“I was the last one you’d thought you’d see there…”

We tend to think of untimely remittances to retirement plans as primarily an ERISA issue, and certainly, the cause of many DOL audits. Lately, however, it seems the IRS also sees late contributions as an invitation to examine the plan. 

Untimely remittances typically present limited tax issues. The late contributions trigger a prohibited transaction and excise tax, but excise taxes are often miniscule. A plan operational failure (tax disqualification defect) only occurs if plan terms were violated by the practice, and in our experience, many plans do not require contributions to be remitted under any specific timing.  So why is the IRS targeting these plans if there aren’t likely to be significant tax issues?  We think it is because the IRS views late contributions as a potential indicator of other plan issues – i.e., plans with late contributions are more likely to have made other mistakes in operations.

The IRS has ample opportunity to learn of late contributions as they are required to be reported on the Form 5500, the prohibited transaction is reported on a Form 5330, and the DOL is authorized to share information learned on their plan audits with the IRS.  This just serves as another reason to be über-diligent on remitting employee contributions to the plan timely; otherwise, the IRS might ruin your black-tie affair.