The Department of Labor (DOL) rules require that plan sponsors deposit employee deferrals and participant loan repayments to the Plan as soon as reasonably possible but no later than the 15th business day of the following month. Many plan sponsors focus on the second part of the rule and skip over the more critical first part of “as soon as reasonably possible.” There are separate rules regarding the timing of employer contributions, which are not addressed here.

What is Reasonably Possible?

For most large plan sponsors, the pay date or within a few days of it is usually what is considered reasonably possible. The reason for this is that on the pay date, employers have the information about the amount of deferrals and loan repayments by participant. Additionally, with the increasing use of payroll integration with investment platforms, the transmission of contribution data is often automated, making it very quick to remit the deferrals. The DOL rules do not allow for grace periods for delays due to staff vacations or other scheduled time off. Therefore, plan sponsors should have trained backup personnel available to timely remit contributions.

Small Plans

Plans with fewer than 100 participants can use the seven-business day safe harbor rule to determine when to deposit employee deferrals. The Department of Labor (DOL) provides small plans with extra time for deposits because it’s probable that the process for sending payments to the plan isn’t automated.

Why is Timing Important?

Participant deferrals are not part of the employer’s general assets and should be segregated and deposited into the Plan. These funds represent employees’ wages that were elected to be invested for future retirement. If the employer doesn’t make the deposits timely, the failure may result in an operational mistake, giving rise to plan disqualification and a prohibited transaction (loan from the Plan to the employer). The participants may also miss out on possible investment gains due to the delay in the deposits.

Self-Correction of Late Deposits

The plan sponsor should:

  • Determine which deposits were late.
  • Calculate the lost earnings necessary to correct.
  • Deposit any missed elective deferrals.
  • Deposit lost earnings associated with the late or missed deferrals.
  • File Form 5330 with the IRS to pay the excise tax.
  • Review procedures and correct deficiencies that led to the late deposits.

Please contact us for further analysis if you have not complied with timely employee deferral deposits to determine the recommended correction method.