For years, the Department of Labor (“DOL”) has focused much of its enforcement resources on delinquent deposits of participant contributions. Under the general rule set forth in existing regulations, participant contributions to ERISA plans become plan assets “as soon as they can reasonably be segregated” from the employer’s general assets. The current regulations set outer limits on when participant contributions become plan assets (90 days for welfare plans; for retirement plans, 15 business days after the end of the month in which the employer either receives the amount or would have paid it in cash to the participant). However, we have always cautioned employers that the outer limits are not safe harbors. Employers cannot rely on them if it is shown that the employer could reasonably have segregated the contributions sooner.
In an effort to provide certainty to small employers in this area, the DOL has now finalized a safe-harbor rule for determining when participant contributions become plan assets. Under the final safe harbor, sponsors of “small” plans will be deemed to have complied with the general rule if the contributions are deposited within seven business days after they are received (if the contributions are paid to the employer) or otherwise would have been paid in cash (if the contributions are withheld from wages). A small plan is one with fewer than 100 participants at the beginning of the plan year.
The deposit timing rules apply not only to participant elective deferrals, but also to plan loan repayments. The final rule states that seven business days is merely a safe harbor; i.e., it is not the exclusive means of determining whether the general deposit timing rule has been met. Thus, a small plan might still satisfy the general “as soon as they can reasonably be segregated” rule, even if contributions are deposited more than seven business days after they are received (or would have been paid).
The rule applies equally to retirement and welfare plans. However, the Preamble to the new regulations confirms that Technical Release 92-01 (which established a non-enforcement policy for certain unfunded welfare plans with respect to ERISA’s trust requirement) remains in effect.
The new rule is effective immediately Small employers should evaluate whether their existing practices comply with the safe harbor. If not, they should consider accelerating the process for remitting participant contributions in order to take advantage of the safe harbor.