#7
High Risk
Delayed Payment of Deferrals and After Tax Contributions
Employee contributions must be deposited by the 15th of the following month or face prohibited transaction penalties.
- Potential Consequences
- Prohibited transactions
- Lost earnings calculations
- DOL violations
- Double penalties
- Prevention Tips
- Establish clear payroll to plan deposit procedures
- Coordinate with payroll processor and recordkeeper
- Monitor deposit timing monthly
- Segregate employee contributions immediately
- Document deposit procedures and timing
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Employee pre-tax deferrals and after tax contributions must be paid to the plan at the earliest date that the amount can be segregated from the employer’s general assets. However, under no circumstances can the contributions be made after the 15th of the following month.
Close coordination between the employer, payroll processor and record-keeper is needed to assure that this requirement is met.
A late contribution gives rise to a prohibited transaction under ERISA, and is highly frowned upon. This will result in two penalties. The first is an operational fault for failing to follow the plan, and second, a fine for a prohibited transaction.
In addition to fines, the employer may be required to pay for lost market gains as a result of the delayed investing.
"It has been said that time heals all wounds. I don't agree. The wounds remain. Time – the mind, protecting its sanity – covers them with some scar tissue and the pain lessens, but it is never gone."
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