Late Deferral Contributions

[FishOn]

Have a plan that uses a recordkeeper to load contributions with the payroll company with 360 integration.  A new participant had contributions withheld but the recordkeeper did not accept the contributions for the participant due to their failure to set up the participant's account.  This happened earlier this plan year and the contributions were made a month later. The total amount of late contributions is $58 and the missed contributions were corrected by back dating the contributions.  The recordkeeper is telling the client they have to go through VCP and file a 5330.  Is this correct?

[Lou S.]

Doesn't sound correct. It sounds like the funds were segregated from the employer and held in suspense until an allocation could be made. At least if I understand it correctly.

[Paul I]

Since the amounts were withheld from the employee's paycheck, they are late deposits.  Assuming that this failure is limited to this employee (or a very small number of participants so the dollars are small), and assuming the client wants some assurance that the correction acceptable to the DOL and IRS, then consider making the correction under the DOL's VFCP under PTE 2002-51 and allocating the related excise tax to the affected participants (no 5330).  Use the DOL calculator to determine the lost earnings, and make sure any associated match, if any, is fully funded along with earnings.

In the real world, the primary focus is putting the participant in the position of not having been harmed by the operational error, and then giving the agencies their due.

Any recordkeeper worth their salt can do this in their sleep.

(Note: Back-dating anything generally is a bad idea.)

[Bill Presson]

I'm wondering if by "back dating" the op means crediting the deferrals "as of" the correct deposit date so that future earnings are correct.

[Lou S.]

Paul while I generally agree, it sounds like the funds were sent to the record keeper and thus segregated from the assets of the employer, just not invested in the employee specific account, unless I'm missing something.

I agree with Bill's comment by "back dating" I think they mean "invested as if it had been invested on the original receipt date".

 

[FishOn]

38 minutes ago, Bill Presson said:

I'm wondering if by "back dating" the op means crediting the deferrals "as of" the correct deposit date so that future earnings are correct.

Yes, that is what has be done.  Like it was deposited on the correct date into the investments the participant selected.

[Peter Gulia]

While none of us knows the facts, some of what’s in the situation FishOn describes suggests a possibility of facts that might set up some opportunity for a different analysis.

A rule interpreting and implementing ERISA § 3(42)’s definition for "plan assets" states this “include[s] . . . 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.” 29 C.F.R. § 2510.3-102(a)(1) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1).

But the rule does not specify a particular act that then must happen. Rather, the focus is on treating an amount as plan assets, distinct from the employer’s assets. An amount delivered to the plan’s trustee or its custodian, or either’s agent might be treated as the plan’s assets—even if not yet allocated to any participant’s or beneficiary’s account.

As Lou S. guesses, some collaboration of the plan’s administrator, trustee, and service provider might have treated the amount that lacked instructions as the plan’s asset.

Further, FishOn’s story suggests the employer/administrator or a service provider made good the balance allocated to the participant’s account as if the allocation had not been delayed.

In this context, “back-dating” is an unfortunate word some recordkeeping people sometimes use to describe the operations that result in a participant’s account getting the balance the account would have if an amount had been invested on the trading day it ought to have been invested had all fiduciaries and service providers acted correctly.

Perhaps there’s room for a fiduciary, after using diligence and prudence (including getting its prudently selected lawyer’s advice), to find that there was no prohibited transaction.

Or a fiduciary might find the facts are not so crisp.

Either way, a fiduciary might evaluate whether to use the Voluntary Fiduciary Correction Program. (An applicant may use VFCP without conceding that there was a breach.)

[Paul I]

I expect FishOn can fill in the details.  I read "the recordkeeper did not accept the contributions for the participant" to mean the recordkeeper did not keep the funds.

I agree that some recordkeepers request the "as of" deposit dates and associated amounts to run through their corrections process.  This works nicely if their system tracks a "plan date" (which is the as of date related to the amounts) and a "trust date" (which is the date the money is received into the trust).  These two dates provide the documentation to show what happened and what should have happened.