Failure to Timely Remit Salary Deferrals to Plan

[Guest Sheila S]

I am dealing with a 401(k) plan that has failed to deposit participant salary deferrals into the trust on a timely basis (i.e, 15 day rule). The plan will remit the deferral amounts to the trust immediately along with lost earnings. Must a 5330 also be filed as a result of the prohibited transaction?

[Alf]

Yes.

In addition to restoring the contributions, the employer would be liable for an excise tax under the Internal Revenue Code. This excise tax is 15% of the amount involved in the transaction for each year (or part of a year) that the transaction went uncorrected. If the Internal Revenue Service (“IRS”) issues a notice of deficiency or assesses the excise tax before the transaction is corrected, and additional tax of 100% of the amount involved is imposed.

An employer that is liable for this excise tax is required to file an IRS Form 5330 to report the transaction for each year in which there was a violation and pay the applicable excise taxes.

Also, the prohibited transaction would have to be reported on the plan’s Form 5500 annual return.

[Guest kclark]

Is there any recourse on a TPA of a 401(k) plan in an untimely deposit to investment accounts for employees or is it the Employer that gets penalized? Since dollars were deposited to Record Keeper, there was no negligence on Employer's part.

TPA is holding onto employee contributions due to a re-vamping of their system and has been down for over 4 weeks!

I was asked by one of my organizations if they as an employer could file a complaint against their recordkeeper in this situation.

It sounds like if they alert the DOL to this situation, the employer is the one who will suffer and blow the whistle on themselves.

Am I totally off base here? I am more knowledge in health & welfare plans and don't deal much with 401(k) plans!

Any guidance would be appreciated.

[bzorc]

The TPA should be investing these contributions into the trust, and would have to do the catch-up reporting later. The employer is indeed blowing the whistle on himself, but then his recourse is against the TPA, in my opinion.

[Guest Bob Collins]

It seems very, very wrong for the TPA to be holding funds for 4 weeks!!! If the employer doesn't move to have the assets contributed to the trust and the money disappears, I would expect that DOL would go after the employer.

[GBurns]

There was a fairly similar discussion on this Message Board re " Black our periods". It might be informative to look back at some of the answers given, although I done agree with some.

[imchipbrown]

I think we're being a little reactionary here, at least in terms of the Employer. I think the 15 days (or 31, or whatever) is the limit for separating the deferrals from the general assets of the Employer and sending them of to the investment company.

The investment company should follow their instructions re: whose account/how much/what investments, thereby getting whatever commission, fee, etc. they're due. I think the Employer has done its job.

If its taking this long to get invested, its time for a new investment company. No, I'm not an investment company :-{