401(k) contribution remittance: What’s an employer to do?

Over the past several years the U.S. Department of Labor’s Employee Benefits Security Administration has identified delinquent employee contributions as an ongoing national policy priority. With assets in 401(k)-type plans reaching $2.8 trillion on behalf of more than 50 million active participants, protecting employee contributions has become more important for the government, particularly since employees have been forced to take more responsibility for their retirement savings.

One particular regulation that has been a source of confusion for employers — and in some cases, has landed them in hot water with the DOL — is the timely deposit of employee contributions into 401(k) plans. The regulation states employers should remit employee contributions on the earliest date they can reasonably be segregated from the employer’s general assets, but no later than the 15^th business day of the following month. While this has come to be known as the “15 day rule,” the reality is that deposits — for small and large plans — are expected to be made much sooner.

In fact, the DOL issued an amendment to the regulation in January 2010 to create a safe harbor rule under which small plans — classified as plans with fewer than 100 participants — would be considered in compliance if employee contributions were deposited within seven business days. The DOL has not issued a similar safe harbor rule for large plans. However, most in the industry believe larger plans will be held to an equal, if not higher, standard, meaning deposits should be made within two to three business days.

If you are scratching your head on this one, you’re not alone. When the regulation was implemented, there were no automated payroll processing systems that allowed for contributions to be easily segregated from general assets. With advancements in technology, this process is essentially instantaneous. And because of it, the DOL has changed its expectations on remittance, despite not rewriting the rule.

So what’s an employer to do? The best advice is to be consistent. If an employer demonstrates the ability to remit contributions within one business day, the employer better make sure all remittances happen within one business day each pay period  — no exceptions! The second best advice, don’t rely on safe harbor rules to protect you.

If you find your plan is not in compliance with the new interpretation of the regulation, it is recommended you self-correct the plan. The DOL website provides a guide for correcting under the Voluntary Fiduciary Correction Program that even includes a user-friendly online calculator for lost earnings.

As in most cases, knowledge is power. Whether that knowledge is obtained through the use of a reputable service provider, consultant, or HR expert, employers and plan sponsors must stay on top of changes in government regulations and rules.