DOL Releases Final Participant Contributions Regulations

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.

Background

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.