401(k) Timely Deposits

When a participant elects to make deferral contributions to the plan (as either 401(k) contributions or designated Roth contributions) and the payroll deduction is taken, the Department of Labor strictly enforces the timely deposit of these deferral contributions (and any participant loan repayments into the plan). The requirements state that deferral contributions (and participant loan repayments) must be deposited into the plan immediately after the contributions can be reasonably segregated from the employer’s general assets.

While the time it takes following the payroll date to segregate the contributions from the employer’s general assets may be different for different employers (some take longer than others), if the contributions can be segregated from one employer’s general assets more quickly than another, then they must be deposited into the plan’s trust as soon as possible thereafter. The outside deadline for deposit is the 15^th business day following the end of each month; however, there are very few circumstances under which the Department of Labor would accept this time period as being as soon as administratively possible.

To determine how quickly contributions can be deposited into a plan, the employer should look at the past 12 months of deposits. By calculating the number of days between each payroll date and its corresponding deposit date, the employer will likely find that the number of days is fairly consistent. For example, if the employer finds that deposits are routinely made within 4 or 5 days, it is likely that the Department of Labor would determine that deposits made within no more than 5 days are acceptable (or made “as soon as possible after the contributions can be segregated from the employer’s general assets”) and that deposits made more than 5 days after the payroll date are late.

It is important to develop internal control procedures for monitoring deferral contributions and confirming that deposits are consistently deposited in a timely manner.  However, there is one exception to the rules on timely deposit explained above. For small employer plans (i.e., plans with fewer than 100 plan participants), the Department of Labor has established a safe harbor for timely deposits of deferral contributions (and participant loan repayments). Generally, if deferral contributions (and participant loan repayments) for a small employer plan are made within 7 business days of the payroll date, they will be considered as timely deposited.

If deferral contributions are NOT deposited in a timely manner, then corrective action must be taken, or the employer commits a prohibited transaction. To correct the late deposits, lost earnings must be calculated and deposited in participant accounts. Form 5330 must be filed and an excise tax must be paid.