Timeliness of Participant Deferrals for Employee Benefit Plans
May 29, 2015
By Denise Finney, CPA
Top Employee Benefit Plan Tips for June:
Timeliness of participant deferrals continues to be a hot topic with the Department of Labor (“DOL”) and Internal Revenue Service (“IRS”). As we prepare for summer, Plan sponsors want to make sure they stay out of hot water when it comes to remitting participant deferrals, which include participant contributions and loan repayments.
In general, participant deferrals must be remitted to the plan as of the earliest day the deferrals can be reasonably segregated from the employer’s general assets. The questions plan sponsors need to ask themselves are: How early can participant deferrals be segregated? Are participant deferrals remitted in this timeframe? They’re not one-size-fits-all answers. However, the DOL has provided a safe harbor rule for small plans (those with less than 100 participants at the beginning of the plan year). For small plans, if the plan sponsor remits participant deferrals no later than 7 business days following the day on which the deferrals would have been payable to the participant in cash (i.e., pay date), the participant deferral is deemed to be contributed on the earliest day they could be segregated from the employer’s general assets.
Although the DOL has not provided a safe harbor rule for large plans (those with more than 100 participants at the beginning of the plan year), the DOL has spoken at numerous Employee Benefit Plan Conferences held by the American Institute of Certified Public Accountants (“AICPA”) stating that there is no safe harbor rule for large plans, as they believe large plans have more resources than small plans and can remit the deferrals sooner than 7 business days. In fact, the general consensus is that employers should consider how soon they can remit payroll taxes to determine how soon they can remit participant deferrals, which is generally between 1 and 3 days after employees are paid.
To ensure plan sponsors are remitting participant deferrals on the earliest day possible, we suggest discussing the payroll and deferral remittance process with the payroll manager and plan administrator, and documenting the discussion and conclusions reached in the plan administrative committee minutes. We also encourage plan sponsors to monitor the timing of remittances by maintaining a schedule of participant contributions and loan repayments by pay date which include key information such as participant deferral amounts and the corresponding date remitted to the plan and to calculate how many days it took to remit those deferrals. Reconciliation of this schedule to payroll registers and to the plan will also assist plan sponsors in ensuring that participant deferrals withheld were in fact remitted and received by the plan.
Recap of Top Employee Benefit Plan Tips for June:
- Determine how early participant deferrals can be segregated from the employer’s general assets.
- Determine if participant deferrals are remitted to the plan within appropriate time frame.
- Monitor the timing of remittances by maintaining a schedule of participant contributions and loan repayments.
- Reconcile the schedule of participant contributions and loan repayments to payroll registers and the plan.