[Federal Register Volume 61, Number 153 (Wednesday, August 7, 1996)]
[Rules and Regulations]
[Pages 41220-41235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19791]
[[Page 41219]]
_______________________________________________________________________
Part III
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
29 CFR Part 2510
Regulation Relating to Definition of ``Plan Assets''--Participant
Contributions; Final Rule
Federal Register / Vol. 61, No. 153 / Wednesday, August 7, 1996 /
Rules and Regulations
[[Page 41220]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2510
RIN 1210-AA53
Regulation Relating to Definition of ``Plan Assets''--Participant
Contributions
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final regulation revising the
definition of when certain monies which a participant pays to, or has
withheld by, an employer for contribution to an employee benefit plan
are ``plan assets'' for purposes of Title I of the Employee Retirement
Income Security Act of 1974 (ERISA) and the related prohibited
transaction provisions of the Internal Revenue Code (the Code). The
final regulation provides that participant contributions to employee
pension benefit plans become plan assets on the earliest date that they
can reasonably be segregated from the employer's general assets, but in
no event later than the 15th business day of the month following the
month in which the participant contributions are withheld or received
by the employer. The final regulation establishes a procedure by which
an employer that sponsors a pension plan may obtain an extension of
this maximum period for an additional 10 business days with respect to
participant contributions received or withheld in a single month. With
respect to employee welfare benefit plans only, the final regulation
leaves unchanged the current regulation, which provides that
participant contributions become plan assets as of the earliest date on
which they can reasonably be segregated but in no event later than 90
days from the date on which the participant contributions were received
or withheld by the employer. This rule provides guidance to employers
that sponsor contributory pension and welfare plans, including plans
complying with section 401(k) of the Code, as well as fiduciaries,
participants, and beneficiaries of such plans.
DATES: Effective date. This regulation is effective on February 3,
1997.
Applicability dates. The regulation also establishes a procedure by
which an employer may obtain a postponement of the application of the
new maximum period for pension plans for up to 90 additional days
beyond the effective date. For collectively bargained plans, the new
maximum period for pension plans does not apply until the later of
February 3, 1997 or the first day of the plan year that begins after
the last to expire of any applicable collective bargaining agreement in
effect on August 7, 1996. Pending the application of the new maximum
period for pension plans, plans are subject to the same maximum period
that applies to employee welfare benefit plans. Except as described
above with respect to the postponement procedure and collectively
bargained plans, the requirements of the regulation are applicable to
all plans on the effective date.
FOR FURTHER INFORMATION CONTACT: Rudy Nuissl, Office of Regulations and
Interpretations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, Washington, DC (202) 219-7461; or William W.
Taylor, Plan Benefits Security Division, Office of the Solicitor, U.S.
Department of Labor, Washington, DC (202) 219-9141. These are not toll-
free numbers.
SUPPLEMENTARY INFORMATION: On December 20, 1995, the Department of
Labor (the Department) published a notice of proposed rulemaking in the
Federal Register (60 FR 66036) to revise a regulation at 29 CFR 2510.3-
102 which had been issued by the Department in 1988. The 1988
regulation provided that the assets of the plan include amounts (other
than union dues) that a participant or beneficiary pays to an employer,
or amounts that a participant has withheld from his or her wages by an
employer, for contribution to the plan as of the earliest date on which
such contributions can reasonably be segregated from the employer's
general assets, but in no event to exceed 90 days from the date on
which such amounts are received by the employer (in the case of amounts
that a participant or beneficiary pays to an employer) or 90 days from
the date on which such amounts would otherwise have been payable to the
participant in cash (in the case of amounts withheld by an employer
from a participant's wages).1 This final rule was based on a
record developed with respect to a proposed regulation published in
1979. 44 FR 50363 (August 28, 1979).
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\1\ The Department's view is that elective contributions to an
employee benefit plan, whether made pursuant to a salary reduction
agreement or otherwise, constitute amounts paid to or withheld by an
employer (i.e., participant contributions) within the scope of
Sec. 2510.3-102, without regard to the treatment of such
contributions under the Internal Revenue Code. See 53 FR 29660 (Aug.
8, 1988).
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In the December 20, 1995 notice, the Department proposed to change
the maximum period during which participant contributions to an
employee benefit plan may be treated as other than ``plan assets'' to
the same number of days as the period in which the employer is required
to deposit withheld income taxes and employment taxes under rules
promulgated by the Internal Revenue Service (IRS). The Department
solicited comments on the advisability of other measures that the
Department might consider to address the problem of delays in
transmitting participant contributions to plans. The Department
received more than 600 written comments in response to the proposal.
The Department held a public hearing on the proposal on February 22 and
23, 1996, in Washington DC, at which time 21 organizations provided
testimony.
The following discussion summarizes the Department's proposal and
the major issues raised by the commenters. It also explains the
Department's reasons for the modifications reflected in the final
regulation which is published with this document.
Discussion of the Final Regulation and Comments
1. The Proposed Regulation
In issuing the proposed rule the Department stated that it did not
propose to change the general rule embodied in the 1988 regulation,
which is that participant contributions become plan assets as of the
earliest date that they can reasonably be segregated from the general
assets of the employer. Instead, the Department's proposal emphasized
that the maximum time period was not a safe harbor, and proposed to
drastically reduce the maximum period after which participant
contributions would be considered plan assets. Under the 1988
regulation, this maximum period was 90 days after the contributions
were received by the employer or would otherwise have been payable to
the participants in cash. The Department proposed to change the maximum
period to the same number of days as the period within which the
employer is required to deposit withheld income taxes and employment
taxes under rules promulgated by the IRS.
The currently applicable IRS rules are codified at 26 CFR 31.6302-
1. As explained in the preamble to the December 20, 1995 notice of
proposed rulemaking, the IRS deposit rules generally require employers
who have
[[Page 41221]]
reported more than $50,000 of withheld income taxes and employment
taxes for a prior 12-month ``lookback'' period (defined as ``semi-
weekly depositors'') to make tax deposits to a Federal Reserve Bank or
authorized financial institution within a few days of withholding from
wages. Employers who have reported $50,000 or less of withheld income
taxes and employment taxes in the lookback period are defined as
``monthly depositors'' and must make such deposits on or before the
15th day of the month following the month in which the employees' wages
are paid. The Department specifically solicited comments on the
appropriateness of including in the final regulation the following two
special rules that supplement the general tax deposit rules in the IRS
regulation: (1) An employer who has accumulated on any day $100,000 in
withheld income taxes and employment taxes must deposit such taxes by
the next banking day; (2) an employer who accumulates less than a $500
tax liability during a calendar quarter is not required to make
deposits; the tax is paid with the filing of the tax return for the
quarter.
The Department recognized that some employers would perceive
difficulties in transferring participant contributions to an employee
benefit plan that they do not have in the deposit of federal employment
taxes. The Department solicited comments as to any specific burdens and
associated costs of this kind. The Department also requested comments
on the transition period needed for employers and service providers,
especially small businesses, to make changes in practices that would be
necessary to comply with the proposal if it was adopted.
Although the Department did not propose a maximum period applicable
to all employers based on a fixed period of days (such as 15 days), it
stated in the December 20, 1995 notice that it would consider such a
rule if adopting the time periods in the IRS tax deposit rules would
place an undue burden on plan sponsors. The Department solicited
comments on the advantages or disadvantages of using a fixed period of
days or some other formulation for a maximum period as well as to the
advisability of other measures to address the problem of delays in
transmitting participant contributions to plans.
2. Comments Addressed to the Maximum Period Described in the Proposed
Regulation
In response to the proposed regulation, the Department received
many comments 2 objecting to the use of the time periods that
apply for the deposit of withheld income taxes and employment taxes as
the maximum period for segregating participant contributions from the
employer's general assets. Employers of different sizes represented
that they would face difficulty and greatly increased costs in
attempting to meet the foreshortened time frames for segregation of
participant contributions set forth in the proposal. Service providers
to plans stated that it would not be feasible for them to administer a
rule that had a different maximum time period based on the size of the
employer. There was general agreement that the 90 day maximum period in
the 1988 regulation should be reduced, but many commenters regarded the
proposed regulation as formulating an overly restrictive maximum period
with the effect of imposing more stringent requirements on larger
employers even though, they contended, most of the cases in which
participant contributions were mishandled appear to have involved
smaller employers.
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\2\ References to ``comments'' and ``commenters'' includes both
written comment letters as well as prepared statements and oral
testimony at the public hearing.
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The commenters generally represented that, under current practices,
there are significant differences between the processing of withheld
federal income taxes and employment taxes prior to deposit, and the
processing of participant contributions to employee benefit plans. Tax
deposits are made without providing any data regarding the allocation
of the deposit amounts to individual employees until the end of the
year. By contrast, commenters stated that each time participant
contributions are transmitted to the plan, eligibility must be
confirmed, contributions must be allocated to the participants'
individual accounts, and the individual amounts must be reconciled to
the aggregate amount. Commenters also pointed out that employees who
participate in 401(k) plans may select differing amounts for
contribution, and may frequently change both these amounts and the
vehicles to which they are allocated.
Many commenters represented that the process of reconciling and
allocating participant contribution amounts is time consuming. Because
of the work involved in preparing for the transmission of participant
contributions to the plan, many commenters stated that they customarily
make such transmissions once a month, rather than after each pay
period. The commenters stated that requiring participant contributions
to be segregated as often as twice a week or more would force employers
to conduct these reconciliations and allocations with the same
frequency and thus would add substantially to the costs and burdens of
handling participant contributions.
Other commenters maintain that the proposal would simply not allow
sufficient time for the necessary review and correction of errors
before the transmission of the participant contributions to the plans.
These commenters pointed out that accuracy in calculating and
allocating participant contributions is very important. Although some
commenters acknowledged that mistakes can be corrected, including the
return of mistaken contributions, frequent mistakes can present
significant employee relations problems and undermine participant
confidence. According to numerous commenters, it is less burdensome and
costly to take additional time to assure the accuracy of participant
contributions before they are transmitted to the plan than it is to
find and correct mistakes afterwards. They pointed out that the more
frequently reconciliation and allocation computations are made, the
greater the opportunity for committing errors.
The commenters also represented that many brokerage houses, banks
and mutual funds are not willing to accept lump sum payments of
participant contributions from employers without at the same time
receiving instructions as to the allocation of such amounts to the
participants individual accounts. Some commenters also stated that
investment vehicles would not be willing to accept participant
contributions more frequently than once a month, even with appropriate
individual participant data, without increased charges. In addition,
some commenters stated that the proposal would present particular
problems for plans that have participant accounts valued on a daily
basis.
