Multiple Employer Deferral Deposit Timing

[Below Ground]

Plan is a large multiple-employer 401(k) plan which has adopting employers all across the country. Typical adopting employer is a small firm which is on the very "low side" of sophistication. Processing is further complicated as adopting firms have varied payroll cycles (no standard). Deferral data is required to be sent to a "central site", which processes actual deposits for all adopting entities. Given that the 15th of the following month is no safe harbor, how should (or can) one determine when deferrals should be deposited to satisfy the "timely standard" of the DOL?

[Guest Pensions in Paradise]

IMHO the DOL would look at the facts/circumstances for each adopting employer. For the typical small firm I would advise that the contributions be mailed no later than 2 to 3 business days following each paydate. The fact that the adopting employer is participating in a large multiple-employer plan does not impact how quickly each adopting employer can submit their contributions.

[Ron Snyder]

The standard is the earliest date that the employer can reasonably transmit the contribution. Depending on how hard it is to collect the information and the funds, that may be 2-3 days, as suggested by Paradise, or 5-6 days.

[Locust]

From the DOL perspective, the important act is the deposit in trust, not the allocation to pt accounts. So you might get a recommendation that the deposits be made to a holding account that was in trust before the actual allocation to accounts. The allocation to accounts would presumably coincide with the investment of the funds according to pt direction.

The question I have is how to invest the holding account. Is it acceptable to have it in a no-interest account for a short period of time? Arguably, yes for a couple of reasons: 1. if the money wasn't deposited until the allocation, no earnings would have been credited, and 2. the cost of allocating the earnings to pts would be greater than the earnings. If it didn't seem right to put the funds into a no-interest account, perhaps the interest could be credited against fees otherwise owed by pts.

[KJohnson]

I think how Locust desribes it is how it works in some multiemployer (k) settings--the service provider takes the "float" and offsets it against its fee and this formula is specified in the service provider's agreement. Allocations are then only made at specified dates (for example twice a month). You do get into some fine issues such as the fact that the employees of employers who get their money in "early" could be considered to be paying more in administative fees than other employees. On the other hand, the no interest route could raise some fiduciary concerns.

[austin3515]

IAn Dingwall, chief accountant at the DOL, has said in seminars that I've attended that a zero interest account is fine to comply with the "assets held in trust requirement." As others have suggested, the DOL's only concern with respect to employee contributions is that they are held in trust, and therefore protected by the broad trust laws.

How they are invested is a FIDUCIARY issue, and I think a participant would be hard pressed to file a suit (class or individual) to recover any losses from a non-interest bearing account because the lost earnings are simply not significant (assuming they are invested at least monthly). I know this is a common alternative to making investments each pay period.

[Below Ground]

I really appreciate all of the above posts.

In many ways I don't think the 3 - 5 day period is reasonable for the type of plan I am discusssing. Please note that I am NOT arguing with the position that this is what the DOL would want or say. I am just saying that real world facts of this case, and cases like this, make this time frame impossible. How can I say this? Shouldn't all firms that want a plan be able to meet this standard?

Well, look at payroll tax withholding requirements for very small firms. You do not have a 3-5 day time frame for that, which I would think would be more pressing for the government. (Collection of tax dollars.) Now, look at a collection of small unrelated firms (that are subject to those withholding tax rules) which band together to save money and gain "purchaing power" made possible by the multiple employer approach; thereby allowing a quality plan to be possible for these small firms. Don't we want employees of these firms to have some form of retirement benefit beyond social security?

The strict position of the DOL seems to be counterproductive. Oh, I know that we need to safeguard against abuse by the evil business owner, but do we really want to make all aspects of 401(k) plans so difficult for the small firm. Of course, didn't a similiar course of events impact defined benefit plans?

The holding account approach might prove to be a good solution. I can see where this could be applied with minimal increased effort. However, isn't this similiar to the fiduciary breach scenerio in the McKay Hochman Alert (Hot Topic) of June 8th (or thereabout)?

Again, thanks for the posts.

[Locust]

It would be nice to have it both ways - treated like a big plan/employer for investment and administration purposes, and like a small plan/employer to get some slack on the deposit requirement.

Isn't this the challenge of the multiple employer approach - to establish efficient and compliant procedures to get all of the data and information from the many small companies and to administer the plan properly?

[Below Ground]

Locust, you are correct. Just needed to vent on the issue. It is a shame that having a plan is not easier for the small firm than it actually is. The real loss is the lack of benefit coverage for the employees of those small firms.

