Legal Updates

1/26/2010

DOL Finalizes Safe Harbor for Depositing Plan Contributions From Participants

In February 2008, the Department of Labor (DOL) issued a proposed regulation regarding a new safe harbor for depositing plan contributions for participants. For a general overview of the proposed safe harbor, please see our article, “Department of Labor Proposes Safe Harbor for Depositing Plan Contributions From Participants” (3/20/2008). The article describes the regulatory history of, and the increased level of attention that the DOL has paid to, the timeline for participant contribution deposits.

On January 14, 2010, the DOL published its final regulation establishing the new safe harbor. The final regulation is the same as the proposed regulation (with some clarifications) and is effective January 14, 2010. While the safe harbor itself only applies to small employers, the preamble to the regulation provides insight into the operation of the general rule for all employers. This edition of WorkCite highlights the guidance presented by the DOL that is relevant to all plans and discusses the key features of the safe harbor.

General Rule: All Plans

The general rule is unchanged. The assets of a plan include: (a) amounts that a participant or beneficiary pays to an employer, or (b) amounts that a participant has withheld from his or her wages. Such amounts must be contributed to the plan as of the earliest date on which the contributions can reasonably be segregated from the employer’s general assets, but no later than the timeframes set forth in the regulation.

Deposit-By-Deposit Basis: All Plans

The safe harbor for depositing plan contributions is available on a deposit-by-deposit basis. Thus, if an employer fails to meet the requirements of the safe harbor for one payroll period, it may still use the safe harbor for contributions in future payroll periods.

Furthermore, the discussion in the preamble suggests that the DOL evaluates compliance with the general rule using the same principles. That is, employers that are generally able to place participant contributions into a plan account within a certain number of business days, but are unable to do so on a particular occasion, would still be in compliance with the general rule so long as there are reasonable facts and circumstances justifying the delay.

Example. A large employer generally transfers participant contributions into the plan account within three business days following the date they are withheld from payroll. Due to a power outage, the employer is unable to transfer participant contributions until five business days after such contributions are withheld. The employer will not have engaged in a prohibited transaction because the power outage was a special fact that delayed the earliest date the fund could be reasonably segregated from the employer’s general assets.

Loans: All Plans

Consistent with the DOL’s prior interpretation of the proper treatment of loan repayments under ERISA, the final regulation treats loan repayments as participant contributions. As such, loan repayments are also covered by the general rule and the new safe harbor.

Safe Harbor Scope: Small Plans

The new safe harbor is available for pre-tax and after-tax participant contributions to pension and welfare plans with fewer than 100 participants at the beginning of the plan year.

Note. The availability of the safe harbor is determined based on the size of the plan, rather than the size of the employer. This effectively excludes most multiemployer and multiple employer plans from taking advantage of the safe harbor.

The final regulation does not define “participant.” However, ERISA defines this term as including not only active employees, but also former employees who may be entitled to benefits.

Example. If at the beginning of the plan year a 401(k) plan has 85 participants who are active employees and an additional 20 participants who are former employees with vested benefits remaining in the plan, the employer would not be able to take advantage of the proposed safe harbor.

The new safe harbor is also available to Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs and Salary Reduction Simplified Employee Pension Plans (SEPs). However, the DOL declined to expand the safe harbor to include larger plans.

New Safe Harbor Requirements: Small Plans

The safe harbor is a means by which small employers can satisfy their obligations under the plan asset regulations. Under the final regulations, a participant contribution will be deemed to have satisfied the general rule if it is deposited with the plan not later than the seventh business day following:

• The day on which the contribution is received by the employer, when the participant pays it to the employer; or
• The day on which the amount of the contribution would otherwise have been payable to the participant in cash, when the contribution is withheld by the employer from the participant’s wages.

Under the safe harbor, employers have seven business days to deposit participant contributions into the plan. However, as is the rule for all plans, employers need not allocate the contributions among participants’ accounts within that seven-day period.

Failure to Meet the General Rule or Safe Harbor: All Plans

When an employer fails to satisfy either the general rule or the small employer safe harbor, a prohibited transaction will occur. This will expose the fiduciary to excise tax and claims for fiduciary breach. Further, losses and interest on such late contributions must be calculated from the date on which the contributions could have reasonably been segregated, rather than the end of the safe harbor period.

Pre-Funding: All Plans

The DOL expressed skepticism as to whether depositing an amount equal to a participant’s contribution to the plan in advance of withholding it from the participant’s wages would satisfy the safe harbor. This is because the general rule requires that contributions be made within a certain number of days after the amounts are withheld. Rather than deciding the issue in the final regulations, the DOL concluded that whether an instance of pre-funding meets the requirements of the safe harbor would depend on the particular facts and circumstances.

No Trust Requirement for Welfare Plans

The DOL was careful to point out that Technical Release 92-01 is not affected by the final regulations for the safe harbor. That is, the DOL will continue not to assert a violation of the trust or reporting requirements for certain welfare plans solely because of a failure to hold participant contributions in trust.

For assistance in determining whether your contribution regimen meets the requirements of the final safe harbor regulations and/or the general rules for depositing plan contributions, please contact any member of the McGuireWoods Employee Benefits or Labor & Employment teams, or the individual authors listed below.

IRS Circular 230 Notice: The advice contained in this communication (and any attachments) is not intended or written by us to be used, and may not be used or relied on, for the purpose of avoiding penalties under the Internal Revenue Code. Any such advice relating to any federal tax matter is not confidential; rather, it is intended to support the promotion or marketing of the transactions or matters addressed herein, and each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

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