A company that sponsors an employee benefit plan, such as a 401(k) plan or health benefit plan, must remit the withholdings from the employees to the plan’s trust in a timely manner. Failure to remit the withholdings promptly can result in the employer having to pay for the loss of earnings and pay an excise tax of up to 100% of the amount involved.
The following are the Department of Labor (DOL) rules for remitting contributions:
• The employer is required to deposit employee contributions to the trust as soon as they are segregated.
• In no event can the deposit be later than the 15th business day of the following month.
• For plans with fewer than 100 participants, the safe harbor rule is to remit the contributions within seven business days of withholding.
Some employers are using the 15th business day of the following month as a safe harbor. The rules regarding the 15th business day isn’t a safe harbor for depositing deferrals; rather, these rules set the maximum deadline. As such, the DOL requires employers to remit the contributions as soon as it is determinable. We recommend that contributions for large plans (greater than 100 participants) be remitted at the same time as when payroll taxes are remitted to the IRS.
In 2010, the Department of Labor’s Employee Benefits Security Administration (EBSA) initiated the Contributory Plans Criminal Project (CPCP) to combat misuse of employees’ withholding. An example of the employers misusing the employees’ deferral is by using employee payroll contributions for their own personal use or to cover business expenses. By not remitting the withholdings timely, the employer is depriving the employees’ contributions of the potential earnings had the funds been placed into a trust. As such, timely remittance of contributions has been an area highly scrutinized by the DOL in recent years.
If an employer had failed to remit the contributions in the time manner required by the DOL, the employer can elect to correct the error by using the DOL’s Voluntary Fiduciary Correction Program (VFCP). To correct the error, the employer is required to pay for lost earnings plus an excise tax of 15 percent. If the employer does not correct the error, there may be an additional tax of 100 percent of the amount involved.
Forms and publications on these topics are available at www.IRS.gov.