The Department of Labor (DOL) has added language to the 2003 Form 5500 instructions to require plan auditors to review deposits of participant contributions (e.g., 401(k) plan elective deferrals) and to confirm that the employer has deposited the contributions timely. Enlisting the plan auditors to assist in enforcing this regulatory requirement will place greater pressure on employers to comply with the requirement and to correct any late deposits. Furthermore, with recent accounting scandals, employers probably should anticipate strict interpretation of the rules on the part of the auditors.

Over the past several years, the DOL has devoted more resources to enforcing the rule regarding the timing of the deposit of 401(k) elective deferrals. One of the methods the DOL uses to regulate this requirement is the Form 5500. Question 4a on Schedules H and I inquires as to whether the employer has failed to deposit participant contributions in accordance with time period prescribed by the regulations. The regulations require an employer to deposit the contributions on the earliest date the employer can reasonably segregate the contributions from its general assets, but in no event later than the 15th business day of the month following the month in which the employer withheld the contributions from employee’s paycheck. Unfortunately, many employers and practitioners have erroneously interpreted the regulation to permit them to have until the 15th business day of the following month to deposit the participant contributions, even if they could have segregated the funds sooner. Prior versions of Schedules H and I helped create some of that confusion because it asked whether the employer had deposited the contributions within the “maximum” time period permitted in the regulations. To eliminate the confusion, the DOL removed the word “maximum” from question 4a, commencing with the 2002 version of the forms.

The DOL now has added language to the 2003 Schedule H and I instructions requiring a plan auditor to confirm the accuracy of the employer’s response to question 4a. If an employer answers question 4a with a “no,” the plan auditor must determine whether the employer has responded to the question on line 4a in accordance with the regulations. In other words, the auditor will need to review the deposits to determine whether the deposits were in fact made timely. The auditor then must disclose on the audit report his/her determination in accordance with generally accepted auditing standards. Obviously, if the auditor’s opinion does not agree with the response in line 4a, the preparer either must change its response or anticipate a DOL investigation. Small plans that qualify for the audit waiver under line 4k do not have to be concerned with the plan auditor review, but of course the employer still must respond truthfully.

The DOL no longer requires an employer to report late deposits of participant contributions as prohibited transactions on line 4d of Schedules H and I. Furthermore, large plans no longer report the late deposits as prohibited transactions on Schedule G. The change in the reporting rules does not signal a change in the DOL’s treatment of late deposits of participant contributions as a prohibited transaction. Apparently, the DOL feels that reporting the late deposits on line 4a is sufficient. And, the design of the Schedule G did not accommodate the reporting of this type of prohibited transaction. Therefore, even though an employer no longer reports the late deposits as a prohibited transaction on Schedule G, the employer still must correct the prohibited transaction and pay the excise tax via Form 5330. For large plans (and small plans which are ineligible for the audit waiver), the DOL continues to require the auditor’s opinion to cover the delinquent participant contributions.

If an employer corrects the late deposit of participant contributions by filing under the Voluntary Fiduciary Correction Program (VFCP) and complying with the requirements of Prohibited Transaction Exemption 2002-51, the employer does not have to pay the prohibited transaction excise tax. Even if the employer qualifies for the excise tax exemption, the employer must report the late deposit on question 4a (i.e., answering question 4a with a “yes”).

Since the excise tax is nominal, most employers correct using the methodology of the VFCP but do not file under the program. We recommend if employers deposit participant contributions late, they should: (1) correct using the principles of VFCP, (2) pay the excise tax, and (3) footnote the Schedule H or I to indicate to the DOL that the correction has taken place.

Form 5500 Workshop
SunGard Corbel will have a complete discussion of how to report the late deposit of 401(k) plan elective deferrals in the upcoming Workshops.