Late Deferral/Loan Payments

[Lori H]

A small 401(k) plan failed to submit timely deferral/loan payments in 2007 when they were transitioning to a new manager. The accounts were frozen during the implementation and then they had problems learning how to submit contributions. This, I am thinking, could have easily been avoided by submitting contributions to an interest bearing money market account set up in the plans name at a bank until the kinks got smoothed out at the new provider(Fidelity) or they could have simply opened a holding account at Fidelity. Irregardless they made up the late payments and earnings on the late payments were calculated and ultimately credited to the participants account.

After this they received DOL correspondence requesting them to apply to VFC and provide exhibits that the deposits and additional interest were made.

My question is should the applicant seek relief under PTE 2002-51? Total earnings credited were $1127.93

If not, what would the basis be on the excise tax? The earnings?

[Guest Jennyb473]

as I understand it, the excise tax would be on the earnings amount, so roughly $169. We had a similar situation not too long ago with a client infamous for late deposits. We identified the problem and have since corrected it, however we did file Form 5330 for 2 years and had client make up earnings and pay excise tax. We did not opt for VFCP filing though. Client did get a DOL letter suggesting they file for VFCP, I spoke with an agent and was told that it was not mandatory to file, but writing a response letter to the DOL could be helpful - if error is corrected, safe harbor will not be granted if an audit, but chances are an audit may not happen if that was the only red flag and an auditor reviewed file and saw this letter, etc.

that is what we did........keepign our fingers crossed now.

[Lori H]

as I understand it, the excise tax would be on the earnings amount, so roughly $169. We had a similar situation not too long ago with a client infamous for late deposits. We identified the problem and have since corrected it, however we did file Form 5330 for 2 years and had client make up earnings and pay excise tax. We did not opt for VFCP filing though. Client did get a DOL letter suggesting they file for VFCP, I spoke with an agent and was told that it was not mandatory to file, but writing a response letter to the DOL could be helpful - if error is corrected, safe harbor will not be granted if an audit, but chances are an audit may not happen if that was the only red flag and an auditor reviewed file and saw this letter, etc.

that is what we did........keepign our fingers crossed now.

Thank you Jenny. So they should/could have just done the 5330 at the time of the made up earnings and bypassed the VFCP? It took the DOL a year or so to issue the VFCP and of course it was a result of them answering "yes" to late deposits on the Schedule I, but they are now doing a VFCP AND a 5330.