Late Deposit of Participant Deferrals
Ridgeway Services sponsors a calendar-year 401(k) plan with 180 eligible employees. The plan uses a biweekly payroll. For the pay period ending Friday, March 14, 2025, Ridgeway withheld $48,000 in participant deferrals. The controller deposited the deferrals with the plan's custodian on Wednesday, April 30, 2025, because the bookkeeper was on leave. The plan's prior recordkeeper had deposited deferrals within three business days. Ridgeway's CFO argues that the deposits were timely because they were made before the end of the month following the month of withholding and because the plan document does not specify a deposit deadline. The plan's Form 5500 for 2025 has not yet been filed. The plan has 180 participants, and the plan's assets are held in trust. The 15th business day of April 2025 is April 21.
1. Were the March 14, 2025 deferrals timely? Identify the controlling deadline and explain why the CFO's argument fails.
Read the worked answer
No. Participant contributions become plan assets on the earliest date on which they can reasonably be segregated from the employer's general assets, but in no event later than the 15th business day of the month following the month in which the amounts are withheld. For a plan with 100 or more participants, that outside limit applies; the 7-business-day safe harbor for small plans does not. The March 14 withholdings had to be deposited by April 21, 2025. The April 30 deposit was seven business days late.
The CFO's argument fails because the plan document cannot override ERISA's asset rule, and the end of the following month is not the standard. The prior recordkeeper's three-day practice is evidence of what was reasonably feasible, which can make the earliest-date standard even earlier than the outside limit. The administrator should treat the deposit as late and calculate lost earnings.
2. What correction, reporting, and tax consequences follow from the late deposit?
Read the worked answer
Ridgeway must restore the plan, not just the participants, by depositing lost earnings for the period of delay. The DOL's VFCP calculator or an equivalent reasonable method can compute earnings, allocated to each affected participant's account. The late deposit is a prohibited transaction under ERISA §406 and IRC §4975 because the employer used plan assets for its own benefit, and it is a fiduciary breach.
The 2025 Form 5500 Schedule H should answer yes to the question asking whether participant contributions were not transmitted within the required time. Ridgeway should consider Form 5330 and the excise tax, unless a class exemption applies. The correction should be documented, and the plan should adopt a written deposit policy and monitoring control. If the failure is corrected within 180 days, PTE 2002-51 may relieve the excise tax if its conditions are met, but it does not excuse the fiduciary breach.
3. Should Ridgeway use the DOL's Voluntary Fiduciary Correction Program (VFCP)?
Read the worked answer
VFCP is available for certain fiduciary breaches, including late remittance of participant contributions, and it can provide relief from DOL civil penalties and a no-action letter. It is not the same as the IRS Employee Plans Compliance Resolution System, which addresses plan qualification. VFCP requires a description of the breach, calculation of lost earnings, proof of correction, and a penalty payment if applicable.
Because the amount is known and the breach is straightforward, VFCP is a reasonable option, especially if Ridgeway wants documented assurance. Even if it uses VFCP, Ridgeway must still file the Form 5500 answer accurately and resolve any excise tax. The plan should correct promptly, because delay increases lost earnings and may affect the exemption analysis.