When it comes to employee deferral deposits, timing is everything. During the course of 403(b)/457(b) plan audits, the Internal Revenue Service (IRS) commonly reviews how long an employer holds elective deferrals (employee contributions) before depositing them into the 403(b) and/or 457(b) plan.
The general rule requires that contributions be deposited into the plan as soon as administratively possible, but no later than the 15th business day of the month following the month those amounts are withheld from pay.
Late deferral deposits can be costly to the employer. To correct late deferrals, the IRS can require the employer to reimburse employees by calculating the missed earnings from the earliest date the employer could have made the deposit. Developing a best practice regarding the remittance of employee contributions can help ensure delays are avoided and employee contributions are processed in the most efficient manner possible.
There are two key aspects of a good remittance best practice:
- Remit employee contributions immediately following each pay period; this will ensure the contributions are invested on behalf of your employees in a timely manner.
- Use of an electronic method in lieu of mailing a check is highly recommended; this is an excellent method due to the efficiency and security it provides.
One such electronic method is the Automated Clearing House (ACH). ACH is an electronic network that directly transfers funds between two bank accounts.
ACH transfers are processed in two ways:
- ACH debit transactions involve money getting “pulled” from an account. Once authorized by the employer, it gives a Third-Party Administrator (TPA) or investment provider, the ability to pull the remittance amount directly from the employer’s account.
- ACH credit transactions let you “push” money online to your TPA or investment provider.
ACH payments are safer, more cost-effective, and more convenient than traditional paper checks.
ACH payments can’t be lost in the mail, reducing the risk of fraud and tampering. Also, unlike a paper check, which can not only be delayed by the postal system but also can take a few days to a few weeks to verify, most ACH transfers take only a day or two to settle, meaning the funds will be available to deposit to employee accounts the same day or the next business day.
Many employers continue to have remote work plans in place and/or have recognized the need to use digital services to a much greater extent. Timeliness of employee deferral deposits is a critical component to overall 403(b) and 457(b) Plan compliance. Sending monies electronically will ensure they are received and processed in the most expeditious timeframe possible.
Kevin Hensley is Managing Directo, Operations at US OMNI & TSACG Compliance Services, an OASBO Benchmark Program Provider and Gold Sponsor.