401(k) deposits are an essential function of any 401(k) plan, and there are complicated (and sometimes frustrating) rules that govern deposit processes.
Of course, you probably knew that. Otherwise, you wouldn’t be here.
You’re likely reading this for one of the following reasons:
- You’re new to your 401(k) administration or HR position, and looking to learn like a champ.
- Issues with deposits were uncovered during your 401(k) audit.
- You’d just like a quick refresher.
There are actually many more reasons to read this post, but we’ve got more important information to share. So let’s quickly talk about…
Payroll Processing and the 401(k) Deposit Rules for Employers
The 401(k) deposit rules for employers revolve around your payroll processing. If your business offers a 401(k) plan, your payroll processes have to comply with the IRS rules and regulations. Otherwise, you’re in for a whole lot of hassle.
With that, let’s get to the actual rules.
The Rules & How They’re Determined
When it comes to 401(k) contributions, there’s one central guiding rule:
The Essential 401(k) Deposit Rule
Make contributions ASAP. In reality, this is as soon as administratively feasible. The IRS requires that 401(k) contributions be deposited as soon as possible after the money is withheld from the employee’s paycheck.
When are deposits counted?
The deposit is only counted once it has been received by the investment company or Plan Custodian (the entity which holds the money and deposits it into funds). That’s because 401(k) deposit rules are all about making sure the participant's money is working for them as quickly as possible.
Naturally, what counts as “as quickly as possible” varies between businesses, so the IRS also sets maximum thresholds for these deposit deadlines, which depend on the size of your plan.
If you have a small plan (fewer than 100 eligible participants), you’re in luck! The IRS allows for a 7-day safe-harbor deadline. That means you have 7 business days to make sure employee contributions are deposited without having to pay any taxes, penalties, or worry about a lot more red tape.
If, however, you have over 100 eligible plan participants, things are a little less straightforward:
What you should do:
The essential rule comes back into play here. If you are responsible for a large plan, the best bet is to make deposits by the earliest date you can segregate contributions from general assets.
The IRS-Mandated Deadline:
The maximum deadline set by the IRS is the 15th business day of the month after the payroll month.
Ex: July payroll contribution deadline = August 15th
An Important Caveat:
You can still be considered late if you’re making deposits in less than 15 days. 15 days is the absolute maximum, but the IRS actually considers your 401(k) deposit late if it takes longer than it normally does to make a deposit.
Auditors have some sort of formula which basically just averages the number of days it took to do the transfer during the plan year in question. Then, any 401(k) deposits that took longer than this average are flagged as late.
Consequences For Breaking The Rules
Now, like all the best things involved in 401(k) plan administration, messing up 401(k) deposits comes with a wide range of consequences:
1. Fees resulting from late deposits
Depending on the corrective program you must take to fix the deposit errors, you may have to pay fees.
2. Corrective employer contributions to account for lost earnings
When contributions are deposited late, employees can lose out on earnings. It’s the plan administrator’s responsibility to fix the oversight by making the late deposit and compensating participants for any lost earnings.
3. 15% IRS excise tax
Under ERISA, if your company has engaged in a prohibited transaction due to late deposits, you may face an excise tax of at least 15%. Use Form 5330 to file and pay this excise tax.
4. Potential audit from the Department of Labor
Late deposits are a red flag, particularly if there is a pattern of these delayed contributions. The Department of Labor Auditors pay attention to these red flags, and they might bring down a DOL audit upon your head.
Not great. If you’re already struggling with 401(k) administration issues that are causing the late deposits, a U.S. Department of Labor (DoL) audit is the last thing you need.
5. Potential plan disqualification
Finally, yes, it’s extreme, but the extreme and habitual violation of these deposit rules may result in the disqualification of the plan.
Now, let’s not get too negative. Here’s what to do:
How to Fix It If You Broke The Rules
Make the deposit immediately
The first step isn’t going to surprise anyone. You need to correct the missing deposit as soon as it’s brought to your attention. This saves the plan participant from losing out on earnings, (and you from having to reimburse them even more).
Make up for lost earnings through VFCP
Correct 401(k) deposit mistakes using the DoL’s Voluntary Fiduciary Correction Program (VFCP). This is actually a relatively straightforward (if tedious and sometimes arbitrary) process, which can be completed online.
The DoL’s excellent online calculator helps you find out exactly what you need to pay, and provides guidelines to walk you through the process (with examples). There are no fees for filing under the VFCP, but you still have to file Form 5330 and pay that excise tax to the IRS totalling 15% of the lost earnings.