Smaller employers represented that they use outside service
providers to assist in plan management. For such employers, participant
contribution data is transmitted to the service provider and then back
to the employer as part of the reconciliation process before the
contributions are transmitted to the plan. It was also represented that
many smaller employers handle their own payroll and participant
contribution processing but lack sophisticated automation systems for
this work. It was represented that, because of these factors, many
smaller employers would
[[Page 41222]]
have difficulty meeting the outside limits set forth in the proposed
rule.
A few very large companies with sophisticated computer payroll
systems indicated that they could comply with the proposed regulation.
Many large companies, however, especially those with employees at
various locations and decentralized payroll systems, represented that
additional time is needed for processing payroll information from
different locations. One commenter pointed out that the deposit
schedules in the proposal would present difficulties for companies that
are members of control groups. Employers which have multiple payrolls
with varying cut-off dates stated that the proposal would seriously
increase their costs. For such employers, the proposed rule would
impede the more economical consolidation of contribution data from
different payrolls into large batches for processing. Instead, it would
require the processing of smaller amounts of data on an almost
continuous basis.
Employers who must comply with the ``next banking day'' rule for
deposits of withheld income taxes and employment taxes informed the
Department that the proposed rule would not be administratively
feasible because the transmission of participant contributions is far
more labor intensive and time consuming than the deposit of payroll
taxes. Moreover, some employers may become subject to this special
deposit rule only when they have unusually large payrolls, such as when
they pay large bonuses to employees.
Many commenters recognized that participant contributions could be
segregated quickly and frequently into a trust established to
temporarily hold participant contributions until they could be
reconciled in a more practical and less costly manner. Some of these
commenters, however, represented that the costs of establishing and
administering a separate trust would be considerable, outweighing any
additional earnings gained from using a trust, and would not be
justified by the additional benefits they might produce.3 Some
commenters provided calculations to support their claim that any
additional earnings derived from more frequent deposits of participant
contributions, either to individual accounts or to a holding trust,
would be more than offset by the increased attendant expenses.
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\3\ Some commenters assume that such earnings must be allocated
to the participants' individual accounts. This is not necessarily
so. A plan may provide that the earnings will be used to defray
reasonable plan expenses.
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Some commenters expressed concern that fiduciaries of participant
directed plans designed in accordance with the Department's regulations
at 29 CFR 2550.404c-1 would not be relieved of liability under ERISA
section 404(c) for management of money deposited in these separate
holding trusts. The commenters stated that requiring plan fiduciaries
to manage assets of such plans is contrary to the purpose of plans
designed to comply with section 404(c), which is to permit the
participants to exercise control over the assets allocated to their
individual accounts.
3. Comments Relating to Welfare Plans
A number of commenters recommended that the 1988 regulation remain
unchanged as applied to assets of employee welfare benefit plans.
Others proposed that participant contributions to welfare plans not be
treated as plan assets unless the contributions are deposited with a
trust. According to these commenters, welfare plan participants would
derive very little benefit from application of the proposed regulation
to their contributions because participant contributions to most
welfare plans, particularly health benefit plans, are not meant to be
invested, but are used to purchase coverage (such as medical or
disability coverage or life insurance) for a given period of time,
either directly from the employer in the self-insured context, or
through a state-regulated insurer. For such plans, the commenters
argued, there is no need to determine when or if participant
contributions become plan assets because the coverage is immediately
available to the participant and all the assets of the employer or of
the insurer are available for the payment of the benefits under the
plan. Several commenters also maintained that for many welfare plans,
especially health benefit plans, the participant contributions merely
reimburse the employer for expenditures on benefits or premiums that
the employer has already made.
The Department does not agree that the concept of participant
contributions becoming plan assets as soon as they can reasonably be
segregated from the employer's general assets has no relevance to
welfare plans. In the view of the Department, employees who agree to
deductions from their wages for contributions to a plan are entitled to
have the assurance that when the employer decides to purchase an
insurance policy or medical services for the plan, it is acting as a
fiduciary of the plan and is governed by the fiduciary standards of
ERISA in so doing. The fact that the participant contributions may be
used to repay an employer for advancing funds for the plan's expenses
does not, in the view of the Department, change the character of the
participant contributions. Moreover, if participant contributions to a
welfare plan are not promptly devoted to benefits and expenses, the
prudence and exclusive purpose requirements of ERISA may require that
the contributions be invested.
In addition, the Department, in issuing the proposed regulations,
did not contemplate a change in the general rule that participant
contributions to pension and welfare plans become plan assets as of the
earliest date on which they can reasonably be segregated from the
employer's general assets. Nor were comments solicited on alternatives
to the general rule. A change in the general rule is thus beyond the
scope of this rulemaking. The Department, however, does not believe
that the record is sufficient to support a change in the maximum time
period for welfare plans. As a result, the Department has determined
not to change the current maximum period of 90 days with respect to
welfare plans.
The Department has recognized that for cafeteria plans and certain
other types of welfare plans, the trust and certain reporting
requirements of ERISA present special burdens. As a result, the
Secretary issued a technical release, T.R. 92-01, which provides that
the Department will not assert a violation of the trust or certain
reporting requirements in any enforcement proceeding, or assess a civil
penalty for certain reporting violations involving such plans solely
because of a failure to hold participant contributions in trust. 57 FR
23272 (June 2, 1992); 58 FR 45359 (Aug. 27, 1993). Several commenters
sought assurance that the promulgation of this regulation does not
affect the continued validity of the technical release. The Department
wishes to provide such assurance. T.R. 92-01 is not affected by the
final regulation contained in this document, and remains in effect
until further notice.
COBRA payments were the subject of a number of comments.4 The
record indicates that participants and beneficiaries generally make
COBRA payments in the form of separate checks, usually made out to the
employer, and which arrive at different
[[Page 41223]]
times over the course of each month. Commenters stated that such
payments contain a high rate of errors and that the reconciliation
process regarding eligibility and amount is time consuming. One
commenter alleged that welfare plans that use third party service
providers to receive and aggregate participant contributions, including
COBRA payments, before they are applied to plan purposes need a minimum
of 45 days before the participant contributions should be treated as
plan assets. Because the Department has determined not to change the
existing regulation as it applies to welfare benefit plans, the
Department has determined not to create a special rule for COBRA
payments or for welfare plans that use a third party service provider
to receive participant contributions.
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\4\ COBRA payments are made for continuation of coverage under
certain group health plans pursuant to provisions of ERISA and the
Internal Revenue Code that were enacted as part of the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA).
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With regard to the continued application of T.R. 92-01, some
commenters questioned whether the technical release extended relief to
plans which receive COBRA contributions. It is the view of the
Department that the mere receipt of COBRA contributions or other after-
tax participant contributions (e.g., retiree contributions) by a
cafeteria plan would not by itself affect the availability of the
relief provided for cafeteria plans in the technical release.
Similarly, in the case of other contributory welfare plans, the mere
receipt of after-tax contributions by a plan would not affect the
availability of relief under the technical release provided that such
contributions are applied only to the payment of premiums in a manner
consistent with 29 CFR 2520.104-20(b)(2)(ii) or (iii) or 2520.104-
44(b)(1)(ii) or (iii).
4. The Final Regulation
After consideration of the comments and hearing testimony, the
Department has decided to modify the outside limit set forth in the
proposal. Under the final regulation, the general rule of the 1988
regulation remains unchanged for both pension and welfare benefit
plans: The assets of a plan include amounts paid by a participant or
withheld by an employer from a participant's wages as of the earliest
date on which such contributions can reasonably be segregated from the
employer's general assets. The final rule changes only the outer limit
beyond which participant contributions to employee pension benefit
plans become plan assets. The 1988 regulation had an outer limit of 90
days from the date of withholding from a participant's wages or from
the payment of the contribution by the participant to the employer. The
final regulation has an outer limit for pension benefit plans of the
15th business day of the month immediately following the month in which
the participant contributions are received by the employer (in the case
of amounts that a participant or beneficiary pays to an employer) or
the 15th business day of the month following the month in which such
amounts would otherwise have been payable to the participant in cash
(in the case of amounts withheld by an employer from a participant's
wages). Under the final rule the outside limit for welfare benefit
plans is the same time period as in the 1988 regulations, 90 days from
the date of the employer's withholding or receipt of the participant
contributions.
Substantially all of the commenters who addressed the issue
advocated a uniform maximum time period for all employers, large and
small. The maximum period for pension benefit plans contained in the
final regulation is slightly longer than the alternative by far the
most often proposed by commenters, which was 15 days after the end of
the month in which the participant contributions were received. Comment
letters received from a wide range of employers, third party
administrators, trustees and investment vehicles for plans indicated
that a 15 day rule would not impose undue costs or burdens, or
otherwise require them to change their current processes for handling
participant contributions. A comment recommended that the number of
days be measured in business days rather than calendar days. Because
the Department realizes that, for many employers, holidays and weekends
reduce the total number of days in which employers can perform the
functions necessary to segregate participant contributions from their
general assets in an orderly and cost efficient manner, the Department
has decided to adopt a maximum period measured by business days rather
than calendar days (i.e., excluding Saturdays, Sundays and national
legal holidays).
The final rule for pension benefit plans accommodates employers who
are unable reasonably to segregate participant contributions from their
general assets more frequently than in what appears to be a fairly
standard monthly processing cycle for participant contributions to
pension plans. The new rule thus should not increase the costs and
burdens for the great majority of employers who sponsor pension benefit
plans. In addition, as requested by most commenters, the rule would
apply to all such employers, regardless of size, and would simplify the
compliance monitoring function performed by service providers and the
Department.
At the same time, the final rule significantly reduces the maximum
period during which participant contributions to pension benefit plans
may be treated as other than plan assets (assuming that the participant
contributions could not reasonably be segregated from the employer's
general assets in a shorter time). Under the final rule, the maximum
period in which employers could commingle participant contributions to
pension benefit plans with their general assets would average about 35
days and would be no more than 52 days. Thus, in comparison to the 1988
regulation, the final rule enhances the security of employee retirement
benefits that are funded in whole or in part through participant
contributions.
