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Depositing Employee Contributions

SITUATION: Our company is considering hiring a payroll provider. We want to make sure that any new payroll processing procedures we implement will give us enough time to deposit participant contributions to our 401(k) plan in a timely manner.

QUESTION: What are the deadlines for depositing participant contributions?

ANSWER: Plan sponsors have a fiduciary responsibility to make deposits of participant contributions on a timely basis. The U.S. Department of Labor (DOL) has issued guidelines to help clarify timelines for plan sponsors.

DISCUSSION: Generally, participant contributions include all amounts paid by participants or withheld by the employer from participants’ wages as contributions. Under the DOL guidelines, sponsors must deposit all such amounts as of the earliest date they can reasonably be segregated from the employer’s general assets. However, it cannot be later than the 15th business day of the month following the withholding (or the date the plan sponsor receives the amount). That is the latest date and is not a safe harbor deadline. If the contributions can reasonably be segregated from the employer’s general assets before then, the contributions should be deposited into the plan trust at that earlier time.

For plans with fewer than 100 participants at the beginning of the plan year, there is a safe harbor deadline. Participant contributions need to be deposited no later than the seventh business day following the date they are received or withheld by the employer. Meeting this deadline is sufficient even if the plan sponsor can reasonably segregate the amounts from general assets within seven business days.

To help prevent late deposits, plan sponsors may want to review and document the steps taken to process their payroll. If late deposits do occur, plan sponsors should take corrective measures. The participant contributions should be deposited as soon as possible, along with any missed earnings on the late deposits to be allocated to the accounts of affected participants. Plan sponsors may also want to use the voluntary correction programs provided by the DOL and the IRS. Finally, it may be useful to review any procedures already in place with the goal of identifying changes that can be made to prevent a recurrence.

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