Hopefully, like us, you’ve had a few minutes to recover from last year’s October 15 401(k) audit deadline. Now it’s time to look back on how the audit process went for you. What went right or wrong? What can be done to ensure a better audit experience next year?
PriceKubecka performed over 400 audits in 2023. The most common error we saw was a failure to remit deposits in a timely manner.
If your employee wants 4% of their wages to go into their retirement account, does he/she have a clear understanding of what’s considered wages? For that matter, does your payroll or HR department understand?
The most common problems arising from not following the plan’s definition of eligible compensation are overstatements or understatements in participants’ accounts due to improperly excluding or including amounts for deferrals and allocations. There is a plethora of reasons why plan rules aren’t being followed – improper pay codes, changing payroll providers, employee turnover, etc. But ultimately it comes down to how the payroll system is set up and whether administrators are aware of what’s in the plan.
Late 401(k) contributor deposits. What does that really mean?
As it relates to large 401(k) plans (100+ active participants), the Department of Labor and the IRS are strict about how long it should take your company to deposit an employee’s withholding into their 401K account. Here’s the actual rule for large plan filers:
Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month. Remember that the rules about the 15th business day isn’t a safe harbor for depositing deferrals; rather, that these rules set the maximum deadline. DOL provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants.
All too often, our clients focus only on the second part of this rule – “however, in no event can the deposit be later than the 15th business day of the following month.” Then they’re surprised and upset when we flag late deposits they’ve made. What the client should have been doing is focusing on the first part – “require that the employer deposit deferrals to the trust as soon as the employer can” Here’s why.
If you have remitted funds 3 days after the payroll check date, you’ve demonstrated to PriceKubecka, the Department of Labor, and the IRS that ‘as soon as the employer can’ for your company is 3 days. That is your benchmark for the rest of the year. If next time you remit funds 10 days after payroll, that’s considered a late deposit, even though it’s sooner than the 15th business day of the following month.
Correcting Late Deposits on 401(k) Deferrals
Your auditor flagged a few late deposits in the 401(k) audit. Now what? As the plan sponsor you must consider correcting those late deposits. If you don’t, you may be out compliance in the eyes of the Department of Labor and IRS.
If your plan had a deposit that was considered late – for this example, we’ll say 7 days late – the Department of Labor expects the plan sponsor to calculate what monetary amount the plan participant lost by not having those funds in the plan’s active investment accounts for those 7 days. Whatever that amount ends up being should be added to the employee’s account. As the plan sponsor, that amount is your correction, or ‘penalty.’
Your third party administrator or record keeper can help you with the appropriate method of correction. However, if late deposits are pervasive across the entire year or multiple years, we may advise that you also meet with an ERISA attorney to ensure everything is corrected properly.
Fixing the Late 401(k) Deposit Permanently
What happens if you don’t correct late deposits, or if they keep happening repeatedly, year after year?
If you don’t make some changes, you’re possibly putting a target on your back. These errors will be reported in your 5500 and in your financial statements. All of which will get the attention of the Department of Labor. You are begging for a full-blown audit. Fortunately, this outcome is easily fixable and preventable. All you need to do is place the same importance on 401(k) deposits as you do on payroll. Just add it to the checklist as a deposit that needs to be made the same day as payroll is processed.
If you’re already spending the day or the week ensuring every one of your employees gets paid on time, it’s just one extra step to make sure 401(k) deposits also get made on time.
Other ways to avoid the mistake:
- If deferral deposits are a week or two late because of unforeseen circumstances, keep a record of why those deposits were late.
- Have at lease 2 people responsible for the process so that if one person is out on vacation then the second person can continue performing the process. Train the backup payroll processor.
- Coordinate with your payroll provider and others who provide service to your plan, if any, to determine the earliest date you can reasonably make deferral deposits. The date and related deposit procedures should match your plan document provisions, if any, about this issue.
- Implement and document practices and procedures that you explain to new personnel, as turnover occurs, to ensure that they know when deposits must be made.
PriceKubecka is your 401k audit expert.
Did this error appear in your 401(k) audit? Would you like our help in preventing these errors next year? Please CONTACT US. At PriceKubecka, it’s our mission to ensure clients have a better audit experience. Our 401(k) experts can answer your questions about late deposits, as well as any other plan error your audit identified.