The final rule does not change the requirement of the 1988 rule
that participant contributions become plan assets as of the earliest
date that they can reasonably be segregated from the employer's general
assets. Under the final rule this general requirement remains
applicable to both pension and welfare benefit plans. The final rule
also retains the emphasis of the proposed rule that the maximum period
does not operate as a safe harbor for either pension or welfare benefit
plans. As a result, for many plans, participant contributions will
become plan assets well in advance of the applicable maximum period.
Although the Department believes that the final regulation
establishes a maximum period that is sufficiently long to accommodate
the needs of employers that sponsor pension plans, employers who are
complying with the general rule, on occasion, may be unable to transmit
participant contributions to the plan within the maximum period. To
accommodate such a situation, the regulation includes a procedure for
an employer to extend the maximum period for an additional 10 business
days with respect to participant contributions for a single month.
Under this procedure, the employer must provide a true and accurate
written notice to the participants that the employer has elected to
take advantage of this extension period for the month. The notice must
also state the reasons why the employer cannot reasonably segregate the
participant contributions within the maximum time period for pension
plans, and state that the participant contributions in question have in
fact been transmitted to the plan and provide the date of such
transmission. The notice must be provided within 5 business days after
the end of the extension period. In addition, the employer must have
[[Page 41224]]
obtained, prior to the beginning of the extension period a performance
bond or irrevocable letter of credit in favor of the plan. Within 5
business days after the end of the extension period, a copy of the
notice provided to the participants must also be provided to the
Secretary along with a certification that the notice was distributed to
the participants and that the bond was obtained.5
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\5\ Such copy shall be addressed to: Participant Contribution
Regulation Extension Notification, Office of Enforcement, Pension
and Welfare Benefits Administration, U.S. Department of Labor, 200
Constitution Ave., NW., Washington, DC 20210.
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The amount of the bond or letter of credit must be not less than
the amount of the participant contributions received or withheld by the
employer during the previous month. The Department is concerned that in
some cases, the reasons prompting the employer to elect an extension
under this procedure may recur in the immediately following months and,
if so, might put the participant contributions at risk of loss. In
addition, because the extensions will not be subject to prior approval
by the Department, the Department has determined that the bond or
letter of credit must remain in effect for at least three months
following the month in which the extension period expires in order to
give the Department sufficient time to confirm that the participant
contributions were actually transmitted to the plan as represented in
the notice.
The regulation provides that an employer may not elect an extension
under this procedure more than twice in any plan year, unless the
employer pays to the plan an amount representing interest on the
participant contributions that were subject to all the extensions
within the plan year. The interest amount is to be measured by the
greater of (1) the amount that the participant contributions would
otherwise have earned from the date of withholding or receipt by the
employer until the date of transmission to the plan if the
contributions had been invested during such period in the investment
alternative available under the plan which had the highest rate of
return, or (2) the underpayment rate defined in section 6621(a)(2) of
the Internal Revenue Code applied to such period.
The Department emphasizes that the extension procedure is available
only to extend the maximum period and has no effect on the employer's
obligation to comply with the general rule that participant
contributions become plan assets as soon as they can reasonably be
segregated from the employer's general assets. The Department also
notes that this extension procedure applies only with respect to
participant contributions to pension plans; it does not apply with
respect to participant contributions to welfare plans.
5. Comments Recommending Alternative Approaches
a. Other Maximum Time Periods
Many commenters recommended other maximum time periods. One
commenter recommended a maximum period of the 25th day of the month
following the month in which the employer withheld or received the
participant contributions. A significant number recommended that the
maximum period be the 30th day of the month following the month in
which the employer withheld or received the participant contributions.
A few recommended a maximum period of 60 days after the date of
withholding or receipt by the employer. Others suggested a maximum
period of 45 days after the date of withholding or receipt. Several
commenters recommended maximum time periods of less than 15 days after
participant contributions were withheld or received by the employer.
Nearly all employers who make monthly transmissions of participant
contributions to plans and who provided information concerning their
current practices indicated that they transmit participant
contributions to plans within several days after the end of the month
in which the participant contributions are withheld or received.
The final rule, which provides a maximum period of 15 business days
after the end of the month in which the employer withheld or received
the participant contributions for pension plans, provides additional
time for the resolution of errors or for other unforeseen delays. In
light of the above, the Department believes that the final regulation
provides a sufficient maximum time for employers who are not able
reasonably to segregate participant contributions from their general
assets and transmit them to pension plans more often than once a month.
b. Extended Maximum Time Periods When There is a Change in Trustees
Some commenters recommended that the Department provide an extended
maximum period for situations where the employer changes recordkeepers
or plan trustees for section 401(k) plans. One recommended that the
maximum period in this situation should be the end of the third month
following withholding of the participant contributions. Another
commenter suggested that a rule allowing a maximum period ending on the
last day of the month following the month in which the contribution is
made would accommodate this situation. According to these commenters,
additional time is often needed to accomplish a smooth changeover of
recordkeeping and trustee functions from one party to another. The
commenters, however, did not provide any detailed information as to why
participant contributions could not be directed to one trust or the
other during this time period. The final regulation does not contain an
extended maximum period for special situations. The Department
recognizes that a change in trustees or funds for a section 401(k) plan
may require a period during which the outgoing fund or trustee cannot
accept contributions and the participants are unable to direct changes
in investment choices or contribution amounts. The Department, however,
believes participant contributions should be transmittable to the new
fund or trustee within the maximum time provided. In the Department's
view, a change in recordkeepers or other service providers to a plan
should not affect the maximum allowable period before participant
contributions become plan assets. In addition, the extension procedure
would be available to an employer who was complying with the general
rule but, due to a change of trustees, needed a brief extension of the
maximum period.
c. Administrative Waivers
Other commenters suggested that, in the event that the regulation
provided a maximum period of less than 30 days after the end of the
month in which the contribution is received, the Department should
provide a procedure for obtaining waivers of the maximum period. These
comments fall into two categories. The first category of comments
asserts that certain employers may not be able to segregate participant
contributions within the outside time limitation for reasons unique to
the company, but the employer is nonetheless transmitting participant
contributions to the plan as soon as they may reasonably be segregated
from the employer's general assets and should be able to petition the
Department for a waiver of the limitation. The second category of
comments asserts that employers who would ordinarily remit participant
contributions to the plan within the maximum period may sometimes miss
the limit because they are changing trustees, or because of other
factors, such as computer failures, erratic mail delivery, and employee
illness.
[[Page 41225]]
With respect to the first category of comments, the Department
believes that it has provided a sufficiently delayed effective date to
enable the small percentage of employers who cannot currently transmit
participant contributions to pension plans within 15 business days
after the end of the month in which the employer received the
contribution to change their practices to come into conformity with the
regulation without incurring undue expense. Nevertheless, as described
in the discussion of the effective date, the final regulation includes
a procedure by which an employer who is complying with the general rule
may obtain a postponement of the application of the maximum period for
pension plans for up to 90 additional days beyond the effective date.
This optional postponement will allow such employers additional time to
make necessary changes in their operations to be able to comply with
the final rule.
With respect to the second category of comments, the Department
believes that the maximum period established by the final regulation is
sufficiently long to accommodate most unanticipated events.6 With
respect to events beyond the control of the employer, the Department
notes that a predicate for a prohibited transaction under section
406(a) is that the fiduciary cause the plan to engage in the prohibited
transaction in question. Therefore, if the event giving rise to the
delay in segregating participant contributions is, in fact, beyond the
control of the employer, there would be no prohibited transaction under
section 406(a). Nevertheless, as explained more fully above, in the
discussion of the final regulation, the Department decided to provide a
procedure by which an employer who was complying with the general rule
may, on occasion, obtain a brief extension of the maximum time period
for pension plans.
---------------------------------------------------------------------------
\6\ Where, for example, an employer mails a check to the plan,
the Department is of the view that the employer has segregated
participant contributions from plan assets on the day the check is
mailed to the plan, provided that the check clears the bank.
---------------------------------------------------------------------------
d. Special Rule for Simplified Employee Pensions
Two commenters stated that the proposed rule was particularly
inappropriate as applied to simplified employee pensions that allow
participants to elect salary reduction contributions. Although such
plans are available only to employers with less than 26 employees, the
commenters maintained that many sponsors of SEPs would be semi-weekly
depositors. According to these comments, some SEPs allow participants
to designate their own custodians and the sponsor must make separate
payments to the custodian for each participant's account. The comments
state that the amount deferred for a given pay period is often very
small, and may well be less than the minimum deposit amount permitted
by the custodian. One of these commenters recommended that, for SEPs,
the time period should be 15 days from the earlier of (1) any pay
period in which the largest single accumulated participant contribution
exceeded $1,000, (2) the earliest date on which the total of all
accumulated participant contributions exceeded $5,000, or (3) two
months from the last contribution.
The Department has determined not to create a special rule for
SEPs. The great majority of commenters, including third party
fiduciaries, stated that it is important to have a single rule for all
employers. The final rule would permit sponsors of SEPs to remit
participant contributions as infrequently as once a month, if
necessary. This should allow the remission of amounts sufficiently
large to be accepted by custodians of SEPs.
e. Maintain the 90 day Maximum Time Period
Some commenters expressed the opinion that the 1988 regulation
should remain unchanged. Many of these commenters stated that the
abuses against which the proposed regulation is directed could be
better addressed by non-regulatory measures. Foremost among such
recommended measures was stricter enforcement efforts to identify and
correct violations. Given the Department's broad enforcement
responsibilities, the Department has concluded it would not be
practical to rely entirely on enforcement efforts to address the abuses
at issue here. The Department seeks, by reducing the maximum period
during which participant contributions may be treated as other than
plan assets, to reduce the amount of participant contributions that are
at risk because they have not yet been deposited in trust. Participant
contributions which have not been transmitted to a pension plan run two
types of risk: interest lost due to delay in depositing contributions,
and loss of the contributions themselves if the employer becomes
bankrupt. These risks may result in sizeable losses. Through July 1,
1996, the Department's enforcement actions against 401(k) plan sponsors
have retrieved $10.01 million in plan assets on behalf of participants
and beneficiaries. While the Department's non-regulatory efforts have
made a difference in the safeguarding of pension plans, the growth in
the number of plans with participant contributions (including 401(k)
plans) has made it infeasible, given the scarcity of Departmental
resources, to audit or advise every plan that warrants correction. In
these circumstances, the Department believes that publishing new
guidelines is the appropriate and efficient method of improving pension
safety.
