New Deadline to Deposit 401(k) Contributions

In an effort to stop companies' misuse of their employees' 401(k) contributions, the Department of Labor (the "DOL") issued a rule requiring companies to put into trust employee contributions no later than the 15th business day of the month immediately following the month in which the contributions are received or would otherwise be available to the employees in cash. While the new outer limit dramatically shortens the old 90-day limit, it does not modify the general rule that employee contributions must be put into trust as soon as they can reasonably be segregated from the employer's assets.

Welfare Plans

The rule does not modify the old 90-day outer limit that applies to employee contributions to welfare plans (e.g., deductions from wages for contributions to an insurance policy or for medical services). However, it does not affect the exception from ERISA's trust and reporting rules that is available to certain welfare plans (e.g., cafeteria plans) under T.R. 92-01.

DOL Abandons Rule in Proposed Regulations

The DOL's proposed regulations would have keyed the maximum period to the same number of days as the period that an employer has to deposit withheld income and employment taxes under IRS rules. Due to many objections, the DOL abandoned that rule.

Service providers asserted that it would not be feasible for them to administer a rule that had a different maximum time period based on the size of the employer. Moreover, the consensus was that there are significant differences between processing of withheld incomes and employment taxes and processing contributions to pension plans. The deposit of contributions to pension plans requires a significant amount of work for both small and large employers (e.g., accounting and reconciling for investment changes and allocations).

Limit is Set According to "Business Days"

The DOL cast the new outer limit in terms of business days rather than calendar days. The DOL recognized the fact that Saturdays, Sundays and national legal holidays reduce the total number of days in which employers can make arrangements to put their employees' contributions into trust.

Permanent Extension Procedure

An interesting feature of the rule is that it provides a procedure for employers to extend the maximum period for depositing a month's worth of contributions. Under the procedure, an employer can obtain an additional 10 business days. The procedure is available to pension plans only. The procedure requires the following three steps:

1. The employer must obtain--prior to the beginning of the extension period--a performance bond or irrevocable letter of credit in favor of the plan guaranteed by a bank or similar institution that is supervised by the Federal government or a State government. The amount of the bond or letter of credit must not be less than the amount of the participant contributions received or withheld by the employer during the previous month. The bond or letter of credit must remain in effect for at least three months following the month in which the extension period expires.
2. The employer must provide a written notice to plan participants within 5 business days after the end of the extension period. The notice must:
3. • State that the employer has elected to take advantage of the extension period for the month;
   • Explain why the employer could not meet the deadline;
   • State that the contributions have, in fact, been deposited; and
   • State the date on which the contributions were actually deposited.
4. Within 5 business days after the end of the extension period, the employer must provide to the DOL:
5. • A copy of the notice given to participants described in (2), above; and
   • A certification that the notice was distributed to participants and that the bond or letter of credit was obtained.
   • These materials should be mailed and addressed to: Participant Contribution Regulation Extension Notification, Office of Enforcement, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Ave., N.W., Washington, D.C. 20210.

An employer can use the permanent extension procedure as many times as it wants. But if it uses the procedures more than twice in a plan year, the employer must pay to the plan an amount representing interest on the participant contributions that were subject to the extensions. The interest amount is equal to the greater of:

1. The amount that the contributions would have earned from the date of withholding or receipt until the date of transmission to the trust if the contributions had been invested during such period in the investment alternative under the plan which had the highest rate of return; and
2. The amount that the contributions would have earned from the date of withholding or receipt until the date of transmission to the trust under the underpayment rate defined in section 6621(a)(3) of the Internal Revenue Code.

Effective Date of Rule

All plans must begin to comply on February 3, 1997. An exception exists for collectively bargained plans and plans that complete a temporary postponement procedure by February 3, 1997. Collectively bargained plans have to comply by the first day of the plan year that begins after the expiration of the last to expire of any applicable bargaining agreement in effect on August 7, 1996. During this grace period, collectively bargained plans must comply with the 90-day outer limit rule applicable to welfare plans.

Temporary Postponement of Effective Date

A plan that has difficulty complying by February 3, 1997 may apply for a temporary extension. By following the temporary postponement procedures, an employer can obtain a 90-day extension to comply with the rule (i.e., until May 4, 1997). To obtain a temporary postponement, an employer must take the following steps:

1. The employer must provide a written notice to all participants prior to February 3, 1997 stating:
2. • That the employer elected to postpone the applicability of the rule;
   • The date on which the postponement will expire; and
   • The particular reasons why the employer cannot comply with the rule.
3. The employer must obtain a performance bond or irrevocable letter or credit in favor of the plan and in an amount of not less than the total amount of participant contributions received or withheld by the employer in the previous three months. The bond or letter of credit must be guaranteed by a bank or similar institution supervised by the Federal government or a state government and must remain in effect for three months after the month in which the postponement expires.
4. The employer must provide to the DOL:
5. • A copy of the notice in (1) above; and
   • A certification that such notice was provided to the participants and that the bond or letter of credit was obtained.
6. Within 10 days after transmission of the affected participant contributions, the employer must provide to participants for each month during which the postponement is in effect a written notice indicating the date on which the contributions were transmitted to the plan.

During the postponement period under this procedure, the plan must comply with the 90-day outer limit applicable to welfare plans.