You are in your third year as internal auditor with VXI International, manufactu

Question

You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft. VXI began a defined contribution pension plan three years ago. the plan is a so-called 401(k) plan (named after the tax code section specifies the conditions for the favorable tax treatment of these plan) that permits voluntary contributions by employees. Employees' contributions are matched with on dollar of employer contribution for every two dollars of each employee contribution. Approximately $500,000 of contribution is deducted from employee paychedk each month for investment in one of three employer-sponsored mutual funds.

While performing some preliminary audit test, you happen to notice that employee contribution to these plan usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when when the plan was first begun,contributions were invested within one week of receipt of the funds. when you question the firm's investment manager about the apparent change in the timing of investments, you are told, Las year Mr. maxwell ( the CFO) directed me to initially deposit the contribution in the corporate investment account. At the close of each quater, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds."

Required:

1) What is Mr. Maxwell's apparent motivation fo the change in the way contribution are handled?

2) Do you percieve an ethical dilemma?

Explanation / Answer

The reason for delaying the contribution is to earn income on the contributions or to use as working shortage, Since the delay the payment is always better than paying in advance, business organization are tend to make such critics by allowing the other at risk.

If the employer doesn't make the deposits timely, the failure may constitute both an operational mistake, giving rise to plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals) and a prohibited transaction. Although an employer can correct an operational mistake under EPCRS, a prohibited transaction can't be corrected under EPCRS. However, the DOL maintains a Voluntary Fiduciary Correction Program (VFCP) that may be used to resolve the prohibited transaction.

Yes, Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month. Remember that the rules about the 15th business day isn't a safe harbor for depositing deferrals; rather, that these rules set the maximum deadline. DOL provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants.

Correction through EPCRS may be required if the terms of the plan weren't followed. Correction for late deposits may require you to:

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