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:

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.