Not submitting employee deferrals or submitting them late are surefire ways to get the attention of the DOL.
In my many years of experience auditing employee benefit plans, I have never encountered a plan sponsor who seeks the attention of the Department of Labor (“DOL”). Common operational issues in the administration of employee benefit plans are a sure way to pique the interest of the DOL and have them knocking on your door.
If one were to compile a list of common operational issues impacting employee benefit plans, at the top of that list would be errors regarding the timeliness of plan payouts. Whether it be (1) failure to pay employee deferrals into the plan; or (2) failure to deliver employee deferrals in a timely manner (which is more common), prompt identification of either issue is essential to perform necessary corrective actions and assess the need for adjust the procedures surrounding plan operations. Our recent blog on preparing for an employee census referred to reconciling the census with a topical calendar. What is a “punctuality calendar?”
The actuality schedule compares employee deferrals according to payroll records to amounts paid into the plan as employee contributions and loan repayments. This calendar allows the plan sponsor to quickly and easily identify if there are pay periods where deferrals have not been sent to the custodian or if there has been a delay in remittance. An appropriate timeline includes the following steps:
- Review payroll report – When preparing a schedule for meeting deadlines, start with a payroll report for each pay period that shows retained employee deferrals under all types of deferrals for your plan fiscal year (for example, loan repayments, 401(k), Roth, catch-up) . If your plan operates on a calendar year-end, this includes all pay periods for the year that are included in the company’s W-2 year-end summary. For plans with no calendar year end, be sure to select all pay dates that fall within the plan’s fiscal year end. This payroll report must show the applicable pay period and pay date. Make sure the deadline schedule includes all off-cycle payroll runs and all non-sequential or second-check runs.
- Get the contribution report “You would get this report from the Regime Archivist and Guardian.
- Perform a comparison – Compare employee carryovers from payroll to amounts received by accountant and set keeper.
- Determine gaps – In the event that discrepancies are discovered or unreconciled amounts exist, the next step would be to compare the amounts withheld from employee pay to the amounts paid on specific dates at the participant level, rather than at the plan level , to isolate the differences. Was a specific employee’s deferral omitted from the plan payout? Was an entire payroll division omitted? Was a specific paycheck voided? Is the error pervasive, affecting all employees?
Not only is it important to determine whether the employee deferrals per pay match the amounts received by the plan accountant and custodian, but it is also important to identify the number of days that have elapsed between when the amounts were withheld from employee pay checks (i.e. pay date) and when the amounts were deposited into the plan. DOL regulations require that amounts be deposited into the plan as soon as such amounts can reasonably be separated from the general assets of the employer. A wide gap between the fastest payout period and the longest payout period could prove detrimental and may require lost earnings to be calculated to compensate employees for any delays in paying out employee deferrals in the plan. .
During this exercise, it is important to understand the difference between late submissions and missed submissions. Missed deferrals exist when a company withheld money from an employee’s paycheck and did not pay it into the plan. Late payments are withheld and paid into the plan, but untimely. Any late payments or missed contributions are considered a prohibited transaction and must be reported on Schedule H of the plan’s Form 5500 filing. In either case, remedial action must be taken by the plan sponsor to restore the integrity of the affected participants, including calculating and depositing lost earnings in the accounts of affected plan participants and paying a tax. excise duty of 15% based on lost earnings.
In addition to missed and late payments, a third problem can exist when 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 payment because the money was never withheld from the employee’s paycheque; it is rather a malfunction. However, such eligible employees must be considered to contribute to the plan, and such errors must be corrected in accordance with specific guidelines from the Internal Revenue Service (“IRS”).
To simplify the reconciliation process and identify errors as they arise, it is recommended that you complete a timeline for meeting deadlines as the year progresses. Each pay period, identify the amounts deducted, determine when these amounts are received by the plan, and ensure that these amounts match. Additionally, review your timeline for meeting deadlines for the past year to see how quickly employee deferrals have been turned over to the custodian. Then, coordinate with your payroll department to establish procedures to ensure that you make deposits as soon as possible on that schedule. Read our related blog on Attendee Deferral Timing Considerations for more information on timing.
This practice of creating a topical timeline will give you insight into possible contributing issues. When issues are identified early, it can result in errors being corrected efficiently, which can save the employer time and money. The IRS understands that, despite your best efforts, mistakes do happen. The good news is that there is relief available under IRS guidelines, which is discussed in more detail in our blog on the IRS Employee Plan Compliance Resolution System.
Access the rest of this blog series below:
Part 1: Census reconciliation