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Custodian delays cause deferral issues


ejohnke

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We have a new plan, effective 1/1/24, with deferrals effective 2/1/24. There were SIGNIFICANT delays with the Custodian and deferrals couldn't actually start until 3/22/24. What is the appropriate way to correct this issue?  

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If deferrals started with payroll but couldn't be deposited because of the custodian, you have late deposits. Simply deposit the payments along with the lost earnings, file the 5330 and decide if you are going to though the DOL late contribution program or not.

If the deferrals didn't start you can calculate a QNEC on the missed deferral opportunity and deposit that,  but I think you might just be able to self correct and start the deferrals 3/22 as the delay was "short" and folks have 9 months to catch-up the missed deferral opportunity.

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1. were deferrals withheld? but not sent in? in that case you have late deposits. See VFCP, and Form 5330, and look up late deposits to retirement plans

2. were deferrals not withheld? but they should have been? In that case you have a missed opportunity to defer. See EPCRS, if there were deferral elections, or no deferral elections, or match or no match, the actual amount will vary, but it all covered in the IRS's EPCRS rev pro. 

 

Note: the custodian not being ready isn't a valid excuse. Plans encounter this all the time, and purposely pick a special deferral start date farther out, that is written into the plan document, for this very reason. The give service providers time to get set-up with all the info from the sponsor. Even in the event of an unexpected delay, there is no reason why the deferrals couldn't have started on time, and the plan open up a temporary account, such as brokerage/checking/savings account etc in the name of the plan into which to deposit the deferrals. Then they would be deposited to the trust on time, and then once the regular custodian is ready, the money can be transferred to there. 

 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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In this case deferrals were not withheld.

What happens when we add an auto enrollment layer to this issue? The auto-enrollment wasn't initiated by the custodian until 4/1/24.  In order to calculate the 2/1-3/22 MDO, what deferral amount(s) would we use?

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