- Collecting 401(k) Contributions
- June 15, 2008 | Author: Angela M. Bohmann
- Law Firm: Leonard, Street and Deinard, [incorporation phrase format]Professional Association - Minneapolis Office
Employers who sponsor 401(k) plans are undoubtedly aware that they are required to deposit employee contributions promptly after the contributions have been withheld. Employers are liable for the missed contributions and earnings if the deposits are not timely made, and may also be liable for excise taxes. Under U.S. Department of Labor regulations, deposits must be made as soon as the amounts can reasonably be segregated from the employer’s general assets, but no later than the 15th business day of the month following the month in which the amounts were withheld.
Some employers have viewed this outside limit as a safe harbor. The Department of Labor has made it very clear that the deadline is not a safe harbor and has also suggested that very few employers should have to take that long to deposit 401(k) deferrals. The Department of Labor has now issued a proposed regulation containing a safe harbor time period of seven business days for small plans (fewer than 100 participants) to deposit employee deferrals and loan repayments. Although the regulation is not yet final, the Department will honor the seven-day safe harbor in its enforcement proceedings. The Department has requested comments on an appropriate safe harbor for larger plans, which the Department has suggested should perhaps be a shorter time period than the safe harbor for smaller plans.
In addition to publishing the proposed regulation, the Department of Labor also released Field Assistance Bulletin Number 2008 01, discussing fiduciary responsibility for collecting delinquent contributions. The Department of Labor has been frustrated in its enforcement actions with fiduciaries who claim that it is not their responsibility to collect delinquent plan contributions, such as 401(k) contributions that are not timely deposited. Trustees who are “directed” trustees, i.e., trustees who take all their direction from the employer or some other fiduciary, may claim that it is not their responsibility to collect delinquent contributions and employers have not appointed anyone else to collect the contributions.
In the Field Assistance Bulletin, the Department of Labor has explicitly stated that a trustee or other fiduciary must be assigned the responsibility to collect delinquent contributions. That responsibility should be established in writing. If no trustee is named to collect delinquent contributions, the person or entity responsible for appointing the trustee, typically the plan sponsor, will be responsible for losses associated with a failure to collect delinquent contributions. Under general ERISA requirements, the plan sponsor is responsible if plan contributions are not timely deposited. Rather than increasing plan sponsor liability, the Field Assistance Bulletin is more likely to cause trustees to insist that some other fiduciary be explicitly named to collect plan contributions. With the new seven-day contribution safe harbor for small plans discussed earlier, employers may find their plan trustees monitoring contributions and contacting employers if contributions seem late by more than seven business days.