Timely Remittance of Participant Contributions
Posted on July 12, 2016 by Legacy Retirement Solutions
A recent article that we at Legacy Retirement Solutions, LLC (“Legacy”) published in our monthly newsletter discussed the importance of timely adopting the most recent Internal Revenue Service (“IRS”) mandated restatement of pre-approved defined contribution retirement plans commonly known as the “Pension Protection Act” (“PPA”) restatement requirement. Timeliness is often an important component of retirement plan compliance. With regard to the PPA restatement requirement, a failure to timely adopt the proper plan document could result in significant (but generally correctable) tax-qualification failures. The purpose of this article is to discuss another retirement plan compliance requirement that is connected to timing, more specifically, the timely remittance of participant contributions by a plan sponsor to the trust of its retirement plan.
Department of Labor (“DOL”) regulations require that all retirement plans deposit participant contributions to the trust account of such plan as soon as the money can reasonably be segregated from the employer’s assets, but not later than the 15th business day of the following month. Many employers mistakenly believe that the rule means the later of those two events but, in fact, the DOL has always interpreted this rule to require that such amounts be contributed as of the earlier of the two possibilities. This widespread misinterpretation of the rule by many employers resulted in numerous failures to satisfy this requirement.
In addition to the misinterpretation of the rule, another problem confronting employers who attempt to comply with the contribution timing rule referenced above is the lack of objectivity associated with the statement of the rule itself. When is “as soon as the money can reasonably be segregated from the employer’s assets”? Would three business days after the processing of a payroll from which amounts are withheld satisfy the rule? What about five business days after payroll? Or should the amounts always be remitted on the same day that the payroll at issue is processed?
The DOL attempted to alleviate some of the uncertainty associated with the application of this rule by providing a “safe harbor” contribution deadline whereby satisfaction of the safe harbor would result in satisfaction of the rule. Under the safe harbor, participant contributions (which include plan loan repayments) must be remitted to the trust of the plan within seven business days of the day that the employee could have otherwise received the amount at issue in cash. Thus, for example, if the employees’ 401(k) contribution could have been received in cash on July 13, 2016 then, in order to be deemed a timely contribution under the safe harbor, the participant contributions must be deposited into the plan’s trust account by no later than July 22, 2016, seven business days after the pay date. This optional safe harbor only applies to “small” plans with fewer than 100 participants (as calculated for purposes of the Form 5500, Annual Return/Report of Employee Benefit Plan (“Form 5500”)). Plans with 100 or more participants are not allowed to use the safe harbor and remain subject to the somewhat nebulous “as soon as the money can reasonably be segregated” standard.
Penalties for noncompliance are severe, and do not require an audit by the IRS or DOL to be detected. In this regard, one of the questions on the annually filed Form 5500 is whether deposits of participant contributions were made in accordance with the timing set forth above. As you might suspect, the “wrong answer” to this question increases a plan sponsor’s chances of future audit exponentially.
Failure to satisfy the contribution timing rule discussed above is generally considered to result in an impermissible loan to the employer in the amount of the inappropriately retained participant contributions. Such an impermissible loan is a “prohibited transaction” under both the Internal Revenue Code and the Employee Retirement Income Security Act (“ERISA”). These facts may also constitute a violation of the terms of the plan document which is a tax-qualification defect. In order to resolve these compliance issues, the DOL sponsors the “Voluntary Fiduciary Correction Program” which is available to voluntarily resolve the prohibited transactions that occur as a result of impermissible loans. In addition, the Employee Plans Compliance Resolution System (“EPCRS”) as sponsored by the IRS is available to resolve the tax-qualification defects that may have occurred in connection with such failures.
As much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice. Therefore, if you believe that the issues discussed herein may apply to your (or your client’s) company, be sure to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.