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Revised Form 5500 Targets Late Deposits of 401(k) Plan Deferrals - April 1, 2003

The Department of Labor (DOL) made a significant modification to the recently issued 2002 Form 5500 (Annual Return/Report of Employee Benefit Plan).  The revised Form eliminates any further debate regarding the DOL's intended deadline for plan deposits of employee 401(k) elective deferrals.  The 2002 Form reports information to the DOL for employee benefit plan years that begin in 2002.

Background   DOL Regulation §2510.3-102(b)(1) states that participant contributions become plan assets on the earlier of:

(a) The earliest date on which the contributions can reasonably be segregated from the employer's general assets; or

(b) The 15th business day of the month following the month in which the contribution is withheld by the employer from the employee's wages or the amount is received by the employer (in the case of amounts, such as after-tax voluntary contributions, that the participant pays to the employer).

As highlighted in previous compliance alerts (January 1, 2001, November 25, 2002), the date in (b) is the maximum deadline which applies only if the date in a) does not come sooner.  We further emphasized that this is a hot audit issue for both the DOL and the IRS, that employee contributions not contributed timely to the trust are considered an extension of credit from the plan to the employer (“a party-in-interest”), and that the extension of credit is considered a “prohibited transaction.”  View Full text of DOL Regulation §2510.3-102

Many Preparers Support 15th Day Following Standard   While the IRS and the DOL have made their position clear on this issue in audit situations, many preparers of Form 5500 (not including our firm) have applied the "15th day of the month following" standard.  They believed this position was supported by the wording of question 4a on Schedules H and I of the 1999–2001 Form 5500 which referenced the “maximum” time period under the regulations.  Based on the prior wording, the preparer could indicate that deposits were not “late” (at least for purposes of answering the question), provided the employer deposited the deferrals within the “maximum” time period, interpreted as no later than the 15th business day of the next month.  

Question 4a Revised   The revised question 4a on Schedules H and I of the 2002 Form eliminates any further debate regarding this matter by removing the word “maximum,” therefore clarifying that the preparer (employer) should check “yes” to question 4a if the employer was positioned to deposit the elective deferrals earlier than the 15th business day of the following month. 

Acknowledgement of Prohibited Transaction   Answering “yes” to question 4a acknowledges that the employer breached its fiduciary duty by committing a Prohibited Transaction (PT).  Acknowledgement of the PT requires the employer to correct the failure to timely deposit employee elective deferrals by contributing the late deferrals and lost earnings as specified under the DOL’s Voluntary Fiduciary Correction Program (VFCP) or the IRS's Voluntary Correction Program (VCP).  The employer must then report the prohibited transaction on Form 5330 and pay the 15% excise tax on the value of the use of the money as if the plan loaned the employee elective deferrals to the employer.

Prohibited Transaction Exemption   Employers who acknowledge that the failure to timely deposit the 401(k) deferrals was a prohibited transaction were required to file IRS Form 5330 and pay a 15% excise tax on the value of the use of the money.  However, starting in late 2002, the DOL now grants a Prohibited Transaction Exemption (PTE) to employers who file under the DOL Voluntary Fiduciary Correction Program (VCFP) thereby satisfying the requirements for.  Access more information on Prohibited Transaction Exemption 2002-51

The VCFP submission requires the self-correction of the failure to timely deposit elective 401(k) deferrals, the deposit of any lost earnings as specified under VCFP, and the payment of the applicable VCFP monetary sanction.  After these requirements are satisfied, the employer may treat the prohibited transaction as an exempt transaction, and may answer "no" to Question 4a.  In such event, there is no IRS Form 5330 filing requirement and no excise tax due.

Commentary   Industry professionals believe that an employer who answers “yes” to question 4a has a high probability of receiving a letter from the DOL inviting the employer to file under VFCP.  They also believe a DOL plan audit may result from the admission of the breach.  However, proactive voluntary actions of the nature described in "Acknowledgement of the PT" above typically satisfy the DOL and significantly mitigate the possibility of a letter or plan audit. 

Be mindful that while the employer does save the excise tax by submitting under VCFP, the other costs involved (professional cost to prepare the submission and the VCFP monetary sanction) are far more onerous than the relatively small cost associated with the proactive voluntary course of action.  In the event that the employer is selected for plan audit, or receives the letter, the only loss in taking this course of action is the cost associated with the preparation of Form 5330 and the minimal cost associated with the 15% excise tax on the value of the use of the money (the excise tax is typically a very small dollar amount since it is calculated on the the lost earnings only, not the total amount of the late deposit and the lost earnings). 

We recommend that employers seek ERISA counsel before taking any course of action relative to the matters discussed herein.

Learn more about DOL Voluntary Fiduciary Correction Program (VFCP)

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© 2003 Milberg Consulting LLC  All Rights Reserved

We intend the information in this publication as a general resource, not as legal or plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a tax or ERISA professional. Milberg Consulting LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update.


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