Timely 401(k) Deposits

by James Aniol

In February 2006, the Department of Labor (DOL) revised the instructions to IRS Form 5500 to require that plan auditors review the deposit of 401(k) elective deferral contributions and to confirm that the plan sponsor has deposited these contributions in a timely manner.  The DOL is using plan auditors to enforce this regulatory requirement, placing greater pressure on plan sponsors to comply with the deposit requirement as well as to correct any late deposits.  The requirement began with the 2003 plan year.  Only large plans, those with more than 100 participants are required to have their plans audited, but small plans that are not subject to the audit requirement need to comply with the deposit deadlines as well.


The time period described by the DOL regulations requires that a plan sponsor deposit 401(k) deferral, after-tax contributions and loan repayments (employee contributions) that have been taken from their employees' paychecks on the earliest date the employer can reasonably segregate these amounts from its general assets, but in no event later than the 15th business day of the month following the month in which the employer withheld the contributions from the employee's paycheck.

In separate DOL investigations completed in 2005, the DOL took the position that plan sponsors had the ability to remit employee contributions to the plan within 7 (small plans) to 14 (large plans) days of the payroll date.  The IRS lists late deposits as the first of the top ten 401(k) compliance issues on their website http://www.irs.gov/retirement/article/0,,id=135260,00,html and has indicated the employee contributions can be segregated within a day or two of the date the employee's paycheck is issued.  In many cases, amounts can be segregated on the same day.  Clearly there is no current support for the 15-day limit.  The DOL has taken the position that remittances made to the plan later than these time frames failed to comply with DOL regulations and that these untimely deposits of employee contributions to the plan and the retention thereof violated Employee Retirement Income Security Act (ERISA) guidelines.

ERISA requires the DOL to assess a civil penalty against a fiduciary that causes the late deposit of 401(k) elective deferral contributions.  The penalty under ERISA is equal to 20% of the "applicable recovery amount", meaning the late deposit plus earnings.


If contributions are deposited late, the employer should take the following corrective action:

·  Determine the amount of the earnings due on the late deposits using the DOL calculator found at http://askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx

·  Correct the late deposit of participant contributions by filing under the Voluntary Correction  

Program (VCP) and comply with the requirements of Prohibited Transaction Exemption 2002-51;

·  Pay the excise tax; and

·  Footnote Schedule H or I of IRS Form 5500 to indicate to the DOL that the correction has taken place.

            If an employer corrects the late deposit of employee contributions by filing under the VCP, the employer does not have to pay the 20% excise tax.  The employer must correct the late deposit and pay the excise tax using Form 5330.  Because the amount of the excise tax is small, many employers correct the situation using the steps detailed above, but do not file under VCP.  Filing under the VCP and paying the excise tax may give the employer protection against future DOL and IRS actions.

            If late deposits are uncovered in a plan audit, substantial monetary sanctions and penalty taxes may be imposed by the IRS and the DOL even if the failures are unintentional administrative errors.  The IRS has emphasized that sanctions will be imposed for failure to follow the terms of the governing plan document, even if the plan's operation otherwise complies with the qualification requirements of the IRC.  The DOL may seek to apply this correction for all earlier years open under the statute of limitations, which would be a maximum of six years.


To avoid the appearance of any impropriety we recommend that employee contributions be deposited to the trust at the same time that payroll tax deposits are made.