Common Questions About Your 401(K) Plan
Is there a deadline for depositing participants’ deferrals to a 401(k) plan?
This is a hot issue because both the IRS and Department of Labor (DOL) are actively pursuing plans whose employee deferrals are not deposited timely. Deferrals must be deposited the earlier of:
- The earliest date the deferrals can be reasonably segregated from the employer’s general assets; or
- The 15th business day of the month following the month in which the deferral is withheld from the employee’s paycheck.
The DOL and IRS demand that if the employer can deposit the contributions into the plan prior to the 15th day deadline, IT MUST DO SO or face a fine. The DOL and IRS positions on plan assets have been made clear – funds must be deposited as soon as they can reasonably be segregated from the employer’s assets. Please note that the DOL believes most employers are capable of depositing deferrals as rapidly as they deposit payroll withholding taxes.
Penalties, in the form of taxes and interest, are imposed on late deposits. In addition, employers must contribute lost earnings to the affected participants. The DOL and IRS are actively auditing plans to review the history of deposits and determine the earliest date the employer is required to deposit deferrals.
Should 401(k) deferrals be taken out of bonuses and overtime pay?
Most plans provide for salary deferrals to be made from full compensation, including bonuses and overtime pay. A common mistake is the failure to withhold deferrals from full compensation. As an example, if an employee elects to defer 3% of annual salary, then 3% must also be withheld from any bonus or overtime paid as well. Failure to withhold on full compensation could be costly, requiring the employer, NOT the employee, to make up these missed contributions and earnings. Not all plans require deferrals on bonuses or overtime. You should carefully review your plan document if you are not certain. Our retirement plan specialists are more than happy to assist.
The owners and other key employees are not able to make the maximum 401(k) salary deferrals because the plan is failing the ADP and ACP tests. What can I do?
Satisfying the non-discrimination tests can be difficult for plans of all sizes. Unfortunately, the solutions are to: 1) tell the owners and key employees that they will have to make smaller contributions 2) make an additional contribution to the lower-paid employees or 3) make refunds to the owners and key employees. You can avoid these problems (and the non-discrimination tests) by adding a “safe harbor” provision. The following safe harbor provisions are available to your 401(k) plan:
- 3% profit sharing contribution
- 100% vested
- No hours of service or last day of employment conditions may be imposed,
- Must be given to all eligible employees—even if they do not contribute to the plan
- Basic matching contribution—100% of first 3% of salary deferred plus 50% of next 2% of salary deferred
- 100% vested
- No hours of service or last day of employment conditions may be imposed
- Must only be given to employees who defer into the plan
What are the bonding requirements for retirement plans?
All retirement plans covering employees are required by law to maintain a fidelity bond. Generally, the required coverage must be a minimum of 10% of plan assets as determined at the beginning of the year, up to a maximum of $500,000 of assets. We recommend purchasing enough insurance to cover the growth of the plan assets for at least 3 years. The added cost should be negligible.