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401(k) Plan Fix-It Guide - You haven't timely deposited employee elective deferrals

 

Mistake

Find the Mistake

Fix the Mistake

Avoid the Mistake

8) You haven't timely deposited employee elective deferrals. Determine the earliest date you can segregate deferrals from general assets; compare that date with the actual deposit dates and any plan document requirements.

Usually corrected through DOL's Voluntary Fiduciary Correction Program. You may need to correct through the IRS correction program.

Deposit into the plan’s trust all elective deferrals withheld and earnings resulting from the late deposit.

Coordinate with your payroll provider to determine the earliest date you can reasonably segregate the deferral deposits from general assets. Set up procedures to ensure that you make deposits by that date

The employer is responsible for contributing the participants' deferrals to the plan trust. If your plan document contains language regarding the timing of deferral deposits, you may correct failures to follow the plan document terms under EPCRS. However, this type of mistake can also lead to another problem – it may give rise to a “ prohibited transaction,” which is a transaction between a plan and a disqualified person that the law prohibits. An employer is a disqualified person.

A disqualified person who takes part in a prohibited transaction must correct the transaction and must pay an excise tax based on the amount involved in the transaction. The initial tax on a prohibited transaction is 15% of the amount involved for each year. If the disqualified person doesn't correct the transaction, there may be an additional tax of 100% of the amount involved.

Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month. Keep in mind that the rules regarding the 15th business day isn't a safe harbor for depositing deferrals; rather, these rules set the maximum deadline. DOL provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants.

If the employer doesn't make the deposits timely, the failure may constitute both an operational mistake, giving rise to plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals) and a prohibited transaction. Although an employer can correct an operational mistake under EPCRS, a prohibited transaction can't be corrected under EPCRS. However, the DOL maintains a Voluntary Fiduciary Correction Program (VFCP) that may be used to resolve the prohibited transaction.

For an additional discussion of prohibited transactions, see question 9(b).

Timing of other contributions: 

Rules governing the timing of matching contributions or other employer contributions are different from those for elective deferrals. The employer must meet the following rules to obtain a current tax deduction:

  • Contributions made by the employer to match deferrals may be made at the time of the elective deferral contribution or later, but not later than the filing deadline of the employer’s income tax return, including extensions.
  • Employer contributions that aren't tied to elective deferrals must be made by the filing deadline of the employer’s tax return, including extensions.

Review your plan document for the timing and amount of your matching and other employer contributions.

How to find the mistake:

Review plan terms relating to the deposit of elective deferrals and determine if you've followed them. Although it isn't common, some plan documents contain a specific time for deposits. For example, if the plan document states the deposit will be made on a weekly basis, but deposit(s) are made on a biweekly basis, you may have an operational mistake requiring correction under EPCRS. In this simple example, your mistake would be not operating the plan according to the plan document, which can be corrected under EPCRS.

How to fix the mistake:

Corrective action:
Correction through EPCRS may be required if the terms of the plan weren't followed. Correction for late deposits may require you to:

  • Determine which deposits were late and calculate the lost earnings necessary to correct.
  • Deposit any missed elective deferrals, along with lost earnings, into the trust.
  • Review procedures and correct deficiencies that led to the late deposits.

Example:
Employer B sponsors a 401(k) plan for its 1,200 employees, all of whom are participants in the plan. Employer B pays employees on the first day of the month. The plan expressly provides that the employer must deposit deferrals within five days after each payday. B conducts a yearly compliance audit of its plan. During this review, Employer B discovered it deposited elective deferrals 30 days after each payday for the 2011 plan year.

Correction programs available:

Employer B did not make the deposits within the time required by the plan document. This operational mistake is correctible under EPCRS.

Self-Correction Program:
The example illustrates an operational problem because the employer didn't follow the terms of the plan relating to the timing for depositing elective deferrals. Therefore, if the other eligibility requirements of SCP are satisfied, Employer B may use SCP to correct the failure.

  • No fees for self-correction.
  • Practices and procedures must be in place.
  • If the mistakes are significant in the aggregate:
    • Employer B needs to make a corrective contribution by December 31, 2013.
    • If not corrected by December 31, 2013, Employer B is not eligible for SCP and must correct under VCP.
  • If the mistakes are insignificant in the aggregate, Employer B can correct beyond the two-year correction period for significant errors. Whether or not a mistake is insignificant depends on all the facts and circumstances.

Voluntary Correction Program:
Correction is the same as described under "Corrective action." Employer B makes a VCP submission according to Revenue Procedure 2013-12. Employer B’s plan has 1,200 participants, so the fee for the VCP submission is $15,000. When making a VCP submission, Employer B must include Forms 8950 and 8951 and consider using the model documents in Revenue Procedure 2013-12 Appendix C.   

Audit Closing Agreement Program:
Under Audit CAP, correction is the same as described under "Corrective action." Employer B and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction based on the maximum payment amount.

How to avoid the mistake:

  • Establish a procedure that requires elective deferrals to be deposited coincident with or after each payroll according to the plan document. If deferral deposits are a week or two late because of vacations or other disruptions, keep a record of why those deposits were late.
  • Coordinate with your payroll provider and others who provide service to your plan, if any, to determine the earliest date you can reasonably make deferral deposits. The date and related deposit procedures should match your plan document provisions, if any, dealing with this issue.
  • Implement practices and procedures that are communicated to new personnel, as turnover occurs, to ensure that incoming personnel has a full understanding of when deposits must be made.

401(k) Plan Fix-It Guide
401(k) Plan Overview
EPCRS Overview
401(k) Plan Fix-It Guide (pdf)
401(k) Plan Checklist
Additional Resources

IRS.gov / Retirement Plans / Correcting Plan Errors / Fix-It Guides / Potential Mistake

Page Last Reviewed or Updated: 10-Jul-2013