January 8, 2015
By: Kriste Naples-DeAngelo, CPA, MBA
Late remittances of employee contributions to retirement plans continue to be an ongoing issue for Plan Sponsors. The general rule is that amounts that a participant pays to their employer or which has been withheld from their pay, must be contributed to the plan on the earliest date that those contributions can be reasonably segregated from the employer’s general assets.
For instance, most employers routinely submit payroll taxes withheld from employee paychecks as early as 1-2 business days or even the same day. The Department of Labor (DOL) has taken the position that if the payroll taxes can be remitted in that timeframe, so should retirement plan contributions.
What continues to confuse many Plan Sponsors is that this general rule also says that the maximum time period for transmitting these employee contributions shall in no event be later than the 15th business day of the month following the month in which the participant contributions are received by the employer. THIS IS NOT A SAFE HARBOR and therein lies the confusion.
When contributions are remitted beyond the “reasonable” timeframe, this is considered to be a prohibited transaction, which must be reported on Form 5500 and also in the Plan’s financial statements. Plan Sponsors should take this very seriously, since the DOL views this as a loan to the employer from the plan.
To correct a late remittance, the Plan Sponsor is required to make the affected participants’ accounts whole and put in the position as if the remittance was timely. Therefore, the Plan Sponsor must provide the plan with lost interest. The interest amount may be calculated using an on line calculator provided on the DOL website. This calculation can be extremely burdensome and take a considerable amount of time if there are several remittances that are considered to be remitted beyond the “reasonable” time period. The result often times is a very small amount. Nonetheless, there is no material or minimum amount whereby a correction would not be appropriate.
My recommendation to Plan Sponsors is to document your remittance process and determine the earliest date that you believe these contributions can be reasonably segregated from the general assets. Then, most importantly, ensure that you follow what you documented. I also recommend checking the remittance dates throughout the year to ensure that you are meeting your documented expectations. Remember…anything outside your expected timeframe may be considered a late remittance by the DOL and should be voluntarily corrected.