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Frequent 401(k) Audit Finding Series - Late Remittances

Background

The Department of Labor (DOL) requires Plan Sponsors to remit employee 401(k) withholdings in a timely manner.  The technical requirement is that employee withholdings must be remitted “on the earliest date that they can reasonable be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which the contribution was withheld”. 

DOL has been very clear that the 15th business day is not a safe harbor and, upon examination, will frequently find that contributions made even one day after the pay date can be late if the Sponsor has demonstrated a history of remitting on or before the payroll date. 


Observations

DOL has been very clear that the 15th business day is not a safe harbor and, upon examination, will frequently find that contributions made even one day after the pay date can be late if the Sponsor has demonstrated a history of remitting on or before the payroll date. 

Small Business Safe Harbor:  For small plans, generally businesses with under 100 employees, remittances will be considered timely if the employee contributions are deposited within 7 business days of the payroll date.  Large plans, those that are required to have 401(k) audits, are not eligible to utilize this safe harbor.


Failures

During 401(k) audits, we find late remittances in approximately 20% of engagements.  A common theme for the failure is a delay occurred because the employee who normally remits the contributions was absent from work (vacation, sick, etc.).   The DOL expectation is that the Sponsor has controls in place that will allow for timely remittance regardless of whether any specific employee is absent.


Corrective action

If they haven’t already done so, the Sponsor needs to remit the late employee contributions.  In addition, the Sponsor must fund lost earnings to make the impacted employees whole.  As part of a voluntary correction program, the DOL provides a calculator that can be used to calculate lost earnings that is owed to participants.

As the late remittance of employee contributions is considered a prohibited transaction between the Sponsor and the Plan, there is also a requirement for the Sponsor to file IRS Form 5330 and pay an excise tax.  The excise tax is usually nominal and is calculated at 15% of the lost earnings funded.


Scott M Dufek, CPA | 05/11/2018




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