|Mistake||Find the Mistake||Fix the Mistake||Avoid the Mistake|
|8) Employee elective deferrals weren’t deposited by the required date.||Review employee data and payroll remittances to ensure that elective deferrals were properly withheld and deposited by the due date.||Make a contribution for each participant.||Review the SARSEP plan rules on the timing of employer contributions and adopt administrative procedures to ensure that you contribute them on time.|
You’re responsible for contributing the elective deferrals that plan participants make to their IRAs associated with a grandfathered SARSEP. If your plan document contains language specifying when you must deposit 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-IRAs 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 these rules don’t give a safe harbor for depositing deferrals; rather, they set the maximum deadline for deposit. Department of Labor has a 7-business day safe harbor rule for employee contributions to plans with fewer than 100 participants. This regulation is the “Final Rule-Definition of Plan Assets-Participant Contributions”.
This type of mistake can also lead to another problem – it may give rise to a prohibited transaction - a transaction that the law prohibits between an IRA and a disqualified person. The law considers an employer a disqualified person with respect to any plan maintained by that employer.
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 doesn’t correct the transaction within the taxable period, the law imposes an additional tax of 100% of the amount involved.
If you didn't deposit elective deferrals by the required date, the failure may constitute both an operational mistake giving rise to plan disqualification (if your plan specifies a date by which elective deferrals must be deposited) and a prohibited transaction. Although you can correct the operational mistake under EPCRS, you can’t correct a prohibited transaction using EPCRS. However, DOL maintains a Fiduciary Correction Program, which you may be able to use to resolve the prohibited transaction.
How to find the mistake:
For each pay period, review the date you withheld the elective deferral contributions from employees’ salaries (typically the same date that you paid the net salaries to the employees) and compare it with the date you deposited the 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 you didn’t follow your plan terms for when you should’ve deposited employee salary deferrals. Correction for late deposits may require you to:
- Determine which deposits were late and calculate their lost earnings.
- Deposit any missed elective deferrals into the SEP-IRA, along with lost earnings. Use the Department of Labor’s Online Calculator to determine 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 states 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 2015 plan year
Correction programs available:
The example shows an operational problem because the employer failed to follow the plan terms for the timing for depositing elective deferrals. Therefore, if the employer satisfies the other eligibility requirements of SCP, they 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 for depositing 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 2016-51.
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 that is not excessive, considers facts and circumstances, and bears a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2016-51.
How to avoid the mistake:
Coordinate with your payroll provider to determine the earliest date the deferrals can reasonably be segregated from your general assets and then set up procedures to ensure that you make deposits by that date. Establish procedures so you deposit elective deferrals coincident with or after each payroll according to the plan document. If you have instances where your deferral deposits are a week or two later than the normal timely deposit (for example, because of vacations or other disruptions), keep a record of why those deposits were late. If you’ve changed the person responsible for depositing elective deferrals, make certain the new person understands when these deposits must be made.