The Department of Labor ("DOL") issued new regulations
on January 14, 2010 (75 Fed. Reg. 2068) confirming earlier
regulations and guidance that plan assets should be contributed to
an employee benefit plan on the earliest date the amounts can
reasonably be separated from the employer's general assets. See
29 C.F.R. § 2510.3-102. Plan assets include elective deferrals
to a 401(k) or 403(b) plan, loan repayments, or employee
contributions to be deposited in a VEBA.
Safe Harbor for Small Plans
I n addition to the general guidance that assets should be
deposited as soon as possible, the DOL also created a safe harbor
rule for small plans with less than 100 participants. Under the
safe harbor, plan assets must be deposited not later than the 7th
business day following the day on which the amount is received by
the employer or the 7th business day after the amount would have
been paid to the employee. It is not mandatory for small plans to
deposit amounts within 7 business days; however, if amounts are not
being deposited within 7 business days, the plan sponsor must
justify why it takes longer than 7 business days to make the
deposit. In the event the plan sponsor is challenged by the DOL,
the plan sponsor will have to give the reason why 7 business days
is not workable, which the DOL may or may not accept. This safe
harbor applies only to small plans, and the DOL has indicated that
it does not consider 7 business days reasonable for plans with more
than 100 participants.
Failure to Be Timely Carries a Price
F ailure to deposit plan assets in a timely manner is a
prohibited transaction under ERISA and the Internal Revenue Code,
and is subject to an excise tax under the Code. Although the DOL
and IRS have provided guidance on how to correct such failures,
correction involves both a financial cost (including the cost of
earnings, filing a Form 5330 and assistance in making the
correction) and an administrative cost in terms of staff time. In
addition, employers are required to report the failure to timely
contribute assets on the annual report (Form 5500) for a plan. See
2009 Form 5500, Schedule H, Question 4a and Schedule I, Question
4a.
Next Steps
Employers should review their procedures for depositing
plan assets. Employers that sponsor large plans (those with 100 or
more participants) should evaluate their practices to determine if
plan assets are being deposited as soon as possible after the
amounts are withheld or received. Employers that sponsor small
plans should review their practices to ensure that plan assets are
being deposited within 7 business days, or justify why it is not
reasonable for the assets to be deposited within 7 business days.
If you have questions about the new regulations or your plans or
arrangements, please contact the attorney in the Benefits and
Compensation practice group with whom you work.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.