This is the sixth in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Monday, Bob Toth , our guest blogger, discussed 403(b) Service Agreements: “Harmonizing” the 403(b) Plan.
Now it’s my turn, and today’s post is about the Timing of Depositing Employee Contributions.
So let’s start with the rules before the final regulations. Hard to imagine in today’s environment, but the employer actually had until the end of the year as permitted by an old 1967 IRS Ruling, Revenue Ruling 67-69. So to take the extreme example, if the employee had his or her salary reduced in January, the employer did not have to forward the contribution to the 403(b) provider until December.
Now for the first time, non-ERISA 403(b) plans will have to transfer employee money to the 403(b) plan within a strict time frame. In essence, the ERISA timing rules are effectively extended to cover all 403(b) plans. The final regulations require that plan sponsors transmit all contributions to 403(b) plans to the vendor as soon as is administratively feasible. The IRS considers that to be within 15 business days following end of month in which contributions are withheld from pay.
For plans subject to ERISA, there will not be any changes. The Department of Labor which oversees this matter requires that for “large plans” (those with 100 or more participants) employee contributions must be transmitted to the investment provider by the earlier of
- 15 business days following the month in which the amount was withheld from the employee’s pay, or
- The earliest date on which it is administratively feasible to remit the contributions.
But what about “small plans” (those with less than 100 participants. 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. Sounds reasonable doesn’t it? Well, maybe not according to Bob Toth and his Partner Nick Curabba and in their blog post, A Potentially Dangerous ‘Safe Harbor’. 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.
And what happens if these time frames are not met? That’s a topic for another time.
That’s it for now. The afore-mentioned Bob Toth will be back next Friday to discuss Church 403(b)(9) Retirement Income Accounts.