There are certain problems in life where waiting might actually help.
Late 401(k) deposits aren’t one of them.
Employee salary deferrals are plan assets once they’re withheld from employees’ paychecks and are required to be deposited into the plan on a timely basis. When those deposits are late, you potentially have a prohibited transaction and a fiduciary problem.
Yet I’ve seen plan sponsors discover late deposits and treat the issue like an unpaid library book.
We’ll get to it eventually.
Don’t.
Once you discover late deposits, figure out what happened, determine which contributions were affected, calculate the lost earnings, and work with your professionals to correct the problem.
Depending on the circumstances, correction may involve restoring lost earnings, addressing excise taxes, reporting the delinquent contributions on the Form 5500, and potentially using the Department of Labor’s Voluntary Fiduciary Correction Program.
The biggest mistake is pretending the problem doesn’t exist.
I’ve always said that most retirement plan problems are fixable. The IRS and Department of Labor understand that mistakes happen. What creates bigger headaches is discovering a problem and allowing it to continue.
You also need to figure out why the deposits were late.
Was payroll responsible? Did somebody go on vacation? Did the person responsible for submitting contributions leave the company? Was there a problem transmitting the payroll file?
Fixing the past without fixing the process means you’re probably going to have the same problem again.
Plan sponsors sometimes worry that admitting an error will create liability. In reality, ignoring a known problem can make the situation considerably worse.
Late deposits don’t improve with age.
They don’t disappear because nobody complained.
When you discover them, correct them, document what happened, and fix the process that caused them.
Because with 401(k) problems, procrastination usually isn’t a correction method.