There are numerous types of prohibited transactions. Prohibited transactions are defined as certain transactions between a retirement plan and a disqualified person (broadly a person with some involvement with the retirement plan) that would cause the plan/plan sponsor to be in violation of Employee Retirement Income Security Act of 1974 (ERISA). One type of prohibited transaction is the untimely remittances of employee elected deferrals (commonly referred to as retirement contributions) by the plan sponsor to the plan’s custodian (usually a financial firm charged to manage the plan’s assets).
As part of their fiduciary responsibility, plan sponsors are required to remit employee retirement contributions on a timely basis – defined by the Department of Labor (DOL) as the earlier of:
- The 15th business day of the month following the month in which the contribution is withheld by the employer from the employee’s wages (or the amount is received by the employer);
- The earliest date on which the contributions can reasonably be segregated from the employer’s general assets.
For example, if a plan sponsor consistently demonstrates that they’re able to remit employee retirement contributions to the custodian within 5 days, then any remittance greater than 5 days would be considered a prohibited transaction. To rectify the prohibited transaction caused by the untimely remittance, the plan sponsor would need to make a Qualified Non-Elective Contribution (QNEC) (usually calculated by the custodian) equal to the lost earnings incurred by each employee due to the untimely deposit.
For small plans (having fewer than 100 participants at the beginning of the plan year(, there is a safe harbor for remittances:
- Seven business days following pay day, the actual day checks or direct deposits are made available to employees.
Company sponsored retirement accounts aren’t ‘set-it and forget,’ but instead require active involvement by members of the plan sponsor.
Jeremy Bottlinger, CPA