401(k) Correction Issue

[Guest ccl]

I have a pretty big issue with respect to a Plan that has a 401(k) feature. There are maybe 200 employees effected. Basically, the payroll people for the company and the 401(k) administrator messed some elective deferrals up... a lot. One pay period, the payroll company would deduct an amount for an employee deferral. That same pay period, the 401(k) administrator would not defer the amount. Then in subsequent pay periods or even days, the 401(k) administrator would contribute amounts to the Plan for the effected employees. Sometimes they would get it right on the first try, sometimes not.

Similar things happened with matching contributions. Payroll would deduct an amount for matching contributions but the 401(k) administrator wouldn't and later would correct it with contributions.

My question is, how do I correct this? Do I use EPCRS, and if so, what sections apply to this kind of mistake? Or do I use VFCP? I'm a bit lost on how to correct such a big problem. Thanks

[Guest Sieve]

2 separate issues.

The match is not deducted from paychecks, and does not have to be contributed on a payroll basis--perhaps does not even have to be contributed until well after the end of the year, depending on whether the match is calculated on a payroll or annual basis. As you've described it, that contribution from the employer may not be late at all.

The deferral is simply a matter of not having made the contributions pursuant to regs. It is correctible by making the contributions, with interest based on the DOL online calculator, and filing a 5330 to pay excise taxes for the prohibited transaction (keeping plan assets with employer general assets). The excise taxes are very small in relation to the late contributions. It's not a complicated fix--the hard part is keeping on track in the future so you don't have to do it continually. I don't know many who have also used VFCP.

[PAL]

As an added note, when filing the Form 5500, Schedule H item 4(a) should indicate that there were delinquent contributions and a Schedule of Delinquent Participant Contributions should be included.

I also see very few using the VFCP but I know that recently, the DOL has been sending plan sponsors a letter informing them about the availability of the VFCP if the Form 5500 indicates delinquent contributions exist. What I found interesting is that while the letter appears to be informational and I don't believe it says a response is required, if you don't respond, DOL will send a follow-up letter expressing their concern that they haven't heard back from you. So, if you have a client that gets one of these letters, they should send a thanks but no thanks everything is already fixed response.

PAL