Safe Harbor Rule for Small Employer Remittances to 401(k)
One of the big audit issues raised by the U.S. Department of Labor (the "DOL") in audits of 401(k) plans has been how quickly an employer transfers amounts withheld from an employee's paychecks as an elective deferral to the plan's trustee. The DOL has regulations that require amounts withheld to be deposited with the trustee for the 401(k) plan as soon as is practical, but in no event later than 15 days. Many employers think this rule permits them fifteen 15 days. The DOL has a different opinion. On audit, the DOL usually examines an employer's deposit history and uses an average which often is as little as one or two business days. Remittances made outside the due date are treated as prohibited transactions (a loan from the plan to the employer) and are subject to a punitive sanction.
Now the good news. Recognizing that small employers (employers with less than 100 participants in their 401(k) plan) often have difficulty meeting the standard above, the DOL has officially confirmed a seven day safe harbor rule for small plans only. Effective immediately, as long as an employer has less than 100 participants, if amounts withheld as elective deferrals are deposited with the plan's trustee within seven days, the deposit will be deemed to be timely. No relief, however, for large employers. The "as soon as is practical" rule will continue to apply to employers with 100 or more participants in their 401(k) plans.