Late Deposits Issue - VFCP Qs

[LANDO]

We were recently made aware of a late contribution issue with one of our clients when the company was purchased and the new owner started submitting their 401(k) deposits.

Due to a payroll software issue, deferral and loan payments have been consistently submitted 2 weeks late since 2006. This is a small plan and the deposits have not met the 7-business day safe harbor. After interviewing the sponsor, we have determined it would be very difficult to make the argument that deposits were made as soon as administratively feasible. With a little extra work, the new owner is using the same payroll system and is now submitting deposits timely. No late contributions have been reported on the plan’s 5500s, nor has the sponsor filed 5330s.  The new owner wants to correct the late deposit issue and we are trying to provide some guidance/assistance. 

Obviously, this situation is a candidate for VFCP, but neither we nor the plan sponsor have data prior to 2014.  The sponsor may be able to produce individual payroll data for the last couple of years, but we would need to propose some simplifying assumptions given individual payroll data is not available for more than a few years.  This would seem reasonable given that deposits have consistently been 2 weeks late for the entire period.  The IRS has been open to less than full corrections where data was unavailable in VCP filings we’ve done. We haven’t had to do any VFCPs where a full correction was not possible. We are wondering if the DOL is open to less than full corrections and some simplifying assumptions with VFCP filings.

Given these facts, we have a couple of questions for the group:

1. Has anyone used the VFCP when a full correction is not possible because the data no longer exist?
2. Since we don’t have individual payroll information for all years, is the DOL open to using annual deposit information and assumed annual interest rates for calculating interest due on the late deposits?
3. Other insights?

 Thanks in advance for any insights.

[Bill Presson]

On 2/28/2024 at 12:45 PM, LANDO said:

1. Other insights?

 

Holy crap, Batman.

[LANDO]

Right?

[Peter Gulia]

Has the decision-maker evaluated doing reasonable restoration and allocations without seeking EBSA’s blessing?

Instead of an awkward VFCP procedure that might expose information that otherwise neither participants nor the Labor department would likely find and prove, might a fiduciary consider offering some restoration without conceding a breach, and without revealing a reasoning for any amounts of restoration?

Might a decision-maker want confidential advice and as much protection of those communications as can be had with the evidence-law privilege for lawyer-client communications?

Might the business buyer want its lawyer’s advice about whether the buyer has a right to recover from the seller because the seller breached a warranty or representation made to the buyer?

[LANDO]

The sponsor will certainly need to engage their own external counsel, and that is a terrific point about seller's potential liability here Peter.  Thank you.

The purpose of my post was to understand if any of the experts that use this forum have experience with using VFCP where less than a full correction has been approved by the DOL.  I probably could have asked this more simple question, but generally the contributors to this forum like more facts surrounding the questions posed. 🙂