Administering Your Employee Benefit Plan: Participant Contributions and 401K Audits

Timely remittances of elective participant contributions will keep your plan in compliance

By Jake Dopson, assurance senior manager, CPA, CCIFP

The administration of your Company’s 401(k) or 403(b) defined contribution employee benefit plan is often a thankless task that is delegated to payroll or accounting clerks that may or may not be familiar with all the regulations surrounding such a task. However, non-compliance with Department of Labor, Internal Revenue Service (IRS), or Employee Retirement Income Security Act (ERISA) regulations can cause administrative and financial burdens to companies who sponsor these plans. One common area of confusion amongst plan administrators is the process of withholding elective participant contributions from participant’s paychecks, and then remitting these amounts to the plan in the timely manner.

The remittance of participant contributions to a plan has been a hot topic over the past several years, specifically the issue of the timing of when these amounts are remitted to the plan from the plan sponsor. The failure of plan administrators to remit these amounts to the plan in a “timely manner” has been identified by both the IRS and the DOL as one of most common areas of non-compliance noted in the administration of these plans. The difficulty in determining compliance is mostly due to the subjectivity in determining what exactly constitutes a “timely manner”. The time period described by DOL regulations requires participant contributions to be deposited into the plan at the earliest date that the plan sponsor can reasonable segregate these amounts, but no later than the 15th business day of the month following the month in which the contributions were withheld from the participant’s paycheck.

Although technically a plan sponsor has until the 15th business day of the following month to deposit contributions, this timing rarely holds up under scrutiny, as most plan sponsors can demonstrate that the participant contributions can be segregated much earlier. If a plan sponsor can show the ability to segregate and remit payroll-related taxes within a certain time-frame, it is reasonable to believe that participant contributions could be segregated and remitted under the same time-frame. In general, the most effective way for a plan sponsor to maintain compliance in this area is consistency; the plan sponsor should include within their payroll processes and very specific process and timeline for the withholding and deposit of participant contributions to the plan.

So what are the ramifications of late remittances of participant contributions? While the process of correcting these transactions is a complicated one, in general, the plan sponsor must determine the amount of investment earnings that participants lost by having their contributions deposited late into the plan. This calculation takes into consideration the amount of late contributions, how late the contributions were, and general investment performance during that period in time. The plan sponsor must remit these calculated amounts to the plan. Penalties and fines may also apply. The DOL administers a Voluntary Fiduciary Correction Program, which assists plan sponsors in the process of fixing such issues.

By understanding the compliance requirements surrounding the timing of participant contributions, plan administrators will be able limit the administrative and financial burdens that come with not remitting participant contributions to the plan in a timely manner.

For more information on how your company can achieve better results, contact the team at Pulakos CPAs – where Performance Matters™!