Q. What constitutes a timely remittance of 401(k) deferrals?
The length of time for 401(k) deferrals depends on the size of the plan. For small plans consisting of fewer than 100 participants, there is a seven day safe harbor for remittance. However, for large plans filing a Form 5500 with Schedule H, there is no safe harbor.
The Department of Labor (DOL) rules require the employer to deposit deferrals ‘as soon as administratively feasible, but not later than the 15th business day of the month following the month of deferral.’ We strongly caution clients not to follow the 15 day rule, but rather defer as soon as possible. The DOL and their auditors will look at certain factors regarding the company to determine if there is justification for the time in which deferrals are made. Considerations will be given to historical timing of employee contributions deposits, the internal payroll systems and the automated or manual practices facilitating the remittance of deferrals, if there are multiple entities on different payroll platforms needing to be consolidated before remittance and how quickly the company is remitting payroll tax withholdings. For instance, if an employer is able to remit payroll tax within one to three days, the DOL would expect the 401(k) deferrals should be able to be done within the same timeframe. Failure to do so is considered to be a use of participant’s money for the benefit of the business and can result in an excise tax amounting up to a minimum of 15 percent of the ‘lost earnings’ for each year the transaction remains uncorrected.
Q. What if there are outlying remittances?
If there are outlying remittances, there must be a justifiable rationale. Circumstances such as a fire or tornado at the main office that has destroyed computer systems and payroll records would likely be sufficient reasoning. In the event of the payroll or accounting clerk being out of the office, another person must be cross-trained in order to continue making remittances during that time.
Janice Fortin, CPA, MST is a Shareholder and Practice Leader of Doeren Mayhew’s Troy, Mich. Employee Benefit Plan Group. She can be reached at 248.244.3003. For more information on how to avoid 401(k) deferral remittance issues, contact our employee benefit plan advisors today.
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