Publications

October 1999

Timely Deposit by Employers of Employee 401(k) Contributions is Crucial

By J. Michael Bermensolo, Esq., Geller Group Ltd.

Employers who sponsor 401(k) plans must pay close attention to deadlines imposed by the Department of Labor (DOL) for depositing employee 401(k) contributions into such plans. The maximum time period for remitting employee 401(k) contributions is the earlier of the 15th business day of the month following the month in which such contributions are withheld from the paychecks of employees or as soon as they can reasonably be segregated from the employer's general assets.

The amount of time that is reasonable for segregation from the employer's general assets depends on the facts and circumstances of each individual case. The DOL gives an example of a large national corporation that maintains several payroll centers with different pay periods and separate records of payroll deductions but aggregates withholdings and issues a single, monthly check to the plan's trust. In that case, the DOL considers the corporation to be in compliance if deposits are made within 15 business days of the month in which amounts were withheld. However, according to the DOL, a company with a small number of employees at a single payroll location can reasonably be expected to transmit employee 401(k) contributions to a plan's trust within 10 days of the close of each pay period in order to be in compliance with the DOL regulations.

Prohibitive Transaction

Employers who do not timely deposit employee 401(k) contributions engage in a prohibitive transaction and must first restore delinquent contributions plus lost earnings to the plan's trust in order to make all participants whole. Also, the employer must pay an excise tax to the IRS for the use of plan assets. In addition civil and criminal sanctions may be imposed.

Since October l995, 1,182 investigations have resulted in findings of prohibitive transactions with monetary sanctions imposed according to the DOL. Also, 126 criminal cases have been opened with 50 cases resulting in criminal prosecution of 62 persons.