Timing of employee 401(k) contributions (including loan repayments)
When must employee contributions and loan repayments be withheld from payroll?
This is a top audit issue for 401(k) plans, and requires a consistent approach by all team members handling payroll submission. If a plan is considered a ‘small plan filer’ (typically under 100 eligible employees), the Department of Labor is more lenient and provides a 7-business day ‘safe harbor’ allowing employee contributions and loan repayments to be submitted within 7 business days of the pay date for which they were deducted.
If a plan is larger (>100 eligible employees), the safe harbor does not apply, and the timeliness is based on the earliest date a plan sponsor can reasonably segregate employee contributions from company assets. Historically, plans leaned on the outer bounds of the requirement (by the 15th business day of the month following the date of the deduction effective date), but today with online submissions and funding via ACH, a company would generally be hard-pressed to show that any deposit beyond a few days is considered reasonable.
To ensure timely deposits, it’s imperative for plan sponsors to review their internal processes regularly. All relevant team members — including those who may have to handle the process infrequently due to vacations or otherwise — understand the 401(k) deposit process completely and have the necessary access.
I am a self-employed business owner with income determined after year-end. When must my 401(k) contributions be submitted to be considered timely?
If an owner or partner of a company does not receive a W-2 from the business, and determines their self-employment income after year-end, their 401(k) contribution should be made as soon as possible after their net income is determined, but certainly no later than the individual tax filing deadline. Their 401(k) election should be made (electronically or in writing) by the end of the year reflecting a percentage of their net income from self employment. Note that if they elect to make a flat dollar 401(k) contribution, and their net income is expected to exceed that amount, the deposit is due no later than the end of the year.
Timing of employer 401(k) contributions
We calculate and fund our match / safe harbor contributions every pay period. How quickly must those be deposited?
Generally, there’s no timing requirement throughout the year for employer matching or safe harbor contributions. The employer may choose to pre-fund these amounts every pay period, enabling employees to see the value provided throughout the year and to benefit from dollar cost averaging.
Note that plans that opt to allocate safe harbor matching contributions every pay period are required to fund this at least quarterly.
When do we have to deposit employer contributions for year-end (e.g., true-up match or safe harbor deposits, employer profit sharing)?
Employer contributions for the year are due in full by the company tax filing deadline, including any applicable extension. Safe harbor contributions have a mandatory funding deadline of 12 months after the end of the plan year for which they are due; but typically for deductibility purposes, they are deposited even sooner.