Prohibited Transactions with Rachel Rosner and Alison Quesada
When you run payroll, employee deferrals are withheld with the expectation that they will be deposited into the retirement plan quickly. But if those funds sit in the company’s bank account, even for a short time, the IRS considers it a prohibited transaction.
What Is a Prohibited Transaction?
A prohibited transaction occurs when employee retirement contributions aren’t deposited into the plan within the required timeframe. Even if the money is safe in the company account, the IRS treats it as if the business is using employee contributions as a loan.
“You’re not putting employees’ money where it should be going. The IRS wants employee retirement dollars to be in retirement plans as quickly as possible.” – Rachel Rosner
The Timing Rule
Employers have seven business days after payroll to deposit employee deferrals into the retirement plan. While this provides some flexibility, many business owners run into compliance issues when they delay or overlook contributions.
- Best practice: Run payroll, then immediately transfer contributions to the plan’s recordkeeper.
- Risk: Chronically missing deposits creates compliance problems and may require corrective contributions from the employer.
- No exceptions: There is no de minimis rule, every late deposit counts.
Why It Matters
Timely deposits protect employees’ retirement savings and keep your plan in compliance. For business owners, failing to follow the rules doesn’t just create administrative headaches, it can result in additional costs to make employees whole for lost investment earnings.
Prohibited transactions may sound technical, but at their core, they’re about protecting employee savings. Clear processes, accurate payroll records, and consistent follow-through keep contributions timely and compliant.
Ready to see how the right retirement plan team can protect employees and keep your business compliant? Reach out to our team to start the conversation.
