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Record keeper screwed up 401k deferrals for 2020. Can it be fixed?

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  • Record keeper screwed up 401k deferrals for 2020. Can it be fixed?

    Record keeper was supposed to do a pull of payroll deferrals from bank in Dec for 2020 tax year. I went back and looked at bank records and the pull was never made. I have the deferral amounts all set up in bookkeeping and W2 have already been put out by payroll. Can the missing contributions still be put into the account for 2020? It was just December that was missing. All other pulls went through. I know the company received my spread sheet for the pull as they replied with a thank you. What are my options? Will be a pain to go back and redo everything showing the new amounts.

  • #2
    If the employee deferral was properly deducted from compensation not already received with a pay date by 12/31/20 and has/will be reflected in the 2020 W-2 filed on time. The record keeper can/should immediately pull the missing deferral from the businesses accounts*.

    Pattern and practice is that one-participant 401k deferrals should be deposited by the statutory 15 business day requirement (1/22/21), but no later than the W-2 filing deadline.

    However, if this is an ERISA 401k plan with non-owner/spouse employees. This is technically a late deferral deposit under both the DOL 7 business day (1/12/21) rule for small employers with < 100 employees and the statutory 15 business day requirement (1/22/21).

    ​​​​The administrator would document procedures for future deferral deposits, such as verifying a business account debit within 5 business days to ensure future compliance under the appropriate compliance correction program.

    *If this was not done, the deferral (amount and earnings) should still be made up under the appropriate compliance correction program. I'm not entirely sure how.


    • #3
      spiritrider Thanks for the reply. That is helpful. We fall within the later category of the ERISA plan. Payroll was processed on 12/11. Luckily it only applied to one W-2 employee. There are 4 members of the MMLLC taxed as a partnership that will get K-1 income that had their deferrals withheld from guaranteed compensation. Will this have a different effect on the outcome?


      • #4
        It means that you have missed both the DOL 7 business day deferral deposit deadline safe harbor for small employers and the statutory 15 business day deadline of the month following the deferral for the W-2 employees 12/11/20 deferral.

        See the IRS

        This may or may not be self-correctible and is well outside my area of specific knowledge. You need to refer this to your record keeper, TPA if there is one or another employer retirement plan specialist for correction. I would not consider this a DIY scenario.


        • #5
          Thanks again for your input spiritrider. I have notified the TPA, recordkeeper, Plan FA, and the group’s CPA. Hopefully this can get worked out. As far as possibly owing any lost earnings, is the recordkeeper on the hook for this or the person that is the trustee for the plan? It was the recordkeeper’s mistake but the trustee did not catch it in time.


          • #6
            It is the plan sponsor (employer) who is responsible for making up for the lost earnings. Who actually coughs up the cash is based on contractual responsibilities and facts and circumstances.


            • #7
              Just heard back from the FA and the recordkeeper had switched over their platform in Dec which seems to be the cause of the issues. I did notice that there was a different name for the monthly pull this month. Will self advocate for them to pay it. Sounds like it was an issue for other customers as well.


              • #8
                OK, record keeper sent me an email notifying of a bank pull today. They ended up with an incorrect amount. Not the amount on the spreadsheet I sent in December. Getting very tired of dealing with this! Hope to get all of these issues resolved. Lesson is to never trust anyone to do the job correctly? Will keep an eye on them to make sure all transactions take place as they are scheduled. Whole new level of stress that I don’t want to have to deal with. Wish me luck!


                • #9
                  As I said I am not a professional, but the description of a prohibited transaction in the link I provided, peaked my interest.

                  I found this link to IRS Rev. Rul. 2006-38 that seems to imply an excise tax penalty may be due. I suggest asking the TPA about this. It may not apply, but better to be safe than sorry.

                  Last edited by spiritrider; 01-25-2021, 02:25 PM.


                  • #10
                    spiritrider TPA is in the loop. Will see how it goes. Again, appreciate your input very much! Hopefully just a one time issue.


                    • #11
                      Let us know how it all works out. It will be a valuable data point for other similar practices.


                      • #12

                        This maybe the wrong place to post this but I do not seem to be able to create a new topic
                        If I have a 401k and rolled it over in 2020 to a roth IRA thereby ending the solo 401k can I start a SEP IRA in 2021 without having to wait one year. My presumption is yet but these would be employer contributions only subject to the 20% of net income rule.
                        Please let me know

                        Thank you