Late deposits and the VFCP

What a late deposit is

Money withheld from paychecks for 401(k) deferrals or loan repayments becomes a plan asset as soon as it can reasonably be separated from the employer’s general assets. Department of Labor rules set an outer limit of the 15th business day of the month after the payday, but that is a maximum, not a grace period. If you can deposit within two days, two days is your standard. Plans with fewer than 100 participants have a safe harbor: deposits made within 7 business days are treated as timely.

Why it matters to employers

Holding participant money is treated as a prohibited loan from the plan to the employer and a fiduciary breach. Late deposits must be reported on Form 5500, which the Department of Labor reviews. The employer must make up lost earnings and owes an excise tax, paid with IRS Form 5330.

How to correct

1. Deposit the late contributions.

2. Pay lost earnings to the affected participants, using the Department of Labor’s online calculator.

3. File under the Voluntary Fiduciary Correction Program for relief from civil penalties.

A 2025 update, effective March 17, 2025, added a self-correction component for late participant contributions and loan repayments, so smaller errors can be reported through an online tool without a full application. To use it, lost earnings must be $1,000 or less and the late amounts must reach the plan within 180 days.

Common mistakes

• Treating the 15th business day as the deadline.

• Depositing on an irregular schedule, which sets a pattern that shows what “as soon as possible” means for you.

• Missing off-cycle payrolls, bonuses and final paychecks.

• Fixing the deposit but not paying lost earnings.

• Running payroll and the plan on disconnected systems with a manual upload in between.