New Question on Form 5500 Could Be Troublesome to Practitioners
From McKay Hochman's Prototype Plan News, April-May 2003 Edition

As we approach the Form 5500 filing season, we wanted to alert you to some of the changes made to the Form 5500 and Instructions for the 2002 plan year.

Question 4a of Part IV of Schedule H (for large plans) and Schedule I (for small plans) addresses whether the participant’s elective deferrals became part of the plan’s trust in a timely manner. The exact wording of the question was revised to read as follows:

“Did the employer fail to transmit to the plan any participant contributions within the time period described in 29CFR Sec. 2510.3-102(See instructions and DOL’s Voluntary Fiduciary Correction Program.)”

The above-cited regulation requires an employer to deposit the elective deferrals:

a. As of the earliest date on which such contributions (elective deferrals withheld from payroll) can reasonably be segregated from employer assets, or

b. In no event, later than the 15th business day of the month following the month in which the participant contribution amounts are received by the employer or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant's wages).

The “15th business day” deadline probably does not apply to many large plan sponsors in this electronic age because the money is generally moved electronically in a matter of a few days. The DOL has been clear that the determination of what is the "earliest date" that the assets could be segregated will be benchmarked based on other employer transmittals of payroll amounts. Therefore, to the extent that other payroll reductions including taxes and insurance premiums are being wire transferred to the appropriate parties within a day or two of posting payroll, this precedent would be used in establishing the earliest date the assets could be transferred with respect to the elective deferrals. The rewording of the question on the 5500 schedule further emphasizes the true deadline.

The ultimate responsibility for timely deposit falls on the plan sponsor; however, practitioners are going to be faced with some tough decisions this 5500 season. In order to prepare the 5500, practitioners will need to answer question 4a based on available deposit records or on their client's word. In situations where the firm preparing the 5500 does the recordkeeping, reports should indicate the timing of the deposits. These should be reviewed for consistency. If there are any delayed deposits that fall outside the scheduled deposit date, but within the 15th day deadline, the practitioner should attempt to establish the reason for the delay; if the reason is valid, the question can still be answered "no," if not, it may be necessary to obtain additional information, or answer the question "yes."

As part of the 5500 information-gathering process, it will be necessary to determine the timing for transferring other salary reduction amounts to third parties. To the extent that other amounts are being segregated more rapidly then the deferral amounts, the reason for the delayed deferral deposits should be determined. Absent a valid reason for the delay, this question should be answered "yes." MHCO clients have asked us whether or not to rely on the word of their client in instances where the client says that all deposits were timely. MHCO stresses that it is critical to educate your clients as to the importance of these stringent deadlines and the consequences for failing to comply. This is an area that the DOL has actively monitored, and while an employer who answers question 4a with a “yes” is acknowledging that a prohibited transaction has occurred with respect to the plan, answering it “no” when there have been late deposits translates into filing a fraudulent return.

If the plan sponsor answers question 4a of the Schedule “yes” it is quite likely that the matter will be investigated further by the DOL, including possibly triggering a plan audit. Late deposits are considered prohibited transactions, and the employer must take steps to undo the prohibited transaction. Specifically, the employer must deposit the deferrals adjusted to reflect any earnings that would have been credited had the amounts been deposited in a timely manner. Lost earnings must be calculated as the plan’s rate of earnings or, if greater, 6%. This means that while it is likely that late deposits for 2002 would have experienced a loss, the corrective contribution must include earnings at a rate of at least 6%.

The employer will also need to complete and file a Form 5330 to calculate the 15% excise tax attributable to the usage of the money for the late deposit. This excise tax is determined based on the rate the employer would have paid to borrow the delinquent amount for the time in question. While this amount is generally quite small, it is important to take these steps in order to document the correction. Filing under the DOL Voluntary Fiduciary Correction Program will eliminate the prohibited transaction excise tax; however, since the excise tax amount is generally minimal, it probably makes sense to pay the excise tax as opposed to the VFCP filing fee.

Because of the seriousness of the potential consequences, it is essential that plan sponsors understand that timely deposits are critical. In addition, adequate records are essential to prove that deposits have been made within the DOL guidelines. As a result, it is important that you emphasize to your clients the true deadline for making the deposits (i.e., as soon as administratively feasible, as opposed to the 15th day of the month following the date the deferrals were withheld). To create a paper trail, you may want to develop a paper or electronic deposit record so the necessary information will be available in a verifiable form when it is time to prepare the 5500. Otherwise, as part of the year-end data collection, plan sponsors should be asked to verify the date of deposit of salary deferrals. Written plan administrative policies and procedures or periodic plan sponsor training sessions may be helpful in alerting your clients as to their ongoing operational responsibilities and may help to avoid the time and expense of correcting late deposits.

Schedule SSA Change
The SSA Attachment to the 5500 is used to report separated participants with vested benefits in the plan to the Social Security Administration (SSA). In the original instructions for 2002, the IRS stated that a copy of page 2 of the SSA must be used to report additional participants that do not fit on page 1 of Schedule SSA. In response to many public comments, the IRS announced in the Spring 2003 IRS Employee Plan News that neither the IRS nor the SSA will impose penalties if additional participants are reported in a manner other than a page 2 of the SSA form.