When an employer offers a defined contribution plan, whether that’s a 401(k) or a 403(b) plan, they must ensure that the money contributed from participants’ paychecks is deposited in their retirement accounts in a timely fashion.
While this might seem like a simple or minor task in a plan sponsor’s fiduciary responsibilities, the Department of Labor (DOL) takes non-compliance with remittance rules very seriously. Missing deposit deadlines — even by a day or two — can carry big penalties.
Unfortunately, there is a lot of confusion about how fast plan sponsors must make these deposits. The DOL expects plan sponsors to separate employee elective deferrals and loan repayments from the employer’s general assets as soon as reasonably possible, but no later than the 15th business day of the following month. Small plans with fewer than 100 participants have seven business days to complete this transaction, but larger plans are expected to do this as soon as reasonably possible.
Many plan sponsors understandably believe they have until the 15th of the next month, because that’s what the DOL says. They see this as a safe harbor, but it is not. The DOL requires that participant contributions and loan repayments are transferred as soon as reasonably possible. The deadline of the 15th deadline is the last possible day that is considered to be timely.
So, What is “Reasonable?”
The definition of “reasonable” varies depending on your company’s unique circumstances. For those with more streamlined operations, it may be within a few business days of completing payroll withholding taxes. For companies with several locations, up to eight days may be reasonable.
Other companies differentiate between “regular” and “business” days. Many companies outline their remittance schedule in their benefit plan document. Whether your plan has a remittance policy or not, the DOL will look at your plan’s deposit history and assume that the default procedure is represented by the regular pattern established by the plan sponsor.
Late participant contributions and loan repayments are prohibited transactions under the 1974 Employee Retirement Income Security Act (ERISA). They are subject to an excise tax based on the amount of the late remittance, plus other possible penalties. After the DOL determines a late remittance, plan sponsors must report the transaction on their Form 5500.
Plan sponsors are often unaware of remittance violations. Holidays, employee absences or other factors could cause a delayed remittance, which then may go unnoticed by the plan sponsor. It’s not uncommon to find late remittances during regularly scheduled audits on larger plans.
How to Avoid Missing Remittance Deadlines
Given the confusion about remittance rules, here are some things plan sponsors can do to avoid delays in depositing employee contributions First, think about what works for your organization. If your business has multiple locations, do you need extra time to organize the remittance? How often can you review your transactions to make sure you are meeting deadlines?
It can be helpful for many companies to review their remittance schedule on a quarterly basis, and to tie the 401(k) remittance schedule to the payroll tax withholding timetable. Reviewing your remittance schedule on a quarterly basis will also help you correct problems sooner, making the process easier and less costly. With delayed deposits, employees miss opportunities to earn interest and capital gains from their investments. So, the longer the money is delayed, the more expensive it will be to make up lost earnings.
You can also protect yourself by developing a backup strategy. It’s a good idea to have multiple employees trained in remittance procedures in case one person is on vacation or out sick. Reviewing each quarter’s holiday schedule also may help you plan around those days when the company, banks or other partners are closed.
Finally, if you do have a late remittance, it’s critical to document why that transaction was delayed. This will help your auditor and the DOL understand the situation and your actions to apply a solution.
Make Compliance with Remittance Guidelines a Top Priority
Protecting participants’ retirement accounts is a top priority for the DOL, and making sure plan sponsors adhere to a regular remittance schedule is something it monitors very closely.
Many plan sponsors are under the false impression that they have a lot of time to complete the deposit each month, but the DOL expects it done as soon as reasonably possible, and on a regular basis. Your plan document may help guide your schedule, but the DOL looks at the remittance history and considers that as policy.
Whether it’s formal or informal, following a regular remittance schedule may seem easy, but unexpected issues may prevent your from following procedures. Make sure you plan accordingly.