Employers maintain 401(k) and other contributory retirement plans for various reasons: retention of key employees, marketplace competition, and to provide supplemental retirement funds. Adhering to compliance requirements is imperative in order to avoid unnecessary risk and adverse consequences. Under increasing scrutiny by the federal government, it is crucial that employers make timely deposits of employee deferrals, contributions and loan repayments to retirement plans. Failure to comply with timing requirements could result in significant violations and liability. Below are a few questions to consider as you manage your employee plan:
- What is timely deposit?
The deposit to the plan trust must be made as soon as the deferrals, contributions and loan repayments can be reasonably segregated from payroll. Special rules apply if there are multiple payrolls. Typically, deposits have to be made the same day the payroll is cut; there is a special rule for small plans (fewer than 100 participants at the start of the plan year), which allows deposits to be made by the seventh business day.
- Is there an outside limit?
Yes. Department of Labor Regulations set forth an outside limit of the 15th business day of the next month. However, this can only be used in limited circumstances.
- What if we haven't been depositing employee deferrals/contributions and loan repayments on a timely basis?
You change your procedures and consider correcting for the prior delay and applying for approval under the government's voluntary correction program.
- Why is this important?
It is important to handle participant money properly. Plan fiduciaries can be subject to lawsuits and fines, and the plan may be disqualified if these requirements are ignored.
If you would like to discuss the specifics of your plan, please feel free to reach out to your relationship attorney who can connect you with our Employee Benefits team, or contact one of the authors.
Client Alert 2012-032