Late 401(k) Deposits: Deadlines, Lost Earnings and Correcting Through VFCP

9/29/2026

Late 401(k) deposits are the most common operational failure payroll causes in a retirement plan, and the one that is easiest to prevent and most tedious to fix. The rule itself is short. The correction is not: it involves the Department of Labor's plan asset regulation, a lost earnings calculation, an IRS excise tax return, a disclosure on the plan's annual return, and a decision about whether to use the DOL's correction program or fix it quietly and accept the reporting consequences.

Our 401(k) payroll handbook covers the timing rule as a day-to-day control. This page assumes the control has already failed. It covers how to find late deposits, how to measure them, and what correcting them actually involves, from payroll's side of the desk.

The Rule You Have Broken

Under the DOL's plan asset regulation at 29 CFR 2510.3-102, amounts withheld from a participant's wages as 401(k) contributions, or as repayment of a participant loan, become plan assets "as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets."

Three features of that rule cause most of the confusion.

There is an outer limit, and it is not the deadline. For pension plans, the regulation says the date can never be later than the 15th business day of the month following the month in which the amounts were withheld. Many payroll teams read that as a target. It is not. It is a ceiling that applies only if your actual capability is slower than that, which for any employer using electronic payroll is almost never the case. The operative standard is the earliest date you could reasonably have segregated the money.

The standard is measured against you. If your payroll provider transmits deferrals the day after payroll for most pay dates, that pattern is the evidence of what is reasonable for your organization. A deposit made eight business days after payroll when your usual practice is two days is late, even though it falls well inside the 15th-business-day ceiling.

Small plans get a safe harbor; large plans do not. A plan with fewer than 100 participants at the beginning of the plan year is treated as compliant if the amounts are deposited no later than the 7th business day following the day the employer received or withheld them. Larger plans have no bright line at all.

The regulation's reach to loan repayments is the part payroll most often forgets. A loan repayment deduction sitting in the operating account for two weeks is a late deposit under exactly the same rule as a deferral.

Why "Late" Is a Prohibited Transaction, Not a Late Payment

Once withheld amounts become plan assets, an employer that keeps them in its own account is using plan assets for its own benefit. That is a prohibited transaction under ERISA and under Internal Revenue Code section 4975, regardless of intent and regardless of how small the amount or how short the delay.

That characterization drives everything that follows. A late tax deposit costs a penalty. A late plan deposit requires the employer to restore the plan to the position it would have been in, pay an excise tax to the IRS on the "amount involved," and disclose the failure on the plan's Form 5500, where it is visible to the DOL and, for plans that need an audit, to the plan's independent accountant.

How Late Deposits Actually Happen

In practice, almost every late deposit traces back to one of a short list of causes:

• A manual step in the transmission. Someone has to approve the funding file, upload a contribution file to the recordkeeper, or release a wire. When that person is out, deposits wait.
• Off-cycle and bonus payrolls. The regular payroll transmits automatically; the special bonus run or the manual check batch does not, because nobody set up the remittance.
• Recordkeeper file rejections. The file is sent on time, rejected for a format or census error, and resent a week later. The money was ready on day one.
• Provider or recordkeeper changes. During a conversion, deferrals are withheld under the new system and remitted under the old instructions, or held until the new account is open.
• Loan repayments on a separate remittance. Deferrals go out with the payroll file, but loan repayments are remitted monthly by a different person.
• Year-end and holiday periods, when approvals slip and the business-day count gets miscounted.
• Cash management decisions. Occasionally, a business short on cash holds withheld deferrals deliberately. That is the most serious version of this failure, and it can carry personal fiduciary exposure for the people who made the call.

Finding Late Deposits: Run the Examiner's Test

The DOL and plan auditors test timeliness by comparing every pay date to the date the corresponding money reached the plan's trust. Do that test yourself, for the whole year, before anyone else does.

