News & Views

The rules governing the deposit of 401(k) deferrals are found in Department of Labor regulations. These rules state that deferrals must be put in the plan on the earliest date on which the contributions can reasonably be segregated from the employer's general assets. The regulations also provide an outer deadline of the 15th business day of the month following the month in which the deferrals were withheld.

Many employers assume that the 15-day outer deadline is the general rule for 401(k) deposits. This is simply not accurate! In the preamble to the regulations, the Department of Labor emphasized that the 15-day outer deadline is not a safe harbor. According to the Department of Labor, "for many plans, participant contributions will become plan assets well in advance of the applicable maximum period." With most payroll systems, employers are able to segregate wage-withholding amounts in a matter of days, if not almost immediately.

What, then, is the deadline to make 401(k) salary deferrals? Reish, Luftman, Reicher & Cohen, a law firm in Los Angeles, California, states it is rare that an employer can prove to a Department of Labor investigator that the deposit of the 401(k) deferrals was properly delayed for more than ten (10) days. Accordingly, if 401(k) deferrals are not being deposited in the plan within ten (10) days, there may be a violation of ERISA fiduciary and prohibited transaction rules.

The Department of Labor considers a failure to timely deposit 401(k) deferrals both a prohibited transaction and a fiduciary breach. It is treated as a prohibited loan from the plan to the company or as an illegal taking of plan assets.

Your company should ensure that 401(k) deferrals are transferred to the plan on a timely basis. If 401(k) deferrals have not been transferred within the applicable time frames, your company should consider voluntary correction procedures that are available through the Department of Labor.

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