401k Contributions

[Burke]

Client called concerning their 401k plan. Employee defers 6% of salary. Employer matches 3%. However, plan statement at end of year shows employee contributions of only about 2/3 of the amount she actually had withheld, plus it shows employer match of 1/2 of that amount. TOTAL of these two amounts does exceed slightly the amt employee put in for entire year. Employer and plan administrator say this is okay. He will make a contribution by 3/15/10 which will reconcile employee contributions and required employer match amts. No deposits have been made into plan since July. Is this legit?

[Burke]

No response on this. Anybody got an opinion? To clarify, employee's plan statement shows approx $2,000 contributions, employer match = $1,000. Employee actually had $3,000 deducted for the year (equally from each bi-weekly paycheck.) No contributions to plan showing up on statement since July. Employer and plan adminstrator say since TOTAL put in plan equals or exceeds employee contributions, all is okay and employer will contribute amt equal to his match by 3/15/10.

[veritas]

The employee contributions

must be made as soon as reasonably possible.

From the DOL.

Employee Contributions
If a plan provides for salary reductions from employees’ paychecks for contribution to the plan (such as in a 401(k) plan), then the employer must deposit the contributions in a timely manner. The law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so.(2)

(2) This means the deposits should most likely be made in as few as seven days.

It would not be unusual for the employer to make matching contributions by the due date of the tax return including extension.

[Burke]

Exactly. I researched this and from what I found, the employer has until the 15th of the month following the month contributions are withheld to get them deposited. This is the same time-line for FICA/FITdeposits. For a small business, this should be considered reasonable by the IRS. For a large corporation, no. (Some of those are required to deposit FICA & FIT withholdings within 3 days or sooner.) So, following the letter of the law, the employer is not making timely deposits of employee contributions. On the other hand, he is maintaining that the TOTAL CONTRIBUTIONS are more than the employee's yearly contributions regardless of how they are allocated on the plan statement, and so the plan is technically funded on the employee's part for the entire year by July. IMO, he should just fund the employee's part as it is withheld all year and forego his match (as he is allowed) until the due date of the tax return if that is what he wants to do every year. The plan statement is not showing that, and therefore the employee feels he is being shortchanged as his contributions are not being deposited and therefore not earning any investment gains. Anybody ever run across this before? I would love to have a cite.