Safe Harbor for 401(k) Plan Deposits
The pension law prohibits an employer from using retirement plan assets for the employer’s own benefit. The penalties for violating these rules are substantial. However, plan sponsors and their advisors have long argued that the regulations governing the timely deposit of retirement plan participant contributions and loan repayments are so confusing that plan sponsors could inadvertently run afoul of the regulations governing employer use of plan assets.
The good news is that the U.S. Department of Labor listened to the concerns of employers and has recently issued final “safe harbor” deposit deadline regulations for small plans. The new safe harbor rules apply to plans with fewer than 100 participants at the beginning of the plan year.
What the Final Regulations Say
The final regulations state that participant contributions and loan repayments will be treated as being made in a timely manner if they are deposited with the plan no later than the 7th business day following the date they are received by the employer. In the case of an amount withheld from wages, it’s the 7th business day following the date the amount would have been payable to the participant in cash. To be deposited, amounts need only be placed in an account of the plan. Allocation among the participants on that date is not necessary.
The safe harbor rules are not the only way employers can meet their obligation to deposit participant contributions in a timely manner. Employers can satisfy the general rule that requires employers to transfer participant contributions into retirement plans by the earliest date on which these contributions can reasonably be segregated from the employer’s general assets. However, since determining the “earliest date” is not always a simple matter, small plan sponsors that can take advantage of the seven-day safe harbor may prefer to do so.
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Health Care Commentaries is
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technical information is presented in generalized fashion, no final
conclusion on these topics should be made without further review. For
additional information on the issues discussed, please contact a member
of our Health Care Team. This
document is not intended or written to be used, and cannot be used, for
the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
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