401k late due to chg in recordkeeper, or not

[TPApril]

Company was changing recordkeeper for 401k plan. They got locked out of outgoing custodian and new one could not set up in time, so they missed timely deposits for one month. After they were advised the late amount that would show up on their 5500 and the lost earnings deposit due (<$100), they have resisted and they believe due to intention, they are not at fault. Contemplating how to handle

[Karoline Curran]

I would say they have late deposits no matter whose fault it is. I believe the safe harbor time frame for making deferral deposits for a small plan (not an audit plan) is 7 business days, and could be considered less- for example,  if they consistently make deposits in 3 days then they would expected to make deposits consistently in 3 days.  Hope this helps!

[Kevin C]

It depends on the details of the situation.  The general rule under §2510.3-102  is that the amounts become plan assets on the earliest date they can reasonably be segregated from the assets of the employer.  Unusual circumstances can affect when the deposit is considered late.  For example, if the employer first found out about the situation when the new custodian returned their deposit check, I think you would have a strong argument that a later than normal deadline would apply to that deposit. But, they would still need to act to get the deposit made as soon as it could reasonably be done.   At the other extreme, if the employer knew about this ahead of time and just waited until the new custodian got around to opening the new account, then I think the deposits are late.  They could have opened a plan account somewhere else to deposit the funds and transferred it to the new custodian when they were ready. If they don't meet the small plan safe harbor, it's basically a facts and circumstances determination.  

If the DOL gets involved, the determination is made by the Investigator who handles the case. My experience prior to the small plan safe harbor was that some DOL Investigators would apply common sense to the determination, but others would not. 

[RatherBeGolfing]

4 hours ago, Karoline Curran said:

I would say they have late deposits no matter whose fault it is. I believe the safe harbor time frame for making deferral deposits for a small plan (not an audit plan) is 7 business days, and could be considered less- for example,  if they consistently make deposits in 3 days then they would expected to make deposits consistently in 3 days.  Hope this helps!

You are getting the general rule and the safe harbor mixed up.  The safe harbor for a small plan is that deposits made within 7 business days are deemed to be made on the earliest date on which such contributions could reasonably be segregated from the employer's general assets.  You do not lose the 7 day safe harbor just because you normally deposit the contributions in 3 days.

The general rule is that contributions have to be deposited on the earliest date on which such contributions can reasonably be segregated from the employer's general assets.  Anything beyond what is reasonable is late.  If a pattern can be found, say 3 days, anything beyond 3 days should be looked at to see if the delay was reasonable.  Also, just because the employer normally takes 3 days doesn't mean that 3 days is reasonable if it could have reasonably been done in 1 or 2 days.

There is also a maximum time period for deposits to be considered reasonable.  A contribution that is deposited later than the 15th business day of the month following the month in which the contribution would have been payable to the participant in cash is by definition not reasonable.

[RatherBeGolfing]

14 hours ago, TPApril said:

Company was changing recordkeeper for 401k plan. They got locked out of outgoing custodian and new one could not set up in time, so they missed timely deposits for one month. After they were advised the late amount that would show up on their 5500 and the lost earnings deposit due (<$100), they have resisted and they believe due to intention, they are not at fault. Contemplating how to handle

How late were the contributions?

Also, I agree with Kevin that if they knew there would be a long delay between recordkeepers, the contributions are late.

[TPApril]

To be specific, based on 7 day safe harbor, the deposits ranged from 2 to 16 business days late

[chc93]

Wasn't there some informal position by the DOL that they will accept "administrative" delays.  For example, the only person that can sign the deferral checks goes out of the country for awhile... or is out sick.  Or in this case, unforseen glitches in recordkeeper changes prevents timely deposits.

2 to 16 days late would seem to fall into this category.  In the end, it is the PA who has to answer to any audit... IRS and/or DOL.

[MarkS]

I just went through a DOL audit where deposits were late for a similar reason; the new record-keeper wouldn't ok any pulls from the employers (multiple employer plan) to the new custodian until all prior accounts had been validated. The auditor asked for the blackout notices and was ok with the late deposits.

[Karoline Curran]

4 hours ago, RatherBeGolfing said:

You are getting the general rule and the safe harbor mixed up.  The safe harbor for a small plan is that deposits made within 7 business days are deemed to be made on the earliest date on which such contributions could reasonably be segregated from the employer's general assets.  You do not lose the 7 day safe harbor just because you normally deposit the contributions in 3 days.

