DOL Issues Final Regulations for Timely Deposit of Employee Contributions to Small Plans
On January 13, 2010, the Department of Labor (DOL) released its final regulation establishing a safe-harbor time frame within which participant contributions and loan payments will be considered as having been timely deposited to a retirement plan trust or to a welfare benefit plan.
Under the general rule contained in the DOL’s 1996 regulations, plan sponsors have been required to deposit employee contributions to a plan as of the earliest date that the contributions may reasonably be segregated from the plan sponsor’s general assets, but in no event later than the 15th business day of the month following the month in which the employees’ contributions were withheld from pay by the plan sponsor. However, under the existing regulations, a large number of plan sponsors have disregarded the ‘earliest date’ requirement and interpreted the regulations as allowing the plan sponsor to deposit employee contributions by the 15th business day of the month following the month that the employees’ contributions were withheld from pay. The DOL, however, in its audits has always enforced the ‘earliest date’ requirement of the regulations. Thus, in an audit, the DOL has used the shortest period of time that the plan sponsor had segregated assets in the past and applied that as the standard for timeliness of contributions.
With the issuance of the final regulations, the DOL has not changed the general rule as described above. However, the regulations have created a safe-harbor for plans that have less than 100 participants (small plans). This safe-harbor provides that participant contributions to small plans are treated as having met the general rule (deposited as soon as reasonably segregable for the employer’s assets) if they are deposited to a plan’s trust within seven business days after being withheld from the employees’ pay or received by the employer (if not automatically withheld from payroll). It is important to note that, absent an administrative exception, participant contributions to small plans made more than seven business days after being withheld will be treated as late and therefore a prohibited transaction between the employer and the plan subject to: disclosure on annual Form 5500, an excise tax reportable on Form 5330, and to correction under the DOL’s correction procedures.
The final regulation also makes clear that participant contributions are considered deposited to a plan’s trust when placed in an account titled under the plan’s name, without regard to whether the contribution deposited has been allocated to a specific participant or investment.
The safe-harbor under the final regulation applies to amounts that a plan participant or beneficiary pays to an employer or has withheld by an employer from their wages. Such amounts include elective salary deferral contributions, voluntary employee contributions, loan payments, and required employee contributions to a defined benefit plan.
For large plans (those with more than 100 participants), the DOL is still considering whether a regulatory safe harbor is needed. However, it is clear that the DOL’s position will likely be that deposits of employee contributions need to be made in less than seven business days. The DOL seems to take the view and we have advised clients that employee contribution should be deposited to the plan at the same time the employer is required to remit federal tax withholding deposits to the government. For larger employers, this is typically within two-four business days after the payroll date.
The final regulations for small plans became effective January 14, 2010.
For more information, please contact Peter Alwardt.
This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter.