Correcting Late Deferrals

[jukeboy56]

Here are the facts...

The plan is a 401(k) Plan with a June 30th year-end

In January 2006 the sponsor transmitted the deferrals for a particular payroll period to the custodian. The custodian received the money but never credited them to the participant accounts. The amount of the deferrals was a little over $6,000.

The plan changed custodians at the end of December 2006.

In early 2007, when the plan was audited for its 6/30/2006 year-end the custodian's error was discovered and disclosed in the notes of the financial statements as employee contributions receivable, with a description of the error. The old custodian was contacted and subsequently sent the money, which had been sitting in limbo, to the new custodian.

The new custodian received the money in July 2007 and applied it to participant accounts. An analysis was done of missed earnings and these were paid by the old custodian and applied to the participant accounts. It was a little over 550 days from the time of the error to the time of correction.

So, the participants have been "made whole" as of July 2007. My questions are about paying the excise tax due and whether the steps we are taking will prevent further penalties or more severe actions.

I know that the initial error is considered a prohibited transaction, and each subsequent plan year that it goes uncorrected is another prohibited transaction. Will what I am going to file correct all of the problems, or do I need to explore one of the voluntary correction programs? (Or is use of the correction programs negated by the fact that we went beyond 180 days before correction?)

We are filing a Form 5330 for the year ended 6/30/2006 to pay 15% on the earnings missed between January 2006 and June 30, 2006 (calculated at the applicable federal rate).

We are filing a Form 5330 for the year ended 6/30/2007 to pay 15% on the earnings missed for the year ended June 30, 2007 (including compounding).

We are filing a Form 5330 for the year ended 6/30/2008 to pay 15% on the earnings missed for the few days from July 1, 2007 until the correction later in July 2007.

We will list the amount of the delayed contributions on line 4a, Part IV of Schedule H of Form 5500 and attach a schedule listing the amount of the delayed contributions as a prohibited transaction.

Thanks to anybody with advice to offer.

[Guest Sieve]

This is the proper approach. The interest should be--but is not required to be--based on the DOL's online calculator. Correcting under the DOL's Voluntary Fiduciary Correction Program (a step not always taken) is not precluded by the 180-day rule (which impacts other issues, such as waiver of the excise tax or, in some instances, streamlined doucment production requirements.

[Guest Rutager]

As a follow up to this question - the employer determines the correction amount for the lost earnings and deposits these lost earnings back in the plan - can the employer put the lost earnings in a forfeiture account (which are used to pay plan expenses) or must the employer allocate the lost earnings back to the affected partipants - as this is a participant directed account. I have a client who is telling me he spoke to someone at DOL who advised him they could just put the lost earnings in a forfeiture account - however - that makes no sense to me - this does nothing to make the participants "whole".

[jpod]

jukeboy: Are you sure you have a "late deposit" problem under Title I and the PT rules? The Title I requirement only requires that the amount withheld from pay be deposited to the Plan by the applicable deadline described in the participant contribution requlation; allocation to participant accounts by that deadline is not required. If the money was handed to the custodian, perhaps the deadline was satisfied. The fact that the plan changed custodians and the former custodian did not immediately transfer the money to the new custodian complicates the issue, but perhaps the custodian was still a plan custodian for so long as it continued to hold the money.

Your client may indeed have a qualification problem (or even another fiduciary breach problem) by not ensuring that the money was allocated so that it could be invested promptly, in which case an earnngs component would seem to be appropriate. However, I am suggesting that you may not have a late deposit problem under the participant contribution regulation, in which case no 5330 filing would be necessary.