The Department of Labor regulations states that employee contributions should be remitted to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets, but no later than the 15th business day after the end of the month from the date on which such amounts are received by the employer or withheld from wages.
In order to be in compliance with the regulations it is important for the plan sponsor to ensure that the contributions are remitted to the plan as soon as possible and that they have a consistent remittance schedule. So, for example, if the plan sponsor demonstrates that they can get the contribution to the plan in 3 business days, the DOL could consider a contribution made 6 business days after the payroll date to be a late contribution. Although they have been asked to do so, the DOL has refused to provide a “safe-harbor” time period for the plans to be able to follow and avoid late contribution penalties.
If the plan sponsor does not comply with the regulations, this could be considered a breach of fiduciary duty and a prohibited transaction. If there is a late contribution plan sponsor would need to reimburse all participants for the lost earnings due to the delay in the transmission of the funds in order to correct the error. Plan sponsors can do this correction in the Voluntary Fiduciary Correction Program (VFCP) which encourages employers to comply with ERISA by voluntarily self-correcting certain violations.
Also, it is important to note that the above information is for plans that are considered large (greater than 100 participants). For plans with fewer than 100 participants (“small plans”), the DOL has issued a “safe harbor” time period that they can use to ensure that their contributions are timely. For these small plans contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered to be in compliance with the law. This is just a “safe-harbor” rule. Technically small plans would not be subject to penalties if they contribute later than the 7th business day time period and they can demonstrate that it is the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.
Kim Lubbers, CPA