401(k) Rescue, the Ekon Benefits 401(k) Fix-It Series, describes the most common 401(k) mistakes as determined by the IRS. We provide explanations of common mistakes, suggested prevention techniques and recommendations on correction methods.

Common Mistake #8: Employee Elective Deferrals Were Not Deposited Timely

As part of their fiduciary duty, plan sponsors are responsible for ensuring the timely deposit of employee elective deferrals. By law, deposits must be made on the earliest date that the funds can be separated from the employer’s general assets, but no later than the 15th business day of the month following the month in which the contributions were deducted from the participant’s compensation. Federal regulations require that deferrals be deposited into the plan as soon as they can be reasonably segregated from the employer’s general assets — which, in practice, is often within just a few days after payroll. The “15th business day” rule is not a safe harbor; it sets a maximum outer limit and only applies if earlier deposit is not administratively feasible.

To encourage timely remittance, the Department of Labor (DOL) established a 7-business-day safe harbor for plans with fewer than 100 participants. If the employer deposits employee deferrals within 7 business days of withholding, the deposit is deemed timely. For larger plans, it is assumed they can remit contributions more promptly than the 7-day safe harbor. Therefore, no specific safe harbor exists — but the DOL expects that deferrals be remitted as soon as administratively possible, typically within a few business days. Additionally, if your plan document contains specific instructions regarding deposit timing, those terms must be followed.

Failure to deposit employee elective deferrals on time can result in either an operational failure (failure to follow the plan’s terms) or a prohibited transaction (a temporary use of plan assets by the employer, which constitutes an illegal “loan” under ERISA rules).

• Operational failures can be corrected through the Employee Plans Compliance Resolution System (EPCRS).
• Prohibited transactions require correction through the DOL’s Voluntary Fiduciary Correction Program (VFCP), along with the payment of lost earnings and an excise tax using IRS Form 5330.

In addition, late deposits must be reported on Form 5500 for the plan year. Failure to report late deposits accurately can increase the likelihood of an IRS or DOL audit.

Preventing This Error

To avoid these errors, plan procedures should be designed to ensure prompt and consistent deposit timing. Maintain a documented deposit timeline, test payroll regularly, and ensure that backup staff are trained to process contributions during vacations or staffing changes.

For a complete listing of the most common 401(k) mistakes, please visit the IRS 401(k) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.