Late Deposit or Not?-Form 5500

[Guest Lawrenceg]

Employer fails to make timely deposit of deferrals as employer did not take the funds from employees paycheck.

Is this just an operational failure for the failure to take the money out of the employee's check or

is it also a late deferral deposit because it was corrected three weeks later?

[mming]

I would say both, although it may be viewed as one infraction since it's a cause and effect kind of thing. Although, as a safe harbor rule, deferrals are expected to be deposited within a week after they've been segregated from an employee's paycheck (which may have occurred here once the money was actually taken from the paycheck), I believe that, given extenuating circumstances, a deposit is technically allowed up to the 15th day following the month in which the deferral was made. Depending on the time of the month it occurred, that can be as long as 45 days after the money is deferred. Also, I think that there is some relief for plans with <100 participants in that they have easier justification regarding 'extenuating circumstances' than large plans do.

[Kevin C]

The deposit timing rules apply to amounts paid to the employer by a participant and amounts withheld from paychecks. If nothing was withheld from the paychecks, I don't see how the timing rules would apply. What you have is an operational failure to implement their deferral elections for that pay period.

§2510.3-102

Definition of "plan assets" --participant contributions.

(a) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets.

[Guest Sieve]

I agree with Kevin. Assets do not become plan assets until something has been withheld or paid over to the employer for payment into the trust. If there has been nothing withheld, then there can be no salaray deferral assets which should have become plan assets as soon as withheld & thus the reg is not applicable.

[mming]

I recently found something from the IRS that specifically addresses this issue. In their fall '07 edition of Retirement News for Employers, they wrote that in the instance of an employer's failure to execute an employee's election to defer, the employer can make a QNEC for the employee and go through EPCRS (going through EPCRS for a small amount seems nuts, but what else are they going to say?). The article goes on to say the QNEC should be 50% of the missed deferral adjusted for earnings.

[jpod]

I would say that there is quite arguably no operational error and definitely no late deposit. If the original omission was corrected by "doubling up" a few weeks later, IMO there is no operational error, and as previously stated you can't have a late deposit unless too much time has elapsed between the date of the payroll deduction and the deposit, which appears not to have been the case here.

[BG5150]

I recently found something from the IRS that specifically addresses this issue. In their fall '07 edition of Retirement News for Employers, they wrote that in the instance of an employer's failure to execute an employee's election to defer, the employer can make a QNEC for the employee and go through EPCRS (going through EPCRS for a small amount seems nuts, but what else are they going to say?). The article goes on to say the QNEC should be 50% of the missed deferral adjusted for earnings.

"Going through EPCRS" does not necessarily making a filing. The missed deferrals, as long as they are not significant, can be corrected through SCP. The method of doing that is outlined in EPCRS. If it was an isolated incident, I think it would be okay to do SCP. But if it happened to a lot of people, or happened multiple times, VCP might be a better approach.

[Kevin C]

If you qualify, there is a special rule for brief exclusions in Rev. Proc. 2008-50, Appendix B, Section 2.02. The missed match gets deposited, but you don't have to to correct the deferrals.

jpod, I don't think two operational failures in opposite directions means there is no operational failure.

[jpod]

Kevin:

1. I don't understand your comment to me. Please elaborate.

2. Where did Lawrenceg say anything about a match? If there was a missed match because it's a pay period match subject to a limitation and the employee did not get that pay period's match I would agree that the match needs to be provided, but nobody said anything about a missed match.

[Kevin C]

jpod,

1. Your post #5 suggests correcting an operational failure to withold the amount elected by the participants by withholding twice as much as they elected for a later pay period. For both affected pay periods, the amount withheld would not be what the participants elected. I'm saying that I don't think the two errors cancel each other out.

2. I was describing the Rev. Proc. correction for a brief exclusion. The match is part of that correction. If I did not mention the match, it might mislead someone into thinking no correction of any kind is needed in that situation.

[jpod]

Kevin, thanks for the explanation. So, exactly what would you advise the employer to do, after it already did the double-up?

[PLAN MAN]

Kevin, thanks for the explanation. So, exactly what would you advise the employer to do, after it already did the double-up?

Are you saying the employer did the "double-up" without the participant's election, or did the employer explain the situation and the participant chose to increase their deferral amount to make-up for the lost deferrals? I always thought the special rule for brief exclusions in Rev. Proc. 2008-50, Appendix B, Section 2.02 applied only if the participant is given the opportunity to increase their deferrals over the remainder of the plan year.

[jpod]

I don't know how it was done, I know only that lawrenceg said it was done.

[Kevin C]

jpod,

The OP says "...it was corrected three weeks later". It could have been corrected using one of the methods from Rev. Proc. 2008-50. Unless we get more information, we won't know what they did.

Do you want to continue the discussion assuming an employer failed to take deferrals from one pay period and then took double deferrals from a pay period three weeks later?

[jpod]

Kevin: sure, let's assume the worst case scenario, i.e., the employer took a double amount out of the employee's paycheck without employee changing his election, or without even giving permission orally to do that. I don't know about you, but I would advise the employer not to do it again, but I would further advise that it would be reasonable to let sleeping dogs lie and move on because the risk of plan disqualification if this were detected in an audit is immeasurably small.

[Kevin C]

jpod,

In addition to advising them to not do it again, I'd say they have two separate corrections to make. (Rev. Proc. 2008-50, section 6.02(2)(d)) The first is the failure to take the elected deferrals from the paychecks for one pay period. The second is taking double deferrals from the other check.

For the first, I would look to the brief exclusion rules in Appendix B, Section 2.02(1)(a)(ii)(F). If they don't qualify for it, they would be under the partial year exclusion rule. Worst case would be a QNEC to correct the deferrals for the excluded employees. If they qualify for the brief exclusion rules, they don't have to correct the deferrals. Either way, if there is a match, they would have to contribute the missed match.

For the second, I don't see any direct guidance. The general principles in Section 6.02 of the Rev. Proc. encourage retaining the funds in the plan. Since the extra amounts were withheld from paychecks, I would consider them as deferrals. I think a reasonable correction would be to keep the extra deferrals in the plan, but notify participants that they can adjust their future deferrals if they want to. If there is a match, there might also need to be some kind of match adjustment if the timing of the double deferrals causes someone to get less match than they otherwise would have received.

Even if you do a match correction, that doesn’t mean that everyone will receive additional matching contributions. The match correction rules in Appendix B, Section 2.02(1)(a)(ii)(D)(1) say that the match correction is reduced to the extent that (i) the sum of this contribution and other matching contributions actually made on behalf of the employee for the plan year would exceed (ii) the maximum matching contribution permitted if the employee had made the maximum matchable contributions permitted under the plan for the plan year.

If there is no match, you may end up with the same result inside the plan as in your suggestion to “let sleeping dogs lie”. But, if the plan ever gets audited, it would be nice to have good notes documenting that you followed the correction method steps to get there.