401(k) contribution remittance: What’s an employer to do?
Originally posted March 19, 2014 by Kerri Norment on https://eba.benefitnews.com
Over the past several years the U.S. Department of Labor’s Employee Benefits Security Administration has identified delinquent employee contributions as an ongoing national policy priority. With assets in 401(k)-type plans reaching $2.8 trillion on behalf of more than 50 million active participants, protecting employee contributions has become more important for the government, particularly since employees have been forced to take more responsibility for their retirement savings.
On the other hand, employers and sponsors of 401(k) plans are responsible for ensuring plans comply with federal law. But ever-changing interpretations of government regulations have resulted in employers being out of compliance with certain rules and not even knowing it.
One particular regulation that has been a source of confusion for employers — and in some cases, has landed them in hot water with the DOL — is the timely deposit of employee contributions into 401(k) plans. The regulation states employers should remit employee contributions on the earliest date they can reasonably be segregated from the employer’s general assets, but no later than the 15th business day of the following month. While this has come to be known as the "15 day rule," the reality is that deposits — for small and large plans — are expected to be made much sooner.
In fact, the DOL issued an amendment to the regulation in January 2010 to create a safe harbor rule under which small plans — classified as plans with fewer than 100 participants — would be considered in compliance if employee contributions were deposited within seven business days. The DOL has not issued a similar safe harbor rule for large plans. However, most in the industry believe larger plans will be held to an equal, if not higher, standard, meaning deposits should be made within two to three business days.
If you are scratching your head on this one, you’re not alone. When the regulation was implemented, there were no automated payroll processing systems that allowed for contributions to be easily segregated from general assets. With advancements in technology, this process is essentially instantaneous. And because of it, the DOL has changed its expectations on remittance, despite not rewriting the rule.
So what’s an employer to do? The best advice is to be consistent. If an employer demonstrates the ability to remit contributions within one business day, the employer better make sure all remittances happen within one business day each pay period — no exceptions! The second best advice, don’t rely on safe harbor rules to protect you.
If you find your plan is not in compliance with the new interpretation of the regulation, it is recommended you self-correct the plan. The DOL website provides a guide for correcting under the Voluntary Fiduciary Correction Program that even includes a user-friendly online calculator for lost earnings.
As in most cases, knowledge is power. Whether that knowledge is obtained through the use of a reputable service provider, consultant, or HR expert, employers and plan sponsors must stay on top of changes in government regulations and rules.
New IRS Plan Correction Program Effective April 1
Source: https://ebn.benefitnews.com
On the last day of 2012 the IRS updated the Employee Plans Compliance Resolution System (EPCRS), published as Rev. Proc 2013-12. The program allows plan sponsors to declare, fix and pay penalties (where applicable) for certain operational or demographic missteps under the “voluntary correction program” (VCP).
The revisions, effective April 1, “include changes and additional guidance with respect to correction methods as well as procedural changes for VCP submissions,” according to a client bulletin by the law firm Drinker Biddle. According to that document, authored by Sharon L. Klingelsmith and Heather B. Abrigo, changes to the program include the following:
Corrective contributions for excluded employees in 401(k) plans. “Previously all corrective matching contributions and, if the plan used nonelective contributions to satisfy a safe harbor, all corrective nonelective contributions, related to missed deferrals for an excluded employee were required to be made in the form of a qualified nonelective contribution ‘(QNEC)’ which is a nonforfeitable (i.e., fully vested) contribution. Except for corrective matching and nonelective contributions used to satisfy the safe harbor requirements under section 401(k)(12) of the Code, contribution in the form of a QNEC is no longer required for corrective matching and nonelective contributions,” according to the authors.
Overpayments from defined contribution plans. “If a defined contribution plan overpays benefits, in most cases, the plan sponsor must request that the participant return the overpayment to the plan. Rev. Proc. 2008-50 provided that the participant should repay the overpaid amount with appropriate interest but that the employer was required to make up any amount not repaid by the employee with interest at the plan’s earnings rate. Rev. Proc. 2013-12 now also requires the plan’s earnings rate to be used for participant repayments. In addition, if the reason for the overpayment is the lack of a distributable event, the plan sponsor is not required to make a contribution to the plan even if the participant does not repay the overpayment,” Klingelsmith and Abrigo write.
Finding Missing Participants. “The IRS has discontinued the IRS Letter Forwarding Program as a method for finding lost plan participants who are owed retirement plan benefits. Rev. Proc. 2013-12 provides the following methods to locate missing participants should certified mail not result in success: (i) Social Security letter forwarding program; (ii) a commercial locator service; (iii) a credit reporting agency; or (iv) Internet search tools.”
These changes offer a glimpse of the complete Drinker Biddle report, which advisers may wish to call the attention of their clients.