Other commenters suggested that improving disclosure of information
to participants would obviate the need for a shorter maximum period by
allowing participants to better monitor their employer's handling of
participant contributions. The Department believes that the
establishment of meaningful and timely disclosure requirements in this
area would require legislative changes to ERISA. Furthermore, imposing
such requirements on employers or plans may impose a burden on them,
particularly with respect to small plans that do not use third party
administrators already offering this disclosure. The Department
considered a suggestion that it offer enhanced disclosure as an option
for smaller plans who could not reasonably segregate plan assets within
the maximum period in the final regulation, but concluded that such an
option may be costly for employers and plans and could be difficult to
administer.
As described above, however, the Department has determined not to
change the maximum 90 day period with respect to participant
contributions to welfare benefit plans.
6. Other Comments
a. Comments Relating to General Rule
Several commentators suggested that the existing rule that amounts
that a participant or beneficiary pays to a plan or has withheld from
his wages by an employer for contribution to a plan become plan assets
as of the earliest date on which such amounts can reasonably be
segregated from the employer's general assets be replaced by a fixed
time safe harbor. Others suggested that the existing rule be replaced
by a rule that such amounts become plan assets as of the earliest date
that it would be administratively feasible to transmit the assets to
the plan.
The rationale generally set forth by the commenters for proposing
the elimination of the rule that participant contributions become plan
assets as of the earliest date on which they can reasonably be
segregated from the employer's general assets is that it is difficult
to determine with exactitude as to when that date is and that the rule,
[[Page 41226]]
if it means that participant contributions become plan assets as soon
as they can be mechanically segregated from the employer's general
assets, is costly and burdensome. The commenters who advocated changing
the rule to state that participant contributions become plan assets as
of the earliest date that it would be administratively feasible to
transmit such contributions to the plan also appear to be reading the
existing rule as meaning that participant contributions become plan
assets as soon as they can be mechanically segregated from the
employer's general assets.
After consideration of these comments, the Department has
determined not to change the existing general rule. As indicated in the
preamble to the proposed regulation, the Department did not propose to
change the existing rule. The test remains as stated in the preamble to
the 1988 regulation:
The revised general rule relating to participant contributions
is intended to reflect a balancing of the costs of promptly
transmitting such contributions to the plan relative to the
protections provided to participants by such transfers. In
formulating the final regulation, the Department has attempted to
remain consistent with one of the key purposes of the trust
requirement of section 403(a) of ERISA--the segregation of plan
assets so as to prevent commingling of such assets with an
employer's own property.
The regulation is not intended, however, to allow employers to
use participant contributions for their own purposes. The Department
is concerned that participant contributions be paid promptly into
the plan so as to begin earning interest or other investment return
and to be available for the payment of benefits. Employers should
examine their current payroll procedures to ascertain whether they
are indeed transmitting participant contribution amounts at the
earliest reasonable time. (53 FR 17629, May 17, 1988)
b. Comments Relating to Fiduciary Duties
Several commenters urged that the Department indicate its position
with respect to the fiduciary duties of the institutional trustee which
receives contributions. They stated that, typically, the standard form
of trust agreement provides that the trustee is accountable only for
funds actually deposited and that, in their view, the trustee has no
obligation to collect contributions. One commenter acknowledged that
while the institutional trustee which receives contributions does not
have any primary duty to enforce payment of contributions, section
405(a)(3) of ERISA imposes a fiduciary duty to remedy the breaches of
other fiduciaries of which it has knowledge, but stated that a trustee
would not necessarily have sufficient information to determine when
there has been such a breach with respect to timely deposit of employee
contributions. Finally, one commenter who receives employee
contributions from many sponsors of 401(k) plans stated its belief that
``each service provider has a fiduciary responsibility to plan
participants to blow the whistle on the abusers,'' and stated that its
service agreement ``specifies that we will contact the Department of
Labor if contributions are not made at least once a month.''
Although it is the view of the Department that the plan sponsor
(usually the employer) is primarily responsible for assuring that
participant contributions are transmitted to the trustee in a timely
manner, section 405(a)(3) would impose a fiduciary duty on plan
trustees in certain circumstances.7 Delineating those
circumstances is beyond the scope of this rulemaking.
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\7\ For the Department's views of the obligations imposed on a
fiduciary by section 405(a)(3) in another situation, see 29 CFR
2509.75-5, Q&A FR-10.
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c. Partnerships
Two comments were received relating to when contributions by
partners to section 401(k) plans become plan assets. The letters
represent that, under 26 CFR 1.401(k)-1(a)(6)(ii), a partner's
compensation is deemed currently available on the last day of the
taxable year, and an individual partner must make an election by the
last day of the year. They ask when the monies, which otherwise would
be paid to a partner, but for the partner's election, become plan
assets, inasmuch as partners do not receive wages. In the view of the
Department, the monies which are to go to a section 401(k) plan by
virtue of a partner's election become plan assets at the earliest date
they can reasonably be segregated from the partnership's general assets
after those monies would otherwise have been distributed to the
partner, but no later than 15 business days after the month in which
those monies would, but for the election, have been distributed to the
partner.
d. Bankruptcy Laws
Two commenters recommended that the Department seek to have the
bankruptcy laws amended to provide a preference for participant
contributions commingled with the employer's general assets. One
commenter stated that such contributions should be elevated to the same
priority as earned payroll. Because such a change cannot be
accomplished through the Department's regulatory authority, these
recommendations are beyond the scope of this rulemaking.
e. Participant Loans
Clarification was requested from a commenter that the time periods
applicable to determining when participant contributions become plan
assets also apply to determining when repayments of participant loans
that are withheld or received by the employer become plan assets.
Another commenter stated that monies withheld for repayment of
participant loans should be afforded at least 90 days after withholding
because many plans provide for quarterly repayment of loans.
The question of when participant loan repayments become plan assets
is beyond the scope of this rulemaking. The notice of proposed
rulemaking did not solicit comments on this matter. The record is
insufficient for the Department to address this matter in the final
regulation. In the Department's view, however, employers should
promptly transmit participant loan repayments to plans. An employer's
failure to transmit loan payments within a reasonable time after
withholding or receiving them could subject the employer to liability
for violations of the same provisions of ERISA and criminal law that
are violated when an employer is delinquent in forwarding participant
contributions to plans.
f. Bonding
Several commenters suggested that many of the problems with which
the Department is concerned could be addressed by requiring that the
withheld wages and participant contributions be covered by ERISA's
bonding requirements prior to their transmittal to the plan. While this
suggestion may have some merit with respect to safeguarding participant
contributions from losses due to acts of fraud and dishonesty, it would
not protect against participant contribution losses where fraud or
dishonesty could not be shown. This is because the bond required under
section 412 of ERISA (29 U.S.C. 1112) protects the plan only against
acts of fraud or dishonesty. However, participant losses due to an
employer's failure to quickly segregate participant contributions arise
from numerous causes, of which provable acts of fraud or dishonesty are
a relatively minor factor. In addition, it would require an amendment
to the Department's existing bonding
[[Page 41227]]
regulations,8 which currently require bonding with respect to
participant contributions made by withholding from employees' salaries
only at the point in time when they are segregated from the employer's
general assets within the meaning of 29 CFR 2580.412-5. Such an
amendment is beyond the scope of this regulation.9
---------------------------------------------------------------------------
\8\ See 29 CFR 2580.412.
\9\ T.R. 92-1 does not extend to the enforcement of the bonding
requirements of ERISA.
---------------------------------------------------------------------------
g. Maritime Employers
Two commenters stated that the proposed regulation would present
particularly difficult compliance problems for maritime employers.
According to these commenters, participant contributions for 401(k)
plans in this industry are commonly not transmitted to the plan until
the end of the voyage in which the participant earned the amount of the
contribution. Such voyages may last several months. The comments did
not focus on when wages are withheld for transmission to the plan. If
the wages are not withheld until the end of the voyage, the maximum
period within which the withheld wages must be transmitted would begin
at the end of the voyage. If the wages were withheld during the course
of the voyage, the Department does not perceive any reason why the
employer cannot remit such withheld wages to the plan within the same
maximum period as any other employer.
h. Multiemployer Plans
Several commenters argued that, because of the unique nature of
multiemployer plans, in that the plan trustees are independent of any
individual employer, the regulation should either entirely exempt
elective contributions to multiemployer plans from its provisions or
exempt such contributions from the maximum period provision. The
commenters noted, however, that the collective bargaining agreements
governing most multiemployer plans provide for transmittal of such
contributions from the employer to the plan within a fixed period,
typically between 10 and 20 days after the month in which such
contributions are made. The Department determined that the maximum time
period for pension plans in the final regulation was sufficient to
accommodate multiemployer plans and determined not to create a special
rule or exemption for multiemployer plans. At the same time, and as
more fully explained below in the discussion of the effective date, the
Department recognized that transmission of participant contributions
may be controlled by collective bargaining agreements and has addressed
the special nature of collectively bargained plans, including
multiemployer plans, in connection with the applicability of the new
maximum period for pension plans in the final regulation.
7. Dues Financed Plans
The final regulation leaves undisturbed the effect of the 1988
regulation on amounts paid to employee organizations as union dues. It
continues to be the Department's position that amounts paid as union
dues should not be characterized as participant contributions merely
because a portion of such dues might be used to provide benefits under
a welfare or pension plan sponsored by the employee organization.
8. Consequences of Treatment of Participant Contributions as Plan
Assets Before Transmission to the Plan Trustee
a. ERISA
Once participant contributions become plan assets, they become
subject to the trust requirements of ERISA section 403, 29 U.S.C. 1103.
Although ERISA section 403(b) contains a number of exceptions to the
trust requirement for certain types of assets, including assets which
consist of insurance contracts, and for certain types of plans,
participant contributions generally must be held in trust by one or
more trustees once they become plan assets. ERISA section 403(a), 29
U.S.C. 1103(a). Although the Secretary has authority, pursuant to ERISA
section 403(b)(4), to grant exemptions for welfare plans, including
health plans, from the trust requirements, this exemptive authority
does not extend to most pension benefit plans. As noted above, the
Secretary has issued a technical release, T.R. 92-01, which provides
that, with respect to certain welfare plans (e.g., cafeteria plans),
the Department will not assert a violation of the trust or certain
reporting requirements in any enforcement proceeding, or assess a civil
penalty for certain reporting violations, involving such plans solely
because of a failure to hold participant contributions in trust. 57 FR
23272 (June 2, 1992), 58 FR 45359 (Aug. 27, 1993). As a result, except
for plans which come within T.R. 92-01, an employer's failure to
transmit participant contributions to a plan trustee or investment
manager by the applicable period described in the final regulation may
subject the employer to liability under ERISA for failure to hold plan
assets in trust.
