The deposit timing rules are relatively straightforward, or so we thought…
Just a few weeks ago, a client asked us for assistance in completing the 401(k) recordkeeper’s 2014 Form 5500 data questionnaire. As expected, the questionnaire asked whether there were any employee contributions that were not deposited on-time. We were very surprised to see the questionnaire go on to incorrectly state the deposit timing rule. The recordkeeper was incorrectly advising its clients, in writing, that the deposit deadline can be extended to the 15th business day of the month following the withholding. This is an old myth, and one we thought had been universally debunked years ago.
U.S. Department of Labor (DOL) regulations clearly require the employer to deposit employee deferrals and loan payments in the 401(k) plan trust on the earliest date those amounts can reasonably be segregated from the employer’s assets. In other words, the employer must deposit employee contributions and loan payments promptly after each pay period.
The DOL regulations include a safe harbor for small plans. If a plan has fewer than 100 participants, the deposit deadline is the seventh business day after the amounts are withheld from paychecks. For this purpose, “participants” are counted in the same manner used for the 5500—a participant includes any employee or former employee with an account balance plus any employee who is eligible to participate but does not contribute to the plan.
The safe harbor rule does not apply to large plans. In a large plan, the employer will almost always be required to deposit contributions and loan payments more quickly. In many cases, the employer will be required to make its deposits within just a day or two after the amounts are withheld from payckecks. Ensuring deposits are made timely should be top priority for every employer with a 401(k) plan.
Enforcement of this rule continues to be a DOL priority, and failing to identify and correct late deposits may result in penalties and excise taxes. Late deposits are treated as prohibited transactions, which are subject to excise taxes. Late deposits may also be considered breaches of fiduciary duties to the plan, which might subject the fiduciaries to liability for damages (and even criminal liability in egregious cases).
If an employer has made late deposits, it is required to make appropriate corrections (e.g., by depositing lost earnings to participant accounts). The employer may request relief from the excise taxes through the Voluntary Fiduciary Correction Program. In addition, employers are obligated to self-report late deposits on the annual Form 5500.