DOL Issues Final Safe Harbor Rules for Employee Benefit Plan Contributions
The U.S. Department of Labor (DOL) has issued its final safe harbor regulations establishing a time frame within which participant contributions and loan payments will be considered timely deposited to an employee benefit plan.
Under the new regulation, “small” plans (those with less than 100 participants) have the safe harbor option of depositing participant contributions withheld from paychecks within seven business days. These funds do not have to be allocated to participant accounts.
Plans with 100 participants or more, beware!
This safe-harbor rule does not apply to large plans (those with more than 100 participants). Although the DOL is considering whether a regulatory safe-harbor is needed for larger plans, we expect that the DOL’s future position will require that all participant withholdings be deposited in less than seven business days to be considered timely.
Under the current rules—which apply to all plans—plan sponsors are required to deposit employee contributions to a plan as of the earliest date the contributions can be reasonably segregated from the sponsor’s general assets, but in no event later than the 15th business day of the month following the date on which the employer received the contributions. Small plans can take advantage of the safe harbor rules or can continue to follow existing guidelines.
All plans must meet the “earliest date” requirement
Many plan sponsors have routinely ignored the “earliest date” requirement, instead delaying the deposit of participant funds into the trust as late as the middle of the following month. In DOL audits, the “earliest date” requirement has been defined to be the shortest period of time the plan sponsor has taken to deposit funds in the past. Any deposit made after this shortest period of time may be deemed untimely. Failure to comply with this rule can result in a “prohibited transaction” under DOL regulations, subjecting the plan sponsor to an excise tax and correction under the DOL’s procedures.
Please contact us if you would like assistance establishing controls to comply with current DOL guidance.