An ancient Mirador on a hill with a clear view representing Transitioning a retirement plan to Mirador

Timely 401(k) & 403(b) Deposits: Why It Matters and How to Stay Compliant

One key responsibility for businesses offering 401(k) and 403(b) plans is ensuring employee contributions and loan repayments are deposited on time. The Department of Labor (DOL) and IRS closely monitor these transactions, and failing to deposit funds promptly can lead to compliance issues, penalties, and even plan disqualification.

How Soon Do Deposits Need to Be Made?

The general rule is that employee contributions and loan repayments must be deposited as soon as they can reasonably be separated from the company’s general assets. Here’s how that breaks down:

  • For plans with fewer than 100 participants: Deposits made within 7 business days after payroll are considered timely.
  • For plans with 100+ participants: Deposits must be made as soon as possible—often within a day or two after payroll.

Waiting too long—whether due to cash flow delays, payroll process issues, or simple oversight—can create an operational failure that requires correction and could trigger an audit.

What Happens If Deposits Are Late?

Late contributions are flagged on Form 5500, making them a potential red flag for the IRS and DOL. Late deposits can also result in:

  • Lost earnings for employees, which must be calculated and repaid.
  • Excise taxes and penalties on the employer.
  • Increased scrutiny in audits and possible legal risks from participants.

How to Fix Late Deposits

If you’ve missed a deposit deadline, there are ways to correct the issue:

  1. Self-Correction (SCP) – Identify the late deposits, calculate lost earnings, and document process improvements.
  2. Voluntary Correction (VCP) – Report the issue to the IRS and pay a fee to avoid heavier penalties.
  3. DOL Correction (VFCP) – Submit a correction to the DOL, which may waive excise taxes in some cases.

How to Prevent Late Deposits

✔ Set a deposit schedule – Align contributions with your payroll tax payment schedule.
✔ Designate a backup person – Ensure someone else knows the process if your payroll manager is unavailable.
✔ Use automated remittance – Work with a TPA, payroll provider, or financial advisor to streamline the process.

Keeping deposits timely isn’t just a compliance issue—it’s about protecting your employees’ retirement savings and keeping your plan running smoothly. Need guidance? Talk to your TPA or financial advisor to ensure your deposit process is on track.

Earned vs. Passive Income: How It Affects Your Retirement Contributions

When planning for retirement, one of the biggest questions business owners ask is: How much can I contribute to my retirement plan? While it might seem like a simple question based on total earnings, the IRS sets strict rules about what type of income qualifies for retirement contributions. The key distinction? Only earned income counts.

What is Earned Income?

Earned income is money you make from actively working. It includes:

  • W-2 wages or salaries
  • Self-employment income
  • Commissions and bonuses

This income is subject to FICA and Medicare taxes, which is why the IRS allows it to be used as the basis for retirement plan contributions. Whether you’re contributing to a 401(k), Defined Benefit Plan, or pension plan, your contribution limits are based only on this type of income.

What is Passive Income?

Passive income is money that comes from investments or business activities that don’t require your direct involvement. Examples include:

  • Rental income
  • Interest and dividend income
  • Capital gains
  • Business income from an LLC or S-Corp (in some cases)

Because passive income isn’t tied to active work, it does not count when calculating retirement contributions. The IRS assumes that passive income sources, like rental properties or investments, will continue generating income in retirement, making additional tax-advantaged contributions unnecessary.

The K-1 Complexity

If you’re a business owner receiving income through a K-1, the distinction between earned and passive income can be more complicated.

A K-1 reports partnership income, deductions, and credits for tax purposes. While many K-1s only report passive income, others may include self-employment income—which is considered earned income and can be used to calculate retirement contributions. Look at Box 14 of your K-1 to see if it includes self-employment earnings. If it does, that portion of your income may qualify.

Why This Matters for Your Retirement Plan

Understanding the difference between earned and passive income is essential when designing a retirement strategy that maximizes tax-advantaged savings. Many business owners assume they can contribute based on total income, but only earned income applies.

Contribution limits can be complex, and every situation is different. Working with an advisor can help ensure you’re maximizing your ability to save for retirement based on all allowable income sources.

Want a quick estimate of how much you can contribute? Check out our calculator to see what your annual contribution limit might be based on your income and age.