Remedy for late transfer of employee contributions to 401(k)plan.

[KIP KRAUS]

I thought This topic had been discussed before, but I can't find it anywhere. Until discovered last week by our independent auditors, we were unaware that one weeks worth of employee payroll deductions to the 401(k) plan had not been forwarded to the plan trustee in a timely manner. We have since forwarded the initial deducted amounts to the trustee. We know that we must now remit lost earnings on these funds and are in the process of doing so.

We have been told that the earnings can be based on the most favorable fund performance of the Plan fund options during the delenquent period. Does this mean that we simply calculate the year-to-date earnings from the date the funds would have normally been deposited to the date we remit the additional earnings? Is there any guidance out there that would tell us what dates should be used to do the calculations? The additional amount is small and not an issue for the company we just want to do the right thing to remedy the error.

Are we automatically going to be required to file a form 5330 and pay excise taxes because of this administrative error?

[actuarysmith]

There is a thread started out there on this subject under the topic of form 5330.

I think that you will have to file a 5330 even though the amount is small. There is no De Minimum rule.

As far as the calculations and the number of days late - we have been asking our clients to tell us how many days late the deposits have been! I know it sounds crazy (because they probably assume that it is our job to do that, but doing so would make us fiduciaries), but there is no black and white rule to use on this matter. It is a facts and circumstances determination.

[Dave Baker]

Info re interest rate to be used:

http://www.benefitslink.com/boards/index.php?showtopic=5073

Another user suggests looking to the DOL's Voluntary Fiduciary Correction program for guidelines, even if the plan sponsor does not file under the program:

http://www.benefitslink.com/boards/index.php?showtopic=4904

VFC program is at http://www.benefitslink.com/DOL/volfiduciary.shtml

[pjkoehler]

As a starting point you want to familiarize yourself with the "plan asset" regulations set forth in DOL Reg. Sec. 2510.3-102, which provide that amounts that an employer withholds from an employees paycheck for contribution to a pension benefit plan become "plan assets" as soon as they "can be reasonably segregated from the employer's general assets," but in no case later than the 15th business day of the month following the month in which the amounts were withheld. The outside limit is definitely not a safe harbor and I've never heard of a case in which the DOL accepted the argument that the outside limit was the earliest date on which they could be reasonably segregated. In most cases, the DOL looks at the level of sophistication of the payroll processing system in place and makes a judgment, in light of the employer's ability to process other payroll deductions. There's no bright line, but in my experience, unless your client is running an antiquated or manual system and so thinly capitalized that it's economically infeasible to upgrade it (tax-exempts are sometimes able to make this sort of factual argument), the DOL would probably not accept a period of more than 10 business days from the date the amounts were withheld.

Keep in mind that the nature of the prohibited transaction, which also involves a violation of the ERISA trust requirement and a breach of fiduciary responsibility by the employer, arises because the employer holds "plan assets" outside of ERISA trust solution. A timely filing of Form 5330 may satisfy the Code's tax payment and tax return filing requirements, but it doesn't relieve the fiduciary of exposure to civil penalties. If this is an isolated, minor failure to timely deposit funds within this timeframe, self-correction is probably satisfactory, but you may want to take a closer look at the client's deposit timing, after an objective determination of the "earliest date" under the "plan asset" regs. For chronic violations, it might make sense to consider the DOL's Voluntary Fiduciary Compliance Program, which covers delinquent participant contributions. A successful application results in a no-action letter with respect to DOL civil penalties that otherwise apply.

[KIP KRAUS]

Thank you one and all for your helpful comments and suggestions. I have contacted our legal advisors for their opinion as well.

Gee, who would have thought that all of the intentional abuse of union pension funds in the 60's and 70's would have caused employers so much grief for an honest mistake and a full willingness to rectify it.

[pjkoehler]

As a starting point you want to familiarize yourself with the "plan asset" regulations set forth in DOL Reg. Sec. 2510.3-102, which provide that amounts that an employer withholds from an employees paycheck for contribution to a pension benefit plan become "plan assets" as soon as they "can be reasonably segregated from the employer's general assets," but in no case later than the 15th business day of the month following the month in which the amounts were withheld. The outside limit is definitely not a safe harbor and I've never heard of a case in which the DOL accepted the argument that the outside limit was the earliest date on which they could be reasonably segregated. In most cases, the DOL looks at the level of sophistication of the payroll processing system in place and makes a judgment, in light of the employer's ability to process other payroll deductions. There's no bright line, but in my experience, unless your client is running an antiquated or manual system and so thinly capitalized that it's economically infeasible to upgrade it (tax-exempts are sometimes able to make this sort of factual argument), the DOL would probably not accept a period of more than 10 business days from the date the amounts were withheld.

Keep in mind that the nature of the prohibited transaction, which also involves a violation of the ERISA trust requirement and a breach of fiduciary responsibility by the employer, arises because the employer holds "plan assets" outside of ERISA trust solution. A timely filing of Form 5330 may satisfy the Code's tax payment and tax return filing requirements, but it doesn't relieve the fiduciary of exposure to civil penalties. If this is an isolated, minor failure to timely deposit funds within this timeframe, self-correction is probably satisfactory, but you may want to take a closer look at the client's deposit timing, after an objective determination of the "earliest date" under the "plan asset" regs. For chronic violations, it might make sense to consider the DOL's Voluntary Fiduciary Compliance Program, which covers delinquent participant contributions. A successful application results in a no-action letter with respect to DOL civil penalties that otherwise apply.