The Department of Labor (“DOL”) issued new regulations on January 14, 2010 (75 Fed. Reg. 2068) confirming earlier regulations and guidance that plan assets should be contributed to an employee benefit plan on the earliest date the amounts can reasonably be separated from the employer’s general assets. See 29 C.F.R. § 2510.3-102. Plan assets include elective deferrals to a 401(k) or 403(b) plan, loan repayments, or employee contributions to be deposited in a VEBA.
Safe Harbor for Small Plans
In addition to the general guidance that assets should be deposited as soon as possible, the DOL also created a safe harbor rule for small plans with less than 100 participants. Under the safe harbor, plan assets must be deposited not later than the 7th business day following the day on which the amount is received by the employer or the 7th business day after the amount would have been paid to the employee. It is not mandatory for small plans to deposit amounts within 7 business days; however, if amounts are not being deposited within 7 business days, the plan sponsor must justify why it takes longer than 7 business days to make the deposit. In the event the plan sponsor is challenged by the DOL, the plan sponsor will have to give the reason why 7 business days is not workable, which the DOL may or may not accept. This safe harbor applies only to small plans, and the DOL has indicated that it does not consider 7 business days reasonable for plans with more than 100 participants.
Failure to Be Timely Carries a Price
Failure to deposit plan assets in a timely manner is a prohibited transaction under ERISA and the Internal Revenue Code, and is subject to an excise tax under the Code. Although the DOL and IRS have provided guidance on how to correct such failures, correction involves both a financial cost (including the cost of earnings, filing a Form 5330 and assistance in making the correction) and an administrative cost in terms of staff time. In addition, employers are required to report the failure to timely contribute assets on the annual report (Form 5500) for a plan. See 2009 Form 5500, Schedule H, Question 4a and Schedule I, Question 4a.
Employers should review their procedures for depositing plan assets. Employers that sponsor large plans (those with 100 or more participants) should evaluate their practices to determine if plan assets are being deposited as soon as possible after the amounts are withheld or received. Employers that sponsor small plans should review their practices to ensure that plan assets are being deposited within 7 business days, or justify why it is not reasonable for the assets to be deposited within 7 business days. If you have questions about the new regulations or your plans or arrangements, please contact the attorney in the Benefits and Compensation practice group with whom you work.