Last week, the U.S. Department of Labor (“DOL”) announced that it had sued an officer and fiduciary to the Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) plan of Pharmaceutical Alternatives Inc., an Ohio-based company, for improperly using plan assets withheld from employee pay for the benefit of the company as well as for other violations of the Employee Retirement Income Security Act (“ERISA”). Generally, a SIMPLE IRA plan allows employers with under 100 employees to make contributions to traditional IRAs set up for each eligible employee. In its suit, the DOL alleges that from August 5, 2005 until January 16, 2009, a company executive caused the company to retain employee contributions or fail to remit employee contributions in a timely fashion. The DOL is seeking the recovery of all assets owed to the plan.
The failure to remit contributions in a timely fashion is the No. 1 issue identified by the Internal Revenue Service (“IRS”) during examinations of 401(k) plans. The rules applicable to 401(k) plans require employers to deposit salary deferrals as of the earliest date on which such amounts can reasonably be segregated from the employer’s general assets. Because of the sophisticated payroll systems that many companies use, the IRS takes the position that salary deferral amounts can often be segregated within a day or two of the date the employee’s paycheck is issued. In some cases, the IRS has found that amounts can be segregated on the same day. However, in no event may salary deferrals be deposited later than the 15th business day of the month following the month in which such amounts would have been payable to the participant in cash. Although some employers mistakenly believe that they have 15 days to deposit employee contributions, the correct standard is, as noted above, “the earliest date on which such amounts can reasonably be segregated from the employer’s general assets.”
Regardless of the number of participants in a 401(k) plan, all employers must implement procedures to ensure that employee salary deferrals are deposited timely. If an employer deposits employee contributions late, the employer must correct the error by restoring the lost income resulting from the late deposits to the trust. Further, the failure to deposit salary deferrals on a timely basis constitutes a prohibited transaction, which subjects the employer to the payment of an excise tax under the Internal Revenue Code.