It’s been nearly 20 years since the Department of Labor (DOL) first set out to define when employee contributions become benefit plan assets. This first regulation included a general rule and an outside limit. The general rule set forth that employee contributions become plan assets as of the earliest date it they can reasonably be segregated from the employer’s general assets. The outside limit was 90 days from the date on which the contribution is received or withheld by the employer.

In 1996, the DOL amended the regulation for certain retirement plans and modified the outside limit from 90 days to the 15th business day of the month following the month in which the contribution is received or withheld by the employer. The general rule was unaffected. This meant that an employer was still responsible for defining the reasonableness of its own policy to remit employee contributions.

Identifying the earliest date that is reasonable for the employer to segregate employee contributions is ultimately a facts-and-circumstances determination. The vagueness of the regulatory language left many employers and their advisers uncertain. The standard that might be considered timely for a large national corporation with several payroll centers or divisions will likely not translate to an employer with relatively fewer employees paid from a single location. The DOL has suggested that the employer’s payroll frequency and the time it takes the employer to remit payroll taxes should be viewed as relevant factors.

In a proposed amendment published on February 29, 2008, the DOL acknowledged that the interest of employers and employees would be better served if the regulation was amended to provide a higher degree of compliance certainty. Therefore, the DOL is proposing a safe harbor for small retirement plans (plans with fewer than 100 participants) under which employee contributions will be considered to have been deposited in a timely fashion if the contributions are deposited within 7 business days following the date on which the contribution is received or withheld by the employer. As under the current regulation, the employee contributions are considered “deposited” when they are placed in an account of the plan, without regard to whether the contributions have been allocated to specific employees or investments of such employees. The types of contributions impacted by the proposed rule include employee after-tax contributions, employee salary deferrals, and loan repayments.

The DOL intends on making the new safe harbor effective on the date the final regulation is published in the Federal Register. Compliance with the safe harbor rule is not mandatory. Therefore, small employers may still be in compliance with the deposit requirements if they exceed the 7 business day safe harbor but continue to meet the general standard for reasonableness. The DOL has also indicated that it intends to include a safe harbor for large retirement plans if there is sufficient information and data to evaluate current practices and the DOL concludes that a safe harbor will be beneficial.