Plan Officials: Don’t File Your W-3s Just Yet!

Posted by Maria T. Hurd, CPA

IRS Form W-3Were your 401(k) and 403(b) deferral deposits accurate and timely?

Picture this: it’s the last day of January and another deadline has been met successfully. Employees have their W-2s and everyone is happy.

Despite the relief payroll managers and retirement plan officials may feel from this most recent sprint to the finish, THE RACE IS NOT OVER. Before sitting down, get that second wind and verify that deferral withholdings were actually deposited to the plan, without exception. To do so, proceed as follows:

  1. Make a list of each pay date during the year and the related deferral amount for each paycheck. Please note that paycheck dates for 2013 must be included, NOT pay periods.
  2. Obtain a report from your vendor or vendors showing each deferral deposit by date
  3. Compare the totals to the amount on your W-3’s, box 12a: deferral compensation
  4. If the totals do not agree, research each pay period to locate any participants who received more or less than the amount withheld from their pay, as shown on their W-2s

Following is an example of how the schedule looks for a company with monthly payroll, and only one Form W-3:

Pay Date

Deposit Date

Employee Deferral per Payroll

Employee Deferral per Deposit Records

Differences

1/31/2013

2/5/2013

$131,900.00

$131,900.00

$0.00

2/28/2013

3/5/2013

$23,170.20

$23,170.20

$0.00

3/31/2013

4/2/2013

$40,590.30

$40,590.30

$0.00

4/30/2013

5/2/2013

$48,700.40

$48,700.40

$0.00

5/31/2013

6/3/2013

$22,900.78

$22,900.78

$0.00

6/30/2013

7/2/2013

$108,900.60

$108,900.60

$0.00

7/31/2013

8/5/2013

$52,200.70

$52,200.70

$0.00

8/31/2013

9/4/2013

$40,400.80

$40,400.80

$0.00

9/30/2013

10/2/2013

$41,400.90

$41,000.90

$400.00

10/31/2013

11/6/2013

$48,400.15

$48,400.15

$0.00

11/30/2013

12/3/2013

$49,800.35

$49,800.35

$0.00

12/31/2013

1/7/2014

$47,300.40

$47,300.40

$0.00

Grand Total

$655,665.58

$655,265.58

$400.00

 W-3, Box 12a  Deposits Difference
  $655,665.58 $655,265.58      $400.00

 

As you can see, the deferrals by pay period agree with the total on the W-3, but the total deferrals withheld from these employees exceed the amounts deposited by $400. At this moment, it would be very important for this employer to identify what employee(s) did not receive an accurate allocation, and correct the mistake by immediately depositing the missed amount plus earnings. Needless to say, this is a reconciliation that should be performed after each payroll date, rather than just once a year. In no event should plan sponsors neglect to ensure the completeness and accuracy of their deferral deposits, just because they know that their auditor will do it. Plan sponsors’  internal controls must operate independently of the audit process to properly prevent and detect errors in plan operations.

Many plan officials have never heard of the ”Form W-3-Transmittal of Wage and Tax Statements,” because their payroll provider files the original Form W-3 with the government, as required, and gives them a pro-forma report containing payroll totals for the year. On the W-3, the crucial piece of information for the reconciliation of deferrals withheld to deferrals deposited is on Box 12a: Deferred Compensation. The total payroll page from your payroll provider will definitely show total 401(k) or 403(b) plan deferral withholdings for the year, and it will show even more payroll information than the W-3. Much of that information will be essential to produce an accurate census, the next step after the deferral deposit reconciliation. Just like fitness training is never done, plan operations and their administrative oversight is never done either.

Lastly, please note that this employer remitted the deposits within seven days after each payroll date, thereby complying with the Timeliness of Deposits rules available to small plans as a safe harbor. Large plans must deposit deferral withholdings as soon as they can be reasonably segregated from plan assets, but in no event later than the 15th business day of the month following the month of withholding. The DOL has stated that timeliness of deposits is a case-by-case determination, and that the 15th business day of the following month was never intended to be a safe harbor. Deferral deposits are no place to lose the race. Since the DOL analyzes patterns of deposits for their subjective determination of reasonableness, steady patterns of 3 to 5 days may be a better choice than erratic patterns of immediate deposits followed by longer time lags.  Just as in distance running, sometimes steady wins the race.

Photo by Phil Roeder (License)

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