In addition, ERISA's fiduciary responsibility provisions apply to
the management of plan assets. An employer who retains plan assets
commingled with its general assets would be exercising ``authority or
control respecting the management or disposition of [plan] assets'' and
would be a fiduciary with respect to those assets pursuant to ERISA
section 3(21)(A)(i). Among other things, ERISA's fiduciary
responsibility provisions make clear that the assets of a plan may not
inure to the benefit of any employer and shall be held for the
exclusive purpose of providing benefits to participants in the plan and
their beneficiaries, and defraying reasonable expenses of administering
the plan. ERISA sections 403-404, 29 U.S.C. 1103-1104. Fiduciaries who
violate these provisions are personally liable to the plan to, among
other things, make good losses resulting from such violations and to
restore to the plan any profits of such fiduciary which have been
gained through the use of plan assets. ERISA section 409(a), 29 U.S.C.
1109(a).
ERISA's fiduciary responsibility provisions also prohibit certain
transactions involving plan assets. ERISA sections 406-407, 29 U.S.C.
1106-1107. In particular, ERISA section 406(a)(1)(D), 29 U.S.C.
1106(a)(1)(D), provides that a plan fiduciary shall not cause the plan
to engage in a transaction if he knows or should know that such
transaction constitutes a direct or indirect transfer to, or use by, or
for the benefit of a party in interest of any assets of the plan. The
employer of employees covered by the plan is a party in interest with
respect to the plan. ERISA section 3(14)(C), 29 U.S.C. 1002(14)(C).
Violations of ERISA's prohibited transaction provisions subject the
fiduciaries and parties in interest to liability for the plan's losses
and other relief. In the case of pension plans qualified under the
Code, the parties in interest (referred to as disqualified persons) are
subject to excise taxes under IRC section 4975. In the case of other
employee benefit plans, particularly welfare plans, the parties in
interest are subject to civil penalties under ERISA section 502(i), 29
U.S.C. 1132(i).
b. Criminal Law
As was noted in the preamble to the final regulation published in
1988, the Department of Justice takes the position that, under 18
U.S.C. 664, the embezzlement, conversion, abstraction, or stealing of
``any of the moneys, funds, securities, premiums, credits, property, or
other assets of any employee welfare
[[Page 41228]]
benefit plan or employee pension benefit plan, or any fund connected
therewith'' is a criminal offense, and that under such language,
criminal prosecution may go forward in situations in which the
participant contribution is not a plan asset for purposes of title I of
ERISA. As with the 1988 regulation, the final regulation defines when
participant contributions become ``plan assets'' only for the purposes
of title I of ERISA and the related prohibited transaction excise tax
provisions of the Internal Revenue Code. The Department reiterates that
this regulation may not be relied upon to bar criminal prosecutions
pursuant to 18 U.S.C. 664.
Similarly, State criminal laws may apply when an employer converts
participant contributions to the plan to the employer's own use.
Although the provisions of ERISA generally supersede State laws that
relate to employee benefit plans covered by title I of ERISA, generally
applicable State criminal laws are not preempted. ERISA section
514(b)(4), 29 U.S.C. 1144(b)(4). This regulation may not be relied upon
to bar criminal prosecutions under such generally applicable State
laws.
9. Effective Date of the Final Regulation
The effective date of this regulation is February 3, 1997. The
Department received relatively few comments addressing the
appropriateness of the proposed delayed effective date of 60 days after
the adoption of the final regulation, although the Department
specifically requested comments on this matter. Of those comments
received, the bulk of the comments addressing the effective date
recommended a one year delay if the proposed regulation was adopted
without significant change as a final rule, although several
organizations serving 401(k) plans indicated that a 180-day period
would not be inappropriate. However, most of the comments and hearing
testimony indicated that there would be little or no difficulty for the
vast majority of employers to meet the maximum period adopted in the
final rule for participant contributions to 401(k) plans. Some
commenters stated that while only a small percentage of employers would
have difficulty meeting the maximum period adopted in the final rule,
they would need a full year to change their processing systems.
The Department believes that the effective date for the regulation
has been sufficiently delayed to accommodate the needs of those
employers who will need to make significant changes in their payroll or
other systems in order to comply with the final regulation.
Nevertheless, the Department has determined to provide a procedure to
allow employers who are complying with the 1988 regulation to obtain up
to an additional 90 days postponement of the application of the new
maximum period for pension plans. Under this procedure, prior to the
effective date of the regulation, an employer must provide a true and
accurate written notice to the participants that the employer has
elected to postpone the application of the new maximum period for
pension plans, and providing the date that the postponement will
expire. The notice must also describe the reasons why the employer
cannot reasonably segregate the participant contributions within the
maximum time period for pension plans.
At the same time, the employer must obtain a performance bond or
irrevocable letter of credit in favor of the plan in an amount not less
than the total participant contributions withheld or received by the
employer during the previous three months. The bond or letter of credit
must be guaranteed by a government supervised bank or similar
institution. The Department is concerned that in some cases, the
reasons prompting the employer to elect a postponement under this
procedure may recur in the immediately following months and, if so,
might put the participant contributions at risk of loss. Because the
postponements will not be subject to prior approval by the Department,
the Department has also determined that the bond or letter of credit
must remain in effect for at least three months following the month in
which the postponement expires. A copy of the notice provided to the
participants must also be provided to the Secretary along with a
certification that the notice was distributed to the participants and
that the bond was obtained.10
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\10\ Such copy shall be addressed to: Participant Contribution
Regulation Extension Notification, Office of Enforcement, Pension
and Welfare Benefits Administration, U.S. Department of Labor, 200
Constitution Ave., N.W., Washington, DC 20210.
---------------------------------------------------------------------------
Finally, for each month in which the postponement is in effect, the
employer must provide a true and accurate notice to the participants
stating the date on which participant contributions received or
withheld by the employer during that month were transmitted to the
plan. This notice must be distributed so as to reach the participants
within 10 days after the transmission. While the postponement is in
effect with respect to a particular plan, the participant contributions
to the plan will be subject to the same maximum period under the final
regulation that applies to employee welfare benefit plans.
Many commenters representing organized labor and employer
organizations pointed out that a rule requiring a change in a provision
governed by a collectively bargained plan may require renegotiation of
the collective bargaining agreement. These commenters also noted that
the drafters of ERISA recognized the special needs of collectively
bargained plans by providing special effective dates for collectively
bargained plans with respect to ERISA's participation, vesting and
funding provisions.11 They asked that the Department provide a
special postponement of the application of the maximum period for
collectively bargained plans. The Department believes that the comments
have merit and has provided for a postponement of the application to
collectively bargained plans of the new maximum period for pension
plans. Under the final regulation, the maximum period for pension plans
does not apply to collectively bargained plans until the later of (1)
the effective date or (2) the first day of the plan year that begins
after the expiration of the last to expire of any applicable bargaining
agreement in effect when the final regulation is issued. During this
period of postponement of applicability, the maximum period for welfare
plans in the final regulation will apply to collectively bargained
plans.
---------------------------------------------------------------------------
\11\ See ERISA sections 211(c)(1) and 308(c)(1), (29 U.S.C. sec.
1061(c)(1) and 1086(c)(1)).
---------------------------------------------------------------------------
Economic Analysis Conducted in Accordance With Executive Order 12866
and OMB Guidelines
Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the
Department must determine whether the regulatory action is
``significant'' and therefore subject to review by the Office of
Management and Budget (OMB) and the requirements of the Executive
Order. Under section 3(f), the order defines a ``significant regulatory
action'' as an action that is likely to result in, among other things,
a rule raising novel policy issues arising out of the President's
priorities. Pursuant to the terms of the Executive Order, the
Department has determined that this regulatory action is a
``significant regulatory action'' as that term is used in Executive
Order 12866 because the action would raise novel policy issues arising
out of the President's priorities. Thus, the Department believes this
notice is ``significant,'' and subject to OMB review on that basis.
[[Page 41229]]
Costs
In connection with the publication of the proposed regulation the
Department solicited comments on potential economic effects of the
proposed rule in the context of Executive Order 12866, and any evidence
with respect to whether or not the proposed rule might be
``economically significant.'' The Department received many comments
regarding the additional costs and burdens that would have attended the
proposed regulation. Some commenters asserted that there would be
increased costs but did not provide data and information to explain
their assertions. The Department assumed that the information provided
in the record by those who did set forth data is reflective of the
additional costs which others would incur.
The Department estimated compliance costs of the plan asset
regulation set forth in this notice by utilizing information placed in
the record and Departmental data on industry practices.12 Costs
are separated into initial costs and ongoing costs.13 Initial
costs represent up-front expenditures for plan revisions,
reprogramming, and other one-time costs; these costs were annualized
over a conservative estimate of the ``life'' of the regulation, 10
years, in order to show such costs on an annual basis. Ongoing
expenditures incurred annually include additional audits for those
plans which need to create supplemental trust accounts, and the cost of
performing administrative tasks more frequently. Total annualized
initial costs and ongoing costs were aggregated to estimate total
annual costs.
---------------------------------------------------------------------------
\12\ For the purposes of this analysis the Department referred
to data collected from the Form 5500, the annual return/report filed
by pension and welfare benefit plans. In addition, the analysis also
makes use of results of surveys on participant contribution plans
conducted by William M. Mercer, Incorporated, the Profit Sharing
Council of America, and Bankers Trust Company contained in the
record.
\13\ Costs are estimated based on information submitted to the
record both in the form of comment letters and testimony gathered at
the public hearing held on February 22 and 23, 1996.
---------------------------------------------------------------------------
The plan asset regulation as originally promulgated in 1988
provides that participant contributions become plan assets as soon as
they may reasonably be segregated from the employer's assets. The
regulation is now being modified to shorten the maximum length of time
employers would have to treat participant contributions to pension
plans as other than plan assets under Title I of ERISA from 90 days
after these contributions were withheld or submitted, to 15 business
days after the end of the month in which the contributions were
withheld or submitted. Therefore, the costs of this regulatory action
are limited to the costs associated with bringing into compliance those
employers that are not remitting participant contributions to pension
plans within 15 business days after the close of the month.14
---------------------------------------------------------------------------
\14\ The final rule does not change the requirement of the 1988
regulation that participant contributions become plan assets as of
the earliest date that they can reasonably be segregated from the
employer's general assets. The economic effects of these provisions
were accounted for in the issuance of the 1988 regulation.