1. List every payroll that withheld deferrals or loan repayments, including off-cycle, bonus, correction and manual-check runs. Pull this from the payroll register, not from the regular pay calendar.
2. Match each to the trust deposit, using the recordkeeper's or trustee's receipt date, not the date your bank shows the debit initiated.
3. Establish your normal lag. Look at the pattern. If most deposits land in one to three business days, that is your demonstrated capability.
4. Flag outliers against that pattern, not against the 15th business day.
5. Check amounts as well as dates. A deposit can be on time but short, with the remainder sent later. The shortfall is a late deposit.
6. Separate deferrals from loan repayments, since they are often remitted differently.

Document the method and the result. If you find nothing, the documentation is evidence that you looked. If you find something, it becomes the basis for the correction. Our payroll audit procedures guide covers how to structure an internal test like this, and the payroll segregation of duties guide covers how to keep the person who runs payroll from being the only person who can release the remittance.

What Correction Requires

Whichever route you take, a complete correction has the same core parts:

7. Deposit the principal, meaning the late amounts themselves, if they have not already been deposited.
8. Deposit lost earnings to the plan, allocated to the affected participants' accounts.
9. Pay the excise tax on the prohibited transaction, or satisfy the conditions of an exemption that relieves it.
10. Report the delinquency on the plan's Form 5500 for the year it occurred, and carry it forward until it is fully corrected.
11. Fix the cause, so the same failure does not recur next quarter.

Calculating Lost Earnings

Lost earnings run from the date the amounts were withheld from participants' pay (not from the date they became "late") to the date they were deposited, and through to the date the lost earnings themselves are paid.

The DOL's Voluntary Fiduciary Correction Program publishes an online calculator for this. It uses the IRS underpayment rates under Internal Revenue Code section 6621(a)(2), which change quarterly, with daily compounding factors. The DOL maintains the table of historical rates on its site. Using the calculator is not mandatory, but under the VFCP's self-correction option, the lost earnings must be computed with it, and in practice nearly every correction uses it because the result is defensible and reproducible.

Two practical points:

• Run the calculation per pay date, not in aggregate. Each late payroll is its own delinquency with its own start date.
• Allocate to participants. The lost earnings are credited to the accounts of the participants whose money was late, in proportion to their delayed amounts. Your recordkeeper will need the allocation file.

The alternative measure in the VFCP, restoration of profits, applies where the employer earned more on the money than the plan lost. For most payroll delays, the calculator's lost earnings figure is the relevant one.

Route One: The Full VFCP Application

The Voluntary Fiduciary Correction Program is the DOL's process for fiduciaries to correct specific breaches, including delinquent participant contributions and loan repayments, and receive a no-action letter. The program was updated in a final rule effective 17 March 2025.

A full VFCP application involves correcting the transaction, documenting the calculation, and submitting the application with the supporting records the program lists. The benefit is the no-action letter, which states that EBSA will not take civil enforcement action on the corrected transaction, and access to excise tax relief under Prohibited Transaction Exemption 2002-51 if the exemption's conditions are met.

A full application makes sense when the delinquency is too large or too old for the self-correction option, when it involves a pattern rather than an isolated failure, or when the employer wants the certainty of the no-action letter.

Eligibility is lost if you wait. The VFCP is not available to a plan or fiduciary that is "under investigation" as the program defines it. Once an EBSA investigation has begun, voluntary correction is no longer the route.

Route Two: The VFCP Self-Correction Component

The 2025 update added a Self-Correction Component (SCC) for exactly the kind of small, short delay most payroll failures produce. According to the DOL's VFCP fact sheet, the SCC is available for delinquent participant contributions and loan repayments to pension plans when:

• Lost earnings total $1,000 or less
• The delinquent amounts are remitted to the plan within 180 calendar days from the date they were withheld from participants' paychecks
• Neither the self-corrector nor the plan is under investigation

To use it, the employer computes lost earnings with the online calculator, deposits principal and lost earnings, files an SCC Notice through EBSA's web tool, and assembles a retention record, including the SCC retention record checklist and a penalty-of-perjury statement, which goes to the plan administrator to keep. EBSA responds with an email acknowledgment rather than a no-action letter.

The SCC was paired with an amendment to PTE 2002-51, also effective 17 March 2025. Under the amended exemption, a self-corrector does not have to send a notice to interested persons. Instead, it completes Form 5330 to calculate the excise tax it would otherwise owe, keeps that form, and pays the excise tax amount to the plan rather than to the IRS. The amendment also removed the earlier restriction that denied exemption relief to anyone who had used the program for a similar transaction within the previous three years.

