For some 20 years, the regulations of the Department of Labor (“DOL”) under ERISA have provided that amounts that a participant has had withheld from his wages by his employer, or that he pays to his employer, for contribution to a benefit plan are “plan assets” as of the earliest date on which such amounts can be reasonably be segregated from the employer’s general assets. Upon becoming plan assets, contributions can no longer be held by the employer and generally must be held by a trustee or an insurance company for the benefit of plan participants.
In the case of “pension benefit plans,” including 401(k) plans, the regulations currently provide that when a participant’s contribution is withheld from his wages, the date it becomes a plan asset cannot be later than the 15th business day of the month following the month in which such amount would otherwise have been payable to him in cash. If the participant pays a contribution to the employer, it becomes a plan asset no later than the 15th business day of the month following the month in which it is received by the employer. Thus, contributions to pension benefit plans must be remitted to the plan within this 15-day period at a maximum.
If the DOL concludes that the plan asset regulations have been violated on account of the late remittance of participant contributions, a prohibited transaction under ERISA results. The employer must then pay an excise tax and also contribute a “make-whole” amount to the plan to compensate affected participants for the delay in transferring their contributions to the plan.
Proposed Safe Harbor
The DOL has indicated on various occasions that the 15-day rule is not intended as a safe harbor, and that it expects participant plan contributions to be remitted to the plan as soon as reasonably possible. Last month, however, the DOL issued a proposed regulation which would create a safe harbor for participant contributions to plans with fewer than 100 participants (determined at the beginning of the plan year).
Under the proposal, a participant contribution would be deemed to have been contributed to the plan on the earliest date on which the contribution could reasonably be segregated from the employer’s general assets if it were deposited with the plan not later than the seventh business day following:
- the day on which the contribution were 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 had been withheld by the employer from the participant’s wages.
The proposed regulation does not define “participant.” ERISA defines this term as including not only active employees but also former employees who may be entitled to benefits. Thus, for 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 proposed regulation would explicitly treat participant loan repayments the same as participant contributions. The current regulation does not address such repayments, but in a 2002 advisory opinion the DOL held that although participant loan repayments are subject to the plan asset regulation, they nevertheless become plan assets on the earliest date on which they can reasonably be segregated from the employer’s general assets. Most employers now remit loan repayments to their plans on the same basis as participant contributions.
Welfare Benefit Plans
The proposed safe harbor would also apply to contributions to welfare benefit plans, such as health plans. Under the current regulations, the maximum time for remitting such contributions to the plan is 90 days from the date on which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the date on which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld from a participant’s wages).
Possible Safe Harbor for Larger Plans
In the preamble to the proposed regulation, the DOL indicates that it intends in the final regulation to include a safe harbor for employers with plans of 100 or more participants if the comments it receives on the proposed regulation provide information and data sufficient to enable it to evaluate the current contribution practices of such employers and to conclude that it is a net benefit to such employers and participants to have a safe harbor.
Reliance on Proposed Regulation
It is not known when the proposed regulation will be finalized. However, in the preamble, the DOL indicates that before the effective date of the final regulation, it will not assert a violation of ERISA as to a plan with fewer than 100 participants if participant contributions and loan repayments are transferred to the plan in accordance with the seven-day safe harbor in the proposed regulation. Therefore, employers who sponsor plans with fewer than 100 participants can take advantage of the safe harbor immediately.
The “safe harbor” terminology used in the proposed regulation implies that an employer would still be able to satisfy the plan asset regulations if it could demonstrate that it could not reasonably segregate participant contributions and loan repayments from its general assets within seven business days. Indeed, the preamble describes the proposed regulation as “not mandatory.” In practice, however, the seven-day period could become the de facto enforcement standard.
Accordingly, employers sponsoring plans with fewer than 100 participants should review their procedures to ensure that participant contributions and loan repayments are remitted to the plans within the seven-day period in the proposed regulation.