We’ve heard it all, over the 10+ years Cassell Plan Audits has been operating. Excuses like, “It wasn’t that late” and “We didn’t know” when our clients didn’t deposit 401(k) plan contributions and loan payments on time.
Unfortunately, getting 401(k) plan participant contributions and loan repayments to the plan’s custodian on time is a big deal for the Department of Labor (DOL). It’s important to your friendly neighborhood auditors, too!
Your plan document might not spell it out, but the DOL regulates sponsors to ensure they handle participants’ money responsibly.
What are considered late deposits
For large plans (defined as those with 100+ participants with balances), plan sponsors must keep participant contributions separate from their general assets. If not, transfer deposits out of the company’s cash account and deposit them with the custodian as soon as administratively possible. Ensure that the time to transfer deposits never exceeds 15 business days after the month-end of the applicable pay date. Note: the 15th business day is NOT a safe harbor.
Here’s the kicker: when determining whether you are late, the DOL will look at the time it typically takes you to make the deposit. If a plan sponsor usually deposits participant deferrals or loan payments within three days, the DOL might consider anything longer as “late.” That’s not good news.
What to do when you’re late
Fixing late deposits involves more than just making up lost earnings in participants’ accounts. It also requires making compliance filings.
The DOL provides a specific process through its Voluntary Fiduciary Correction Program, generally:
- Deposit the deferrals immediately.
- Make an additional deposit to cover participants’ lost investment gains.
- File Form 5330 with the IRS and pay an excise tax, if required.
- Report the delinquency on Form 5500.
- If the correction is made under the DOL’s prescribed correction program, submit supporting documentation for their review and approval.
In other words… it’s a big hairy deal that is more often than not preventable.
The impact of late deposits on earnings and associated taxes might be minimal. However, the time and cost to prepare corrections and possibly hire professional help for compliance filings can make this an expensive error.
How to avoid this costly mistake and deposit 401(k) plan contributions and loan payments on time
So, how do you avoid this headache? Well, one way is to set a clear rule for how many days after payday contributions need to be made and then stick to it without fail.
For example, if your procedures show that the administrative process takes five business days, anything beyond that is considered late and needs fixing. And if something unexpected happens, like the payroll system breaks down or wires to the custodian get rejected, document everything. Keep careful records and explain why things got delayed.
Oh, and vacations and holidays don’t excuse you, so better to have a backup plan in place for when the usual person in charge is out.
And here’s the thing: having the rule is one thing, but following it every single time is where the rubber meets the road. Letting things slide because you’re only a couple of days past the cutoff date and “it’s not that late” isn’t going to cut it with the DOL. This rule also applies to any special payroll runs or manual checks. Consistency is key.
Smaller plans get a break
Now, if your plan has fewer than 100 participants with balances, you get a bit of leeway. The DOL is okay with deposits taking up to seven business days. This safe harbor rule can be found in DOL Regulation section 2510.3-102(a)(2).
But once your plan is defined as large, the rules become more stringent. You’ve got to tighten up your game.
Word to the wise: don’t wait until your auditor (or worse, the IRS) tells you that you are a large filer. As a plan sponsor, you need to know the rules and what defines a “large” 401(k) plan. In short, 100+ participants with balances on the first day of the plan year makes your plan large.
These rules protect plan sponsor and participants, too
Yes, depositing on time keeps you on the right side of regulations. Moreover, placing internal controls to stay compliant prevents errors or, worse, potential fraud.
Deposit participant contributions on time to protect everyone involved and keep your plan running smoothly.
Stick to your deposit policy, document any hiccups, and keep those internal controls locked down tight. When in doubt—or if you’ve deposited contributions or loan payments late—let’s chat.
As a 401(k) plan auditing firm, we can’t give tax advice. However, we’re happy to share what we’ve learned from over 10 years of experience and help when it’s audit time. Have questions? Reach out to Cassell Plan Audits today.