DOL dings employer for failure to deposit elective deferrals within 7

[k man]

A client of ours was audited by the DOL. The result was the DOL cited them for not deposting employee contributions timely (most occurences were prior to the new 15 day reg). The DOL position was based on the fact that the employer does payroll weekly and that segregation of the assets could have been done in seven days. frankly, we are confused with this interpretation. does anyone have any insight?

[Guest Cutfade]

The regulations provide a maximum of 15 business days to deposit employer contributions. This is not a safe harbor, though, as the regs also require deposit as soon as the money can reasonably be segregated from the employer's general assets. Given the employer's weekly payroll, I don't think the DOL is way out of line on this one.

What, if any, sanctions has the DOL proposed? I am working with a plan that is attempting to self-correct this same problem. The employer in that case intends to make up lost earnings for affected participants and to pay the 10% excise tax. Lost earnings will be determined (because of the number of participants and investment options) by simply taking the most favorable return of all options for the period in question, and multiplying that by the employee contributions.

[R. Butler]

It is my undersatnding that k-mans experience is the current trend. The rule states that assets must be segregated as soon as reasonably possible, in no event will this time period exceed the "15 business day stuff". The DOL's position is that generally assets can be segregated within a few days of the payroll date.

I attended a 5500 workshop and we were advised that the DOL is going to start hammering this one hard. If the employer is concerned about increased administrative expenses assoicted with weekly, bi- weekly, etc. deposits, it was recommended that at a minimum the plan sponsor establish a seperate checking account under the Plan's name, segregate the assets immediately into the checking account and still continue to remit monthly deposits to the investment company out of the checking account.

[Guest Boilerburm]

There was disagreement in our office on whether or not this violation is technically a Prohibited Transaction. Filing the 5330 is not at issue, but some auditors have questioned whether it needs to be classified as a Prohibited Transaction. I would be interested to read everyone's opinion on this.

[R. Butler]

I have always been under the impression that it is a prohibited transaction. It is a loan from the plan to the employer. If it is not classified as a prohibited transaction I would be curious as to where your classifying it on the 5330. I thought the whole purpose in filing the 5330 in such situations is that it is a prohibited transaction.

[k man]

we are going to take the position that it will cost the client and participants more money if the adminstrators have to allocate and invest the contributions more than two times a month as opposed to doing it once a month. Our firm charges plan sponsors an additional fee to allocate contributions more than two times a month. if the investment return is in the range of 10 percent and factoring in the amount of contributions vs. our fee, then the participants lose.

[KJohnson]

k man--I think that could be a good fiduciary analysis and a possible defense for a 406(B) prohibited transaction but I don't think it gets you around 406(a)--under DOLs interpretation of the plan asset regs you technically have an extension of credit between the plan and the party in interest because the deferrals are plan assets as soon as they can reasonably be segregated.

Thus you still have the excise tax, 5330, and make whole "cure" issues.

[Guest]

Is it really a requirement that the dollars be invested into the participant's accounts, or just "segregated" from the other assets? I read into the reg that the deferral dollars need to be segregated into an account separate from the general account of the employer.

Therefore, the employer can setup another outside money market account in which they can place the deferrals until they are ready to allocate it to the participant's accounts. The money would be earning interest and then could be allocated to the participant's accounts at the end of the month, thus avoiding having to do more than one allocation and incurring additional costs.

[KJohnson]

I agree with Carol Ringwald as long as the assets can be considered as part of the "trust". I have seen this used with multiemployer 401(k) Plans were money comes in throughout the month from different employers but the recordkeeper will not take daily "feeds".

The one issue is the interest on the money that sits in the bank account. Allocating it to each participant could be a real pain in some circumstances. I have, however, seen agreements that provide that this "float" would be used in the first instance to pay part of the recordkeeper's fee.

[Guest FREE401k]

I attended a Corbel seminar in September, 2000 and the speaker addressed this particular subject. He used to work for the IRS and the DOL, and seemed very up to speed on their inner workings. His exact words were that the DOL is "on a rampage" about the timely deposit of contributions. He said that they interpret how quickly a Plan Sponsor should be able to make the contribution by looking at how quickly they make their federal payroll tax deposits. For example, if they do their tax deposits in three business days, then they better be making their 401(k) contribution deposit in three business days.

He also advised that the next area the DOL would be looking closely into was Plan fees.

[Bill Berke]

The DOL is on a campaign to educate employers as to their fiduciary duty to segregate plan assets from corporate assets as soon as feasible. Of course being the gov't they use a hammer and disregard the poor job of education the DOL has done in the past. This means that an employer with one payroll must get the money into the trust within three or four days after payday. See the DOL regs. The problem that is being discussed is that once an employer establishes the transmittal time - say two days - if the employer takes five days on occasion, that is a violation of its own standard. Ridiculous, yes, imho. However, the atty's I talk to all agree that the employer with one payroll really better get the money in within two or three days after EACH payday. When you have a plan with late deposits, you could take advantage of DOL's VFC, which prescribes the interest calculation on the late deposits and should be used if the amounts involved (including possible penalties) are "significant". Att'ys will tell you to use VFC almost all the time, but I tend to be somewhat practical and "significant" to me is a variable based upon facts and circumstances.

