Delayed deposit of employee deferral

[rblum50]

A client just supplied me with their 2018 W-2's showing total employee deferrals of $22,000. When I balanced the assets of the plan from their brokerage statements, the total deferrals amounted to$20,000. I thought that the missing $2,000 was simply a contribution in transit that would show up early in January, 2019. Unfortunately, only $1,000 showed up in January leaving the plan $1,000 short. When I questioned the office manager, she indicated that the November contribution of $1,000 was never deposited and wants to know if she should deposit this amount now. As I see it, there are a few issues:

1) employee deferrals are cash items. Therefore, the remaining $1,000, yet to be deposited, cannot be considered employee deferrals for 2018.

2) If 1) above is true, then the individual W-2's reflect excessive deferrals amounts and need to be re-done. Conceivably, if individual 2018 personal tax returns have been already filed, they may need to be re-filed.  

3) Since the $1,000 has been in a corporate account rather than the 401(k) since November, could this be a prohibited transaction?

4) If the adjustments for most (there are only about 6 in the plan) would be relatively small, if there anything that can be legally done to make this mess just go away?

[Kevin C]

1) NO!  Deferrals don't stop being deferrals when the employer keeps the money.

2) NO!  See 1).

3) Yes, it is a prohibited transaction. 

4)  Yes.  The employer needs to correct the PT by depositing the deferrals plus lost income.  An excise tax applies to the PT (Form 5330) unless the employer files under the DOL Voluntary Fiduciary Correction Program (VFCP).    

[justanotheradmin]

Kevin C. is correct. 

It's a classic late deposit. Deferral money doesn't lose it's status as deferral money simply because the employer holds onto it longer than they should. The fact that the late deposit crossed the end of the plan year doesn't change this. 

If the payroll person goes on vacation, or family leave or whatever, situations like this arise. Unfortunately this happens all the time.