401(k)ology –What Happens When Contributions Are Deposited Late?

Employer matching contributions are a powerful benefit in retirement plans—but they come with complex rules that can trip up even the most diligent plan sponsors. While “late deposits” is a term commonly used to describe payroll period contributions that are submitted to the plan beyond the Department of Labor’s guidelines, “late deposits” only includes employee contributions – not the match.

In a previous post, we covered why the Department of Labor (DOL), through the Employee Benefits Security Administration (EBSA), takes late 401(k) deposits so seriously. Once the employer withholds employee contributions from pay, they’re considered plan assets. Any delay in depositing those funds—whether due to oversight or operational issues—can result in a prohibited transaction and a breach of fiduciary duty.

However, employer matching contributions are not treated the same as deferrals and are not covered under the DOL’s correction program. That may come as a surprise to some since employer matching contributions are often deposited to the plan at the same time as the employee contributions.

So, what happens when employer matching contributions are deposited to the plan late? In many cases, there will not be any “lost earnings” owed to participants on the match. In this post, we will demystify the critical differences in the deposit timing rules for employee deferrals versus employer matching contributions, address when employers must make earnings adjustments for late deposits and explain how match calculation periods differ from funding timelines.

Employee Contributions – Department of Labor’s Oversight

Before diving into employer matching contributions, let’s review late employee deferrals and recent updates to the corrections program applicable to employee contributions. “Employee contributions” includes employee deferrals (pre-tax and Roth), voluntary employee contributions (after-tax contributions) and employee loan repayments, to either a 401(k) or 403(b) plan. All employee contributions are considered plan assets.

The Voluntary Fiduciary Correction Program (“VFCP”) is available to address errors when employee contributions (aka “participant contributions”) are remitted to the plan beyond the DOL’s prescribed deadlines. Any delay between deducting employee contributions from an employee’s paycheck and actually depositing those employee contributions in the plan trust is considered a loan or extension of credit between the employer (a fiduciary) and the plan.

If employee contributions are remitted beyond certain DOL timelines, the plan must provide make-up investment earning contributions to the affected participant accounts . These earnings are commonly referred to as “lost earnings” in the correction process as outlined in the VFCP.

The DOL released an update to their correction program in January 2025, with an effective date of March 17, 2025. Let’s take a quick look at the newly available correction method available for employee contributions.

Self-Correction Component (SCC) – At a Glance

The SCC is a new feature of the VFCP that allows plan sponsors and fiduciaries to correct certain fiduciary violations without submitting a formal VFCP application—provided specific conditions are met.

• Eligible Transactions
  Delinquent (Late) Transmittal of Participant Contributions and Loan Repayments
  Eligible Inadvertent Participant Loan Failures

• Key Conditions for SCC Use

  • Delinquent contributions/loan repayments must be deposited in 180 days or less from the applicable payroll date they were withheld.

  • The plan must not be under investigation by the DOL or another regulatory agency.

  • The correction must be completed in full and in accordance with the specified methods.

  • The plan sponsor must retain documentation of the, even though no formal submission is required.

  • Total lost earnings must be $1,000 or less.

• Benefits of Using SCC

  • No formal VFCP application is needed.

  • Avoids DOL enforcement actions and civil penalties if all conditions are met.

  • No waiting for a DOL response or no-action letter.

• Important Notes

  • Plan sponsors must still calculate and restore lost earnings using the DOL’s online calculator. - Plan sponsors must complete the SCC Retention Record Checklist

  • Fiduciary must sign Penalty of Perjury statement.

For a more in-depth look at the new SCC requirements and online tools for correcting late deposits, refer to the DOL’s helpful tool to check eligibility for the program. As a reminder, this program is only applicable to contributions and loan repayments that are deducted from the employee’s compensation!