For a payroll team, the SCC changes the economics. A single late payroll caught within a few weeks will almost always qualify, and correcting it no longer requires a full application.

Route Three: Correcting Outside the VFCP

An employer can also deposit the principal and lost earnings and pay the excise tax without using the VFCP at all. That is a legitimate correction, but it carries two consequences worth weighing:

• No exemption. Without the VFCP and PTE 2002-51, the excise tax is owed to the IRS and reported on Form 5330.
• Nonexempt prohibited transaction reporting. On the Form 5500, delinquencies not corrected under the VFCP with PTE 2002-51 conditions satisfied are treated as nonexempt prohibited transactions, which the plan's auditor must address.

For most small, recent delinquencies, the SCC now costs less effort than going outside the program.

Form 5330 and the Excise Tax

The excise tax under Internal Revenue Code section 4975 is reported on Form 5330. According to the IRS instructions:

• The initial tax is 15% of the amount involved for each year, or part of a year, in the taxable period.
• If the transaction is not corrected, an additional tax of 100% of the amount involved can apply.
• For failure to transmit participant contributions, the amount involved is based on interest on the late amounts, following Revenue Ruling 2006-38, not on the full deferral amount.
• The taxable period runs from the date of the prohibited transaction until it is corrected, so a delinquency left open across years generates a separate tax for each year.
• The return is due by the last day of the 7th month after the end of the employer's tax year.

Two filing details have changed in recent years. The Form 5330 instructions now direct filers to Form 8868, not Form 5558, to request an extension. And Form 5330 must be filed electronically for tax years ending on or after 31 December 2023 by filers required to file 10 or more returns in the year. Confirm the current requirements in the latest instructions before filing.

The excise tax is owed by the employer as the disqualified person, not by the plan, and it should never be paid from plan assets.

Form 5500 Reporting

Late deposits must be disclosed on the plan's annual return:

Filing	Where late deposits go
Large plan (Schedule H)	Line 4a
Small plan (Schedule I)	Line 4a
Form 5500-SF	Line 10a

 

Per the DOL's instructions and its Form 5500 FAQs on delinquent contributions, the total delinquent amount is reported for the year in which the contributions were late and carried forward on the same line each year until the year after the violation is fully corrected, including payment of lost earnings. The FAQs also explain that delinquencies reported on line 4a are not repeated on line 4d or Schedule G, and that the auditor's report for a large plan addresses the line 4a information, separating delinquencies corrected under the VFCP with PTE 2002-51 satisfied from those that remain nonexempt prohibited transactions.

The practical consequence for payroll: whoever prepares the Form 5500, usually the plan's third-party administrator, needs your timeliness test and correction records before the filing deadline. An undisclosed late deposit that later surfaces in an audit is two problems instead of one.

Fixing the Cause

The correction is only finished when the failure cannot recur in the same way. Controls that work:

• Remit deferrals and loan repayments with the payroll itself, in the same file or the same release, rather than as a separate monthly task.
• Write down the standard timeline, such as "deposited within two business days of every pay date," and measure against it.
• Include off-cycle payrolls in the remittance procedure explicitly.
• Name a backup approver for every manual release step.
• Reconcile deposits to the register every pay date, and compare total plan deposits to total withholding quarterly.
• Treat file rejections as urgent. A rejected contribution file should be escalated the same day.
• Plan provider conversions with a remittance calendar agreed before the first parallel payroll.

Our payroll year-end checklist is a good place to add an annual timeliness review, and the payroll and retirement plans reference page covers how deferrals interact with the rest of the payroll system.

A documented procedure is also what a reviewer looks for first. The 401(k) Procedures Manual and e-Alerts is built as a desk reference for exactly this kind of written process, and its alerts are a way to keep up when the DOL changes the correction programs, as it did in 2025.

A Worked Sequence

Suppose an employer with about 60 participants runs a bonus payroll on a Friday. The regular payroll's deferrals transmit automatically, but the bonus deferrals require a manual upload, and the person responsible is on leave. The deferrals reach the trust 12 business days later.

