retirement plan has a specific deadline by which employer
contributions must be deposited to the plan for each plan year.
However, the rules concerning participants' contributions have not
been as clear. For example, in 401(k) plans, employees typically
defer a portion of their weekly or biweekly paychecks. How soon
should these contributions be deposited into the plan?
The question of when participant salary deferrals must be
deposited into the plan is a long-standing issue and one about which
the Department of Labor (DOL) has been quite vocal. The DOL has also
been very active and aggressive in its enforcement in this area.
Fortunately, final regulations issued earlier this year have
provided welcome guidance for plans sponsored by small employers.
Plan Asset Rule
The regulation describing the deposit requirement is sometimes
referred to as the "plan asset rule" since it actually specifies the
timing within which participant contributions are deemed to become
assets of the plan. This translates into a deposit deadline because
it is considered an illegal loan from the plan if an employer is
still holding those amounts on or after the date they are deemed to
be plan assets. Pre-tax salary deferrals and after-tax employee
contributions withheld from payroll as well as loan repayments are
considered participant contributions for purposes of the rule.
General Deposit Timing Rule
There are two tests to determine when deferrals have become plan
assets and, thus, whether they have been timely deposited. The
better known of the two specifies that deferrals become plan assets,
at the latest, on the 15th business day of the month following the
month in which they were withheld from employees' paychecks. For
example, any deferrals withheld during the month of May become plan
assets, at the latest, as of the 15th business day of June.
The second test provides that, if it is possible for a plan
sponsor to segregate deferrals from its general assets earlier than
the 15th business day of the following month, then those deferrals
become plan assets as soon as it is reasonably possible to segregate
such amounts. This rule presents several operational issues to
It is not uncommon for an employer to have several payroll
periods in a month but to wait to deposit salary deferrals until
after the final payroll of that month. However, the DOL has
indicated that, if it is administratively possible to make a deposit
within a certain number of days following the final payroll of the
month, it should also be possible to make a deposit within the same
number of days after each mid-month payroll. Therefore, any
mid-month salary deferrals and loan repayments held and deposited
with the final monthly payroll would be considered delinquent.
ABC Company, Inc. has biweekly payroll with pay dates of Friday,
April 16 and Friday, April 30, 2010. Salary deferrals for both pay
periods are deposited on Wednesday, May 5th. Since the date of
deposit is only 3 business days following the last pay date in
April, the DOL would likely assert that deferrals from the April
16th payroll should have been deposited no later than April 21st and
treat them as 14 days delinquent.
Since what is "reasonably possible" is open to interpretation,
there has been a great deal of confusion in the industry as to how
to appropriately determine when deferrals become plan assets. This
confusion has been fueled by inconsistent DOL enforcement of the
issue. For example, in some regions of the country, DOL
investigators have treated 10 to 12 calendar days following payroll
as timely while other regions have enforced a 3 to 5 calendar day
standard. They set the standard and require plan sponsors to present
evidence that a longer timeframe should be allowed.
To make matters more challenging, some DOL investigators have
claimed the rule requires that deferrals not only be deposited
within the requisite timeframe but also allocated to participant
accounts and invested. In an effort to comply with such an ambiguous
rule, some employers have gone to the other extreme and deposited
deferrals as soon as they knew the amounts, even if prior to the
actual payroll date.
While such an approach solves the DOL issue, it creates another
problem in that IRS regulations prohibit depositing deferrals prior
to the pay date to which they relate.
Safe Harbor Deadline Offers Welcome Guidance
for Small Plans
Earlier this year, the DOL finalized new regulations that provide
much needed clarity to this rule. In short, the new regulations
create a safe harbor timeframe in which to deposit employee
contributions and loan repayments. As long as those amounts are
deposited into the plan no later than the 7th business day following
payroll, they are deemed to be timely, even if the employer is able
to make the deposit earlier.
