If your company has a pension plan you should be aware of late contribution rules. No matter the size of your plan or the number of plan participants, if you have employees contributing money to a pension plan you must follow have timely contributions of their money. Timely contributions are not just a courtesy but a requirement. The general IRS rule states that contributions made by employees should be deposited into the 401k plan as soon as they can be segregated from plan sponsor assets. Some plans also have plan document 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 that aren’t 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 terms of the plan 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, along with 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 takes part in a prohibited transaction must correct the transaction and must pay an excise tax based on the amount involved in the transaction.
- The initial tax on a prohibited transaction is 15% of the amount involved for each year.
- If the employer doesn’t correct the transaction, there may be an additional tax of 100% of the amount 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 provide service to 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 has 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.
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By Michael Rossi, CPA
For over 30 years, Maria has served clients in a variety of areas including financial statement audits, reviews and compilations as well as business and individual taxation. Maria excels working with clients in the real estate, and healthcare industries, along with employee benefit plans.
You can reach Maria at 714-569-1000