Timing of 401k contribution via ACH (remittance and allocation)

[TGIF]

A large Company’s pay date is Friday.

The Company 401k contributions can be reasonably segregated on Friday.

Current practice for contributions is a wire order entered on Thursday and executed on Friday, so that the money is pulled from the Company general assets on Friday and the amounts are allocated to participant accounts on Friday before the market close.

Recordkeeper offers a new ACH process. Under the new ACH process, Recordkeeper will initiate the ACH process on Friday and will allocate the contribution amounts to participant accounts on that same Friday before the market deadline. Participants will receive market earnings for Friday.

However, the ACH process pulls the funds from the Company on the next business day. Thus, the contribution amount is pulled from the Company’s general assets on Monday.

Recordkeeper allocates the funds to participants on Friday when the ACH is initiated even though the funds are not pulled from the Company until Monday.

Recordkeeper says this is a common industry practice (to allocate contributions to participants before the contributions are actually remitted to the trust). Is this process OK? Do most recordkeepers allocate the amounts to participant accounts before the funds are actually remitted to the trust?

It appears to be an interest-free loan from the recordkeeper to the plan sponsor (party-in-interest to party-in-interest). Recordkeeper says that if the Company does not make payment when the ACH pulls the funds on the next business day, they will simply reverse the transaction/allocations under the mistake of fact provision. 

We can't find any guidance on loans between parties in interest. Does this violate ERISA? Other concerns? Or is this a common practice/no worries?

[Paul I]

This process is common among the very large recordkeepers.  I agree with you that it appears to be an interest-free loan, and it certainly gives the big guys an advantage over small recordkeepers who do not have the financial resources to front payrolls.  I have raised this point at conferences that have included IRS and DOL staff and at conferences with a room full of ERISA attorneys, and the reactions have been tepid at best.  The DOL surprisingly were a little less troubled by this because of the overall speed of getting funds into participant accounts.

This does not meet the criteria for being a mistake of fact that you will find in plan documents and regulations, so the recordkeeper is off base on that point.  From what I have heard from recordkeepers is they treat the ACH failure/transaction reversal more like a failed trade.

[Luke Bailey]

On 11/20/2023 at 10:22 PM, Paul I said:

I agree with you that it appears to be an interest-free loan,

Yes, but would appear to meet the requirements for the exemption for a 3-day or less interest-free loan under PTE 80-26. Agree that pulling the funds back if the employer ACH fails seems problematic on at least a couple of points.