Nevertheless, in estimating the economic effects of this regulation,
the Department has included the costs to plans which should have
been in compliance with the regulation as originally stated, as well
as with this revised regulation, but are not currently in compliance
because their administrators may have misunderstood the requirements
of the regulation as published in 1988.
---------------------------------------------------------------------------
Compliance costs were estimated using information from commenters
on current practices and analysis of Form 5500 annual report data to
develop an estimate of the number of plans out of compliance with the
revised regulation. The present value (using a 7 percent real discount
rate) of the cost of compliance expressed in constant 1995 dollars
ranges from $17 million for 1996 costs to $9 million for 2005 costs,
totalling $107 million over the 1996-2005 period, and with a value
expressed as a constant annuity of $15 million per year over ten years.
Comments and survey data in the record supplied information on how
different sponsors would have different burdens associated with coming
into compliance, reflecting different payroll practices. Many witnesses
testified that they would incur no additional burden if the standard
was revised to require deposit by the fifteenth day after the previous
month's end. Some testified that they would have to change their
payroll practices to come into compliance; others determined that they
would have to redesign their payroll systems, or make use of a short-
term interest bearing trust. Comments and testimony were received
regarding financial institutions' practices, including fee structures;
information on compliance rates was taken from Form 5500 data, as
verified by survey data supplied in the record.15
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\15\ The annual cost estimate is based on commenters' estimates
of $6,000-$10,000 per plan per year for those that will establish
and maintain a trust for holding participant contributions short
term, $4,000-$6,000 per plan that will modify its participant
contribution management systems to comply with the revised
regulation (a first year only cost), and $600 per plan per year for
those that will be required to increase the number of deposits of
participant contributions to come into compliance. Some plans that
already deposit on a monthly basis will have to accelerate their
deposit schedules to comply with the 15 business day rule, but will
not have to pay for additional transactions. The sources used were
comment letters or testimony from Bankers Trust Company, National
Fuel Gas Company, American Society of Pension Actuaries, Profit
Sharing Council of America, Louis Kravitz, Berry Petroleum, and
Southern Champion Tray Company.
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Data analysis indicated that approximately 15,000 (in 1996) to
27,000 (in 2005) contributory pension plans would need to take steps to
come into compliance with the new provisions on participant
contributions. Of an estimated 239,000 16 pension plans which
receive participant contributions, approximately 94 17 percent
already deposit participant contributions within 15 business days after
the end of the month in which contributions were withheld or paid.
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\16\ Form 5500 data from 1992 (the most recent year for which
complete data is available) establishes that there are approximately
172,000 contributory pension plans subject to this regulation. Data
for 1989-1992 and preliminary data for 1993 show an average annual
increase of 22,000 in the number of contributory plans; assuming a
continuation of this rate of growth yields an estimate of 239,000
contributory plans subject to this regulation in 1995. Linear
extrapolation of this rate of growth yields an estimate of 461,000
plans in 2005.
\17\ This estimate is based on an analysis of Form 5500 data
utilizing 27,654 Form 5500 returns submitted for the 1992 plan year
by contributory plans, which showed 5% of large plans out of
compliance. Compliance rates of small plans were based on an
analysis of the behavior of the smallest Form 5500 filers; it is
estimated that 6% of small plans are out of compliance with the
revised regulation. This analysis represents the higher end of the
range of noncompliance rates based on survey data submitted by
commentators, none of which had a sample size of more than 317,
indicating a range of 2.5 to 8 percent of respondents are not in
compliance with contribution date limits in this regulation.
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In addition to the annual costs quantified above, other
unquantified costs may be recognized by employers, plans and
participants. For example, certain employers or plans may be unable to
accommodate the changes required by this revised regulation, and
consequently may conceivably offer a different type of pension plan,
reduce the employer's contribution to the plan, or cease to offer any
plan. However, the marginal cost of complying with the final regulation
has not been conclusively shown to have a measurable effect on rates at
which employers establish or terminate plans.
Benefits
Wages which are withheld for contribution to a plan are regarded by
the Department as the property of the participant from the time when
they would otherwise be payable to the participant directly. Delays in
the transmittal of these funds into a trust result in lost earnings to
the participant. PWBA estimates that $82 million will be gained in 1997
by participants and beneficiaries through the increased
[[Page 41230]]
earnings by having their contributions placed in trust at an
accelerated rate.18 The present value (using a 7 percent real
discount rate) of the increased earnings on participant contributions
expressed in constant 1995 dollars ranges from $76 million in 1997 to
$69 million in 2005 totalling $661 million over the 1996-2005 period,
and with a 10-year annuitized value of $94 million.19 This
estimate of these savings to participants, which are a result of
earlier segregation, include what is effectively a transfer from
employers, some of whom are in full compliance with the 1988 regulation
and act properly under their fiduciary responsibilities.
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\18\ This figure was reached by multiplying the additional
number of days funds will be in trust by the portion of the
estimated $63.7 billion (in 1997) in annual participant
contributions that would be deposited earlier by an annual rate of
return. A 2.1 percent annual real rate of return was used for
contributions deposited by those large plans which place funds in
short-term interest bearing trusts. A 10.1 percent real rate of
return was used for contributions deposited by the remainder of the
large plans and the small plans, representing an estimate of the
rate of return of 401(k) funds held in trust.
\19\ Although the Department expects plan sponsors to incur
costs in 1996 in anticipation of the final regulation's effective
date in 1997, the Department has assumed that no savings to
participants will accrue in 1996.
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In addition, PWBA believes that the revised regulation will reduce
the likelihood that some participant contributions will be lost in
bankruptcy proceedings by being placed in trust sooner, which will put
these contributions out of reach of the sponsor's creditors,20
with an estimated annual savings, stated as a 10-year annuitized value,
to participants and beneficiaries of $4 million. Plans will receive
additional saving to participants through the reduced likelihood of
litigation (both from the Department and from private sources) due to
the shortened maximum time limit. Many other savings to participants
associated with the revised regulation, such as reduced anxiety among
participants, improved goodwill of employees toward the plan sponsors,
and increased pension savings rates, have not been quantified.
---------------------------------------------------------------------------
\20\ Several commenters recommended that the Bankruptcy Code be
amended to exclude participant contributions from the bankrupt
employer's estate. Such an amendment would require legislation and
is beyond the scope of this regulation.
---------------------------------------------------------------------------
Based on information submitted to the record and the Department's
data, the present value (using a 7 percent real discount rate) of the
quantified benefits expressed in constant 1995 dollars ranges from $79
million in 1997 to $71 million in 2005, totalling $686 million over the
1996-2005 period, and with a 10-year annuitized value of $98 million.
The present value (using a 7 percent real discount rate) of the net
savings to participants expressed in constant 1995 dollars ranges from
$69 million in 1997 to $62 million in 2005, totalling $579 million over
the 1996-2005 period, and with a 10-year annuitized value of $83
million.21 This projection of the net savings to participants
includes what is effectively a transfer from employers some of whom are
in full compliance with the 1988 regulation and act properly under
their fiduciary responsibilities.
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\21\ The costs and savings to participants resulting in the use
of the postponement of applicability and extension procedures are
not included here. It is expected that the incidence of utilization
of these procedures will be so minimal as to have no measurable or
material effect on aggregate costs and benefits.
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Non-Regulatory Alternatives
The Department examined non-regulatory approaches for promoting the
prompt deposit of participant contributions into trust, including (1)
increased enforcement efforts by the Department, (2) issuance of non-
regulatory guidance, (3) educating participants on their rights, and
(4) seeking legislative guaranty of the protection of participant
contributions, as is done by the Pension Benefit Guaranty Corporation
for defined benefit plan assets. The increased enforcement approach
advocated by a number of comments is more fully addressed above in the
discussion of such comments.
Using its non-regulatory authority, the Department recently
announced a voluntary compliance program (61 FR 9203, March 7, 1996)
and a complementary class exemption (61 FR 9199, March 7, 1996) to
encourage plan sponsors who are delinquent in submitting participant
contributions to make their plans whole. This initiative, known as the
Pension Payback Program, is targeted at persons who failed to transfer
participant contributions to pension plans within the timeframes
mandated by regulation. Those who comply with this program will avoid
ERISA civil actions initiated by the Department, the assessment of
civil penalties under ERISA section 502(l), and related Federal
criminal prosecutions. The Department has received the cooperation of
the Department of Justice and the IRS in creating this program.
The Department has undertaken both an enforcement initiative and a
pension education campaign. One of the results of these two initiatives
was the demonstration of the need for a modified plan asset regulation.
An improved plan asset regulation will reduce the significant risk to
the pension assets of American workers caused by certain employers'
failure to modify their performance of their own accord. While most
plan sponsors have used technological improvements to accelerate the
date upon which participant contributions are placed in trust, the
failure of some plan sponsors to adopt improved industry procedures in
the years since the promulgation of the original plan asset regulation
has resulted in reduced retirement savings or actual losses for their
employees.22 While some elements of the 401(k) industry
voluntarily police employer transmittal of participant contributions
23, this appears to be rare, and thus fails to provide adequate
protection for employees' retirement contributions. Therefore, the
Department has determined that revision of the 1988 regulation is
necessary to provide greater protection against loss of pension income.
---------------------------------------------------------------------------
\22\ This is demonstrated by the interim results of the
enforcement initiative: over $10.01 million has been recovered for
contributory pension plans and their participants.
\23\ For example, a prominent third party administrator states
in its contract that it will notify the Department of Labor's
enforcement personnel should participant contributions become
overdue.
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Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires each
Federal agency to perform a Regulatory Flexibility Analysis for all
rules that are likely to have a significant economic impact on a
substantial number of small entities. Small entities include small
businesses, organizations, and governmental jurisdictions; under ERISA,
a ``small plan'' is one with less than 100 participants. ERISA section
104(a)(2), 29 U.S.C. 1024 (a)(2).
