The matter of timely deposits is a key compliance issue regarding a company’s 401(k) plan.
Plan sponsors have a fiduciary responsibility to deposit participant contributions in a timely manner—and act in the participants’ best interests.
The IRS deems late deposits as a fiduciary violation, considering the plan sponsor-fiduciary as acting in their own interests rather than the participant’s. Failure to deposit participant contributions timely is considered a prohibited transaction and can trigger costly penalties.
401(k) deposit deadlines
Participant contributions comprise both elective payroll deferrals and plan loan repayments. Since these are considered plan assets, the employer must follow the guidelines set by the U.S. Department of Labor (DOL).
Participant contributions to the 401(k) must be deposited:
- On the earliest date the plan sponsor can reasonably segregate participant contributions from the sponsor’s general assets; or
- Not later than the 15th business day of the following month (should there be circumstances beyond the employer’s control).
- For plans under 100 participants, the IRS and DOL allow contributions to be made no later than seven (7) business days from the withholding.
Best practices for our clients is to deposit those payroll deferrals as close to payday as possible. Not making those deposits timely is a red flag for the DOL to investigate if the employer is using the funds for company purposes instead of employees’ retirement savings.
Because timely 401(k) deposits are critical for plan compliance, we offer a payroll submission service to our full-service administration clients, to ensure participant contributions are submitted in compliance with IRS and DOL regulations.
Correcting late deposits
If the deposit is late, the employer must make additional contributions to the plan on the participant’s behalf, to make up for any lost earnings due to the error. In all instances, the plan sponsor must:
1 – Deposit the deferral/loan amounts with the applicable interest through the actual deposit date.
2 – Report the late deposits on the plan’s form 5500 until fully corrected.
3 – The sponsor then must choose to either file a Form 5330 with the IRS and pay the requisite excise tax or use the DOL’s Voluntary Fiduciary Correction Program (VFCP) program and apply for a “no-action” letter.
VFCP permits eligible plan sponsors to disclose and correct various fiduciary failures, including late deposit errors. Once the error is corrected according to this program, the DOL issues the sponsor a no-action letter, which indicates there will not be a civil investigation of the late deposit error nor civil penalties against the company in connection with it. The no-action letter does not exclude other government agencies from bringing action against the plan sponsor.
Your Intac FuturePlan consultant can walk you through all the steps to implement a deposit correction. As full-service retirement plan administrators, we ensure our clients’ plans comply with ERISA and DOL requirements. Contact your plan consultant to discuss our payroll submission service, or email me at [email protected] about other ways we serve plan sponsors.