Proposed Regulation Relating to Definition of Plan Assets; Participant Contributions

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:

[email protected]. 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