Why “Failed to Transmit Payment on Time” Matters and How to Prevent It
Reporting a “Failed to Transmit Payment on Time” on your company’s annual Form 5500 is more than just a compliance hiccup — it signals a significant breakdown in fiduciary responsibility that can lead to financial penalties, reputational harm, and lost employee trust.
What does “failed to transmit” mean?
A “Failed to Transmit” designation indicates that your company experienced delays in processing employee 401(k) contributions. These delays mean that funds deducted from employees’ paychecks weren’t promptly deposited into their retirement accounts, preventing them from being invested in the market on time.
Why do delays happen?
Delays often occur in companies where payroll contributions compete with other responsibilities, overburdening the planning team. Lack of payroll integration with a recordkeeper is another common factor, as it means they must be processed manually, increasing the likelihood of human error and administrative inefficiencies.
What are the risks of late payroll contributions?
- Missed investment opportunities for employees: Delayed contributions cause employees to miss out on potential market gains, which can impact their long-term retirement savings.
- Financial reimbursement obligations: As the fiduciary, your company must reimburse employees for the lost earnings they would have gained with timely contributions.
- Penalties and excise taxes: The IRS imposes a 15% excise tax on lost earnings for failing to process payroll contributions promptly. This adds a financial burden on top of reimbursement obligations.
- Reputational damage and loss of trust: Employees depend on timely contributions to build their retirement security. Delays can erode their confidence in the company’s management, potentially affecting morale and retention.
- Increased audit risk: Late contributions reported on Form 5500 can trigger greater scrutiny from the Department of Labor (DOL) and increase the likelihood of an audit.
Preventing “failed to transmit” incidents
Businesses can mitigate the risks associated with late payroll contributions by automating the integration of their payroll systems with their recordkeeper, ensuring timely and accurate deposits.
Partnering with a third-party administrator (TPA) can also relieve administrative burdens, allowing experts to handle critical retirement plan duties precisely. Regular compliance monitoring through audits is essential to identify and address potential issues before they escalate, safeguarding the plan’s integrity.
Finally, working with an experienced retirement plan advisor can optimize operations and maintain compliance, providing peace of mind while maximizing the plan’s effectiveness.
Failed payroll contributions highlight the need for strong oversight
By addressing the root causes of delays and implementing preventative measures, your company can reduce risks, protect employee trust, and ensure your retirement plan operates smoothly. Building a robust system for managing payroll contributions today can save your business significant time, money, and stress in the future.
The information contained in this document is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.
