The rules and regulations revolving around employee benefit plans can be vague and confusing. One of these rules concerns timely deposit of employee elective deferrals. Not complying with this rule can have potentially severe consequences, including:
- corrective contributions for missed earnings
- the assessment of excise taxes and penalties against the employer
- disqualification of the tax-exempt status of the employee benefit plan.
It is the responsibility of the employer to deposit employee elective deferrals to the plan trust in a timely manner.
So, what constitutes a timely deposit?
For plans with fewer than 100 participants.
The 7 business day safe harbor rule is in effect. This means that as long as deposits of elective deferrals are made within 7 business days of the payroll pay date then these deposits are considered to be timely
For plans with greater than 100 participants.
The Department of Labor (DOL) rules require that these deposits be made as soon as administratively feasible, but no later than the 15th business day of the following month. However, a deposit that is made by the 15th business day of the following month can still be considered late, and thus subject to penalties, if it is determined that the deposit could have been made sooner. The key point of this rule is ‘as soon as administratively feasible.’
To make sure that deposits are made timely as defined by the DOL, employers should work with their payroll provider to determine the earliest date that elective deferral funds can be reasonably separated from general payroll funds and create procedures to ensure that deposits are made by that date.
For example, if an employer has a procedure in place to deposit elective deferrals on the following Thursday after the payroll pay date, but it is determined that these elective deferrals can be separated and deposited even one day earlier on Wednesday, then deposits made by this employer are considered late and may require corrective action.
We can help.
Froehling Anderson has a team of experienced individuals with years of experience auditing employee benefit plans. Our team can assist with any questions you may have concerning compliance with DOL rules and regulations. Contact us at 952-979-3100.