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Three best practices for remitting 401(k) contributions

By Maha Ahmed
Qualified Plan Financial Consultant

Sponsoring a business retirement plan like a 401(k) can be a smart way to save big on taxes, maximize retirement savings, and attract and retain qualified employees. As sponsors, employers have certain responsibilities under the plan; the most important is properly managing plan contributions. Failure to comply with Department of Labor (DOL) rules may mean the employer will have to pay additional interest and earnings to plan participants.

Take last year’s DOL case against a Pennsylvania-based dentist. The dentist was fined for the misuse of plan funds that were intended for the business’s 401(k) plan. According to the DOL, the employer failed to deposit employee and employer contributions into the plan in a timely manner from 2009 through 2012. A district judge ordered the defendant to repay nearly $45,000, including lost interest and earnings, to plan participants.

Employers can avoid this type of litigation by following these 3 simple rules:

  1. Segregate your retirement plan assets from company assets. Never look at elective deferrals as if they are the company’s money. Elective deferrals come directly from an employee’s paycheck and are amounts they specified to go into their retirement plan. This money should never be placed into general assets. A company should never use these funds to pay bills, even if the company is in financial straits.
  2. Submit the payments as soon as possible. The longer these payments sit in employer assets, the easier it is to get mixed up and commingled into the employer’s general assets. Employers need to deposit employee deferrals into the plan within seven days of the most recent paycheck. On the other hand, employer contributions can be deposited on or before the employer’s business tax deadline.
  3. Reconcile regularly. Make sure you regularly reconcile employee elective deferral forms with the company payroll system. If employees increase the amount of money they are deferring into the 401(k) plan, that change needs to be processed as quickly as possible. Make sure you reconcile your business bank statement to ensure that your financial institution received the contributions. You don’t want to discover that salary deferrals were not being made in a timely fashion throughout the year.

Avoiding these types of mistakes is crucial to maintaining a compliant 401(k) plan. If you discover any errors, it’s vital to correct them promptly. Contact your third party administrator and/or financial advisor immediately if you find yourself in this position.

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