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Updated: March 31, 2024
Missed 401(k) contribution payments can be a common small business bookkeeping and cash management oversight. Failure to make 401(k) contribution payments on time can lead to unwanted results for both the business and the business owner. That’s why it is important to understand 401(k) contribution payment requirements but also to have a strategy in place to make sure these payments are taken care of on time, every time.
Having worked as a bookkeeper for many years, there can be different causes for things to go awry. In this article, we will explore 401(k) contribution payments in detail, some of the most common reasons they aren’t made on time, the consequences of missed payments, how to correct them, and how to keep them from getting missed in the first place.
Access to a way to save for retirement is one of the top three benefits employees look for when looking for a new employer. Since the early 1980s, employers have increasingly turned to the 401(k) plan to provide these benefits.
Simply put, a 401(k) plan allows employees to defer some of their income on a pretax basis and deposit it into an investment plan. This helps employees lower their tax liability during their working years, usually resulting in overall savings in taxes over their lifetime. The deferred income, plus any earned dividends, provides the employee with income after retirement.
Although it’s not required, many employers match a certain percentage of employees’ contributions to their 401(k) plan. This matched amount is a business expense, which reduces the employer’s taxable profit.
In short, it’s a win-win-win.
Now that we better understand why offering a 401(k) can have positives, let’s get into more detail what contribution payments owed has to do with this.
In a nutshell, 401(k) contribution payments are managed as part of a company’s payroll process, and there is no bill or statement that comes in the mail reminding employers to make sure that these payments get made. Because of this, it’s easy for employers to overlook them.
The important thing to remember about 401(k) contributions is that, like withheld payroll taxes or collected sales taxes, the money is not your business’s money. It might feel like it is your business’s money because the cash is sitting in your company’s bank account. Paying the contribution might feel like an expense because cash is leaving the bank account, but keep in mind that 401(k) contributions are the property of your employees. You are simply holding these funds in trust for them until they can be deposited into the employee’s retirement plan.
Because you are acting as a fiduciary for your employees, you have a legal obligation to make your 401(k) contribution payments and make them “on time.” A fiduciary is a person or entity that is legally obligated to work in the best interests of another party whose assets or resources they are managing or overseeing. Making sure that these payments are handled promptly and properly comes with the territory.
To be clear, practically every business wants to make sure that these contributions end up where they are supposed to, but unintentional mistakes can happen.
Throughout my bookkeeping career, I’ve seen numerous records with tens of thousands of dollars in retirement benefits sitting on the balance sheet. Although sometimes a simple bookkeeping error is to blame, more often than not the retirement benefits have never been paid. There are a few common reasons for this:
There can be some less-than-ideal outcomes when not making 401(k) contribution payments on time (or if a business fails to make them altogether), such as:
Fines and taxes
I mentioned earlier that when you have a 401(k) plan, you are acting as a fiduciary for your employees. This means that you are legally required to put your employees’ interests above your own, or those of your business. There are legal and financial consequences if you fail to do this.
Failure to make 401(k) contribution payments on time can result in the following fines and penalties:
If you’re thinking that you can fly under the radar on this step, think again. Form 5500, which is filed annually by the 401(k) plan administrator, reports late payments to both the IRS and the Department of Labor.
Criminal penalties
It’s a slippery slope that you don’t want to find yourself on and one that most businesses can avoid.
Loss of employees’ trust
If you owe past 401(k) contribution payments, your first step is to contact an accountant or a payroll specialist who can help you address the missed payments as soon as possible.
The internet will direct you to the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) to make up missed 401(k) contribution payments and the IRS’s Employee Plans Compliance Resolution System (EPCRS) to report missed payments and calculate excise tax due. While you will want to make missed payments as quickly as you can, doing so without the assistance of a payroll specialist or accountant could result in payment mistakes and further scrutiny.
In other words, act quickly, but don’t act without the guidance of a professional.
In every case of unintentional missed 401(k) contribution payments that I’ve seen, the missed payments could have been prevented with two simple mechanisms:
Offering a 401(k) plan provides your employees with a benefit that frequently sits at the top of their wish lists, while offering tax savings to them and to your business. However, when you have a 401(k) plan in place, you act as a fiduciary for your employees. This means that you are responsible for making contribution payments on time, every time. Failure to do so can result in financial and even criminal penalties.
Working with a reputable payroll company, a proactive and experienced bookkeeper, and implementing a cash management system will help you stay out of cash flow trouble with your 401(k) contribution payments and get you back to doing what you do best: running your business.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.