DOL Issues Final Safe Harbor Rules for Small Plan Contributions
The U.S. Department of Labor (DOL) has issued final safe harbor regulations for the remittance of employee contributions to small retirement or welfare plans (those with fewer than 100 participants). Employers of these plans now have the safe harbor option of depositing participant contributions (e.g., to 401(k) or 403(b) plans) within seven business days after the money is received or withheld from payroll. This seven day rule was originally proposed on February 29, 2008. As of January 14, 2010, the ruling is final.
“You don’t have to use the safe harbor rule; you can follow the existing general rule by making deposits ‘as soon as reasonably possible,’ but be prepared to justify your practices,” says Mary Spanier, a benefit services manager with LarsonAllen. “Safe harbor could save you documentation time, and your employees benefit from getting their money into investment vehicles sooner.”
Employer options
If employers choose not go with the safe harbor, they can continue to follow the existing general rule, which requires that participant contributions (including loan repayments) be remitted to the plan as soon as they can “reasonably be segregated from the employer’s general assets,” according to Section 2510.3-102 in Title I of the
Employee Retirement Income Security Act of 1974 (ERISA). However, this date cannot exceed the 15th business day of the month following the date on which the employer received the contributions or withheld the contributions from the employee’s compensation. Failure to comply with the general rule could result in a “prohibited transaction” and subject the employer to excise taxes.
Benefits of the safe harbor
By using safe harbor and depositing participant contributions within seven business days, employers can alleviate the burden and cost of monitoring their remittances on an ongoing basis and reduce the risk of their remittance practices potentially being challenged by the DOL as well as their employees. The safe harbor regulations will also benefit the employees in the form of increased investment earnings since their contributions will usually be deposited to their accounts sooner than in the past.
Safe harbor not available for large plans
These final safe harbor regulations were not expanded to cover large plans (those with more than 100 participants at the beginning of the plan year). The DOL explained they did not have sufficient data to adequately evaluate the impact of extending the safe harbor to large plans at this time. However, employers of large plans should continue to evaluate their contribution remittance policies to ensure they are meeting the requirements of the general rule and if possible, shorten that period of time between receiving and/or withholding participant contributions and depositing them into the plan.
How can we help
For more information on the final safe harbor regulations or your current remittance practices, contact Mary Spanier at
mspanier@larsonallen.com or 320-203-5612 or a
benefit services principal in your region.
Helpful DOL resources