[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Proposed Rules]
[Pages 66036-66040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30782]
[[Page 66035]]
_______________________________________________________________________
Part V
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
29 CFR Part 2510
Proposed Regulation Relating to Definition of Plan Assets; Participant
Contributions; Proposed Rule
Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 /
Proposed Rules
[[Page 66036]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2510
RIN 1210-AA53
Proposed Regulation Relating to Definition of Plan Assets;
Participant Contributions
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains a proposed 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). This
regulation will provide guidance to employers that sponsor contributory
plans, including plans complying with section 401(k) of the Internal
Revenue Code, as well as fiduciaries, participants, and beneficiaries
of such plans.
DATES: Written comments and requests to testify concerning the proposed
regulation must be received by February 5, 1996. The Department has
scheduled a public hearing on this proposal on January 24, 1995, and,
if necessary, on January 25, 1995. The hearing will begin at 10:00 am
on both days.
ADDRESSES: Interested persons are invited to submit written comments
and requests to testify concerning this proposed regulation to: Pension
and Welfare Benefits Administration, Room N-5669, U.S. Department of
Labor, 200 Constitution Ave., N.W., Washington, DC 20210. Attention:
Proposed Participant Contribution Regulation. All submissions will be
open to public inspection at the Public Documents Room, Pension and
Welfare Benefits Administration, U.S. Department of Labor, Room N-5638,
200 Constitution Ave., NW., Washington, DC 20210. Written comments may
also be sent by the Internet to the following address:
hinz@access.digex.net. The hearing on this proposal will be held in
Room N-3437A, Constitution Ave., N.W., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Rudy Nuissl, Office of Regulations and
Interpretations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, Washington, DC (202) 219-7461; or William W.
Taylor, Plan Benefits Security Division, Office of the Solicitor, U.S.
Department of Labor, Washington, DC (202) 219-9141. These are not toll-
free numbers.
SUPPLEMENTARY INFORMATION: In 1988, the Department of Labor (the
Department) published a final regulation defining when certain monies
that a participant pays to, or has withheld by, an employer for
contribution to a plan are ``plan assets'' for purposes of Title I of
ERISA and the related prohibited transaction provisions of the Code.\1\
53 FR 17628 (May 17, 1988). The final 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).\2\ 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 Secretary of Labor has authority to issue regulations
relating to section 4975 of the Internal Revenue Code pursuant to
section 102 of Reorganization Plan No. 4 of 1978. 5 U.S.C. App. 165.
For the sake of clarity, the remainder of the preamble refers only
to Title I of ERISA. However, these references apply to the
corresponding provisions of section 4975 of the Code as well.
\2\ The Department has taken the position that elective
contributions to an employee benefit plan, whether made pursuant to
a salary reduction agreement or otherwise, constitute amounts paid
to or withheld by an employer (i.e., participant contributions)
within the scope of Sec. 2510.3-102, without regard to the treatment
of such contributions under the Internal Revenue Code. See 53 FR
29660 (Aug. 8, 1988).
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Except as provided in ERISA Sec. 403(b), plan assets are required
to be held in trust by one or more trustees.\3\ ERISA Sec. 403(a), 29
U.S.C. 1103(a). In addition, ERISA's fiduciary responsibility
provisions apply to the management of plan assets. Among other things,
these 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 Secs. 403-404, 29 U.S.C. 1103-1104. They also prohibit a
broad array of transactions involving plan assets. ERISA Secs. 406-408,
29 U.S.C. 1106-1108. Employers who fail to transmit promptly
participant contributions, and plan fiduciaries who fail to collect
those amounts in a timely manner, will violate the requirement that
plan assets be held in trust; in addition, such employers and
fiduciaries may be engaging in prohibited transactions.
\3\ ERISA Sec. 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. In addition, 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).
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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 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 contributions is not a plan asset
for purposes of Title I of ERISA. The final regulation defined 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 Code. The Department reiterates that this regulation
may not be relied upon to bar criminal prosecutions pursuant to 18
U.S.C. 664.
Similarly, the Department wishes to reemphasize its view, expressed
in the preamble to the final regulation, that in circumstances in which
the employer clearly converts participant contributions to its own use,
such amounts are considered ``segregated,'' and thus will be ``plan
assets''.
