By Susan Burnoski, CPA | Director/Senior Manager, Audit & Assurance
Employers that offer a defined contribution plan, either a 401(k) or a 403(b) plan, need to ensure employees’ payroll contributions are deposited into their retirement account in a timely manner. This task may seem minor, and in some cases obvious, in the range of a plan sponsor’s duties. However, the Department of Labor (DOL) expects plan sponsors to follow remittance rules specifically and missing deadlines for deposits, if even by a few days, can result in significant financial penalties. Ensure your plan is in compliance by defining and planning for deadlines.
There are no clear definitions of how soon plan sponsors are required to make deposits into their contribution plan. The DOL advises plan sponsors to separate employee elective deferrals and loan repayments from the employer’s general assets as soon as reasonably possible, but no later than the 15th business day of the next month. Plans with fewer than 100 participants receive a safe harbor of seven business days to complete the transaction, but larger plans are expected to complete as soon as possible.
Plan sponsors may incorrectly translate this guideline to believe they have until the 15th of the following month to complete the transaction. The DOL requires plan sponsors to transfer participant contributions and loan repayments as soon as reasonably possible with the 15th as the last possible day that is considered timely. The keyword for further discussion is ‘reasonably.’
The requirement of ‘reasonably’ can vary depending on a company’s situation. Businesses with efficient operations and finance teams may be able to complete transactions within a few business days of completing payroll. Companies with multiple locations and smaller operational teams may reasonably take more than five business days to complete the transaction. Depending on the company’s structure and payroll process, the remittance schedule should be specified in internal policies and procedures. Establishing a remittance policy ensures the company can maintain a steady transaction flow history, which the DOL will review to establish a pattern of transactions.
Employers that are late in remitting participant contributions and loan repayments are considered by the DOL as prohibited transactions under the 1974 Employee Retirement Income Security Act (ERISA), which can result in an excise tax based on the amount of late remittance and other penalties. If a late remittance occurs, plan sponsors need to report the transaction on their Form 5000.
Plan sponsors may not be aware of remittance violations and unknowingly fail to plan accordingly. Avoiding late remittance penalties is possible by establishing clear processes for conducting payroll transactions. Consider what works for the company, including factors such as the number of locations, staff involved in processing payroll, etc., to create clear guidelines. Identify a process owner to review whether transactions are meeting deadlines. Adjusting internal processes to account for holidays, vacation schedules, paid leaves, or other delays is a key factor in ensuring a company can avoid delayed remittance penalties.
Best practices include reviewing the remittance schedule on a quarterly basis to connect the 401(k) remittance schedule to the payroll tax withholding timetable. Examining quarterly allows companies to identify any delayed deposits and correcting mistakes will be less expensive than penalties received. Delayed deposits cause employees to miss earning interest and capital gains from their funds; the longer their money is missing, the more expensive it will be for companies to correct lost earnings.
The company’s process and procedure plan for remittance should include staffing plans for vacation days or any other employee absence. Training multiple employees on withholdings and transferring correctly ensures a company can always avoid late remittances, regardless of the staffing plan.
If a late remittance still occurs, plan sponsors need to quickly document why the transaction was delayed. Precise documentation helps the company’s auditor and DOL understand the occurrence and the steps that were taken to correct the issue.
Plan sponsors are required to protect their participant’s retirement accounts and determining a strict remittance schedule is a key component to successful plans. Don’t assume the company has ample time to transfer funds each month; the DOL expects the task to be done as soon as reasonably possible and creating an internal plan schedule will help keep remittances on a timely schedule. To discuss how your company can create a consistent plan, contact me today to discuss.