Question: So we recently changed payroll companies and I just found out the new company hasn’t been remitting the employee 401(k) plan amounts like my old payroll company was doing for us. Some of these payments should have been sent in over a month ago. Can we just send it in now and be done with it?
Answer: Alas, if only things were so easy. The IRS and the Department of Labor (DOL) are really serious about preventing the private sector from withholding 401(k) money from an employee’s paycheck but “forgetting” to submit it to the plan.
These government agencies consistently take the position that failing to remit the 401(k) amounts as soon as it is administratively feasible is really just a disallowed loan from the 401(k) plan to the company and is considered a prohibited transaction. Let’s consider for a moment what “as soon as administratively feasible” means to the DOL. If the plan is considered a “small plan” for Form 5500 filing purposes then the DOL considers 7 business days to be enough time to remit 401(k) amounts. If the plan has over 100 participants it can be considered a “large plan” and they consider only 3 business days to be a reasonable amount of time to remit. If the company holds the employee 401(k) withholdings beyond this time then the burden of proof is on the employer to prove it was not administratively possible to remit the money within that time frame. For example, you might have an argument if your area was in a hurricane and had no power for 12 days. Saying your payroll person was on a 2 week cruise isn’t going to work because if you managed to make payroll on time without them in town then the remittance of 401(k) amounts should have been deposited as part of the same payroll procedures.
So if you have just realized you are a month behind on making the 401(k) payments then you are absolutely correct to send in those amounts to the plan as soon as you can. In addition to these missed 401(k) payments you should also deposit some lost earnings on the funds as well. This amount will be the greater of the actual lost earnings to the employees or the profit resulting to the company from the use of the funds. Unfortunately it is unlikely to be a trivial calculation for you to determine what additional earnings amount to remit to the employees. You have the ability to use the DOL Voluntary Fiduciary Correction Program (VFCP) and their online lost earnings calculator located at: http://askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx
Using the VFCP calculator requires an actual submission to DOL indicating the amounts of late deposits involved and evidence the correction (including the remittance of lost earnings to each participant) has actually taken place. Using this method allows you to avoid the IRS Form 5330 filing and 15% penalty on the lost earnings involved.
If the VFCP is not your correction method of choice, you have the option to correct this mistake by filing the Form 5330 and pay the 15% penalty on the lost earnings for each year the amount was not corrected in full including paying the lost earnings. Earnings can be a little trickier to calculate using this method. To calculate the lost earnings you use the highest percentage rate of these listed options:
- use the highest rate of any available fund,
- use the actual rate of earnings that would have applied to each participant,
- use the average overall rate of earnings for the plan over the year, or
- you should use the DOL calculator if the outcome would have been an investment loss.
Just filing the Form 5330 does not prevent the DOL from auditing and/or assessing a penalty against the employer so this option is not without some risk.
In any event, the recommended plan of action is to remit the missed 401(k) amounts, calculate some lost earnings and remit those as well. Decide if you want to file the Form 5330 or use the VFCP to report the failure to timely remit the deposits. Ultimately change your procedures so the problem doesn’t keep happening to you because late deposits must be reported on your annual plan Form 5500 filing so the DOL is going to see if there is a history of this problem in your plan. You don’t want to give them an excuse to look closer at it and this particular problem can absolutely trigger an audit of your plan.