The long-awaited guidance on deadline for depositing elective deferrals arrived in proposed regulation format on February 29, 2008. The proposal offers a “7-business day safe harbor” for employers with less than 100 participants as of the first day of the plan year to make their deposits to the plan, not to allocate them.

The actual deadline would be the 7th business day following the day that amounts would have been payable to the participant in cash or received by the employer to repay a participant loan (thus incorporating Advisory Opinion 2002-02A).

Effective Date
The proposed effective date will be the date the final regulations are published in the Federal Register.  Nonetheless, the DOL will not assert a violation of ERISA if the 7-business day safe harbor period in this proposal is followed. 

Participant contributions will continue to be considered deposited when placed in an account of the plan, without regard to whether the contributed amounts have been allocated to specific participants or investments of such participants.    As proposed, the safe harbor would be available for both participant contributions to pension benefit plans and participant contributions to welfare benefit plans.

The general rule--providing that amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer's general assets—has not changed. However, the DOL felt that clarification of the deposit of deferrals “as soon as possible” concept would benefit both employers and the DOL.  The DOL noted that it devotes significant enforcement resources to cases involving delinquent employee contributions and close to 90% of the applications under the DOL’s Voluntary Fiduciary Correction Program involve delinquent employee contribution violations.

Many employers, as well as their advisers, continue to be uncertain as to how soon they must forward these contributions to the plan in order to avoid the requirements associated with holding plan assets.

Prior to this, we have written articles on this hot subject. The specific method of measuring the exact day that the deferral deposit was considered late was unclear and subject to benchmarking. Thus, this guidance is an extremely helpful step in resolving an important issue. Employers who wanted to make the best effort were often unaware that they potentially engaged in a prohibited transaction if they were even one day later than the normal number of days they took to make the deposit. The new guidance will provide a higher degree of compliance certainty with respect to when an employer has made timely deposits of participant contributions to the plan

It is understood that the later deferral deposits are made the more likely they will not be made at all. So, having deferrals deposited quickly is a key to avoiding incidents where employers suffering business hardships take the employees deferrals into the businesses' coffers instead of depositing them to the trust.  The DOL feels the 7-day safe harbor will not add any additional risk to employees.

The DOL performed a number of studies and the 7-day rule seemed easiest to implement. The DOL had also considered 5 days and 10 days but found both to be less viable.

The DOL asked for comments on several issues. Comments must be received by April 29, 2008. Some of the areas the DOL has asked for comments on:

• The 7-business day safe harbor.
• Whether a safe harbor is needed for larger plans and the corresponding size.
• The amendment of paragraph (f) of 2510.3-102.
• Adding participant loan repayments to paragraph (a)(1) of 2510.3-102.
• The effective date of the final safe harbor amendment.
• On the appropriateness of the size standard used in evaluating the impact of this proposed rule on small entities.
• On the potential impact of the proposed rule on small entities.