The Need for a Proposed Regulation
Although the Department believes that, in the vast majority of
contributory employee benefit plans, participant contributions are
handled with integrity, recent investigations conducted by the
Department have revealed numerous violations related to employers'
delay in transmitting or failing to transmit to employee benefit plans
amounts that a participant or beneficiary pays to an employer, or
[[Page 66037]]
amounts that employers withhold from participants' wages, for
contribution to the plans. Evidence uncovered in ongoing investigations
indicates that such delays are not uncommon.\4\ The above described
recent enforcement activities focused on participant contribution
indicate a significantly higher frequency of violations for such
investigations than the Department encounters in general.\5\
\4\ In the Spring of 1995 PWBA began a project to investigate
misuse of employee contributions to employee benefit plans and in
particular in 401(k) plans. As of October 31, 1995 there were 417
employee contribution investigations open and 130 cases were closed
during the year. More than $3.7 million has been recovered through
voluntary compliance in situations where employee contributions were
not placed in trust for participants.
\5\ Of the 130 closed employee contribution cases, 44, or 33.8
percent of closed cases, resulted in findings of violations of
ERISA's fiduciary provisions. This compares to a finding of
fiduciary violations in 12 percent of all other closed cases in FY
95.
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In addition, the Department, responding to requests for technical
assistance from employers and participants, has received information
that many employers who receive participant contributions are under the
misimpression that the current regulation permits a delay of up to 90
days in segregating such contributions, even if the participant
contributions can reasonably be segregated much sooner. The Department
has also received similar information from a variety of other sources.
Such delays deprive participants of earnings on their contributions and
increase the risk to participants and their beneficiaries that their
contributions will be lost due to the employer's insolvency or
misappropriation by the employer.
In order to better protect the security of participant
contributions to employee benefit plans, the Department believes that
the final regulation published in 1988 must be revised. It is important
to clarify that participant contributions become plan assets as soon as
they can reasonably be segregated from the employer's general assets.
In addition, the Department believes that the 90-day maximum period
under 1988 regulation is too long, given the abuses that have been
uncovered by the Department's investigations, and improvements in cash
management and payroll processing practices since the final regulation
was adopted.
The Proposed Regulation
This document contains a proposal to revise the regulation at 29
CFR 2510.3-102 by changing the maximum period during which participant
contributions to an employee benefit may be treated as other than
``plan assets''. Under the current regulation, the maximum period is 90
days from the date on which the participant contributions are received
by the employer (for amounts that participants or beneficiaries pay to
the employer) or would otherwise have been payable to the participants
in cash (for amounts that the employer withholds from the participants'
wages).
Under the proposed rule, the maximum period for an employer to
transmit participant contributions to the plan would be 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 currently applicable rules are
codified at 26 CFR 31.6302-1.\6\ In general, these rules require
employers who have 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.
\6\ See also IRS Publication 15 (Cat. No. 10000W) Circular E,
Employer's Tax Guide (Rev. January 1995) and IRS Notice 931 (Rev.
October 1995).
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In addition, the IRS regulations reflect the statutory requirement
that 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. 26 U.S.C. 6302(g). If an employer accumulates less than a
$500 tax liability during a calendar quarter, no deposits are required;
the tax is paid with the filing of the tax return for the quarter.\7\
The Department solicits comments on the appropriateness of including
these two special rules to the general tax deposit rules in the IRS
regulation.
\7\ The Department recognizes that mistakes may occur in the
processing of participant contributions. It is the Department's view
that ERISA does not prevent the return of any mistaken contributions
nor the ability to make correcting contributions after the mistakes
are discovered. See ERISA Sec. 403(c), 29 U.S.C. 11103(c).
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The proposed rule would require employers who cannot reasonably
segregate participant contributions at an earlier date to treat such
amounts as plan assets within the same time frame that the employer is
required to segregate and deposit withheld income taxes and employment
taxes. The following table illustrates the basic time periods specified
in the IRS regulations:
------------------------------------------------------------------------
Type of depositor Date withheld Date deposit due
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Semi-Weekly Depositor (more Wednesday, Thursday, Following Wednesday.
than $50,000 of Federal and/or Friday. Following Friday.
Income, Social Security and Saturday, Sunday,
Medicare taxes Monday and/or
(collectively, employment Tuesday.
taxes) reported for 12-
month period ending last
June 30).
