96-19791. Regulation Relating to Definition of ``Plan Assets''Participant Contributions

[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.

-----------------------------------------------------------------------

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 [phone]; or William W. 
Taylor, Plan Benefits Security Division, Office of the Solicitor, U.S. 
Department of Labor, Washington, DC [phone]. 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).
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \2\ References to ``comments'' and ``commenters'' includes both 
written comment letters as well as prepared statements and oral 
testimony at the public hearing.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------

    \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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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 [phone] (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