How much time does an employer have to remit employees’ 401(k) deferrals withheld from their paychecks? Department of Labor regulations require an employer to remit employee 401(k) deferral contributions to the trust as of the earliest date on which such contributions can be reasonably segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which such contributions were withheld. Generally, for plans with less than 100 participants, remittances made within 7 business days will be deemed timely. Regardless of the number of participants in the retirement plan, the recommended course of action is to deposit the 401(k) deferrals into the retirement plan as soon as possible.
There are many tools to help faciliate 401(k) deferral deposits in a timely manner. Financial institutions can establish an ACH debit arrangement which eliminates the need to issue checks and have them sent through the postal system where they can be either delayed or lost. If a retirement plan is audited, the plan sponsor and the IRS agent may not always come to the same conclusion that a particular 401(k) payroll deferral was deposited in a timely manner. A plan sponsor may have followed the same exact procedure for all previous 401(k) deferral remittances but due to an inexplicable reason a single deferral remittance was received in a much later timeframe and as a result, it can be deemed as not being remitted timely. Setting up the ACH debit is the first of a two step process to remit 401(k) deferrals. The second step is to provide the financial institution with each employee’s contribution amount. Again, there are tools available to assist with this process, such as a contribution remittance file. After an initial investment of time to set up a template file, providing 401(k) deferral information on an ongoing basis can be as simple as a few keystrokes. As the IRS and Department of Labor place greater scrutiny on timely deposits of 401(k) deferrals, every plan sponsor should take advantage of these tools!!
If a 401(k) deferral remittance is deemed to be deposited in an untimely manner, corrective actions must be taken to cure this prohibited transaction. Lost earnings must be calculated and deposited into each affected participant’s account. In cases where there have been losses, interest must still be calculated using goverment published rates for underpayments. The plan sponsor must file a Form 5330, paying a 15% excise tax on the interest payment. It is likely that the administrative fees to calculate the tax and prepare the return will far exceed the amount of excise tax, so it is a lot more prudent to remit the 401(k) withholding on a timely basis in the first place!
– Michael Poon, Case Manager