Late Deposits

[Randy Watson]

Two questions, how far back do we need to go to correct late deposits and was there a time when the DOL was okay with deposits being made by the 15th of the month following rather than the earliest date they can be segregated? For example, I'm sure that it was more reasonable to contribute deposits near the 15th of the month following back in 1994 than it is today because of the technolgical advances since that time.

[Guest SWH]

If you pick a stop date, I would make sure that it correlates to an event. For example, I only went back to this date because this is the date that we put computers in the office, new software, etc.

[E as in ERISA]

The 15 day rule wasn't final until mid 1996. Not effective until early 1997. Before that it was 90 day rule that is still applicable to welfare plans.

[E as in ERISA]

http://benefitslink.com/erisaregs/403.html

[Randy Watson]

That's very good to know and certainly helps our situation.

What about my original question? Was there a time in say 1997 or 1998 when the 15th day following the month was permissible? I know the DOL presently takes the position that the 15th day "deadline" is almost never acceptable.

[austin3515]

No, but I don't think the DOL was as "maniacal" about it back then as they are today.

I don't think there's any need to go back 10 years though (okay, technically there is, but in reality nobody ever would). I'd go back as far as they can audit, which should be 3 prior 5500's.

[E as in ERISA]

They started applying the "as soon as possible" standard pretty soon after the regulations were finalized. The proposed regulations had intended to use a standard that was the same as the timeline for depositing payroll taxes. So that is how the DOL began enforcing the rule after the final regulations: Payroll tax deadline plus a few days. But at first no one was aware unless they knew someone who had been audited. So most were not applying it that way. See if there was a year in which the employer and/or recordkeeper had a technology change that would have facilitated earlier transmission. Consider using that date.

[GBurns]

If the regulations were finalized way back in 1996 and effective 1997, it seems a stretch to claim not to know that this issue should have long ago been corrected. So while it seems hard to go back 10 years rather than just 3 years, I would look out for an auditor to claim plan failure etc. if you do not go back 10 years.

The "technology change" date should not matter since it did not matter with the payroll tax deadline date. The needed technology was widely and readily available prior to 1996.

But I guess a date has to be selected and should have some rational reason.

While it could be that the DoL might only audit 3 years back on a "normal" basis, this might not be regarded as normal. How far back can they go if fraud, fiduciary failure etc is the claim?

How far back can the IRS go especially if driven by employee complaints ? Isn't there some written guidance on self correcting this issue?

Could there be an employee lawsuit for losses caused by the late deposits if they become aware of the issue especially because of this correction process?

[E as in ERISA]

What was not immediately understood was that the DOL was tying "as soon as feasible" to the payroll tax deadline. It was unbelievable considering that DOL had just acknowledged in the preamble all the differences between forwarding payroll taxes versus processing 401(k) deposits with the extra work -- related to reconciling at a participant level for 401(k), the investment elections So many believed that taking it to the 15th deadline was barely feasible if you were doing reviews and reconciliations of data. Technology has continued to improve the process each year. And the e-sign legislation and rules have confirmed that an electronic environment is okay. I think it was 1999 before the IRS clarified electronic methods can be widely used for elections. So maybe e-elections were not widely used until the 21st century. I assume a high percentage of employees is now entering their elections directly on the recordkeepers phones or web and that has improved timelines.

[GBurns]

When I saw this item I remembered this and another thread where this issue was discussed. I particulary noted the comment about DOL agents in various parts of the country (implied widespread ocurrence) and the very small amount of money involved (implying that it is the principle that counts).

http://www.mhco.com/Commentary/2006/DOL_De...eded_060806.htm

[Kevin C]

We have a client facing a similar horror story. They have bi-weekly payrolls and send their deposits on the pay date. During the time period the DOL auditor is looking at, the client mailed checks for deferrals and loans to the custodian using regular mail. They now transfer the deposits electronically on the pay date. The auditor first insisted that the date the deposits were credited to the account was the deposit date. I sent the client a copy of the preamble to the final reg and highlighted the footnote that says the DOL considers the contributions to be segregated from the assets of the employer when the check is mailed, provided the check clears. The agent responded that they can't prove when they mailed the checks. He is claiming that anything not credited to the account within 4 days of the paydate is late. Over the 18 month time period, the auditor is claiming 12 bi-weekly payrolls were "late". One check was credited 10 days after the pay date, 3 were credited 7 days after, 2 were credited 6 days after and 6 were credited 5 days after. The checks were mailed first class on Fridays from Texas to Florida.

The penalty amounts involved are trivial, but our client is upset about being accused of holding the contribution checks before depositing them. They are still fighting this, so we will see what happens. Does anyone know if they can request that the agent's supervisor get involved in the audit?

[Kirk Maldonado]

Although this is a tax law concept, there is the "mailbox rule" pursuant to which documents are deemed to have been delivered on the date that they are deposited with the U.S. Postal Service.

For example, the IRS does not have to receive your tax payment by April 15th, it just has to be postmarked no later than April 15th.

The courts have adopted the same analysis for COBRA cases (part of COBRA was an amendment to ERISA), so it would seem that it should also work for the fiduciary responsibility rules of ERISA.

But you will probably have to do a bit of research on this point to be able to convince the DOL auditor.

[Bird]

Kevin-

It is the supervisor who is probably the problem. I think they want to be able to tell the nat'l office "we got "x" plans to pay earnings on delinquent contributions" and of course we know that they don't care if the earnings are $.02.

If your client wants to fight, I say more power to them. It's a bit of a crapshoot as to whether naked aggression or a more conciliatory approach is better; depends on the agent, supervisor and client. I had one of these with similar facts and the client had a VERY strong personality and lots of money and he basically ranted and raved until they caved in. The auditor was sympathetic to our case, which helped. But she was sane and is probably long gone.

FWIW.

[Kevin C]

Bird,

The strange thing is that this auditor is from the same office as the agent who did an audit last year on a takeover client of ours. The takeover client really had a problem with late deposits. That auditor was very generous on applying the deadline. His supervisors approved everything because they closed the case using the lost earnings amount he had me calculate.

Kirk,

The preamble to the final deposit regulations has a footnote that says the DOL uses the mailbox rule. (The preamble also says some interesting things about monthly deposits, but that doesn't apply here because they deposit each pay period.) The agent didn't dispute the mailbox rule, he just insisted on proof of when they were mailed. They used postage metered first class mail, so even if the custodian saved the envelopes, there would be no "proof" of when they were mailed. I found some information on the internet on average delivery times for first class mail. We'll see if that makes any difference.

[Bird]

If what they care about is statistics, then your varying experiences might not seem so strange. For the serious problem, they get to say they fixed it (and don't care so much about how accurate/severe the calcs are), but for the case where there really isn't a problem, they don't get to say they fixed it unless you calc and deposit something, anything.

I don't want to come off as thinking I know everything about this; my experience is limited, but from what I've seen and heard what I said above is not that far-fetched.

[Kirk Maldonado]

Kevin C:

Thanks for that information; I wasn't aware of it.

However, the DOL added a caveat to the Mailbox Rule:

Where, for example, an employer mails a check to the plan, the Department is of the view that the employer has segregated participant contributions from plan assets on the day the check is mailed to the plan, provided that the check clears the bank. [Footnote 6 to the preamble to Section 2510.3-102, 61 Federal Register 51225 (1996).

In its most typical formulation, the Mailbox Rule does not require actual receipt of the document, simply its mailing.