A 401(k) deduction does not end at payroll: What a federal indictment shows small employers

Quick Answer

• A federal indictment announced October 6 alleges an Ohio business owner withheld employee 401(k) contributions and never remitted them to the plan.

• Employers must send deferrals to the plan promptly once the money can reasonably be kept apart from company funds; plans under 100 participants may rely on an optional 7-business-day safe harbor.

• Reconciling the payroll liability to the plan deposit every cycle is how an honest employer proves the money moved.

On October 6, 2026, the U.S. Department of Justice announced the indictment of an Ohio business owner who, according to the indictment, withheld employee retirement contributions from paychecks, did not remit them into the company's 401(k) plan, and failed to pay the required employer matching contributions. The release alleges he used the money for other business and personal expenses and later ran a Ponzi scheme and a mortgage fraud. An indictment is only a charge, and the defendant is entitled to a fair trial.

That is an alleged intentional scheme, and nothing in it describes an honest employer. The question for everyone else is narrower and more practical: when employee money is withheld from a paycheck, how quickly does it reach the plan, and can you prove it?

The difference between fraud and a late deposit

Fraud and a late deposit are different things, but they start from the same gap. In any business with a 401(k), money leaves the paycheck on payday and stays in the operating account until someone sends it to the plan. When payroll runs in one system and the plan's recordkeeper sits in another, with no automated sync and no reconciliation, that transfer can slip while everyone assumes it happened. It is a real exposure for founder-led professional services firms, where a single person may handle payroll, bank access, and the plan relationship.

The IRS Fix-It guide on late deferral deposits advises employers to coordinate with their payroll provider to find the earliest date deferrals can reasonably be separated from general assets, and to set up procedures that make deposits by that date.

The DOL deposit rule and the 7-business-day safe harbor

Under Department of Labor regulation 29 CFR 2510.3-102, employee contributions become plan assets as soon as they can reasonably be separated from the employer's general assets. The general rule is to deposit them by that date, and in no event later than the 15th business day of the following month. The IRS stresses that the 15th business day is a maximum, not a safe harbor.

For plans with fewer than 100 participants at the beginning of the plan year, the Department of Labor offers an optional safe harbor: employee contributions deposited within 7 business days are treated as timely. Missing the safe harbor does not by itself mean a violation, but the deposit is then judged under the general standard.

The safe harbor covers employee deferrals and loan repayments, not the employer match. Under the IRS guidance, matching contributions follow different timing rules, so check your plan document for any date it sets.

The payroll-to-plan reconciliation loop

Three checks, run on every payroll rather than at year-end, show whether the money moved and when:

1. Deduction: The payroll register shows each employee's deferral, loan repayment, and match, and those amounts post to a payroll liability account in the general ledger.

2. Remittance: The exact amount moves from the operating bank account to the plan's custodian or recordkeeper, usually through the payroll provider, inside the deposit window.

3. Reconciliation: The cash outflow clears the liability, and the account returns to zero after each remittance. Any balance that lingers is flagged through your regular bank reconciliation.

Record the deposit date next to each payday. The IRS advises keeping a record of why deposits were late when they run a week or two behind, and a dated ledger trail is the easiest way to produce one.

Why your bookkeeper belongs in this process

Adopting a 401(k) plan does not end the need for oversight. A bookkeeper who reconciles the payroll liability to the cash that left the bank each cycle can show whether the transfer happened and when, which is the record you want if a deposit is ever questioned. For more on how the two functions connect, see our guide on payroll and bookkeeping services.

Enforcement across benefit plans is active. The Department of Labor's Employee Benefits Security Administration closed 878 civil investigations in fiscal year 2025, and 63% produced monetary recoveries or other corrective action, according to its enforcement fact sheet.

Frequently asked questions

What happens if an employer deposits 401(k) contributions late?

According to the IRS, a late deposit can be a prohibited transaction between the plan and the employer. The initial excise tax is 15% of the amount involved for each year, and an additional 100% tax can apply if the transaction is not corrected. Reporting the excise tax is covered in our guide to Form 5330 and employee benefit excise tax.

What should an employer do after finding a late 401(k) deposit?

Identify which deposits were late, calculate the lost earnings, and deposit the missed amounts with those earnings into the plan trust. The IRS notes this is usually corrected through the Department of Labor's Voluntary Fiduciary Correction Program, and it advises keeping a record of why deposits were late. Involve your plan administrator or ERISA advisor before correcting.

Does a payroll provider make sure the 401(k) deposit is on time?

Not automatically. The IRS states that the employer is responsible for contributing participants' deferrals to the plan trust, so confirm in writing how and when your payroll provider remits deferrals, loan repayments, and match. Then check each payroll's deposit against your general ledger.

Numetix pairs AI-powered automation with experts in the loop to reconcile payroll liabilities to the cash that leaves your bank account every pay cycle, so a balance that did not reach the plan is visible while you can still fix it. Explore our payroll services or see how our bookkeeping services keep payroll liabilities reconciled.

Disclaimer: This article is for informational purposes only and does not constitute formal legal, accounting, or ERISA advice. Consult a qualified plan administrator or ERISA attorney about your plan's circumstances.