CPA & Business Advisory Blog

Contributory Retirement Plans: What You Need to Know About Late Remittance

It’s pay day!  Your gross pay every two weeks is $1,000, but somehow you only end up with $700.  The government has taken their cut, health insurance premiums have been withheld… and some of us are putting a few dollars aside for retirement

We have a deduction labeled “401k” on our check stub.  It’s our contribution to our retirement savings and in a perfect world, the money that is being withheld would show up in our 401k accounts as an increase in our investments on the same day we receive our $700.  Sounds simple, right?  And, although we’re not receiving it as cash, a check, or directly deposited in our bank account on pay day, it’s still our money.  More so, we’ve earned it!

401k retirement contributions

 

That’s the reason the Department of Labor (DOL) has a rule in place that requires participant contributions withheld from wages by an employer to be contributed to the participant’s retirement account as of the earliest date on which such contributions can be reasonably segregated from the employer’s general assets. 

In other words, the DOL doesn’t want your employer misusing your money for company purposes. This is good for you, but what does that mean?  What is a “reasonable” time frame in this situation?  For large retirement plans, there is no bright line answer. 

Most employers do their best to get our money remitted in a timely fashion, but in certain cases, it can be an administrative nightmare! 

  • The calculation of the amount to be withheld has to be performed and reviewed for accuracy.  Sometimes there are errors that need to be corrected. 
  • Once the amount is decided, an ACH is sent to the custodian or trustee. 
  • If any discrepancies are noted, the funds may be held up again until a correction is made. 
  • Finally, the money makes it into our investment accounts.

But from start to finish, how long did that process take and was it as of the “earliest date” possible? 

If the process took four business days one week and five business days the next, and on one occasion, it may have taken 12 business days, what does that mean to your employer?

For small retirement plans (generally less than 100 eligible employees), there is a Safe Harbor rule of seven business days.  It’s cut and dry.  The pay period where it took 12 business days is too long and if the DOL audits the company, they will likely have to calculate lost earnings associated with that contribution remittance and contribute those monies back into the plan as well as pay excise taxes. 

For larger retirement plans (generally more than 100 eligible employees), the remittances can’t be later than the 15th business day of the following month.  BUT, this is not allowed to be used as a safe harbor.  Meaning, if you’re able to remit the contributions in 10 business days, but instead you take 14 business days, you can’t say that you’re remitting them timely just because they aren’t later than the 15th business day of the following the month. 

What should a company do?

Go through your current process.  And I mean really go through it with a fine-toothed comb.  How quickly can you really remit the contributions?  Document the process and then make sure it’s done on a consistent basis.  If the employee who handles the remittances is out of town on vacation, ensure you have someone in place as a backup that can takeover.  An employee on vacation is not an acceptable excuse.  If your service provider is at fault, hold them accountable.  A delay by the service provider is also not a valid excuse. 

As you can see, late remittances in contributory plans have some pretty clear cut guidelines. If you have questions about your contribution, either as an employee or an employer, contact me or any of my colleagues in the Employee Benefit Plan group at 440-449-6800. We’re happy to help and will be glad to start the conversation.

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