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Staying Up-To-Date On Your Retirement Plan

By Jerry Kalish

One of the first functions that many business owners outsource is payroll. In fact, none other than the IRS recently reminded us that outsourcing payroll duties to third-party service providers can streamline business operations. Still, business owners are still ultimately responsible for paying federal tax liabilities associated with the practice.

Payroll taxes are called "trust fund" taxes because it's the obligation of employers to hold the employee’s money in trust until they deposit it with the government. Failure to do so in a timely manner can subject the business and the individuals involved to penalties and interest. And to make the point, the IRS cites the recent case of an Orlando man sentenced for a $181 million payroll-tax fraud.

Now substitute "plan assets" for "trust fund taxes" and "Department of Labor" for "Internal Revenue Service". The Department of Labor is the federal organization that has jurisdiction over the fiduciary aspects of retirement plans, and it takes the timely deposit of employees’ 401(k) contributions seriously.

Last year the DOL announced a proposed “safe harbor” rule for employee contributions to a "small" retirement plan (one with less that 100 participants). The DOL said that an employer will be deemed in compliance with the law if those amounts are deposited with the plan within seven business days of receipt or withholding. The DOL said in its announcement that the department would not accuse a plan sponsor of an ERISA violation while the proposal is being finalized if 401(k) contributions are deposited within the seven-day time limit.

In addition, the DOL requested information and data regarding a possible safe harbor for plans with 100 or more participants to enable it to evaluate the current contribution practices of these large employers.

In fact, delinquent depositing of employee 401(k) contributions usually gets discovered sooner than delinquent deposit of payroll taxes. Employees usually have no way of confirming payroll tax deposits, but with daily valuation 401(k) plans, employees can go online to check to see when their 401(k) contributions hit their accounts. Consistently late 401(k) deposits can be a red flag for an employer having financial problems.

And it’s a matter that the employer has to report at least once a year when the retirement plan’s annual Form 5500 is filed with the DOL. One of the required questions that the employer must answer is whether it failed to transmit to the plan any participant contributions within the required time period. If the employer has answered "no" , then it should not be surprised if there is a knock on the door by the DOL.

Jerry Kalish is founder and President of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm that serves private-held companies, publicly traded companies, and public sector employers. He blogs at The Retirement Plan Blog and can be reached at jerry@nationalbenefit.com.

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