As a plan sponsor of a 401(k) plan, it is imperative to ensure that both employee and employer contributions are deposited into the plan in a timely manner.
Employee contributions have the shortest deposit deadlines and must be deposited into plan accounts as soon as they can reasonably be segregated from the assets of the business sponsoring the plan. Employer contribution deadlines can vary and are usually described in the plan document.
Any contribution that is deposited after the applicable deadline will typically need to be adjusted to account for lost earnings, meaning you could owe employees additional funds.
Late deposits of employee contributions
A late deposit occurs when employee deferrals and/or 401(k) loan payments are properly withheld from pay but are not timely deposited into the 401(k) plan. Note that this article uses the term “late deposit” to specifically refer to late employee contributions to the plan.
The deadline is as soon as the contributions can reasonably be segregated from the assets of the business sponsoring the plan. However, small plans with less than 100 participants have a 7 day safe harbor. This means deposits made within 7 business days after the pay date in which those amounts were withheld are not considered late. Plans with 100 participants or more have a 5 business day safe harbor, which means deposits made within 5 business days after the pay date in which those amounts were withheld are not considered late.
A late deposit is considered a prohibited transaction under IRS and DOL rules. This is because the agencies view the employer as keeping employee funds for their own purposes for the period of time that the deposits are late. The funds reduce an employee’s paycheck and, as of the date of that paycheck, are owned by the employee, not the employer (unlike employer contributions).
Late deposits must be reported on the plan’s Form 5500. Additionally, a 15% excise tax will be applied on the amount of the lost earnings and reported on Form 5330.
Note that the DOL also provides for the Voluntary Fiduciary Correction Program (VFCP) to correct late deposits. The process, however, is both optional and more complex. Guideline uses the IRS method and 5330 filing to correct the late deposit prohibited transaction but does not separately file the correction under VFCP.
It’s important to monitor plan contributions regularly and ensure that deposits are being made as quickly as possible. If your company uses one of our fully integrated payroll partners and Guideline has not collected deductions from a recent payroll run, it may be the result of a payroll disconnection from Guideline. In this case, please check your Guideline dashboard for a payroll reconnection task.
Missed deferrals
Late deposits (as described above) only apply if a deferral or 401(k) plan loan repayment is withheld from an employee’s pay and there is a delay in getting that contribution deposited into the 401(k) plan. If a plan fails to withhold deferrals from an employee’s pay when it should have, it is considered a missed deferral opportunity.
Depending on the timing of the correction and several other factors, the missed deferral opportunity may need a correction that involves a contribution of Qualified Nonelective Contributions (QNECs). QNECs are employer contributions that are always 100% vested. Since the employees already received the pay where the deferral should have been deducted, the IRS limits the QNEC to no more than 50% of the amount of the missed deferral opportunity (although note that in some cases the QNEC can be 25% of the missed deferral or not required at all).
When the QNEC is required, lost earnings will also need to be calculated because the QNEC takes the place of the missed deferral. The deadline used to calculate the lost earnings for the QNEC is the original payroll date where the deferral should have been applied.
Late employer contributions
Employer contributions must be contributed by deadlines that vary based on the type of contribution. Note that the deadline can also be specified in the plan document.
At Guideline, there are two possible deadlines that could apply to employer contributions:
Safe harbor matching contributions where the plan document specifies the contributions are made per pay period (most Guideline plans) must be contributed by the end of the plan quarter following the plan quarter where the payroll took place. For example, if the plan year ends on December 31 the latest deposit date for safe harbor matching contributions for the January 15 payroll is the last day in June.
All other employer contributions must be deposited no later than the time prescribed by law for filing the employer's federal income tax return for the fiscal (or taxable) year with or within which such plan year ends (including any requested extensions).
If employer contributions are deposited after this deadline, lost earnings apply to the contribution. At this time, Guideline only supports calculating lost earnings if a sponsor extends their initial tax filing deadline.
How lost earnings are calculated
Lost earnings amounts are calculated based on the following factors:
Amount of the late contribution
Date the contribution was due or the deferrals were withheld from participants’ paychecks (pay date)¹
Date the contribution was deposited in the plan’s trust account
The earnings on investments for the applicable participant for the period between the date the contribution was due and the date actually contributed
Once the late contributions are collected, Guideline will calculate and attribute lost earnings to each affected participant’s account. These corrective contribution amounts will be charged to your company bank account.
Additionally, if the late contribution is a late deposit of employee contributions, you will typically owe excise taxes (as described above), which must be paid to the IRS. In this event, we will prepare a Form 5330 on your behalf and and notify you once it is available in your Resource Library. The excise tax is calculated as 15% of the lost earnings owed, and it is your responsibility to sign, file, and submit payment for the excise taxes to the IRS directly.
¹ Note that, in some cases, Guideline uses the pay date to determine late deposits. If payroll is backdated, or processed after the pay date, it may result in late deposits.