Possible Late Deferrals in Large Plan

We are trying to determine whether a large plan made several late deposits for approximately 50 participants during 2022 totaling around $25k .  They were deposited between 5 and 50 days after the payroll date, although most were in the lower range.  The one deposit that was 50 days overdue, as well as some of the others, were late because the plan was switching recordkeepers at the time and that was a very convoluted mess that dragged on for a couple of months. 

The trustee usually makes the deposits within a few days of payroll, and I'm aware of the 'asap' guideline for deposits; in addition to the recordkeeper change, the trustee also had seemingly valid reasons for why the other deps were late.  Since all of the deps were made by the 15th business day following the payroll date, would it be reasonable to deem the deposits as being made in a timely manner given the circumstances?     

If not, all but one late deposit would've had positive earnings (a small amount), while all the others would've suffered losses if they were immediately invested.  I imagine this could be remedied via self correction and a 5330 would still need to be filed to report the late amounts (as well as report that late deps occurred on the 5500) even though the net earnings calculated would be negative and there wouldn't be any excise tax due. 

Also complicating things is the fact that the 5558 that was filed did not request an extension for the 5330.  It has been a long time since I've had a situation like this, so any help would be greatly appreciated - hopefully there's some relief.  Thanks in advance!    

There is no safe harbor for a large plan. You need to segregate and hold in the trust to be considered timely. I believe the timing is the same as depositing payroll tax withholding. Generally I think the DOL allows 3 days on large plans but can apply an earlier standard if the company routinely meets an earlier deadline. So I'd say all were late. Isn't the tax though something like 15% of the earnings?  If the total was $25K and the longest was 50 days how much lost earnings are we talking? You can ask for a waiver of penalties for reasonable cause but I don't think the late penalties on this one would be very much.

There doesn't appear to be a penalty due to the net investment losses that were experienced; the issues (as I see them) would be 1) the red flag put up by filing a 5330 and reporting on the 5500 that there were late deps, which could possibly trigger an IRS audit, 2) not requesting an extension for the 5330 on the 5558, 3) going through the tedious task of calculating all of the losses for each dep and preparing the 5330, and 4) perhaps the client taking exception to being charged extra for the 5330 regarding something rather inconsequential - I've read on these boards about someone who had to prepare a 5330 and spent a lot of time on it just to conclude that a $0.19 penalty was owed.  

What is your opinion regarding #2?  Unless you just always automatically ask for an extension for the 5330 when the 5558 is filed, you will end up in this position every time  you receive the plan's admin info after July.  Also, if any excise tax was due it would have to be paid by 7/31 even if the 5330 was on extension.  This would appear to be a pretty common problem - are TPA firms always blindly extending the 5330 even though it's n/a 99.9% of the time?    

48 minutes ago, Lucky32 said:

are TPA firms always blindly extending the 5330 even though it's n/a 99.9% of the time?    

 

I'm not, and I doubt many TPAs are, for two reasons. First, the 5330 extension request is not automatically granted like the 5500/8955-SSA extensions are. Second, even if the filing extension is approved, that does not grant extra time to actually pay the excise tax. We file the 5330 as soon as possible. My understanding on this has always been that if the IRS wants to penalize you for late filing, they'll let you know.

48 minutes ago, Lucky32 said:

the issues (as I see them) would be 1) the red flag put up by filing a 5330 and reporting on the 5500 that there were late deps, which could possibly trigger an IRS audit, 2) not requesting an extension for the 5330 on the 5558, 3) going through the tedious task of calculating all of the losses for each dep and preparing the 5330, and 4) perhaps the client taking exception to being charged extra for the 5330 regarding something rather inconsequential

Issue 1 is real, but not material. I would never advise a client to ignore the issue (or to do or not do anything else, for that matter) based on perceived audit risk. Issues 3 and 4 are related in my mind. I would let the client know what the rules are and what corrective action should be taken (lost earnings, Form 5330 filing), and what our fees would be to do the work. If they want to be reimbursed for that expense by going after the recordkeeper whose delay caused the issue, that's between them and the recordkeeper in my mind.

2 hours ago, Lucky32 said:

even though the net earnings calculated would be negative and there wouldn't be any excise tax due

I don't think you get off the hook quite that easily here. I think in this situation it would be considered reasonable to use the Fed underpayment rate to determine lost earnings, but I don't have a citation or guidance off the top of my head

I think if you have a loss, the DOL calculator for earnings is used to calculate the tax but I'm not 100% sure. The Fed underpayment rate might be the correct one, they might be the same, I don't remember.

But if you are talking about $25K for a max of 50 days, like I said what is that? 3% is $750 and 15% of that is $112 that probably on the high side. I think the cap on the penalty is something like 25%. So your clients max exposure is likely under $150 even with the penalty if the IRS imposes. Your fee to calculate the lost earnings and prepare the form are probably going to be more than any excise tax in this case.

1 minute ago, Lou S. said:

I think if you have a loss, the DOL calculator for earnings is used to calculate the tax but I'm not 100% sure. The Fed underpayment rate might be the correct one, they might be the same, I don't remember.

That's my recollection as well. And yes, the DOL/VFCP calculator uses that rate. I know the usual caveat with that calculator is "only to be used if actually filing under VFCP" but I think this is the exception.

Thank you both for your insights - they're very helpful.  If you could please humor me a little more - so you're saying that even though there weren't any real lost earnings because of poor investment performance, you still have to use an assumed rate (e.g., the DOL/VFCP calculator or Fed underpayment rate) to calculate and pay on fictional gains? 

Also, are you presuming a 3% deferral on $25k of wages, Lou, because the $25k is the amount of the late deferrals.  I was under the impression that the penalty is 15% of only the earnings, which could come out to pennies - is this not correct?   

It's technically a prohibited transaction and considered a short term loan to the employer, hence the implied interest rate. For the penalty I think it is the greater of the penalty rate or the actual earnings, hence the DOL calculator for participants with a loss.

I was using 3% earnings simply as an illustrative example, I have no idea what the actual amount would be but figured at the DOL calculator rate a maximum of 3% interest on $25K and that's probably being very generous would be $750 in implied interest. The penalty is 15% of that interest so that where the $112.  The actual earnings amount are probably even smaller. But that was just a rough and dirty illustration to show you how small a number you are probably looking at.

Got it now - thanks again.