• Is it late? Twelve business days misses the small plan 7-business-day safe harbor, and it is also slower than the employer's usual two-day pattern.
• Lost earnings: computed in the VFCP online calculator from the bonus pay date to the deposit date. For a single bonus payroll, the figure is likely to be small.
• Route: if lost earnings are $1,000 or less and principal and earnings are deposited within 180 days of withholding, the SCC is available. The employer deposits the lost earnings, files the SCC Notice, completes Form 5330 to calculate the excise tax amount, and pays that amount to the plan.
• Reporting: the delinquent amount goes on Form 5500-SF line 10a (or Schedule I line 4a) for the year, flagged as corrected.
• Cause: bonus payroll remittance added to the standard procedure, with a named backup.

Run that sequence within a few weeks of the failure and the whole matter is administrative. Leave it for a year and it becomes a multi-year excise tax calculation and an auditor finding.

Frequently Asked Questions

When are 401(k) deposits considered late?

When they are not deposited as of the earliest date the employer could reasonably have segregated them from its general assets, under 29 CFR 2510.3-102. For pension plans, the date can never be later than the 15th business day of the month after the month the amounts were withheld, but that is a ceiling, not a deadline. The real test is your own demonstrated capability. Plans with fewer than 100 participants at the start of the plan year have a safe harbor: deposits within 7 business days are treated as timely.

Do loan repayments count as late deposits?

Yes. The plan asset regulation expressly covers amounts withheld from wages for repayment of a participant loan, on the same terms as deferrals. A loan repayment withheld from pay and held in the employer's account is a late deposit if it is not remitted when it reasonably could have been. Because loan repayments are often remitted on a different schedule from deferrals, they are a frequent source of findings, and they are eligible for the same VFCP corrections, including the self-correction component.

How are lost earnings on late 401(k) deposits calculated?

From the date the amounts were withheld from pay until the date they were deposited, using the DOL's VFCP online calculator, which applies the IRS underpayment rates under section 6621(a)(2) with daily compounding. Calculate each late payroll separately and allocate the result to the affected participants' accounts. The self-correction component requires the online calculator, and most other corrections use it because the result is consistent and easy to document for the Form 5500 preparer and the auditor.

What is the VFCP self-correction component?

An option added by the DOL in its 2025 VFCP update, effective 17 March 2025, for delinquent participant contributions and loan repayments to pension plans. It is available when lost earnings are $1,000 or less, the amounts are remitted within 180 calendar days of withholding, and neither the plan nor the self-corrector is under investigation. The employer corrects, files an SCC Notice online, keeps a retention record, and, under amended PTE 2002-51, pays the excise tax amount to the plan instead of the IRS.

Do I have to file Form 5330 for late 401(k) deposits?

Generally yes, unless the excise tax is relieved under PTE 2002-51. The initial tax is 15% of the amount involved, which for late deferrals is based on interest rather than the full contribution, and the return is due by the last day of the 7th month after the end of the employer's tax year. Self-correctors using the SCC complete Form 5330 to calculate the tax and keep it, but pay the amount to the plan.

How are late deposits reported on Form 5500?

On line 4a of Schedule H or Schedule I, or line 10a of Form 5500-SF. The total is reported for the year of the delinquency and carried forward each year until the year after full correction, including lost earnings. Delinquencies not corrected under the VFCP with PTE 2002-51 satisfied are treated as nonexempt prohibited transactions, which a large plan's auditor must address. Give your timeliness test and correction file to the Form 5500 preparer before the filing deadline.

Building the Procedure That Prevents the Next One

Correction programs exist because late deposits are common, but every correction costs staff time, an excise tax calculation and a disclosure. A written remittance procedure, tested every pay date, is cheaper than all three. The 401(k) Procedures Manual and e-Alerts gives payroll and benefits teams a documented reference to build that procedure on, and for the plan-side rules behind it, see the 401(k) Training and Certification Program.

Correction program terms, calculator rates and filing rules change. Confirm the current VFCP requirements on the DOL's site and the latest Form 5330 and Form 5500 instructions before you correct, and coordinate with the plan's administrator and advisers on anything beyond a single, recent delinquency.