Changes to DOL Late Deferral Remittance Enforcement Procedure
Posted on July 9, 2018 by Legacy Retirement Solutions
This article is intended to share with you a recent change to the Department of Labor’s (“DOL”) enforcement procedures regarding the late remittance of participant elective deferrals by plan sponsors. Unfortunately, the DOL appears to have adopted a more aggressive and threatening approach with regard to plan sponsors who attempt to correct such failures without pursuing “pristine” correction under the DOL’s “Voluntary Fiduciary Correction Program” (“VFCP”). The following explains this issue, its history and what plan sponsors should be prepared to experience in connection with these matters going forward.
Within this newsletter, we have previously considered a plan sponsor’s obligation to timely remit participants’ elective deferral contributions to a retirement plan trust. [https://www.legacyrsllc.com/timely-remittance-participant-contributions-2/] The aforementioned article discussed the general rule which requires that participant contributions be remitted to the trust account of a retirement 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.
We also discussed how, in operation, many plan sponsors failed to satisfy this rule resulting in an impermissible loan to the employer in the amount of the inappropriately retained participant contributions. This impermissible loan is a “prohibited transaction” under both the Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act (“ERISA”) but is readily correctable under the DOL’s VFCP, a voluntary program available to resolve the prohibited transactions that occur as a result of impermissible loans.
Notwithstanding the availability of VFCP to resolve prohibited transactions created by the late remittance of participant elective deferral contributions, many plan sponsors do not correct these failures in this manner. Often this occurs because the plan sponsor is unwilling to expend the time and effort or incur the expense associated with pursuing pristine correction available under VFCP. In general, this conclusion often is drawn due to the existence of relatively insignificant corrective contributions requirements under VFCP, a decision that the VFCP process is too cumbersome to pursue or a combination of the two.
For example, a single late payroll for a typical small employer plan sponsor that is only a few days or even a few weeks late can easily result in requiring an employer funded corrective contribution under VFCP of significantly less than $100. However, it can take a significant amount of time to simply understand what is required in order to submit a matter to the DOL under VFCP let alone the time it takes to actually prepare such submission. Thus, some plan sponsors attempt to pursue “informal” correction of these failures in order to attempt to avoid some of the procedural requirements of VFCP not because there is a conscious desire to avoid correction but simply because some plan sponsors believe that it isn’t worth the effort to pristinely correct a problem with such a small direct economic correction requirement.
As mentioned above, some plan sponsors attempt to informally correct late deferral failures without submitting the matter to the DOL under VFCP. In general, this is accomplished by calculating and allocating to affected participants an employer funded corrective contribution under the rules of VFCP. However, rather than actually submitting the issue to the DOL under VFCP, the plan sponsor only prepares a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans (“Form 5330”), and remits such form to the Internal Revenue Service (“IRS”) with the associated excise tax. The activity is then reported to the IRS and DOL on the annual Form 5500, Annual Return/Report of Employee Benefit Plan (“Form 5500”) as a prohibited transaction which was “corrected” via the contribution of a corrective earnings allocation and the filing of a Form 5330.
The problem with the process described above is that, although it does resolve the impermissible loan resulting from the late remittances for Code purpose, it does not resolve the prohibited transaction for ERISA purposes. Then, the failure to correct is formally disclosed to the DOL within the annual Form 5500 filing. It is difficult to logically justify the disclosure of an unresolved compliance failure to the DOL. However, the plan sponsors that pursue this process presumably assume that the amounts at issue are too small to warrant individualized enforcement attention from the DOL.
In the past, the utilization of this informal corrective process would, at times, result in the offending plan sponsor’s receipt of a letter from the DOL. In essence, the letter would instruct the offending plan sponsor that the process it had followed did not resolve the prohibited transaction for ERISA purposes and that the only way to do so was to employ VFCP. The letter generally would then go on to alert the plan sponsor to the occurrence of any free educational seminars or materials that might assist it in submitting the matter to the DOL under VFCP and encourage them to submit the matter to the DOL under VFCP. Unfortunately, in recent months, the educational and congenial tone of the aforementioned DOL letter has disappeared and has been replaced with the threat of “enforcement measures”.
More specifically; as seen within documentation and articles published by Nevin Adams of the American Society of Pension Professionals & Actuaries (“ASPPA”) on June 8, 2018; the DOL now has a different letter that it has issued to some plan sponsors in the context of an informally “corrected” late deferral contribution failure. Within the new letter, the DOL advises plan sponsors that self-correction of this type of failure outside of VFCP “will not be acknowledged by the [DOL]”. In addition, the letter informs plan sponsors that the corrective contribution calculator available to those who submit these matters to the DOL under VFCP is not for use by those who attempt to self-correct outside of VFCP. Finally, the new letter states that recipients of the letter have 60 days from the date of the letter in order to properly submit the matter to the DOL under VFCP after which the DOL will “consider any possible alternative enforcement measures”.
