Deadline for Forwarding Employee 401(k) Contributions and Loan Payments to the Trust
The Department of Labor ("DOL") has issued final regulations on the deadline for employers to forward their employee's 401(k) contributions and loan payments to the 401(k) trust. This has been a hot topic in DOL audits for several years and the DOL has included a "safe harbor" rule for employers whose plans have less than 100 participants. The rules for larger employers remain the same.
For many years, the DOL regulations have provided that employers must forward their employee's 401(k) contributions and loan payments to the trust "as of the earliest date on which such contributions and payments can reasonably be segregated from the employer's general assets." The regulations also say that the amounts must be forwarded to the 401(k) trust not "later than the 15th business day of the month following the month in which the participant contribution or participant loan repayments … would otherwise have been payable to the participant in cash…"
Many employers thought that the 15th business day of the following month was the deadline and they were in compliance if they met that deadline. The DOL auditors have disabused us of that notion for the past several years and have taken the position, in audits, that the "earliest date on which contributions can reasonably be segregated" meant three to five days.
The final regulations do not change the rules for employers whose 401(k) plans have more than 100 participants. The DOL will continue to take the position that the "earliest date" means three to five business days after the date of the payroll from which the 401(k) contributions or loan repayments are withheld.
The final regulations provide a "safe harbor" for plans with less than 100 participants at the beginning of the plan year. These employers are in compliance as long as the money is forwarded to the 401(k) trust not later than the seventh (7th) business day following the date of the payroll from which the 401(k) contributions or loan repayments are withheld. The safe harbor means that you are in compliance if you forward the money by the seventh business day. It does not mean that you are out of compliance if you forward the money after the seventh business day, but you will have to demonstrate that the actual date was the "earliest date" by which you reasonably could forward the money.
Consequences of Missing the Deadline
If you miss the deadline for forwarding the 401(k) money to the trust, the DOL takes the position that the money becomes a "plan asset" which must be held "in trust" for the participants. Since the money is not being held in trust, you are in violation of ERISA. The penalty for this violation is usually that the situation is treated as a loan from the 401(k) trust to the employer which is a "prohibited transaction" under ERISA. The employer is required to pay interest on the loan at a rate determined by the DOL, file an excise tax return on the prohibited transaction and pay a tax equal to 15% of the amount of the interest due on the loan. The amount of the interest and the excise tax may be nominal, but the employer is saddled with the administrative burden and expense of calculating the amount of the interest and filing the excise tax return. This burden should serve as an incentive for you to forward the 401(k) money to the 401(k) trust in a timely basis.
Conclusions and Recommendations
The DOL's final regulations provide some relief for employers with less than 100 participants. The seventh business day rule provides additional time for these employers. The rules remain the same for larger employers and all employers should establish procedures to ensure that their employee's 401(k) contributions and loan repayments are forwarded to the 401(k) trust on a timely basis.