What employers needs to know about timely remittance of contributions for 401(k), 403(b), and profit-sharing plans
Employers with a defined contribution plan, whether a 401(k), 403(b), profit-sharing or other plan, must ensure that deferral contributions withheld from employee paychecks are deposited into the plan’s trust in a timely manner. While this may seem like a relatively simple task, it can be confusing to determine how quickly employers are required to make these deposits and mistakes can be costly.
Late deposits require that any resulting lost earnings and interest be restored to employees’ accounts from employer funds. Additionally, failing to timely deposit employee deferral contributions is a fiduciary violation which could result in civil penalties, excise taxes, or plan disqualification.
What is the deadline for remitting employee deferrals?
The deadline for remitting employee deferrals continues to be an area of concern for the Department of Labor (“DOL”), and a gray area due to perceived interpretation. The DOL requires employers to deposit contributions withheld “as of the earliest date on which such contributions … can reasonably be segregated from the employer’s general assets”, but “in no event later than the 15th business day” of the following month (29 CFR 2510.3-102).
While many employers have been using the maximum deadline of the 15th day of the following month as a safe harbor, this is not the intent of the DOL. Likewise, the Internal Revenue Service states the following: “remember that the rules about the 15th business day isn’t a safe harbor for depositing deferrals; rather, that these rules set the maximum deadline”. The intended interpretation is that the DOL requires employers to remit employee contributions to the plan as soon as possible.
Employee benefit plan remittance considerations: What is “reasonable”?
The timing of when contributions can reasonably be segregated from general assets may vary from one employer to another. When determining the remittance schedule, employers should consider:
- The established deadline for remitting employment taxes. The DOL or plan auditors may “compare the timeliness of the employer’s remittance of participant contributions to the plan to the timeliness of the employer’s remittance of FICA and FIT withholdings to appropriate sources” as suggested by Employee Benefits Security Administration (“EBSA”) officials (“504 Participant Data” 18).
- The actual timing of past deposits. The DOL or the plan auditor may consider the pattern of past deposits demonstrated by the employer as the default procedure.
- Whether the plan document already contains language about the timing of deferral deposits. If so, the employer should follow and/or amend the plan document terms to ensure compliance with regulations.
Avoid late remittances on employee benefit plans
It’s not uncommon to discover late deposits during the regularly scheduled audit that is required for larger plans, and employers can avoid this mistake by:
- Establishing a procedure requiring elective deferrals to be deposited within a specified time-frame following the payroll date, if not already included in the plan documents.
- Coordinating with those responsible for making the deposits to ensure the established remittance schedule is achievable.
- Documenting policies and procedures and ensure that they are communicated to and understood by those responsible.
- Ensuring actual procedures are consistent with plan provisions, if plan documents include provisions with regards to deposit date. Consider amending the plan provisions, if they don’t include current procedures or align with regulations.
- Regularly reviewing deposits for timeliness to ensure mistakes are addressed quickly and related costs lessened.
As timeliness of employee deferrals continues to be a top concern for the DOL, familiarity with DOL regulations, establishing appropriate procedures, and monitoring the plan surrounding remittances will help employers meet the deadline for depositing employee contributions and ensure their plan remains in good standing.
For more information regarding employee benefit plan audits including information on timely remittances of employee contributions, please contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000
- “29 CFR 2510.3-102 Definition of ‘plan assets’—participant contributions.” gov
- “504 Participant Data.” Audits of Employee Benefit Plans (PPC). Thomson Reuters/PPC.
- “401(k) Plan Fix-It Guide – You haven’t timely deposited employee elective deferrals.” gov
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.