One of the continuing confusions in how 401(a) rules apply to 403(b) plan  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.  Neither non-ERISA or ERISA 403(b) plans will ever file a Form 5330. Ever. Even when the VFCP program is being used to correct the late deposit.

Adding to the confusion is that the Form 5500 instructions do not differentiate between 403(b) plans and 401(a) plans. It simply states that  all “defined contribution” plans need to file the Form 5330 for late deposits, and pay the penalty tax.  So keep the following in mind:

  • 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 directions 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 only applies to 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), as it still is, after all, an ERISA prohibited transaction. But there is no statutory requirement that you report it other than on the Form 5500 or mandatorily pay a penalty.
  • An important corollary is that the non-ERISA 403(b) plan is never subject to either the ERISA prohibited transaction rules or the 4975 tax. HOWEVER,  timely deposit is a condition of 403(b) status: the 403(b) regs mandate that the deposits of elective deferrals must be made “within a period that is not longer than is reasonable for the proper administration of the plan. For purposes of this requirement, the plan may provide for section 403(b) elective deferrals for a participant under the plan to be transferred to the annuity contract within a specified period after the date the amounts would otherwise have been paid to the participant. For example, the plan could provide for section 403(b) elective deferrals under the plan to be contributed within 15 business days following the month in which these amounts would otherwise have been paid to the participant.” So, if the deposits are made past the date identified in the plan or, if there is no date, beyond a reasonable period, you have a form and operation problem which needs to be corrected under EPCRS (probably SCP-but that is also a problem if the error is being repeated regularly).
  • Identifying those “late” deposits can be a challenge.  Some insurance companies, in particular, can be notorious about the time in which they take to actually allocate their  deposits to annuity contracts (this can a problem more so in the 401(k) market than 403(b)s, because the 401(k) contracts are typically not subject to the strict SEC rules on posting deposits which are imposed on “registered” 403(b) investments. But even mailing a check to a 403(b) vendor can cause delays that the auditor may improperly raise issues with).  The problem this delay 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.