Employee benefit plan timely deposit of employee deferrals: Actual vs. reality
Most retirement plan sponsors are aware of the 15-business day requirement but are unaware the Department of Labor (DOL) will require a much smaller and consistent remittance period. If the DOL determines contributions to be late within the 15-business day remittance period, the plan sponsor will be required to pay certain excise taxes and lost earnings to the participants affected and report on the Form 5500 the amount of contributions deemed to be late.
General DOL remittance requirements — actual vs. reality
The DOL regulation requires that benefit plans remit employee contributions to the plan as soon as they can be reasonably segregated from the employer’s general assets. In no case can this amount of time exceed 15 business days after the end of the month in which the amounts were withheld. The 15-business day rule, however, is not a safe harbor. The general rule has been interpreted by the DOL as being as little as zero days for entities with more than 100 participants. This is outlined in 29 CFR § 2510.3-102 and the 5500 audit instructions (See page 38 - Line 4a on the 2018 instructions). However, for multiemployer plans, DOL Bulletin No. 2003-02 provides the ability to use the time frames established in collective bargaining agreements when determining the time frame in which a participant contribution can reasonably be segregated from the general assets of any given employer.
The DOL regulation requires that benefit plans remit employee contributions to the plan as soon as they can be reasonably segregated from the employer’s general assets.
The DOL also looks at the consistency of timing and holds employers to the least number of days for deposits when determining if contributions are timely. In our experience, we have seen a plan sponsor remitting contributions consistently at 3 to 5 days, but the plan sponsor was also able to remit a few payrolls to the plan within 1 to 2 days. As a result, the DOL deemed all payrolls remitted at 3 to 5 days to be late.
For plans with under 100 participants, there is a safe harbor provision. Additionally, there are other special rules for collectively bargained plans. Both are also outlined in the CFR referenced above.
What practical steps can be taken to mitigate this issue?
The DOL has indicated that employee deferrals should be segregated from plan sponsor assets directly after each pay period. Complying with this regulation may increase plan administration expenses if the custodian/recordkeeper charges for each allocation of contributions. A less costly option is for the plan sponsor to make the deposit into the plan’s money market account directly after each pay period with allocations to the participant accounts monthly. We recommend discussing alternatives with your plan’s custodian/recordkeeper that allow for compliance with DOL requirements while controlling costs.
So, what should you do if you realize that you have not been complying with the actual DOL interpretation of a timely remitted employee contribution to your plan(s)?
It’s important to start complying with consistent early remittances of employee contributions to your plans as soon as possible to stop incurring exposure to the plan sponsor and plan. Reach out to your third-party administrator, legal counsel, and plan auditor to determine the best course of action for historical contributions that could be determined late by the DOL under examination.
If you have any questions concerning your deposit of employee deferrals, please contact us directly.