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Employers sponsoring an employee benefit plan have a responsibility to ensure timely depositing of participant contributions and loan repayments into the plan. This obligation, regulated by the Department of Labor (DOL), is often a source of confusion for many plan sponsors due to its intricate requirements and deadlines.
The timeliness of depositing participant contributions and repayments of participant loans is an area that consistently creates misunderstanding for employee benefit plan stakeholders. Under the DOL’s Regulation 2510.3-102(a)(1), the assets of the plan include amounts that a participant has withheld from his or her wages by an employer, for contribution and repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can be reasonably segregated from the employer’s general assets, but in no case later than the fifteenth business day of the month following the month in which the participant contributions or participant loan repayment amounts are received by the employer.
The fifteenth business day verbiage is not a safe harbor but, rather, a maximum deadline. The most important part of the regulation is “the earliest date on which such amounts can be reasonably segregated,” and, usually, this is the part that creates misunderstanding for plan sponsors. The DOL emphasizes that the deadline is the earliest date on which contributions and repayments can be segregated, and they may look to prior payrolls during the plan year to determine what should be considered the earliest date.
A plan sponsor has a bi-weekly payroll and historically has remitted contributions by the third business day after the pay date. For the current payroll period, it takes the plan sponsor nine days from the pay date to remit the amounts withheld into the plan. The DOL will likely consider the nine-day period as unreasonable, even though the contributions or repayments were made prior to the fifteenth business day of the next month.
If it’s discovered that certain contributions and repayments have been remitted “late”, prompt action will help to minimize the financial impact and exposure to the plan. Under Sections 406 and 407 of the Employee Retirement Income Security Act of 1974, “late” remittances are classified as prohibited transactions and are required to be reported to the DOL, without regard to their materiality, in the plan’s Form 5500. Contributions and repayments that are determined to be remitted “late” will need to be corrected by the plan sponsor. The correction process typically requires the calculation and deposit of lost earnings to the plan for all impacted participants and the payment of excise tax on the “late” remittances equal to fifteen percent of the lost earnings. The excise tax is paid in conjunction with the filing of Internal Revenue Service Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.
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About the Author
Eric Ritz is an assurance director at GreerWalker. He has more than 17 years of professional assurance experience providing audit and assurance services to a variety of closely held businesses. Eric also leads the employee benefits plan practice within GreerWalker. He has experience in working with a wide range of plans, including defined benefit plans, defined contribution plans, health and welfare plans, and ESOPs. He regularly presents at EBP training sessions across the Carolinas.
The information contained herein is general in nature and based on authoritative guidance that is subject to change. Neither GreerWalker LLP nor GreerWalker Corporate Finance LLC (collectively, “GreerWalker”) guarantee the accuracy or completeness of any information and are not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. GreerWalker assumes no obligation to inform the reader of any changes in tax laws, regulations, accounting standards, or other factors that could affect information contained herein. This publication does not, and is not intended to provide legal, tax or accounting advice, and readers should consult their advisors concerning the application of tax laws or accounting guidance to their particular situation. Any tax analysis in this publication is not advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.