It is that time of year, when many CFOs and human resources administrators begin to prepare for and collect data needed to perform an annual benefit plan audit. Most large employee benefit plans such as a 401(k), 403(b), or a defined benefit plans (with more than 100 participants) are required to be audited and the audit report must be attached to the Form 5500 filing.

These audits may uncover that a plan sponsor made employee contribution deposits into the plan late. Even plans which do not require an annual benefit plan audit are required to remit employee contributions on a timely basis. When filing the Form 5500, a plan sponsor must disclose late deposits. Plans with late deposits may be more likely selected for audit by the Department of Labor (DOL) and could be subject to civil penalties as required under the Employee Retirement Income Security Act of 1974 (ERISA).

What Is A Late Deposit?

Late deposits occur when employee contributions are held by the employer too long following the date the employer withholds contributions from employees’ wages. The issue is that during this delay, the employer had access to these funds instead of being invested into the participant’s retirement accounts. As a result, the participants did not have the opportunity to earn investment income on these funds, their contributions, since they were being held by the employer. There are misconceptions surrounding what constitutes a late deposit. The rule, as defined in CFR 2510.3-102 states:

The assets of the plan include amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.

In other words, deposits to the plan need to be made as soon as administratively possible. There is no specific number of days that constitute a timely versus late deposit. If the employer demonstrates that these assets could be reasonably segregated the day the payroll is paid, then that can become that employer’s standard for a timely deposit. Any deposits that occur beyond that standard time frame could be deemed late. It is important that once that standard is set, the employer continues to operate consistently.

Small plans (fewer than 100 participants) do have a 7 business day safe harbor rule, but this does not apply to large plans.

The Penalty

Late deposits are considered a prohibited transaction. The DOL views the employer as either receiving a loan from the plan and/or benefiting from the use of plan assets, both of which are not allowed. The penalty is a 15% excise tax on the amount involved for each year in the taxable period, and an additional tax of 100% if not corrected within the taxable period. The DOL can also assess a civil penalty against the individual(s) that caused the late deposit.

How To Correct

The DOL has a Voluntary Fiduciary Correction Program (VFCP) that the employer can enroll in to correct this type of error. This process typically involves making all missed contributions to the plan, plus an additional contribution for any lost earnings had the deposit been made timely. The DOL website has resources to perform this calculation of lost earnings. The VFCP form must include a response to who was involved with the error, how it occurred, how it was corrected and what the process for making deposits was before and after the error.

Until the issue has been fully corrected through the VFCP, the plan must mark on their 5500 Schedule H that not all contributions were made timely. If the plan is required to have an audit, these amounts will also be shown as part of the supplementary schedules in the audit report.

Preventing Late Deposits

The most important step in preventing late deposits is to document the procedures for deposits to the plan and then adhering to those procedures. One best practice is to consider making one employee responsible for aggregating all information and a second employee responsible for funding the deposit. All individuals involved in managing the plan should understand the seriousness and ramifications of late deposits. If late deposits do occur, management should document why the late deposit did occur and make every effort to prevent the same situation from occurring in the future. Please note that absence of employees responsible for processing payroll is not a valid excuse to avoid the penalties noted above. In that regard, employers should consider having a backup plan in place in the event of such absences.

Selden Fox Can Help

At Selden Fox, we perform more than 30 employee benefit plan audits annually. We are diligent about not only identifying and reporting any late deposits but creating new systems and procedures for the plan sponsors to prevent late deposits going forward. As a plan sponsor, if you are dealing with late deposits or preparing for your next benefit plan audit and have some questions, do not hesitate to contact us directly to discuss.

Robert Zeman

Robert Zeman is an audit manager at Selden Fox. He handles the audit fieldwork for several of firm's clients across industries. Robert is a certified public accountant and earned both his bachelor’s and master’s degrees in accounting from the University of Illinois at Urbana-Champaign.