Department of Labor Position on 401(k) Elective Deferral Deposits

By Sheldon M. Geller

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The time period described by the regulations requires that a plan sponsor deposit 401(k) deferral contributions on the earliest date the employer can reasonably segregate the contributions from its general assets, but in no event later than the 15th business day of the month following the month in which the employer withheld the contributions from the employee’s paycheck.

Many plan sponsors and practitioners have mistakenly interpreted the DOL regulation to permit them to wait until the 15th business day of the following month to deposit 401(k) elective deferral contributions, even if they could have segregated the funds earlier. Other employers and practitioners have mistakenly interpreted the regulation to permit them to have 15 business days following the point at which the employer could have segregated the deferrals and deposited same into the plan’s trust. This confusion resulted from prior versions of IRS Form 5500 attachments that asked whether the employer had deposited the contributions within the “maximum” time period permitted in the regulations. The DOL removed the word “maximum” from Schedules H and I of IRS Form 5500 with the 2002 plan-year forms.

Small plans that are not subject to the audit requirement need to comply as well, even though no outside plan auditor is reviewing the timeliness of deposits and disclosing their determination in their audit report in accordance with generally accepted auditing standards (GAAS).

In one investigation, the DOL took the position that a plan sponsor had the ability to remit employee contributions to the plan within 14 calendar days (or 10 business days) following the date on which the contributions were withheld. The DOL took the position that remittances made to the plan more than 10 business days after the contribution withholding dates failed to comply with DOL regulations and that these untimely remittances of employee deferral contributions to the plan and the retention thereof violated Employee Retirement Income Security Act (ERISA) guidelines. Furthermore, the DOL took the position that the plan sponsor needed to compensate the plan for lost opportunity earnings associated with the delinquent employee contributions in accordance with DOL regulations, which prescribe a method for determining compensation for delinquent contributions.

ERISA requires the DOL to assess a civil penalty against a fiduciary who breaches a fiduciary responsibility under, or commits any other violation of, ERISA, including the late deposit of 401(k) elective deferral contributions. The penalty under ERISA is equal to 20% of the “applicable recovery amount,” meaning any amount recovered from an ERISA fiduciary or other person with respect to the breach or violation. Furthermore, any ERISA violation may be the subject of legal action taken by third parties, including plan participants or other governmental agencies.

If employers deposit participant contributions late and therefore fail to execute their fiduciary duties, they should take the following corrective action:

• Correct the late deposit of participant contributions by filing under the Voluntary Fiduciary Correction Program (VFCP) and comply with the requirements of Prohibited Transaction Exemption 2002-51;
• Pay the excise tax; and
• Footnote the Schedule H or I of IRS Form 5500 to indicate to the DOL that the correction has taken place.

If an employer corrects the late deposit of participant contributions by filing under the VFCP, the employer does not have to pay the prohibited transaction excise tax. The employer must correct the prohibited transaction and pay the excise tax via Form 5330. Because the excise tax is nominal, many employers correct using the methodology of the VFCP but do not file under the program. Employers are well advised, however, to file under the VFCP program and to pay the excise tax.

Even if the employer qualifies for the excise tax exemption, the employer must report the late deposits in IRS Form 5500. The DOL continues to focus on the timeliness of the remittance of participant contributions, and this remains an enforcement initiative of the Employee Benefits Security Administration.

Monetary sanctions and penalty taxes of substantial amounts may be imposed by the IRS and the DOL even if the failures are unintentional administrative errors. The IRS has emphasized that sanctions will be imposed for failure to follow the terms of the governing plan document, even if the plan’s operation otherwise complies with the qualification requirements of the IRC.

Even the most carefully administered plan may experience a potentially disqualifying defect that may be timely discovered by the implementation of self-protection procedures and the conduct of an annual self-audit. The sanctions associated with disqualification can penalize a plan sponsor for inadvertent and unintended infractions of the very complex rules of federal pension law.

The DOL has dramatically deferred to plan sponsors by enabling them to correct violations through self-correction mechanisms to avoid significant monetary sanctions and fiduciary liability. The DOL encourages plan sponsors to conduct self-audits of actual plan operation concerning the level of compliance, and to find and correct any qualification failures. Voluntary compliance is a relatively new and rapidly changing area of the law.