If you deposit your 401(k) deferrals late, 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 has an online calculator that can be used to determine lost earnings.

EBSA has a model application on its web site 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.

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.

For additional guidance on correcting the late deposit of employee elective deferrals, please contact your Nyhart consultant.  We can also assist with the application process.

This article was last updated on March 1, 2011