Quick Summary
Employee 401(k) contributions and loan repayments must be deposited as soon as they can reasonably be separated from company assets, and plans with fewer than 100 participants have a seven business day safe harbor. Late deposits are prohibited transactions that require depositing lost earnings, reporting on Form 5500, and addressing excise tax. Since March 2025, the DOL's Voluntary Fiduciary Correction Program allows self-correction when lost earnings are $1,000 or less and the money is deposited within 180 days. Clear payroll procedures and a backup person help prevent repeat problems.
When an employee's 401(k) contribution is withheld from their paycheck, it becomes plan money. Until it reaches the plan's trust, the company is holding money that belongs to participants. That is why deposit timing is taken seriously, and why late deposits are one of the issues the Department of Labor sees most often.
The good news is that late deposits are usually straightforward to correct, especially when they are caught quickly.
The deposit rule
Under DOL regulations, participant contributions must be deposited as soon as they can reasonably be separated from the employer's general assets. The outer limit is the 15th business day of the month after the money was withheld, but that is not a safe harbor. If your company can reasonably deposit within two days, the DOL may consider a deposit on day six to be late.
For plans with fewer than 100 participants, the DOL offers a safe harbor: deposits made within seven business days of withholding are considered timely.
The same rules apply to participant loan repayments withheld from pay.
Why deposits end up late
Late deposits rarely come from bad intent. Common causes include:
- The person responsible is out sick or on vacation
- A change in payroll providers or recordkeepers
- Manual uploads that get delayed or rejected
- Off-cycle payrolls, such as bonus runs, that are forgotten
- A new plan where deposit procedures are not yet established
How to correct a late deposit
Correction generally involves five steps:
- Deposit the missing contributions as soon as the problem is discovered.
- Calculate lost earnings. The DOL's Voluntary Fiduciary Correction Program (VFCP) Online Calculator computes the amount owed using IRS underpayment interest rates.
- Deposit the lost earnings to the affected participants' accounts.
- Report the late deposit on the plan's Form 5500 for the year it occurred, even if it has already been corrected.
- Address the excise tax. Late deposits are prohibited transactions, which generally carry an excise tax reported on IRS Form 5330. Correcting through VFCP may provide relief from the excise tax if certain conditions are met.
Your correction options
Self-correction under VFCP. Since March 17, 2025, the DOL has allowed plans to self-correct late participant contributions and loan repayments when:
- The lost earnings are $1,000 or less
- The contributions are deposited within 180 calendar days of the date they were withheld
- Lost earnings are calculated with the VFCP Online Calculator
- The sponsor files an electronic self-correction notice with the DOL and keeps the required records
Self-correctors do not receive a no-action letter from the DOL, but properly completed self-corrections are generally protected from DOL civil enforcement.
A full VFCP application. For larger amounts, or deposits made more than 180 days late, a formal VFCP application is available. If accepted, the DOL issues a no-action letter.
Correction outside the program. A sponsor can also deposit the contributions and lost earnings, file Form 5330, and pay the excise tax without using VFCP.
Late employer matching contributions are a different issue. They follow the plan document's timing rules and are not eligible for the VFCP self-correction option.
Preventing the next one
Most late deposits are process problems, so the fixes are process fixes:
- Write down the deposit procedure, including a target timeline that is faster than the legal maximum.
- Name a backup person who knows how to submit contributions when the primary person is out.
- Use payroll integration with your recordkeeper where available.
- Set reminders for off-cycle payrolls.
- Reconcile monthly, comparing payroll withholdings with deposits received by the recordkeeper.
- Ask your TPA to flag late deposits as soon as they appear.
Why patterns matter
A single late deposit, promptly corrected, is a routine fix. Repeated late deposits are a different matter. They show up year after year on Form 5500, which is public, and a pattern can draw DOL attention.
Want a second look at your plan's deposit process? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review plan operations. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
How late is "late"?
It depends on how quickly your company can reasonably deposit contributions. Plans with fewer than 100 participants can rely on the seven business day safe harbor.
If the lost earnings are only a few dollars, do we still need to correct?
Yes. The self-correction option was designed with small amounts in mind, which makes correcting them simpler.
Does correcting a late deposit change the Form 5500 answer?
No. Late deposits during the plan year must still be reported on Form 5500, even if they were corrected.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.