[GBurns]

Below Ground

Could it be that this problem would not exist for small employers if they did not particpate in these large multiple employer plans but had their own plan?

Be that as it may, there is no reason why this "central site" has to wait on all particpating employers to submit before making the deposits. They can do it as received which should alleviate the time issue.

[Below Ground]

No. The multiple-employer nature does not cause the timing problem. Given that some small firms process withholding tax on a monthly basis, having to tell that small firm that deferrals need to be processed within 3 - 5 days of issuance of paychecks is "problematic". It is not the processing of the "central site" that causes delays, it is the small firm getting information and transferring funds for processing by the central site. Regardless, thanks for your comment. It suggests that participating employers need to be better screened before being accepted.

I do think the solution posted by Locust has great merit. Thanks!

[WDIK]

Please help me understand the timing distinctions between sending the paycheck to an employee and depositing the employee's deferral amount into the trust.

[wsp]

Please help me understand the timing distinctions between sending the paycheck to an employee and depositing the employee's deferral amount into the trust.

My thoughts exactly....Seems like education is the problem here not location or multiple entities.

[JanetM]

Can't the small employer cut a check Multi-employer plan the same time they cut check to employee? Don't understand the problem with segregating the assets immediately unless the employer has cash flow issues and can't actually fund payroll, taxes and benefits on payday.

[Below Ground]

Wow! Never thought there would be this many people that have trouble understanding concerns of small businesses! When you are "chief cook and bottle washer" and some one says you need to do extra work for a program you maintain primarily for the few employees you have, I guess you have no reason to complain. Yes I know, many plans are primarily for the owners, but not in this case. This really is a case where several small firms have joined together to allow for a better quality program for their employees. I guess that this type of situation is very unique, otherwise it would not be so hard to understand why adding more processing time might be a concern. Okay, lets give this a try.

Writing out checks for employees and reconciling records... 30 minutes.

Processing remittances to members accounts under the trust... 30 minutes.

Not having to do this extra 30 minute job another 3 times per month (1 1/2 extra hours)... Priceless!

Anyway, I thank posters for the constructive responses provided. The suggestion of Locust with the holding account would reduce remittance processing time since you are then only writing a single check for the total of the deferrals of that period. The time consuming processing to individual accounts would then be reduced to a minimum, and reduce confusion for the multiple pay periods. Afterall, you would then just be writing out a total check.

Oh, it is a multiple employer plan. A multi-employer plan does have a certain level of exemption from this standard. Similiar operational issues, yet not the same for considerations under the rules. In fact, it is those common operational concerns that are use to justify the exemption. (check it out!) Of course, if that is recognized, we can't thoughfully consider all the underlying reasons for why a small firm might want to reduce the work associated with having a plan. Interesting, is it not?

Hope I helped clear that up.

[WDIK]

After multiple readings of this thread, I hope that I have come to a conclusion as to the misunderstanding between my comment and Below Ground's posts.

Apparently, there is not a problem for the individual employer to deposit deferrals into a trust holding account at the same time paychecks are issued. The problem is that it is too time consuming for the individual employer give instructions for allocating the deferrals among participant investments. The "central site" has no timing problem once it receives the allocation instructions.

I am a small business owner that participates in a multiple employer 401(k) plan. We do not process payroll in-house, but I would have thought that the technology was available with any payroll system to easily provide allocation breakdowns. You learn something new everyday.

As a personal view only, an extra 1-1/2 hours a month to keep the DOL happy would be worth it.

[Locust]

WDIK - I'm not a recordkeeper but it seems to me that it is more complicated that having the payroll make the investment splits. The recordkeeper has to do some reconciliation work to insure that the contributions are correct. In a daily plan it is very difficult to undo contributions, so it has to be absolutely correct going in. In the multiple employer context you may receive data from different sources with variable capabilities. If you receive it directly from the company (rather than through a payroll service), it is likely to have mistakes occasionally. Even if you receive it from a payroll service, you can't really rely upon it without checking. I've worked with recordkeepers (big ones, thought not necessarily competent) whose systems completely shut down if everything is not done exactly right - the assumption is that data and contributions will be perfect and timely - and that's not the real world.

[Below Ground]

Thank you Locust for providing clarity where I apparently could not. Your posts have been constructive and helpful. It is nice to see that there are people on this bulletin board who truly wish to help others by sharing expertise and experience. Again, thanks!

[WDIK]

Below Ground:

I apologize if my posts have given offense or been pointless. It certainly was not my intent.