One of the questions asked by your TPA during the annual census collection may be whether your participant contributions and loan payments were transmitted within the Department of Labor (DOL) safe harbor time frame.
It’s an important question because both the DOL and the Internal Revenue Service (IRS) are interested in seeing employee contributions deposited timely. When contributions are not deposited timely, an operational failure occurs, which could lead to plan disqualification. However, there are ways to correct the failure as well as ways to prevent future occurrences.
The following are a few scenarios that may trigger late deposits:
- Depositing a few pay dates together, later in the month, when you finally have time.
- Depositing late because you were waiting for cash flow to deposit the match at the same time.
- The employee who handles deposits is on vacation and no one else knows the process.
- Starting a deposit submission but getting sidetracked and failing to finish the submission.
The general rule is that employee contributions and loan repayments must be remitted to the plan by the earlier of:
- The date when contributions/loan repayments can reasonably be segregated from the employer’s general assets. (Most 401(k) and 403(b) plans will fall into this category.)
OR
- The 15th business day of the next month.
The number of participants in your plan also affects the permitted time frame.
- If your plan has under 100 participants as of the beginning of the plan year, no later than the 7th business day following the paycheck date is considered timely.
- If your plan has 100 or more participants, though, you likely have less time. In this case, contributions must be remitted on the earliest date possible instead of within 7 business days. If you can make the deposit on the 2nd business day after the paycheck date, for example, that is going to be the standard that the DOL feels is timely for your plan.
Having contributions remitted late to the plan could also cause additional issues for the plan. Depending on the contribution amounts involved and the fluctuation of investment returns around the time of the late deposits, this could lead to potential lawsuits by participants. Also, since the late deposit amount is reported on the Form 5500, it is a possible red flag for IRS and/or DOL audits, unless their correction programs are used. Since your TPA completes additional work to assist with the calculation and correction of late deposits, you may also incur additional administration fees.
If you discover that you missed a deposit, reach out to your TPA for assistance in determining if it is late and what options are available for correction. Your TPA will be able to explain the correction programs available and provide assistance, but ultimately it will be the plan sponsor or fiduciary who decides how to proceed. If the late deposit is discovered during an IRS audit, the Audit Closing Agreement Program (Audit CAP) option uses similar correction steps but involves negotiated sanctions.
How you choose to correct the failure will likely depend on the severity of the failure, such as the number of participants affected, the number of deposits that are late, and the contribution amounts that are late. Late deposit correction options are described below.
Self-Correction Program (SCP) – IRS Employee Plans Compliance Resolution System (EPCRS)
This option is available without contacting the IRS, but you must have procedures in place, and you must review them to determine what changes are needed to avoid the issue in the future.
- Determine which deposits were late.
- Calculate lost earnings to be deposited to affected participants’ accounts.
- Report the late deposit amount on Form 5500 for the year of the failure through the year of correction.
- In addition to the error being an operational failure, it is also considered a prohibited transaction because it is believed to be a loan from the plan to the employer. For 401(k) plans (but not 403(b) plans), this requires payment of a 15% excise tax on the calculated lost earnings using Form 5330.
Voluntary Correction Program (VCP) – IRS Employee Plans Compliance Resolution System (EPCRS)
- Complete the same action steps as SCP above.
- Submit the necessary application to describe the failure and the correction.
- The user fee varies from $1,500 to $3,500, depending on the plan’s asset balance.
- Once the submission is reviewed, the IRS issues a Compliance Statement if the correction methods were approved or if additional steps are required for correction.
DOL’s Voluntary Fiduciary Correction Program (VFCP)
- Complete similar steps as above to determine which deposits were late, and deposit lost earnings to applicable participants’ accounts.
- The completion of an application is also required, but no user fee is due.
- Some corrections may qualify for exemption from the payment of the 15% excise tax.
There are ways to avoid late deposits!
- Revisit your process. If you don’t really have one, now is the time to create one.
- Who is responsible for making the deposit?
- Who is the back-up person if the usual employee is out?
- How many days after the paycheck do you intend to make the deposit?
- Who will review the transaction confirmation to be sure it’s completed?
Ask a third party for help! Your CPA, TPA, or payroll company may offer contribution remittance services. Reach out to one of them for options and pricing.
- Find consistency. If you have payroll on Fridays, for example, and you remit your payroll taxes on the following Tuesday, submit the contributions to the plan on Tuesday as well.
- Ask a third party for help! Your CPA, TPA, or payroll company may offer contribution remittance services. Reach out to one of them for options and pricing. Maybe the person-by-person details can be remitted to the plan’s investment platform on your behalf, and you will simply need to login to review the data and remit the payment portion.
Please note that employer contributions do not have the same timing requirement that employee contributions and loan repayments have. Employee contributions and loan repayments being withheld from your employees’ paychecks should be deposited to their accounts on time. The more checks and balances you have in your deposit process, the smoother it will be and the better chance your deposits will be timely.
Additional resources for this topic:
DOL Federal Register issued 1/14/2010 Volume 75, Number 9: https://www.govinfo.gov/app/details/FR-2010-01-14/2010-430/summary
IRS 401(k) Plan Fix-It Guide (Mistake #8): https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide
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This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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