Employers who fail to remit timely participant contributions to a 401(k) plan on their Form 5500 are likely to receive a letter from the Employee Benefits Security Administration regarding the potential use of the Department of Labor's Voluntary Fiduciary Correction program. The letter informs employers that the failure to remit participant contributions, or the untimely remittance of participant contributions, violates ERISA. Such failure can result in significant civil penalties for the employer.
However, it is important that all employers, even those who did not report delinquent contributions, determine whether they have complied with the governing DOL regulations. DOL has made this issue a priority, and it is a common issue for examination on audit.
DOL regulations provide that "the assets of the plan include amounts that a participant has withheld from his wages by an employer, for contribution to a plan, as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets." This regulation is the basis for any DOL examination regarding the timely remittance of participant contributions.
The DOL regulations don't specify a date on which contributions must be made to the plan. Instead, they provide that the segregation must occur on the earliest date on which such segregation can reasonably occur. The results of the "reasonable earliest date" analysis will vary from employer to employer and depend on the individual facts and circumstances.
Despite the use of the "reasonable earliest date" standard, the regulations do provide a maximum time period for the segregation of participant contributions from the employer's general assets: "In no event shall the date occur later than the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash."
This maximum time period is not a safe harbor. An employer who segregates participant contributions from its general assets by the 15th business day of the following month will not satisfy the general rule unless it is determined that such date is the earliest date on which such contributions could reasonably be segregated from the employer's general assets. It's unlikely that an employer will be able to satisfy this standard by using the 15th business day of the following month.
DOL does not provide a generally applicable safe harbor, and employers should follow the general rule that participant contributions must be segregated as of the earliest date on which such segregation can reasonably occur.
Safe harbor for small plans
While the maximum time period for the remittance of participant contributions doesn't provide a safe harbor, DOL has created a safe harbor with respect to certain small plans.
The regulations provide that in the case of a plan with fewer than 100 participants at the beginning of the plan year, any amount deposited "not later than the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash, shall be deemed to be contributed to such plan on the earliest date on which such contributions can reasonably be segregated from the employer's general assets."
This rule provides an alternative method of ensuring compliance with the general rule; however, the small-plan safe harbor is not the exclusive means of compliance. The safe harbor simply provides a guaranteed seven-business-day period during which small plans are ensured of compliance.
VFC program encourages compliance
If an employer reported delinquent contributions, or if the employer determines that delinquent contributions are currently being made, the VFC program provides a relatively easy way to correct mistakes. The VFC program is designed to encourage voluntary compliance with ERISA through self-correction.
Under the program, delinquent contributions are corrected through four steps:
1. Identifying the delinquent contributions.
2. Correcting the delinquent contributions through remittance to the plan's trust.
3. Calculating and restoring of any losses or profits with interest and distribution to affected participants.
4. Filing an application with DOL that shows evidence of the corrective action taken.
The first two steps are generally easy to satisfy. Step 1 requires the determination of which participant contributions were delinquent and step 2 requires confirmation that all delinquent contributions have been paid to the plan's trust. Step 3 can be satisfied through the DOL's online calculator. And for completing step 4, DOL has published a model application.
The VFC program is a streamlined process that results in a "no action" letter from the DOL. This letter states that DOL will take no civil enforcement action against the applicant and will not impose a civil penalty.
Employers should conduct an internal audit to ensure compliance with DOL regulations. In particular, employers should determine whether there is an earlier date on which such contributions can reasonably be segregated. In addition, small plans may wish to take advantage of the seven-business-day safe harbor. While small plans can choose to comply with the general rule, the use of the safe harbor provides an alternative mechanism for compliance.
If an employer determines that it needs to adjust its segregation practices, then it should consider use of the VFC program, which provides a streamlined method of correction since there is no submission fee, and lost earnings are typically not overly burdensome. However, employee benefits counsel should be consulted to ensure that the employer qualifies and that the appropriate corrections have been made.
The issue of delinquent participant contributions is clearly on the radar of DOL. Employers should ensure compliance going forward and consider a VFC program application for any prior errors.
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