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Employee Benefit Plan Sponsor Traps
The plan sponsors of employee benefit programs have a fiduciary responsibility to those plans and the participants. With an ever-changing regulatory landscape it can be tough to keep up with the rules. Three areas in particular -- late elective deferrals, plan terminations vs. plan mergers, and fidelity bonds vs. fiduciary liability insurance -- often confuse plan sponsors and could be traps that result in errors.
By Melissa M. Wolf, CPA
Plan sponsors of employee benefit programs have a fiduciary responsibility to the plans and the participants. With an ever-changing regulatory landscape (especially within the past year) how does one keep up? To help, here are three areas that often confuse plan sponsors and could be traps that result in errors.
Late Elective Deferrals
Participant elective deferrals become plan assets on the earliest date that amounts withheld from participant wages can be segregated from the employer's general assets for large plans (100 participants or more at the beginning of the plan year). In no event shall the date occur later than the fifteenth business day of the month following the month in which the participant contribution amounts are received by the employer (not a safe harbor). Plans with fewer than 100 participants have until the seventh business day following the day on which the amount is received by the employer (withheld) or would have been payable to the participant in cash.
The Department of Labor (DOL) considers remittances to be late if an employer can deposit within one business day. That will be the standard used by the DOL. If an employer can deposit within five business days, then five business days would be the standard. They also look for consistency throughout the year.
The IRS, however, considers remittances to be late if the plan sponsor fails to remit participant elective deferrals by the earliest date they can reasonably segregate from general assets. This is not considered an operational failure for voluntary correction plan (VCP) purposes if the plan does not have language relating to the time contributions are to be deposited. If there is timing language, then there is a qualification failure to follow the terms of the plan document.
To prevent or correct remittance issues, set a policy and follow it. If you do have late remittances, remit lost earnings to the plan and allocate to the affected participants. Consider the need to enter the DOL Voluntary Fiduciary Correction Program (VFCP) or self-correct (for nonsignificant errors). Also consider if a Form 5330 is required because late deposits are considered a prohibited transaction and subject to a 15% excise tax (on lost earnings, not the deposit) under Internal Revenue Code Section 4975.
Plan Termination vs Plan Merger
In a plan termination, a formal resolution to terminate a plan is adopted and all current participants become 100% vested. Financial statements are required to be reported on the liquidation basis. A final Form 5500 filing is due seven months from the month in which all assets are distributed.
The IRS views a plan merger as an amendment to the plan that will remain intact. Anti-cutback analysis must be performed as features and protected benefits cannot be eliminated and must be preserved, up to the date of merger. A final Form 5500 filing is due seven months from the month in which all assets are transferred to the new/surviving plan.
Fidelity Bond vs Fiduciary Liability Insurance
ERISA Section 412 and related regulations require a fidelity bond in which the plan is named as insured. Generally, funding requirements are at least 10% of the amount of funds handled (funds or property of the plan) subject to a minimum of $1,000 per plan official. The maximum amount under ERISA is $500,000 per plan; however, effective for plan years beginning on or after Jan. 1, 2008, the maximum amount is $1 million for plans that hold employer securities (with certain exceptions).
Fiduciary liability insurance, on the other hand, is not required by ERISA Section 412. This insurance covers claims for alleged failure to act prudently within the meaning of ERISA. Many fiduciaries incorrectly believe that their ERISA fidelity bond protects personal assets, but it does not.
Melissa M. Wolf, CPA, is a firm director at Baker Tilly US LLP in Wilkes-Barre and a frequent speaker at PICPA’s Employee Benefit Plans Conferences. She can be reached at melissa.wolf@bakertilly.com.
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