Timing is everything. You’ve no doubt heard this phrase, but it holds especially true when it comes to depositing employee deferrals into your 401(k) plan. Depositing each employee’s salary deferral into their 401(k) plan account may seem like a small piece of the 401(k) puzzle, but failing to meet the deadlines for depositing the contributions, or not making the deposit at all, can have long-lasting and costly ramifications.
Rules On Depositing Employee Deferrals
The Department of Labor requires employers to deposit their employees’ deferrals (monies the employee elected to have withheld from their paycheck and deferred into the 401(k) plan) “as soon as administratively feasible.” Seven business days is considered a “safe harbor” deadline and meets the DOL’s definition of “as soon as administratively feasible.”
If you go beyond the seven business day safe harbor deadline, don’t panic. All is not lost. The absolute final deadline for making the deposit is the 15th business day of the following month. However, you’ll be required to defend to the DOL why making the deposit on time was not administratively feasible. If tardy deposits are a pattern on every payroll, your defense won’t hold. For instance, you cannot deposit all your contributions once a month instead of each payroll period.
While the maximum allowed time to deposit employee deferrals into the plan is no later than the 15th business day of the following month, this is not a safe-harbor limitation. Exceeding the seven business day rule may result in both an operational failure to comply with the rules in the plan document and a prohibited transaction.
The recordkeepers we work with assist business owners with the initial set up of the 401(k) plan account. Many payroll providers offer an integration service, allowing them to deposit 401(k) deferrals to your recordkeeper once you’ve submitted payroll to them.
If your payroll is done in-house, including the deposit of your employees’ 401(k) plan deferrals as an added step in your payroll process and depositing deferrals on the same day you write payroll will eliminate the possibility of missing a deposit or making the deposit late.
Even the Best Make Mistakes
Deposit errors are prevalent when it comes to 401(k) plans. We have a detailed process to correct any errors we uncover, and will gladly walk you through any mistake we uncover to help you understand where you went wrong . Once the error is corrected and your process has included steps to avoid the issue in the future, you’ll make timely deposits ongoing.
If you’re curious about other common administrative pitfalls we’ve found in our 20+ years as compliance experts for 401(k) plans, we’ve written another piece on compliance common errors and how to avoid them!