Correcting 401(k) Deposit Delays

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Managing a 401(k) plan is essential for employers, ensuring compliance with Department of Labor (DOL) regulations. Timely deposits of employee deferrals are critical, but mistakes can happen, leading to late deposits. This article provides insights into late 401(k) deposits and offers steps for correction.

Understanding Late 401(k) Deposits
Late deposits occur when employers fail to transfer employee contributions to the 401(k) plan within the required timeframe. The Employee Retirement Income Security Act (ERISA) mandates that contributions be deposited as soon as possible, generally within a few business days after payroll deductions.

The implications of late deposits are serious, risking employees' retirement savings and violating ERISA regulations. This can result in fines, penalties, or lawsuits from employees or the DOL.

Reporting Requirements
Late deposits must be reported on Form 5500. For large plans, details are included on Schedule H Line 4a, while small plans report on Line 10a. Plans requiring an audit will also attach a Schedule of Delinquent Participant Contributions detailing late deposits and corrections made.

Correcting Late Deposits
Employers can correct late deposits in two ways:

  1. Self-Correction: Employers contribute lost earnings to affected participants' accounts, compensating for missed investment opportunities.
  2. Voluntary Fiduciary Correction Program (VFCP): This DOL program encourages proactive correction of fiduciary breaches, including late deposits, offering a structured approach to resolution.

Self-correction saves time and costs since it doesn't require participant notification. However, utilizing the VFCP can provide additional benefits.

DOL Communication
If late contributions are reported, the DOL may issue a letter prompting self-correction under the VFCP. This letter serves as a reminder that further action, including penalties, may follow if the issue is not addressed.

Key Steps for Correcting Late Deposits via VFCP

  1. Identify the Issue: Review payroll and 401(k) records to determine when and why late deposits occurred.
  2. Calculate Lost Earnings: Assess the investment gains that would have accrued if deposits were timely.
  3. Make Corrective Contributions: Contribute both the original amounts and calculated lost earnings to affected accounts.
  4. Notify Participants: Inform employees about the late deposits and corrective measures taken. While optional for self-correction, notification may encourage participation.
  5. Document the Correction: Maintain thorough records of the issue, correction, and notification processes.

Benefits of Using VFCP
Correcting late deposits through the VFCP allows employers to mitigate the risk of DOL enforcement actions and penalties. While the VFCP ensures no further action regarding late deposits, the DOL may still address other plan violations.

DOL Response
Typically, plans that respond to a DOL letter with a VFCP application receive confirmation of compliance, indicating that no civil enforcement actions or penalties will be pursued.‍

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Although late 401(k) deposits can pose challenges, the DOL's Voluntary Fiduciary Correction Program (VFCP) offers a pathway for correction. By promptly addressing late deposits, employers can protect employees' retirement savings, ensure regulatory compliance, and demonstrate a commitment to fiduciary responsibility.

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