401(k) Deferral Deposit Deadlines

Late 401(k) contributions can potentially lead to penalties and missed investment opportunities. Employers must adhere to strict deposit deadlines to comply with IRS regulations and ensure employees’ retirement savings grow as intended. Understanding these deadlines and the consequences of missing them is essential for both employers and employees to maintain the tax advantages associated with 401(k) plans.

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What Is a 401(k) Deferral?

401(k) deferrals are a portion of an employee’s pre-tax salary set aside for retirement savings. These contributions are deducted directly from the employee’s paycheck and deposited into their 401(k) account. The process is automatic, making it a seamless way for employees to save for their future without needing to take additional steps.

Employers are responsible for ensuring that the deferrals are deposited into the employee’s 401(k) account promptly. Typically, this process involves the employer deducting the specified amount from each paycheck and transferring it to a plan administrator like ADP Retirement Services, Fidelity or Vanguard. The plan administrator then allocates the funds according to the employee’s investment choices.

How Long Do Employers Have to Deposit the Money?

The deadline by which 401(k) deferrals must be deposited into an employee's account depends on the size of the company.

The Department of Labor (DOL) mandates that employers must transfer 401(k) contributions as soon as they can reasonably be segregated from the employer’s assets. Generally, this means within seven business days for small businesses with fewer than 100 employees.

For larger companies, the time frame can be slightly longer, but it should not extend beyond the 15th business day of the month following the month in which the deferrals were withheld.

This is not a deadline but an outer limit where anything submitted later cannot be treated as being on time. The law requires the deposit to be made "as soon as possible," meaning the earliest date the employer can reasonably segregate the withholdings from its general assets. Thus, large employers cannot rely on the seven-business-day rule that applies to small plans, as they are expected to be capable of making deposits quickly.

Penalties for Late Deferral Deposits

Failure to meet these deadlines can result in significant penalties from both the DOL and IRS.

Employers who make late 401(k) deferrals may face fines and corrective actions. Under DOL regulations, employers may need to take corrective measures to rectify late deposits, including contributing additional funds to compensate for lost investment gains.

The IRS offers the Voluntary Correction Program (VCP) under the Employee Plans Compliance Resolution System ( EPCRS ) , which allows employers to correct failures and avoid harsher penalties. Participating in the VCP can be costly and time-consuming, but it provides a structured way to address late contributions and mitigate further repercussions.

In addition to DOL penalties, the IRS imposes excise taxes on late 401(k) deposits. If contributions are not deposited in a timely fashion, the IRS may assess a 15% excise tax on the amount of the late deposit. This tax is imposed annually until the late contributions are corrected.

Employers are also required to file Form 5330 to report and pay the excise tax, adding an administrative burden.

How Employers Can Fix Delayed Deferrals

Employers should first pinpoint why the 401(k) deferrals were delayed. This step helps in preventing future occurrences and addressing the root cause, whether it is due to administrative errors, cash flow issues or misunderstanding of deadlines.

1. Calculate the late deposit amounts . Next, calculate the amounts that should have been deposited into the employees’ 401(k) accounts.

2. Make late contributions. Deposit the calculated amounts into the employees’ 401(k) accounts as soon as possible. Include any earnings that would have accrued during the delay period.

3. Use the VFCP tool, if necessary. Consider utilizing the DOL's  VFCP. This program allows employers to correct late contributions and other fiduciary breaches voluntarily, potentially reducing penalties.

4. Notify affected employees. Inform employees about the late contributions and the steps being taken to rectify the situation. Transparent communication helps maintain trust and reassure employees that corrective measures are being implemented.

5. Review and update procedures. Review and update internal procedures to prevent future delays. Implementing robust checks and balances, enhancing payroll systems and providing training to relevant staff can help ensure timely 401(k) deferrals going forward.

What If Your Employer Delays Your 401(k) Deferral?

When an employer delays 401(k) deferral deposits, it can disrupt your retirement savings plan and cause you to miss out on potential growth opportunities. Here's what to do if your employer doesn't make your deposit on time.

1. Contact your employer. The first step is to address the issue directly with your HR department or payroll administrator. Employers may sometimes experience administrative or financial difficulties that cause delays, but it’s crucial to get clarity on the situation.

2. File a complaint. If your employer does not provide a satisfactory resolution, you can file a complaint with the Employee Benefits Security Administration (EBSA). The EBSA oversees the enforcement of regulations related to retirement plans and can investigate potential violations.

3. Monitor your contributions. Regularly monitor your 401(k) account to ensure contributions are being made as expected. Keeping a close eye on your retirement account helps you catch any discrepancies early and take prompt action if issues arise.

Bottom Line

Timely 401(k) contributions are important for both employers and employees to avoid penalties and optimize retirement savings. Employers must adhere to regulatory deadlines to prevent financial repercussions and maintain the tax benefits of the plans.

Employees should also stay vigilant, monitoring their accounts and addressing any delays promptly. By understanding the processes and taking corrective measures when needed, both the employer and employee can work toward securing a stable and prosperous retirement.

Tips for Managing Your 401(k)

• Gradually increasing your 401(k) contributions can significantly enhance your retirement savings. Consider boosting your contribution rate whenever you receive a raise or bonus. Many plans offer automatic escalation features, which incrementally increase your contributions each year. By consistently raising your contribution percentage, even by small amounts, you can take advantage of compound interest and grow your retirement nest egg more effectively.
• Consulting a financial advisor can provide personalized guidance and expertise in managing your 401(k). Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .

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