Fiduciaries to Pay $485K for Failing to Forward Payroll Deductions
The DOL sued retirement plan fiduciaries in Connecticut for failing to forward contributions and loan repayments withheld from participants’ paychecks as required by ERISA.
A court judgment received by the U.S. Department of Labor
(DOL) orders retirement plan fiduciaries to restore $485,560.77 to plan
participants.
In 1984, Fletcher-Thompson, Inc., an architectural,
engineering and interior design firm headquartered in Bridgeport, Connecticut,
established The Fletcher-Thompson Savings Plan to provide retirement benefits
for its employees. An investigation by the DOL’s Employee Benefit Security
Administration (EBSA) found that, beginning in 2008, the company became
delinquent in remitting employee deferrals and loan repayments to the plan. The
company ceased remitting anything at all to the plan as of May, 2012. Nevertheless,
it continued to withhold contributions and loan repayments from participants’
pay.
The total amount outstanding, including lost interest, is
$485,560.77, the DOL says. It filed a complaint in U.S. District Court against
plan fiduciaries on June 9, 2014.
Defendants Fletcher-Thompson, Inc. Savings Plan and Michael
S. Marcinek, in their capacities as fiduciaries of the Fletcher-Thompson Inc.
Savings Plan, agreed to enter into a consent judgment. The judgment orders them
to restore the $485,560.77 to the plan in installments of no less than
$40,463.40 per month for 12 months, ensure that non-fiduciary plan participants
receive the share to which they are entitled and provide a full accounting to
the EBSA each month. The order also prohibits Marcinek from ever again serving
as a fiduciary to an Employee Retirement Income Security Act (ERISA)-covered
benefit plan.
According to the consent judgment, in connection with the resolution of this matter, the DOL will assess a
penalty pursuant to ERISA §502(l) of 20% of the “applicable recovery
amount”—$485,560.77. The defendants agree to pay the penalty except to the
extent that they seek and are granted a waiver in the Secretary of Labor’s sole
discretion.
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New safe harbor correction methods related to automatic enrollment features in defined contribution plans are being implemented by the Internal Revenue Service.
The Internal Revenue Service (IRS) says a new revenue
procedure, 2015-28,
“modifies but does not supersede” an earlier revenue procedure, 2013-12, which in part
defines methods for plan sponsors to voluntarily correct issues with plan “auto
features” so as to avoid jeopardizing their plans’ tax-advantaged status.
In short, the 2015-28 revenue procedure modifies the safe
harbor correction methods and examples in Appendices A and B of the 2013-12
revenue procedure to provide additional leeway and alternative correction
methods for employee elective deferral failures. As explained by the IRS, these
elective deferral failures usually occur when a plan sponsor misses elective
deferrals for eligible employees who should be subject to automatic plan
features—whether automatic enrollment or automatic deferral escalation—within a
401(k) plans or 403(b) plan.
The 2015-28 revenue procedure explains that “if a failure to
implement an automatic contribution feature for an affected eligible employee,
or the failure to implement an affirmative election of an eligible employee who
is otherwise subject to an automatic contribution feature, does not extend
beyond the end of the 9.5 month period after the end of the plan year of the
failure,” no qualified non-elective contribution (QNEC), as defined in Section
1.401(k)-6 of the IRS’s income tax regulations, for the missed elective
deferrals is required.
For this new safe harbor to apply, however, the following
conditions must be satisfied:
Correct
deferrals must begin no later than the earlier of: 1) the first payment of
compensation made on or after the last day of the 9.5 month period after
the end of the plan year in which the failure first occurred for the
affected eligible employee, or 2) if the plan sponsor was notified of the
failure by the affected eligible employee, the first payment of
compensation made on or after the last day of the month after the month of
notification.
Notice
of the failure that satisfies specified requirements in new Section
.05(8)(c) of Appendix A of the 2013-12 revenue procedure is given to the
affected eligible employee no later than 45 days after the date on which
correct deferrals begin.
Corrective
contributions to make up for any missed matching contributions are made in
accordance with timing requirements under IRS self-correction program
(SCP) for significant operational failures (as described in Section 9.02
of the 2013-12 revenue procedure) and are adjusted for earnings, vis a vis
Section 9.04 of 2013-12 revenue procedure.
The new revenue procedure also impacts the calculation of
earnings for certain failures to implement automatic contribution features.
As explained by the IRS, “this revenue procedure provides an
alternative safe harbor method for calculating earnings for employee elective
deferral failures under Section 401(k) plans or Section 403(b) plans that have
automatic contribution features and that are corrected in accordance with the
procedures in Section 3.02(1) or 3.03 of this revenue procedure.”
If an affected eligible employee has not affirmatively
designated an investment alternative, missed earnings may be calculated based
on the plan’s default investment alternative, provided that, with respect to a
correction made in accordance with the procedures in Section 3.02(1) of the new
revenue procedure, any cumulative losses reflected in the earnings calculation
will not result in a reduction in the required corrective contributions
relating to any matching contributions.
A safe harbor correction method for employee elective
deferral failures that extend beyond three months but do not extend beyond the
normal self-correction program period for significant failures is also provided.
The IRS’s explanation continues: “This revenue procedure
creates a safe harbor correction method for employee elective deferral failures
if the period of failure exceeds three months (or the conditions for the safe
harbor correction method described in Section 3.02 or 3.03(1) are not met by
the plan sponsor). This safe harbor correction would permit the plan sponsor to
make a corrective contribution equal to 25% of the missed deferrals (25% QNEC)
in lieu of the higher QNEC required in Sections .05(2)(b) and .05(5)(a) of
Appendix A and Section .02(1)(B) of Appendix B to Rev. Proc. 2013-12.”
In order to use this safe harbor correction, the plan
sponsor must satisfy five conditions outlined in the full text of the 2015-28
revenue procedure. For example, the correct deferrals must begin no later than
the earlier of the first payment of compensation made on or after the last day
of the second plan year following the plan year in which the failure occurred.
Or, if the plan sponsor was notified of the failure by the affected eligible
employee, the correct deferrals must be made with the first payment of
compensation made on or after the last day of the month after the month of
notification.
See the full
text of 2015-28 for additional explanation and language underlying the
safe harbor changes.