SCP, VFCP, or None of the Above

[Catch22PGM]

Employee contributions were withheld on November 1, 2025.  Plan sponsor submitted the allocation breakdown to the recordkeeper same day.  The recordkeeper made an error and the funds were never deducted from the plan's sponsor's bank account or deposited into the participant accounts.  The account shortages were caught by your friendly neighborhood TPA while reconciling the accounts.  After numerous conversations, the recordkeeper acknowledged their error.

On June 30, 2026, the recordkeeper deducted the contribution amount from the plan sponsor's bank account, deposited the missing contributions, and backdated the deposit to November 1, 2025.  The participants received the number of shares they would have received had the deposit been made on November 1, 2025.  When calculating the earnings based upon the November 1, 2025, share values and June 30, 2026, share values, they amount to approximately $800.

The recordkeeper is insisting that this is not a late deposit since they backdated and provided the proper number of shares.  They don't believe this falls under SCP or VFCP.  Due to the timing, I agree SCP doesn't apply because the correction didn't occur within 180 days of the withholding and the VFCP calculator wasn't used to calculate earnings.  However, I still believe VFCP is required because the withholding occurred on November 1, 2025, but the funds were not segregated from employer assets until June 30, 2026.

Am I wrong here?  I prefer to be wrong, but I still believe this would be considered a late deposit regardless of who made the error or how it was corrected.

[Bri]

Could you argue that issuing the ACH directive to the RK, as part of the contribution submission, is an official move to segregate the assets as a determinable payable? 

Akin to handing them over a check that the RK lost behind a desk for X months.....

I do think the DOL side, the participants got their money as of when they should have, seems clean.  The IRS side (for the possible PT) seems more of the issue here.

[Paul I]

I agree with @Bri that the IRS is more likely to issue.  The DOL's rationale behind their late deposit rules is the company's having control of the money withheld from participants' accounts for more than a reasonable time essentially means the company had use of those funds and could have earned income on those funds.  That is a prohibited transaction and there is a tax on prohibited transactions.

An unanswered question is how did the plan sponsor reconcile their payroll and checking accounts without discovering that the funds had not been withdrawn?  There likely is no credible argument that the plan sponsor did not know this for more than 8 months.  Neither the plan sponsor or recordkeeper is totally innocent.

What is missing from the actions taken to date is a at least a Form 5330 to pay the excise tax on the late deposit and the associated lost earnings.

The plan sponsor can decide if it wants to file a VFCP, but if the IRS gets involved, the 5330 penalties will compound year over year until paid.