The Department of Labor recently published a final rule that allows employee benefit plans with fewer than 100 participants to comply with time limits for the segregation and deposit of participant contributions to employer-sponsored pension and welfare benefit plans. An employer’s failure to promptly deposit contributions into a plan account is a prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA) and certain provisions of the Internal Revenue Code (the Code), which potentially exposes the employer (or plan sponsor) to an excise tax and other liability. The final rule amends the existing regulation by establishing a safe harbor period to provide small plan sponsors a higher degree of certainty with respect to the required timing of such deposits.
The previous rule was issued by the DOL in 1988 and, for purposes of ERISA and the Code, defined “plan assets” as amounts withheld from or paid by a participant for contribution to an employee benefit plan. Under the 1988 rule, plan assets were required to be deposited “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets,” but no later than 90 days from the date on which contribution amounts are received or withheld from a participant. The DOL amended the existing rule in 1996 to reduce the outer limit for deposit of participant pension plan contributions to the 15th business day of the month following the month in which such contributions are received or withheld from a participant. Under the 1996 amendment, participant contributions to welfare plans still became plan assets on the earliest date they could reasonably be segregated from the employer’s assets, but the 90-day outer limit was retained.
The DOL tried to clarify that the 15-day (in the case of pension plan contributions) and 90-day (in the case of welfare plan contributions) maximum time periods were intended to apply in limited circumstances and were not safe harbors, but some plan administrators and employers remained uncertain and mistakenly applied the law and/or interpreted DOL guidance to mean that they had until the applicable 15th or 90th day to make such deposits. Last week’s final rule mirrors a 2008 DOL proposed safe harbor, under which eligible employers with small plans would be considered to have made timely deposits within 7 business days. Specifically, participant contributions to a pension plan will be treated as having been made to the plan in accordance with the general rule if contributions are deposited by the 7th business day following the day on which an amount is received by the employer (where the plan participant or beneficiary remits payments to the employer) or on the 7th business day following the day on which such amount would have been payable to the employee (where the employer withholds amounts from a participant’s wages). Contributions will be considered “deposited” upon remittance into any account of the plan without regard to allocation to specific participants or participant investments. The final rule does not apply to plans with more than 100 participants. As a result, contributions to such plans must still be made as soon as they can be segregated from the employer’s general assets.
The final rule was published in the January 14 edition of the Federal Register and was immediately effective on the date of publication.
The final rule can be found here.