by Lisa Maniscalco, CPA, Audit Manager
Under the Employee Retirement Income Security Act of 1974 (ERISA), plan sponsors must follow certain rules to make sure that they deposit retirement plan contributions and participant loan payments in a timely manner. Although the definition is subjective to interpretation, The Department of Labor has established safe harbor guidelines for both large and small plans.
Large plans are defined as those with 100 or more participants for determining if deposits are made timely. The law states that plan sponsors with large plans must deposit participant contributions (including participant loan payments) as soon as it is reasonably possible to segregate them from the company’s assets.
Small plans are defined as those with fewer than 100 participants. For plan sponsors with small plans, deposits for retirement plan contributions and loan payments must be made as soon as it is reasonably possible to segregate them from the company’s assets but no later than the 7th business day following the payday.
It is recommended that both small and large plans should be consistent when funding their plan’s retirement plan contributions and loan payments. For example, if a small or large plan makes contributions on the 3rd day after the payroll has been paid, it is highly recommended to be consistent and continue to fund contributions in the same timeframe since the plan was able to demonstrate that it was capable of segregating plan assets from the company’s assets during that timeframe.
In the event participant withholdings are not remitted timely, the plan sponsor would be required to calculate and fund lost earnings on the participant’s behalf and would be subject to excise taxes. Form 5330 should be filed with the IRS to pay those excise taxes which are 15% of the lost earnings for participants whose withholdings were remitted late. In addition, lost earnings must be remitted to the plan and allocated to participants. Plan sponsors also have the option of going through the Voluntary Fiduciary Correction Program (VFCP). The VFCP can be time consuming and expensive but it also protects the plan sponsor. Without going through the VFCP, the Department of Labor (DOL) could take enforcement action or even audit the plan. Also, the missed earnings calculations are based on the Internal Revenue Service’s rate of underpayment, which is often lower than the plan’s rate of return. If the VFCP is approved, the DOL will issue a “no action” letter that frees the plan sponsor from enforcement procedures.
It is recommended that plan sponsors know the rules and stay current with any changes to them.
Please contact your Maillie advisor to find out more on this topic.