When employees see 401(k) deferrals and loan repayments come out of their paycheck, they understandably assume that their money is already in the plan and being invested. This is essentially the Department of Labor’s (DOL) assumption as well. Once employee contributions are withheld, the expectation is that they are deposited into the plan as soon as they can reasonably be separated from company assets.

DOL regulations say participant contributions must be deposited by the earlier of:

    • As soon as the amounts can be reasonably segregated from company assets, or
    • No later than the 15th business day of the following month

The misconception: That second date tends to get a lot of notice, but it is not the right target–and it is definitely not a grace period. In most situations, it is much later than what the DOL considers acceptable. If your process allows you to deposit contributions to the plan within a few days after payroll, that is the standard you are expected to meet.

What “Timely” Looks Like in Practice

With today’s payroll systems and electronic funding, many employers are depositing contributions within a couple of business days. The DOL may look at how quickly you’ve been able to do it in the past as a reasonable benchmark, so your fastest funding timeline often becomes your required timeline.

Plans with fewer than 100 participants do get a small-plan safe harbor, which treats deposits as timely if made within seven business days from the date they were withheld. Even though that rule technically applies only to small plans, it may serve as a helpful deadline for everyone – and it is about as long as any employer should be taking.

Why This Is an Important Issue

Late deposits are one of the most commonly flagged items on a Form 5500, and they are very easy for regulators to spot. If there is a pattern of late deposits, it tends to draw more attention and can increase the risk of audit. In addition to the reporting, late contributions often mean calculating and funding lost earnings and dealing with the associated correction process. More importantly, the delay could deprive participants of their ability to access their funds or direct their investments–issues that the DOL take very seriously.

What You Can Do

Taking a look at your process and procedures can be a big help. It is worth confirming how long it actually takes for contributions to move from payroll to the plan, whether that timing is consistent each pay period, and if any cumbersome processes or redundancies have the potential to slow things down. In many cases, just taking the time to come up with reasonable and repeatable procedures can go a long way.

The general rule of thumb is simple: Once employee money is withheld, it should be getting to the plan as quickly and consistently as possible. That keeps the plan compliant, reduces correction work, and most importantly ensures retirement funds are invested without unnecessary delay.

As always, if you have any questions about your process, the DOL’s expectations, or what to do when contributions are late, please don’t hesitate to contact your Blue Ridge Associates Plan Consultant.