This notice describes the economic impact that the changes to the
existing regulation on participant contributions will have on small
entities. A summary of the analysis for this finding follows; these
points are explained in greater detail above:
(1) The Department is promulgating this regulation because it
believes that modifying the regulatory guidance in this area is
necessary to better protect the security of participant contributions
to pension benefit plans. Reducing the maximum period during which
participant contributions may be treated as other than plan assets is
expected to reduce the amount of plan contributions that are at risk
because they have not yet been deposited in trust. This regulation
preserves the existing rule that
[[Page 41231]]
participant contributions become plan assets as soon as they can
reasonably be segregated from the plan sponsor's general assets. Under
the 1998 regulation, this maximum period of time is 90 days from the
date of withholding from a participant's wages or from the payment of
the contribution by the participant to the employer; under the revised
regulation, this date is the 15th business day of the month following
the month in which the contribution would have been payable to the
participant. The revised regulation provides that the maximum time
period applicable for pension plans may be extended upon meeting
certain conditions specified in the regulation. The rule has not been
changed for welfare benefit plans.
(2) The proposed regulation requested comments on the initial
regulatory flexibility analysis and from small entities regarding what,
if any, special problems they anticipate they may encounter if the
proposal were to be adopted, and what changes, if any, could be made to
minimize these problems. In excess of half of the comments received
were received from small entities, their representatives, or businesses
that provide employee benefit services to small employers. Comments
received included concern about the increased administrative costs
associated with the need for an increased number of transactions, that
employers would respond to the increased costs by avoiding establishing
or terminating plans, and that costs would be passed on to employees.
Commenters also expressed concern that inaccuracies in the
reconciliation of accounts could be introduced by the number of
transactions and short time provided to contribute in the proposed
regulation. Two-thirds of the comments received from small businesses,
third party administrators, or their representatives recommended that
contributions to pension plans be made by the 15th day of the month
following the month of withholding. Some commenters recommended other
time periods, such as 30 to 60 days from the day of withholding, or the
last day of the month following the month of withholding. It was also
suggested that Department pursue a course of increased enforcement
rather than alter the regulation. A few commenters suggested that the
effective date be delayed, in some instances up to a year. Five
commenters suggested that a waiver or exemption procedure be
established. Most of the commenters did not distinguish between maximum
periods for compliance for large and small entities. Some commenters,
particularly service providers to small plans, advocated that the same
rule apply to large and small entities. Only three comments recommended
that a different period for transmittal be provided for large and small
entities. Other comments received requested special consideration for
COBRA payments or Simplified Employee Pensions (SEPs) (available only
to employers with fewer than 26 employees). A few commenters suggested
that a bonding or disclosure option be included as an alternate form of
compliance.
The Department believes that most of the comments expressing
concern about increased administrative costs were in response to the
time frames provided in the NPRM for transmittal of withheld
contributions to the plan. Commenters generally indicated that
additional time was needed for transactions and reconciliations of
accounts. Most small entities found that a fifteen day maximum period
for transmittal of contributions would address their concerns. The
provisions setting the maximum period at 15 business days address the
concerns of those plans that requested additional time for compliance
(including SEPs). Based on the comments and testimony received, the
Department decided not to determine the maximum period based on the
size of the plan (as was proposed), but did change the maximum period
based on the type of plan, i.e., the outer limit for welfare benefit
plans was not changed. Provisions permitting an extension of time to
comply with the regulation were included for entities that would, on
occasion, have difficulty meeting the maximum time period of the
regulation, and for those entities that would have difficulty revising
their benefits systems prior to the effective date of the regulation.
Based on the comments received, including many from small employers
and the businesses that provide payroll and plan administration
services to them, it was determined that there should be a single outer
limit, rather than a tiered regulation providing less rigid
alternatives for small plans. However, to the extent that the
provisions for extensions of time respond to small plan concerns, those
procedures may be considered an alternative form of compliance.
(3) Of the estimated 283,000 pension plans that will receive
participant contributions subject to the regulation (in 1997), an
estimated 245,800 are small plans (plans with less than 100
participants). Based on Form 5500 filings and comments received on the
proposed regulation, only six percent (14,748) will not be in
compliance with the revised regulation, and will therefore have to
change their practices to comply with the new standard. Testimony and
comments also indicate that a high percentage of small plans already
act in compliance with the revised standard. No small governmental
jurisdictions will be affected.
(4) In response to specific requests from employers, including
small employers, the Department is establishing procedures for
extension of the maximum time period for transmittal of contributions.
The disclosure and bonding provisions in the procedure provide an
alternative to plans that find compliance with the maximum period for
pension plans to be burdensome. The projected reporting, recordkeeping
and other compliance requirements of these procedures are described
below. The professional skills necessary for meeting these requirements
are those expected to be available to small plans in their ordinary
course of business.
(5) To the extent that small plan concerns have not been met by
setting the maximum period at 15 business days, several alternatives
which could minimize the impact on small entities have been identified,
and have been included in this final regulation. These alternatives
include a procedure allowing for a postponed application of the new
maximum period for pension plans, and a procedure allowing for an
occasional longer maximum period for transmittal of contributions, with
heightened disclosure and bonding requirements. In order to achieve the
Department's policy objectives, these alternative procedures require
significant safeguards for the security of participants' contributions.
It would be inappropriate to create an alternative with lower
compliance criteria, or an exemption under the proposed regulation, for
small plans because those are the entities which pose a higher degree
of risk of loss due to the delay in depositing participant
contributions into trust. The need for improved compliance by small
plans is demonstrated by the Department's findings, through its
employee contribution investigations, that of closed 401(k) plan cases
with monetary recovery, 75% of these cases involved plans with fewer
than 100 participants.
It should be noted that the Department's proposed regulation
created three tiers of compliance, based on the size of payroll.
However, the overwhelming majority of the comments, including those
from representatives of small plans,
[[Page 41232]]
specifically opposed that approach, asking that a single compliance
schedule remain in effect. Moreover, from the comments received, it
appears that creating a less stringent outside limit exclusively for
small plans might prove more costly because outside service providers
would then have to maintain two sets of software and protocols,
reducing economies of scale. The additional costs would be passed on to
their clients, including small plans.
In addition, many of the reasons set forth in the comments for
having alternative forms of compliance are based on the proposed
regulation, which had significantly more rigid time frames for
compliance. Because the requirements of the final regulation were
drafted in response to those comments, it is the Department's belief
that most of the concerns of small businesses have been addressed in a
manner favorable to them.
This modification of the existing plan asset regulation does not
eliminate protections already provided by the rule, but simply reduces
the outside limit on the existing rule to enhance compliance in light
of improved technology, thereby further improving employee protections.
The Department believes that it has minimized the economic impact
of the revised regulation on small entities in accordance with the
Regulatory Flexibility Act, while accomplishing the objectives of
ERISA.
Paperwork Reduction Act
The Department of Labor, as part of its continuing effort to reduce
paperwork and respondent burden conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and/or continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This program helps to ensure that
requested data can be provided in the desired format, reporting burden
(time and financial resources) is minimized, collection instruments are
clearly understood, and the impact of collection requirements on
respondents can be properly assessed. Currently, the Pension and
Welfare Benefits Administration is soliciting comments concerning the
proposed new collection of the Notice of Extension of Time for
Compliance with 29 C.F.R. 2510.3-102.
Written comments must be submitted on or before October 7, 1996.
The Department of Labor is particularly interested in comments which:
evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
enhance the quality, utility, and clarity of the
information to be collected; and
minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submissions of responses.
Address comments to Mr. Gerald B. Lindrew, U.S. Department of
Labor, PWBA/OPLA, Room N-5647, 200 Constitution Avenue, N.W.,
Washington, DC 20210, telephone 202-219-4782 (this is not a toll-free
number).
I. Background
In response to comments received regarding the revised regulation
below, it was deemed appropriate to offer an optional procedure for
those plans that would incur difficulty or undue expense in complying
with the deadlines of the regulation. This notice-and-bonding procedure
serves as an alternate form of compliance while protecting the security
of the participant contributions to pension plans and providing the
Department with adequate notice of the plans' actions.
II. Current Actions
The collection has two components: the first provides a 90 day
extension of time for plans that cannot comply with the revised
regulation prior to the effective date of the regulation. This
effectively gives those plans 270 days to comply. The second component
extends the maximum time period under paragraph (b) by ten business
days.
In order to comply with one of these options, notice must be
provided to the participants of the plan, a performance bond or
irrevocable letter of credit at least equal to the amount of
participant contributions at risk must be secured, and the Department
must be given a copy of the notice and certification that the notice
was sent and the bond was secured.
Based on past experience, the staff believes that none of the
materials required to be submitted under the procedure for postponement
of application of the maximum period for pension plans will be prepared
by the respondents; rather, the respondents are expected to contract
with service providers such as attorneys, accountants, and third-party
administrators to prepare the materials. Therefore, the Department has
inserted one hour as a placeholder for the estimated burden, in light
of the current requirements that time spent by service providers not be
included in the hourly burden estimate, but rather as a cost. The
annual cost of using service providers for this collection of
information is estimated to be $249,000 in the first year only. In
contrast, because the Department believes that those respondents who
seek an extension of the maximum period are likely to seek such
extensions more than once and therefore are more likely to use their
own personnel, the Department has estimated the burden based wholly on
use of in-house personnel.
Type of Review: New.
Agency: U.S. Department of Labor, Pension and Welfare Benefits
Administration.
Title: Notice of Extension of Time for Compliance with 29 C.F.R.
2510.3-102.
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions; Farms.
Burden:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Total
Cite/reference respondents Frequency responses Average time per response Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Extension of Effective Date......... 166 Occasionally.................... 166 ............................ 1 hour.
Extension of Maximum Time........... 166 Occasionally.................... 166 6 hours..................... 996 hours.
Totals........................ ........... ................................ 332 ............................ 997
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 41233]]
Estimated Total Burden Cost:
Applicability Postponement: $249,000 (first year only).
Extension of Maximum Time: $124,000.
Total: $373,000.
Comments submitted in response to this notice will be summarized
and/or included in the request for Office of Management and Budget
approval of the information collection request; they will also become a
matter of public record.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, this rule does not include
any Federal mandate that may result in increased expenditures by State,
local or tribal governments, and does not impose an annual burden
exceeding $100 million on the private sector.
Statutory Authority
The final regulation is adopted pursuant to the authority contained
in section 505 of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135)
and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3,
1979), 3 CFR 1978 Comp. 332, and under Secretary of Labor's Order No.
1-87, 52 FR 13139 (Apr. 21, 1987).
List of Subjects in 29 CFR Part 2510
Employee benefit plans, Employee Retirement Income Security Act,
Pensions, Plan assets.
