DOL Releases Final Participant Contributions Regulations

January 21, 2010

On January 14, 2010, the U.S. Department of Labor (“DOL”) published final regulations (DOL Regulation Section 2510.3-102) in the Federal Register on when participant contributions become “plan assets” subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).  Participant contributions are considered any amounts that an employer receives from its employees or are withheld from wages for contribution to an employee benefit plan.  These rules apply to employee contributions to qualified retirement plans (401(k), Savings Incentive Match Plan for Employees (“SIMPLE”) Individual Retirement Accounts (“IRAs”), Salary Reduction Simplified Employee Pensions (“SEPs”), Cafeteria Plans, Health Savings Accounts withheld from payroll or any other employee contributions made to welfare plans.  These new regulations establish a safe harbor period of seven (7) business days for employers to forward employee contributions to small pension and welfare plans.


In accordance with DOL Regulation Section 2510.3-102, employers must segregate participant contributions from general assets on the earliest date on which the contributions can be segregated from employer general assets.  The maximum time period employers may take to pay the contributions into the plan trust are:

  • the 15th business day of the month following the month in which the participant contribution amounts are received by the employer (in the case of amounts that a participant pays to an employer), or
  • the 15th business day of the month following the month in which the amounts would otherwise have been paid to the employee in cash (in the case of amounts withheld by an employer from a participant’s wages).

The shorter maximum period for segregation of participant contributions applies only to qualified retirement plans.  In the case of SIMPLE IRAs and Salary Reduction SEPs, the period during which employers must make contributions to a retirement trust is extended to the 30th calendar day following the month in which the participant’s contribution would otherwise have been payable to the participant.  Welfare benefit plans, as described in ERISA Section 3(1), have 90 days to segregate participant contributions from plan assets.

New Requirement

In complying with this requirement, there were many employers who were not clear what the “earliest date” on which the segregation of contributions was possible.  To provide a higher degree of certainty, the DOL was asked to create a “safe harbor.”  In February 2008, the DOL released proposed regulations that provided a safe harbor for plans that have fewer than one hundred (100) participants (determined at the beginning of the plan year).  Under these proposed regulations, these plans would be considered to have been timely under the “earliest date” requirement if the contributions are deposited within seven (7) business days.

The DOL has adopted this seven (7) business day safe harbor rule, effective immediately.  This rule applies to both small qualified retirement and welfare benefit plans.  To comply with the safe harbor, deposits must be made to a small plan within seven (7) business days following, as applicable, the day on which elective deferrals would otherwise have been payable to the participant in cash or the day on which the employer receives plan loan repayments.  During the seven (7) business day safe harbor period, benefit plan contribution amounts that employers have received from employees will not be considered plan assets.

Under the final regulations, the safe harbor is available on a deposit-by-deposit basis, such that a failure to satisfy the safe harbor for any deposit of participant contribution amounts to a plan will not affect the unavailability of the safe harbor for any other deposit to the plan.

Why are these rules important?

Any late deposits of participant contributions and loan repayments (“delinquent contributions”) are a violation of ERISA’s trust requirement.  Participant contributions include elective deferrals (including catch-up and Roth contributions), after-tax contributions, any other participant contributions, and loan repayments that participants either have withheld from paychecks or pay directly to the employer for contribution into a plan.  A late deposit also may be a violation of the prudence rule and a prohibited transaction that can create excise tax penalties.

COBRA Subsidy Extension Becomes Law

January 2, 2010

The Congress passed legislation (H.R. 3326) extending the original federal COBRA subsidy created by the American Recovery and Reinvestment Act of 2009 (ARRA) which President Obama signed  into law on December 19, 2009.


Under the ARRA, the federal government pays sixty-five (65%) percent of COBRA premiums for up to nine (9) months for employees who were involuntarily terminated between September 1, 2008, and December 31, 2009. This subsidy was set to expire at the end of this year and has already started to end for individuals who have been receiving this subsidy since March.

New Extension

Assistance-eligible individuals (“AEIs”) involuntarily terminated from employment on or before February 28, 2010, can now receive the subsidy.  The subsidy will remain at sixty-five 65% percent of the premium, but the maximum subsidy period will expand from nine (9) months to fifteen (15) months.  Only those individuals losing health coverage due to involuntary employment termination will continue to qualify for the COBRA subsidy. The following is a summary of the new law:

New Extended Eligibility Period:  AEIs involuntary terminated on or before February 28, 2010 will now be eligible for the subsidy, instead of December 31, 2009.  The new law eliminates the requirement that COBRA coverage must commence before COBRA subsidy sunset date (December 31, 2009 before the new law is effective and February 28, 2010, after).  Eligibility for the COBRA subsidy will only be conditioned on a qualifying event occurring on or before February 28, 2010, without regard to when the COBRA coverage period begins.  This means that AEIs involuntarily terminated on or before December 31, 2009, who become eligible for COBRA coverage after December 31, 2009 will now be COBRA subsidy eligible.  This new law reverses earlier guidance (IRS Notice 2009-27, Q/A-10).

Longer Subsidy Period: The maximum COBRA subsidy period has been extended from nine (9) months to fifteen (15) months.   Please remember that the new law does not change the maximum COBRA period that an individual is entitled to under COBRA or state continuation.

Notices For Those Who Exhausted Their COBRA Subsidy: Any AEI who exhausted their original nine (9) month COBRA subsidy period before the new law takes effect can receive the COBRA subsidy for another six (6) months if they remain an AEI and their maximum COBRA period has not ended.   AEIs who either dropped their COBRA coverage or kept their COBRA coverage but paid the full unsubsidized premiums must be notified that they may pay reduced premiums for retroactive coverage or receive credit for or reimbursement of overpayment.  These notices must be provided within sixty (60) days of the AEI dropping or first overpaying for COBRA.   Such AEI must pay for coverage no later than sixty (60) days after enactment (December 19, 2009) or February 17, 2010 (or if later, thirty (30) days after the notice was provided).

Other Notice Requirements: Anyone eligible for the COBRA subsidy or terminated from employment (voluntarily or not) on or after October 31, 2009 must be provided with a notice describing the revised program within sixty (60) days of the law’s enactment (December 19, 2009) or February 17, 2010 or, if later, the usual deadline for furnishing materials to individuals experiencing a COBRA qualifying event.


January 2, 2010

Introduction: Every year, I receive a number of questions regarding how to complete Part I of Form 8889.  The reason for this is that the instructions to Form 8889 are very complex and unclear.  To assist, the following shows how to complete Form 8889 in 23 different situations for 2009.

The discussion below is for example purposes only.  Individuals should be advised to seek professional tax assistance in the completion of Form 8889 or any other tax return.

Download the full PDF by clicking here.