We had been waiting for this for some time: a safe harbor rule for the time by which retirement plan sponsors must deposit employee 401(k) contributions. On February 28, 2008, the Department of Labor (DOL) announced that  employee contributions to a "small"retirement plan (one with less that 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited with the plan within 7 business days of receipt or withholding. The DOL said in its announcement that the department would not accuse a plan sponsor of an ERISA violation while the proposal is being finalized if 401(k) contributions are deposited within the 7-day time limit.

In addition, the DOL requested information and data regarding a possible safe harbor for plans with 100 or more participants to enable it to evaluate the current contribution practices of these large employers.

This "7-day safe harbor rule" will add clarity to "small plan" sponsors. Prior to the proposed regulation, many plan sponsors relied on the so-called "15-day rule". The rule required that employee contributions be deposited in the 401(k) plan on the earliest date that they can reasonably be segregated from the employer’s general assets, but not later than the 15th business day of the month following withholding or receipt by employer.

Except there never actually was such rule. The DOL had taken the view in its audits that the deadline under the timely standard almost always occurs prior to the 15th day of the month following withholding. The deadline in almost every case had turned out to no more than one to two weeks following withholding. In many cases, the DOL interpreted the deadline to be no more than a few days following withholding depending on the employer’s individual facts and circumstances, i.e., the manner in which payroll taxes are withheld.

Sounds reasonable doesn’t it? Well, maybe not according to Nick Curabba and Bob Toth in their blog post, A Potentially Dangerous ‘Safe Harbor’ on Baker & Daniels’ new blog, Benefits Biz Blog. They caution that:

As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice. We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.

Mr. Curabba and Mr. Toth also cautioned about the potential for trouble in light of the DOL’s recent Field Assistance Bulletin 2008-01 that make Trustees responsible for the collection of employee contributions, a topic about which I wrote in my recent post, In the shadow of LaRue, Department of Labor issues a directive on fiduciary responsibility for collection of delinquent contributions.  

Click here to download (PDF) a copy of the proposed regulation.