In view of the foregoing, Part 2510 of Chapter XXV of Title 29 of
the Code of Federal Regulations is amended as set forth below:
PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, AND
G OF THIS CHAPTER
1. The authority citation for part 2510 continues to read as
follows:
Authority: Secs. 3(2), 111(c), 505, Pub. L. 93-406, 88 Stat.
852, 894, (29 U.S.C. 1002(2), 1031, 1135) Secretary of Labor's Order
No. 27-74, 1-86, 1-87, and Labor-Management Services Administration
Order No. 2-9.
Section 2510.3-101 is also issued under sec. 102 of
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978),
effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR
1978 Comp. 332, and sec. 11018(d) of Pub. L. 99-272, 100 Stat. 82.
Section 2510.3-102 is also issued under sec. 102 of
Reorganization Plan No. 4 of 1978 (43 FR 477133, October 17, 1978),
effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR
1978 Comp. 332.
2. Section 2510.3-102 is revised to read as follows:
Sec. 2510.3-102 Definition of ``plan assets''--participant
contributions.
(a) General rule. For purposes of subtitle A and parts 1 and 4 of
subtitle B of title I of ERISA and section 4975 of the Internal Revenue
Code only (but without any implication for and may not be relied upon
to bar criminal prosecutions under 18 U.S.C. 664), the assets of the
plan include amounts (other than union dues) that a participant or
beneficiary pays to an employer, or amounts that a participant has
withheld from his wages by an employer, for contribution to the plan as
of the earliest date on which such contributions can reasonably be
segregated from the employer's general assets.
(b) Maximum time period for pension benefit plans. With respect to
an employee pension benefit plan as defined in section 3(2) of ERISA,
in no event shall the date determined pursuant to paragraph (a) of this
section occur later than the 15th business day of the month following
the month in which the participant contribution amounts are received by
the employer (in the case of amounts that a participant or beneficiary
pays to an employer) or the 15th business day of the month following
the month in which such amounts would otherwise have been payable to
the participant in cash (in the case of amounts withheld by an employer
from a participant's wages).
(c) Maximum time period for welfare benefit plans. With respect to
an employee welfare benefit plan as defined in section 3(1) of ERISA,
in no event shall the date determined pursuant to paragraph (a) of this
section occur later than 90 days from the date on which the participant
contribution amounts are received by the employer (in the case of
amounts that a participant or beneficiary pays to an employer) or the
date on which such amounts would otherwise have been payable to the
participant in cash (in the case of amounts withheld by an employer
from a participant's wages).
(d) Extension of maximum time period for pension plans. (1) With
respect to participant contributions received or withheld by the
employer in a single month, the maximum time period provided under
paragraph (b) of this section shall be extended for an additional 10
business days for an employer who--
(i) Provides a true and accurate written notice, distributed in a
manner reasonably designed to reach all the plan participants within 5
business days after the end of such extension period, stating--
(A) That the employer elected to take such extension for that
month;
(B) That the affected contributions have been transmitted to the
plan; and
(C) With particularity, the reasons why the employer cannot
reasonably segregate the participant contributions within the time
period described in paragraph (b) of this section;
(ii) Prior to such extension period, obtains a performance bond or
irrevocable letter of credit in favor of the plan and in an amount of
not less than the total amount of participant contributions received or
withheld by the employer in the previous month; and
(iii) Within 5 business days after the end of such extension
period, provides a copy of the notice required under paragraph
(d)(1)(i) of this section to the Secretary, along with a certification
that such notice was provided to the participants and that the bond or
letter of credit required under paragraph (d)(1)(ii) of this section
was obtained.
(2) The performance bond or irrevocable letter of credit required
in paragraph (d)(1)(ii) of this section shall be guaranteed by a bank
or similar institution that is supervised by the Federal government or
a State government and shall remain in effect for 3 months after the
month in which the extension expires.
(3)(i) An employer may not elect an extension under this paragraph
(d) more than twice in any plan year unless the employer pays to the
plan an amount representing interest on the participant contributions
that were subject to all the extensions within such plan year.
(ii) The amount representing interest in paragraph (d)(3)(i) of
this section shall be the greater of--
(A) The amount that otherwise would have been earned on the
participant contributions from the date on which such contributions
were paid to, or withheld by, the employer until such money is
transmitted to the plan had such contributions been invested during
such period in the investment alternative available under plan which
had the highest rate of return; or
(B) Interest at a rate equal to the underpayment rate defined in
section 6621(a)(2) of the Internal Revenue Code from the date on which
such contributions were paid to, or withheld by, the employer until
such money is fully restored to the plan.
(e) Definition. For purposes of this section, the term business day
means any day other than a Saturday, Sunday or any day designated as a
holiday by the Federal Government.
[[Page 41234]]
(f) Examples. The requirements of this section are illustrated by
the following examples:
(1) Employer W is a small company with a small number of employees
at a single payroll location. W maintains a plan under section 401(k)
of the Code in which all of its employees participate. W's practice is
to issue a single check to a trust that is maintained under the plan in
the amount of the total withheld employee contributions within two
business days of the date on which the employees are paid. In view of
the relatively small number of employees and the fact that they are
paid from a single location, W could reasonably be expected to transmit
participant contributions to the trust within two days after the
employee's wages are paid. Therefore, the assets of W's 401(k) plan
include the participant contributions attributable to such pay periods
as of the date two business days from the date the employee's wages are
paid.
(2) Employer X is a large national corporation which sponsors a
section 401(k) plan. X has several payroll centers and uses an outside
payroll processing service to pay employee wages and process
deductions. Each payroll center has a different pay period. Each center
maintains separate accounts on its books for purposes of accounting for
that center's payroll deductions and provides the outside payroll
processor the data necessary to prepare employee paychecks and process
deductions. The payroll processing service has adopted a procedure
under which it issues the employees' paychecks when due and deducts all
payroll taxes and elective employee deductions. It deposits withheld
income and employment payroll taxes within the time frame specified by
26 CFR 31.6302-1 and forwards a computer data tape representing the
total payroll deductions for each employee, for a month's worth of pay
periods, to a centralized location in X, within 4 days after the end of
the month, where the data tape is checked for accuracy. A single check
representing the aggregate participant contributions for the month is
then issued to the plan by the employer. X has determined that this
procedure, which takes up to 10 business days to complete, permits
segregation of participant contributions at the earliest practicable
time and avoids mistakes in the allocation of contribution amounts for
each participant. Therefore, the assets of X's 401(k) plan would
include the participant contributions no later than 10 business days
after the end of the month.
(3) Assume the same facts as in paragraph (f)(2) of this section,
except that X takes 30 days after receipt of the data tape to issue a
check to the plan representing the aggregate participant contributions
for the prior month. X believes that this procedure permits segregation
of participant contributions at the earliest practicable time and
avoids mistakes in the allocation of contribution amounts for each
participant. Under paragraphs (a) and (b) of this section, the assets
of the plan include the participant contributions as soon as X could
reasonably be expected to segregate the contributions from its general
assets, but in no event later than the 15th business day of the month
following the month that a participant or beneficiary pays to an
employer, or has withheld from his wages by an employer, money for
contribution to the plan. The participant contributions become plan
assets no later than that date.
(4) Employer Y is a medium-sized company which maintains a self-
insured contributory group health plan. Several former employees have
elected, pursuant to the provisions of ERISA section 602, 29 U.S.C.
1162, to pay Y for continuation of their coverage under the plan. These
checks arrive at various times during the month and are deposited in
the employer's general account at bank Z. Under paragraphs (a) and (b)
of this section, the assets of the plan include the former employees'
payments as soon after the checks have cleared the bank as Y could
reasonably be expected to segregate the payments from its general
assets, but in no event later than the 90 days after a participant or
beneficiary, including a former employee, pays to an employer, or has
withheld from his wages by an employer, money for contribution to the
plan.
(g) Effective date. This section is effective February 3, 1997.
(h) Applicability date for collectively-bargained plans. (1)
Paragraph (b) of this section applies to collectively bargained plans
no sooner than the later of--
(i) February 3, 1997; or
(ii) The first day of the plan year that begins after the
expiration of the last to expire of any applicable bargaining agreement
in effect on August 7, 1996.
(2) Until paragraph (b) of this section applies to a collectively
bargained plan, paragraph (c) of this section shall apply to such plan
as if such plan were an employee welfare benefit plan.
(i) Optional postponement of applicability. (1) The application of
paragraph (b) of this section shall be postponed for up to an
additional 90 days beyond the effective date described in paragraph (g)
of this section for an employer who, prior to February 3, 1997--
(i) Provides a true and accurate written notice, distributed in a
manner designed to reach all the plan participants before the end of
February 3, 1997, stating--
(A) That the employer elected to postpone such applicability;
(B) The date that the postponement will expire; and
(C) With particularity the reasons why the employer cannot
reasonably segregate the participant contributions within the time
period described in paragraph (b) of this section, by February 3, 1997;
(ii) Obtains a performance bond or irrevocable letter of credit in
favor of the plan and in an amount of not less than the total amount of
participant contributions received or withheld by the employer in the
previous 3 months;
(iii) Provides a copy of the notice required under paragraph
(i)(1)(i) of this section to the Secretary, along with a certification
that such notice was provided to the participants and that the bond or
letter of credit required under paragraph (i)(1)(ii) of this section
was obtained; and
(iv) For each month during which such postponement is in effect,
provides a true and accurate written notice to the plan participants
indicating the date on which the participant contributions received or
withheld by the employer during such month were transmitted to the
plan.
(2) The notice required in paragraph (i)(1)(iv) of this section
shall be distributed in a manner reasonably designed to reach all the
plan participants within 10 days after transmission of the affected
participant contributions.
(3) The bond or letter of credit required under paragraph
(i)(1)(ii) shall be guaranteed by a bank or similar institution that is
supervised by the Federal government or a State government and shall
remain in effect for 3 months after the month in which the postponement
expires.
(4) During the period of any postponement of applicability with
respect to a plan under this paragraph (i), paragraph (c) of this
section shall apply to such plan as if such plan were an employee
welfare benefit plan.
[[Page 41235]]
Signed at Washington, DC, this 30th day of July 1996.
Olena Berg,
Assistant Secretary for Pension and Welfare Benefits, Department of
Labor.
[FR Doc. 96-19791 Filed 8-6-96; 8:45 am]
BILLING CODE 4510-29-P