Participant Contributions are "Plan Assets" After 7 Business Days - March 3, 2008
On February 29, 2008, the DOL issued a proposed amendment to DOL Regulation §2510.3-102 which establishes "a safe harbor period of 7 business days (effectively 9 days)" regarding the deadline for plan deposits of employee 401(k) elective deferrals and loan repayments for plans sponsored by small employers only (plans with 100 or fewer participants). View Proposed Amendment
DOL Regulation §2510.3-102 states that participant contributions become plan assets on the earlier of:
(a) The earliest date on which the contributions can reasonably be segregated from the employer's general assets; or
(b) The 15th business day of the month following the month in which the contribution is withheld by the employer from the employee's wages or the amount is received by the employer (in the case of amounts, such as after-tax voluntary contributions, that the participant pays to the employer).
In previous compliance alerts (January 1, 2001, November 25, 2002, April 1, 2003), we emphasized that the date in (b) above is the maximum deadline which applies only if the date in a) does not come sooner. We further emphasized that this was a hot audit issue for both the DOL and the IRS since employee contributions not contributed timely to the trust are considered an extension of credit from the plan to the employer (“a party-in-interest”), and that the extension of credit is considered a “prohibited transaction.”
The safe harbor provides certainty for small employers and their third party administrators concerning the reasonableness of the employer's timing for the deposit of employee 401(k) deferrals and loan repayments.
The 7-business day safe harbor and proposed amendments to 2510.3-102 are effective on the date of publication of the final regulation in the Federal Register. Further, if the employer complies with the 7-business daysafe harbor prior to the effective date, the DOL will not assert a violation of ERISA based on the rule discussed above (i.e., that participant contributions or loan repayments become plan assets on the earliest date on which they can reasonably be segregated from the employer's general assets).
Halleluiah! What else can one say as to this long awaited guidance, other than...
We have and will continue to advise our small and large employer clients that the deadline for deposits is the same date as the employee's pay date (the date on their pay check). We'll certainly advise them of the new 7-business day safe harbor but we'll also advise them of their ethical obligation to their employees. Think about it... Aside from those companies with staggered pay dates, multiple companies contributing to a common plan, or companies with multiple locations with de-centralized payrolls, what legitimate reason does any employer have to hold these monies for even one additional day?
Bottom line: If an employer writes a check to the employee as of any given date, why can't they write a check to the plan's investment vendor as of the same date?
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The information provided is intended as a general resource, not as investment or retirement planning, or legal plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a qualified planning, tax or ERISA professional. ERISA Expertise LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update. Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.