Late 401(k) Deposits: What Plan Sponsors Must Know
Timely deposit of employee elective deferrals into a 401(k) plan isn't just best practice, it's required by law. Unfortunately, late deposits are one of the most common operational failures and the implications can be serious.
1 - What the Law Requires (beyond the "15-day myth)
- IRS Rule: Employer contributions must be deposited as soon as they can be reasonably segregated from general assets, typically within 1 - 3 business days after payroll. The often cited "15 business days" guideline only applies in unusual circumstances and is not a safe harbor for most plans.
- DOL 7 Business Day Safe Harbor: Under 2010 Regulations, small plans (those with fewer than 100 participants) can rely on a 7 business day safe harbor. If deposits are made within 7 business days, they are deemed timely. This provision was added after data showed about 21% of small plans consistently met that standard.
However, even small plans are expected to achieve the fastest timeframe their payroll system allows.
2 - Consequences of Late Deposits
When deposits are late, multiple problems may arise:
- Operational error: This is considered a mistake under IRS EPCRS (Employee Plans Compliance Resolution System)
- Prohibited transaction: As the employer is a "disqualified person," delaying deposits can trigger prohibited transaction rules.
- Required corrections:
- Deposit all withheld deferrals plus earnings that participants lost during the delay.
- Correct the issue through the DOL Voluntary Fiduciary Correction Program (VFCP) or the IRS VCP, ensuring paperwork and filings (e.g. Form 5330) are completed.
- Potential penalties: These can include excise taxes, lost earnings, additional penalties, and disclosure on Form 5500.
3 - How to Fix Late Deposits
According to the IRS Fix-It Guide:
- Identify the earliest date when deferrals could have been segregated.
- Compare that date with the actual deposit date and your plan’s stated requirements.
- Deposit the delayed deferrals and associated earnings into the plan trust.
- Correct through DOL’s VFCP or IRS EPCRS to avoid harsher penalties.
4 - Best Practices to Avoid Late Deposits
- Automate deposit timing to ensure funds are segregated immediately once withheld.
- Implement internal controls—e.g., system alerts or audit trails—to highlight any delays.
- Train payroll & HR teams on legal timelines and your plan’s specific requirements.
- Monitor compliance continuously, especially if you run a small plan relying on the 7-day safe harbor.
5 - Why You Need to Act Now
Late deposits aren’t just a paperwork issue—they can erode participant trust, trigger significant fees, and even cause disqualification of your plan’s tax benefits. The IRS and DOL provide clear frameworks for fixing these errors—but they also expect proactive compliance
If you're unsure about your plan’s deposit timelines or if you’ve ever been late, reach out today. Better to be proactive than reactive.