Contributions and timely remittance of participant deferrals

• Apply the plan asset rule and maximum period in 29 CFR 2510.3-102
• Use the seven-business-day safe harbor for plans with fewer than 100 participants
• Design tests of deferral amounts, compensation definitions and remittance timing
• Report late deferrals on Schedule H line 4a and compute lost earnings

When deferrals become plan assets

Amounts a participant has withheld from wages for contribution to the plan, or pays to the employer, become plan assets as of the earliest date they can reasonably be segregated from the employer's general assets (29 CFR 2510.3-102(a)(1)). The same rule applies to participant loan repayments. For pension plans, that date can never be later than the 15th business day of the month following the month in which the amounts were withheld or received (2510.3-102(b)(1)). For welfare plans, the outside limit is 90 days (2510.3-102(c)).

The 15th business day is an outer limit, not a safe harbor. A sponsor that deposits deferrals in two days for most payrolls has shown it can segregate them in two days, and a 10-day deposit for one payroll is late even though it meets the 15th business day. This is the most common source of late-deposit findings.

The small plan safe harbor

For plans with fewer than 100 participants at the beginning of the plan year, amounts deposited no later than the 7th business day after the pay date (or receipt date) are deemed timely (2510.3-102(a)(2)). The safe harbor is optional and does not apply to large plans. Many audited plans have 100 or more participants, so it rarely helps in an audit.

What to test

Remittance timing. For every payroll in the year, compare the pay date to the date the recordkeeper received the deferrals and loan repayments. Testing every payroll is efficient: a calendar-year biweekly plan has 26 payrolls. Establish the sponsor's normal remittance pattern to define "reasonably segregated," then flag outliers.

Amounts. For a sample of participants and pay periods:

• agree the deferral percentage or amount to the participant's election;
• recompute the deferral on compensation as the plan defines it, since many plans include or exclude bonuses, overtime or commissions;
• recompute employer matching and nonelective contributions under the plan formula, including any true-up; and
• trace the amounts to the recordkeeper's participant account.

Employer contributions receivable. Agree year-end receivables to subsequent deposits and the plan's formula.

Automatic enrollment. Confirm new hires were enrolled at the default rate on time when the plan has an eligible automatic contribution arrangement or similar feature.

The contribution remittance workpaper lays out the tests.

When deposits are late

Late deferrals are a prohibited use of plan assets by the employer, a party in interest. Consequences:

• they are reported on Schedule H line 4a (or Schedule I) for the year delinquent and each later year until fully corrected, including payment of lost earnings;
• the employer owes a first-tier excise tax under Internal Revenue Code section 4975 on the amount involved, reported on IRS Form 5330, unless relief applies;
• correction means depositing the principal and lost earnings, and the DOL's VFCP offers relief, covered in a later lesson; and
• the auditor communicates the matter as a reportable finding.

The auditor also tests the line 4a schedule as an ERISA-required supplemental schedule.

Common file mistakes

• Testing timing for a sample of payrolls instead of all of them.
• Treating the 15th business day as a safe harbor for large plans.
• Using gross wages instead of the plan's definition of compensation.
• Late loan repayments not reported on line 4a or 4d.

See the participant data and late deposits guide.

Granite Peak Engineering 401(k) Plan: which deposits were late?