Although the Department of Labor (DOL) regulations became final on January 14, 2010, the late deposit of employee salary deferral contributions and loan repayments continue to be the number one compliance issue the IRS finds when auditing a plan, and a focus of the DOL.
The regulation stipulates a Safe Harbor for the deposit of deferrals and loan repayments to a pension or welfare benefit plan with fewer than 100 participants (as determined at the beginning of the plan year).
The regulation provides that the deposit will be treated as having been made to the plan in accordance with the general rule (i.e., on the earliest date on which such contributions can be reasonably segregated from the employer’s general assets), when contributions are deposited into the plan no later than the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash, OR when contributions are deposited into the plan no later than the 7th day following the day on which such amount is received by the employer (in the case of amounts that a participant pays to an employer such as loan repayments).
Participant contributions will be considered deposited when placed in an account of the plan without regard to whether the contributed amounts have been allocated to specific participants or investments of such participants.
Late Deferrals are considered a violation of ERISA’s trust requirement, a breach of fiduciary duty, and a prohibited transaction. If deposits are late, lost earnings must be calculated and deposited to the affected participant’s accounts, an excise tax is applied, and the plan sponsor may submit corrections for review through the Voluntary Fiduciary Compliance Program.
It is important to have written internal payroll procedures regarding the submission of employee contributions, and to review them periodically to determine if contributions are being transferred in a timely manner. This may include a policy of having your payroll provider submit deposits directly into the plan, virtually eliminating the chance of late deposits.