How long does an employer have to deposit 401(k) contributions withheld from employee's paychecks?
Employers with 401(k) plans are responsible for depositing their employees' salary deferrals to the plan's trust on the earliest date that the deferrals can reasonably be segregated from the employer's general assets, with a 7-business-day safe harbor rule for plans with fewer than 100 participants. In no event can the deposit be later than the 15th business day of the month following the payroll withholding.
Late deposits may result in lost earnings and interest for employees' accounts. In addition, failing to deposit salary deferrals on a timely basis is a fiduciary violation and could subject the plan to the U.S. Department of Labor's (DOL's) civil penalties and could violate the plan's terms.
Because it is a violation of the Employee Retirement Income Security Act (ERISA) for an employer to have custody of plan assets, plan fiduciaries will have committed various breaches of fiduciary duty (failure to maintain plan assets in trust, allowing plan assets to inure to the benefit of the employer, self-dealing in plan assets, and failure to act for the exclusive purpose of providing benefits to plan participants and beneficiaries). This can result in the employer engaging in a prohibited transaction for which it can be assessed excise tax. The Internal Revenue Service's (IRS's) guidance states:
The employer is responsible for contributing the participants' deferrals to the plan trust. If your plan document contains language about the timing of deferral deposits, you may correct failures to follow the plan document terms under Employee Plans Compliance Resolution System (EPCRS). However, this type of mistake can also lead to another problem - a " prohibited transaction," which is a transaction between a plan and a disqualified person that the law prohibits. An employer is a disqualified person.
A disqualified person who participates in a prohibited transaction must correct this and pay an excise tax based on the amount involved in the transaction. The initial tax on a prohibited transaction is 15% of the amount involved for each year. If the disqualified person doesn't correct the transaction, an additional tax of 100% of the amount involved may be due.
An employer can correct a fiduciary violation for failing to timely deposit salary deferrals using the DOL's Voluntary Fiduciary Correction Program (VFCP). VFCP, however, is not available if the plan is under a DOL investigation or an IRS examination.
To avoid the appearance of any impropriety, employee contributions should be deposited to the trust at the same time that payroll tax deposits are made.
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