DOL Final Regulations for Safe Harbor for Deferral Deposit Deadline (and Loan Repayments) for Small Plans
01/15/2010

The Final Regulation is the same as the proposed regulation with the exception of a few minor clarifying changes. For reference, the text of the final regulations is at the end of this article including the examples retained from the proposed regulations.

This small plan safe harbor provides that the deposit will be treated as having been made to the plan in accordance with the general rule (i.e., on the earliest date on which such contributions can reasonably be segregated from the employer’s general assets) when contributions are deposited with the plan no later than the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages) OR when contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer such as loan repayments).

Participant contributions will 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.

SIMPLE IRA and SARSEP also Covered
SIMPLE IRA and SARSEP included in the final regulations as they are also CODA type arrangements. However, the maximum period during which SIMPLE IRA salary reduction elective contributions may be treated as other than plan assets is 30 calendar days in both ERISA and the IRC.

Safe Harbor Applied on a Deposit-by-Deposit Basis
The safe harbor is available on a deposit-by-deposit basis, such that a failure to satisfy the safe harbor for any deposit of participant contribution amounts to a plan will not result in the unavailability of the safe harbor for any other deposit to the plan. Thus, if one payroll misses the safe harbor, all other payrolls during the year may still use the safe harbor.

Optional Safe Harbor Concept
Using the safe harbor is an optional, not mandatory rule. The DOL added new paragraph 2510.3–102(a)(2)(ii), clarifying that the final safe harbor regulation is not the exclusive means by which employers can discharge their obligation to deposit participant contributions or loan repayments on the earliest date on which such contributions and payments can reasonably be segregated from the employer’s general assets.

The DOL states that, when an employer fails to deposit participant contributions (or loan repayments) in accordance with the general rule (i.e., as soon as such contributions or payments can reasonably be segregated from the employer’s general assets), losses and interest on such late contributions must be calculated from the actual date on which such contributions and/or payments could reasonably have been segregated from the employer’s general assets, not the end of the safe harbor period.  

Large Plans Not Included in the Safe Harbor
After careful consideration of the comments, the DOL does not believe that it has a sufficient record on which to evaluate current practices and assess the costs, benefits, risks to participants associated with extending the safe harbor or any variation thereof to large plans at this time. As a result, the Department has determined not to change the safe harbor provision to cover participant contributions to a pension or welfare benefit plan with 100 or more participants.

Effective Date
The safe harbor and the proposed amendments to paragraph (a)(1) and (f)(1) of § 2510.3–102 are effective on January 14, 2010, the date of publication of the final regulation in the Federal Register.

Click here for our article on the proposeed regulations.

For Reference:
Final Regulations Section 2510.3-102 Definition of “plan assets” — Participant contributions.

(a)(1) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.

(2) Safe harbor. (i) For purposes of paragraph (a)(1) of this section, in the case of a plan with fewer than 100 participants at the beginning of the plan year, any amount deposited with such plan not later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer), or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages), shall be deemed to be contributed or repaid to such plan on the earliest date on which such contributions or participant loan repayments can reasonably be segregated from the employer’s general assets.

(ii) This paragraph (a)(2) sets forth an optional alternative method of compliance with the rule set forth in paragraph (a)(1) of this section. This paragraph (a)(2) does not establish the exclusive means by which participant contribution or participant loan repayment amounts shall be considered to be contributed or repaid to a plan by the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.

(b) Maximum time period for pension benefit plans.
(1) Except as provided in paragraph (b)(2) of this section, with respect to an employee pension benefit plan as defined in section 3(2) of ERISA, in no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than the 15th business day of the month following the month in which the participant contribution or participant loan repayment amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).

(2) With respect to a SIMPLE plan that involves SIMPLE IRAs (i.e., Simple Retirement Accounts, as described in section 408(p) of the Internal Revenue Code), in no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than the 30th calendar day following the month in which the participant contribution amounts would otherwise have been payable to the participant in cash.

(c) Maximum time period for welfare benefit plans.
With respect to an employee welfare benefit plan as defined in section 3(1) of ERISA, in no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than 90 days from the date on which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the date on which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).

(f) Examples. The requirements of this section are illustrated by the following
examples:
(1) Employer A sponsors a 401(k) plan. There are 30 participants in the 401(k) plan. A has one payroll period for its employees and uses an outside payroll processing service to pay employee wages and process deductions. A has established a system under which the payroll processing service provides payroll deduction information to A within 1 business day after the issuance of paychecks. A checks this information for accuracy within 5 business days and then forwards the withheld employee contributions to the plan. The amount of the total withheld employee contributions is deposited with the trust that is maintained under the plan on the 7th business day following the date on which the employees are paid. Under the safe harbor in paragraph (a)(2) of this section, when the participant contributions are deposited with the plan on the 7th business day following a pay date, the participant contributions are deemed to be contributed to the plan on the earliest date on which such contributions can reasonably be segregated from A’s general assets.

(2) Employer B is a large national corporation which sponsors a 401(k) plan with 600 participants. B has several payroll centers and uses an outside payroll processing service to pay employee wages and process deductions. Each payroll center has a different pay period. Each center maintains separate accounts on its books for purposes of accounting for that center’s payroll deductions and provides the outside payroll processor the data necessary to prepare employee paychecks and process deductions. The payroll processing service issues the employees’ paychecks and deducts all payroll taxes and elective employee deductions. The payroll processing service forwards the employee payroll deduction data to B on the date of issuance of paychecks. B checks this data for accuracy and transmits this data along with the employee 401(k) deferral funds to the plan’s investment firm within 3 business days. The plan’s investment firm deposits the employee 401(k) deferral funds into the plan on the day received from B. The assets of B’s 401(k) plan would include the participant contributions no later than 3 business days after the issuance of paychecks.

(3) Employer C sponsors a self-insured contributory group health plan with 90 participants. Several former employees have elected, pursuant to the provisions of ERISA section 602, 29 U.S.C. 1162, to pay C for continuation of their coverage under the plan. These checks arrive at various times during the month and are deposited in the employer’s general account at bank Z. Under paragraphs (a) and (c) of this section, the assets of the plan include the former employees’ payments as soon after the checks have cleared the bank as C could reasonably be expected to segregate the payments from its general assets, but in no event later than 90 days after the date on which the former employees’ participant contributions are received by C. If, however, C deposits the former employees’ payments with the plan no later than the 7th business day following the day on which they are received by C, the former employees’ participant contributions will be deemed to be contributed to the plan on the earliest date on which such contributions can reasonably be segregated from C’s general assets.