Monthly Depositor ($50,000 In any day during a By the 15th of the
or less of employment taxes calendar month. following calendar
reported for 12-month month.
period ending on the
previous June 30).
Either semi-weekly or Not relevant........ Next banking day
monthly depositor, if after the $100,000
$100,000 or more in in employment taxes
employment taxes are was accumulated.
accumulated on any date.
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For example, a semi-weekly depositor that pays its employees on
Wednesday, December 13, is required to deposit withheld income taxes
and employment taxes by the following Wednesday (December 20). Under
the proposed rule, any participant contributions withheld on December
13 would become plan assets as soon as they could reasonably be
segregated from the employer's general assets, but no later than
December 20. Participant contributions that are paid separately by
employees or former employees to the employer would be subject to the
same time frames. For example, if a semi-weekly depositor receives a
participant's payment on Monday,
[[Page 66038]]
December 18, the payment amount would become plan assets as soon as
they could reasonably be segregated from the employer's general assets,
but no later than the following Friday, December 22.
Because the IRS tax deposit rules are generally applicable to
employers, the Department expects that employers who sponsor
contributory employee benefit plans are familiar with and have systems
in place to comply with the IRS requirements.\8\ Thus, the Department
believes that applying these same rules in determining when the maximum
period beyond which participant contributions must be treated as plan
assets should not result in serious inconvenience or expense for such
employers. The Department believes that currently available cash
management and payroll processing technology allows the segregation of
participant contributions within the maximum period proposed in this
document. Furthermore, the final regulation published in 1988 requires
that participant contributions be treated as plan assets as soon as
they can reasonably be segregated from the employer's general assets.
As a result, this proposed change will not be material for many
employers who have complied with the final regulation published in
1988. The Department recognizes that some employers perceive
difficulties in the transfer of participant contributions to the plan
that they do not have in the deposit of federal employment taxes. The
Department solicits comments as to any specific burdens and associated
costs of this kind. The Department also requests comments on the
transition period needed for employers and service providers,
especially small businesses, to make changes in practices that may be
necessary to comply with the proposal if it is adopted.
\8\ The Department understands that most employers who sponsor
section 401(k) plans are ``semi-weekly depositors'' under the IRS
rules.
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Although the proposed rule would not change the requirement that
participant contributions be treated as plan assets at the earliest
date they can reasonably be segregated from the employer's general
assets, changing the regulations to provide for an outer limit that
conforms to IRS requirements will allow the Department and plan
participants to more quickly and easily determine that a violation has
occurred. This will assist the Department in its increased monitoring
and enforcement in this area, as it reduces the room for argument as to
how rapidly participant contributions must be segregated from the
employer's general assets. In addition, changing the ninety-day limit
for treating participant contributions as other than ``plan assets''
reduces the risk of loss that exists when employers improperly hold
participant contributions in their general assets for the maximum
period rather than segregating them from the employer's general assets
at the earliest reasonable date.
The proposed rule does not include an alternative proposal for a
maximum period based on a fixed period of days (such as 15 days), but
the Department may consider adopting such a rule in place of the rule
described above if adopting the IRS tax deposit rules as the maximum
period for segregating participant contributions would place an undue
burden on plan sponsors. Commenters may wish to address the advantages
or disadvantages of using a fixed period of days or some other
formulation for a maximum period when they provide comments on the
proposed rule.
The Department also welcomes comments on the advisability of other
measures that it might consider to address the problem of delays in
transmitting participant contributions to plans, such as, for example,
requirements for more frequent disclosure to participants of
participant contributions and account balances by the plan.
This document also modifies the language in section 2510.3-102 to
emphasize that the assets of a plan include participant contributions
as of the earliest date on which such contributions can reasonably be
segregated from the employer's general assets. Although this
modification would not change the effect of the existing regulation,
the Department expects that the proposed new language will reduce the
likelihood that employers will incorrectly believe that the maximum
period in the proposed rule is a safe harbor and that they may delay
the segregation of participant contributions up to the maximum period.
Effective Date of Regulation
Pursuant to the requirements of the Administrative Procedure Act at
5 U.S.C. 553(b), the Department is publishing this notice of proposed
rulemaking for notice and comment and will promulgate this rule in
final form subsequent to such comment period. The Department expects to
issue a final rule 45 days following the close of the comment period.
