Correcting and Reporting Late 401(k) Contributions

When an employer fails to deposit employee 401(k) contributions on time, it creates a compliance issue. The Department of Labor (DOL) mandates that employee deferrals be deposited into the plan’s trust as soon as they can be reasonably segregated from the employer’s general assets. While there is an outside limit of the 15th business day of the month following the withholding, the “as soon as administratively feasible” standard is the primary rule. For small plans with fewer than 100 participants, a safe harbor exists where deposits made within seven business days are considered timely.

Failure to meet these deadlines constitutes a prohibited transaction under the Employee Retirement Income Security Act (ERISA). This means the employer has improperly held onto plan assets, which belong to the employees from the moment they are withheld. The correction process requires depositing the original amounts and compensating the plan for lost earnings.

Calculating and Correcting the Error

The employer’s first responsibility is to correct the financial impact on participants by depositing the full principal amount of the late contributions. In addition, the employer must calculate and contribute any lost earnings that would have accrued had the funds been invested on time. This restores participants to the financial position they would have been in without the delay.

The Department of Labor provides an official method for this calculation through its Voluntary Fiduciary Correction Program (VFCP) Online Calculator. This tool is the accepted standard for determining lost earnings. To use the calculator, you will need the total principal amount, the date funds were withheld, and the date they were deposited.

The calculator uses a standard interest rate to determine the amount of lost earnings, ensuring a standardized calculation. Once the calculator provides the total lost earnings amount, the employer must deposit this sum and the principal into the affected participants’ accounts.

A Simpler Option: The Self-Correction Component

The Department of Labor offers a streamlined path called the Self-Correction Component (SCC) for minor errors. Employers may be eligible if delinquent contributions are corrected within 180 days and the lost earnings are $1,000 or less. The SCC requires the employer to submit an electronic notice to the DOL certifying the correction is complete. The DOL provides an email acknowledgment but does not issue a formal no-action letter, unlike the full VFCP.

Required IRS Filings and Tax Payments

The prohibited transaction of a late contribution triggers an excise tax from the Internal Revenue Service (IRS), which is separate from DOL corrective actions. This tax is reported and paid using IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.

The excise tax is 15% of the “amount involved,” which for late contributions is the calculated lost earnings. This is a first-tier tax, and a much steeper second-tier tax can be imposed if the transaction is not corrected promptly.

To complete Form 5330, you will need the plan’s name and number, the employer’s identification number (EIN), and details of the prohibited transaction, including the calculated lost earnings. The form must be filed by the last day of the seventh month after the end of the employer’s tax year in which the transaction occurred. An extension can be requested using Form 8868, and the calculated excise tax must be paid with the form. This payment cannot come from plan assets; it is the employer’s financial responsibility.

Preparing the VFCP Application

For corrections that do not qualify for the Self-Correction Component, a full Voluntary Fiduciary Correction Program (VFCP) application is required. The application must include proof of payment, such as bank statements, showing the late contributions and lost earnings have been deposited. You also need the “printable results” from the DOL’s VFCP Online Calculator.

The application also requires a detailed narrative and supporting documents. The narrative must:

• Identify the individuals responsible for the remittance process
• Describe the error that led to the delay
• Outline the internal controls and procedural changes being implemented to prevent future occurrences
• Include copies of relevant plan documents, such as the adoption agreement

Submitting the VFCP Application

After gathering all documentation, submit the application through the DOL’s online portal. This electronic process assumes the correction, including the deposit of all funds, has already been made.

To file, create an account on the Employee Benefits Security Administration (EBSA) website and navigate to the VFCP section to upload your documents. After submitting the application, you will receive an electronic confirmation.

The DOL will review the submission. If the correction is satisfactory, the agency will issue a “no-action” letter. This letter is formal assurance that the DOL will not pursue civil action or penalties for the corrected breach.

Annual Form 5500 Reporting

The late deposit must also be disclosed on the plan’s annual report, Form 5500. This reporting is required for the plan year in which the error occurred, even if it was corrected under a DOL program.

The late contributions are reported on the appropriate schedule of the Form 5500. For large plans with 100 or more participants, this is disclosed on Schedule H, line 4a, while small plans report this on Schedule I. The form requires the employer to state the total amount of delinquent contributions.

A benefit of completing a correction under a DOL program is that you can note this on the Form 5500. This notation shows the DOL that the breach was rectified, which can prevent further inquiries or audits that might otherwise be triggered by the disclosure.