On January 14, 2010, the U.S. Department of Labor (“DOL”) published final regulations establishing a “safe harbor” period for timely contributing participant contributions to pension and welfare benefit plans with fewer than 100 participants. These regulations are effective as of January 14, 2010.

Under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code, an employer is generally prohibited from using plan assets for its own benefit, e.g. as a loan. For over 20 years, the DOL has endeavored to define when amounts paid by, or withheld from the wages of, a plan participant or beneficiary become plan assets. If an employer improperly uses plan assets, for example by delaying the deposit of salary deferrals to a 401(k) plan, the employer will have breached its fiduciary duty and engaged in a prohibited transaction generally subject to excise taxes.

The long-standing standard has been that such amounts become plan assets on the earliest date on which they can reasonably be segregated from the employer's general assets, with an outside limit depending upon the type of plan, i.e. pension (15 th business day of the following month), SIMPLE with SIMPLE IRA (30 th calendar day of the following month) or welfare (90 th day following the date the contributions were received). Because it was not clear what the earliest reasonable day could be, the DOL proposed a “safe harbor” in 2008 for plans with fewer than 100 participants. These final regulations adopt the 2008 proposed “safe harbor” with few, minor clarifying changes.

According to the final regulations, if a plan has fewer than 100 participants at the beginning of the plan year, any amount deposited with the plan no later than the 7 th business day following the day on which the contributions have been received by the employer shall be deemed to be contributed or repaid to the plan (in the case of a participant loan) on the earliest date on which the amount could reasonably be segregated from the employer's general assets. However, the DOL acknowledged that the “safe harbor” is not the exclusive means for meeting the earliest date requirement. The DOL expressly declined to extend the “safe harbor” to plans with more than 100 participants, because it did not have sufficient information to determine if the safe harbor is appropriate for such plans. The DOL also reaffirmed that cafeteria plans, which are generally not subject to ERISA's trust requirement, are not affected by this regulation.

Employers should review their payroll and plan administrative practices to ensure that contributions received by, or withheld from the wages of, plan participants and beneficiaries are being timely deposited. Additionally, if an employer has been delinquent in depositing any participant contributions, it should undertake a full correction for the late deposits.

If you have any questions regarding the above or need assistance with the review of any payroll or plan administrative practice, or with the correction of any delinquent contributions, please feel free to contact Liza Hecht at lhecht@nfclegal.com or the Nukk-Freeman & Cerra attorney with whom you normally work.

Any tax advice included in this written or electronic communication was not intended or written to be used and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.