The threatening tone of the new version of this DOL correspondence is undeniable. Thus, it raises the question of whether plan sponsors should continue to consider any corrective option for this issue other than the formal use of VFCP. It remains to be seen how the DOL reacts to recipients of the letter who do not proceed with formal VFCP correction of late deferral remittance issues. However, presumably, all plan sponsors now have additional motivation to pursue formal correction of these issues under VFCP in order to avoid potential DOL enforcement actions.
We hope that this article helped you to better understand this topic. However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you 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.
Each year qualified retirement plans must successfully navigate through a myriad of deadlines and due dates. One of the most important deadlines for most plan types relates to the Department of Labor’s annual filing of the Form 5500. Each Form 5500 must accurately reflect the characteristics and operations of the plan or arrangement being reported. The requirements for completing the Form 5500 will vary according to the type of plan or arrangement. This filing is due by the end of the 7th month following the end of the plan year; for calendar plan years this is July 31st. A plan may obtain a one-time extension of time to file a Form 5500 annual return/report (up to 2½ months) by filing IRS Form 5558, Application for Extension of Time To File Certain Employee Plan Returns, on or before the normal due date, thereby making the extended due date October 15th for calendar year plans.
As a plan sponsor or financial advisor, it is paramount that you maintain an open line of communication with your TPA or recordkeeper responsible for preparing this filing in order to avoid potential penalties and fines from both the Internal Revenue Service (IRS) and the Department of Labor (DOL). In order to avoid delays in the preparation and filing of the form, here are some things you can do as the plan sponsor to assist your service provider.
Failure to file your Form 5500 in a timely manner can be costly if not handled properly. The fines and penalties can be mitigated through the Delinquent Filers Voluntary Correction (DFVC) program at a reduced rate in most circumstances. Legacy Retirement Solutions specializes in assisting plans who have failed to timely file their Form 5500, call us for assistance today.
With the ever increasing need for complete disclosure; managing and maintaining all of the documents, forms, testing results, tax filings, etc. has become a daunting and exhaustive task. In addition, the regulatory agencies charged with auditing and investigating retirement plans continue to raise their expectations with respect to the formal policies and procedures implemented and maintained by retirement Plan Sponsors in order to facilitate the compliant operation of their plan.
Legacy is here to help your Company satisfy these requirements and expectations by offering 3 different levels of Plan Year Compliance reporting for the Defined Contribution plans from our Standard and our Plus, right up to our Premium. Each Plan Year report is designed to help your Company maintain a “single source” organized and streamlined record of a prior Plan Year’s operation. We also have a compliance package for our Defined Benefit/Cash Balance Plans. Below is a listing of each Plan Year Compliance package offered along with a list of included reports and pricing. Please contact us for more information.
1. Summary of Test Results
2. Eligibility Status
3. 410(b) Test
4. Deductibility Test
5. Annual Additions Report
6. ADP/ACP Test
7. ADP/ACP Corrections
8. HCE & Key Determination
9. Top Heavy Report
$250 – Flash Drive
$350 – Hardcopy Binder
1. Standard Package
2. Basic Plan Document
3. Adoption Agreement
4. Summary Plan Description
5. SAS-70 Recordkeeper
6. Form 5500
7. Summary Annual Report
8. 5500 Reconciliation
9. Safe Harbor Notice
$400 – Flash Drive
$500 – Hardcopy Binder
1. Plus Package
2. Auditor Report
3. Administrative Report
4. Trust Report
5. Loan Summary Report
6. Investment Policy Statement*
7. 404(a)(5) Notice*
8. Auto Enrollment Notice*
9. QDIA Notice*
$500 – Flash Drive
$600 – Hardcopy Binder
|Defined Benefit Package
2. Summary of Plan Provisions
3. Form 5500 with all applicable schedules
5. Plan Document
6. Adoption Agreement
9. Participant Statements
10. Trust Rpt/Brokerage Account statements
11. AFTAP – Adjusted Funding Target Attainment Percentage
12. AFN – Annual Funding Notice
13. PBGC Filing, if applicable
$500 – Flash Drive
$600 – Hardcopy Binder
*If applicable and subject to third-party provision of such documents, if necessary