401k Deposit Deadline

[Gadgetfreak]

We all may know the DOL safe-harbor of 7 days for depositing 401k deferrals. I am trying to find specific language that states that this deadline refers to getting it into participant accounts (i.e. knowing the participant allocations) and not just sending a check to the custodian. Everything I read speaks about check timing, deposit, etc. I have no doubt that the spirit of the law is that participants must have it in their accounts but is there specific language? Thanks.

[Peter Gulia]

You might not find a rule or regulation that explicitly commands when such an amount must be credited to a participant's account.

The rule you refer to, 29 C.F.R. 2510.3-102, governs when an amount is treated as a plan's asset.

But it's at least possible that a plan could have circumstances in which an amount belongs to the plan but might not yet be allocated among participants' accounts.

When an amount ought to be allocated to a participant's individual account is governed by other law, including ERISA sections 402-408, the written plan, and other documents governing the plan or its trust.

[Gadgetfreak]

I agree with you. In fact, I have found several comments on the DOL 7-day safe-harbor which say something similar to:

The regulations also clarify that it is only the deposit, not the allocation or investment, that must occur within the requisite window.

Honestly, I am a bit surprised because I would think the DOL is looking to protect the participant as much as possible and having money deposited with the custodian but not allocated to participant accounts seems opposite their intent. But I have a client who had a few late files but never a late deposit and I am debating how to answer the question on the 5500.

[401king]

I think if the Sponsor's RK is having a hard time allocating the money to the participant accounts then it may be time for a new RK. The DOL's rule targeted only the Plan Sponsors, but no the RKs. It may be a lot to ask for some RKs to allocation within X number of days, depending on what systems or investments they use.

[jpod]

As pointed out there could be other fiduciary breach risks associated with not allocating promptly, but the pt exposure ends when the employee money is handed over to the plan trustee.

[Gadgetfreak]

I agree, In this case, the client is sending the money to the RK on time but isn't sending the file at the same time. So it is not the RK's fault. But, based on this thread and what I am reading online, it doesn't seem the client violated the 7-day safe-harbor. As such, I am more confident advising them that they can answer No to the question of whether DEPOSITS were late.

Thank you.

[GMK]

I like post #5 here:

http://benefitslink.com/boards/index.php/topic/45730-employer-not-submitting-payments-withheld-on-my-check/

as a description of when deposits have to be made, that is, there is a 7 day safe harbor for depositing the assets in the Plan, but if deposits can be made in 2 or 3 days, then taking more time than that is too long.

And the timing of when the allocations are made by the RK is another matter, which the Plan Administrator should address as a fiduciary responsibility, but not because of the deposit timing safe-harbor.

[jpod]

I thought the 7 day safe harbor was in fact a safe harbor, for plans eligible for it, even if could be proven that they could make the deposit in 1 day. No?

[Bird]

I thought the 7 day safe harbor was in fact a safe harbor, for plans eligible for it, even if could be proven that they could make the deposit in 1 day. No?

Yes.

And I agree with your earlier post - the late deposit rules are all about prohibited transactions - the employer effectively borrowing plan money by not depositing it soon enough. If they deposit it timely, they have met the rules. If they don't provide info to allocate it, it might be some other fiduciary breach as you noted.

[CMarkB]

Yes, the 7 day rule is indeed a safe harbor for plans with fewer than 100 participants at the start of the plan year. Depositing participant contributions or loan repayments by such a plan by the 7th business day after the day on which such amounts were received by the employer is deemed to be contributed or repaid on the earliest date such amounts can reasonably be segregated from the employer's general assets.

[GMK]

Thanks for the correction.

I was thinking of discussions back then, including on BenefitsLink, which suggested that they might come after you in the "2 or3 days" case, but that must have been paranoia and uncertainty talking. If they were going to enforce a "less than 7 day" rule, they would have done it by now. Good to know.

[MoJo]

I've been following this thread and "agree" with the comments made about the safe harbor nature of the "7 day rule" and the possible fiduciary concerns on the related, but different issue of allocating and investing the contributions, when GMK raised an issue in my mind, anyway. The DOL has given small plans a "safe harbor" for segregation of contributions from sponsor assets and designating them as "plan assets" - and those employers have the "7 day rule" with which to do so. BUT, if it is "possible" to actually do so within 2-3 days, would not a "plaintiff's attorney" have a case that it would be "prudent" to do so, and then also accelerate the timing of actually investing those funds as provided for in the plan (usually as participant directed)?

I don't mean to muddy the waters, but if I can think of it, so can "real" attorneys who actually go to court, and considering I read a week or so ago that more and more "small plans" are being hit with lawsuits, would it not be a best practice to "establish" a practice of consistency - still applying the "as soon a possible" approach of the DOL's actual rule on the issue?

Just to put meat on the issue, I am aware of a plan that got nailed by the DOL for a "fiduciary breach" of delays in contributions AND investments, even though it was a "small plan" (under 100 participants) and MAILED (SNAIL MAIL) a check TO VANGUARD (why they agreed to take checks is beyond me) - with postmarks within the 7 days (effectively segregating "plan assets" from corporate one), but not getting to the "trust" and invested until usually a week later.

[GMK]

I am aware of a plan that got nailed by the DOL for a "fiduciary breach" of delays in contributions AND investments, even though it was a "small plan" (under 100 participants) and MAILED (SNAIL MAIL) a check TO VANGUARD (why they agreed to take checks is beyond me) - with postmarks within the 7 days (effectively segregating "plan assets" from corporate one), but not getting to the "trust" and invested until usually a week later.

