Department of Labor Finalizes Safe Harbor Ruling for Small Plans

Effective January 14, 2010, the Department of Labor (DOL) has established a safe harbor rule requiring a timely deposit of seven business days for employee contributions. The safe harbor rule applies to retirement and health and welfare plans subject to ERISA with fewer than 100 participants, often referred to as “small plans.”

In 1988, the DOL published a regulation defining when funds withheld from an employee’s pay by an employer for contribution to an employee benefit plan, are considered “plan assets.” In 1996, the DOL amended the 1988 regulation, requiring plan sponsors to deposit employee contributions and loan payments into employee benefit plans as of the earliest date on which the contributions can reasonably be segregated from the assets of the employer, but not later than, for retirement plans, the 15th, for welfare benefit plans, the 90th business day of the month following the month in which the participant contributions were withheld by the employer.

The 1996 amendment caused confusion to the sponsors and service providers’ application of the general rule. Most of the focus of this rule concerned retirement plans, particularly, 401(k) plans, and many employers, as well as their advisers, overlooked the “earliest date” condition and focused on the “15th business day of the month following the month” provision of the rule. In many cases, this interpretation led employers to the incorrect conclusion that they had until the 15th day of the following month to deposit employee contributions into the plan, causing delinquent employee contribution violations. The DOL’s interpretation of the term “reasonably” caused problems in the enforcement of the rule. In applying the standard, the DOL at times referred to the shortest time period in which the plan sponsor had ever segregated the assets resulting in inconsistencies in applying the rule.

To clarify the issue, the DOL determined that it was in the best interest of plan sponsors, plan participants, and beneficiaries to amend the contribution regulation and establish a safe harbor. It was proposed that employers with fewer than 100 participants would be considered to have made a timely deposit to their plan if the participant’s contributions are deposited within seven business days, which would usually be the equivalent of nine calendar days.

The DOL considered and subsequently rejected applying the safe harbor to large plans with 100 or more participants stating they do not have sufficient data to evaluate the costs, benefits, risks, etc. Therefore, large plans must still comply with the basic rules and, in many cases, must already meet faster deposit requirements.

On January 14, 2010, the DOL approved the final regulation with the exception of a few minor changes. The finalized safe harbor, like the proposal, is applicable to participant contributions and loan payments for pension benefit plans and welfare benefit plans with less than 100 participants. This increased certainty will reduce costs for both employer and participants by reducing disputes over compliance issues and allow easy oversight of the remittance practices. According to DOL estimates, accelerated remittances could result in $43.7 million in additional income to participant accounts as long as no employers delay response to the safe harbor, and $19 million annually even if all employers chose to delay to the full duration of the safe harbor.

In summary:
• The new safe harbor rule is effective as of January 14, 2010, the date of the publication of the final regulations.
• Eligibility for the “safe harbor” is limited to plans with 100 or fewer participants measured as of the first day of each plan year.
• The safe harbor rule applies to each payroll period; however, failure to meet safe harbor regulations during one payroll period will not eliminate the rule for other payroll periods. In a DOL audit, the timing of the deposit of employee contributions and loan payments to the plan by the employer is always scrutinized. This final regulation is not going to alter that, although for small plans, the safe harbor rule provides a bright line for what is compliance. We recommend that employers evaluate their practices regarding how quickly the employee contributions and loan payments are transferred to the plan. Regardless of whether the employer fits within the safe harbor, the employer should make sure its practices will meet the regulatory rule of transferring employee contributions and loan payments to the plan “on the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.”