Retirement Plan Contributions: Timing is Everything

The U.S. Department of Labor (DOL) has a specific definition for “timely” remittance of employee contributions: “the earliest date that is reasonably possible to segregate the contributions from the employer’s general assets, but no later than the 15th business day of the following month.”

Yet, confusion arises among plan administrators as to what actually constitutes “the earliest date.” For instance, some plan sponsors mistakenly treat the “15th business day” rule as a safe harbor.

In the Eyes of the DOL

Here’s how the DOL sees it: If an employer typically remits employee contributions within a day or two of its end-of-the-month pay date, the company has established that it is administratively possible for them to segregate and remit employee contributions within this timeframe.

Thus, if the employer begins making remittances on the 15th day of the following month, the DOL would typically attempt to classify this as a prohibited transaction. This is because the company had established with previous remittances that it is possible to remit employee contributions sooner.

The DOL further warns that when contributions “can reasonably be segregated from the employer’s general assets in a shorter time period, a delay in forwarding the contributions — even a delay that does not exceed the maximum time period under the regulation” may result in a prohibited transaction.

Note that the DOL does provide a safe harbor for small plans (fewer than 100 participants), allowing them a period of seven business days to remit contributions following receipt or withholding. This safe harbor is not available to large plans.

Delays Can Be Costly

In the case of prohibited transactions related to late remittance of employee contributions, the DOL can and does impose civil penalties. This may include payment of excise taxes to the Internal Revenue Service. Here, it’s important to note that the DOL has not established a dollar or percentage amount of late contributions or lost earnings that require a correction.

A best practice would be to remit the contributions during payroll processing. Note that once the “earliest date” for the transfer of salary reductions is determined, the plan sponsor must abide by this date to prevent a prohibited transaction.

Employer Matching Contributions

The Employee Retirement Income Security Act (ERISA) rules do not explicitly require a plan sponsor to make matching contributions with each payroll. Plan sponsors are only required to deposit the matching contribution before the last day of the following plan year.

If this provision is properly reflected in the plan document, there is nothing stopping a plan sponsor from remitting those funds at year-end. In order for the contribution to be tax-deductible in the year for which the match is allocated, the deposit must be made by the earlier  of the filing date or the extended due date of the employer’s corporate tax return.

Balancing the cost of doing business with providing attractive employee benefits is always a challenge. To gain an edge, some 401(k) plan sponsors are switching the timing of their matching contributions, making just one deposit annually instead of each pay period. Of course, this gives rise to several obvious questions:

Does it make sense?

Changing the timing of the employer matching contribution can help plan sponsors reduce the administrative burden of remitting monthly matching contributions. There’s also a potential benefit when it comes to employees who leave the company during the year since, in order to receive the annual match, participants usually must be employed on the last day of the plan year.

Significant contribution dollars can be saved when a plan sponsor doesn’t have to make an annual matching contribution for those participants who left before the end of the plan year. Even if the former employee is not vested in the matching contribution, the plan still incurs the burden of administering the forfeited funds.

How will employees react?

Switching from pay-period contributions to annual contributions could have an impact on how plan participants view the company match. This is because such a move can potentially result in lower investment earnings for participating employees since the money is not in their account for the entire year.

Contact us if you have any questions on the timing of employee or employer contributions, or need assistance correcting late contributions to your retirement plan.

About the Authors

Cindy H. Mitchell
Cindy H. Mitchell
CPA
Director, Taxation Services

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