Yikes. This is also good to know.

[jpod]

MoJo, if you assume that the regulation is an accurate interpretation of the law which a court will respect as such, technically what the safe harbor rule says is that if the money is deposited within the 7 days, then it doesn't become plan assets until the day it is actually deposited; therefore, there can be no pt or even a fiduciary breach because you didn't deposit it faster, even if you clearly could have deposited it faster.

And, while there is no way to predict what a judge might do, and I agree with you about the ERISA plaintiffs' bar, these are small plans so, almost by definition, there aren't deep pockets here.

[MoJo]

jpod: I disagree to some extent about your interpretation of the rule, especially the part about the contribution "not being a plan asset until" deposited, if you comply with the "rule." I've always thought the position was the assets are a "plan asset" AS SOON AS it can be reasonably be segregated from sponsor assets, and the rule only gave you a pass against enforcement of the PT that would occur if the assets were not conveyed up until the 7th day. Sort of like "prosecutorial discretion" in agreeing to not go after you in the circumstance that it took as long as 7 days, but the assets *for all other purposes* (i.e. fiduciary purposes) were still plan assets.

As far as these plans not being "deep pockets, I'll see if I can find the article talking about lawsuits against plans under $10 million in assets (many of which will be less than 100 participants). I agree that Schlicter may not be interested, but I know of many, many trial lawyers would be very interested in a $100k payday - and some have even approached me as a subject matter expert to assist them (and I politely declined, being a "inside person" in the industry). As with many things, it starts with the large plans, and when the recipe is perfected, it is scaled down market.

[Belgarath]

As a non-lawyer, I tend to agree with MoJo in this. I note that in the first paragraph of 2510.3-102, says, (my emphasis)


(a)(1) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets.

Now, I don't know what that really means in real life circumstances, but it does seem to indicate that the exemption isn't "blanket" and may only be relied upon for specific purposes. But as I said, I'm not a lawyer, so this is nothing more than useless speculation on my part. It's fun to randomly talk about things I know nothing about, when I can't be held responsible for what I say. I think that qualifies me to run for President.

[401K_AZ]

I posted my thoughts on the subject before, at http://benefitslink.com/boards/index.php/topic/56254-late-deposits-dol-safe-harbor/#entry246113

When I was at the DOL, we did not look at the date the contribution was remitted, or even the date the money was received by financial institution, but the date it posted to the trust account.

And, we never looked at when the contributions were allocated to the actual participants--just when the contribution posted to the plan's account.

There is a difference between when the entity receives the assets and when it was posted to the account--often it is the following day.

[MoJo]

401K_AZ - but the rule is one of when the assets are "segregated" from the assets of the plan sponsor (i.e. out of the control of the plan sponsor). Clearly, the most "complete" segregation is when the assets hit the "trust account" but that is still a matter of interpretation as to when it occurs. A check written and handed to someone to process is *out of the control* of the plan sponsor (the check being a negotiable instrument that if not good gives rise to both civil and criminal liability). A check placed in the mail is the same.

I understand that some of these practices are just dumb (the client who mailed checks to Vanguard was clearly capable of doing things electronically, but just "never change"). Why is the rule dependent on the efficiency of the service provider when the rules clearly indicate that the issue is one of segregation - which can occur before the trustee processes the contribution?

[hr for me]

Any rule you are looking for wouldn't have worked for any of the older quarterlies (and I've been told some still exist) that we had long before dailies. Daily recordkeeping does make it easier to allocate the contributions/earnings faster but back in the day of quarterlies, the plan sponsor had to deposit timely but often the recordkeeping didn't happen for 2-3 months after the first contribution of the quarter. So if you look at it that way (the simple old days) it might make a bit more sense. However there were times where the last contribution deposit of the quarter out of paychecks didn't make it into the trust due to that timing. Oh the fun of reconciling 401k quarterlies. I can reconcile just about anything now LOL....finding that last d*mn penny!

The money was deposited in the trust so it was earning interest/gain/loss but that wasn't specific to any participant until the earnings were allocated on whatever the basis formula was for the plan.

[ESOP Guy]

Honestly, I am a bit surprised because I would think the DOL is looking to protect the participant as much as possible and having money deposited with the custodian but not allocated to participant accounts seems opposite their intent. But I have a client who had a few late files but never a late deposit and I am debating how to answer the question on the 5500.

My understanding the intent of the rule was to solve the problem of the money never making it to the trust.

You have to remember the rule was made back when many 401(k) (especially small 401(k)s) were balance forward. So what you had was people being reported balance of X in the plan when the assets weren't in the plan. What made up a large part of X was a receivable from the sponsor.

I had a client back then where it wasn't uncommon for the receivable to be 8 or 9 quarters of deferrals that hadn't been put into the plan. The amount of cash in the plan was much lower then what the sum of the statements said everyone's balance was.

What happened a few times is the sponsor (not my client but others) went bankrupt and the the receivables were never paid. That is when people found out the money coming from their pay checks wasn't in the 401(k).

In fact my brother had this happen to him. He lost over $30k when his employer went bankrupt. It turned out towards the end the company was staying afloat with the employees' money.

So the DOL made the rules you had to get the money into the plan ASAP.

[ESOP Guy]

It agree with others it is my understanding not getting the funds invested timely is a fiduciary breach and not covered by the timely deposit rules.

If I recall correctly (and I admit I might not be) but aren't fiduciary breaches bad in that the person can be held personally liable for damages?. The deposit rules the sponsor pays the lost earnings. A fiduciary breach the person responsible can be made to pay from their pocket.