Q: How Soon Do You Really Have to Deposit Employee Contributions?
A: As soon as possible! For “small” plans (those with fewer than 100 participants at the beginning of the plan year), the Department of Labor (“DOL”) recently finalized a safe harbor regulation. If the employer deposits the withheld amounts no later than the 7th business day following the pay date, the regulations deem that the employer has satisfied the requirement to pay the contributions as soon as reasonably practical.
Note the regulations treat amounts as “deposited” when they are placed in an account of the plan. The amounts do not have to be actually allocated to the participants’ accounts to meet the deposit timing deadline.
Also note there is no safe harbor for large plans. The DOL regulations require an employer to deposit participant contributions (elective deferrals and loan payments) on the earlier of (1) the earliest date the employer reasonably could have segregated the participant contributions from its own funds, or (2) the 15th business day of the month following the month of deferral. Employers do not get to choose between these two deadlines; the 15th business day is simply the outside limit to get the deposit made, regardless of any administrative issues the employer may have to the contrary.
If we then disregard the 15th business day deadline, the next question is: What is the earliest date on which participant contributions reasonably can be segregated from the employer’s general assets? Typically, this is only a few days after the actual withholding from the employees’ checks. Based on
DOL plan audits in recent years, the DOL believes most employers should be able to deposit the deferrals within approximately 5 days. This deadline is for each pay period, which means employers should not wait until the end of the month and make one deposit of all deferrals and loan payments for that month.
This brings us to the final question: What happens if deferrals were not timely deposited? Failure to deposit participant contributions on time is both a fiduciary breach and a prohibited transaction. The employer must correct the breach of fiduciary duty by making up the deferrals and loan payments (if not already deposited) as well as lost earnings on the late deposits. Corrective earnings must be at least equal to the IRS minimum rate specified by the DOL in its Voluntary Fiduciary Correction Program. Often, the administrative cost to make this calculation is exponentially greater than the interest itself.
To correct the prohibited transaction, the employer must file Form 5330 and pay a 15% excise tax on the lost earnings amount. Additionally, the employer must indicate on the 5500 that they failed to deposit timely. If applicable, a schedule of late deposits and their correction also must be attached to the 5500. Failure to correct invites DOL inquiry and possible audit.
In summary, employers must make every effort to deposit participant contributions as soon as possible, even when it’s not administratively convenient. If you have any questions or concerns regarding the timing of deposits or correction of late deposits for your plan, please contact MBC as soon as possible.
The general information provided in this guide is based upon complex requirements of the Internal Revenue Code and Treasury Regulations. It is provided with the understanding that, for the purposes of this publication, MBC Retirement Services, Inc. is not engaged in rendering legal, accounting, or other professional services. Although care has been taken to present the material accurately, MBC Retirement Services, Inc. disclaims any implied or actual warranties as to the accuracy of any material herein and any liability with respect thereto.