Common 401K Errors: Untimely Remittances of Employee Contributions

Employees who fund contributions to their retirement plan via payroll deduction expect the employer to quickly deposit funds to their account. While this is often an automated payroll process, the Department of Labor (DOL) views non-compliance with timely remittance rules as a major issue. Funding employee contributions to retirement plan accounts outside of a narrow range of dates can carry significant penalties.

The way the rules around timely deposit of employee contributions are applied vary for large plans, small plans, and from company to company. As a result, there is often confusion about how plan sponsors are supposed to track and correct these deposits.

Here is a summary of FAQ’s on identifying and correcting late remittances and, hopefully, preventing them from occurring.

We usually fund deferrals on the Tuesday after payroll or sometimes a few days later. If we’re sick or on vacation it might take a little bit longer. Is this an issue?

Retirement Plan contributions withheld from an employee’s pay are considered Plan assets by the Department of Labor (DOL) at the time those contributions can reasonably be segregated from the Plan Sponsor’s general assets. In no case can this be later than the 15th business day following the end of the month in which amounts are contributed by employees or withheld from their wages. Small plans, which have fewer than 100 participants, have seven business days to fund contributions. However, larger plans are held to the standard of “as soon as reasonably possible.” If there is not a defined and applied narrow remittance window to each contribution, the Plan auditor or DOL may identify a significant number of remittances requiring corrective action.

Does this mean the Tuesday after payroll meets the DOL requirement? What if we’re a few days late?

For most plans, the time it is “reasonably possible” to segregate contributions could be as little as a couple of days; it is based on the historical timing of contributions. If a Plan Sponsor has demonstrated the ability to fund contributions within a few days of payroll, the DOL could consider all contributions funded past that date as late, which is considered a prohibited transaction. The “reasonably possible” standard depends upon the facts and circumstances of the company, including whether it has automated electronic payroll systems or manual systems to transmit contributions. The DOL has routinely clarified that employers should transfer participant contributions as soon as reasonably possible and the 15th business day of the following month is simply the last possible day that can be considered timely.

What about loan payments or employer contributions?

Payments made by employees to repay loans taken from their retirement account are subject to the timely remittance requirements described above if the payments are funded via payroll. However, employer contributions funded with payroll are not.

What should we do if we’ve identified late remittances?

Determine the earliest date you can segregate deferrals from general assets. Compare that date with the actual deposit dates and any plan document requirements. If you identify a remittance as having been made outside this window of time, the plan administrator should document the circumstances that account for the longer contribution period. For those contributions identified as late, the Plan Sponsor should calculate lost earnings on the late contributions and make corrective contributions equal to the lost earnings. Plan sponsors are allowed to self-correct by funding the calculated lost earnings to affected employee accounts. Plan sponsors may also choose to correct by fund the lost earnings via the DOL’s  Voluntary Fiduciary Correction Program (VFCP). Correcting through the VFCP may relieve the plan sponsor from paying excise taxes and other penalties. If the VFCP corrections are approved, the DOL will issue a “no action” letter protecting the plan sponsor from enforcement procedures on the related remittances.

We’ve identified and corrected late remittances. That’s the end of the matter, right?

Large plan filers must report late remittances on Schedule H of the annual Form 5500. The Plan auditor must also present late remittances as a supplemental schedule to the audited financial statements. Additionally, these identified amounts will continue to be disclosed through the year corrected. For example, late remittances from 2020 identified and corrected in 2021 will appear on both the 2020 and 2021 Form 5500 and supplemental schedule in the audited financial statements. Timely contributions are a common area of focus during DOL examinations. Should you receive notice of a DOL audit, you should be prepared to explain and support all self-corrected items.

The Bottom Line

Plan Sponsors should coordinate with their payroll provider to determine the earliest date employee contributions can be “reasonably segregated” from general assets. Employers should establish procedures, and monitoring controls to ensure they remit contributions according to schedule and identify and correct any contributions not following the schedule.

Got questions about your Employee Benefit Plan? We can help.

Holtzman’s team of Audit & Assurance professionals can help meet your employee benefit plan’s annual audit and filing requirements and work to protect the plan’s integrity. We are an AICPA Employee Benefit Plan Audit Quality Center Member that audits 100+ plans representing over 160,000 participants and plan assets over $4.3 billion. Our goal is to provide value throughout the employee benefit plan process, help to identify risk areas, and how to put best practices into place to support your business. Learn about our full suite of employee benefit plan services and get in touch today!

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