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Guest Article

Deloitte logo

(From the March 10, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Department of Labor Proposes "7-Business Day Safe Harbor" for Depositing Contributions to Small ERISA Plans


Seeking to provide small employers with a "higher degree of compliance certainty" regarding the time by which participant contributions must be deposited to pension and welfare plans, the Department of Labor has issued proposed regulations providing a 7-business day safe harbor for plans with less than 100 participants. 73 FR 11072 (February 29, 2008).

General Rule for Depositing Participant Contributions

Amounts which a participant pays to an employer, or which are withheld from the participant's wages by the employer, for contribution to an ERISA pension or welfare plan automatically become plan assets "as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets." DOL Regulation § 2510.3-102(a).

The existing regulations specify a maximum time period in which this must occur, and calculate the absolute deadline from the date the participant contributions are received by the employer or, in the case of wage withholding, would have been payable to the participant in cash (the "Participant Contribution Date"). The absolute deadline is:

  • the 15th business day of the month following the month containing the Participant Contribution Date for pension plans, and
  • 90 days from the Participant Contribution Date for welfare plans (the "Maximum Time Period")

Most welfare plans which receive participant contributions are not subject to the ERISA trust requirement and are, therefore, not affected by the plan asset regulations.

Proposed Safe Harbor for Small Plans & Reliance

Participant contributions to a plan with less than 100 participants at the beginning of the plan year will be treated as made in compliance with the general rule (i.e., will be treated as made on the earliest date on which they can reasonably be segregated from the employer's general assets) if they are deposited no later than the 7th business day after the Participant Contribution Date.

As is currently the case, the contributions only need to be deposited to an account of the plan and need not be allocated to specific participants or investments by that date. The proposal is not clear on how the number of participants will be determined, although presumably it will be by reference to the Form 5500, and is not clear on whether the number will be limited to active, or will also include separated, participants.

The proposed regulations clarify that the general rule also applies to loan repayments (i.e., that loan repayments must be transmitted as soon as they can reasonably be segregated from the employer's general assets). The 7-business day safe harbor will be available for loan repayments that are made to plans with less than 100 participants.

Although the regulations are not yet effective, employers are entitled to rely on them. For plans with less than 100 participants, employers will be treated as in compliance with the general rule (i.e., will be treated as if the contributions were deposited on the earliest date they could reasonably be segregated from the employer's general assets) if the contributions are transmitted to the plan in accordance with the 7-business day safe harbor.

Impact of Failure to Comply with the General Rule

Under the general rule, once participant contributions can reasonably be segregated from the employer's general assets they become plan assets for purposes of Title I of ERISA and the related prohibited transaction provisions of the Internal Revenue Code. If the plan is required to hold assets in trust, the employer's retention of contributions after they become plan assets raises concerns regarding fiduciary compliance and violation of the prohibited transaction rules.

Fiduciary Violation for Inadvertent Late Transmittal

Participant contributions that are not timely transmitted to the trust are delinquent. DOL recently addressed the collection of delinquent contributions and outlined the attendant duties of the plan's fiduciaries in this. (See DOL Advisory Opinion No. 2008-01.) While the duty to collect delinquent contributions can be expressly allocated to a specific fiduciary, if the designated fiduciary fails to collect them, the other fiduciaries have a duty to take action to correct that failure if they know or should know of it. This is the case even if the other fiduciaries have no obligation to collect delinquent contributions under the terms of their contract, as is often the situation with directed trustees.

A fiduciary is any person who exercises discretionary authority over the management of the plan or its assets, renders investment advice for a fee, or has any discretionary authority in administration. A trustee is always a fiduciary, and the employer is a fiduciary when it acts in the capacity of plan administrator or as the appointing agent for the plan's trustee or investment advisor, or otherwise exercises discretionary authority over the management of the plan or its assets. A fiduciary that breaches any of its duties is personally liable to make the plan good for any losses caused by its breach.

Where there are delinquent contributions, a breaching fiduciary would be liable for the lost investment gain on the contributions. By its uncertain nature, the general rule creates an everpresent risk that the employer and fiduciaries are not, or have not been, complying. As a result, fiduciaries face the potential retroactive imposition of liability for lost investment return where the employer's transmittal of participant contributions turns out not to have satisfied the general rule.

Prohibited Transaction Violation for Inadvertent Late Transmittal

Both ERISA and the Code prohibit an employer from using plan assets for the employer's own benefit, and prohibit the lending of money between the plan and the employer. The Code imposes a penalty tax equal to 15 percent of the "amount involved" for each year a prohibited transaction remains uncorrected. It imposes an additional tax equal to 100 percent of the "amount involved" if the prohibited transaction is not corrected before IRS assesses or provides a notice of deficiency regarding the 15 percent tax. Recent IRS guidance has clarified that the "amount involved" is only the interest on the contributions, which reduces the potential liability. See IRS Revenue Ruling 2006-38. Nonetheless, an employer may be unaware of its liability where it mistakenly believes it timely transmitted the contributions, and find itself liable for the tax along with interest and penalties for its inadvertent late payment and reporting.

Factors in Formulating the Safe Harbor

In formulating the safe harbor, the Department cited two key objectives:

  • To provide a higher degree of compliance certainty regarding when an employer has made timely deposits of participant contributions, and
  • To provide a net income gain for participants by encouraging earlier deposit.

In terms of anticipated employer reaction, the Department expects that:

  • Employers now taking less than 7-business days will be unlikely to modify their practice to hold the contributions for a few additional days given the cost of administrative change and possible adverse employee reaction.
  • Employers now taking more than 7-business days will in substantial part seek to modify their procedures to comply with the safe harbor to obtain the certainty of compliance that it offers.

Although technically available to both pension and welfare plans, the Department acknowledged that the primary beneficiary of the new safe harbor will be single-employer defined contribution plans. An estimated 311,000 single employer defined contribution plans will be eligible to use the new safe harbor. Such plans constitute about 97 percent of all plans that could potentially benefit from the new safe harbor, and they hold about 18 percent of the $2.2 trillion held by all contributory single employer defined contribution plans.

Observations

The safe harbor offers much needed certainty for eligible employers and their plan fiduciaries who seek to comply with the timing requirement for depositing participant contributions. Given the potential liability facing employers and fiduciaries for "guessing wrong" under the general rule, the Department of Labor seems justified in its conclusion that a substantial number of eligible employers will seek to use the safe harbor.

Clear beneficiaries of the new safe harbor will be the small defined contribution plans sponsored by employers who are on a semi-weekly deposit schedule for Social Security and Medicare taxes but who transmit employee contributions to the plan less quickly although have done, or will do, so within 7 business days. Commentators have long speculated that employers would be at risk under the Department's general rule if the employer regularly met a tax deposit deadline which is shorter than what is used to deposit participant contributions.

Employers not on a semi-weekly deposit schedule may or may not find it worth their effort to comply with the 7-business day safe harbor, depending on their size and sophistication. These employers, generally on a monthly payroll tax deposit schedule requiring deposit by the 15th day of the following month, would not likely be targeted for inconsistency in the same manner as the semi-weekly depositors assuming they transmit participant and payroll taxes with similar frequency. However, they may find that plan fiduciaries might require them to comply with the 7-business day safe harbor as a condition of the engagement.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2008, Deloitte.


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