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Plan Insight

MARCH 2010 Newsletter

DOL Audits of 401k Deposits

Editor's Note: Please review the "safe harbor" exemption for small business located in the first article of this newsletter.

Subject to the exception for certain types of assets under ERISA 403(b), The Employee Retirement Income Security Act of 1974 ("ERISA") requires that plan assets be held in trust. Once assets constitute plan assets, the failure to timely transmit them to trust will violate ERISA's trust requirement and thus, constitute a breach of fiduciary duty. In addition, the failure will be deemed to constitute a prohibited transaction.

Department of Labor ("DOL") regulations govern when participant before-tax contributions to an Internal Revenue Code (the "Code") section 401k plan constitute plan assets. Under regulations issued in 1988, such amounts were deemed to become plan assets as of the earliest date on which such contributions could reasonably be segregated from the employer's general assets (the "general rule"), but in no event later than 90 days from the date on which such amounts are received by the employer or would otherwise have been payable to the participant, in the case of amounts withheld from the employee's wages (the "maximum period").

Concerned that plan sponsors were violating the regulation, in 1995 DOL began a project to investigate the misuse of employee contributions in general, and before-tax contributions to 401k plans in particular. As a result of its investigation, DOL concluded that the regulations needed to be revised.

In revising its regulations in 1996, DOL noted that many employers were then misinterpreting the rule as permitting all employers to delay the transmission of 401k before-tax contributions until 90 days after they were withheld. That is, many employers misinterpreted the maximum period as constituting a safe harbor. Notwithstanding this observation, when DOL revised its regulations, it decided not to make any changes in that portion of the regulation that was obviously most misunderstood, that is, the general rule. Rather, the only change was to shorten the fixed period to 15 days under the maximum period portion of the regulations.

Now, with the new revised ‘ 7 day’ safe harbor regulations in hand, several regional offices of DOL have begun actively investigating 401k plans and plan sponsors for compliance with these requirements as part of DOL's National Enforcement Project.


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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM


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