If your company has a pension plan, you should know the late contribution rules. No matter the plan size or the number of plan participants, if you have employees contributing money to a pension plan, you must follow and have timely contributions of their money. Timely contributions are not just a courtesy but a requirement. The general IRS rule states that employee contributions should be deposited into the 401k plan as soon as they can be segregated from plan sponsor assets. Some plans also have plan documents requiring when contributions should be deposited.
Here are some rules about late contributions to a 401 K plan you should know:
- Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month.
- The rules regarding the 15th business day aren’t safe harbor for depositing deferrals; rather, these rules set the maximum deadline.
- DOL provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants.
- Contributions made by the employer to match deferrals may be made at the time of the elective deferral contribution or later, but not later than the filing deadline of the employer’s income tax return, including extensions.
- Employer contributions not tied to elective deferrals must be made by the filing deadline of the employer’s tax return, including extensions.
- Per Dept. of Labor regulations, late contributions can create a “prohibited transaction” between the plan and the employer.
How to fix the late contributions to a 401 k plan:
Correction through the IRS’s Employee Plans Compliance Resolution System (EPCRS) may be required if the plan’s terms weren’t followed. Correction for late deposits may require you to:
- Determine which deposits were late and calculate the lost earnings necessary to correct.
- Deposit any missed elective deferrals and lost earnings into the trust.
- Review procedures and correct deficiencies that led to the late deposits
Correction through the DOL’s Voluntary Fiduciary Correction Program (VFCP) may be required if a prohibited transaction occurred:
- An employer who participates in a prohibited transaction must correct the transaction and pay an excise tax based on the amount involved.
- The initial tax on a prohibited transaction is 15% of the amount involved for each year.
- If the employer doesn’t correct the transaction, an additional tax of 100% of the amount may be involved.
How to avoid late contributions:
- Establish a procedure that requires elective deferrals to be deposited coincident with or after each payroll according to the plan document.
- If deferral deposits are a week or two late because of vacations or other disruptions, keep a record of why those deposits were late.
- Coordinate with your payroll provider and others who service your plan, if any, to determine the earliest date you can reasonably make deferral deposits.
- The date and related deposit procedures should match your plan document provisions, if any, dealing with this issue.
- Implement practices and procedures that are communicated to new personnel as turnover occurs to ensure that incoming personnel have a full understanding of when deposits must be made.
For more information about pension plans and pension plan audits call LSL CPAs & Business Advisors at 714.569.1000.
Click here for more details about our Pension Plan Audit services.
By Michael Rossi, CPA
