401(k) deposit rules for employers

According to federal law, employers are legally required to deposit employee contributions within a specific timeframe. If an employer fails to deposit their employee contributions and/or loan repayments within a reasonable amount of time, this creates a prohibited transaction between the employer and the plan, as the failure results in a “loan” to the employer.

To correct the issue, the employer should deposit the contributions, as well as contribute late interest to affected participants, and may be subject to penalties assessed by the IRS. 

Below, we’ll walk through the deposit rules for employers, best practices for establishing procedures and recordkeeping to avoid late deposits, and more. 

What are 401(k) deposit rules for employers?

It’s generally advised that employers deposit employee deferral contributions as soon as possible to avoid penalties, taxes, and losses in earnings and interest for employee accounts. Under federal law, employers are required to deposit employee contributions no later than the 15th business day of the month. Although the regulations for the 15 business day deadline have not been amended, they were written before most payroll providers were operating electronically. Therefore, the DOL has held plans to a stricter deadline than how the law reads.

Small plans, defined as those with less than 100 participants, can take advantage of a seven-business-day “safe harbor” when depositing employee contributions to the plan. Under that rule, employee contributions are considered timely if they’re deposited into the plan’s trust within seven business days after the payroll date. 

Large plans, defined as those with 100 or more participants, do not qualify for the safe harbor. Instead, they’re subject to scrutiny by the DOL and if applicable, their plan auditor, to determine how quickly payroll deposits can be made. Large plans must typically deposit employee contributions within five business days, but each employer must analyze its own payroll process to determine the correct number of days for its plan.

It is also worth noting that there is a separate deadline for employer contributions, which are generally required to be deposited no later than the extended due date of a plan sponsor’s corporate filing for the year. 

How can a sponsor correct late deposits?

An employer has two options to correct a late contribution: they can either make a self-correction, or use the DOL’s Voluntary Fiduciary Correction Program (VFCP). If a late contribution is not corrected timely, it may cause penalties to compound, because for every plan year it is not corrected, it creates a new prohibited transaction. Note, that in order for a late contribution to be considered fully corrected, the late interest must be allocated to the affected participant account(s).

To avoid late contribution penalties, we recommend employers reconcile their payroll accounts on a quarterly basis, or at the very least, before the end of the year to avoid penalties from multiplying.  

Self correction

An employer can self-correct a late deposit through self-correction. This process involves depositing the late contributions to the plan, calculating lost earnings, funding the lost earnings to plan participants, and filing Form 5330 to pay the 15% excise tax penalty on Form 5530. 

For Human Interest clients, we currently assist sponsors with self-correction of late contributions by depositing late earnings based upon the VFCP calculator and preparing annual Form 5330’s to assess the appropriate penalty.  

VFCP correction

To use VFCP, the employer will need to file an application with the DOL, which can be completed alone or with an attorney if necessary. Once the VFCP is approved, the DOL will issue a letter that states the plan does not need to be audited on late contributions and that there will be no penalties on the filing.