Contribution Timing and Collection Responsibility, a Q&A
By James Farley, Director Retirement Research, Lord Abbett & Co. To contact Mr Farley, email firstname.lastname@example.org.
When must 401k deposits be made? Who's responsible when contributions are not made? The Department of Labor is flexing its regulatory and advisory muscle to clarify any misunderstanding that may exist and at the same time is asking the benefit's community to suggest alternative solutions.
1. What are the current Department of Labor (DOL) rules regarding an employer depositing employee 401k deferrals?
The DOL has a general rule in Regulation 2510.-103 that states "amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer's general assets."
2. I heard there is some sort of 15-day rule. What's this about?
The DOL outlined an outer limit in its 1996 amendments to the general rule discussed in Question and Answer 1 as "the 15th business day of the month following the month in which participant contributions are received by the employer," but did not declare that a safe harbor date to deposit the funds.
3. What is the DOL trying to accomplish now?
According to the preamble to recently promulgated proposed amendments, "many employers, as well as their advisers, continue to be uncertain as to how soon they must forward these contributions to the plan in order to avoid the requirements associated with holding plan assets."
The DOL sites in a footnote that "since the inception of the Voluntary Fiduciary Correction Program1 in 2000, close to 90 percent of the applications have involved delinquent participant contribution violations."
4. What will be the rule going forward?
Under the proposed amendment (not the rule yet), a safe harbor has been created regarding participant contributions to a retirement plan with fewer than 100 participants (welfare plans also). (This safe harbor is not to be confused with a Safe Harbor 401k plan, which excuses plan sponsors from testing employee contributions and employer-matching contributions if stringent requirements are met.)
Contributions will be considered to be made according to the general rule described in Question and Answer 1 if "contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer…or the 7th business day following the day on which such amount would otherwise would have been paid to the participant in cash."
5. You said it is "not the rule yet." What does that mean?
This guidance has been issued as a proposed amendment, and, as such, the public may comment on or before April 29, 2008. In the preamble, DOL states that the amendment to the regulation will not be effective until published in the Federal Register in final form. "Before the effective date of the final safe harbor regulation, the Department [of Labor] will not assert a violation of Employee Retirement Income Security Act [ERISA] based on the general rule..."
6. Was there anything else in this proposed amendment besides the timing of employee contributions?
Yes. The DOL wants to extend the application of the regulation "to amounts paid by a participant or beneficiary or withheld by an employer from a participant's wages for purposes of repaying a loan (regardless of plan size)."
7. What about plans that have more than 100 participants-does this safe harbor apply to them?
It appears there will be a "wait and see" posture regarding this question. The DOL addresses it in the preamble by saying, "…it is unclear if these plans have the same need for a safe harbor period within which participant contributions should be required to be deposited with a plan. The Department intends, as part of its final regulation, to include a safe harbor for employers with large plans if commentators provide information and data sufficient to evaluate the current contribution practices of such employers and conclude that it is a net benefit to such employers and participants to have a safe harbor."
8. Is there an economic benefit to this proposed seven business-day safe harbor?
According to DOL analysis cited in the preamble, "...accelerated remittances could result in $34.5 million in additional income to be credited annually to participant accounts under the plans if no employers choose to delay remittances in response to the safe harbor and $15 million annually even if all eligible employers were to delay remittances to the full duration of the safe harbor."
To obtain these figures, the DOL used an annual return of 8.3 percent which they note is "an estimate of the long-term rate of return on defined contribution plan assets implicit in the flow of funds account of the Federal Reserve [Board]."
9. What's happening with collection responsibility?
The DOL recently issued a Field Assistance Bulletin (2008-1) ("FAB"). In this FAB, the DOL notes that its field investigators discovered that many plan trustees, particularly financial institutions hired by a plan fiduciary, have agreements that relieve them of any responsibility to monitor and collect delinquent contributions.
In other words, the financial institution will properly handle the contributions it receives from a plan sponsor, but does not assume the responsibility to "chase down" contributions that appear to be late or missing.
