when is a deferral remittance actually considered "late"

[M Norton]

401(k) plan, sponsor has bi-weekly payroll, every other Friday.  Deferrals are withheld from payroll Friday, the 10th of the month.  The due date, seven business days, would be Tuesday, the 21st.  Plan sponsor writes a check for the deferrals and mails it on Monday, the 20th.  It is received and posted to the brokerage on Thursday, the 23rd. Just looking at the activity in the plan brokerage account it appears the deferrals were late, but the payment was mailed timely.  Does the check date count?  The postmark on the envelope?  

Help appreciated to resolve a discussion here.

Thanks!

[RatherBeGolfing]

1 hour ago, M Norton said:

...but the payment was mailed timely

Was it?

Quote

§ 2510.3–102 Definition of ‘‘plan assets’’— participant contributions. (a)(1) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.

Clearly you don't meet the general rule of "the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets."

If this is a plan with fewer than 100 participants at the beginning of the plan year, the safe harbor would be:

Quote

(2) Safe harbor. (i) For purposes of paragraph (a)(1) of this section, in the case of a plan with fewer than 100 participants at the beginning of the plan year, any amount deposited with such plan not later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer), or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages), shall be deemed to be contributed or repaid to such plan on the earliest date on which such contributions or participant loan repayments can reasonably be segregated from the employer’s general assets.

So, it is deemed contributed on the earliest date on which such contributions or participant loan repayments can reasonably be segregated from the employer’s general assets if deposited no later than the 7th business day.

Does mailed on a the 7th business day mean deposited on the 7th business day? I don't think so. 

Lets look at the final rule published on 1/14/2010.

Quote

 

SUPPLEMENTARY INFORMATION:

B. Overview of Final Rule and Comments

For the reasons explained below, the Department has decided to adopt a final regulation that, with the exception of a few minor clarifying changes, is the same as the proposal. The following is a paragraph by paragraph review of the regulation and a summary of the comments received with respect to each. Paragraph (a)(2) of § 2510.3–102, like the proposal, sets forth a safe harbor under which participant contributions to a pension or welfare benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as having been made to the plan in accordance with the general rule (i.e., on the earliest date on which such contributions can reasonably be segregated from the employer’s general assets) when contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages). As under the 1996 amendments, participant contributions will be considered deposited when placed in an account of the plan, without regard to whether the contributed amounts have been allocated to specific participants or investments of such participants.

 

I think it is pretty clear that deposit means deposit.  In your example, the deposit takes place on the 23rd, which is outside of the safe harbor window.  Since the employer in your example fails to satisfy the general rule, it is their responsibility to deposit the contributions no later than the 7th business day following. 

The contributions are late.

[Bird]

I see two likes already but I dunno, that bold part is really about "depositing vs allocating" not "depositing vs mailing" IMO.  I'm not saying it's not absolutely g-d stupid to be mailing checks 7 business days after payroll, and maybe they should be considered late on general principles of punishing stupidity, but I don't think the cites fully close the circle.  There are plenty of cases where mailing is considered depositing so I think a case could be made that they aren't late.  I'm not saying we don't have clients like this but it sure is annoying to have to deal with it when there is no good reason for it.

[RatherBeGolfing]

12 minutes ago, Bird said:

that bold part is really about "depositing vs allocating" not "depositing vs mailing" IMO

Absolutely.  Allocating and mailing is not the same thing. I think you are looking at it backwards though.  The allocation or investment of the contribution would come after the deposit.  If I deposit a contribution today, and the recordkeeper allocates that contribution to 10 participants tomorrow (or 10 investments of the same participant), the deposit date is still today.  I think that is clearly distinguishable from when you mail a check, which also gives the employer another day or two with the participant contributions since it will not actually leave the employers assets until cashed.

Lets also remember that the due date is not 7 business days.  The due date is the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.  The safe harbor simply gives you the benefit of the deposit being deemed to be made on the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets if deposited no later than 7 business days following.

[BG5150]

The rule is there not to get the funds into participant accounts, but to keep participant funds out of the hands of the employer.  As soon as deferrals (and loan payments!) are recorded on employees paychecks/direct deposits, then that money is no longer the employer's.  As long as the funds remain in the employer's bank account, it's like an interest-free loan from the 401(k) accounts to the employer.

[Larry Starr]

20 hours ago, M Norton said:

401(k) plan, sponsor has bi-weekly payroll, every other Friday.  Deferrals are withheld from payroll Friday, the 10th of the month.  The due date, seven business days, would be Tuesday, the 21st.  Plan sponsor writes a check for the deferrals and mails it on Monday, the 20th.  It is received and posted to the brokerage on Thursday, the 23rd. Just looking at the activity in the plan brokerage account it appears the deferrals were late, but the payment was mailed timely.  Does the check date count?  The postmark on the envelope?  

Help appreciated to resolve a discussion here.

Thanks!

You have gotten good responses previously, but I just want to state it unequivocally that this employer is WRONG in what they are doing regardless of whether mailing or receipt is the answer.  They need to stop thinking about this 7/8 day window. There is no doubt they can get the check in earlier; we don't even talk to clients about the "8 day rule". They are told they need to get the money on its way the same day they do the payroll (or maybe a day or two later, but that's it).  Anything else is a recipe for a problem. 

[Peter Gulia]

One wonders how quickly an employer pays withheld taxes and other recipients of wage deductions.

If it's as quickly as I imagine, what explanation would a fiduciary give for treating a retirement plan worse than other creditors?

 

[Pam Shoup]

From a recordkeeper's point of view - check to see if whoever holds the plan assets can work with ACHs or wires and eliminate the paper check processing altogether.  The recordkeeper may be able order the ACH directly, once the contribution data has been received.

[Patricia Neal Jensen]

All good answers already, but my comment would be that there is little (no?) excuse for mailing checks in today's world.  The "vendor made me do it" excuse does not work.  If the vendor does not make electronic deposit possible, the plan sponsor should choose a vendor who does support this.

PNJ

[Lou S.]

8 minutes ago, Patricia Neal Jensen said:

All good answers already, but my comment would be that there is little (no?) excuse for mailing checks in today's world.  The "vendor made me do it" excuse does not work.  If the vendor does not make electronic deposit possible, the plan sponsor should choose a vendor who does support this.

PNJ

While I agree with you some clients are old fashioned and somehow they are tied to the check book still.

[Larry Starr]

5 hours ago, Patricia Neal Jensen said:

All good answers already, but my comment would be that there is little (no?) excuse for mailing checks in today's world.  The "vendor made me do it" excuse does not work.  If the vendor does not make electronic deposit possible, the plan sponsor should choose a vendor who does support this.

PNJ

I disagree strongly.  Even my own plan is funded with checks from my practice twice a month (which is how we all get paid).  Many of my clients send checks because most of them are NOT on platforms.  If you are a reasonably controlled business, sending a check with each payroll is not a big deal and not a problem. BUT there is still no excuse for NOT sending the check with each payroll, even if that takes a day or two.  As I noted, that's what we tell clients is the rule, and it seems to work most of the time.

[Linda Wilkins]

This employer appears to be thinking that the "timely mailing is considered timely payment" rule applies to the funding of withheld 401(k) plan contributions to the trust.  It definitely does not, check out the statute at U.S. Code section 7502.  It only applies to a return or document or payment under the internal revenue laws.  Here, the employer is acting as a fiduciary handling plan funds, and has a duty not to use them to benefit itself (i.e., borrowing from the plan).  I agree with all of the other recommendations.  If you use a check, you should be able to produce a paper trail to prove deposit dates just as well as you can with wires or ACH deposits.