One of the questions asked by your TPA during the annual census collection may be whether your participant contributions and loan payments were transmitted within the Department of Labor (DOL) safe harbor time frame.
It’s an important question because both the DOL and the Internal Revenue Service (IRS) are interested in seeing employee contributions deposited timely. When contributions are not deposited timely, an operational failure occurs, which could lead to plan disqualification. However, there are ways to correct the failure as well as ways to prevent future occurrences.
The following are a few scenarios that may trigger late deposits:
The general rule is that employee contributions and loan repayments must be remitted to the plan by the earlier of:
The number of participants in your plan also affects the permitted time frame.
Having contributions remitted late to the plan could also cause additional issues for the plan. Depending on the contribution amounts involved and the fluctuation of investment returns around the time of the late deposits, this could lead to potential lawsuits by participants. Also, since the late deposit amount is reported on the Form 5500, it is a possible red flag for IRS and/or DOL audits, unless their correction programs are used. Since your TPA completes additional work to assist with the calculation and correction of late deposits, you may also incur additional administration fees.
If you discover that you missed a deposit, reach out to your TPA for assistance in determining if it is late and what options are available for correction. Your TPA will be able to explain the correction programs available and provide assistance, but ultimately it will be the plan sponsor or fiduciary who decides how to proceed. If the late deposit is discovered during an IRS audit, the Audit Closing Agreement Program (Audit CAP) option uses similar correction steps but involves negotiated sanctions.
How you choose to correct the failure will likely depend on the severity of the failure, such as the number of participants affected, the number of deposits that are late, and the contribution amounts that are late. Late deposit correction options are described below.
Self-Correction Program (SCP) – IRS Employee Plans Compliance Resolution System (EPCRS)
This option is available without contacting the IRS, but you must have procedures in place, and you must review them to determine what changes are needed to avoid the issue in the future.
Voluntary Correction Program (VCP) – IRS Employee Plans Compliance Resolution System (EPCRS)
DOL’s Voluntary Fiduciary Correction Program (VFCP)
There are ways to avoid late deposits!
Ask a third party for help! Your CPA, TPA, or payroll company may offer contribution remittance services. Reach out to one of them for options and pricing.
Please note that employer contributions do not have the same timing requirement that employee contributions and loan repayments have. Employee contributions and loan repayments being withheld from your employees’ paychecks should be deposited to their accounts on time. The more checks and balances you have in your deposit process, the smoother it will be and the better chance your deposits will be timely.
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