Deposits of employee contributions to a 401(k) plan are required to be timely. Per the IRS, participant 401(k) contributions must be deposited into plan accounts as soon as they can reasonably be segregated from the assets of the business sponsoring the plan. Generally, this is the start of the deposit process, coinciding with payroll dates, for employee deferrals. A sponsor may be liable for lost potential earnings when deposits are considered not to be made timely.
One situation that will likely result in lost earnings adjustments is when a payroll run is backdated, or processed after the pay date. Note that submitting payroll runs on time will help to avoid this. If your company uses one of our fully integrated payroll partners and Guideline has not collected deductions from a recent payroll run, it may be the result of a payroll disconnection from Guideline. In this case, please check your Guideline dashboard for a payroll reconnection task.
Lost earnings amounts are calculated based on the following factors:
- Employee's delayed contribution amount
- Date the contributions were withheld from participants’ paychecks (pay date)
- Date the contributions were deposited in the plan’s trust account
- The missed growth opportunity during the period between funds being withheld and deposited to the trust (correlated with market activity).
Once the late contributions are collected, Guideline will calculate and attribute lost earnings to each affected participant’s account based on actual market activity. These corrective contribution amounts will be charged to the employer’s company bank account if the delay was not caused by Guideline. Additionally, note that excise taxes will be collected by the IRS during Form 5500 filing for all delayed contributions.