Understanding Timeliness Requirements for Employee Contributions

Article Summary

• Employee deferrals must be deposited into a retirement plan as soon as they can reasonably be separated from an employer’s general assets.
• Common timeframes such as five or seven business days are general expectations, not safe harbors.
• An employer’s fastest historical deposit sets the standard for what is considered timely going forward.
• The “15th business day of the following month” is not a grace period and applies only in rare circumstances.
• Late deposits are treated as prohibited transactions and require correction, including restoring lost earnings.
• Employers may need to file Form 5330 or use the Voluntary Fiduciary Correction Program (VFCP) to resolve late deposits.
• Strong internal controls, consistent processes, and clear documentation are key to preventing future issues.

Timeliness Requirements for Employee Contributions: What Employers Need to Know

February 12, 2026

Timely deposits of employee contributions are one of the most important operational responsibilities for retirement plan sponsors. While the rule itself is relatively short, its application is often misunderstood, and missteps in this area continue to be one of the most common compliance issues identified during audits and regulatory reviews. Understanding how the Department of Labor (DOL) evaluates deposit timing—and how to respond when a deposit is late—is critical to protecting both plan participants and the employer.

At its core, the timeliness requirement is rooted in fiduciary responsibility. Employee deferrals are considered plan assets as soon as they can reasonably be separated from an employer’s general assets. Once that point is reached, the employer has a duty to ensure those funds are deposited into the plan promptly and accurately. Failing to do so can expose the plan sponsor to regulatory scrutiny, excise taxes, and reputational risk, even when delays are unintentional or administrative in nature.

Understanding the “As Soon As Reasonably Possible” Standard

The DOL does not provide a specific number of days by which employee contributions must be deposited. Instead, the governing standard requires employers to remit employee deferrals into the plan as soon as they can reasonably be separated from the employer’s general assets. This standard is intentionally flexible, allowing it to apply across employers of different sizes, payroll structures, and administrative capabilities.

Because there is no fixed deadline, many employers look for practical benchmarks. In practice, informal expectations have developed over time. Smaller employers often deposit employee contributions within about seven business days following payroll, while larger employers with more automated systems frequently deposit within five business days or fewer. These timeframes are commonly referenced in audits and compliance discussions.

However, it is critical to understand that these are not safe harbors. They are general observations, not guarantees. Meeting a five‑ or seven‑day timeframe does not automatically mean a deposit is timely, and exceeding those timeframes does not automatically mean a deposit is late. The DOL’s focus is not on averages—it is on what is reasonable for that specific employer, given its actual payroll and administrative processes.

Why an Employer’s Fastest Deposit Becomes the Standard

One of the most important—and often overlooked—aspects of the timeliness rule is that an employer’s own behavior sets the benchmark. In other words, the fastest timeframe in which an employer has successfully deposited employee contributions becomes the expectation going forward.

For example, if an employer typically deposits contributions within five business days but makes a next‑day deposit during a particular payroll period, that next‑day deposit demonstrates that the employer is capable of remitting funds more quickly. From the DOL’s perspective, that faster timing is now evidence of what is “reasonably possible” for that employer.

As a result, even a single next‑day deposit can establish a new standard. If subsequent deposits take longer without a clear and documented reason, those deposits may be considered late—even if they fall within timeframes that would otherwise seem reasonable. This is why consistency matters just as much as speed. Employers are not required to deposit contributions as quickly as possible once; they are expected to deposit them consistently within the shortest reasonable timeframe they have demonstrated.

The Misunderstood “15th Business Day of the Following Month”

Another common source of confusion is the reference to the “15th business day of the following month.” Many employers assume this date functions as a grace period or a safe harbor, allowing contributions to be deposited any time before that deadline without issue. In reality, that interpretation is incorrect.

The 15th business day of the following month represents an absolute outer limit, not a target or standard. It applies only in rare circumstances where an employer can demonstrate that it was truly not possible to separate employee deferrals from general assets any earlier. For most employers, particularly those with modern payroll systems, this situation is uncommon.

Relying on the 15th business day as a routine deposit deadline significantly increases the risk of late contributions. In audits and DOL investigations, deposits made close to this outer limit often attract additional scrutiny, especially if the employer has previously demonstrated an ability to deposit contributions more quickly.

What Happens When a Deposit Is Late

Despite best efforts, late deposits can and do occur. The important thing is how quickly and thoroughly the issue is identified and corrected. When employee contributions are deposited later than required, the delay is treated as a prohibited transaction under ERISA. This classification triggers specific correction requirements designed to make participants whole.

The correction process generally involves several key steps:

First, the employer must identify the affected payroll periods and determine how late the contributions were deposited. This involves comparing payroll dates, contribution withholding dates, and actual deposit dates to establish the length of the delay.

Next, the employer must calculate the lost investment earnings attributable to the late deposit. Participants are entitled to the earnings they would have received had the contributions been deposited on time. Many employers use the DOL’s online lost earnings calculator for this purpose, while others rely on the plan’s actual investment returns during the delay period. Either approach is generally acceptable, as long as it is applied consistently and reasonably.

Once the lost earnings are calculated, both the original contribution amount and the associated earnings must be deposited into the plan. These amounts must then be allocated to the affected participants based on the specific payroll periods involved. Accuracy is critical here, as misallocations can create additional compliance issues.

Reporting and Filing Considerations

In addition to restoring lost earnings, employers may have reporting obligations when correcting late deposits. Because late contributions are prohibited transactions, they can trigger an excise tax that must be reported on Form 5330. The excise tax is generally calculated as a percentage of the lost earnings and continues to accrue until the correction is completed.