The Department has determined to propose that the final rule will be
effective 60 days after its publication, which the Department believes
will allow sufficient time for an appropriate transition to the new
maximum periods. The Department solicits comments regarding the
appropriate effective date for the final regulation.
Regulatory Flexibility Act
The Department has determined that this regulation would not have a
significant economic impact on small plans or other small entities. The
regulation would describe when contributions made by a participant of a
plan subject to ERISA or to the related prohibited transaction excise
tax provisions of the Internal Revenue Code must be transmitted to the
plan by an employer withholding the contributions. The Department
solicits comments on whether the proposal is likely to have a
significant economic impact on small entities. The Department also
requests comments 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.
Executive Order 12866
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. The
Department also solicits comments on potential economic effects of this
proposed rule in the context of Executive Order 12866, and any evidence
with respect to whether or not this proposed rule may be ``economically
significant''.
Paperwork Reduction Act
The regulation being issued here is not subject to the requirements
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) because
it does not
[[Page 66039]]
contain an ``information collection request'' as defined in 44 U.S.C.
3502(11).
Statutory Authority
The proposed regulation would be 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.
PART 2510--[AMENDED]
1. The authority for Part 2510 is revised to read:
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 (51 FR 3521, January 28, 1986), 1-87 (52 FR 13139,
April 21, 1987), and Labor Management Services Administration Order
No. 2-6.
Section 2510.3-40 is also issued under sec. 3(40), Pub. L. 97-
473, 96 Stat. 2611, 2612 (29 U.S.C. 1002(40)).
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 47713, 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:
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. In no event shall the date determined
pursuant to paragraph (a) of this section occur later than the end of
period of time during which the employer is required to make federal
tax deposits for withheld income taxes and taxes under the Federal
Insurance Contributions Act under regulations issued at 26 CFR 31.6302-
1, measured 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 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).
(c) 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 Internal Revenue Code in which all of its employees participate.
W's practice is to issue a single check to the trust that is maintained
under the plan in the amount of the total withheld employee
contributions within two days of the date on which the employees are
paid. Under applicable Internal Revenue Service federal tax deposit
rules, W is a ``monthly depositor'' as defined at 26 CFR 31.6302-
1(c)(1). Under these rules W must deposit withheld federal income taxes
and employment taxes no later than the 15th of the month following the
month in which the relevant wages 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 a 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 any pay period as of the date two days
from the close of such period, even though IRS federal tax deposit
rules allow W substantially more time in which to make tax deposits.
(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, where the data tape is checked
for accuracy. A single check representing the aggregate participant
contributions for the month is issued to the plan by the employer. X
believes that this procedure, which takes 7 days after receipt of the
date tape to complete, permits segregation of participant contributions
at the earliest practicable time and avoids mistakes in the allocation
of contribution amounts for each participant. X, however, is a ``semi-
weekly depositor'' under the Internal Revenue Service's Federal Deposit
Rules and makes Federal tax deposits within the time frames, set forth
in those IRS rules. 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 date on which the
employer would be required to deposit withheld income taxes and
employment taxes under 26 CFR 31.6302-1. The participant contributions
become plan assets no later than end of the time period within which X
is required to deposit withheld income taxes and employment taxes.
(3) Employer Y is medium-sized company which maintains a self-
insured contributory group health plan. Several former employees have
elected, pursuant to the provisions of ERISA Sec. 602, 29 U.S.C. 1162,
to pay Y for continuation of their coverage under the plan. Y is a
semi-weekly depositor of withheld Federal income taxes and employment
taxes. Under paragraphs (a) and (b) of this section, the assets of the
plan include the former employees' payments as soon as Y could
reasonably be expected to segregate the payments from its general
assets, but in no event later than the date on which Y would be
required to deposit the payment amounts if the payments were withheld
from Federal income taxes or employment taxes. A former employee's
payment received on a Monday would have become plan assets no later
than the following Friday.
(d) Effective date. This section is effective 60 days after date of
publication of final regulation.
[[Page 66040]]
Signed at Washington, DC, this 14th day of December 1995.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 95-30782 Filed 12-19-95; 8:45 am]
BILLING CODE 4510-29-M
