With October 15 closing in and large numbers of Form 5500s being finalized also comes the wrapping up of all the loose ends necessary for audits to be completed.

There is some disturbing stuff in that potpourri of issues crossing our desks. Most striking is that even now, some six years after the publication of IRS and DOL guidance related to the "new world" of 403(b) regulations, there continues to be a basic misunderstanding of some of the fundamental remaining differences between 403(b) and 401(k) plans-even from otherwise reputable auditing firms.

One set of those involves the reporting rules related to the correction and reporting on the 5500 of one of the most common errors in any elective deferral plan, the late deposit of those deferrals into the plan. We were asked to by an IQPA to provide evidence that the Form 5330 was filed on a 403(b) plan with late deferrals, and that a VFCP has been filed. 

As you may imagine, I actually took some pleasure in answering this question. But the answer could serve as a reminder for many:

  • Though late deferrals to an ERISA 403(b) plan do need to be reported under the Compliance portion of  the Form 5500 Schedule H or Schedule I, Form 5330 cannot be filed-in spite of the silence in the Form 5500 instructions. This is because the Tax Code’s prohibited transaction rules, Section 4975, do not apply to 403(b) plans-even if it is an ERISA 403(b) plan. Form 5330 is only for plans to which 4975 applies.  Tell your auditor NOT to file the Form 5330, and that no 5330 penalty tax is due.
  • Late ERISA 403(b) deposits are, however, violations of ERISA’s prohibited transaction rules under ERISA Section 406.  This means that the DOL’s Voluntary Fiduciary Compliance Program (VFCP)  does apply to these deposits. But your analysis shouldn’t stop there. Note that, unlike the mandatory rule under Code Section 4975, the ERISA 5% penalty on the earnings on these late deposits under ERISA 502(i) is an administrative penalty that may be assessed by the DOL.  The statute only requires that you fix the late deposit (by paying the interest), not that you report it other than on the Form 5500 or pay a penalty. In small cases- lets say, for example, where the maximum penalty imposed is little more than a few dollars-it is well worth considering not filing under VFCP.  An auditor will have a hard time dinging a plan for a sawbuck or two.
  • And about those "late" deposits.  Some insurance companies are notorious about the time in which they take to actually allocate their 403(b) deposits to individual contracts. I’ve seen one vendor claim that it has seven days to do it. The problem this causes on audit is that many auditors pick up the posting date of the contribution to the participant’s contract, and claim that the late posting represents a late deposit, and a prohibited transaction.  This is not the rule. The DOL has recognized this issue of there being time between the deposit and the date it is allocated. It provided and an important example in its preamble to its “deposit” rules under 2510.30-102 that

    “Where, for example, an employer mails a check to the plan, the Department is of the view that the employer has segregated participant contributions from plan assets on the day the check is mailed to the plan, provided that the check clears the bank.”

Remind your auditor that the test is the date that the money is irrevocably sent from the employer’s account (such as by check or wire), NOT the date the vendor allocates the deposit to the contract.

Just as my frustration with Independent Qualified Public Accountants was peaking, our oldest son, Ryan (who is in the business, working for the Newport Group in North Carolina) dropped us a note reminding us that when you Google the term IQPA, the lead result is the "International Quarter Pony Association."  Levity does help put things into perspective…..  



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