My apologies to William Camden for dragging him into ERISA. The proverbial saying in the headline, “An ynche in a misse is as good as an ell” appeared in his Remaines concerning Britaine published in 1637. It was an early forerunner of what we now know as “A miss is as good as a mile.”
What’s the ERISA connection?
Late 401(k) deposits are high priority enforcement matters with the Internal Revenue Service (“IRS”) which oversees the tax aspects and the Department of Labor (“DOL”) which oversees the fiduciary aspects of retirement plans.
There is no such thing as a “miss” with 401(k) contributions. A late 401(k) deposit is a late 401(k) deposit regardless of the amount. It’s considered a prohibited transaction. That is, an extension of credit between the plan and a “party-in-interest”, the employer as plan sponsor.
When are deposits considered late?
That depends on whether it’s the IRS or the DOL taking a look.
The IRS has said that an employer has to determine the earliest date that deferrals can be segregated from general assets. Employers should compare that date with the actual deposit dates and any plan document requirements.
The DOL requires that the employer deposit deferrals to the trust as soon as the employer can, but in no event can the deposit be later than the 15th business day of the following month. Keep in mind that the rules about the 15th business day isn’t a safe harbor for depositing deferrals. It’s a maximum deadline.
The DOL also provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants. But sometimes the “7-day safe harbor rule ” isn’t actually a safe harbor. On audit, the DOL can decide that employee contributions could have been deposited sooner.
What voluntary correction programs are available?
If the employer doesn’t make the deposits timely, the failure may constitute both 1) an operational mistake giving rise to plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals); and, and 2) as mentioned above, a prohibited transaction.
The operational mistake can be corrected under the IRS Employee Plans Compliance Resolution System (EPCRS). In addition, the initial tax on a prohibited transaction is generally 15% of the amount involved for each year. If the disqualified person doesn’t correct the transaction, there may be an additional tax of 100% of the amount involved. Form 5330 Excise Tax Return with payment of the tax must be filed with the IRS.
The prohibited transaction can be corrected using the DOL Voluntary Fiduciary Compliance Program (VFCP). for late deposits. The employer must correct the violation by contributing the delinquent contributions and restoring “lost earning” to the affected participants. If the employer’s application is accepted, the employer will receive a “no-action” letter which in essence says that the DOL will not launch a civil investigation or attribute the otherwise applicable 20% penalty for covered transactions. This 20% penalty is not the same as the previously mentioned 15% excise tax levied against prohibited transactions.
Caveat: This information should not be considered tax or legal advice. As always, be sure to check with your own legal counsel on the best way to handle the matter based on your individual facts and circumstances.
Cultural Note: The “ell” referenced above is a now obsolete unit of measurement in England that was usually 45 in (1.143 m), or a yard and a quarter mentioned in Camden’s Remaines concerning Britaine. The book may be out of print, but it’s still available either as a digital copy sponsored by the Boston Public Library, or a print copy available from Patrick McGahern Books, Inc. for US $560.16.