(b)lines Ask the Experts – Failure to Timely Remit Employee Deferrals
November 17, 2009 (PLANSPONSOR (b)lines) – An employer failed to remit employee deferrals for over three months in violation of the terms of its plan document that requires contributions by the 15th of the month following the deduction of these amounts from payroll.
The plan’s adviser asks: “What is the remedy for this failure?”
Under Treasury Regulation 1.403(b)-8, contributions to a plan must be contributed with a reasonable period necessary for the proper administration of a plan. This regulation uses the 15th day of the month following the deferral as an example of a “reasonable period.” In addition, for 403(b) plans subject to the Employee Retirement Income Security Act, ERISA generally requires that contributions be made “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets” but not later than the 15th business day of the month following the deferral. The Department of Labor applies this very strictly (see http://www.dol.gov/ebsa/newsroom/2009/09-428-BOS.html for an enforcement example).
Proposed Department of Labor regulations would add a safe harbor contribution timing rule for plans with less than 100 participants at the start of a plan year that would permit contributions within seven business days of the date on which a deferral would have been paid to a participant in cash. Though the regulations are only proposed, small plan sponsors can rely on the regulations prior to such regulations becoming final.
If amounts were actually withheld from employee paychecks, correction may be appropriate under the Department of Labor Voluntary Fiduciary Correction Program (or using a similar process for plans not subject to ERISA). For more details on the DoL program, see http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html .
In addition, correction, especially if no amounts were withheld from paychecks, may be available under the IRS’ Employee Plans Compliance Resolutions System which provides a number of approaches for correcting contribution failures. Both IRS and DoL correction methods require making up earnings on the late contributions. Because the facts of each situation vary, a sponsor will want to review with counsel to determine the precise correction methodology for failures to withhold or contribute deferrals.
–David Levine and David Powell, Groom Law Group, Chartered
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.