Late Deposits of Elective Contributions: Consequences and Answers

John Iekel

It is possible that sometimes an employee’s elective contribution may not timely deposited for a variety of reasons. There are consequences to that, a recent blog entry points out, and there are ways to address such a situation. 

One of the errors that can come to light during the course of a plan audit, warns the E is for ERISA blog, is failure to deposit employee elective deferrals and loan repayments on time. Funds taken out of employee compensation through such deferral in time become ERISA plan assets, they note—and when that happens, they must be invested in the plan trust, and documented as having been deposited with the recordkeeper. If they have not, a prohibited transaction—or misuse of plan assets by a fiduciary—will have taken place, according to the Department of Labor (DOL), and excise taxes will be due the IRS.

What Is ‘On Time’?

When undeposited elective deposits become plan assets depends on the plan size, E is for ERISA notes. Plans with fewer than 100 participants on the first day of the plan year must be deposited with the recordkeeper by the 7th business day following the day on which the amounts would otherwise have been payable in cash; if the are not, they are not timely deposited. Plans with 100 or more participants on the first day of the plan year, must deposit employee funds with the recordkeeper by the earliest date on which those amounts can reasonably be segregated from the employer’s general assets.

There is some flexibility, they note. For instance, holidays may be taken into account in calculating the earliest reasonable segregation date, meaning that the deposit date would be the first business day after a holiday. And the DOL also has offered some relief related to the pandemic: under EBSA Disaster Relief Notice 2020-01, relief is available if a deposit cannot be made on time due to the pandemic. Among the relief that notice provides is a provision that  Individuals and plans with timeframes subject to the relief will have the applicable periods disregarded until the earlier of (1) one year from the date they were first eligible for relief; or (2) 60 days after the announced end of the national emergency. 

Action Steps 

If such a late deposit has taken place, now what? 

The DOL’s Voluntary Fiduciary Correction Program (VFCP) offers a way to correct the error, at least before the DOL’s Employee Benefits Security Administration (EBSA) has begun an audit of the plan. This, the blog notes, involves preparing a written submission with proof of payment of earnings on late deposited elective deferrals and loan repayments. After a successful submission, EBSA will send a “no action letter” which, the blog adds, will help demonstrate plan compliance if there is a plan audit or there is a merger or corporate acquisition.

Under Internal Revenue Code Section 4975, if the prohibited transaction has taken place, the plan sponsor would pay an excise tax equal to 15% of the amount involved; this must be paid reported on Form 5330. However, the blog notes, the VFCP offers some relief from this tax. 

There also are Form 5500 consequences. The aggregate amount that was not deposited on time would has to be reported on Form 5500 and Form 5500- S-F; in addition, late deposits that were corrected under the DOL’s VFCP must be reported as well.