Employees who participate in an employer sponsored qualified retirement plan such as a 401(k) plan make contributions to their account through employee deferrals. The employer is responsible for contributing the participants' deferrals to the plan trust. Thus, if your employer offers a 401(k) plan, that means that your payroll department withholds your 401(k) contributions from each paycheck.
Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month. Remember that the rules about the 15th business day isn't a safe harbor for depositing deferrals; rather, that these rules set the maximum deadline. DOL provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants.
But how should 401(k) plan contributions be handled when there is a temporary liquidity crisis?
In the event of missed or delayed payrolls, no issues arise with employee deferral contributions (since no payroll means no deferrals are taken). However, when payrolls resume, an evaluation of the impact of missed payrolls on participant loan repayments is necessary to account for any catch-up payments or re-amortization of future payments that may be required.
Furthermore, any employee deferral or loan payment remittances from prior payrolls that may not have yet been contributed to the plan trust should be deposited in the plan trust as soon as possible. Failure to do so will subject you to regulatory voluntary compliance program requirements and require a contribution of lost earnings. There could additionally be significant ERISA fiduciary exposure and potential personal liability, given that such remittances are considered plan assets. Thus, any employee deferral or loan payment remittances which have not yet been contributed to a plan trust should be considered a HIGH priority payment.
If you have any questions about the rules governing employee elective deferrals, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.