Last Updated on March 24, 2025 by Ben
Late 401(k) Contributions
It’s never too late to contribute to your 401(k) plan! In fact, you may be able to contribute more money if you wait until later in the year. Keep reading to learn more about late 401(k) contributions and how they can benefit you.
Late 401(k) Contributions
It is unwise to make late 401(k) deposits. Employees earn interest on the money in their 401(k) accounts. Employee’s money may be lost if a deposit is made after the deadline.
Making untimely deposits may result in fees and fines. You could also be charged an excise tax on the amount you deposit late. Your company’s participation in a 401(k) plan may be revoked as well.
When you realize that you have missed a scheduled deposit, there are a number of procedures to take.
What Is Required
Employers whose plans have hardly any than 100 participants
You must ensure that your payroll vendor deposits all employee contributions and plans loan refunds by the seventh business day after the payment from which those numbers were withheld.
Employers whose plans have 100 or more participants
You must ensure that all employee contributions and loan repayments are deposited by the earlier the date they can be segregated from employer assets or the 15th business day of the month after the paycheck was issued.
The employer is in charge of making sure that the deposits happen on time. This includes both the contributions and any earnings on them. Although some 401(k) plan vendors may remind you if they do not receive your plan deposits on the anticipated date, those vendors are careful to limit their involvement so that they don’t have any fiduciary responsibility for making these deposits.
Deposit the Funds
When a Deposit Is Late
If you make late deposits often, it can cause some problems. But if you fix the problem and make sure it doesn’t happen again, everything will be okay. If you make fraudulent late deposits, that can cause even more problems.
If a plan sponsor realizes that a deposit is late, they need to take steps to fix the situation as soon as possible. This includes making the deposit as soon as possible and adding any lost earnings on those deposits resulting from the late deposit. The U.S. Department of Labor gives a Voluntary Fiduciary Correction Program that includes a penalty calculator. The IRS also provides guidelines for how to address the situation.
If the problem continues and more deposits are made late or not at all, the plan sponsor could be considered in charge of those 401(k) plan assets. Rich Rausser, senior vice president of product services at Pentegra Retirement Services in White Plains, N.Y., said this. If you deposit your contributions late, the IRS might consider it a loan from the plan to you. This is called a “prohibited transaction” and can result in fines.
If a problem continues for a while and the plan sponsor does not report or address it, employees or some other whistle-blower may report the plan sponsor for this violation. If the plan sponsor does not report and address an issue, they will face greater penalties if the plan is audited.
Pay Excise Taxes
- Excise Taxes and Employee Notification
Suppose a company is found to have occupied in a prohibited transaction under ERISA. In that case, it could face an excise tax on the total of money that participants lose because their contributions have not been deposited or invested. For example, if someone is late with a $1,000 deposit and they lose out on $100 because of that delay, the excise tax would be 15 percent of that $100.
In some cases, employers can keep away from paying the excise tax by telling their workers about the late deposit and what they did to try to fix it. However, many employers do not want to send that variety of notice to their employees, so they go ahead and recompense the excise tax and make the late deposit and make up the lost earnings. In this case, the plan sponsors can send their own notice to employees. This gives them more freedom to frame the issue than if they had to follow the DOL’s notice requirements.
- Voluntary Fiduciary Correction Program
The Voluntary Fiduciary Correction Program (VFCP) is a way for people in charge of a plan to correct certain problems. People can use this program to identify and fix things like prohibited purchases, sales, and exchanges, improper loans; delinquent participant contributions; and improper plan expenses. The program includes 19 specific transactions that are allowed to be corrected. If the eligible party documents that a transaction has been corrected, EBSA will not take any action.
Form 5500
If you have been making late deposits to your employee retirement plan, the Department of Labor or the IRS may investigate. When you categorize your annual Form 5500, you must report whether any of your deposits were late, even if they have since been corrected.
If the Form 5500 reporting results in a DOL inquiry, the plan sponsor can respond with an explanation of what happened and what was done to correct the issue. If the Department of Labor (DOL) determines that you did not properly handle a situation with your retirement plan, the DOL may investigate further. If this happens, the DOL can add an extra 20% penalty on top of any lost earnings and excise taxes.
If you make late deposits, the DOL may conduct a plan audit. Mickie Murphy, a director at accounting firm CliftonLarsonAllen LLP in Joliet, Ill., said that the Department of Labor looks at company payroll records when they do an audit to make sure 401(k) plan deposits were made on time. The people who do an audit will look to see when the plan sponsor could have made the deposit. They will use the timing of when payroll tax deposits are made as a guideline. Payments from participants, like loans, must be deposited in the same way.
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Final Thoughts – Late 401(k) Contributions
If you are behind on your 401(k) contributions, it’s not too late to catch up. Depending on how far behind you are, there are a few different ways that you can make up for the lost time. The most important thing is to start contributing as soon as possible so that you can take advantage of the compound interest working in your favor.