Timely remittance of employee deferrals to their retirement accounts remains one of the biggest areas of focus during plan audits. Therefore, it’s critical to ensure you are making these remittances in accordance with DOL regulations.
What’s Considered Reasonable?
According to the DOL, deferrals must be remitted to employees’ accounts “on the earliest date that is reasonably possible to segregate the contributions from the employer’s general assets.” The maximum allowable length of time for remitting deferrals is 15 business days after the end of the month in which the amounts were withheld.
But there’s still some uncertainty regarding timely remittances because in some situations, the DOL has considered “reasonably possible” to be as soon as two days after the end of the month.
In determining what is reasonably timely, the DOL looks mainly at your company’s past history in remitting deferrals. If you have regularly done so within three business days, for example, this will likely be considered what is reasonably timely for you and become the standard for your company. If you were to start remitting deferrals taking longer than three business days, the DOL would probably consider them to be late.
In this case, the remittances would be classified as prohibited transactions—these can result in civil penalties and excise taxes. Note that materiality is not a factor in the determination of whether remittances are late. And the timing issue relates to employee deferrals only, not employer contributions.
Create a Remittance Schedule
To avoid potential problems caused by making late deferrals to employees’ retirement accounts, consider creating a remittance schedule within the parameters of what would likely be considered reasonable for your company. Then stick to this schedule every pay period—for example, by remitting deferrals the same day that pay checks are distributed.
Also train backup payroll staff in the area of deferral remittances. Other ideas include reviewing the total of remitted contributions compared to deferrals per payroll register for each pay period, and reconciling the total deferrals per W-2 forms to total deferrals received by the plan annually at the end of the plan year.
Note that there is a safe harbor for small retirement plans, or plans with fewer than 100 participants. These plans have seven business days following receipt or withholding of employee deferrals to make remittances.