partners forgot to deposit deferrals

[AlbanyConsultant]

I know I've seen this discussed before, but I'm not finding it...

401k plan with SHNEC and profit sharing.  The partners have their valid deferral elections in place by 12/31/25 to both do the max.  We sent a contribution report telling them to deposit the SHNEC and PS and also the deferrals for the partners before the due date of the tax return... and they forgot to do the deferral part.  2025 taxes are filed.

What recourse is there for the partners at this point?  I thought I remembered that it was treated like a missed deferral opportunity for them?  Appreciate anyone pointing me to where this is covered.  Thanks!

 

[Bri]

if they really made those 401(k) elections, you just treat this like any missed deferral like for a staff person.  Figure out when it should have hit and calc your earnings from there.

[AlbanyConsultant]

@Bri, that sounds more like correcting it as a late deferral deposit.

[BG5150]

Is this a missed deferral opportunity?  Or a late deposit?  Did the partners take a deduction other taxes for the deferrals?

[BG5150]

@AlbanyConsultant beat me to it.

 

[Bri]

11 minutes ago, AlbanyConsultant said:

@Bri, that sounds more like correcting it as a late deferral deposit.

I did mean that, they missed the DEPOSIT, not that they missed offering the DEFERRAL opportunity.  Sorry about the confusion....

[AlbanyConsultant]

To clarify, they took the deduction on their return.  So treating it like a late deferral deposit (instead of a missed deferral) sounds reasonable.

[Peter Gulia]

Is this plan ERISA-governed? For example, if all participants are self-employed individuals (and the plan never covered an employee), the plan might not be ERISA-governed.

And whether ERISA or a State’s law governs the plan, consider how remedies might differ regarding a partner. When a participant who is an employee has an amount intended as an elective deferral taken from her otherwise due wages and the amount is not promptly contributed to the plan’s trust, the participant might be due a plan investment adjustment. But an amount not contributed as a partner’s elective deferral might not have been segregated from the partner’s income or capital interests under the partnership agreement. That might affect related measures partnership values, plan investment values, and interacting opportunity losses and gains.

Yet, consider also full correction of nonexempt prohibited transactions.

If there is a correction for the retirement plan, the plan’s administrator might want its TPA’s help in coordinating with the employer’s accounting for partners’ income interests and capital interests.

This is not advice to anyone.

[AlbanyConsultant]

Sound points as always, @Peter Gulia.

There are other participants - in fact, this is in a MEP.  One of the participating employers messed it up (this PE does have other non-partner participants as well).  So the MEP sponsor is keen to do this as 'by the book' as possible.

[Paul I]

It is not clear who the pronoun "they" refers to in the OP. All to often I have seen situations where the partnership (Firm) acts as the plan administrator but Firm collects funds from the individual partners.

• Is the "they" who failed to deposit the SHNEC and PS contributions the Firm or the individual partners?
• Is the "they" who failed to deposit the deferrals the Firm or the individual partners?
• Is the "they" who already filed a tax return the Firm or the individual partners (or both)?

From the perspective of the plan, the deposit the deferrals should be treated late deposits.  Depending who "they" are, the correction could have an added dimension of making the correction for each individual partner.

I also have seen some partners freak out because they have complicated personal tax returns and they do not want to do anything extra that may draw the attention of the IRS.

[AlbanyConsultant]

@Paul I I'm not sure I can distinguish exactly who is the problem... does it matter?

I sent them a report that says in part, "dear Partner 1 and Partner 2, make sure to deposit your pre-tax 401k deferrals per your elections".  Partner 1 responded "will do".  "The partnership" made the deposit of all the employer contributions (including for the partners), didn't send any funds for the partners' deferrals, and then filed their tax returns (taking deductions for the deferrals that were not deposited).

I don't see where any additional impact on the partners would be, other than lost earnings paid by the partnership.
 

[Peter Gulia]

If the MEP also is a PEP, consider that a pooled-employer plan must “designate a named fiduciary (other than an employer in the plan) to be responsible for collecting contributions to the plan[,] and [must] require such fiduciary to implement written contribution[-]collection procedures that are reasonable, diligent, and systematic[.]” ERISA § 3(43)(B)(ii).

Even without that statutory command, a non-PEP multiple-employer plan might have a fiduciary other than the participating employer responsible to collect contributions.

The participating employer might ask the plan’s administrator or, if distinct, a contribution-collection fiduciary about that person’s procedure for collecting a past-due contribution and adjusting individual accounts to make good the elective deferral and an investment-opportunity loss.

[Artie M]

Dunno.

3 hours ago, AlbanyConsultant said:

I sent them a report that says in part, "dear Partner 1 and Partner 2, make sure to deposit your pre-tax 401k deferrals per your elections".  Partner 1 responded "will do".  "The partnership" made the deposit of all the employer contributions (including for the partners), didn't send any funds for the partners' deferrals, and then filed their tax returns (taking deductions for the deferrals that were not deposited).

This sounds like they were paid and then asked to send money to the plan.  The quoted language makes it seem like there is no "withholding" event.  I am very uncomfortable with the process of paying a partner money and then asking them to write a check to the plan. Even though partners, the arrangement is still a CODA-elect before comp becomes currently available.

In your situation, did the partnership:

A. Pay the partner 100% of the 2025 compensation and never reduce the cash distribution?

or

B. Retain the elected amount but simply fail to transmit it to the plan?

If A, its a missed deferral opportunity.

If B, late deposit/late remittance (because the partnership had effectively segregated the deferral amount but failed to fund the plan timely).