On January 14, 2010, the U.S. Department of Labor (DOL) published a final rule that provides a safe harbor for when participant contributions forwarded from an employer to a plan will be treated as having been contributed in a timely manner (the “New Contribution Rule”). The New Contribution Rule applies to retirement and welfare plans with less than 100 participants and provides that employers will meet the safe harbor requirements if participant contributions are deposited into the plan no later than the seventh business day following the day the amount is received or withheld by the employer.

The New Contribution Rule is effective the date of its publication, which was January 14, 2010.

All plan sponsors who maintain plans with less than 100 participants should review their current arrangements for depositing participant contributions into these plans as soon as possible to determine whether they are meeting the safe harbor requirements.

Background

In 1988, the DOL published a final rule that requires employers to deposit participant contributions withheld from a participant’s wages to a retirement plan on the earliest date the contributions can reasonably be segregated from the employer’s general assets, but in no event later than 90 days from the date such amounts are received or withheld by the employer. In 1996, the DOL modified the 1988 rule by eliminating the 90-day outer limit and replaced it with a requirement that contributions be deposited to the retirement plan no later than the 15th business day of the month following the month in which the participant contributions are received or withheld by the employer. With respect to welfare benefit plans, such as a group health plan that requires a participant contribution, Department of Labor Technical Release 92-01 provides that participant contributions withheld from a participant’s wages become plan assets as of the earliest date they can reasonably be segregated from the employer’s general assets, but in no event later than 90 days from the date these amounts are received or withheld by the employer.

Failure to deposit participant contributions into a plan within the applicable time frame has a number of consequences. One consequence is that the delay results in a “prohibited transaction” because it is, in effect, a loan from the plan to the employer. In order to correct the prohibited transaction, the employer will need to deposit the late contributions into the plan (including lost earnings on the contributions during the delay), pay a 15 percent excise tax on these amounts to the Internal Revenue Service and file a Form 5330. Each delay is a separate prohibited transaction.

New Contribution Rule

The New Contribution Rule does not alter the 1988 rule that employers deposit participant contributions on the earliest date the contributions can reasonably be segregated from the employer’s general assets, nor does the New Contribution Rule alter the 1996 requirement that such contributions be deposited no later than the 15th business day of the month following the month in which such amounts are received or withheld by the employer. The New Contribution Rule does, however, provide a safe harbor with respect to plans with less than 100 participants and provides that if an employer deposits participant contributions to such a plan within seven business days following the day the amounts are received or withheld by the employer, the employer will be deemed to have met the rule that the contributions be deposited into the plan on the earliest date they can be reasonably segregated from the employer’s general assets.

Scope of the New Contribution Rule

The following is a brief overview of the scope of the New Contribution Rule:

  • Plan assets. Under the New Contribution Rule, if an employer meets the safe harbor requirements, participant contributions will not be considered plan assets for ERISA purposes during the seven day period.
  • Types of plans. The New Contribution Rule affects participant contributions to pension plans covered by ERISA (including 401(k) and 403(b) plans) and participant contributions to welfare benefit plans. The New Contribution Rule also applies to participant loan repayments.
  • Deposit by deposit basis. The New Contribution Rule will apply on a deposit by deposit basis. As such, the failure to satisfy the safe harbor requirements of the New Contribution Rule with respect to one deposit will not affect other deposits from qualifying for the safe harbor.
  • New Contribution Rule optional. The New Contribution Rule safe harbor requirements exactly specify that an optional safe harbor, which if met, will be deemed to meet the general rule that participant contributions be deposited into a plan as of the earliest date they can reasonably be segregated from the employer’s general assets. The New Contribution Rule is not required, nor is it the only way employers can meet the requirements of the general rule.  

Action Steps

Since the New Contribution Rule is currently effective, employers who maintain or contribute to plans with less than 100 participants should review their current arrangements for depositing participant contributions into these plans and determine whether they meet the safe harbor requirements of the New Contribution Rule. If they do not, they should consider whether the benefits of meeting the safe harbor requirements of the New Contribution Rule justify revising their arrangements.