Untimely remittance of employee contributions to a 401(k) or employee benefit plan

One of the most common errors found during an audit of a 401(k) or employee benefit plan is the failure to timely remit employee contributions to the retirement plan. Management of the 401(k) or employee benefit plan needs to be mindful of the Department of Labor’s (DOL) rules for remittance of employee contributions, their responsibilities for ensuring timely remittance, and the consequences for and means to correct untimely remittance of employee contributions.

DOL rules for remittance of employee contributions

When a 401(k) or employee benefit plan provides for deductions from employees’ paychecks as a means of contributing to a defined contribution retirement plan, the employer is required to follow certain rules for depositing their contributions in a timely manner. 

DOL regulation 2510.3-102 requires that an employer segregate employee contributions of a 401(k) or employee benefit plan from its general assets as soon as “administratively possible”, but how long is “administratively possible”? The general rule as interpreted by both the DOL and the courts has been that if the employer was able to segregate other payroll-related items from the general assets (such as tax withholding payments) at an earlier date, so shall 401(k) or employee benefit plan contributions be segregated. The ability to segregate and timely remit employee contributions from general assets can be contingent upon the size of the 401(k) or employee benefit plan or plan sponsor. However, the DOL would expect 401(k) or employee benefit plans requiring an audit to segregate contributions within 7 business days. 

Plan management’s responsibilities for ensuring timely remittance

Plan management should monitor the timeliness of their employee contributions and establish a policy for remitting employee contributions. Monitoring procedures include reconciling each pay date per the payroll records to the 401(k) or employee benefit plan’s trust statement. This allows plan management to detect and self-correct delinquent participant contributions prior to them being discovered during the audit, which may otherwise lead to delays in report issuance. A remittance policy enables plan management to set an objective for timely remittance and establish processes and procedures to meet the objective. The remittance policy should also include the processes and procedures to self-correct delinquent participant contributions to the 401(k) or employee benefit plan. Amounts deposited into a 401(k) or employee benefit plan outside of the remittance policy guidelines or timeline demonstrated in segregating other payroll-related items are considered prohibited transactions and corrective action is required.

Consequences for untimely remittance of employee contributions

Remittance of employee contributions considered to be prohibited transactions are required to be reported on Form 5500, Schedule H, line 4a and included on the Supplemental Schedule of Delinquent Participant Contributions. Failure to properly report delinquent employee contributions in the Form 5500 can lead to reporting compliance enforcement action such as a rejected filing or the plan administrator can be assessed a monetary civil penalty of $100, per day, from the date the filing was originally due.

Also, under ERISA section 502(c)(2), the DOL may assess a daily penalty against plan management that fails or refuses to comply with the annual reporting requirements, including failure to timely remit participant contributions. In addition, prohibited transactions may trigger civil monetary penalties under ERISA section 502(i) and tax liability under IRC section 4975.

The DOL Voluntary Fiduciary Correction Program (VFCP) offers plan management as a means of self-correcting prohibited transactions, including delinquent participant contributions. The program includes specific transactions and their acceptable means of correction, eligibility requirements, and application procedures.

Have questions about your 401(k) or employee benefit plan? We can help.

K Financial can help meet your 401(k) or employee benefit plan’s annual audit and filing requirements. We are an active member of the AICPA Employee Benefit Plan Audit Quality Center and we invest more time and high quality resources than most firms to ensure that our auditors stay abreast of the latest regulatory and reporting requirements. Contact us today to see how we can better serve your plan.