DOL Finalizes Safe Harbor Rule for Timing of 401(K) Contributions by Small Employers

The U.S. Department of Labor (DOL) previously published final regulations regarding when 401(k) contributions must be sent to the plan’s funding vehicle. Under these regulations, the contributions must be sent as soon as they can reasonably be segregated from the employer’s general assets. The DOL took the position that this should occur within a few days after the amounts were withheld from employees’ paychecks. However, there was no “bright line” rule regarding when the contributions were required to be sent.

The DOL published final regulations earlier this year that establish a “safe harbor” time period for small employers to make 401(k) contributions. These regulations state that a contribution would be considered to satisfy the DOL requirements if it was sent to the plan’s funding vehicle within seven business days after the date it was withheld from employees’ paychecks.

The new DOL regulations only apply to employers with fewer than 100 plan participants at the beginning of a plan year. There is no “safe harbor” rule for larger employers. However, it is generally understood that a larger employer has a shorter time period to send 401(k) contributions to the funding vehicle. We are also aware that the DOL has taken the position during an audit that 401(k) contributions should have been sent to the funding vehicle on the same day the amounts were deducted from employees’ paychecks. Although this strict standard may not apply to all larger employers, a larger employer should review its procedures to ensure that contributions are sent at the earliest reasonable time.

This article discusses 401(k) contributions.  However, the DOL rules also apply to 403(b) contributions made to a plan sponsored by a tax-exempt organization (other than a governmental entity). They also apply to plan loan repayments that are made by salary reduction.