Late employee 401(k) contribution remittances to a retirement plan can pose a major problem to employers. Employees normally contribute to their individual retirement funds through payroll deductions each pay date. If employers do not remit employee 401(k) contributions on time, the IRS requires businesses to take additional steps to correct and disclose this information.
Why is it important to remit timely?
Employees choose how much money they would like to put in their retirement plan as long as it follows the retirement plan adoption agreement. When employers remit employee contributions to the plan, employees are trusting that the employer do so timely. It is especially important to remit timely because plan assets, largely comprised of employee contributions, earn money in the open market depending on the type of assets in which the participant chooses to invest. Employers who do not remit contributions timely are denying employees the chance to earn money for retirement, and since the employer carries the fiduciary responsibility of remitting contributions to the plan, the employer is at fault for not remitting on time.
What is timely?
The IRS does not have a conclusive definition of timeliness; however, the outer limit, according to the IRS, is the 15th business day of the month after contributions were withheld. But for the IRS, the outer limit is just that: an outer limit. The IRS advises (and often penalizes employers) employers remit this money as soon as possible – ideally within 2-3 days of payday or as soon as administratively feasible. For businesses with less than 100 participants, the IRS allows a Safe Harbor rule for remittance within 7 business days.
What do I do if I did not remit my employee 401(k) contributions timely?
The IRS rules allow for employers to “fix” the error through self-correction. This involves two steps: the late contribution, and any earnings thereon. The late contribution is easy enough: remit the money which was not deposited on time, as soon as you can. For any earnings thereon, employers should calculate how much the employees would have been entitled to earn on their 401(k) contribution. You can consult your plan advisor, your third-party plan administrator, or visit the Department of Labor’s (DOL) website and use their Voluntary Fiduciary Correction Program Online Calculator to ensure that the error is fixed correctly.
I remitted my employee 401(k) contributions and earnings. Now what?
The most important part is over: making sure that the employee has their 401(k) contributions and earnings in the plan. Now you need to report it. Employers who sponsor a retirement plan must remit a Form 5500 to the IRS annually. The IRS asks that businesses who return a full-Form 5500 report all late remittances on Schedule H, line 4a, while short-form 5500 users (those businesses with less than 100 participants) must report it in Part V, Question 10a. Those who return a long-Form 5500 must additionally disclose this information in their audited plan financial statements. Some employers may also have to pay additional penalties and excise taxes.
What about employer’s contributions? Or profit-sharing? Are they considered late as well?
While only late remittances of employee 401(k) contributions need to be disclosed on the Form 5500, there can be other potential consequences if employers do not remit other forms of plan contributions on time. You should always follow the plan adoption agreement and consult your plan advisor to make sure all other forms of plan contributions are remitted correctly.
For additional information about 401(k) contributions contact Maria T. Arriola at 714.569.1000.
Written by: Grady Tarplee, Staff Accountant