Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) prioritize ensuring that employee contributions to 401(k) and 403(b) plans are deposited on time. This includes employee contributions and loan repayments. Failure to comply can lead to serious consequences, including penalties, interest payments, and a breach of fiduciary duty.
Here’s everything you need to know to stay compliant and avoid costly errors.
Deposit Deadlines: FAQs on Timely Deposits
When must employee contributions and loan payments be deposited into the plan?
The regulations require deposits to be made by the earlier of two timeframes:
- As soon as the amounts withheld can reasonably be segregated from company assets, or
- No later than the 15th business day of the following month.
Can I wait until the 15th business day to make deposits?
- No. The DOL focuses on the “as soon as possible” rule, generally enforcing a deadline of 3 to 5 days after payroll. If you’ve previously made deposits more quickly, the DOL will expect you to meet that faster timeframe consistently.
What about the 7-business-day safe harbor?
- For plans with fewer than 100 participants, the DOL allows deposits made within 7 business days of a pay date to be considered timely.
- For larger plans, this safe harbor does not apply, and deposits must be made as soon as possible.
A word of caution: Deposits beyond the safe harbor are subject to the general rule, so a deposit made 10 business days after payroll could be considered 5–7 days late.
Can I batch deposits at the end of the month?
No. The DOL requires deposits to be made for each payroll period. Batching deposits violates the regulation.
Can I deposit deferrals early?
Only in specific circumstances:
- You cannot deposit deferrals before pay dates if employees have not yet fully earned the compensation. For example:
- Real-Time Payments: If payroll reflects hours worked right up to payday, deposits cannot be made early.
- Full or Partial Pay Period Delays: If compensation is fully earned by the end of a previous pay period, early deposits are allowed.
Are sole proprietors and partners subject to the same rules?
Sole proprietors and partners must deposit deferrals as soon as the amounts can be reasonably segregated from partnership assets after their earned income is determined (generally after year-end). However, the deposit cannot be later than their individual tax filing deadline.
Consequences of Late Deposits
Failing to deposit contributions on time results in severe consequences:
- Prohibited Transaction: Late deposits are treated as a loan from the plan to the company, which is impermissible under DOL rules.
- Loss of Tax Advantages: Delays could jeopardize the tax-qualified status of the plan.
- Interest Payments: Employers must reimburse employees for lost earnings.
- Fiduciary Breach: Late deposits violate ERISA fiduciary duties.
- Penalties:
- DOL Penalty: Up to 20% of late contributions.
- IRS Excise Tax: 15% of the lost earnings.
How to Ensure Compliance
- Establish a Consistent Process: Set a recurring schedule to deposit contributions immediately after payroll.
- Use Automation: Automate 401(k) and loan payment deposits to reduce delays.
- Monitor Regularly: Audit deposit timelines to ensure compliance with DOL and IRS regulations.
- Consult Professionals: Engage a financial advisor or third-party administrator (TPA) for guidance.
Need Assistance?
Timely 401(k) deposits protect your business, your employees, and your plan’s integrity. If you’re unsure about compliance requirements or need help correcting a late deposit, we’re here to assist.
For any questions regarding this matter or any retirement-related inquiries, please feel free to contact Johnson O’Connor Retirement Plan Services.