10. When are contributions late?
The FAB points out, and the questions and answers above make clear, that contributions are delinquent when they are not contributed following the earliest date that contributions can be reasonably segregated from the employer's assets. (The seven business-day safe harbor is not yet effective.)
11. What does it mean when contributions are late?
As stated in the FAB, "[W]hen an employer fails to make a required contribution to a plan in accordance with the plan documents, the plan has a claim against the employer for the employer for the contribution, and that claim is asset of the plan."
The trustees of the plan must enforce valid claims, as the FAB cites, because responsibility under common law and ERISA Section 404(a) require plan fiduciaries to act solely in the interest of plan participants and beneficiaries.
The most common acceptable correction to late contributions is to have the responsible party (generally plan sponsor) make up lost earnings when remitting. Use of plan assets for a more extended period could potentially subject the responsible fiduciary to criminal charges in extreme cases.
12. What must a plan sponsor do to fulfill its responsibility?
Essentially a plan sponsor must take action. The FAB points out that "authority over a plan's assets subject to the trust requirement of Section 403(a) of ERISA…must be assigned to i) a plan trustee with discretionary authority over the assets, ii) a directed trustee subject to the proper and lawful directions of a named trustee, or iii) an investment manager." The trustee, especially in small plans, is often the business owner.
13. What if the fiduciary has not assigned responsibility?
The FAB answers this directly: "[I]f no trustee or investment manager has the responsibility, the fiduciary with authority to hire the trustees may liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility."
14. What about plans such as a SIMPLE IRA or SEP IRA that have no trustee?
The FAB answers this question via a footnote that states, "In the case of SIMPLE IRAs and SEPs, the plan sponsor generally will be a named fiduciary because the documents establishing the plan provide the employer with the authority with respect to management and administration of the plan…"
15. What happens when one trustee, who has no direct responsibility for collecting contributions, knows that contributions are delinquent?
ERISA has a section, 405(a) (3), that makes one trustee (fiduciary) liable for the breach (failure to perform assigned duties) of another trustee (fiduciary) if the trustee has knowledge of the breach of another unless the trustee makes a reasonable effort to remedy the situation.
The FAB points out various actions that could be taken including contacting the DOL, notifying other fiduciaries that contributions are delinquent or seeking a court order. It then says, "The documents and instruments governing a plan cannot serve to absolve a co-fiduciary from liability for failing to take steps to remedy a known breach of another fiduciary."
16. So what's the bottom line?
The DOL has been criticized by the Government Accountability Office (in a November 2006 report) and by Congress (public hearings all throughout 2007) for not being a strong plan participant advocate, particularly in the area of employee savings (401k plans). These two initiatives, among other disclosure projects, have the DOL asserting itself as being very serious about participant retirement income security. They are utilizing already existing rules and regulations to demonstrate their past and ongoing role, and are likely to continue responding to the challenges before them.
1. The Voluntary Fiduciary Correction Program encourages voluntary (timely) corrections of possible fiduciary breaches by creating a dialogue between the fiduciary and the DOL to avoid potential ERISA civil actions and penalties initiated by the DOL.
About Mr. Farley
Jim Farley is Director of Lord Abbett's Retirement Research Center.
He is responsible for researching and analyzing trends related to retirement plans, including legislative developments, market regulation, and market behavior. In this role, he supports the firm's strategies regarding tax advantaged savings and legacy planning.
Mr. Farley, who has 30 years of experience in pensions and financial services, joined Lord Abbett in 1995 as Associate Director in the Retirement Planning Department. From 1998 through 2001, he covered Eastern Ohio and Western Pennsylvania, with a focus on retirement plan sales. In early 2005, he was named Director of Lord Abbett's Retirement Research Center.
He is recognized by the American Society of Pension Actuaries and Professionals as a Certified Pension Consultant (CPC) and a Qualified Plan Administrator (QPA).
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