What Happens If 401(k) Payroll Deposits Are Late?

Late 401(k) payroll deposits happen. Maybe a payroll was missed, there was an administrative error, or contributions simply weren’t deposited as quickly as they should have been.

Sometimes you catch it internally. Other times, your auditor, TPA, or recordkeeper may be the one who brings it to your attention.

Either way, once you realize a 401(k) deposit was late, the next question is usually: How big of an issue is this, and what do we need to do to fix it?

Late 401(k) deposits can be corrected, but the correction will depend on what actually happened. You’ll need to look at things like:

• How late was the deposit?
• Which employees were affected?
• How much money was involved?
• Which correction rules apply to your plan?

The important thing is to identify the issue, understand what needs to be corrected, and take the appropriate steps to fix it.

Let’s walk through how late 401(k) deposits work and what you should do if you find one.

How late can a 401(k) deposit be?

This is where employers often get tripped up because there isn’t one universal deadline for every 401(k) plan.

The Department of Labor generally requires employee contributions to be deposited as soon as they can reasonably be separated from the employer’s general assets.

Here’s the quick version:

Your situation	What to know
Plan with fewer than 100 participants	A 7-business-day safe harbor may apply.
Larger plan	There’s no 7-business-day safe harbor. Your normal deposit timing matters.
You normally deposit within a few days	That history may help establish how quickly your company can reasonably make deposits.
You thought you had until the 15th business day of the next month	That’s not a safe harbor and doesn’t automatically make the deposit timely.

That last one is an especially common misunderstanding.

The IRS explains this in its 401(k) Plan Fix-It Guide for late employee deferrals.

Why does a late 401(k) deposit matter?

Think about it from the employee’s side.

The money already came out of their paycheck and should have been in their 401(k), working for them.

When that money gets deposited late, simply sending it to the plan may not completely fix the problem.

The correction can involve lost earnings for affected employees. A late deposit can also create a prohibited transaction under ERISA, which may bring additional correction or reporting requirements.

That’s why this is one of those 401(k) mistakes worth correcting carefully rather than simply moving the money and assuming you’re done.

We found a late 401(k) deposit. What should we do?

Start by gathering the facts.

Find the dates the 401(k) contributions were withheld from employees’ paychecks and the dates the money actually reached the plan.

Then determine whether you’re looking at:

• One late payroll
• Several late deposits
• An ongoing timing problem

Get any outstanding employee money into the plan as quickly as possible. From there, the appropriate correction depends on the facts.

Lost earnings may need to be calculated and contributed to affected participants, plus there may also be Department of Labor or IRS correction and reporting requirements.

The Department of Labor has a Voluntary Fiduciary Correction Program, including a self-correction option for certain late participant contributions and loan repayments.

But not every late deposit is handled the same way – that’s where getting help can save a lot of time and second-guessing.

Don’t just fix the deposit. Fix what caused it.

Correcting the late deposit takes care of what already happened. But there’s another important question to ask: Why did it happen in the first place?

There could be a number of reasons:

• A payroll process changed, but the 401(k) deposit process didn’t change with it.
• Someone was out of the office, and there wasn’t a backup person assigned.
• Responsibilities weren’t clear, so everyone thought someone else was handling the deposit.
• Your company has grown, but the process for sending 401(k) contributions hasn’t grown with it.

Once you understand what caused the late deposit, you can look at the process and decide what needs to change going forward.

A good correction should leave you with more than a clean file – it should leave you with a better process too.

Your late 401(k) deposit checklist

•  Identify which payroll deposits were late
•  Get any outstanding employee contributions into the plan
•  Gather payroll and deposit dates
•  Determine whether this happened once or more than once
•  Get help determining the appropriate correction
•  Document what was corrected
•  Tighten the process going forward

One late deposit doesn’t have to become a bigger problem

A late 401(k) deposit is something to take seriously, but it’s also something that can be addressed.

The important thing is not to assume that depositing the contributions late is the end of the correction. There may be additional steps you need to take depending on what happened and how quickly it was corrected.

Start by answering a few key questions:

• How late was the deposit?
• Which employees were affected?
• Was there lost earnings that need to be calculated?
• What correction method applies to your plan?
• Are there any additional filing or reporting requirements?

Once you understand the scope of the issue, you can determine what needs to happen next.

And remember, you don’t have to figure all of this out on your own. Your TPA, recordkeeper, ERISA counsel, and retirement plan advisor can help you understand the issue, determine the appropriate next steps, and make sure the correction is handled properly.

Disclaimer: This material is for general informational purposes only and is not intended to provide legal or tax advice.