Preparing for Your Plan Audit, Part 2: Completion of a Timeliness Schedule
March 08, 2022
By Kevin Nardone
Failing to remit employee deferrals or remitting them late are surefire ways to get the DOL’s attention.
In my many years of experience auditing employee benefit plans, I’ve never come across a plan sponsor that pleads for attention from the Department of Labor (“DOL”). Common operational issues in administering employee benefit plans are a sure way to pique the interest of the DOL and have them knocking at your door.
If one were to compile a list of common operational issues impacting employee benefit plans, high atop that list would be errors involving the timeliness of remittances into the plan. Whether it is (1) the failure to remit employee deferrals into the plan at all; or (2) the failure to remit employee deferrals in a timely manner (which is more common), the swift identification of either issue is essential to performing necessary corrective actions and evaluating the need to adjust procedures surrounding plan operations. Our recent blog on the preparation of an employee census referenced the reconciliation of the census to a timeliness schedule. Just what is a “timeliness schedule?”
The timeliness schedule compares employee deferrals per payroll records to amounts remitted into the plan as employee contributions and loan repayments. This schedule allows the plan sponsor to quickly and easily identify whether there are any payroll periods where the deferrals were not sent to the custodian or if there was a delay in the remittance. A proper timeliness schedule includes the following steps:
- Review Payroll Report – In preparing a timeliness schedule, start with a payroll report for each pay period that indicates employee deferrals withheld under all types of deferrals for the fiscal year of your plan (e.g., loan repayments, 401(k), Roth, catch-up). If your plan operates on a calendar year-end, this includes all pay periods during the year that are included in the company’s year-end summary W-2. For non-calendar year-end plans, ensure you are selecting all pay dates within the plan’s fiscal year-end. This payroll report should indicate the applicable pay period and pay date. Ensure that the timeliness schedule includes any off-cycle payroll runs and any non-sequential or second-check runs.
- Obtain the Contribution Report – You would get this report from the plan’s recordkeeper and custodian.
- Perform a Comparison – Compare the employee deferrals from payroll to the amounts received by the pan’s recordkeeper and custodian.
- Determine Discrepancies – In the event any differences are discovered or unreconciled amounts exist, the next step would be to compare amounts withheld from employee payroll to amounts remitted on specific dates at the participant level, rather than the plan level, to isolate the differences. Was a specific employee’s deferral omitted from the remittance to the plan? Was a whole payroll division omitted? Was a specific payroll check voided? Is the error pervasive, impacting all employees?
Not only is it important to determine that employee deferrals per payroll reconcile to amounts received by the plan’s recordkeeper and custodian, it is also important to identify the number of days that elapsed between when amounts were withheld from employees’ paychecks (i.e., the pay date) and when amounts were deposited into the plan. DOL regulations require that amounts are deposited to the plan as soon as these amounts can be reasonably segregated from the employer’s general assets. A large range between the quickest remittance period and longest remittance period could prove detrimental and may require that lost earnings are calculated to make employees whole for any delay in remitting employee deferrals into the plan.
In performing this exercise, it is important to understand the difference between late remittances and missed deferrals. Missed deferrals exist when a company withheld money from an employee’s paycheck and did not remit it into the plan. Late remittances are withheld and remitted into the plan, but in an untimely manner. Any late remittances or missed contributions are considered a prohibited transaction and must be reported on Schedule H of the plan’s Form 5500 filing. In both cases, corrective action must be taken by the plan sponsor to make the impacted participants whole, including calculating and depositing lost earnings into the impacted plan participant accounts and paying a 15% excise tax based on the lost earnings.
Aside from missed and late remittances, a third issue may exist whereby a plan sponsor fails to withhold money from employees who have elected to defer. In this case, the missed deferral opportunity is not a late remittance because the money was never withheld from the employee’s paycheck; instead, it is an operational defect. However, those eligible employees must be given consideration to contribute to the plan, and such errors must be remedied in accordance with specific Internal Revenue Service (“IRS”) guidelines.
To simplify the reconciliation process and identify errors as they arise, it is a best practice to complete a timeliness schedule as the year progresses. With each pay period, identify amounts withheld, determine when those amounts are received by the plan, and ensure that these amounts reconcile. Additionally, examine your timeliness schedule for the past year to see how quickly employee deferrals were remitted to the custodian. Then, coordinate with your payroll department to establish procedures to ensure that you make deposits by the earliest date on that schedule. Read our related blog on considerations for timing of participant deferrals for additional information on timing.
This practice of creating a timeliness schedule will give you insight into possible contribution issues. When issues are identified early, this can result in an efficient correction of errors, which can save an employer time and money. The IRS understands that, despite all your good efforts, mistakes happen. The good news is that there is relief available under IRS guidelines, which is more fully discussed in our blog on the IRS’ Employee Plan Compliance Resolution System.