Filing the VFCP can end up being a huge pain for an almost nominal fee, so this next step is pretty crucial.
Change Your Process (Keep This From Happening Again)
This is absolutely essential, or you’ll be struggling with this headache over and over again. If your payroll process or another element of 401(k) administration is slowing you down, look for an automated solution that will allow you to make a timely deposit every time.
If you’re not 100% positive what the issue is, you may need to take a deep look at your 401(k) administration and plan document. Here are a few ideas:
Common Problems That Lead To Late Contributions
There’s no shame in making an honest mistake. They happen all the time, which is why the DoL and IRS make it easy to fix them, but viciously sniff out patterns of intentional wrongdoing.
If you’ve been struggling with late contributions, you might share one of these common problems:
1. Payroll File Rejection
Rejection hurts. When a recordkeeper rejects the payroll file due to an unacceptable level of variation in the data, that can delay in your 401(k) deposit - especially if your recordkeeper has poor customer service or isn’t good about sending alerts that help you easily identify the issue with the payroll file.
2. Believing the 15th Day Myth
The 15th business day of the month rule is the absolute longest your cash transfer can take, but this doesn’t mean files submitted before this deadline aren’t late. If you’ve shown that you can make the cash transfer in 3 days, and then you start slipping and making your 401(k) deposits after 4 days? That means you’re late by a day.
How to Get Your 401(k) Contributions Deposited Quickly Every Time
How to do it properly manually
There isn’t anything terribly complex about this process. Essentially, all you’re doing is downloading the payroll file, reformatting it, then uploading it to the recordkeeper.
Of course, easier said than done. You probably have a ton of other things on your plate, and there are a few things that can go wrong and delay your 401(k) deposits.
Here are a few tips to prevent late manual cash transfers:
- Set up a report in your payroll system that closely (if not exactly) matches the recordkeeper’s template. This will make it as easy as pulling the report, making a few simple tweaks, then uploading to the recordkeeper, which will save you time and greatly reduce the chance of making a mistake.
- Be extra diligent in checking for the alert your recordkeeper sends when your payroll file is rejected. There’s nothing worse than being several days (or weeks) late because the recordkeeper’s alert went into your spam folder.
- If you or the person handling this process are going on vacation, be sure someone’s responsible for making sure the contributions get deposited. This may seem obvious, but it’s easier than you think for something like this to slip through the cracks.
Of course, if all of this seems like too much of a pain, there’s a better way to deposit your contributions.
A lot of problems in 401(k) administration - especially late deposits - can be completely avoided by integrating your payroll & recordkeeping systems.
When these two systems talk to each other and the cash transfer process is properly automated, your contributions are always deposited as soon as possible. You’ll still have to keep an eye out for rejected files, but having a payroll integration makes your 401(k) deposit process a lot easier. As an added bonus, it also makes your annual 401(k) audit a lot easier.
Here's what a well-respected CPA with over 20 years auditing employee benefit plans has to say about avoiding late deposits:
"Late 401(k) deposits are still one of the biggest administration issues we run into during the audit, so we always recommend that plan sponsors have a good process to ensure deposits are made in a timely manner. Try to think about what issues might cause late deposits and design your process to address those issues. Or, you might even be able to avoid them entirely by automating your deposit process with integrated payroll & recordkeeping systems."
-Mark Blackburn, Accounting & Assurance Shareholder, LBMC
We’ve gone over just about everything you need to get a handle on 401(k) deposits…
- The Rules & How They’re Determined
- Consequences For Breaking The Rules
- How to Fix It If You Broke The Rules
- Common Problems That Lead To Late Contributions
- How to Get Your 401(k) Contributions Deposited Quickly Every Time
Hopefully, you’re looking all this up preemptively (reminder to bookmark if this has been helpful) and not because you find yourself in a tough situation with late contribution deposits.
If that's the case, however, and you’re tired of dealing with late deposits, we’d love to help you out. At ForUsAll, we have a technology solution that’s completely automated a lot of the busywork around 401(k) administration and compliance - including depositing contributions. We also have a team who watches your plan like a hawk to ensure that any issues or rejected payroll files are handled as quickly as possible, so your contributions are deposited on time. The best part? ForUsAll takes responsibility for Plan Administration, which means we’re legally responsible for Plan Administration, and foot the bill for any issues that come up as a result of our Plan Administration work. Schedule a quick 10 minute demo of our solution today!