401(k) Payroll Regulations Under ERISA


By The Human Interest Team

HR and benefits professionals talk a lot about the importance of employees contributing to their 401(k) plan. But the employer plays a significant role in an employee’s retirement plan by depositing those contributions into the 401(k) plan on time. Included in the fiduciary responsibilities set by the Employee Retirement Income Security Act of 1974 (ERISA) are standards that address employer responsibilities when it comes to depositing contributions, including:

  • Carry out duties prudently

  • Act solely in the interest of plan participants and their beneficiaries

As the plan sponsor and plan fiduciary, it’s the employer’s responsibility to ensure timely deposits. There’s a large sum held in retirement investment assets; in fact, the Investment Company Institue (ICI) estimated that in 2018, the total assets of 401(k) plans were at $5.6 trillion.

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Missed contributions from payroll

The responsibility of plan sponsors to deposit the contributions employees make may seem obvious; unfortunately, not all plan sponsors are making deposits as required. It’s become increasingly important to ensure those employee contributions are protected. In the fiscal year 2015, the EBSA had 274 civil cases that returned employee contributions to their plans, the recoveries from those cases were a total of more $4.9 million. Not all missed contributions are due to fraudulent or unethical behavior. Mistakes happen, and a late deposit isn’t the end of the world. However, if a plan sponsor realizes that a contribution deposit is late, they must immediately take action to resolve the problem.  This includes promptly depositing the missed contribution and adding any lost earnings that were a result of the late deposit.

The IRS’ 401(k) Plan Fix-It Guide – You Haven’t Timely Deposited Employee Elective Deferrals document provides helpful information and direction around how to fix this situation. The first step is to determine which deposits were late and calculate the lost earnings necessary to correct. Then, deposit any missed elective deferrals, along with lost earnings, into the trust. Finally, review procedures and correct the problems that led to the late deposits.

  • The Society for Human Resources provides this explanation around the timing—based on employee population—for the requirements for correcting contribution mistakes:

    • Employers with plans that have fewer than 100 participants must make sure that payroll deposits all employee contributions or loan repayments by the seventh business day after the paycheck (with contributions withheld) was issued.

    • Employers with plans that have 100 or more participants must deposit the missed contributions by the earlier of (1) the date those contributions or loan repayments reasonably can be segregated from employer assets, or (2) the 15th business day of the month after the paycheck was issued.

Legally misused funds or fraudulent activity

When late deposits become a frequent issue, the problems aren’t fixed, or they are fraudulent in some other way, there is a problem. The EBSA provides a helpful list of signs that employee contributions aren’t being handled appropriately, for example:

  1. Your 401(k) or individual account statement is consistently late or comes at irregular intervals.

  2. Your account balance does not appear to be accurate.

  3. Your employer failed to transmit your contribution to the plan on a timely basis.

  4. A significant drop in account balance that cannot be explained by normal market ups and downs.

  5. 401(k) or individual account statement shows your contribution from your paycheck was not made.

Source: Top 10 Signs Your 401(k) Contributions Are Being Misused, Department of Labor, Employee Benefits Security Administration

These problems aren’t simple; employers and plan sponsors should request advice from legal counsel before taking action. If the issue of not depositing employee 401(k) contributions continues and the plan sponsor doesn’t report or address it, employees may report the violation. Similarly, if late deposits are found during a plan audit, even if the failures were unintentional, the IRS and DOL may impose fines and penalty taxes.

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