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Employee Contributions - Am I depositing timely?

As a plan sponsor of a 401(k) plan with employee contributions, I know there's a rule about when to deposit my employees' contributions into the plan. Our payroll runs every other Friday and we usually remit the employee 401(k) deferrals and Roth 401(k) deferrals to our plan by the following Friday (5 business days). Two times this past quarter, there were a lot of extra projects going on at work and unfortunately, the contributions from these two payrolls didn't get deposited, in one case, for two more weeks and in the other, three more weeks. I remember something about that 15th business day rule and wondered if we are okay.

Good questions! The 15 business day rule you mention comes from Department of Labor (DOL) regulations - which makes sense since participant disclosure, rights and reporting rules provide a primary perspective of the DOL's Employee Retirement Income Security Act of 1974 (ERISA). The DOL has stated that participant contributions (401(k) & Roth deferrals, after-tax, loan payments) are plan assets on the earliest date the contributions can reasonably be segregated from the employer's general assets, however, in no event later than the 15th business day of the month following the month in which the participant contributions are withheld or received by the employer. This "IS-day" rule is not, however, a safe harbor. That being said, the DOL amended its participant contribution rules in 2010 to create a small plan safe harbor period under which participant contributions to a small plan are deemed to comply with the law if those amounts which are received or withheld from the employee are deposited with the plan within seven business days. A small plan is defined as having fewer than 100 participants at the beginning of the plan year.

You've explained that your usual business practice is to remit the contributions within 5 business days of your payroll. This means that these two deposits could well be considered late by the DOL, even if both of them were still deposited no later than the 15th business day of the following month.

We always recommend you review this type of question with your ERISA counsel. Let's assume you have and that you've now determined that both deposits are late according to the DOL rules. What's next?

Corrective steps: Similar to the Internal Revenue Service (IRS), the DOL's Employee Benefits Security Administration also states that in correcting a plan problem, you (as plan sponsor) need to restore the plan to the condition it would have been in had the failure not occurred - making the plan whole. For the late deposit of employee contributions, the correction involves allocating the lost earnings and reporting the information on the Form 5500 Annual Return/Report for the plan year{s) in which the late deposit occurred and was not corrected. The DOL has an on-line calculator that can be used to determine what the earnings (interest) should have been. If you use this calculator, the interest rate assumptions are deemed to be satisfactory.

In addition, there is an excise tax that can either be paid by filing a Form 5330 with the Treasury Department's IRS or, if certain conditions are met, can be waived if you use the DOL's Voluntary Fiduciary Correction (VFC) program . Generally speaking, to be able to waive any excise taxes, any late contributions must have been deposited into the plan within 180 calendar days of the date they should have been remitted. Usually, a sponsor must also notify its plan participants of this request of an excise tax waiver (unless the excise tax is less than $100.00).

Reporting of the late contributions (even when fully corrected) must still be done on the plan's Form 5500 for the corresponding year. Effective with 2009 Form 5500, additional details concerning the correction (if any) must be provided in most instances.

As you can see, there are a number of choices that can be made in connection with either determining if any employee contributions were late or in determining the best corrective action plan; including, but not limited to: Filing a Form 5330 with excise tax? Filing a VFC application with the DOL? Requesting a waiver (if all conditions are met) of the IRS's excise tax? The Michigan Pension Group, Inc. will assist you in determining the best way to address this problem.