The question is often posed to us as Third Party Administrators: “How soon after I withhold my employee’s 401k deferrals must they be deposited to the plan?” Unfortunately up until now, the Department Of Labor’s position on this has remained rather unclear. In 1996 a regulation was issued that required employers to deposit employee deferrals as of the earliest date that the contributions could be “reasonably” segregated from the employer’s assets, but absolutely no later than the 15th business day of the month following the month that the employee’s deferrals were withheld from their compensation. This left much to personal interpretation – what is the “earliest date” that the assets could be separated from employer assets? What is considered “reasonably”? Also many mistakenly took this to mean that as long as the contributions were deposited by the 15th business day of the following month, there was no problem.

On January 14, 2010, the DOL published final regulations that finally provided some clarity on this issue. These regulations established a safe harbor rule defining when employee deferrals must be deposited to the plan for small retirement and health & welfare plans (less than 100 participants). The new regulation states that contribution deposits are considered to be timely so long as they are deposited to the plan no later than the 7th business day following the date on which the amounts would have otherwise been paid to the employee as compensation. This new definition leaves little to interpretation and is pretty straight forward. Any contribution deposits not meeting the safe harbor regulation are deemed to be late contribution. Late contributions are considered to be prohibited transactions under a qualified plan and require the plan sponsor to contribute lost earnings to the plan and pay an excise tax on the amounts involved.

Click here for a link to the Department of Labor final regulation.