Interest on Late Deferral Deposits - tiny amounts

[ldr]

Good afternoon to all,

Have any of you ever calculated the earnings on a series of slightly late deposits (between a few days and 6 weeks each) for a client and found that some participants are only going to get a very little bit of money? I just had to do this for a school with about 45 participants.  While 19 of their 26 deposits during the year were late, they weren't THAT late, and the total interest on the late deposits per person just isn't much. Some will get a few bucks but many will get less than a dollar.

Why did I bother with it?  Because some of the employees found out that deposits were being made tardy and demanded to know what our client was going to do about it.  He's in the unhappy position of having to prove that the rules have been followed to the letter.  So he will have to pay us more than the interest and penalties involved to find out what he owes.

The toughest part to figure out is what to do when the participant has already terminated employment and been paid out.  How does our client manage to pay someone as little as 13 cents after they are gone?  Do these tiny payments have to funnel through the platform provider or can the school just write a check to the terminated employees and mail it to them?

Your thoughts, ideas and experiences are greatly appreciated, as always.

[RatherBeGolfing]

13 hours ago, ldr said:

Have any of you ever calculated the earnings on a series of slightly late deposits (between a few days and 6 weeks each) for a client and found that some participants are only going to get a very little bit of money?

Yep.  It happens all the time.  This is why every class, conference session, and webinar make a point of reminding you that there is no de minimis amount when it comes to late deferrals. 

13 hours ago, ldr said:

Why did I bother with it?  Because some of the employees found out that deposits were being made tardy and demanded to know what our client was going to do about it. 

Or maybe because its the law? :)

13 hours ago, ldr said:

He's in the unhappy position of having to prove that the rules have been followed to the letter. 

Why?  The rules have to be followed to the letter anyway, so it should be easy to just notify the participants that he has done what he is supposed to do.  He is lucky they didn't bring it to the DOLs attention and have them enforce the rules instead of giving him the chance to clean up his own mistakes.  

13 hours ago, ldr said:

So he will have to pay us more than the interest and penalties involved to find out what he owes.

This is not unusual.  Hopefully it will be a valuable lesson to the client to make an effort to make timely deposits rather than clean them up later. And honestly, its hard to feel bad for him when he only got 25% of his payroll deposits in timely and some were up to 6 weeks late...

13 hours ago, ldr said:

The toughest part to figure out is what to do when the participant has already terminated employment and been paid out.  How does our client manage to pay someone as little as 13 cents after they are gone?  Do these tiny payments have to funnel through the platform provider or can the school just write a check to the terminated employees and mail it to them?

When it comes to corrections I want transactions into a plan account so that I have a clear paper trail that the corrections were done.  You could establish a checking account for the plan outside of the platform provider and have the amounts deposited there, then cut checks from that account. Or make the corrections to the platform and transfer to the checking account. Any distribution fees should be paid by the client, not the participants.

[ldr]

Thanks, Rather Be Golfing.  Right now I'd rather be golfing too and I don't even play!

I like your idea about having it go through the platform so there is a clear paper trail.  Even if it becomes stupidly cumbersome to distribute these pennies.

Yes I know it's the law.  I'd be very surprised if every TPA in the country makes every single client deposit interest every single time they are late.  We have been a little too lax on this, trying first to warn the client that they had better shape up or we would have to start making these calculations and charging them extra to do it.  Most of them do start making their deposits on time after that.

In this particular case, I do feel for the client because he's new in his position and he took over a mess he did not create.  He's the first and only person in the organization who has ever taken a genuine interest in doing things correctly and there have not been any more late deposits since he took charge.

I did find out that the platform provider will not charge anything except an asset fee and that they will write a check to the participant for pennies if necessary.  However, they won't use distribution instructions that are any older than 6 months so it looks like we may be sending out more distribution forms for tiny amounts.   Or the amounts will waste away with asset fees over time.  If checks do get issued, people may not bother depositing them because they are so small.  We will cross that bridge when we get there.

[RatherBeGolfing]

You are right, there are providers out there who do not make their clients fix their issues like late deferrals, or only do it after a certain point.  If you advise your client that they have compliance issues and the client refuses to correct them because of cost, can you continue to represent the client?  The answer is a clear no if you are subject to Circular 230.  

Do you prepare the 5500?  Its hard to justify preparing an incorrect return, even when you are not the one to sign it.  The bottom line for me is don't make your clients problems your problems by trying to cut them some slack.  

[ldr]

Good advice and we have been having that very discussion lately.  Every place I have worked has had its strengths and its weaknesses, and as one problem after another gets fixed, some new area comes into focus.  This is the issue of the moment, and this is the year we have all promised each other to really scrutinize the timing of deposits and to hold the clients' feet to the fire.  We usually did, for egregious cases and habitual cases, but we haven't really drilled down on every deposit every time for every client until now.  We ask, on the annual questionnaire, whether or not the client had late deposits.  A rare one sometimes answers the question truthfully.  However, with a platform provider handling the funds, we can easily run off a copy of the deposits made for the year and compare it to the payroll runs and see for ourselves whether they were late or not.  That's the extra step we will be taking going forward.