The timing of when participant contributions become plan assets poses important liability issues for plan sponsors. The U.S. Department of Labor (“DOL”) defines participant contributions to include any amounts that a participant has had withheld from his or her wages by an employer for contribution to a plan.

401(k) elective deferrals, aftertax contributions as well as loan repayments made through payroll withholding all fall into this category. Failure to timely remit such amounts may create a prohibited transaction and may also constitute a breach of fiduciary duty exposing plan sponsors to potential penalties, including possible exposure for investment losses and interest.

On January 13, 2010, the DOL Employee Benefits Security Administration (“EBSA”) released final regulations modifying the existing rules governing when contributions to ERISA covered plans constitute “plan assets.”

General Rule Stays the Same

The new final regulations do not change the existing general rule (applicable for both small and large plans) that has been in place since 1997, regarding when contributions become plan assets. Under the general rule, amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer’s general assets. This analysis is based on a facts and circumstances test. An example in the regulations implies that three days is probably a good rule of thumb for large plans with many business units spread across a large geographic area. The new final regulation also clarifies that the absolute maximum time period (NOT a safe harbor) to remit contributions to a plan will be the 15th business day of the month following the month in which they are either received by the employer to be deposited into the plan or would otherwise have been paid in cash to the participant as regular compensation.

New 7-day Safe Harbor for Small Plans (less than 100 participants)

The new final regulations create a safe harbor rule for small plans (i.e., a plan with less than 100 participants). Under the safe harbor, amounts contributed to a small plan will be deemed timely if remitted no later than the 7th business day following the day that the amount is received by the employer. The safe harbor applies to both retirement plans and welfare plans. The safe harbor became effective when the new final regulations were published in the Federal Register on January 14, 2010. With the new safe harbor, employers with small plans can have greater certainty about their remittance practices.

Other Items of Note in the Final Regulations Include:

  • The new final regulations also clarify that participant contributions are considered deposited when placed in an account of the plan. That is, the plan asset rules do not require allocation to specific participant accounts or to participant investment choices. However, once the assets are deposited to an individual account plan, the next step would be to split the contribution into the appropriate accounts and, if applicable, have the contributions invested as appropriate. Ordinary principles of fiduciary prudence will apply in determining whether this second step is timely.
  • The final regulations also hold that Technical Release 92-01 permitting various exceptions to ERISA’s trust requirement (e.g., insured plans, cafeteria plans, etc.) (and thus the plan asset rules) remains in effect.