Employers are responsible for timely transmitting deferrals and loan repayments to the plan trust for 401(k) plans. So, what is considered timely? Under DOL regulations, employee deferrals and loan repayments become plan assets (and therefore must be deposited in the plan trust to avoid a prohibited transaction) on the earliest date that you can reasonably segregate employee contributions from general assets, but not later than the 15th day of the month following the month in which the deferral is withheld from the employee’s wages. Importantly, the 15th day of the following month is not a safe harbor and in current times will almost never be seen as the earliest date the assets could have been reasonably segregated. On multiple occasions, we have had experiences with the DOL on audit where the DOL found that depositing the same day or the day after payroll was required. If the employer doesn’t make timely deposits of employee deferrals, the error may result in an operational failure, giving rise to potential plan disqualification, as well as a prohibited transaction.
For small plans (fewer than 100 participants), there is a safe harbor under the DOL regulations. For small plans, elective deferrals and plan loan repayments deposited within seven business days following the date that they are withheld from participants’ wages are considered timely. For large plans, employers should consider whether their current process of transmitting employee contributions to the trust happens on the earliest date that it reasonably could happen. If not, we recommend that you make changes to your process.
So, what do you do if have a delay? Correct the error as quickly as possible. Time is of the essence when segregating and depositing employee contributions. The first step in correcting the error is to transmit the employee contributions to the plan trust for the 401(k) plan as soon as you discover the error. In addition to depositing the employee contributions, you will need to pay earnings to the affected participants’ accounts on these contributions for the period of delay (when the employee contributions should have been in the plan trust, rather than your general assets). For purposes of calculating the lost earnings, the period of delay begins on the date of the loss (the date the employee contributions should have been deposited to the plan trust) and ends on the recovery date (when the employee contributions are actually deposited). Under DOL guidance, the amount of the lost earnings is calculated by using the highest performing fund available to the affected plan participants during the period of delay. Alternatively, you may use the DOL’s earnings calculator, but only if you submit through the DOL’s voluntary fiduciary correction program (“VFCP”). The VFCP is a free program that the DOL provides plan sponsors so that plan sponsors can put their correction method before the DOL so that it can receive a compliance statement showing that the late deferrals were properly corrected.