Every retirement plan custodian has an interactive website that participants can visit, if their employer offers that feature. While all are a little different, the websites all contain access to vital information about your account under the plan. You can review your beneficiary designations, investment lineup and performance, contribution rates, and loan information. Sadly, statistics show only a small percentage of participants access these tools. Those that do tend to spend only a few minutes on the website, either accessing specific information, or reviewing investment performance. One thing participants do not review often enough is contribution deposit dates. Reviewing this information not only ensures that your employer is timely depositing your contributions, but also that any late contributions include an extra lost opportunity contribution in accordance with the Department of Labor rules.
When it comes to 401(k) plans, there are two types of contributions: employer contributions and employee contributions. Employer contributions must be deposited by the employer/plan sponsor’s tax filing date following the year of contribution. The rules are stricter for employee contributions because those come from the employee’s pay and are fully vested when made. These contributions must be segregated from the employer’s general assets and deposited as soon as reasonably possible.
The absolute last date for deposit is the 15th business day of the month, following the month the contributions were remitted. In other words, if the contributions were collected during March, they must be deposited by at least the 15th business day of April. However, be aware that this is not a safe harbor rule. That means the Department of Labor (“DOL”) can still levy a penalty even if a company’s deposits are within this timeframe. As a result, company sponsors should review their withholding and remittance process with their payroll provider, to ensure the process is being is handled on a timely basis.
Thankfully, there is a safe harbor rule for small plans (i.e., 100 participants or less). For these plans, the deposits are treated as timely if they are made within seven (7) business days from the date they were withheld from wages.
If the deposits are not being timely made, the employer must not only make up the contribution, but will also have to make an extra contribution for lost earnings. If the plan decides to correct through the DOL’s VFCP (Voluntary Fiduciary Correction Program) program, it can use the lost earnings calculator to determine the appropriate contribution. (See https://www.askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx) On the other hand, if the plan is going to self-correct, the general practice is to use the greater of (1) the plan’s actual rate of return or (2) the IRS underpayment rate for the period.
The employer will also be subject to an excise tax, which is at least 15% of the amount involved. The excise tax penalties are paid to the IRS by submitting Form 5330. However, in certain instances the DOL can waive the excise the tax.
By reviewing your deposit information, not only will you ensure that your account is funded on a timely basis, but you will help your plan avoid costly taxes and penalties. The sooner the delinquent deposits are made up, the more likely the Department of Labor will grant relief from the excise tax. Compliance also minimizes the risk of an audit. Both of these events are costly and will likely reduce future plan contributions. Finally, if you do find late deposits in your 401(k) account, remember that you are not only entitled to the contribution, but also a lost opportunity contribution. Make sure both are made.