SARSEP Fix-It Guide - Employee elective deferrals weren’t deposited timely
|Mistake||Find the Mistake||Fix the Mistake||Avoid the Mistake|
|8) Employee elective deferrals weren’t deposited timely.||Review employee data and payroll remittances to ensure that amounts were properly withheld and timely deposited.||Make a contribution for each participant.||Review the SARSEP plan rules concerning the timing of employer contributions and adopt administrative procedures to implement proper timing.|
You’re responsible for contributing the amounts of the elective deferrals made by plan participants to the SEP-IRAs. If your plan document contains language specifying the timing of deposits of elective deferrals, you can correct the failure to follow the terms of the SARSEP plan document under EPCRS.
Department of Labor rules require you to transfer your employees’ elective deferrals to their SEP-IRA on the earliest date on which you can reasonably segregate the amount from your general assets; however, in no event later than the 15th business day of the following month. Keep in mind that the rules regarding the 15th business day of the following month do not provide a safe harbor for depositing deferrals; rather, they set the maximum deadline for deposit. DOL provides a 7-business day safe harbor rule for employee contributions to plans with fewer than 100 participants.
This type of mistake can also lead to another problem – it may give rise to a prohibited transaction - a transaction between an IRA and a disqualified person that the law prohibits .The law considers an employer a disqualified person with respect to any plan maintained by that employer.
A prohibited transaction gives rise to an excise tax. A disqualified person who takes part in a prohibited transaction must correct the transaction and 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 (or part of a year) in the taxable period. If the disqualified person does not correct the transaction within the taxable period, the law imposes an additional tax of 100% of the amount involved.
If you didn'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 elective deferrals must be deposited) and a prohibited transaction. Although you can correct the operational mistake under EPCRS, correction of a prohibited transaction isn't one of its correctable mistakes. However, the Department of Labor’s Employee Benefits Security Administration maintains a Voluntary Fiduciary Correction Program (VFCP), which may be able to resolve the prohibited transaction.
How to find the mistake:
For each pay period, review the date on which you withheld the elective deferral contributions from the employees’ salary, (typically the same date that you paid the net salaries to the employees) and compare it with the date on which you contributed the salary deferral contributions to the employees’ SEP-IRAs. If there is a significant gap between the dates, check whether the gap is avoidable.
How to fix the mistake:
Correction through EPCRS may be required if the terms of the plan were not 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 into the SEP-IRA, along with lost earnings.
- Review procedures and correct deficiencies that led to the late deposits.
Employer B sponsors a SARSEP plan for its 12 employees, all of whom are participants in the plan. B pays its employees on the first day of the month. The plan expressly provides that deferrals are to be deposited within five days after each payday. B conducts a yearly compliance audit of its plan. During this review, B discovered that elective deferrals were deposited 30 days after each payday for the 2011 plan year.
Correction programs available:
The example illustrates an operational problem, because the employer failed to 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 be able to use SCP to correct the failure. Employer B would have to determine whether:
- Appropriate practices and procedures were originally in place to facilitate compliance with requirements regarding the deposit of employee elective deferrals.
- The failure is insignificant.
Voluntary Correction Program:
Under VCP, correction is the same as described above under “Corrective action.” Employer B files a VCP submission in accordance with Revenue Procedure 2013-12, using the model document and Forms 8950 and 8951. The fee for the VCP submission is $250.
Audit Closing Agreement Program:
Under Audit CAP, correction is the same as described above under VCP. 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:
Coordinate with your payroll provider to determine the earliest date the deferrals can reasonably be segregated from general assets and then set up procedures to ensure that you make deposits by that date. Establish procedures whereby you deposit elective deferrals coincident with or after each payroll in accordance with the plan document. If you have instances where your deferral deposits are a week or two later than the normal timely deposit (due to vacations or other disruptions, for example), keep a record of why those deposits were late. The date and related deposit procedures should match your plan document provisions, if any, dealing with this issue. If you have a change in the person in charge of making these deposits, make certain the new person has a full understanding of when these deposits must be made.