Introduction
Managing a 401(k) plan involves careful oversight and adherence to regulations set forth by the Department of Labor (DOL). One critical aspect is ensuring timely deposits of employee deferrals into their retirement accounts. However, despite best intentions, mistakes can happen, leading to late deposits. The consequences of such errors can be significant. In this blog, we delve into understanding late 401(k) deposits and how to rectify them.
Understanding Late 401(k) Deposits
Late deposits occur when employers fail to remit employee contributions (and/or loan repayments) to the 401(k) plan within the timeframe mandated by law. The Employee Retirement Income Security Act (ERISA) requires employers to deposit these contributions into the plan’s trust as soon as they can reasonably segregate them from the company’s assets. Generally, this means within a few business days after withholding them from employees’ paychecks.
The repercussions of late deposits can be serious. Not only does it jeopardize employees’ retirement savings, but it also violates ERISA regulations and constitutes a prohibited transaction. Employers may face penalties, fines, and potential lawsuits from affected employees or the DOL.
Reporting
When late deposits occur, they must be reported on the Form 5500. For large plans, this is reported on Schedule H Line 4a. For small plans filing the 5500-SF, it is reported on Line 10a. Large plans requiring an audit will attach a Schedule of Delinquent Participant Contributions to their financial statements reporting the amount of late employee deferrals and whether or not they’ve been corrected.
Options to Correct
Plan sponsors have the option to self-correct late 401(k) deposits by contributing an allocation of lost earnings to each affected participant’s account. This makes up for the lost opportunity to accumulate investment earnings had the contributions been invested in the plan sooner. The second option is correcting the late employee contributions through the DOL’s Voluntary Fiduciary Correction Program (VFCP). The DOL established the VFCP to encourage employers to proactively identify and rectify errors related to retirement plan administration. The VFCP provides a framework for correcting various types of fiduciary breaches, including late 401(k) deposits.
The benefits of self-correcting the error are the plan sponsor avoids the time to prepare the application or potential professional fees for the preparation of the VFCP application. Additionally, self-correction does not require participant notification. The benefits of using VFCP are discussed later.
Department of Labor Letter
As noted above, late contributions are reported to the DOL on the plan’s Form 5500. When the DOL reviews your filing, they may notice your plan failed to remit participant contributions timely and will see if the contributions were corrected under the VFCP. If your plan has not yet corrected the contributions or self-corrected them outside of VFCP, the DOL may mail you a letter giving you the opportunity to self-correct the prohibited transactions through their VFCP. This can be perceived as a gentle nudge from the DOL that they may look into taking further action against your plan, including penalties and fines. In most cases, plan sponsors will want to apply to the DOL VFCP to avoid further action.
Key Steps in Correcting Late Deposits through VFCP
- Identify the Issue: The first step is acknowledging the late deposit and understanding the extent of the problem. Thoroughly review payroll and 401(k) records to pinpoint when the late deposits occurred and their cause. The resulting total of late deposits is reported on your plan’s Form 5500.
- Calculate Lost Earnings: Employers must calculate the lost earnings associated with the late deposits. Lost earnings refer to the interest or investment gains that would have accrued on the delayed contributions if they had been deposited on time. See our blog on Calculating Earnings for more info.
- Make Corrective Contributions: Under the VFCP, employers must make corrective contributions to affected employees’ accounts. These contributions should include both the original withheld amounts and the calculated lost earnings.
- Notify Participants: Employers are required to inform affected employees about the late deposits and the corrective actions taken to rectify the issue. Some employers may perceive this requirement as a deterrent to joining the program. As noted above, notifying participants is optional under self-correction and may be an incentive to self-correct for employers with limited staff.
- Document the Correction: Documentation is key in demonstrating compliance with the VFCP requirements. Keep thorough records of the identification, correction, and notification processes for future reference.
Benefit of Utilizing VFCP
By voluntarily correcting late deposits through the VFCP, employers can mitigate the risk of facing DOL enforcement actions, penalties, and fines. Employers should note that the VFCP only guarantees that the DOL will not take further action only with respect to late deposits. The DOL can still take action regarding other violations of the Plan.
Department of Labor Response
In our experience, plans that received a DOL letter encouraging them to self-correct through VFCP take the opportunity to submit the application. If the DOL is satisfied with your self-correction, they will typically mail you another letter stating your actions are consistent with the requirements of the VFCP and the Employee Benefits Security Administration (EBSA) will take no civil enforcement against the plan or impose penalties.
Conclusion
Late deposits of 401(k) deferrals can pose significant challenges for employers, but the DOL’s Voluntary Fiduciary Correction Program (VFCP) offers a pathway to rectify such errors. By promptly identifying and correcting late deposits, employers can protect employees’ retirement savings, ensure compliance with ERISA regulations, and mitigate the risk of DOL enforcement actions. Utilizing the VFCP not only resolves past mistakes but also reinforces a commitment to fiduciary responsibility and plan integrity.
