Employee Benefits Advisory: Department of Labor Proposes Safe Harbor for Employee Contributions to Small Plans
3/14/2008
On February 29, 2008, the U.S. Department of Labor (the “Department”) proposed a “safe harbor” for sponsors of plans with fewer than 100 participants who transmit employee contributions to a plan within seven business days of the sponsor’s withholding or receipt of the contributions. Under the safe harbor, these contributions will be considered to have been deposited with the plan in a timely fashion for purposes of Title I of ERISA. Although the safe harbor is not yet finalized, the Department has indicated that plans with fewer than 100 participants may rely on the safe harbor pending the publication of final regulations.
This advisory explains the key features of the proposed amendment, which may be accessed at http://www.dol.gov/ebsa/regs/fedreg/proposed/02292008.htm.
Background
ERISA generally provides that employee contributions to a plan must be segregated from the employer’s general assets (e.g. forwarded to the plan trustee) as of the earliest “reasonable segregation” date following the employer’s receipt or withholding of the contributions. This “reasonable segregation” date is determined based on a facts and circumstances test. Plan sponsors who continue to hold these employee contributions beyond a “reasonable segregation” date may be exposed to a number of ERISA fiduciary and prohibited transactions violations.
In our experience, the Department has taken an increasingly aggressive position on the matter, in some cases arguing that employee contributions could be “reasonably segregated” from an employer’s general assets within two business days following an employee’s payday. However, the Department has not, until now, issued any bright line guidance on the issue, leaving many employers and their advisers uncertain as to the ERISA compliance of their contribution practices.
The Proposed Safe Harbor
The key features of the proposed safe harbor are:
- Participant contributions will be considered to have been deposited with the plan in a timely fashion when such contributions are deposited within seven business days of the date the employer receives or withholds the contributions.
- Available to plans with fewer than 100 participants at the beginning of the plan year.
- Applies to employee contributions to contributory defined contribution plans as well as contributory defined benefit plans, contributory multiemployer defined contribution plans, and contributory welfare benefit plans.
- Applicable to employees’ elective deferrals as well as loan repayments.
- As under the existing regulation, 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.
Welcome Relief for Small Plans
A plan sponsor who utilizes the safe harbor will enjoy the certainty of compliance with certain requirements of ERISA. Sponsors of small plans who are not currently transmitting employee contributions within seven days should seriously consider accelerating their transmissions. In our experience, such changes are unlikely to be onerous or costly.
Relief for Larger Plans?
The proposed regulations offer no relief for plans with 100 or more participants. The Department is still considering whether any safe harbor should apply to these larger plans, and has invited comments regarding the need for and impact of such additional relief. For the time being, however, larger plans remain exposed to severe penalties under the current rules.
If you have any questions concerning the information discussed in
this alert or any other employee benefits topic, please contact
one of the attorneys listed below or your primary contact
with the firm who can direct you to the right person.
We would be delighted to work with you.
Alden Bianchi
617.348.3057 | AJBianchi@mintz.com
Tom Greene
617.348.1886 | TMGreene@mintz.com
Addy Press
617.348.1659 | ACPress@mintz.com
Pamela Fleming
617.348.1664 | PBFleming@mintz.com
Patricia Moran
617.348.3085 | PAMoran@mintz.com
