One of the most common retirement plan operational errors is the failure to timely deposit 401k Plan or 403b Plan employee payroll deductions.
U.S. Department of Labor regulations provide that, for “small” plans (in other words, a plan with less than 100 “participants”, i.e., individuals with a plan account balance plus eligible employees who do not have a plan account), 401k Plan and 403b Plan pre-tax and ROTH elective deferrals and loan repayment deductions are required to be deposited no later than the seventh (7th) business day following the date of the withholding from the employee’s pay. For “large” plans, deferrals and loan repayments are required to be deposited as soon as the “contributions or repayments can reasonably be segregated from the employer’s general assets” – this typically is much sooner than seven (7) business days.
The failure to timely deposit is a breach of fiduciary duty. Approximately 20 years ago, the DOL established the Voluntary Fiduciary Correction Program to address certain breaches of fiduciary duty. Under VFCP, a fiduciary may disclose the late deposit of payroll deductions by filing a comprehensive application with the DOL, describing the error and the corrective actions, and receive a “no action” letter stating that the DOL will not take action against the fiduciary because of the breach. Given the time intensive nature of the application, and the limited likelihood of the DOL discovering and taking action against a fiduciary for a non-egregious error regarding late deposits, employers and other fiduciaries frequently do not file VFCP applications. Instead, self-correction frequently occurs informally.
Whether or not corrected using VFCP, late deposits are required to be “made whole” by the employer (or other fiduciary) by adding “lost earnings”, to help correct the breach. The lost earnings are intended to make up for the time the plan money was uninvested and was part of the employer’s business assets. It has become common practice to use the VFCP online calculator – which is interest-rate-based – to determine the lost earnings, whether or not filing under VFCP.
The DOL recently announced proposed changes to VFCP, including formalizing a self-correction option for late deposits. Self-correction under VFCP will be available for small or large plans, and may be used for repeated failures.
When the updated VFCP is finalized, the employer will be able to electronically notify the DOL that late deposits have been self-corrected, if the following conditions are met:
- Participant contributions and any loan repayments must be deposited within 180 calendar days from the withholding date.
- Lost earnings must not exceed $1,000.
- The plan must not be “under investigation” (as defined under VFCP).
- The VFCP’s online calculator must be used to calculate lost earnings.
- A DOL online web tool must be used to notify the DOL about the self-correction.
- A record retention checklist must be kept.
After VFCP is modified, the payment of excise taxes, or the inclusion of any nominal excise taxes in the lost earnings adjustment, will be eliminated for those who participate in the self-correction option under VFCP.
ACSI is available to help our clients learn more about how the deposit timing rules apply to your 401k Plan or 403b Plan, and to assist with the correction of late deposits.