Current Rules

Under current labor regulations last amended in 1996, sponsors of qualified retirement and health and welfare plans are required to transfer employee contributions withheld from wages as soon as those amounts can be reasonably segregated from the employer’s general assets, but not later than the 15th business day of the month following the end of the month in which the amounts would otherwise have been paid in cash. In compliance audits, U.S. Department of Labor (DOL) investigators have routinely imposed a requirement that plan sponsors (particularly larger companies) deposit these amounts into trust within three to seven business days.

As written, the 1996 amended regulation is based on facts and circumstances and places the burden on the employer to substantiate the time period for deposits as meeting the “as soon as practicable” requirement. While many plan sponsors audited by the DOL mistakenly believed that the 15th business day of the next month was a safe harbor, very few employers routinely using that deadline were able to demonstrate that amounts could not have been segregated and remitted at an earlier date.

New Safe Harbor

Effective January 14, 2010, the DOL published an amendment to the regulation providing a safe harbor period for “small employer plans” (those covering fewer than 100 participants) of seven business days. The safe harbor applies to both retirement plans and health and welfare plans and includes both employee plan contributions and repayments of participant loans. Large employers must still comply with the current rule (“as soon as practicable”). Small employers, however, may utilize this safe harbor by transferring employee contributions by the seventh business day following the payroll date, even though the amounts could have been reasonably segregated and remitted at an earlier date.

The safe harbor is optional, so if a small employer can still substantiate that segregation and payment to a custodian or an insurance carrier cannot be reasonably accomplished until a date later than the seventh business day following the payroll date, the current regulations standard may still be relied upon.

The consequence of violating the plan asset regulation is an assessment by the IRS (in the case of a retirement plan) and/or the DOL (in the case of a retirement or welfare plan) of a prohibited transaction penalty for a “use of plan assets.” Any delay in segregating assets from the employer’s general account is viewed by regulators as an unlawful borrowing by the employer from the plan. Correction of the prohibited transaction involves repaying the plan for the use of the monies and, in the case of a retirement plan, payment of an excise tax of 15% of the amount involved per year until the correction is made. Violations involving health and welfare plans are subject to ERISA penalties of 5% of the amount involved per year until correction (the IRS or DOL can also assess a penalty of 100% of the amount involved if not corrected on a timely basis). The Department of Labor may also impose a 20% fiduciary breach penalty if there is a ruling or settlement involving an alleged breach of fiduciary duties involving plan assets. Prohibited transaction and fiduciary penalties can be avoided by filing for relief under the DOL’s voluntary fiduciary correction program at: http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html.