Department of Labor (DOL) rules require that employers deposit retirement plan participant deferrals as soon as administratively possible. For small retirement plans (under 100 participants), this is typically a timeline of 7 business days. Large retirement plans (100 or more participants) must be as soon as reasonably possible, but absolutely no later than the 15th business day of the following month. However, if a large retirement plan shows that a typical deferral deposit can be done within, for example, 3 business days, that will be the deadline, as the Retirement Plan Sponsor has demonstrated the ability to do so.
Procedures should be in place to ensure retirement plan deposits for employee deferrals and loan payments are made within the appropriate timeframe. When late retirement plan deposits occur, lost interest must be calculated and deposited on each late contribution and loan payment and deposited on behalf of the employees involved. In addition, there is a 15% excise tax on the interest amount which must be filed along with Form 5330.
Per your Retirement Plan Document, participants may make changes to their deferral amounts throughout the Plan Year. This may be per paycheck, or quarterly, for example. Keep your retirement plan participants informed of upcoming deferral change days.
When entering retirement plan deferral and employer contributions, it is of utmost importance to ensure the money is going to the correct participant’s account and to the correct money source (i.e., pre-tax, Roth, match, etc.). Each money source may have its own vesting schedule and distribution rules, so it is imperative that retirement plan deposits are categorized correctly.
When funds are deposited into the retirement plan incorrectly, this can also lead to additional contributions from the employer to correct the issue. For example, if Retirement Plan Participant A’s deferrals are deposited into Retirement Plan Participant B’s account, and subsequently distributed, the employer must make a contribution to Retirement Plan Participant A’s account to make them whole. Another example involves profit-sharing contributions with a vesting schedule that are deposited as a safe harbor match, which is immediately vested. Suppose Retirement Plan Participant A receives such a deposit and subsequently takes a distribution. The profit-sharing money, incorrectly coded as a safe harbor match, will be fully available to Retirement Plan Participant A, rather than following the vesting schedule. Retirement Plan Participant A will be overpaid, and the employer will need to pay additional funds into the forfeiture account to correct this error.
If you find an error has been made with your retirement plan participant contributions, please contact your Watkins Ross administrator. The sooner we can catch and correct retirement plan errors, the lower the correction cost will be.