I deposited deferrals to the 401(k) plan late, what now?
Failure to transmit deferrals to the trust within a certain period of time will result in the deposit of deferrals being considered “late”. The Department of Labor (DOL) requires that deferrals must be deposited as soon as reasonably practicable. For plans with less than 100 participants, the DOL has stated that the deposit of deferrals will be considered timely if the amounts are depositing by the 7th business day following the payroll date, even if such amounts could have been deposited quicker. For plans with 100 or more participants, the date FICA taxes are transmitted is likely to be an indication of how quickly deferrals can be deposited. If deposits of deferrals are not made within the timeframe required by the DOL, it will result in a violation of ERISA and constitute a breach of fiduciary duty.
You will be required to disclose the late deposit of participant deferrals on your Form 5500. You will then be contacted by the Department of Labor (DOL) to be sure you have properly corrected the plan operational error. The Employee Benefits Security Administration (EBSA), which is part of the DOL, has an easy way to correct this error through their Voluntary Fiduciary Correction Program (VFCP). We advise taking advantage of the program right away rather than waiting to be contacted by the DOL. Once the error has been properly corrected, the DOL issues a “no action” letter and you can provide this letter when the DOL asks for proof of proper correction of the error.
The basic premise of the correction is that employees should not be harmed by the late deposit. You will be required to determine lost earnings for each participant and deposit that amount in the person’s account. EBSA’s web site (http://www.dol.gov/ebsa/calculator/main.html) has an online calculator that can be used to determine lost earnings.
EBSA has a model application on its web site: (http://www.dol.gov/ebsa/calculator/2006vfcpapplication.html) that you can use to correct the error yourself. You can also contact the VFCP Coordinator at your EBSA regional office by calling 1-866-444-3272 and the Coordinator will help you will the correction and application.
In addition, the IRS will assess a 15% excise tax on the amount of the violation (the lost earnings on the late deposits). However, if the excise tax is not more than $100, it can merely be allocated among participants with late deposits rather than filing with the IRS and paying the tax to the Federal government.
This article was last updated on August 22, 2012