April 6, 2023

Untimely Deposit of Employee Elective Deferrals

We will be featuring a series of articles over the next few months to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (“ERISA”) and Internal Revenue Service (“IRS”) requirements. This article addresses the issue of untimely deposits of employee elective deferrals.

A 401(k) is an employer-sponsored retirement savings plan that offers significant tax benefits, while helping the employee plan for the future. Although an employee elects to have a percentage of each paycheck paid directly into their 401(k) account, it is ultimately the employer’s responsibility to ensure the participant’s deferrals are contributed to the trust. Department of Labor (“DOL”) rules require that the employer deposit these deferrals to the plan trust as soon as administratively possible; however, in no event can the deposit be later than the 15th business day of the following month. Note that we have seen the DOL use 8 days and 4 days as a Company’s “administratively possible” threshold as it largely depends on the facts and circumstances of each plan. Failure to make timely deposits is a violation of the employer’s fiduciary responsibility and could subject the benefit plan to DOL civil penalties, as well as potentially violating the plan’s terms.

To find whether your plan has made untimely deposits, you must first determine the earliest date in which you can segregate deferrals from general assets. Next, compare that date with the actual deposit dates (as well as any requirements in the plan document) to determine any discrepancies. Untimely deposits are corrected in one of three ways – the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), or the Voluntary Fiduciary Correction Program (“VFCP”).

To be eligible for the SCP, the plan sponsor or administrator must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the law. The SCP allows you to restore your plan’s qualified status by correcting the failure before the last day of the third plan year following the plan year for which the failure occurred, without needing to file anything with the IRS. There is no fee for self correction but note that criminal protection is not provided. If the mistakes are insignificant in the aggregate, the employer can correct beyond the three-year correction period. However, if the mistakes are significant in the aggregate, the employer is not eligible for SCP and must correct under the VCP. Whether a mistake is significant or insignificant depends on all facts and circumstances.

The VCP allows the plan sponsor to come voluntarily to the IRS to bring the plan into compliance without IRS sanctions. The VCP will involve a filing with the IRS and the payment of a fee. The plan sponsor can negotiate with the IRS the mechanics of the plan correction and applicable penalties.

Lastly, the VFCP is a voluntary enforcement program that allows plan officials to identify and fully correct transactions. The VFCP was developed by the Employee Benefits Security Administration to allow plan officials to avoid civil actions (but not criminal actions) and the 20% fiduciary breach penalty for certain fiduciary violations that are fully and accurately self-corrected. The VFCP can only be used if the DOL has not already provided oral or written notification to representatives of the plan of an investigation by the DOL or other federal agencies.

Regardless of how the errors are corrected, the employer must deposit all elective deferrals withheld and lost earnings resulting from the late payment.

In order to reduce the risk of having untimely deposits of employee elective deferrals, there are a number of steps employers and plan management can take.

  1. Plan management (at the employer) can work with the plan’s third party administrator to analyze deposits and determine a reasonable deadline for having all employee deferrals deposited into the plan. For example, if the employer has consistently demonstrated the ability to have withholdings deposited into the plan within 5 days, then that becomes the measurement target.
  2. Plan management can develop processes to ensure that deposits are made within 5 days (based on #1). This includes having redundancies so that sick days or vacations do not interrupt the process of timely deposits.
  3. Plan management can develop review/control procedures (often done quarterly) to have someone not normally involved in the payroll/deposit process review the timing of deposits against the target number of days.

Have any questions about your company’s 401(k) plan? Reach out to Lindsay Medlin (lmedlin@bps.cpa) - 803-771-8943.