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Timely Deposits of Employee Contributions to Small Pension and Welfare Plans

On January 13, 2010, the Department of Labor released a final rule that establishes a safe harbor period of seven business days from the receipt of employee contributions for employers to forward the contributions to small pension and welfare plans.

Under previous rules and regulations, employee contributions to pension and welfare plans were considered “plan assets” on the earliest date that the contributions could be reasonably segregated from the employer’s general assets. Failure to actually deposit contributions or withholdings to the plan resulted in ERISA and Internal Revenue Code violations under the prohibited transactions provisions. Many employers and advisers found over the years that the regulation is unclear and that they are uncertain as to how soon contributions must be forwarded to the plan in order to comply with ERISA and the IRC and avoid the requirements and tax implications associated with holding plan assets. Also, the DOL has spent significant resources investigating and enforcing cases involving delinquent employee contributions.

Under the new rule, employers with plans with fewer than 100 participants are considered to have made a timely deposit to their plan under the regulation if participant contributions are deposited within seven business days. The rule went into effect January 14, 2010 and the Department of Labor anticipates that participant accounts could grow significantly as a result of these new rules. The growth will likely be a result of contributions being forwarded to plan accounts sooner and reduction of taxes and penalties associated with prohibited transactions and delayed contributions.

For more information regarding the new safe harbor rule or other pension and benefits questions, please contact the benefits attorneys at Bingham McHale.

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