The Importance of Timely 401(k) Contributions
For many employers, managing a retirement plan is one of the most important fiduciary responsibilities they take on. Among the most overlooked compliance risks is the timeliness of 401(k) contributions.
It is not just about following the rules. Delays in funding employee deferrals can impact participant outcomes, increase liability, and trigger costly corrections. Whether you are running a newly implemented plan or managing an established one, understanding the timing requirements and how to meet them is essential.
Why Timely Contributions Matter
Delayed contributions are a fiduciary breach
When employees elect to defer part of their wages into a retirement plan, those dollars must be deposited into the plan promptly. Once withheld from pay, these funds are no longer considered company assets. Failing to deposit them quickly violates ERISA (Employee Retirement Income Security Act) rules and can be seen as a misuse of employee money.
Missed deadlines trigger financial consequences
Late contributions often require plan sponsors to correct the error by calculating and depositing “lost earnings” for each participant. In most cases, the employer must also file a Form 5330 and pay a 15 percent excise tax on the late amounts.
These corrections are time-consuming, complex, and reportable to the IRS and Department of Labor.
What the IRS Requires
The 7-business-day rule for small plans
For plans with fewer than 100 participants, the IRS offers a clear safe harbor: if you deposit deferrals within seven business days of payroll, the contributions are deemed timely.
This rule provides clarity for small business owners and payroll teams, but it also sets a firm limit. Missing this window puts the plan out of compliance.
Large plans must act faster
For plans with 100 or more participants, the IRS applies a more subjective standard: contributions must be deposited “as soon as administratively feasible.”
In practice, this often means within two or three business days. The IRS may examine your payroll capabilities to determine what is feasible based on your internal processes. If you can move money quickly, they expect you to.
“If you are able to pay your employees on Friday, you should be able to also take those funds and put them into the 401(k) that same Friday or the following Monday.”
What Happens If You’re Late?
Late contributions do not go unnoticed. Plan sponsors must take the following steps to resolve the issue:
1. Identify affected payrolls
Every missed deadline must be tracked and documented. This is critical for both internal controls and regulatory reporting.
2. Calculate lost earnings
You must calculate the investment gains employees would have earned if their contributions had been deposited on time. These amounts must then be added to their accounts at the employer’s expense.
3. File and pay excise taxes
In most cases, the employer must file Form 5330 and pay a 15 percent excise tax on the late amounts. This is in addition to the lost earnings that must be funded into the plan.
4. Disclose and report
If the error is significant or systemic, the Department of Labor may require additional disclosures. The issue could also be flagged in the plan’s annual audit or Form 5500 filing.
Common Causes of Late Contributions
Understanding why late contributions happen can help prevent them:
- Manual payroll processes: Plans that rely on manual file uploads or batch processing are more likely to miss deadlines.
- Lack of internal controls: Without clear responsibility or oversight, contributions can fall through the cracks.
- High staff turnover: Changes in HR or payroll roles often result in missed steps or knowledge gaps.
- Unfamiliarity with rules: Many new plan sponsors are simply unaware of how strict the deadlines are.
These are all preventable with the right systems and support in place.
How to Stay Compliant
Set clear internal procedures
Build a routine around payroll and 401(k) deposits. Assign roles and establish backup procedures so contributions are never delayed due to vacations or staffing changes.
Automate whenever possible
Using automated payroll integration with your 401(k) provider reduces the chance of delay and improves accuracy.
Monitor your timeline
Keep a log of when contributions are withheld and when they are deposited. Regularly audit this timeline to ensure your process is consistent and within the required timeframe.
Partner with a proactive TPA
A good Third-Party Administrator (TPA) will not just manage your compliance after the fact. They will help you establish the right processes up front, monitor for late deposits, and guide you through corrections if needed.
How Mirador Helps
At Mirador, we know that plan sponsors have a lot on their plate. That is why we design retirement plan processes that fit your business, not the other way around.
If a deadline is missed, we help quantify the correction and guide you through the next steps. But more importantly, we work with you proactively to help prevent errors in the first place.
Whether you are managing your first plan or your fiftieth, our team brings deep expertise, steady support, and a commitment to getting it right.
Final Thoughts
Timely 401(k) contributions are not just a compliance checkbox. They are a reflection of your commitment to your employees and your fiduciary responsibility.
Missing a deposit deadline can quickly become a costly and time-consuming problem, but it is one that is entirely avoidable with the right systems and support.
If you are unsure whether your current process meets the timing requirements, let’s talk. Mirador can help you evaluate your current procedures, implement improvements, and stay confidently compliant.