The regulations also clarify that it is only the deposit, not the
allocation or investment, that must occur within the requisite
While the new guidance removes much of the ambiguity, there are
several important points to note. First, as with other plan-related
safe harbors, the 7-day safe harbor is optional. Employers who
choose to make deposits outside of this window or do so
inadvertently lose reliance on the safe harbor and are judged by the
"as soon as reasonably possible" standard which may call for a 3 to
5 day deposit window. Thus, a deposit on the 8th day will not be
considered one day late—it will be 3 to 5 days late.
Second, the safe harbor is only available to plans with fewer
than 100 participants as of the first day of a given plan year.
While many plan sponsors may define a participant as someone who is
actively contributing to the plan, the DOL considers anyone eligible
to make contributions to be a participant in addition to terminated
employees who still have plan balances. This means that larger plans
cannot assume that the DOL will consider deposits made within 7
business days to be timely.
What's the Worst that can Happen?
As noted above, the DOL treats late deposits as a loan of plan
assets to the plan sponsor. Such a loan is a "prohibited
transaction" (PT) and a breach of fiduciary responsibility. As a PT,
the delinquency subjects the plan sponsor to a 15% excise tax. The
excise tax is applied again for each year (or portion of a year) in
which the PT remains uncorrected.
In addition, another PT, subject to its own excise tax, is deemed
to occur each year until correction is made. This is often referred
to as a cascading or pyramiding excise tax. There is no proration
based on the number of days that elapse, so even though a PT occurs
near the end of the year, the full excise tax applies.
Form 5500 Reporting of Late Deposits
Late deposits are required to be reported each year on Form 5500
(line 4a of Schedule H or I, whichever is applicable). New rules
imposing penalties on service-providers who improperly complete Form
5500 make it unlikely preparers will "look the other way" on this
reporting requirement even if the deposit is only a few days late.
In addition, CPAs who audit large plans are required to review the
timeliness of deferral deposits and note any delinquencies in their
As if the above isn't enough, the DOL issues monthly press
releases announcing lawsuits it has filed against large and small
companies alike for failure to timely remit salary deferrals of
amounts as low as $5,000.
Further, the DOL recently announced the Contributory Plan
Criminal Project that could result in criminal prosecution of
employers who "may convert employee payroll contributions for their
own personal use or may use employee contributions to pay business
The Fix is In
Since there are numerous avenues for the DOL to become aware of
delinquencies, it is in an employer's best interest to voluntarily
take corrective action as soon as possible before an investigator
knocks at the door. The DOL's Voluntary Fiduciary Correction Program
(VFCP) provides specific guidance on how to correct a late deposit.
Deposit all outstanding delinquent amounts as soon as possible.
Provide an additional contribution to participants to make them
whole for any lost investment earnings. This is required even if the
stock market has had negative returns during the timeframe in
The DOL provides an online calculator on its website to use to
determine the lost earnings amount. The following information is
required to use the calculator:
- Amount of late deferrals;
- Loss Date: The date the deferrals should have been
- Recovery Date: The date the deferrals were actually
- Final Payment Date: The date the lost earnings amount will
If multiple payrolls are delinquent, each must be entered
separately into the calculator.
Submit documentation of the correction to the DOL and request a
Some employers choose to make the corrective contributions but
forego the formal submission. While that approach may make the
participants whole, the employer does not have any assurance against
DOL action and must still pay the excise tax. As long as the
deferrals in question were not more than 180 days delinquent and the
employer follows VFCP to apply for a no-action letter, the excise
tax is waived.
The new safe harbor regulation greatly clarifies the deposit
requirement for employers that sponsor smaller 401(k) plans. Those
who choose not to avail themselves of this relief should carefully
review their process for transmitting employee contributions to
their plans and maintain careful documentation describing the amount
of time it takes to complete the process each pay period as well as
an explanation of why it cannot be completed more quickly.
The DOL has made it clear that it plans to continue actively
enforcing the deposit timing rules, to ensure employee contributions
are used for the purpose for which they were intended. Therefore, it
is important for all plan sponsors to review their deposit
procedures to ensure contributions are being made on a timely basis.
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