5330's and Late 401(k) Contributions

[Guest erisafried]

I have recently been working with a company that has had a somewhat spotty history when it comes to getting elective deferrals into its plan in a timely manner (at least according to DOL). As I have been trying to prepare the appropriate ritual sacrifice to the DOL and IRS to attone for these misdeeds, something keeps bothering me about the process, and I wondered if anyone out there could cite me to some authority--formal or otherwise--that will remove this burr from my saddle.

The standard fix for late contributions of elective deferrals seems to require (aside from actually getting the contributions and earnings into the plan) the plan sponsor to file a 5330 and pay some excise tax to IRS.

Here's my problem: the whole reason that the untimely contribution of deferrals is a PT is because of the DOL plan assets reg. The 5330 is an IRS form. The excise tax goes to IRS, not DOL. DOL may not even know that you filed a 5330. By paying excise tax on a "transaction" that the IRS has not (as far as I know) classified as a PT, aren't we just giving IRS some free money?

Does anyone know of any IRS pronouncements, etc. that indicate one way or the other that filing a 5330 in such circumstances does anything other than give you that warm and fuzzy feeling that comes from paying some money to Uncle Sam?

[Kristina]

"DOL may not even know that you filed a 5330."

There are questions on the 5500s (Schedules H and I) which ask specifically if any deferrals were not timely deposited. If you answer yes, the IRS looks for the 5330 to have been filed and the DOL makes a note to arrange that special visit.

[Guest erisafried]

True enough. But that still doesn't address the fact that it is the DOL--not the IRS--that has converted late 401(k) contributions into PTs. Obviously, in a circumstance where contributions are not made to a plan for a couple of years, both DOL and IRS are likely to take exception. But if the plan sponsor deposits the elective deferrals on the 17th business day of the month following the month when the deferrals were made, there does not appear to be any IRS authority that would deem that to be a PT.

The fact that the Schedule H/I instructions (which rely solely on Labor regs, not Tax regs) is certainly relevant to a plan sponsor in determining its risk tolerance. But the mere fact that the instructions tell you to do something does not mean that there is statutory or regulatory support for it.

[Kristina]

If you look in the upper left hand corner of the Sch H and Sch I you will see that the DOL, IRS and PBGC are listed. This means that the contents of the Sch will be reported to each agency. The DOL is now serving as the collector, compiler and disseminator(sp?)of information. The fact that you mail the 5500 series to the DOL does not mean that IRS regs are ignored for the filing.

"But the mere fact that the instructions tell you to do something does not mean that there is statutory or regulatory support for it." I suggest that you review the reporting and disclosure portion of ERISA. The 5330 is required because the plan engaged in a nonexempt transaction with a party-in-interest. Allowing the deferrals to remain with corporate assets is a nonexempt transaction with the plan sponsor who is the party-in-interest.

The key point here is that it is one government. The fact that there are two agencies who have different jurisdictions is not the issue. You will not be reporting to one only. You will be reporting to all interested agencies. "The fact that the Schedule H/I instructions (which rely solely on Labor regs, not Tax regs) is certainly relevant to a plan sponsor in determining its risk tolerance. Use care in "determining its risk tolerance." You will either be reporting in full what took place during the year, or you will not be reporting in full. You take your chances in not filing a full report and having the plan be audited. Not timely depositing is a participant issue, they know and they can contact the DOL directly.

Also, please be aware that the 15th day of the month following the month in which deferrals were withheld may not be the appropriate timeframe for your company. The regulations state that the deferrals must be deposited to the plan as soon as they can be separated from corporate assets,but not later than the 15th day ... If your company has a separate payroll account, the deferrals were separated from the corporate assets on the payday. The DOL will assess penalties from the date they believe the funds could be separated.

[Guest erisafried]

Kristina,

I do appreciate your thoughtful analysis of this issue, and I don't disagree with the points you raise. I did not mean to suggest that it is a good idea to purposefully provide inaccurate responses on a 5500. My interest was really in a more technical reading of the tax and labor regs relating to what is and what is not a prohibited transaction. The point is mainly academic because even if I think that there is a problem with the statutory or regulatory basis for the 5500 instructions, I am probably not going to invite one of my clients to be a test case.

I do not disagree with you that a party in interest who engages in a PT with respect to a plan is obligated to correct it and report its occurence on form 5330 (and on the 5500). Instead, my argument is that, at least insofar as IRS is concerned, the transaction at issue does not appear to be "prohibited". Since it is not possible to file one 5500 with IRS and one with DOL, as a practical matter, you have to comply with both agency's rules. Perhaps that is the answer to the question I posed: IRS does not believe that it is necessary to adopt DOL's timing rule because it can bootstrap its way into the same result by requiring disclosure of the transction on the 5500.

And my point still remains that the simple fact that DOL or IRS imposes a requirement on plan sponsors does not necessarily mean that they have any real authority for it or could make their position stick in court. The Schedule H/I instructions neatly side-step this point by assuming that the failure to comply with the DOL timing rule automatically results in a non-exempt transaction for purposes of Section 4975. If IRS is going to define a transaction as non-exempt, I would expect it to articulate that definition expressly in a regulation or ruling with appropriate references to the Code, the regs, and/or prior rulings and not with a question-begging instruction.

[KJohnson]

I thought that authority to issue interpretations regarding Code Section 4975 was transferred from Treasury to the DOL pursuant to Reorganization Plan No. 4 of 1978 and Treasury is bound by DOL's interpretations of what is a p.t.

Therefore, I am not sure that the DOL/IRS distinction is viable.

[Kristina]

KJohnson,

Well said!

[Guest erisafried]

That's what I was looking for. Thanks for the cite.