The Department of Labor (DOL) requires employee remittances to qualified plans to be made as soon as administratively feasible. The Plan Sponsor has a fiduciary and legal responsibility to remit employee pre-tax, ROTH and participant loan repayments in a timely fashion or face possible fines, penalties or sanctions.
If the DOL considers the qualified plan a small plan (generally less than 100 plan participants), the plan sponsor is allowed a 7-day safe harbor from the date the funds are withheld from employee paychecks to remit employee contributions to the plan. Under the 7-day safe harbor, if the plan sponsor pays in all employee remittances within seven days, they are considered to be remitting timely. If the plan sponsor remits employee contributions more than seven days from the date the money is withheld from employees’ pay checks, the plan sponsor loses the right to use the 7-day safe harbor and may be required to calculate and remit additional earnings for each participant and file an excise tax return along with a 10 percent excise tax penalty for any contributions remitted after seven days. We strongly recommend all small plans take advantage of the DOL’s 7-day safe harbor allowance.
If the DOL considers the qualified plan a large plan (generally more than 100 plan participants), the plan sponsor must justify their definition of “administratively feasible” and should develop and follow a timely remittance process. The plan sponsor should also be prepared to defend their definition of “administratively feasible” and their timely remittance policy.
We recommend the large Plan Sponsor consider the following procedures related to timely remittances:
- Determine what constitutes “administratively feasible” employee contribution remittance practices under typical payroll processing conditions.
- Develop a Remittance Practices Policy.
- Document the Policy, including how you arrived at key decisions.
- Periodically evaluate the Policy to ensure it still represents the plan sponsor’s normal payroll processing procedures. If not, modify the Policy accordingly.
- If employee remittances are paid outside of the Policy’s administratively feasible guidelines, record each occurrence and retain supporting documentation to explain what transpired.
- Challenge staff to constantly strive to improve employee remittance practices in an effort to improve efficiency.
While adopting some or all of these suggestions does not guarantee protection from a Department of Labor or Internal Revenue Service examination, they may provide additional fiduciary protection for the Plan Sponsor and better long-term earnings potential for plan participants.
Retirement plan compliance is complex, requiring help from trusted professionals who understand the complexities, challenges, rewards and opportunities associated with effective retirement planning. Contact Smith Schafer for further discussion and guidance.