Once you’ve established a 401(k) for your small business, you must be aware of critical 401(k) contribution deadlines for you and your employees.
Generally, employers and employees set up contributions through payroll, and everything happens automatically, and on time. However, certain situations can result in late contributions and missed deadlines. Fortunately, there are steps that employers can take to limit the impact of these missed deadlines and fix the situation.
And even though it may seem like a lot to keep track of, the benefits of a 401(k) plan can significantly outweigh the costs or hassles involved with key deadlines.
t’s time to get familiar with 401(k) deadlines, employers! If contributions are late or incorrect, it can mean costly penalties and even plan disqualification. To help you make sure your plans stay up-to-date, here’s the 411 on all the key dates, plus tips for avoiding unwanted side effects of missed deadlines.
Employee contributions to a 401(k) can take many forms, including Roth contributions, pre-tax salary deferrals, voluntary after-tax contributions, and loan repayments. All employee contributions must adhere to the same deadline requirements despite the various types.
Employee contributions should be deposited by the earliest date they can be separated from general assets, usually within 15 business days of the month they were withheld. However, if a business has 100 participants or fewer, they are subject to a safe harbor rule which requires them to deposit employee contributions within seven business days to avoid penalties.
If employee contributions are deposited late, employers must take measures to rectify the situation, including contributing additional funds to make up for lost earnings due to the delay. This can be accomplished through the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) or self-correction.
Self-correcting may be a more convenient option for small businesses but it comes with added costs. First, the IRS levies a 15% excise tax on the lost earnings, which can vary depending on how late the contribution was made. This tax must be paid using IRS Form 5330.
In addition, if you decide to self-correct rather than use the VFCP, you must be aware of the risks involved. Upon completion, you will not receive a “no-action” letter from the DOL, and the issue may be investigated in a future audit. Lost earnings must also be estimated on your own, either based on the plan’s actual return rate or the IRS underpayment rate, and reported on Form 5500 to alert the DOL and create the potential for an audit.
Ultimately, late deposits can happen, but it’s essential to understand the deadlines and fix the situation as soon as possible. This can help you avoid significant penalties and reduce the potential of an audit.
Employer-matching or profit-sharing contributions must adhere to two deadlines: one for deductibility and the other for annual additions. These deadlines vary in accordance with your business’s tax status and the particular contribution type.
The deadline for deducting employer contributions to a 401(k) plan for the corresponding year is the same as the federal tax return (including extensions). However, this deadline will vary depending on your business’s tax status, so confirm your business’s deadline using the IRS website.
To deduct employer contributions for the relevant tax year, you must deposit them before your filing deadline (including any extensions).
Next, the IRS considers all contributions allocated to a participant’s 401(k) account each year to be “annual additions.” These annual additions are limited by IRS code 415 each year (for most plans, this is the same as the plan year.) The 415 limit includes all employer and employee contributions as well as any forfeitures that have been allocated to the plan participant.
Because annual additions include various contribution types, deadlines vary by contribution type. Check with your 401(k) provider to understand the deadlines for each contribution type.
In order to fix late deposits, one must take advantage of the IRS’s Employee Plan Compliance Resolution System (EPCRS). This system offers three different means of correcting a mistake: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit Cap). Depending on which program is used, you must pay a fee for it and provide lost earnings for the period in which your deposit was late. Failure to comply can result in costly penalties or even plan disqualification.
At 401GO, we provide small business 401(k) plans powered by an easy-to-use, automated platform. Our streamlined approach allows you to get up and running in just minutes with simple and affordable pricing to fit your unique business. And when you’re working with us, don’t worry, we’ll keep track of the key deadlines and send reminders if deadlines are missed.
Contact us to discover if 401GO can help you.