Avoiding Late Deferrals: Timing of 401(k) and 403(b) Contribution Deposits
One of the top compliance priorities for the Employee Benefits Security Administration of the Department of Labor is the timing of 401(k) and 403(b) employee deferral deposits. In addition, we recently learned that the DOL is increasing its staff to ramp up its enforcement efforts to make sure that employers deposit employee deferrals in a timely manner.
Employee deferrals to a 401(k) or 403(b) plan must be deposited by the earlier of the following two dates:
- The date that the contributions can be reasonably segregated from the company’s general assets
- The 15th business day of the month following the month in which the payday occurs
*Please note that these rules also apply to transmitting participant loan payments to a retirement plan.
The “15th business day of the following month” is a “no later than” date, and not a rule with which a plan sponsor should take comfort. A DOL investigator could take the position that the plan sponsor could have reasonably segregated the contributions well before then and would therefore conclude that the deposits were late.
There are practical guidelines for deposit deadlines for plan sponsors depending upon whether they are small employers (filing a Form 5500-S/F) or large employers (filing a Form 5500 with an annual audit):
- Small employers have a seven-business-day deadline to make their deposit to be considered timely.
- Large employers must make their contributions as soon as administratively possible. In addition, if the DOL investigates a large employer, they could look at the shortest number of days that the employer was able to make the deposit of 401(k) or 403(b) contributions, conclude that that is as soon as administratively possible and use that as the standard for all other deposits. For example, if the employer managed to make their deposit within one day of a pay date, all future deposits could be held to this timing to determine if the contributions were deposited timely or late. A practical approach for large plan sponsors would be to avoid depositing contributions so early that it would be administratively difficult to replicate in the future.
Late 401(k) and 403(b) Contributions
Late 401(k) and 403(b) contribution deposits are disclosed on Form 5500. As the DOL has made this a priority, and the disclosure can invite DOL scrutiny, it is important to correct late payroll deposits once they are discovered.
Correcting Late Deferrals
Correcting late deferrals requires determining the amount of “lost earnings” that the deferrals could have earned had they been deposited timely. The calculated lost earnings are then contributed to the plan by the plan sponsor on behalf of each participant who had the late deferrals. In addition, the amount of the late deposits must be disclosed on Form 5330 and sent to the IRS along with an excise tax penalty of 15% of the calculated earnings. The earnings and the excise tax often end up being small amounts, however there is no “de minimis” amount that does not need to be corrected.
An optional step is to report the late deferrals and the correction to the DOL as part of their Voluntary Fiduciary Correction Program. However, the DOL will often accept the self-correction process as outlined above without this step.
When will the DOL investigate late deferrals?
Disclosure on the Form 5500 could potentially cause the DOL to take notice and may result in them sending a letter requesting more information. Ideally this would be responded to with information about how the late deferrals were corrected. Other times, a DOL investigation is prompted by employee complaints.
Preparing for a DOL investigation
Having written procedures for how deferrals are processed and following those procedures are key to avoiding problems if the DOL decides to investigate. DOL investigators will rely on the plan administrator’s written procedures as long as they seem reasonable and if the procedures are followed. Otherwise, the investigator will rely on what has happened in practice and will determine what they believe is reasonable after their review.
If the DOL decides to investigate a plan sponsor for late deferrals, having good records about the correction that was made, and being able to demonstrate timeliness going forward can help to avoid a deeper investigation. Here is what the DOL indicates it will want to know:
You must provide a description of the process you use to segregate employee contributions from the company’s general assets. The description could include:
- how you determine the amount to be sent to the plan
- how the company is organized to perform this function
- any requirements of a third party administrator
- any other information affecting the earliest date contributions can be segregated
You must also submit any documents used to determine this date. This documentation might be your past withholding and remittance history, your payroll policies and procedures, and documents supporting a third party’s requirements.
If you need assistance reviewing your company’s 401(k) or 403(b) contribution deposits or making corrections to deposits that are late, please contact the Aldrich Retirement Solutions team.