Avoid Mistakes with Timely Deposits

In any qualified retirement plan, money comes in and money goes out. And an area that garners Department of Labor (DOL) attention is what known as timely deposits. The DOL actively enforces timely deposits of elective deferral contributions. To avoid problems, here what you need to know.

What are the requirements?

Generally, plans appoint a fiduciary, typically the trustee, to ensure that all contributions are deposited into the plan in a timely manner. Larger retirement plans, those with 100 or more participants, must deposit employee contributions as soon as administratively feasible, but no later than the 15th business day of the following month.

The DOL gives smaller retirement plans (those plans consisting of fewer than 100 participants as of the beginning of the year) a shorter period in which to make deposits. Under the DOL safe harbor, plans must make deposits no later than the seventh business day following the date in which the amounts would have been paid to an employee as compensation.

What are the consequences?

If you fail to make timely employee elective deferral contributions, you'll be considered to have engaged in prohibited use of plan assets, otherwise known as a prohibited transaction. The initial excise tax on a prohibited transaction is 15% of the amount involved for each year in the taxable period. If you don't correct the transaction within the taxable period, the DOL will impose an additional tax equal to 100% of the amount involved.

What should employers do?

Employers should perform self-audits to make sure their plan complies with DOL regulations. Regularly review your plan document provisions on timely deposits of elective deferrals.

Then, work with your payroll provider to compare the earliest date that you can segregate elective deferrals from assets to the actual deposit dates. This can help determine if you're depositing the contributions timely.

How can you correct a mistake?

Employers can make corrections and avoid excise taxes using the DOL Voluntary Fiduciary Correction Program (VFCP). Under the program, you must restore the principal amount to the plan, plus the greater of:

• • Lost earnings, from the date of the loss to the recovery date, or
• • Profits resulting from the use of the principal amount from the date of the loss to the date the profit is realized.

You must pay all expenses associated with correcting transactions, such as fees associated with recalculating participant account balances. Finally, you must make any additional distributions if necessary to former employees, beneficiaries or alternate payees.

The DOL has a calculator available on its website to assist with the lost earnings calculation.

How to avoid the mistake

If you have personnel changes, make sure the new staff members have a full understanding of how and when to make deposits into a qualified retirement plan. Making timely deposits will not only avoid taxes and penalties, but it could also save the plan from potential disqualification.