Learn More About the Timeline for Making Contributions to Your 401k Plan
Among the many benefits of a 401k plan is the flexibility given to employers and employees regarding how much to contribute.
For employers, there is also some flexibility in deciding when to contribute matching contributions – each pay period or at year end. For employee contributions, however, there are strict timelines that employers must follow. Understanding the contribution deadlines and monitoring them regularly is a foundational component of 401k administration.
Payroll deduction makes it easy for employees to save for retirement in a 401k. Each eligible employee is given the choice of how much of their compensation to contribute to the plan.
In some plans, employees who do not choose an amount will be automatically enrolled in the plan. Once the employee has made a contribution election or is automatically enrolled, a portion of their salary is deducted from each paycheck and contributed to their 401k account.
The employer must deposit the employee contribution amounts into the 401k “as soon as possible” after a contribution (or loan payment) is deducted from the employee’s paycheck. If an employer typically makes deposits within five business days of the payroll date, for example, that is the time frame they will be measured against for all deferral deposits. The latest deposits can be made is the 15th business day of the month after the contribution is deducted from the employee’s paycheck, but most employers will have a much shorter deposit deadline.
Safe Harbor for small business – Small businesses (those with fewer than 100 employees) are deemed to meet the “as soon as possible” standard if they deposit contributions within seven days following the payroll date.
Employers who do not deposit employee contributions promptly may be subject to IRS and Department of Labor (DOL) penalties. Employers that file a Form 5500 Annual Return/Report of Employee Benefit Plan, must report whether they made any late deposits during the year.
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Many employers help their employees build retirement savings by “matching” a portion of the contributions made by employees. Matching contributions can provide employees a strong incentive to save through the 401k plan rather than forego leaving “free” money.
Some employers contribute the matching dollars each payroll period along with the employees’ salary deferrals. Other employers make the full matching contributions in one payment. To take a deduction, employers must deposit matching contributions into the plan no later than the business’s federal income tax return due date for that year. If the business has an extension to file the tax return, the contribution may be made up until the extended deadline. For example, for a business that operates both its business and its 401k plan on a calendar year basis, 2018 matching contributions must be made by April 15, 2019. If the business has a tax-filing extension, the deadline is October 15, 2019.
Some employers also make profit sharing contributions. These contributions have the same deadline as matching contributions. Employer matching and profit sharing contributions combined are limited to 25% of employee compensation.
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Like other types of retirement plans, to establish a 401k plan for a tax year, the business owner must sign a plan document by the last day of the business’s tax year to contribute for that year (e.g., December 31 for a calendar-year business).
If a business has employees who want to make 401k salary deferrals, however, the 401k plan will need to be established earlier to provide a significant benefit for that year. 401k salary deferrals can only be made from compensation that is received after the plan is adopted. So if an employer is establishing a 401k plan toward the end of the year, employees may only contribute compensation received during the remaining payroll periods after the plan is established. This may prevent them from making significant contributions for that year.
A self-employed business owner without employees may be able to make significant contributions even if the 401k plan is established later in the year. Many self-employed individuals, such as sole proprietorships and partnerships, determine their compensation at the end of the year and don’t receive a regular paycheck.
If a self-employed individual wants to make salary deferral contributions to a solo 401k, they must make an election by the end of the plan year (e.g., December 31 for a calendar-year plan). As long as they make the election to defer by the end of the plan year, they have until the business’s federal income tax return due date, including extensions, to make the salary deferral contribution into the plan.
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If the business is incorporated and the owner receives a regular paycheck that qualifies as W-2 wages, they must follow the seven-business-day deposit guideline (explained above) for each paycheck if deferrals are withheld.
If a self-employed individual wants to make a profit sharing contribution (in addition to or in lieu of salary deferrals), the deadline to contribute is the business’s federal income tax return due date, including extensions, for the year for which they want to contribute.
If plan contributions meant for a 2018 calendar-year plan are made after the end of 2018, business owners must meet the following requirements to apply contributions to the 2018 plan year.
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