New Department of Labor Guidance - Safe Harbor For Timely Deposit Of Employee Contributions To Small Plans

Tuesday, July 1, 2008 - 01:00

Editor:Tell us about your professional background.

Alwardt:I have an extensive background in qualified and non-qualified plan design, operational compliance, equity-based plans, employee communications and representation before the IRS and the DOL.

Prior to joining Eisner I was with a Big Four firm in New York. Currently Ilead Eisner's employee benefits group, which offers a full range of services to clients around the world, from customized plan design and implementation, defined contribution and 401(k) recordkeeping including ESOPs to defined benefit pension plan administration and employee investment education services. We're also excited to have recently added health and welfare plan and retirement plan fiduciary analysis services to our practice.

Editor: Why is the timely deposit of employee contributions to employee benefit plans the subject of such intense focus by the U.S. Department of Labor ("DOL")?

Alwardt: Under the Employee Retirement Income Security Act of 1974 (ERISA), the DOL is charged with oversight of employee benefit plan (retirement and welfare plans) assets held in trust. Over the past years the trend has been toward employee-funded benefits, whether it is through 401(k) plans or employee contributions to medical plans. With such large amounts of cash being withheld from employees' pay, the DOL is concerned that companies will be tempted (and have on occasion) to manage their cash flow with employee money. Thus, under existing and the recently proposed regulations, DOL considers contributions that are not timely remitted to a trust to be a prohibited loan by the trust to the corporation (employer) subject to penalties, excise taxes, and interest.

Editor: What is the requirement under the existing regulations?

Alwardt: Under the DOL's 1996 regulations, plan sponsors have been required to deposit employee contributions to a plan as of the earliest date that the contributions may reasonably be segregated from the plan sponsor's assets, but in no event later than the 15th business day of the month following the month in which the employees' contributions were withheld from pay by the plan sponsor.

Editor: What are the most common mistakes made by clients in complying with the existing regulations?

Alwardt: Under the existing regulations, a large number of plan sponsors have disregarded the "earliest date" requirement and interpreted the regulations as allowing the plan sponsor to deposit employee contributions by the 15th business day of the month following the month that the employees' contributions were withheld from pay. In its audits, however, the DOL has always enforced the "earliest date" requirement of the regulations. Thus, in an audit, the DOL has used the shortest period of time that the plan sponsor had segregated assets in the past and applied that as the standard of timeliness for contributions.

Editor: Can you give an example?

Alwardt: For example, a plan sponsor may typically have made deposits to the plan within eight business days of withholding the contributions from employees, but on one occasion made the deposit to the plan within four business days. The DOL would treat all deposits taking longer than four business days as late and therefore a prohibited transaction resulting in the plan sponsor being required to pay interest to plan participants for (in this example) the four business days the deposits were considered late, as well as excise taxes (reported on IRS Form 5330).

Editor: What changes has the DOL made recently to simplify compliance with the deposit regulations?

Alwardt: On February 29, the U.S. DOL issued proposed regulations providing a safe harbor for what will be considered the timely deposit of employee contributions to small retirement and welfare benefit plans (medical, dental, life, etc.).

The proposed regulations provide sponsors of small plans with a simple safe harbor to help ensure that they comply with the standards for timely deposits. The proposed safe harbor provides that participant contributions to a small retirement or welfare benefit plan (defined as a plan with less than 100 participants at the beginning of the plan year) will be considered deposited timely if the contributions are made to the plan no later than the seventh business day following the day on which the amount could have been paid to the participant in cash. For payments related to retirement plan loans not automatically withheld from payroll, the deposits to the plan will be considered timely if made within seven business days from the receipt of the payment by the plan sponsor.

Editor: What is the impact of the proposed regulations on sponsors of larger plans?

Alwardt: For large plans (those with more than 100 participants), the DOL is considering whether a regulatory safe harbor is needed. However, it is clear that the DOL's position will likely be that deposits of employee contributions need to be made in less than seven business days. The DOL seems to take the view and we have advised clients that employee contribution should be deposited to the plan at the same time the employer is required to remit federal tax withholding deposits to the government. For larger employers, this is typically within one to three business days after the payroll date.

Editor: Are there any technology hurdles to complying with the current and proposed regulations?

Alwardt: None. All reputable custodians/ trustees of benefit plan assets can receive same-day wire transfers or arrange ACH pulls of the contributions from the employer's payroll account.

Editor: When will the proposed regulation be effective?

Alwardt: The new regulation will become effective on the date of publication of the final regulation; however, the DOL has stated that in the interim, plan sponsors that comply with the proposed safe harbor will be considered to have made timely deposits to a plan and will not be subject to penalty or excise taxes.

Please email the interviewee at palwardt@eisnerllp.com with questions about this interview.