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Depositing Employee Contributions – Final Regulations Adopt Safe Harbor

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February 22, 2010

The Employee Benefits Security Administration (EBSA) has adopted the final version of the regulations originally proposed in 2008. The final regulations adopt a safe harbor for considering the deposit of participants’ contributions as made timely. The safe harbor only applies to small pension and welfare plans with fewer than 100 participants.

The safe harbor provides that participant contributions to a small pension or welfare benefit plan will be deemed made timely, if deposited no later than the 7th business day following the date on which they are received by the employer, or would otherwise have been payable to the participant in cash. In other words, the safe harbor applies to amounts paid to the plan by a participant or beneficiary, or withheld by an employer from a participant's wages for purposes of repaying a participant's loan, which are deposited to the plan within 7 business days (even if not individually allocated to each participant within that time).

Further, EBSA clarified two issues raised by commentators to the proposed regulations. First, that any losses and interest applicable to contributions which were deposited late, must be calculated from the actual date on which the contributions or payments could reasonably have been segregated from the employer's general assets, and not the end of the safe harbor period. Second, that the safe harbor is not the only method for employers to meet their obligation to timely deposit participant contributions or loan repayments. The general rule that participants' contributions must be deposited on the earliest date that they can reasonably be segregated from the employer's general assets, but in no event later than the maximum 15th day deadline, continues to apply. Thus, contributions deposited outside the safe harbor period, (i.e., between the 7th and the 15th day) are exposed to being challenged.

In short, participants' contributions which are deposited within seven business days will be protected by the safe harbor and not subject to scrutiny. Employers generally welcome this safe harbor as they otherwise have the burden of proving that a deposit was made as soon as reasonably possible, and no later than the 15th day, whenever the timeliness of a deposit is challenged.  

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