August 2006 Pension Plan tip of the month...

Recently, we have noticed an increase in IRS examinations of retirement plans and we would like to remind you once again, that the Department of Labor has strict standards regarding the time frame in which elective deferral contributions must be segregated from employer assets and into a qualified plan. During their examinations, the IRS enforces the DOL’s standards for timely deposits of deferrals and loan payments.

The IRS/DOL aggressively investigates employee allegations of late deposits. They follow up on every employee complaint of late deposits.

The IRS/DOL has strict guidance regarding the timeframe in which elective deferral contributions must be transferred by an Employer to a qualified plan. In our recent experience assisting clients through IRS examinations, agents have deemed employee contributions (including loan repayments) not segregated within 3-6 business days after each payroll as late. If your payroll frequency is more often then monthly, it is no longer acceptable, according to these standards, to submit contributions on a monthly basis. The 15th (30th for SIMPLE IRAs) business day is not a 'safe harbor'; it is the maximum time. Employee contributions not remitted timely require the allocation of lost earnings and excise taxes to be calculated, funded, and reported. Again, we can help you address this issue.

Deposits must be made consistently each time deferrals are withheld and must be made as early as possible every time.  While it is vital to submit deferrals quickly, it is important to note that the IRS and DOL also frown upon the practice of pre-funding deferrals prior to the date on which they would have otherwise been paid to the employee except for some very limited situations.

Since the annual IRS Form 5500 has a question that asks “Did the employer fail to transmit to the plan any participant contributions within the time period described in 29 CFR 2510.3-102?” it is very important that all Plan Sponsors comply with these standards. If not, it is our understanding that it will most likely trigger a DOL audit and potential penalties and excise taxes.

If you have any questions regarding this Pension Tip, please feel free to contact your Account Executive at The Paragon Alliance Group.