The Department of Labor (DOL) has now issued final regulations on the timing of the deposit of 401(k) contributions, which provides a “safe harbor” deadline for employers.
Prior to the issuance of proposed (now final) regulations, the general rule for depositing employee 401(k) deferrals was that once deducted from an employee’s paycheck, the funds were required to be invested at the earliest possible date that the funds could be reasonably segregated from the employer assets, but no later than the 15th business day following the month of deferrals. One problem with this standard is that each employer is different in what may constitute the “earliest possible date.” The DOL did not provide additional guidance on this matter, but upon Plan audit, the DOL would arbitrarily determine whether the standard was being met.
The new regulations bring some clarity to the deposit rules. The final regulations, applicable to plans with fewer than 100 participants, provide that employee contributions will be considered made on a timely basis if deposited no later than the 7th
business day following the date an employee is paid. This rule applies to both 401(k) deferrals and employee loan repayments.
Although the final regulations are welcome because they provide a set deadline that employers can now rely on, there is a downside if the 7-day rule is not met. If a 401(k) Plan does not meet the deadline, it can reasonably be anticipated that the DOL will be more likely to come down harder on delinquent deposit situations. And audit by the DOL can be a long, tedious process and may involve having to make contributions to replace lost earnings. Questions regarding prohibited transactions and fiduciary responsibility may also be raised.
The best practice is still to deposit 401(k) contributions the same day as when a payroll is processed. If your current procedures in place do not get 401(k) contributions into the investment accounts in seven days, we highly recommend that you review your procedures to ensure that the seven day standard is met.