One of the most common mistakes made by 401(k) plan sponsors is failure to deposit participant contributions (i.e. 401(k) deferrals/Roth contributions) and loan payments in a timely manner. Having said that, it is worthwhile reviewing the rules and consequences of making late deposits.
What are the rules?
In general, the Department of Labor (DOL) requires that participant contributions and loan payments be deposited as soon as the amounts can be reasonably segregated from the general assets of the employer. This is because the amounts are considered to become plan assets at this point in time. Under examinations, the DOL also reviews deposits for consistency to determine whether contributions were funded in a timely manner.
Safe Harbor for Sponsors of Small Plans
Under the regulations, there is a “safe harbor” for sponsors of small plans (generally, plans with less than 100 participants). Under this rule, participant contributions and loan payments will be deemed to have been funded in a timely manner provided that the contributions are deposited within seven business days following the date in which the amounts were withheld.
Sponsors of Large Plans
Since the 7-business day rule does not apply to large plans, these plan sponsors must abide by the general rule of making the deposits as soon as the amounts withheld can be reasonably segregated from the general assets of the employer. As a result, we generally recommend these employers make deposits within three business days on a consistent basis.
What are the consequences of making late deposits?
The employer has engaged in a prohibited transaction with the plan because the employer had “use” of plan assets.
- The late deposit must be reported on Form 5500
- The employer must pay a 15% excise tax on the amount involved by filing Form 5330
- Participants must be credited with lost earnings (the DOL has an online calculator that may be used for this purpose in certain situations)
Is the employer required to file under the DOL’s Voluntary Fiduciary Correction Program (VFCP)?
No. Filing under VFCP is not required. Nevertheless, employers may want to file under this program to obtain relief from the DOL for penalties that may otherwise be imposed and agreement not to investigate the plan fiduciaries for failure to deposit the amounts in a timely manner.
If you have any questions regarding the deposit rules or would like to learn more, please contact us.