Offering your employees a retirement plan, such as a payroll deduction IRA, a SIMPLE (Savings Incentive Match for Employees) IRA or a traditional 401(k) plan, can be a great employment benefit for your employees and your business. However, a retirement plan also requires certain responsibilities – including timely deposits of employee contributions. That is one reason entrepreneurs without a human resources department look to The Payroll Department to provide payroll services.
In recent years, the Department of Labor (DOL) has actively enforced the requirements concerning timely deposits of employee funds. Any mistakes in handling these contributions can result in penalties to your business and plan trustees. Therefore, it’s important to understand the requirements when managing retirement plan contributions.
Employee Contribution Requirements
Plans with less than 100 participants
In 2010, the DOL established a clear safe harbor date regarding timely deposits for employers with small retirement plans (plans with fewer than 100 participants at the beginning of the year). For small retirement plans, you must deposit employee contributions in the plan no later than the seventh business day following the pay date in which the funds were withheld from the employee’s pay. This is a true deadline – not a maximum deadline. If you remit employee contributions within the 7-day window, the DOL will consider your company as having made a timely deposit.
Note: These rules apply to all types of employee contributions, including catch-up and after-tax contributions.
Untimely Employee Contribution Deposit Consequences
If employee contributions are not deposited into the plan within a timely manner, the DOL will regard your small business as comingling plan funds with company funds. Comingling of funds is considered a prohibited transaction that you’re required to report on the plan’s Form 5500.
Also, as a result of not making timely deposits:
- Your plan will be penalized.
- Your company will be liable for lost earnings payments to plan participants.
- Plan trustees may have to pay fines or penalties if they’re found to be in breach of their fiduciary responsibilities.
Therefore, you need to ensure that all employee contributions are deposited as soon as reasonably possible into your company’s retirement plan after completing payroll and issuing employee paychecks from which the contributions were withheld. Remember: It’s always smart to plan ahead when managing retirement funds for employees in your workplace.
If you have any questions regarding deposit compliance or if you think your plan may have deposit issues, contact The Payroll Department. As a payroll provider we are familiar and we can help you with your retirement plan deductions and submission of contributions.
Ariane of The Payroll Department Blog Team