How quickly does a Plan Sponsor need to send the participant contributions to the Trustee?  This is actually a pretty simple answer and ERISA regulation. As soon as possible!   If that is the case, why do we hear from TPAs, CPAs, Investment Advisors, … that their clients are not doing this.

Maybe the Plan sponsors do not realize the ramification of delaying deposits – I will get to that in a little.   The basic rule as paraphrased by the DOL in their April 19th webinar stated:

“Amounts withheld from employees' wages must be transmitted to the plan as soon as they reasonably can be segregated from the company's general assets the funds can be segregated from the company's general assets.”

Again, pretty simple.  There is a safe harbor for small plans under 100 employees that state that if you transmit the funds within 7 days, this rule does not apply.  This means, that in most cases, it appears the government feels a company should be able to transmit their funds in less than a week.  The rule actually states that a company has at the OUTER LIMITS up to the 15th of the following month to make the contribution..BUT…that is the outer limit.  Again, the rule states that funds must be transmitted as soon as they can be reasonably segregated from general assets.  This means that if you can segregate the funds within 48 hours, they MUST submit the funds to the trustee.  You don’t get until the 15th of the following month.

Here is an example that tries to cover-up late deposits.  The Plan Sponsor was late by a couple of months making deposits (literally had them on their desk) The CPA told the Plan Sponsor of their obligation to deposit the funds “as soon as the funds were available’ and since the checks were cut, the funds were available.  The Plan Sponsor called the Trustee and the Trustee told the Plan Sponsor not to worry about it and the Plan Sponsor continued to delay deposits.  The Trustee was going to back date the deposits. Both the Trustee and the Plan Sponsor were wrong.  Both had breached their fiduciary duties.  Even though the trustee is a fiduciary also, think of them as a Co-Defendant.  The Plan Sponsor should know they must deposit the funds timely and the Trustee must ensure this happens.  Both are responsible in this case.

So what happens if the Plan Fiduciaries and Sponsor DO NOT remit the contributions in a timely manner?   It may lead to disqualification of your Plan (yes this is in extreme cases), a prohibited transaction and most definitely a breach of fiduciary duty. ERISA requires the DOL to assess a civil penalty against a Fiduciary that causes the late deposit of 401(k) elective deferral contributions. The penalty under ERISA is equal to 20% of the "applicable recovery amount," meaning the late deposit plus earnings.

At minimum, the DOL requires the Plan Sponsor and/or its fiduciaries to restore to the plan all losses incurred because of the breaches and violations of their fiduciary duties under ERISA, including lost opportunity earnings.

In a recent DOL case involving Lukas Machine Inc., because the employee contributions were never paid, the DOL froze one of the Plan Fiduciaries 401(k) assets to prevent her from withdrawing funds.  Although they didn’t state it, these funds may be needed to repay other plan participants. 

The question to the Plan Sponsor and its individual fiduciaries is – is delaying deposits worth all of this?  Most likely – no.