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Your company maintains a 401(k) plan that expressly requires that elective deferrals be deposited within five days after each payday. However, during a yearly compliance audit of the plan, you discover that elective deferrals were not deposited until 30 days after each payday for the 2007 plan year. How can you address this operational error?
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Answer: |
You can most likely correct this on your own. When an employer fails to make a timely deposit of elective deferrals, the failure may constitute an operational error that could result in plan disqualification for failure to follow plan terms (if the plan specifies a date by which elective deferrals must be deposited by the employer), as well as a prohibited transaction.
Self-correction. The error may usually be addressed under the IRS's Employee Plans Compliance Resolution System (EPCRS), the components of which are the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP).
The error made by your company may be addressed under the Self-Correction Program without paying a fee. A corrective contribution would have to be made, however, within two years for mistakes that are significant in the aggregate. In the event that the corrective contribution is not made by December 31, 2009, your company must correct the error under the Voluntary Correction Program, which could result in a requirement to pay a $15,000 submission fee.
Source: Employee Benefits Management Directions, Issue No. 437, February 10, 2009.
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