[Guest Cindy Lambert]

I can speak from experience regarding the DOL's position on late deposits because I just finished assisting a client with a full-blown DOL audit.

First, yes, late deposits are deemed prohibited transactions and are reportable as such on the Form 5500. Second, the client I was working with does payrolls bi-weekly, and the DOL audited every payroll, and deemed that the Employer could have made deposits within 4 days, so every deposit since 1996 was examined under this assumption. As expected, a great number of deposits failed to meet this deadline. Our Company requested that the DOL be lenient and only consider those deposits which exceeded THEIR maximum of 15 business days after the end of the month, but they would not consider. As a matter of fact, they calculated the late days reported in the audit using calendar days, and we had to argue the point of recalculating, using business days.

This particular client did not have participant-directed accounts (thank goodness ), but we have had many in-house discussions regarding these audits. We have alot of clients who do payrolls more frequently than monthly, but we only process investment splits monthly. We were in agreement that as long as the assets are segregated as soon as possible into some account in the Trust's name (i.e. checking, money market, etc.), then the money is deemed to have been separated from the Employer in a timely manner. However, that particular issue may be the next bane of our existence as recordkeepers.

[R. Butler]

I agree that currently the DOL merely requires that the assets be segregated from plan assets and not necessarily invested into individual accounts. However, if there are late deposits the DOL wants the plan to calculate lost earnings using rates of return on the plans investments. The position seems inconsistent. I am curious if anyone has taken the position that lost earnings should be calculated using an interest rate equivalent to that of an interest bearing checking account. If all that is required is that the assets be segregated and not invested according to participant's selections, the DOL should not force plans to perform tedious and very time consuming gain calcs when computing lost earnings. It is not the excise tax most administrator's are concerned about. The tax is usually very nominal. Computing lost earnings, however, can be difficult.

[Guest Mfcavo]

What about employee contributions to a welfare plan. For example, an employer pays 75% of the cost of a health plan and employees pay 25% via payroll deduction. The employer pays a TPA weekly for benefits payments and claim administration costs. Payday is Friday and the TPA is paid the following Thursday. Does the employer have to follow any special accounting procedures to relfect the employee contributions?

What if the DOL says that the employee contributions are segregable in two days? Must the employer send them to the TPA on Tuesday or put them in a trust until Friday?

[Guest Cutfade]

Doesn't make much sense to me, but the DOL appears more lenient with ee contributions to welfare plans. See 29 CFR 2510.3-102. This would seem to allow up to 90 days to segregate such contributions, as opposed to a maximum of 15 days for a DC Plan.

I think people need to be careful, though, in how they read the regulation and in guessing how it will be enforced by the DOL. Par. (a) provides the general rule, requiring segregation of ee contributions "as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets." Par. (B) provides the 15 day max for DC plans, and Par. © provides the 90 day max for welfare plans.

Why wouldn't ee welfare plan contributions be segregable in the same period of time as pension contributions? If DOL takes this position (and why wouldn't they?), how could an employer ever argue that it should have more than 15 days to segregate any type of ee contributions?

I'd be interested to hear whether DOL has or intends to take this position with respect to H&W contributions.

[Guest Cindy Lambert]

Mu "gut feeling" regarding the deposit timing of welfare plan contributions vs. DC plan contributions is that welfare contributions are not specifically being deposited on behalf of an employee in order for the employee to gain profit or loss. This doesn't overlook the fact that the Employer could still "use" the welfare contributions, but there is no way to calculate lost or restored earnings on welfare contributions. The participant puts in x dollars for the year, and at the end of the year forfeits any remaining balance, then starts over with a $0.00 balance the following year. It still poses an interesting scenario, though.

[Fredman]

Timely subject so close to Halloween...

At a Corbel seminar on Friday it was reiterated that the DOL is putting the smackdown on ERs for late deposits.

Here's the latest twist: The DOL has issued subpoenas to TPAs requesting them to provide information about their clients and whether any had late deposits. A real life example that was used was a TPA was issued a subpoena, the TPA gave the DOL a list of 8 of their clients that may have submitted late deposits and ALL 8 were audited by the DOL.

I agree with the DOL and their position about submiting deposits in a timely manner. I've seen one to many ERs not give a hoot about the employees money. I do have a problem with their attitude & bulliness they are displaying.

[KJohnson]

I agree with Cutfade the "earliest date on which such contributions can reasonably be segregated from the employer's general assets" is the test for both 401(k) deferrals and welfare plan "employee" contributions.

I think the 90 day reference is probably meant to tie into the DOL's non-enforcement position on holding employee contribuitons in trust. (DOL Tech. Rel. 92-01)