Many employee benefit plan sponsors know that participant contributions to a retirement plan that are withheld by an employer need to be remitted to the trust in accordance with the guidelines of the Department of Labor (DOL) Regulation 2510.3-102. This needs to occur no later than the fifteenth business day following the end of the month in which amounts are contributed by employees or withheld from their wages. Many plan sponsors, however, overlook that they are required to remit those contributions to the trust on the earliest date that they can be reasonably segregated from the plan sponsor’s general assets.
The fifteenth business day is the absolute latest permissible remittance date and is not to be viewed as a safe harbor date for doing your deposits (it should only be used if there is no other possible earlier date to remit the funds). As a best practice, deposit contributions to the trust as quickly as you would payroll taxes. For plans that have less than 100 participants, there is a DOL safe harbor rule available of depositing remittances within seven business days.
Develop procedures to remit participant funds to ensure a timely consistent pattern is established. If funds can be remitted within two days of payroll and you then remit within nine days of payroll, the DOL can view that nine-day remittance as late. It can be deemed a prohibited transaction under the Internal Revenue Code. It is deemed a prohibited transaction as it views the plan sponsor as holding the employee funds for the employer’s use and it prevents participants from making investment earnings during that timeframe. Along with lost earnings to participants, a prohibited transaction can also lead to excise tax charges to the plan sponsor.
If you do have a late remittance, it is best to correct it through the DOL’s Voluntary Fiduciary Correction Program (VFCP). Deposit the late remittance as soon as possible, and you will need to calculate the earnings from the date you are doing the deposit from the date that the participant contributions should have been deposited. There is a DOL online calculator available to assist with calculating these amounts using a simplified earnings calculation. Self-correction under the VFCP may provide relief from the excise tax provided certain criteria are met and possibly even help minimize plan risk for audit. It is in your best interest to correct late remittances prior to the IRS Form 5500 filing so it reflects that corrections have been made and are not outstanding.
Make sure that the days to remit funds do not go against any amounts set forth in your plan document. In cases of not following the plan document, there may have to be an application to correct under the Internal Revenue Service Employee Plans Compliance Resolution System.
Keep good records of unforeseen circumstances that resulted in a remittance outside of your typical pattern (payroll software glitches, personnel issues, etc.) in case you would ever be subject to a DOL or IRS audit.
Work with your payroll provider and other service providers to determine the earliest possible date of remittance, establish procedures to ensure those remittances happen on those dates, and train all personnel including backup personnel to help prevent any prohibited transactions. If you do have instances of late remittances or plan noncompliance, work with your trust company and service providers to make necessary corrections to minimize consequences.