The general rule is that contributions have to be deposited on the earliest date on which such contributions can reasonably be segregated from the employer's general assets.  Anything beyond what is reasonable is late.  If a pattern can be found, say 3 days, anything beyond 3 days should be looked at to see if the delay was reasonable.  Also, just because the employer normally takes 3 days doesn't mean that 3 days is reasonable if it could have reasonably been done in 1 or 2 days.

There is also a maximum time period for deposits to be considered reasonable.  A contribution that is deposited later than the 15th business day of the month following the month in which the contribution would have been payable to the participant in cash is by definition not reasonable.

RatherBe, I'm just giving my opinion based on how our compliance dept. handles late deposits.  For instance, if our legal team sees deposits going in within 3 business days, they count anything over 3 days as a late deposit, along with other late deposits.  Have a good weekend!!

[TPApril]

12 minutes ago, MarkS said:

I just went through a DOL audit where deposits were late for a similar reason; the new record-keeper wouldn't ok any pulls from the employers (multiple employer plan) to the new custodian until all prior accounts had been validated. The auditor asked for the blackout notices and was ok with the late deposits.

MarkS - that's very interesting.  Prior to the audit, did you report the delinquent contributions on the 5500 and did the plan sponsor pay the lost earnings (& excise tax)?

[RatherBeGolfing]

9 minutes ago, Karoline Curran said:

RatherBe, I'm just giving my opinion based on how our compliance dept. handles late deposits.  For instance, if our legal team sees deposits going in within 3 business days, they count anything over 3 days as a late deposit, along with other late deposits.  Have a good weekend!!

No worries, you are certainly entitled to do things your way as long as you stay within the law and your clients are happy.  I was just letting you know that your understanding of the rule is incorrect.  Here is the thing, you are not required to take advantage of the 7 day safe harbor for small plans.  If an employer wants to pay more lost earnings and excise taxes than they have to, they are allowed to do that. 

Using a company average for plans that cant take advantage of the safe harbor is common practice and is usually fine, the key is to document and being able to defend it if the government comes knocking.  That is assuming that the company average is reasonable to begin with of course. 

Have a great weekend.

[RatherBeGolfing]

1 hour ago, TPApril said:

To be specific, based on 7 day safe harbor, the deposits ranged from 2 to 16 business days late

so between 9 and 23 business days from pay day?

As long as none of the deposits went past the 15th business day of the month following and the employer was unaware that the delay would be that long you probably have a pretty decent argument.  If they knew ahead of time that it would take over 3-4 weeks between payroll and when they could make the deposit, they probably should have established a plan account for the deposit rather than let it sit in an employer account, and I would argue that that is a late deposit even with the change in recordkeeper.

[Bri]

When in doubt, have the payroll company transfer the withholdings to a plan-named checking account.  At least that way you're around the lateness issue with the prohibited transaction, dealing only with (only!) the fiduciary issues of the trustee having the funds but not having them in the participants' accounts.  I would suspect then that the delays with the platform are more "forgivable"....

[Patricia Neal Jensen]

A lot of good ideas already articulated but I must add one comment:  It was their "fault!"   They are the fiduciary who chose the new vendor and should have made sure of the dates involved for the asset transfer.

[Kevin C]

I guess you've never had a recordkeeper give you a last minute surprise by delaying something they previously said would be done on time.  We've had it happen a few times, despite repeatedly following up to make sure everything was in order and on schedule.  Stuff happens and it's not always the plan sponsor's fault. 

From the comments section of the preamble to the 1996 final deposit regs:

 

Quote

 

With respect to events beyond

the control of the employer, the

Department notes that a predicate for a

prohibited transaction under section

406(a) is that the fiduciary cause the

plan to engage in the prohibited

transaction in question. Therefore, if the

event giving rise to the delay in

segregating participant contributions is,

in fact, beyond the control of the

employer, there would be no prohibited

transaction under section 406(a).

 

 

 

[ESOP1]

Assuming for the sake of argument that the deposits were late, why not work something out with the new recordkeeper? I have to think for the sake of goodwill they would kick in some if not all of <$100.

[TPApril]

They have (less than enthusiastically) agreed to deposit the lost earnings and understand that this will show up on their 5500.

[Patricia Neal Jensen]

The requirement is not that the funds be deposited with the "new" recordkeeper but just that they not remain in the plan sponsor's bank account.  I maintain my earlier position:  the correct resolution to this problem was within the plan sponsor's control.  I have done hundreds of these in my career.  There is always a way that does not include the plan sponsor holding such assets beyond the time limit established.