401(k) Plan fix-it guide - You haven't timely deposited employee elective deferrals

Usually corrected through DOL's Voluntary Fiduciary Correction Program. You may need to correct through the IRS correction program.

Deposit all elective deferrals withheld and earnings resulting from the late deposit into the plan's trust.

The employer is responsible for contributing the participants' deferrals to the plan trust. If your plan document contains language about the timing of deferral deposits, you may correct failures to follow the plan document terms under EPCRS. However, this type of mistake can also lead to another problem - a " prohibited transaction," which is a transaction between a plan and a disqualified person that the law prohibits. An employer is a disqualified person.

A disqualified person who participates in a prohibited transaction must correct this and 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 disqualified person doesn't correct the transaction, an additional tax of 100% of the amount involved may be due.

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. Remember that the rules about the 15th business day isn't a safe harbor for depositing deferrals; rather, that 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.

If the employer doesn't make the deposits timely, the failure may constitute both an operational mistake, giving rise to plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals) and a prohibited transaction. Although an employer can correct an operational mistake under EPCRS, a prohibited transaction can't be corrected under EPCRS. However, the DOL maintains a Voluntary Fiduciary Correction Program (VFCP) that may be used to resolve the prohibited transaction.

For an additional discussion of prohibited transactions, see question 9(b) of the 401(k) Fix-it Guide.

Timing of other contributions:

Rules about the timing of matching contributions or other employer contributions are different from those for elective deferrals. The employer must meet the following rules to obtain a current tax deduction:

• 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.

Review your plan document for the timing and amount of your matching and other employer contributions.

How to find the mistake:

Review plan terms relating to the deposit of elective deferrals and determine if you've followed them. Although it isn't common, some plan documents contain a specific time for deposits. For example, if the plan document states the deposit will be made on a weekly basis, but deposit(s) are made on a biweekly basis, you may have an operational mistake requiring correction under EPCRS. Your mistake would be not operating the plan according to its document, which can be corrected under EPCRS.

How to fix the mistake:

Corrective action:

Correction through 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, together with lost earnings, into the trust.
• Review procedures and correct deficiencies that led to the late deposits.

Example:

Employer B sponsors a 401(k) plan for its 1,200 employees, all of whom are plan participants. The plan has assets of twelve million dollars. Employer B pays employees on the first day of the month. The plan expressly provides that the employer must deposit deferrals within five days after each payday. B conducts a yearly compliance audit of its plan. During this review, Employer B discovered it deposited elective deferrals 30 days after each payday for the 2019 plan year.

Correction programs available:

Employer B didn't make the deposits within the time required by the plan document. This operational mistake is correctible under EPCRS.

Self-Correction Program:

The example shows an operational problem because the employer didn't follow the plan terms for the timing for depositing elective deferrals. If the other eligibility requirements of SCP are satisfied, Employer B may use SCP to correct the failure.

• No IRS imposed user fees for self-correction.
• Practices and procedures must be in place.
• If the mistakes are significant in the aggregate:
  • Employer B needs to make a corrective contribution by December 31, 2022.
  • If not corrected by December 31, 2022, Employer B isn't eligible for SCP and must correct under VCP.

  Voluntary Correction Program:

  Correction is the same as under Self-Correction Program. If the plan is not under audit, Employer B makes a VCP submission per Revenue Procedure 2021-30 via the Pay.gov website following the instructions in Section 11. When making the submission, Employer B should consider using the model documents set forth in the Form 14568 series (i.e. Form 14568 and custom narrative attachments to describe the failure and how it's going to be corrected. User fees for VCP submissions are generally based on the amount of plan assets.

  Audit Closing Agreement Program:

  Under Audit CAP, correction is the same as under SCP or VCP. Employer B and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction. The sanction under Audit CAP is based on facts and circumstances, as discussed in Section 14 of Revenue Procedure 2021-30.

  How to avoid the mistake:

  • Establish a procedure requiring elective deferrals to be deposited coincident with or after each payroll per 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, about this issue.
  • Implement practices and procedures that you explain to new personnel, as turnover occurs, to ensure that they know when deposits must be made.