Employer Matching Contributions – Internal Revenue Service’s Oversight

It is important to stress the difference between employee contributions and employer matching contributions. Matching contributions, while typically deposited in conjunction with employee contributions, are (needless to say) not deducted from employee compensation. Failure to timely deposit matching contributions is not treated as a loan or extension of credit because the amounts (until deposited) are employer funds, as opposed to plan assets. Employers generally must deposit matching contributions by the due date of the employer’s tax return to be deductible for the year they were allocated.

What does “allocate” actually mean in this context? Contribution allocations relate to the limitation year applicable to the contributions. For most plans, the limitation year is the same as the plan year. One misconception is that employer contributions are “allocated” in the year deposited. However, the applicable limitation year is the plan year for which the employer contributions were determined (because the allocation was based on compensation for a specific plan/limitation year subject to annual nondiscrimination testing for that specific period). If the allocations were based on 2024 eligible plan compensation but deposited in 2025 (up to the deduction deadline applicable to the employer), those employer allocations count in the 2024 annual compliance testing and are deductible for the employer in the 2024 tax year.

Note: There are special circumstances applicable when the employer’s fiscal year is different from the plan/limitation year. The deduction then relates to the compensation used to determine the contributions and when the contributions are deposited to the plan. Therefore, it is recommended that plan sponsors consult with tax professionals when determining the deduction limits when the plan year and fiscal year are not the same.

Match Calculation vs. Funding

The timeframe for calculating the match owed a participant is different from the timeframe for funding that amount owed to the 401(k) plan. Many confuse the “Per Pay Period” matching contribution period stated in the plan’s adoption agreement to mean that the match will also be funded per pay period. Depending on the type of match (regular match or safe harbor match), the basic plan document may include additional funding requirements that are not the same as each payroll period.

The real twist? “Allocated” doesn’t mean “deposited.” Contributions are tied to the plan year they’re based on, not when they hit the account. And while match calculations might happen per pay period, funding can follow a very different schedule—unless the plan document states otherwise.

Key Terms:

• Determination/Calculation/Contribution Period – How the match formula is applied to the employee deferrals and the eligible compensation used in the formula. This may be defined in the plan document as per pay period, monthly, quarterly or plan year. For example, if the match contribution period is monthly, the deferrals made (and eligible compensation paid) in that month are used to calculate the match owed that employee for that month. Expanding on the monthly example, assume that the employer’s payroll periods are semi-monthly (1st and 15th of each month). John defers $200 on the 1st and $250 on the 15th; and, he is paid $2,000 on the 1st and $5,000 on the 15th. The employer’s match formula is 50% of deferrals on deferrals up to 5% of eligible compensation. John’s match for that month is limited to $7,000 times 5% = $350 (he deferred $450), so the match is 50% of $350 = $175. Note that the deferrals and compensation for the month were added together to calculate the match.

• Funding/Deposit Timing for the Match – Refers to the actual deposit to the plan by the employer of the matching contribution amounts determined under the formula and period noted above. Under the example above, the employer is required to calculate John’s match on a monthly basis, but the employer is not required to deposit the match on a monthly basis (unless the terms of the plan document specify).

The same principles apply in calculating the match regardless of the contribution period selected in the plan document. Oftentimes, the plan document will state the period as the “plan year,” but employers choose to fund the match with each payroll period. If “plan year” is selected in the plan document, the employer must perform an annual true-up calculation to ensure that each participant received the full match for the plan year.

Theoretically, an employer could calculate the match each pay period and not fund it until a later date. HOWEVER, this also depends on what the plan document states with regard to the timing of the match funding. Some plan documents state that if “Per Pay Period” is selected for the match calculation, the employer must deposit the calculated match as soon as administratively feasible. On the other hand, some plan documents state the employer can fund the employer match not later than the due date of the employer’s corporate tax return for the year, including extensions (more on that below).

In reality, most employers that elect the “Per Pay Period” calculation period also deposit the match on the same per pay period basis as they deposit deferrals for each payroll. The key point here is that the employer is not necessarily required to deposit the pay period match at the same time as the deferrals.

