DOL Issues Final Regulation Creating Optional 7-Business Day Safe Harbor Period For Small Plans

On January 14, 2010, the Department of Labor (“DOL”) published a final regulation (29 CFR 2510.3–102) (“Regulation”) which creates an optional safe harbor period for small plans for the timely deposit of participant contributions. During this period, amounts that an employer has received from employees or withheld from wages for contributions to contributory group welfare plans and pension plans (e.g., 401(k) plans) will not be considered plan assets for purposes of the Employee Retirement Income Security Act (“ERISA”). A “small plan” under the Regulation is a plan with fewer than 100 participants at the beginning of the plan year. Unfortunately, the 80/120 participant rule used to determine if a plan is a small plan for Form 5500 filing purposes does not apply when determining if the plan is a small plan for the optional safe harbor period.

The General Rule

The general rule regarding the timing of the deposit of participant contributions to pension plans (e.g., salary deferrals) is that the contributions must be deposited into the plan as of the earliest date on which these contributions can reasonably be segregated from the employer’s assets, but — in any event — no later than the fifteenth (15th) business day of the month following the month in which the participant contributions are received by the employer or withheld from the participants’ wages.

Please note that the DOL has consistently taken the position that the “no later than the fifteenth (15th) business day of the month following the month in which the participant contributions are received” timeframe is not a safe harbor period. Instead, it is the DOL’s position that participant contributions must be deposited into the plan as soon as reasonably practical after they are received by the employer. Accordingly, the DOL has found contributions to be late as early as two (2) business days after such contributions were received by the employer if the employer’s facts and circumstances support such conclusion (e.g., historically, the employer was able to deposit participant contributions within one (1) business day of their receipt).

Participant contributions not deposited within this timeframe are considered plan assets under ERISA and the employer’s use of such assets is considered a prohibited transaction, subjecting the employer to an excise tax.

The Safe Harbor

Under the safe harbor, participant contributions (including participant loan payments) will be considered to be timely deposited to a small plan if such contributions are deposited within seven (7) business days from:

  • the date the contributions are received by the employer; or
  • the date on which the contributions otherwise would have been payable to the employee (the date contributions are withheld from the employee’s wages).

The seven (7) business-day period typically runs between nine (9) and eleven (11) calendar days.

Late Contributions

In the preamble to the Regulation, the DOL makes it clear that the “as soon as reasonably practical” timeframe still applies to employers that sponsor small plans. Therefore, if the employer is not able to timely deposit participant contributions to the plan within the safe harbor period, then the period for which any losses and interest are owed on the late contributions will be measured from the earliest date on which it was reasonably practical for the employer to deposit such contributions, not from the end of the seven (7) day safe harbor period.

For example, Employer A sponsors a 401(k) plan with 80 participants (a small plan). Employer A historically has been able to deposit participant contributions to the plan within two (2) business days of the end of each pay period. In December 2009, Employer A deposited participant contributions within six (6) business days of the end of a pay period. In January 2010, Employer A deposited participant contributions within fifteen (15) business days of the end of a pay period.

Under the Regulation, the December 2009 participant contributions are timely because they were deposited into the plan within seven (7) business days of the end of the pay period. However, the January 2010 participant contributions are not timely because they were not deposited into the plan within seven (7) business days of the end of the pay period. The losses and interest owed on the late participant contributions are calculated from the third (3rd) business day, instead of the seventh (7th) business day from the end of the pay period.

The good news for Employer A is that the preamble to the Regulation states that the safe harbor is available on adeposit-by-deposit basis. As such, Employer A’s failure to timely deposit the January 2010 participant contributions does not mean that the safe harbor is no longer available to Employer A for future deposits of participant contributions.

Other Provisions

In addition to establishing the safe harbor period for small plans, the DOL also addressed the following topics in the preamble and the Regulation:

  • Optional Safe HarborThe seven (7) business-day period is not mandatory. In other words, plan sponsors are not required to deposit participant contributions on the seventh (7th) business day after the employer has received the contributions from employees or after the contributions have been withheld from the employees’ wages. The general rule for timely deposit of participant contributions still applies as an alternate method of compliance. The Regulation merely provides that if small plan sponsors deposit the participant contributions by the seventh (7th) business day, the contributions will be deemed to have been timely deposited, and therefore no determination of timeliness will be made under the general rule.
  • Large PlansThe optional safe harbor period is not available to the sponsors of “large plans” (contributory group welfare and pension plans with 100 or more participants at the beginning of the plan year). Sponsors of large plans must deposit employer contributions as of the earliest date on which such contributions can reasonably be segregated from its assets.
  • Multiemployer and Multiple Employer PlansThe optional safe harbor period applies to multiemployer and multiple employer plans as a whole, rather than on an employer-by-employer basis. Therefore, there must be less than 100 participants in a multiemployer or multiple employer plan at the beginning of the plan year in order for the optional safe harbor period to apply.
  • Participant LoansThe optional safe harbor period applies to participant loan repayments.
  • Contributory Group Welfare PlansAlthough the optional safe harbor period is available to small contributory group welfare plans, the general rule regarding the timing of deposits of participant contributions still applies. Such contributions cannot be deposited into the plan later than ninety (90) days from the date the participant contributions are received by the employer or withheld from the participants’ wages.

Review Deposit Procedures

Regardless of whether the optional safe harbor period applies to a particular plan, employers should ensure that participant contributions are deposited to the plan as soon as reasonably practical from the date participant contributions are received by the employer or withheld from the participants’ wages. If you would like to discuss the new optional safe harbor period or the general participant contribution deposit rules, please contact us.