Subject: BenefitsLink Nwsltr 12/20/95 DOL ISSUES PROP REGS ON 401(k) CONTRIBUTIONS In today's Federal Register, the DOL issues proposed regulations governing the deadline by which employers must contribute withheld employees' payroll deductions to the trust fund of a section 401(k) plan (also called a cash-or-deferred arrangement or salary reduction plan). The regulations is issued under section 403 of ERISA, the "plan assets" provision. The full text of the proposed regulation, its preamble, and hypertext links to cited ERISA sections appears on BenefitsLink at http://www.magicnet.net/benefits/erisaregs/403.html Written comments to the DOL on the proposed regulation are invited; the deadline is February 5. In fact, comments can be sent to the DOL via email to hinz@access.digex.net The following excerpt from the preamble hits the highlights: "This document contains a proposal to revise the regulation at 29 CFR 2510.3-102 by changing the maximum period during which participant contributions to an employee benefit may be treated as other than "plan assets". Under the current regulation, the maximum period is 90 days from the date on which the participant contributions are received by the employer (for amounts that participants or beneficiaries pay to the employer) or would otherwise have been payable to the participants in cash (for amounts that the employer withholds from the participants' wages). Under the proposed rule, the maximum period for an employer to transmit participant contributions to the plan would be the same number of days as the period in which the employer is required to deposit withheld income taxes and employment taxes under rules promulgated by the Internal Revenue Service (IRS). The currently applicable rules are codified at 26 CFR 31.6302-1. In general, these rules require employers who have reported more than $50,000 of withheld income taxes and employment taxes for a prior 12-month ``lookback'' period (defined as ``semi-weekly depositors'') to make tax deposits to a Federal Reserve Bank or authorized financial institution within a few days of withholding from wages. Employers who have reported $50,000 or less of withheld income taxes and employment taxes in the lookback period are defined as ``monthly depositors'' and must make such deposits on or before the 15th day of the month following the month in which the employees' wages are paid. * * * The proposed rule would require employers who cannot reasonably segregate participant contributions at an earlier date to treat such amounts as plan assets within the same time frame that the employer is required to segregate and deposit withheld income taxes and employment taxes. The following table illustrates the basic time periods specified in the IRS regulations: Type of depositor Date withheld Date deposit due ------------------------------------------------------------------------ Semi-Weekly Depositor (more Wednesday, Thursday, Following Wednesday. than $50,000 of Federal and/or Friday. Following Friday. Income, Social Security and Saturday, Sunday, Medicare taxes Monday and/or (collectively, employment Tuesday. taxes) reported for 12- month period ending last June 30). Monthly Depositor ($50,000 In any day during a By the 15th of the or less of employment taxes calendar month. following calendar reported for 12-month month. period ending on the previous June 30). Either semi-weekly or Not relevant. Next banking day monthly depositor, if after the $100,000 $100,000 or more in in employment taxes employment taxes are was accumulated. accumulated on any date. ------------------------------------------------------------------------ For example, a semi-weekly depositor that pays its employees on Wednesday, December 13, is required to deposit withheld income taxes and employment taxes by the following Wednesday (December 20). Under the proposed rule, any participant contributions withheld on December 13 would become plan assets as soon as they could reasonably be segregated from the employer's general assets, but no later than December 20. Participant contributions that are paid separately by employees or former employees to the employer would be subject to the same time frames. For example, if a semi-weekly depositor receives a participant's payment on Monday, December 18, the payment amount would become plan assets as soon as they could reasonably be segregated from the employer's general assets, but no later than the following Friday, December 22. Because the IRS tax deposit rules are generally applicable to employers, the Department expects that employers who sponsor contributory employee benefit plans are familiar with and have systems in place to comply with the IRS requirements. Thus, the Department believes that applying these same rules in determining when the maximum period beyond which participant contributions must be treated as plan assets should not result in serious inconvenience or expense for such employers. The Department believes that currently available cash management and payroll processing technology allows the segregation of participant contributions within the maximum period proposed in this document. Furthermore, the final regulation published in 1988 requires that participant contributions be treated as plan assets as soon as they can reasonably be segregated from the employer's general assets. As a result, this proposed change will not be material for many employers who have complied with the final regulation published in 1988. The Department recognizes that some employers perceive difficulties in the transfer of participant contributions to the plan that they do not have in the deposit of federal employment taxes. The Department solicits comments as to any specific burdens and associated costs of this kind. The Department also requests comments on the transition period needed for employers and service providers, especially small businesses, to make changes in practices that may be necessary to comply with the proposal if it is adopted. Although the proposed rule would not change the requirement that participant contributions be treated as plan assets at the earliest date they can reasonably be segregated from the employer's general assets, changing the regulations to provide for an outer limit that conforms to IRS requirements will allow the Department and plan participants to more quickly and easily determine that a violation has occurred. This will assist the Department in its increased monitoring and enforcement in this area, as it reduces the room for argument as to how rapidly participant contributions must be segregated from the employer's general assets. In addition, changing the ninety-day limit for treating participant contributions as other than ``plan assets'' reduces the risk of loss that exists when employers improperly hold participant contributions in their general assets for the maximum period rather than segregating them from the employer's general assets at the earliest reasonable date." ************************************************************** To subscribe or unsubscribe to the free BenefitsLink newsletter, send email to erisa@magicnet.net. Best regards, Dave Baker BenefitsLink (national employee benefits Web site) http://www.magicnet.net/benefits/