Plan Sponsors, especially those offering a workplace retirement plan for the first time, need to understand their fiduciary responsibilities. We offer a plan governance tool kit that can help guide your organization in operating your plan. One of your most important fiduciary obligations is to deposit all contributions to the plan promptly. This means that all of your employees’ deferrals, as well as any loan repayments, employer match, or other contributions that your organization makes to the plan, must be segregated from your corporate assets and deposited into the plan shortly after your payroll date.
When is a Contribution Considered “Late”?
The Department of Labor (“DOL”) has strict rules about this because, in their view, if an employer holds onto money intended for the retirement plan for too long, it is considered a prohibited loan from the plan to the employer. As a result, the IRS imposes financial penalties for the period of time during which the funds were improperly under the employer’s control instead of being deposited to the plan where it benefits the participants.
Once the funds are withheld from participants’ paychecks, all contributions become plan assets as soon as they can be “reasonably segregated” from the Plan Sponsor’s general corporate accounts. The DOL requires small plans – those with less than 100 participants on the first day of the plan year, to deposit those contributions within seven business days after the funds are withheld from paychecks. Large plans do not have a similar definitive deadline, and the DOL instead requires all contributions to be deposited on the earliest date on which the employer could have done so. Some DOL agents expect that to be on the same or the following business day, but the timing is based on the history of deposits for the plan during the year.
What Happens if Deposits Are Late?
The DOL requires Plan Sponsors to compensate participants for the missed investment opportunity, meaning the time during which their funds were not able to be invested in the plan because the employer held them for too long. Thus, participants are entitled to receive payment of lost earnings calculated from the earliest date the employer could have made the deposit (for any size plan). The DOL has yet to issue official approval, but the standard industry practice is for Plan Sponsors to self-correct these errors by calculating these lost earnings and allocating them to the affected participants. Additionally, any late plan contributions must be disclosed to the IRS on Form 5330, along with payment of excise taxes, and disclosed to the DOL on Form 5500.
Special Rule for Partnerships and Sole Proprietors
Members of a partnership or a sole proprietorship do not receive weekly or bi-weekly paychecks like other organizations. To contribute to their retirement plan, they must make a deferral election before the end of the plan year. The deadlines mentioned above do not apply to their plan contributions. Instead, deposits are due shortly after their accountant determines the members’ net earned income for the year. For some organizations, deposits can be made up until the members’ deadline for filing their individual tax returns. Your organization’s accountant should give you specific instructions.
How Can I Avoid Late Contributions?
As explained in your Plan Services Agreement, you are responsible for ensuring that all contributions are deposited to the plan on time. Your payroll provider should have a procedure for this as well, and it is your responsibility to make sure you follow those procedures. If you or your payroll provider are late, you will be responsible for paying any compensation owed to participants, excise taxes, or other penalties.
These issues are easily avoidable. We suggest you understand and regularly review your upcoming contributions in your Plan Sponsor portal. You will also receive emails from us shortly before the date of your next expected payroll (so if your pay date changes, you must inform us) to help you stay on track. Making sure you have a process in place within your organization and with your payroll provider can help avoid problems and enable us to keep your plan running smoothly. Also, if your payroll provider integrates with our platform, make sure you follow the format, content, and other requirements specific to your payroll provider.