much. Thanks for your help.

[Guest lindamichals]

What part of the 5330 applies in this instance? Prohibited Transactions? Thanks.