Safe Harbor Matching Contributions

Safe harbor 401(k) matching contributions are subject to special deposit timing rules. If the employer has elected in the plan document to calculate the safe harbor match based on a period shorter than the plan year (e.g., per payroll, monthly, or quarterly), the employer must deposit the safe harbor matching contributions owed for each quarter no later than the last day of the immediately following plan year quarter.

As an illustration, if an employer calculates the safe harbor match for a calendar plan year each pay period from January 1^st to March 31^st (Q1), the employer must deposit the safe harbor match no later than June 30^th (end of Q2). The safe harbor match deposit must include an earnings adjustment if the employer fails to timely deposit it by the June 30^th deadline.

Important Employer Contribution Deadlines

For employer contributions, there are three important issues to keep in mind, all with different and distinct deadlines. These issues include when contributions are deductible, when contributions are counted in the annual additions limitation for the plan’s compliance testing and when safe harbor contributions must be deposited to maintain the plan’s operational compliance. The following illustrates the various deadlines applicable to a corporate entity (C-Corp) with a 2024 calendar year fiscal year and plan year:

• Deadline for Corporate Tax Deduction with Calendar Year Fiscal Year in 2024
  Date: September 15, 2025 (assuming tax filing extension)
  Purpose: To claim a 2024 tax deduction for employer contributions.
  Requirement: Contributions must be deposited by this date to be deductible for the 2024 tax year.

• Deadline for Annual Additions (IRC §415(c) Plan Purposes)
  Date: October 15, 2025
  Purpose: To count contributions as 2024 annual additions under plan rules.
  Requirement: Contributions must be allocated for 2024 and deposited within 30 days after the deduction deadline (i.e., by October 15th if the deduction deadline is September 15th).

• Deadline to Preserve Safe Harbor Status
  Date: December 31, 2025
  Purpose: To satisfy safe harbor matching contribution requirements.
  Requirement: Contributions must be made within 12 months after the end of the plan year.
  
  Caution: Contributions made after October 15th count toward 2025 annual additions, which may trigger excess contributions and require correction via EPCRS.

Practice notes: To ensure compliance and proper deduction timing, we recommend employers consult with retirement plan and tax professionals to determine the applicable deadlines based on the entity structure (i.e., C-Corp, S-Corp. and Partnership), the plan year, and the plan type.

So, Are Matching Contributions “Late”…or Not?

To reiterate: The deposit timing rules for employer matching contributions are distinct from employee deferrals because matching contributions are funded entirely by the employer (i.e., they are not deducted from employee compensation). While timely deposit of these contributions is important, a delay does not constitute a prohibited transaction for which lost earnings owed participants must be calculated. For tax purposes, employer contributions are deductible in the year they are allocated, which typically aligns with the plan year for which they are calculated, but not necessarily the year they are deposited.

If your plan has late deposits that require corrections, know that the rules require lost earnings only for the employee contributions—not the matching component. Employers may consider including missed earnings on the late matching contribution deposit to make employees “whole” and as a basic employee relations matter. Just know that under the DOL’s VFCP correction program, lost earnings are only due on deferrals, after-tax contributions and loan repayments.

Ultimately, understanding the nuances of match calculation versus funding, and adhering to plan document requirements, is essential for maintaining IRS compliance and maximizing tax benefits.

Conclusion

Employer matching contributions may seem straightforward, but there’s more beneath the surface than just syncing with employee deferrals. Newfront Retirement Services’ team of advisors and dedicated service team are always available to help plan sponsors understand these nuances between contribution types and how they are treated. Feel free to contact me or just connect to keep up to date on all things ERISA 401(k): Joni_LinkedIn and 401(k)ology

Helpful Links:

• Voluntary Fiduciary Correction Program

• VFCP Self-Correction Component

• 401(k)ology – “Late” Employee Deferrals and Loan Repayments

• 401(k)ology – Annual Match “True Up”

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