Standard Late Deposit of Salary Deferrals Question

[rblum50]

Client has a calendar year 401(k) plan. Owner writes a check for $3,500 on 12/31/12 representing his final salary deferral for 2012. This is the amount that will bring his total deferrals up to $22,500 for the year. Unfortunately, the check was intentionally held up and wasn't sent to the brokerage firm until 1/29/13.

Questions:

1. Do we agree that a PT has occurred?

2. Do we also agree that going back and changing his 2012 W-2 and his 2012 tax return would cause a

legal problem?

3. Would doing a DOL VFCP submission take care of "everything?"

4. Would an additional submission of some kind to the IRS be required?

Thanks for the help.

[rblum50]

After doing some research, it appears that my client has three issues:

1. There has been a fiduciary breach which can be corrected through the DOL's VFCP program. I haven't be able to determine what, if any, is the cost to send a submission to the VFCP. If anyone knows, I would appreciate the information.

2. Since the plan's provisions weren't followed, there is a qualification issue. This can be corrected through the IRS's VCP program. The cost for submission is $750.

3. Since the client held unto money that should have been deposited into the plan trust, there has been a prohibited transaction. This, I believe, can be dealt with under a VFCP PT class exemption.

Comments?

[MoShawn]

Why not just deposit missed earnings and pay the excise tax on Form 5330? I wouldn't think VCP is necessary, and VFCP is voluntary. All it does is prove to the DOL that you corrected and gets you a no-action letter.

[BG5150]

What I would do: (if $3,500 is not a significant portion of plan assets)

Put the $3,500 on the 5500 as a late deposit.

Pay interest to the trust (or to the individual account if applicable).

Submit form 5330 and pay the tax on the interest.

Notes:

I wouldn't change the W2, as the money was withheld from his paycheck.

No remedy under EPCRS for this.

No need for VFCP on this.

[rblum50]

Looking at the following article from the IRS website: http://www.irs.gov/Retirement-Plans/Late-Deposit-of-Salary-Deferrals-Fixing-Common-Plan-Mistakes, it appears that making submissions under both the VFCP and EPCRS appear to be advisable.

[rblum50]

It appears that I link I provided doesn't work, so here's a copy of the article:

Late Deposit of Salary Deferrals - Fixing Common Plan Mistakes

Employers with 401(k) plans are responsible for depositing their employees salary deferrals to the plans trust on the earliest date that the deferrals can reasonably be segregated from the employers general assets.

The earliest date is based on individual facts and circumstances. If your plan has fewer than 100 participants, your deposit is considered timely if its made within 7 business days after you withhold the salary deferrals even if you were able to deposit them earlier. If you don't deposit the salary deferrals within 7 business days after you receive or withhold them, then your individual facts and circumstances will determine whether your deposit was considered timely. For larger plans (100 participants or more), the determination of whether the deposit was timely is based on the individual employers facts and circumstances.

Regardless of your individual facts and circumstances, you must deposit the salary deferrals no later than 15 business days in the month following the month in which the amounts would otherwise have been payable to your employees in cash. If your facts and circumstances show that you could have made the deposit on an earlier date, then you must have deposited your salary deferrals by that earlier date for them to be considered timely.

The problem

Failing to timely deposit withheld salary deferrals to the plan is a plan error.

Consequences of not segregating and depositing salary deferrals timely

Failing to timely deposit salary deferrals: is a fiduciary violation and could subject your plan to the Department of Labors civil penalties.

could violate your plans terms and jeopardize your plans tax-exempt status

Failing to segregate salary deferrals from your general assets and timely forwarding them to the plans trust allows you prohibited use of plan assets. This can result in you engaging in a prohibited transaction for which you can be assessed excise tax.

The fix - correction programs available to correct this mistake

DOLs Voluntary Fiduciary Correction Program

You can correct the fiduciary violation for failing to timely deposit salary deferrals using the DOLs Voluntary Fiduciary Correction Program. VFCP isn't available if your plan is under a DOL investigation or an IRS examination.

DOLs prohibited tax class exemption in conjunction with VFCP

You may also be eligible to take advantage of the prohibited tax class exemption in conjunction with VFCP if you: deposited the salary deferrals to the plans trust within 180 days from the date the amounts would otherwise have been payable to the employees in cash;

satisfied all VFCP requirements;

received a no-action letter for your VFCP application; and

notified all interested persons in writing within 60 days of submitting your VFCP application. There is an exception to this notice requirement if: your excise tax liability would have been $100 or less;

you contributed the amount of your excise tax liability to the plan; and

you allocated this amount to participants and beneficiaries according to the plans terms for allocating plan earnings.

