A few months ago, I bought a car. I thought it would be fun to get an upgrade and get all the new fancy features that a newer car would bring me. The backup camera, Bluetooth, leather seats, the works! But as most people do, I needed a loan to buy this car. So I went to my bank, asked for a car loan and they approved it! So for the next 48 months, I’ll be making payments so I can have my new fancy car. If I had paid for the car in cash from the start, I wouldn’t have to get a loan and pay interest. But alas, I am borrowing money from the bank so they want something in return.

Employee deferrals are just like a car loan. The money comes from the employee’s check with the expectation that the employer will make the deposit into the retirement plan timely. When the employer doesn’t make the deposit timely, the employer has to pay interest. If the employee contributions had been made timely, the money would have been invested and the employee would have received the typical gains and losses the market would have provided during the time it was invested. However, if the employer does not deposit the deferrals timely, it appears to the Department of Labor that the employer has taken a loan from the employees. Therefore, with any loan, interest would be paid.

If you are wondering what the definition of a timely deposit is at the Department of Labor, the answer is 7 business days from the paycheck date. And on day 8, those deposits are considered late. So one day really does make a difference.

What happens if I am a rule breaker? 

Contact your plan consultant as soon as you can. We will calculate lost earnings and help you determine the next steps. A Form 5330 may be required in order to self-correct the prohibited transaction. This may entail a 15% excise tax and additional fees paid for the calculation and completion of the form.
Hopefully you are reading this as a reminder or as a learning tool and not because you are a rule breaker. But if you fall into the latter category, all is not lost, give us a call so we can helpread more!

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