Raising the Bar

The DoL offers a new safe harbor for small-plan contribution deposits
Reported by Quana C Jew

Leap Day (February 29) came with much applause from the benefits community. On that day, the Department of Labor (DoL) issued a proposed amendment to its existing regulations that would create a safe harbor for determining when employee 401(k) contributions become “plan assets” subject to the Employee Retirement Income Security Act (ERISA). This is critical due to ERISA funding rules that require that plan assets be held in a trust or annuity contract separate and apart from the assets of the employer.

Since 1996, and under the existing rules, participant contributions become plan assets on the earlier of (i) the earliest date on which the contributions can reasonably be segregated from the employer’s general assets (the “General Rule”) or (ii) the 15th business day of the month following the month in which the contributions are withheld by the employer from the employee’s wages or the amount is received by the employer (the “Outer Limit”).

The DoL acknowledges in its proposed guidance that, despite its efforts to clarify the General Rule, many plan sponsors and their advisers continue to be confused as to the deadline for forwarding contributions to the plan. Plan sponsors and their advisers have mistakenly believed that the Outer Limit was the deadline for depositing contributions when, in fact, the General Rule applies unless the date under the General Rule is later than the date in the Outer Limit. As evidence of this confusion, since the inception of the DoL’s Voluntary Fiduciary Correction Program, approximately 90% of the applications have involved delinquent contributions. As a result, the DoL said that it was time to provide greater certitude with respect to the timing of contribution deposits, at least for small plans.

Under the proposed guidance, plans with fewer than 100 participants as of the beginning of the plan year are subject to the proposed guidance. More specifically, participant contributions related to small retirement plans or small welfare benefits plans will be treated as meeting the General Rule if such contributions are deposited under the plan by no later than the seventh business day following the day on which such amounts are received by the employer, or the seventh business day following the day on which such amounts would otherwise have been payable to the participants in cash. The safe harbor would apply even if the participant contributions could have been deposited sooner than the seventh business day deadline. For these purposes, the contributions will be considered as “deposited’ when placed in the account of the plan. Significantly, the seventh business day deadline does not require allocation to a participant’s account or to a particular investment vehicle by such date. Finally, note that, under the safe harbor, the seventh business day deadline also applies to the timing of the deposit of loan repayments.

The effective date of the proposed guidance is the publication date of the final regulations. However, small plans may use the safe harbor rule now, since the DoL will not assert a violation of the General Rule against a small plan so long as the contributions have been transferred to the plan within seven business days.

While the proposed safe harbor only applies to small plans, the DoL states in its proposed guidance that it is willing to consider a safe harbor for large plans (100 or more participants) if commentators provide supporting data to the DoL regarding current contribution practices and the net benefit to employers and participants of implementing a safe harbor. The DoL’s primary concern with extending the safe harbor to large plans is that a safe harbor can create an undesirable incentive for plan sponsors to delay the depositing of contributions up to the full period provided by the safe harbor rather than the earliest date on which the contributions can reasonably be segregated from the employer’s general assets, thereby delaying the potential investment income to participants.

The DoL’s proposed rules are a step in the right direction, as they provide some level of certainty for small plans with respect to the deadline for depositing plan contributions. Only time will tell if plan sponsors of large plans will be afforded a similar level of ­certainty. One thing is for certain: If the DoL decides to provide a safe harbor for the depositing of contributions related to large plans, it will be less than seven business days.

Quana C Jew is a partner at the law firm of Arent Fox, focusing on ERISA, employee benefits, and executive compensation. Quana has served as a guest lecturer in the employee benefits area for various law school, bar seminar, and employee benefits-related organizations. Most recently, Washingtonian magazine named Quana as one of Washington’s best tax lawyers.