If the transaction qualifies for the prohibited transactions class exemption, then you won't be liable for excise tax under IRC Section 4975.

IRS Employee Plans Compliance Resolution System

If your plans tax-exempt status is in jeopardy, then you can use the IRS Employee Plans Compliance Resolution System. If your plan is not under IRS examination and meets the other eligibility requirements, you can use either the self-correction or voluntary correction programs.

If your plan is under examination, you can still self-correct if the failure is insignificant, or you can resolve the issue in a closing agreement through Audit CAP.

DOL and IRS correction programs are not interchangeable

The goal of the DOL's VFCP is to ensure that the employer isn't subject to DOLs civil penalties. The goal of the IRSs correction programs, including VCP, is to ensure that the plan doesn't lose tax benefits arising from its qualified status. It is critical that you know what your objectives are before deciding which program you want to use. Also, you may use both the DOL and IRS programs if you have a dual objective of avoiding the imposition of DOLs civil penalties and the IRSs revocation of your plans qualified status.

The fix - correcting the mistake

Salary deferrals never deposited - If you failed to deposit salary deferrals to the plan, then you must make corrective contributions in the amount of the salary deferrals you should have timely deposited adjusted for earnings. The adjustment for earnings is measured from the earliest date you could have segregated the salary deferrals from your general assets to the date you actually make the corrective contributions.

Late deposit - If you deposited the salary deferrals, but not timely, then to correct this mistake, you must contribute the earnings on the late deposited salary deferrals. Earnings are what the late deposited deferrals would have earned measured from the earliest date you could have segregated them from your general assets to the date you actually deposited them to the plan.

Differences in the earning adjustment under DOL and IRS programs

The general premise of both the DOL VFCP and IRS correction programs is to restore the plan to the position it would have been had you timely deposited the salary deferrals. However, the earnings calculation in both programs could be different.

DOLs VFCP - earnings are determined using the greater of: lost earnings (earnings that the plan would have earned if you had timely deposited the salary deferrals), or

restoration of profits (the profit you earned that is directly attributable to your investment of the salary deferrals that werent timely deposited).

You can use DOLs online calculator when using VFCP to calculate earnings.

IRS correction program - earnings are generally determined based on what the plan would have earned had you timely deposited the salary deferrals. The IRS correction programs do, however, allow you to use reasonable estimates (including the DOLs online calculator) to calculate the earnings on the late deposited salary deferrals if either: its possible to make a precise calculation but: the probable difference between the approximate and the precise restoration of participants benefits is insignificant, and

the administrative cost of determining precise restoration would significantly exceed the probable difference, or

its not possible to make a precise calculation (for example, where its impossible to obtain plan data).

Making sure it doesnt happen again

Establish a procedure for depositing elective deferrals with or after each payroll date, or according to the terms in your plan document. If you have instances when your deferral deposits are later than the normal timely deposit (because of vacations or other disruptions, for example), keep a record of why those deposits were late. Coordinate with your payroll provider and others who provide service to your plan to determine the earliest date you can reasonably make deferral deposits. The date and related deposit procedures should match your plan document provisions, if any, dealing with this issue. If you have a change in the person in charge of making these deposits, make certain the new person understands when he or she must make these deposits.

Keep in mind that despite all of your good efforts, mistakes happen. In that case, the IRS can help you correct the problem so that you retain the benefits of your qualified plan.

Page Last Reviewed or Updated: 12-Dec-2012

[BG5150]

Looking at the following article from the IRS website: http://www.irs.gov/Retirement-Plans/Late-Deposit-of-Salary-Deferrals-Fixing-Common-Plan-Mistakes, it appears that making submissions under both the VFCP and EPCRS appear to be advisable.

You added a comma at the end of the url. That's why it's not working.

[MoShawn]

I would still follow the process BG5150 stated before. Using the DOL VFCP calculator, you are looking at about $8.50 in lost earnings, which would be about $1 in excise tax on Form 5330.

If you have a copy of Form 5330 (along with the check) and proof of deposit of the lost earnings you should be fine, even under DOL audit. Unless there are more details here that we haven't heard yet, I don't think there is any reason to do a full VFCP submission. The class exemption may get you out of the excise tax, but if that is only going to be $1 then why waste the man-hours.