In these increasingly difficult economic times, the Department of Labor continues to pursue an aggressive enforcement policy that is intended to safeguard employee contributions to 401(k) and health and welfare plans by investigating situations in which employers delay in forwarding participant contributions to employee benefit plans. As a reminder, the applicable federal regulation requires that amounts paid by a plan participant or beneficiary or withheld by an employer from a participant’s wages for contribution to a 401(k) plan are plan assets on the earliest date that they can reasonably be segregated from the employer's general assets, but in no event later than the 15th business day of the month following the month in which the participant contributions are withheld or received by the employer. It is important to note that the 15-business-day limit is an absolute deadline and not a safe harbor. Because most companies use sophisticated payroll systems and outside third-party payroll administrators, a determination of when contributions can be “reasonably segregated” is often only a day or two.
If an employer fails to transmit participant contributions to the plan within the applicable “reasonably segregated” time period, the failure must be reported on Schedule H or Schedule I of the Form 5500. Additionally, when an employer is delinquent in forwarding participant contributions and holds them commingled with its general assets, the employer will have engaged in a nonexempt prohibited transaction under ERISA.