Timing of Deferral Deposits - "Reasonableness" Standard for

[Christine Roberts]

Smaller not-for-profit employer (approx. 100 employees) currently makes one check out per month to 6 different 403(B) provider/vendors, reflecting that month's deferrals/matching contributions.

Employer normally has 2 payrolls per month; sometimes 3.

This would necessitate 12 to 18 separate checks per month for the small Business Office staff to oversee.

Seeking opinions as to whether requiring 2 or 3 separate rounds of checks to the 403(B) vendor/providers is reasonable to expect under the circumstances, or whether the employer can meet the standard with one or two rounds of deposits.

[mbozek]

You can

(1) send one check per month per vendor

(2) reduce the number of vendors to a manageable number

(3) make transfers by wire

[Kirk Maldonado]

I don't think that the number of vendors or the number of pay periods will be determinative, in the view of the DOL, regarding when the employee contributions must be forwarded.

[mbozek]

Only if the Plan is subject to ERISA. Salary reduction 403(B) plan is exempt from ERISA if requirements in reg 2510-3.2(f) are followed. If SR plan part of emplyer contribution plan then employer can splitoff sr contributions to separate plan exempt from ERISA.

[Carol V. Calhoun]

Assuming that the plan is nongovernmental (and the original post refers to the employer as a "not-for-profit," I would be concerned about its exemption from ERISA, even if all contributions are salary reduction contributions, if the employer holds onto participant contributions for an excessively lengthy time. One of the requirements for the ERISA exemption is that

The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer's duties pursuant to the salary reduction agreements or agreements to forego salary increases described in this paragraph (f) of this section.

I would be concerned about whether the employer would be deemed to have received indirect compensation if it held participant contributions (that it would otherwise have had to pay out in wages) for a substantial period, during which time presumably it would be receiving the benefit of earnings on the amounts.

Obviously, the situation is not nearly as concrete as if this involved a 403(B) with employer contributions (which would clearly be covered by ERISA) or a even a governmental 457(B) plan (for which the model amendments to comply with 457(g) specify a 15-day period). However, I am not sure we can assume that there is no time deadline.

[mbozek]

Carol: I think you are overreacting to a provision which was written to prevent plans in which employers or plan administrators received compensation ( kickbacks) for selecting a particular 403(B) provider from being exempted from ERISA. "If an employer... receives... such other compensation from an annuity contractor, the employer would be deemed to have established or maintained a plan." Preamble to Dol final regs on 2510.3-2(f), 12/2/77 that you cite. It could easily be rebutted that the measly compensation an employer receives (2-3%) on funds deposited at a bank is reasonable compensation for the cost of administering the plan so there is a set off at 0 cost to the employees. For that matter any benefit an employer receives from a financial institution where employee contributions are deposited on account in a comingled fund, e.g, free checking, can be construed as an indirect benefit in violation of the regs. Where the number of participants are few, the volume of sr contributions is small and there are multiple providers ( which is a component of the exemption) there can be quarterly contributions under the ERISA exemption. Since the 403(B) plan is tailored to the desires and financial means of the individual employees, provisons of an exempt plan can be tailored to minimize the administrative burdens on the employer.

[Carol V. Calhoun]

I'm not saying that the standard here is necessarily 15 days. I am just saying that I don't think we can assume that the employer has an unlimited amount of time to make the contributions. Although the employer can receive reasonable compensation for its services, the question of whether the compensation is reasonable would be a factual issue. I would suspect that an employer that delayed contributions for, say, two years would not be protected by claiming that ERISA didn't apply, and therefore that it had no obligation to move faster than that.

[mbozek]

Carol: If the plan is not subject to ERISA then state labor laws pertaining to depositing employee contributions would apply, not ERISA. State labor laws provide stronger sanctions including criminal penalities, for the failure to deposit contributions.