By J. Michael Bermensolo, Esq., Geller & Wind, Ltd.
Employers who sponsor 401(k) plans must pay close attention to deadlines imposed by the Department of Labor (DOL) for depositing employee 401(k) contributions into such plans. The maximum time period for remitting employee 401(k) contributions is the earlier of the 15th business day of the month following the month in which such contributions are withheld from the paychecks of employees or as soon as they can reasonably be segregated from the employer's general assets.
The amount of time that is reasonable for segregation from the employer's general assets depends on the facts and circumstances of each individual case. The DOL gives an example of a large national corporation that maintains several payroll centers with different pay periods and separate records of payroll deductions but aggregates withholdings and issues a single, monthly check to the plan's trust. In that case, the DOL considers the corporation to be in compliance if deposits are made within 15 business days of the month in which amounts were withheld. However, according to the DOL, a company with a small number of employees at a single payroll location can reasonably be expected to transmit employee 401(k) contributions to a plan's trust within 10 days of the close of each pay period in order to be in compliance with the DOL regulations.
Employers who do not timely deposit employee 401(k) contributions engage in a prohibitive transaction and must first restore delinquent contributions plus lost earnings to the plan's trust in order to make all participants whole. Also, the employer must pay an excise tax to the IRS for the use of plan assets. In addition, civil and criminal sanctions may be imposed.
Since October 1995, 1,182 investigations have resulted in findings of prohibitive transactions with monetary sanctions imposed according to the DOL. Also, 126 criminal cases have been opened with 50 cases resulting in criminal prosecution of 62 persons. *
By J. Michael Bermensolo, Esq., Geller & Wind, Ltd.
The IRS recently extended the remedial period for the amendment of all tax-qualified retirement plans to comply with the provisions of the Uruguay Round Agreements Act, the Uniform Services Employment and Re-employment Rights Act of 1994, the Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997 (collectively known as GUST). The new deadline is the last day of the first plan year beginning on or after January 1, 2000. Accordingly, all employer-sponsored, tax-qualified retirement plans must be amended and redrafted to comply with the provisions of GUST by the IRS-imposed deadline, which for calendar year plans is December 31, 2000.
Failure of any tax-qualified retirement plan to be amended and redrafted for the provisions of GUST within the remedial amendment period will result in the loss of its tax-qualified status. Upon disqualification, the following adverse income tax consequences may result to the employer, the trust, and the plan participants for all years of disqualification: 1) for the employer, the loss of tax deductions taken for contributions made on behalf of participants; 2) for the trust, the assessment of income taxes on earnings; 3) for current plan participants, the inclusion in income of vested employer contributions and earnings; 4) for former participants who rolled over distributions, the loss of tax-free rollover treatment on such distributions; and 5) for employers and participants, penalties and interest assessments on the additional income taxes that must be paid to the IRS.
Even before the filing of amendments to meet the year 2000 or later deadlines, the plan must be operated and administered in accordance with the applicable provisions of GUST that are effective for the 1997, 1998, 1999, 2000, and subsequent plan years.
The IRS has opened the determination letter program for qualified plans that wish to comply with the changes in the qualification requirements made by GUST. Applications for determination, opinion, notification, and advisory letters involving qualified plans and tax-sheltered annuity plans that are filed with the IRS will be reviewed, taking into account these legislative changes.
The issuance of a favorable ruling letter does not exempt a qualified plan or its trust from the obligation to comply with future changes in law or regulations, nor does it protect a plan from IRS review and consequent challenge if the IRS determines that plan operation is inconsistent with the statute. However, the ruling does state, in effect, that in the opinion of the IRS, the plan and related trust, as submitted under the facts given, does satisfy all of the requirements for qualification and tax exemption under the law as it presently exists. *
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.
Michael D. Schulman, CPA
Schulman & Company
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