Posted on Oct 11, 2018

For the 401(k) fiduciary, the importance of timely salary deferral deposits cannot be overstated. An employer that fails to remit employee contributions each pay period (or within the required time frames) runs the risk of penalties and fines. In addition, under IRS regulations the employer’s failure to make timely deposits may be an operational mistake that can disqualify the plan, and may be considered a prohibited transaction. While these mistakes can be resolved through various mechanisms, the employer may be subject to an excise tax and other costly penalties. Repeated errors can trigger an audit.

What’s the best way to avoid mistakes in the first place? The IRS recommends that employers coordinate with their payroll provider to determine the earliest date that employee deferral deposits can reasonably be segregated from the employer’s general assets, and develop procedures to ensure that deposits are made by that date.[1] The date and deposit procedures should be consistent with the plan document provisions if your plan document contains language about the timing of deferral deposits. For example, if deposits are made biweekly but the plan specifies that deposits are to be made weekly, this discrepancy may be considered an operational mistake and should be corrected under the IRS Employee Plans Compliance Resolution System (EPCRS).

It’s also a good idea for the employer to review the plan annually to ensure it reflects any changes in the rules about timeliness, and to develop procedures so any new staff members responsible for plan administration are aware of when deposits must be made. Department of Labor rules require that employers deposit deferrals to the plan as soon as possible, but under no circumstances can the deposit be later than the 15th business day of the following month. Note that the rule about the 15th business day isn’t a safe harbor for depositing deferrals, but rather sets the maximum deadline, and for plans with fewer than 100 participants, the DOL provides a 7-business day safe harbor rule.[2]

Staffing shortages, turnover, vacation schedules, and simple human error are a fact of life and can sometimes result in mistakes. If a deferral deposit is late, the plan sponsor must correct this fiduciary violation by making the deposit as soon as possible and adding lost earnings and interest on the deposits. The Department of Labor’s Voluntary Fiduciary Correction Program generally allows for self-correction of a delayed deposit.[3]

However, a pattern of late deposits is a red flag for the IRS. The late deposits could be considered a loan to the plan sponsor, which is a prohibited transaction subject to an excise tax, and the plan can be disqualified.

The key takeaways for plan sponsors? In a nutshell, know your plan’s terms and provisions and follow them operationally. Keep apprised of changes in the law and make appropriate updates. Finally, set up procedures to ensure that deferral deposits are made at the earliest date possible within the IRS and DOL guidelines. If mistakes happen, fix them as soon as possible through the appropriate correction program.

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.


[1] https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-you-have-not-timely-deposited-employee-elective-deferrals

[2] https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-you-have-not-timely-deposited-employee-elective-deferrals

[3] https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide

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