However, many employers choose to correct late deposits through the Voluntary Fiduciary Correction Program (VFCP). The VFCP allows employers to proactively disclose the issue to the DOL, document the correction, and request relief from the excise tax. When the correction meets the program’s requirements, the DOL will often issue a “no‑action” letter and waive the excise tax entirely.

While the VFCP involves additional documentation, it can provide meaningful protection and peace of mind, particularly for more significant or recurring delays. Employers considering this option should ensure that all calculations, deposits, and records are complete and well‑supported before submitting an application.

The Importance of Documentation

Whether or not the VFCP is used, thorough documentation is essential. Employers should retain records that clearly demonstrate:

•    Payroll dates and withholding amounts
•    Contribution deposit dates
•    Calculations of lost investment earnings
•    Evidence of corrective deposits
•    Any required filings or correspondence with regulators

This documentation not only supports compliance but also simplifies future audits and reduces the risk of repeated findings. In many cases, well‑organized records can make the difference between a routine correction and a prolonged compliance issue.

Communicating With Participants

In some situations, employers choose to notify participants when their accounts are directly affected by a late deposit and subsequent correction. While this step is not always required, it can reinforce transparency and trust, particularly when the correction involves noticeable earnings adjustments.

When communicating with participants, clarity and tone are important. Notices should explain what happened, how the issue was corrected, and confirm that participants have been made whole. Overly technical language or unnecessary detail can create confusion, while overly vague explanations may raise concerns. A balanced, straightforward approach is usually most effective.

Preventing Late Deposits Going Forward

Although correction processes are well‑established, prevention remains the best strategy. Employers can significantly reduce the risk of late deposits by reviewing and strengthening their internal controls around payroll and plan administration.

Key preventive measures often include:

•    Evaluating payroll processing timelines to identify delays
•    Setting internal deadlines earlier than external expectations
•    Automating contribution remittances where possible
•    Training staff on the importance of timeliness and consistency
•    Periodically reviewing deposit patterns for anomalies

Even small adjustments—such as moving an internal approval deadline forward by a day—can have a meaningful impact. Regular monitoring also helps identify issues early, before they develop into larger compliance concerns.

The Role of Consistency and Fiduciary Oversight

Ultimately, compliance with the timeliness requirement is about more than avoiding penalties. It reflects an employer’s commitment to fiduciary responsibility and participant protection. Consistent, timely deposits demonstrate strong plan governance and help ensure that participants receive the full benefit of their contributions.

When employers understand the rules, apply them consistently, and correct errors promptly, they significantly reduce regulatory risk and reinforce confidence in the plan’s administration. And when mistakes do occur—as they inevitably will from time to time—addressing them quickly and transparently goes a long way toward maintaining trust and compliance.

By prioritizing strong internal controls, clear documentation, and proactive oversight, employers can meet their obligations, protect participants, and keep their retirement plans operating smoothly.

frequently asked questions about Timeliness Requirements for Employee Contributions

What does “as soon as reasonably possible” actually mean?
“As soon as reasonably possible” means the earliest point at which employee deferrals can be separated from the employer’s general assets and deposited into the plan. There is no fixed number of days that applies to all employers. Instead, the standard is based on what is reasonable for a specific employer given its payroll systems, administrative processes, and demonstrated practices.

Is there a safe harbor deadline for depositing employee contributions?
No. While smaller employers often deposit within about seven business days and larger employers within about five, these timeframes are not safe harbors. They are general observations, not guarantees of compliance. The Department of Labor evaluates timeliness based on the employer’s actual ability to remit contributions, not industry averages.

Why does one fast deposit change future expectations?
If an employer demonstrates that it can deposit employee contributions more quickly—even once—that timing becomes evidence of what is reasonably possible. Going forward, deposits that take longer may be considered late unless the employer can clearly document why the faster timing was not achievable in those instances.

Is the 15th business day of the following month a deadline employers can rely on?
No. The 15th business day of the following month is an absolute outer limit, not a standard deadline or grace period. It applies only in rare situations where earlier deposit was truly not possible. Most employers should not rely on this date as a routine benchmark.

What happens if employee contributions are deposited late?
Late employee contributions are treated as a prohibited transaction. The employer must correct the issue by depositing the missed contributions and restoring the investment earnings participants would have received had the funds been deposited on time.

How are lost earnings calculated?
Lost earnings can be calculated using the Department of Labor’s online calculator or based on the plan’s actual investment returns during the period of delay. The key requirement is that the calculation reasonably reflects what participants missed and is applied consistently.

Is Form 5330 always required for late deposits?
Not always. Form 5330 is generally required to report excise taxes associated with prohibited transactions. However, employers that correct late deposits through the Voluntary Fiduciary Correction Program may receive relief from the excise tax if the correction is approved.

What is the Voluntary Fiduciary Correction Program (VFCP)?
The VFCP allows employers to voluntarily report and correct certain fiduciary breaches, including late employee contributions. When the correction meets the program’s requirements, the Department of Labor may issue a no action letter and waive excise taxes, providing added protection for the plan sponsor.

Should participants be notified when late deposits occur?
Participant notification is not always required, but some employers choose to notify participants when their accounts are directly affected. Clear, straightforward communication can promote transparency and help maintain trust, especially when earnings adjustments are involved.

How can employers reduce the risk of late deposits?
Employers can reduce risk by reviewing payroll timelines, setting earlier internal deadlines, automating contribution processes when possible, training staff on timeliness requirements, and regularly monitoring deposit patterns for inconsistencies.

For additional guidance, contact the Larson & Company Employee Benefit Plan Team today.