Timing of Deposits

[52626]

We have a client that over the past couple of weeks has been paying severance pay due to layoffs.  Included with the severance pay is the participant's unused PTO.

The severance is not eligible for 401(k) but the PTO is.

Question - this payment is done "off cycle"  however, the actual funding of the deferral takes place with the next regular payroll file feed to the recordkeeper.  This means there is a lag of 3 -5 days before the deferrals from the off cycle are submitted.

The client normally funds the deferrals the day of payroll, but the off cycle will be 3 - 5 days before funding. Client is concerned there is an issue and the off cycle should be funded before the regular payroll file feed. - HR is concerned this will mess up payroll and require manual posting.  Also, there may be chance,  HR sends the deferral file and payroll also picks up the payment.

Since the client funds the contributions the day of payroll and waits 3 -5 days for the off cycle the client is concerned the auditors will flag this as a late deposit.  This has always been the practice however the recent layoffs, has caused some concern if this is an issue.

Clearly, the contributions are funded as soon as "administratively" feasible from the date they are withheld. The payment is made well before the infamous 15 days under the DOL reg.

Any thoughts if there are issues with continuing the process as is?

[rocknrolls2]

Unless your client's plan has fewer than 100 participants as of the beginning of the plan year, the Labor Department will treat your off-cycle deposit of deferrals to be delinquent and require that you credit the amount with plan earnings from the date of the payroll run date. See 29 CFR Section 2510.3-102(a). If, however, your client's plan has fewer than 100 participants as of the beginning of the plan year, there is a safe harbor for the deferrals to be deposited by no later than the 7th business day after the pay date. If your contributions are considered to be delinquent, you should file under the VFC Program and check yes on the appropriate box of the Form 5500. 

[Artie M]

Based on your description of the facts, it seems that the off cycle funding may not be occurring "as soon as administratively feasible".  My experience is that the DOL will not view HR's concerns "this will mess up payroll and require manual posting" as a feasibility issue.  Unless your client fits into the safe harbor that rocknrolls2 describes, there is an issue. 

Here's an anecdote from my experience dealing with HR determining administrative ease.... very large client has payroll every other Friday.  It normally electronically transfers 401k contributions and FIT/FICA withholding and payments the day before the payroll is actually disbursed (e.g., transmits 401k funds to trust and FIT/FICA to IRS on Thursday, then disburses payroll the next day on Friday).  On DOL audit last year, 3 instances were "discovered" in 2020 where those amounts were instead transferred 3 days after the payroll was disbursed.  Each of these instances occurred when there was a holiday where employees were off that Thursday and/or Friday, but payroll still went out on the normal Friday (Thanksgiving, Christmas, and Good Friday), but it appeared that someone in payroll decided to make the 401(k) remittances on the following Monday when returning to work.  The DOL found that those Monday remittances were delinquent and required payment of earnings calculated based on the delay being 4 days (based on normal payment timing, and not 3 days based on when the deferral "withheld").  The DOL almost let it go because for Thanksgiving and Christmas the offices were closed on Thursday and Friday (though for Good Friday the office was open on the Thursday).  However, upon closer inspection, they noted that payroll remitted the FIT/FICA as usual on the Thursday so....