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When 401(k) Contributions Are Late: Why Timeliness Matters

Authored by Matt Waters

Every dollar an employee defers into a 401(k) plan is held in trust. It’s their money, not the employer’s. That’s why the Department of Labor (DOL) is laser-focused on when those dollars make it from payroll into the plan.

Late or missed deposits are one of the most common (and most expensive) compliance failures plan sponsors run into.

What Counts as “Late”?

The rule is simple in theory: employee contributions must be deposited as soon as reasonably possible after payroll.

  • Large plans (100+ participants): usually within just a few business days.
  • Small plans (<100 participants): the safe harbor deadline is 7 business days after payroll.

Translation: waiting until the 15th business day of the following month (a myth many payroll departments still believe) is not compliant.

Why Plans Miss the Deadline

  1. Payroll/HR Disconnect

    • Payroll cuts checks, but no one triggers the contribution funding process.
  2. Operational Bottlenecks

    • Employers “batch” deposits for convenience, leading to unnecessary delays.
  3. System Errors

    • Recordkeeper or payroll integration issues cause deposits to lag.
  4. Cash Flow Concerns

    • Rare but serious: employers intentionally delay deposits to hold onto cash. The DOL treats this like borrowing from employees’ retirement accounts.

The Consequences of Late Deposits

  • Prohibited Transaction: The DOL considers late deposits a loan from the plan to the employer, which is an immediate compliance violation.
  • Excise Taxes: Employers must pay a 15% excise tax on the “lost earnings” from the delay.
  • Restoration: The plan sponsor must contribute missed earnings back into participant accounts.
  • Audit Red Flag: Repeat offenses can trigger a full DOL investigation.

Correcting the Error

If a plan has late contributions, the fix involves three steps:

  1. Deposit the Missed Contributions immediately.
  2. Calculate and Restore Lost Earnings for each affected participant.
  3. File under the Voluntary Fiduciary Correction Program (VFCP) if significant. This gives the employer a “clean bill” from the DOL once corrections are made.

Preventing Late Deposits

  1. Automate Contributions

    • Use payroll integration with your recordkeeper so deposits happen automatically with each pay cycle.
  2. Set Internal Deadlines

    • Don’t operate at the legal limit. Fund contributions within 1–2 business days after payroll.
  3. Assign Responsibility

    • Designate a person (or team) to monitor contribution funding every pay period.
  4. Periodic Spot-Checks

    • Review deposits quarterly to confirm they’re hitting the plan on time.

Bottom Line

Late contributions might sound like a harmless administrative slip, but regulators view them as misuse of employee money. Even a few days’ delay can trigger penalties, added costs, and participant frustration.

By automating deposits, setting internal deadlines, and monitoring regularly, sponsors can keep this issue off the compliance radar, and keep trust intact with employees.

Have questions about late 401(k) contributions? Reach our to our team of professionals at Prime Capital Financial Denver to see how we can help. 

 

This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

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