If you provide a 401(k) account as a benefit to your employees, you need to know the deadline for depositing the employee deferrals into their accounts. If you don’t deposit 401(k) contributions on time, you might face multiple consequences.
In this article, you will learn the 401(k) deposit rules and what you should do if you make a late deposit.
401(k) deposit rules for employers
Meeting a deadline seems pretty simple. But, when it comes to depositing 401(k) deferrals, there are misconceptions about the deadline. To help you stay compliant with laws, let’s debunk the 401(k) deposit deadline myth.
Many employers think the deadline for depositing a 401(k) contribution is the 15th business day of the month after they withheld the contribution from an employee’s wages. For example, if you withhold a 401(k) contribution from employee wages on February 1, you would have until the 15th business day in March to deposit the contribution.
That is incorrect, though. Employers who wait until the 15th day of the following month to deposit deferrals might find out that they owe a penalty, among other consequences.
It is understandable that some employers might think this is the deadline for depositing 401(k) contributions because the myth is rooted in truth.
If the 15th business day of the following month is a myth, how long does an employer have to submit 401(k) contributions?
Here’s the real deadline: you must deposit 401(k) deferrals as soon as possible after you withhold the money from employee wages. The deposits must be timely, but the meaning of timely is not defined by law. Your plan documents might dictate how soon you have to deposit the funds, but this is uncommon.
For larger businesses, a timely deposit will most likely happen within a couple of business days of the payroll withholding. For smaller businesses, there is a safe harbor that allows for more time to deposit. The safe harbor is explained below.
For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. This is where the deadline myth comes from. The 15th business day of the following month is not the deadline; it is only an outer limit of what is reasonably timely. Most businesses will need to deposit the contributions before the 15th day of the following month.
Small business safe harbor
There is a small business safe harbor that applies to businesses with fewer than 100 participants. The safe harbor says a small business’s 401(k) deposits are timely if they are made within seven business days from the date the contributions were withheld from employee wages.
As a small business owner, your business likely falls under this safe harbor.
Matching employer contributions to 401(k) deadline
Rules for depositing your matching 401(k) contribution are different than rules for depositing employee deferrals. Your plan documents should contain the deadlines for depositing your matching contribution.
Late 401(k) contributions
Making late 401(k) contributions is unwise. Employees earn interest on the amount in their 401(k) accounts. When you make a late deposit, employees might lose interest on the amount deposited late.
Making untimely deposits might result in penalties that you have to pay. You might also have to pay an excise tax on the amount you deposit late. And, your business might be disqualified from the 401(k) plan.
When you realize that you failed to make a timely deposit, there are several steps you must follow.
Deposit the funds
As soon as you realize that your deposit is late, deposit the contributions as soon as possible.
You will also need to deposit lost earnings into employee accounts. The employee would have been earning interest on the contribution if it was deposited on time, so you need to make up the lost money amounts.
You will have to self-correct the lost amount unless you use the Voluntary Fiduciary Correction Program (discussed later). To self-correct, follow the Self-Correction Program (SCP) under the Employee Plans Compliance Resolution System (EPCRS).
Pay excise taxes
You need to pay excise taxes on the late deposit amount. The tax will be at least 15%, and there are additional possible penalties. Use Form 5330 to report and pay the excise tax.
You can possibly have your excise taxes waived through the U.S. Department of Labor’s Voluntary Fiduciary Correction Program.
Voluntary Fiduciary Correction Program
The Department of Labor (DOL) normally assesses a penalty of 20% for fiduciary breaches, which is what happens when you do not make timely 401(k) deposits. If you file under the Voluntary Fiduciary Correction Program (VFCP), the DOL will not recommend your 401(k) plan for an audit for fiduciary breaches. Basically, the DOL is waiving the 20% penalty because you are voluntarily reporting and correcting your mistake.
If you are eligible for VFCP, you will deposit the late contributions and the lost wages. When you file under the VFCP, you can use the VFCP calculator to calculate the lost wages you owe.
When you use the VFCP, you most likely will not submit Form 5330 or pay excise taxes.
Form 5500 is used for annual reporting of employee benefit plans. Whether or not your 401(k) deposits were late, you need to file Form 5500 annually.
If you do deposit any 401(k) deferrals late, you must report that on Form 5500.
When you use Patriot Software’s payroll software, we will calculate the 401(k) deferral for each employee. Then, you can deposit those amounts on time after you run your payroll. Check out the software for free.
This article is updated from its original publish date of 12/1/2015.
This is not intended as legal advice; for more information, please click here.