Guest Article

(From the January 25, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Finalizes 7-Business Day "Safe Harbor" Deposit Deadline for Small Plans

The Department of Labor finalized regulations that establish a 7-business day "safe harbor period" for employers to deposit participant contributions and loan repayments to small pension and welfare plans (i.e., plans with less than 100 participants). The final regulations do not apply with respect to large plans (i.e., plans with 100 or more participants at the beginning of the plan year). Employers who make their deposits during the safe harbor period will be treated as having timely contributed those amounts to the plan for certain ERISA and Internal Revenue Code purposes. 75 Federal Register 2068 (January 14, 2010)

Proposed Regulations Are Finalized without Substantive Changes

The final regulations are essentially the regulations that were proposed by the Department of Labor in 2008. No substantive changes were made. However, the DOL responded to various comments it received from plan sponsors, fiduciaries and others regarding the proposed regulations. In response to one comment, the DOL underscored that the safe harbor is not the exclusive means by which small-plan employers can satisfy their obligation to timely deposit participant contributions. Employers can satisfy the "general rule" which requires that the contributions or loan repayments which a participant pays to the employer, or which are withheld from the participant's wages, become ERISA plan assets on -- and must be deposited no later than -- "the earliest date on which such contributions can reasonably be segregated from the employer's general assets." That date, in any event, cannot be later than:

Commenters suggested a longer safe harbor period, pointing to certain problems that can arise for small employers, such as Internet issues, loss of power, incorrect reporting by the payroll provider, etc. However, the DOL declined to lengthen the 7-business day safe harbor, explaining that those kinds of special circumstances can generally be accommodated under the facts and circumstances general rule.

The DOL clarified that the safe harbor is available to SIMPLE IRAs and salary reduction SEPs. It also confirmed that Technical Release 92-01 remains in effect. Technical Release 92-01 provides that the DOL will not assert a violation of the ERISA trust requirement where certain welfare plans are associated with a cafeteria plan and do not hold participant contributions in trust. The DOL also explained that the safe harbor is applied on a deposit-by-deposit basis, so the failure of any deposit to satisfy the safe harbor will not result in the safe harbor being unavailable for any other deposit.

Despite its request for comments regarding whether the 7-business day safe harbor should be extended to large plans (i.e., plans with 100 or more participants at the beginning of the plan year), the DOL concluded that it did not receive sufficient information to assess the costs, benefits, and risks to participants in extending the safe harbor to such plans. As a result, the regulations do not extend the safe harbor to pension or welfare benefit plans with 100 or more participants.

Safe Harbor Addresses the Basic Concerns

The goal of the DOL was to provide employers with a greater degree of certainty regarding whether they are satisfying the ERISA requirement for timely deposit of participant contributions. Under the general rule, as soon as participant contributions or loan repayments can "reasonably be segregated from the employer's general assets" they become assets of the plan for ERISA purposes. The employer or fiduciary could be liable for lost investment gain on amounts which have become plan assets but not yet deposited to the plan. In addition, ERISA and the Internal Revenue 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). Holding participant contributions and loan repayments after they have become plan assets, therefore, could result in the employer inadvertently engaging in a prohibited transaction -- and being subject to penalty under the Internal Revenue Code. An employer could, therefore, be liable for lost earnings and prohibited transaction penalties if it mistakenly believed it made timely deposits.

7-Business Day Safe Harbor Provisions

Under the DOL regulation, participant contributions and loan repayments to a pension or welfare benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as timely made to the plan if the amounts are deposited with the plan no later than the 7th business day following the date the amount was received by the employer (or, in the case of wages that are withheld, the 7th business day following the date the amount would have been payable to participant in cash). To be deposited, the amounts need only to be placed in an account of the plan, and not necessarily allocated among the participants on that date.

Employers who meet the 7-business day safe harbor deadline will not have to speculate on whether the deposit was timely made under the general rule -- the deposit is deemed to have been made by the earliest date the contributions could "reasonably be segregated from the employer's general assets." The deposit is treated as timely not only for that ERISA purpose, but also for purposes of the IRC's prohibited transaction provisions.

The final regulations became effective on January 14, 2010, their date of publication in the Federal Register. Notably, the proposed regulations also provided that employers who complied with the earlier proposed 7-day safe harbor would similarly be treated as if they had complied with the general rule. If they have not already, small plans will very likely seek to comply with the 7-business day safe harbor for the certainty and protection it provides.

The 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, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.