Department of Labor (“DOL”) regulations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) require that employee contributions (amounts withheld from an employee’s pay) be treated as plan assets as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets. Such regulations also provide that in no event shall that date be later than the 15th business day of the month following the month in which the amounts would otherwise have been payable to the employee. (DOL Reg. Section 2510.3-102 and DOL Field Assistance Bulletin 2003-2).
The purpose of the DOL regulations is to assure that employers are not using employee funds for non-retirement purposes or unnecessarily delaying the remittance of contributions.
What Ys Need to Know
To comply with ERISA, Ys participating in the Retirement Plan are required to remit employee-withheld contributions to the Fund as soon as reasonably possible following the date that amounts are withheld from employee paychecks, but in no event later than the 15th business day of the month following the month in which amounts would otherwise have been payable to the employee.
For example, if contributions are withheld from employee paychecks on July 15, the Y is required to remit such employee contributions to the Fund as soon as reasonably possible but no later than the 15th business day of August. The “as soon as reasonably possible” standard will depend upon the facts and circumstances of the Y, including whether it has electronic payroll systems and computer capabilities or manual systems to transmit contributions, as well as the number of Y branches that need to be coordinated and whether an outside payroll provider is utilized.
ERISA regards employee-withheld contributions as plan assets as of the earliest date on which such contributions 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 amounts would otherwise have been payable to the employee. This is important because failure to remit such contributions on time may be viewed as a “prohibited transaction,” and may result in significant excise taxes and penalties.
In this context, the “prohibited transaction” may constitute an impermissible loan between the Retirement Plan and the Y. The method to correct a prohibited transaction is by undoing the transaction (contributing the employee amounts and related earnings).
In addition, the transaction may need to be reported to the IRS (on IRS Form 5330) and an excise tax penalty any other penalties may be due.
Funds withheld from an employee’s pay are considered plan assets and cannot be diverted for any purpose other than to be remitted to the Fund to be credited to the employee’s accounts under the Retirement Plan for the exclusive benefit of the employee. The Fund will be required to report late contributions to the IRS on the annual information return filed for the Retirement Plan.
Using plan assets for any other purpose, including the cash flow needs of the employer, could result in criminal liability.
If Employee-Withheld Contributions are not Remitted to the Fund ASAP
The Y is still obligated to remit the contributions to the Fund, and may also be required to file IRS Form 5330 and pay a 15% excise tax penalty of the amount involved to the IRS. Failure to correct the prohibited transaction, to file the Form 5330 and to pay the penalty tax by the time it is due, or by the time a deficiency notice is received from the IRS, may subject the Y to a 100% excise tax penalty.
Under DOL regulations, a 10-business day extension may be available if certain specific requirements are met, including notifying all participants, the DOL, and obtaining a performance bond.
Employer Contributions are Due on the 15th Business Day
Employer contributions by Ys to the Retirement Plan must be sent to the Fund by the 15th business day after the end of the month to which such employer contributions relate. If a Y fails to remit employer contributions in a timely manner, the Y must pay all contributions plus interest (at the applicable interest rates) to the Fund. In addition, the Y may be required to complete IRS Form 5330 and pay a 15% excise tax penalty.
Failure to Comply May Result in Expulsion
Failure to comply with the timely remittance of either employee-withheld contributions or employer contributions to the Fund could result in appropriate action being taken against a non-complying Y, including expulsion from participation in the plans of the Fund.