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DOL Finalized Deferral Deposit Safe Harbor 1/21/2010
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The DOL has finalized regulations establishing a safe harbor for a small employer to timely deposit elective deferrals, other employee contributions, and participant loan repayments. Consistent with the February 2008 proposed regulations, if the employer deposits the withheld amounts in the trust no later than the 7th business day following the date the employees would have received the contributions (payday), the regulations deem that the employer has satisfied the requirement to pay the contributions as soon as reasonably practical. The DOL adopted the proposed regulations with only minor changes.

“Small" plan rule. As in the proposed regulations, the 7-day safe harbor only applies to small plans (fewer than 100 participants at the beginning of the plan year). The Form 5500 “80/120" rule, which may apply to determine Form 5500 filing status, does not apply to determine the number of participants under the safe harbor rule. As under prior guidance, the regulations treat amounts as “deposited" when they are placed in an account of the plan, without regard to when the amounts are actually allocated to the participant’s account or invested in accordance with the participant’s investment election.

Note: The final regulations do not define “participant" for purposes of the application of safe harbor rule. ERISA regulations define “participant" for plan purposes, which is the definition that applies for Form 5500 purposes. See DOL Reg. §2510.3-3(d) and the instructions to lines 5 and 6 of the 2009 Form 5500. This definition should apply for purposes of determining the number of participants under the safe harbor rule.

Pension and welfare plans. Although the primary application of the 7-day safe harbor is for the deposit of 401(k) plan deferrals, the rule also applies to amounts an employee pays an employer directly (such as a check for an after-tax contribution). As under the proposed regulations, the safe harbor applies both to pension plans (e.g., 401(k) plan) and welfare plans. The absolute deadline for pension plan deposits is the 15th business day of the month following withholding or receipt; the absolute deadline for welfare plans is 90 days after withholding or receipt.

Application to SIMPLE IRAs and SARSEPs. The DOL notes that the 7-day safe harbor also applies to the deposit of deferrals under a SIMPLE IRA or a SARSEP. However, the final regulations reference the rule that the latest date for contributions to a SIMPLE IRA plan is 30 calendar days after those amounts are withheld.

Deposit-by-deposit basis. The DOL clarifies in the preamble that the safe harbor rule applies separately to each payroll. Therefore, the failure to satisfy the safe harbor for one payroll does not prevent the employer from applying the safe harbor for other payrolls during the plan year.

Optional safe harbor. In the final regulations, the DOL modified the proposed regulations to clarify that the 7-day safe harbor is not mandatory, and is not the exclusive method to satisfy the general rule that the employer must deposit deferrals (or loan payments) as soon as the employer reasonably can segregate those amounts. Thus, if the employer makes a deposit after the safe harbor date, the employer may be able to show that the deposit nonetheless was made as soon as practical and therefore timely. The DOL also confirmed that if the employer fails to satisfy the general rule, the employer must calculate losses and interest on the late contributions from the actual date the contributions reasonably could have been segregated, not from the end of the safe harbor period.

No application to large plans. Although the DOL requested in the proposed regulations comments on the need for a safe harbor rule for large plans, and some commenters argued for such a rule, the DOL declined to apply the safe harbor to large plans. The DOL was not convinced it had a sufficient record on the basis of which to evaluate current practices or assess costs, benefits and risks to participants associated with extending the safe harbor to large plans. Similarly, the DOL declined to modify the 7-day rule to apply either as a whole, or on an employer-by-employer basis, to a multiemployer or a multiple employer plan.

Participant loan repayments. Consistent with the proposed regulations, the final regulations provide that amounts withheld from a participant’s wages to repay participant loans become plan assets, and therefore are subject to the deposit timing rules, in the same manner as the timing rules apply to withheld deferrals. The final regulations, without change to the proposed regulations, apply the plan asset rules to loan payments (regardless of the plan size), and extend the 7-day safe harbor to small plans receiving such payments.

Final regulations effective immediately. As provided in the proposed regulations, the final regulations are effective immediately upon publication in the Federal Register. The DOL declined to extend the effective date, opining that the immediate effective date will encourage employers to review their systems, and if necessary, to shorten the deposit period in order to take advantage of the safe harbor.

Comment: The issuance of the final regulations is not surprising, and for the time being, merely “closes the loop" on the DOL’s consideration of the plan asset regulations. Since the February 2008 issuance of the proposed regulations, on which employers were permitted to rely immediately, many employers have embraced the 7-day safe harbor as a way of assuring compliance with the plan asset rules. Adoption of the final regulations in essentially unchanged form will facilitate seamless compliance with the plan asset rules for those employers who have applied the rule. Extension of the plan asset rules (and the 7-day safe harbor) to withheld loan payments is a logical extension of the plan asset rules, and is consistent with the DOL’s prior analysis of loan payments.

Enforcement of the plan asset rules continues to be a DOL priority. According to the DOL, nearly 90% of the applications under the DOL’s VFC program have involved delinquent participant contributions. This fact suggests that employers continue to struggle with the deferral deposit obligation.

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