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DOL Proposes Seven-Day Safe Harbor for Employee Contributions to Benefit Plans

    Client Alerts
  • March 07, 2008

ERISA rules generally require employers to deposit employee contributions to retirement and welfare benefit plans on the earliest date on which the contributions can reasonably be segregated from the employer’s general assets (i.e., as soon as reasonably possible after a payroll date). For retirement plans, such as 401(k) plans, deposit must be made not later than the 15th business day of the month following the month in which contributions are withheld from employee wages, but this rule is not a safe harbor. Failure to comply with these rules generally results in a violation of ERISA’s prohibited transaction rules.

The vagueness of the “reasonably segregated” language left employers and their advisers uncertain as to how quickly contributions actually should be deposited. After years of urging from the benefits community, the DOL proposed a regulation that provides for a safe harbor for benefit plans with fewer than 100 participants (“small plans”). Under the safe harbor, employers will be considered to comply with ERISA rules if they deposit employee contributions by the seventh business day following the date on which contributions are withheld from wages. The proposal will not be effective until issuance of the final regulation, and it may undergo some changes based on comments from the public. In the meantime, the DOL will not assert an ERISA violation for small plans that comply with the seven-business day safe harbor deposit rule. The DOL also clarified that the deposit timing rules apply not only to contributions but also to retirement plan loan repayments in the proposed regulations.

The rule should be a welcome development for small plan sponsors who can easily satisfy the seven-business day safe harbor and may already be doing so. However, it should also be noted that the safe harbor is merely that – a safe harbor. Certain employers may be able to justify a longer period of time for depositing contributions. The proposed regulations would not prohibit this, but they also raise concerns that it could be more difficult to justify a longer period of time for deposits given the relatively short safe harbor period.

The DOL also is considering including a safe harbor for large plans in the final regulation. It is likely that a large plan safe harbor would require deposits in a shorter period of time