How to Report Late 401(k) Contributions

The IRS and Department of Labor (DOL) require employers to adhere to certain regulations regarding 401(k) contributions. When contributions are not made on time, it can lead to compliance issues and penalties. Understanding the steps involved in reporting late 401(k) contributions is key to mitigating negative impacts on the plan and its participants. Employers must promptly correct these late contributions to maintain the integrity of the retirement plan and ensure that employees’ retirement savings are properly managed.

If you need help managing the retirement plan for your business, a financial advisor can work with you to choose a 401(k) and investment options.

When Must 401(k) Contributions Be Made?

Employers are required to deposit employee salary deferrals into 401(k) accounts within a specific timeframe. According to the DOL, contributions should be transferred as soon as they can feasibly be separated from the employer’s assets, which generally means within a few business days.

For companies with over 100 employees, deposits should be made as quickly as possible but must be completed no later than the 15th business day of the month after the employee’s deferral was withheld. For businesses with fewer than 100 employees, the DOL offers a safe harbor rule , which considers contributions timely if they are deposited within seven business days from the date the employee's deferral was withheld.

Employers must monitor their payroll and 401(k) administration processes closely. Accurate record-keeping and regular audits can help identify and correct any discrepancies promptly, minimizing the risk of late contributions and associated penalties.

Reporting Late 401(k) Contributions

Employers are required to disclose late 401(k) contributions on Form 5500 . This is an annual report that gets submitted to both the IRS and Department of Labor (DOL). The specific section of Form 5500 where late contributions are reported is Schedule H for large plans or Schedule I for small plans, which outline the plan's financial details, including the amount of late contributions, the corrective measures taken, and any lost earnings that were restored.

To avoid plan disqualification, employers can use the IRS Employee Plans Compliance Resolution System (EPCRS) to correct errors. The EPCRS offers three ways to correction mistakes:

1. Self-correction program (SCP): Allows the plan sponsor to fix certain errors without notifying the IRS or paying any fees.
2. Voluntary correction program (VCP): Enables the plan sponsor to pay a fee and obtain IRS approval for corrections, as long as the plan is not under audit.
3. Audit closing agreement program (Audit CAP): Permits corrections during an audit by paying a penalty and resolving the issue.

Additionally, employers can use the DOL's voluntary fiduciary correction program (VFCP) to address late salary deferrals. The VFCP enables employers to correct fiduciary violations under ERISA and provides protection from DOL penalties. To participate in this program as an employer, you must:

1. Identify any breaches that fall under the program’s scope.
2. Follow the outlined steps for correcting those breaches, such as addressing improper loans or inaccurate asset valuations.
3. Calculate any losses or profits, restore funds with interest when applicable and ensure participants receive any additional benefits.
4. Submit an application to the corresponding regional office for the Employee Benefits Security Administration (EBSA) , including documentation of the corrective actions taken.

A delinquent filer voluntary compliance program (DFVCP) is available as well, though eligibility for the DFVCP is limited to plan administrators with filing obligations under Title I of ERISA who:

• comply with the provisions of the program AND
• have not been notified in writing by the DOL of a failure to file a timely annual report under Title I of ERISA

Penalties for Late 401(k) Contributions

When employers fail to make timely 401(k) salary deferrals, the DOL may assess excise taxes on the late contributions, which can be costly.

One immediate consequence of late contributions is the requirement to make up for lost earnings. Employers must calculate and compensate for any potential gains that employees could have earned had the contributions been deposited on time. This interest is calculated based on the plan’s investment returns, which can be a time-consuming and costly process for the employer.

In addition to making up for lost earnings, employers may also be subject to excise taxes imposed by the IRS. If the late deposit is classified as a prohibited transaction, a 15% excise tax on the amount involved is applied. This tax is intended to discourage delays and ensure prompt handling of employee contributions.

Persistent late deferrals can lead to legal repercussions, including lawsuits from employees. Employees have the right to sue for breaches of fiduciary duty under ERISA. Such lawsuits can be costly and damaging to the employer's reputation as well as  significant legal fees and potential settlements.

Can Employees Report Late 401(k) Contributions?

Yes, employees have the right to report late 401(k) salary deferrals by their employers. However, they should first address the issue directly with their employer or the plan administrator. Sometimes, delays occur due to administrative errors which can be resolved internally.

If the issue persists, they can report these delays to the Employee Benefits Security Administration (EBSA) , a division of the DOL. The EBSA handles complaints regarding delayed contributions and investigates potential violations. Employees can file a complaint online, by mail, or by phone. Providing detailed information about the delay helps the EBSA in their investigation.

Employees are protected against retaliation for reporting late 401(k) contributions. The Employee Retirement Income Security Act (ERISA) safeguards employees who exercise their rights under the law. If an employer retaliates against an employee for filing a complaint, the employee can seek further protection and remedies through the DOL.

How a Professional Advisory Firm Can Help

Financial advisors often manage 401(k) plans for businesses. Here are four general ways in which they can help.

Choosing a Plan

• Customize plan options : Advisors assess the specific needs of the business and its employees, helping to choose the best 401(k) plan (traditional, safe harbor, etc.) with appropriate investment options, fees and flexibility.
• Choose vendors : Advisors can assist in selecting reputable third-party administrators and record-keepers that manage the administrative side of the 401(k) plan, ensuring efficiency and compliance.

Fiduciary Guidance

• Mitigate legal risks : Advisors help business owners understand their fiduciary responsibilities under ERISA and offer advice to reduce personal and business liability by ensuring that decisions are made in the best interest of plan participants.
• Regulatory compliance : Advisors keep the business up to date with changing regulations and ensure that the plan complies with all ERISA, IRS, and DOL requirements. They help business owners avoid penalties by advising on best practices for contributions, disclosures, and other fiduciary duties.

Employee Education

• Offer retirement guidance : Advisors provide workshops or one-on-one consultations with employees to help them make informed decisions about their retirement savings, such as choosing between Roth and traditional 401(k) options or selecting investment funds.
• Improve participation rates : Through education, advisors can help increase employee participation in the 401(k) plan and encourage higher contribution rates, which benefits both employees and the company (particularly in terms of tax benefits ).

Ongoing Management

• Investment oversight : Advisors regularly monitor the plan's investment options to ensure they remain suitable and competitive for the employees. They can make adjustments based on market conditions or the evolving needs of the workforce.
• Rebalancing and adjustments : Advisors periodically review the plan’s performance and rebalance the portfolio to keep it aligned with the employees' retirement goals , ensuring proper diversification and risk management.
• Monitor compliance : Advisors help with the ongoing reporting and compliance requirements, ensuring that the plan remains in good standing with regulators year after year.

Bottom Line

Knowing how to handle late 401(k) contributions is key for businesses to comply with IRS and DOL regulations, and maintain the trust and financial security of employees. By understanding the timelines for contributions, diligently monitoring payroll processes and utilizing correction programs like the VFCP, employers can effectively address any delays.

401(k) Management Tips for Businesses

• A financial advisor can help pick and manage a 401(k) plan for your business. 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 .
• Small business owners who want to set up a retirement account have several options to consider. Here are five plans to consider .

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