Proposed Rule Amending the Definition of Plan Assets; Participant Contributions

SUMMARY: This document contains a proposed rule that would amend the

Department of Labor's final regulation published in the Federal

Register on August 7, 1996 that defines when participant contributions

to a pension benefit plan become plan assets for purposes of Title I of

the Employee Retirement Income Security Act of 1974, as amended

(ERISA). The proposed amendment would harmonize the Title I rules

governing the definition of plan assets with the Internal Revenue Code

(Code) rules governing the timing of deposits for Savings Incentive

Match Plans for Employees (SIMPLE plans) that involve Individual

Retirement Accounts (SIMPLE IRAs) and thereby simplify compliance by

small businesses.

DATES: Written comments must be submitted on or before May 27, 1997.

ADDRESSES: Interested persons are invited to submit written comments

concerning this proposed rule to: Pension and Welfare Benefits

Administration, Room N-5669, U.S. Department of Labor, 200 Constitution

Ave., N.W., Washington, D.C. 20210. Attention: Proposed Participant

Contribution Regulation Amendment.

FOR FURTHER INFORMATION CONTACT: Amy J. Scheingold, Office of

Regulations and Interpretations, Pension and Welfare Benefits

Administration, U.S. Department of Labor, Washington, D.C. (202) 219-

8671; or William W. Taylor, Plan Benefits Security Division, Office of

the Solicitor, U.S. Department of Labor, Washington, DC (202) 219-9141.

These are not toll-free numbers.

SUPPLEMENTARY INFORMATION: On August 7, 1996, the Department of Labor

(the Department) published a final regulation at 61 FR 41220 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 the Employee Retirement Income Security Act of 1974, as

amended (ERISA), and the related prohibited transaction provisions of

the Internal Revenue Code (the Code).1 Section 2510.3-102(a) of

the final regulation sets forth a general rule that provides that the

assets of a plan include amounts 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. With respect to employee pension benefit

plans covered by Title I of ERISA, section 2510.3-102(b) of the final

regulation further provides that in no event shall the date determined

pursuant to section 2510.3-102(a) occur later than the 15th business

day of the month following the month in which the participant

contribution amounts are received by the employer or in which such

amounts would otherwise have been payable to the participant in cash.

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\1\ The Secretary of Labor has authority to issue regulations

relating to most of section 4975 of the Internal Revenue Code

pursuant to section 102 of Reorganization Plan No. 4 of 1978. 5

U.S.C. App. 165, 43 FR 47713, October 17, 1978. 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.

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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.2 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. These provisions 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.

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\2\ 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 other 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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On August 20, 1996, the Small Business Job Protection Act of 1996

(the Act, Pub. L. 104-188) was signed into law. Section 1421 of the Act

amended section 408(p) of the Code to provide that certain employers

may establish Savings Incentive Match Plans for Employees (SIMPLE

plans). Under amended section 408(p) of the Code, an eligible employer

may establish an employee pension benefit plan by making contributions

to each eligible employee's SIMPLE Individual Retirement Account

(SIMPLE IRA). Section 408(p)(5)(A)(i) of the Code provides that an

employer must make salary reduction elective contributions to each

eligible employee's SIMPLE IRA not later than the close of the 30-day

period following the last day of the month with respect to which the

contributions are to be made.3 However, section 1421 of the Act

did not amend Title I of ERISA, as it did the Code, with respect to

when such participant contributions become assets of the plan.

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3 The Department has taken the position that

contributions to an employee benefit plan made at the election of

the participant, 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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The Need for the Proposed Amendment

In order to harmonize the Title I rules governing the definition of

plan assets with section 408(p) of the Code, as amended by the Act, the

Department proposes to amend 29 CFR 2510.3-102 to provide that salary

reduction elective contributions under a SIMPLE plan that involves

SIMPLE IRAs become plan assets as of the earliest date on which such

contributions can reasonably be segregated from the employer's general

assets, but in no event later than the 30th day following the month in

which such amounts would otherwise have been payable to the participant

in cash.

The Proposed Amendment

The proposed rule contained in this notice would preserve the

general rule set forth in section 2510.3-102(a) governing when

participant contributions to employee pension benefit plans become plan

assets. However, the proposed rule would amend 29 CFR 2510.3-102(b) by

specifying that the maximum period during which salary reduction

elective contributions under a SIMPLE plan that involves SIMPLE IRA may

be treated as other than plan assets is the same

[[Page 14761]]

number of days as the period within which the employer is required to

deposit withheld contributions under a SIMPLE plan that involves SIMPLE

IRAs under section 408(p) of the Code, as amended by the Act. For all

other pension plans covered under Title I of ERISA, including SIMPLE

401(k) plans that meet the requirements of section 401(k)(11) of the

Code, the maximum period would remain 15 business days following the

month in which participant contributions were 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 participant's wages).

Effective Date of the Amendment

The Department is publishing this proposed rule 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 30 days

following the close of the comment period. The Department has

determined to propose that the final rule will be effective immediately

upon publication. Moreover, the Department wishes to note that, pending

adoption of the final amendment proposed in this notice, the Department

will not assert a violation in any enforcement proceeding relating to

salary reduction elective contributions under a SIMPLE plan that

involves SIMPLE IRAs solely because the earliest date on which

participant contributions could reasonably be made to a plan is later

than 15 business days following the month in which such amounts would

otherwise have been payable to the participant in cash, but not more

than 30 calendar days following the month in which such amounts would

otherwise have been payable to the participant in cash.

Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires each

Federal agency to perform an initial regulatory flexibility analysis

for all proposed rules unless the head of the agency certifies that the

rule will not, if promulgated, have a significant impact on a

substantial number of small entities. Small entities include small

businesses, organizations, and governmental jurisdictions. Although the

Department believes that the proposed rule will not have a significant

economic effect on a substantial number of small entities, the

Department has elected to publish the following initial regulatory

flexibility analysis in accordance with the requirements of 5 U.S.C.

603.

(1) Why the Action Is Being Considered

The Department is promulgating this regulation in order to

harmonize Title I regulations with the Code, as amended by the Act.

This is discussed in greater detail in the Supplementary Information

section above.

(2) Objectives of, and Legal Basis for, the Proposed Rule

The proposed regulation harmonizes 29 CFR 2510.3-102 with section

408(p)(5)(A)(i) of the Code, as amended by the Act. This is discussed

in greater detail in the Supplementary Information section above.

(3) Description and Estimate of Small Entities to Which the Rule Will

Apply

The proposed amendment would apply only to those employers that

make salary reduction elective contributions under a SIMPLE plan that

involves SIMPLE IRAs. These employers may be individuals, businesses or

other for-profit institutions, and not-for-profit institutions.

However, only employers that have no more than 100 employees who earned

$5000 or more in compensation during the preceding calendar year are

eligible to make these contributions under the Code. No small

governmental jurisdictions will be affected by this regulation because

governmental plans are not covered by Title I of ERISA. It is estimated

that 6,000 employers would be affected by this proposed language.

4

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4 This figure is based on the revenue estimates for the Act

prepared by the Joint Committee on Taxation. These revenue estimates

suggest that approximately 300,000 SIMPLE IRAs will be created for

individuals who previously did not have an employer-sponsored

retirement plan. The small employers eligible to establish such

plans have between 1 and 100 employees; on average, the small

employers eligible to establish such plan will have 50 employees.

The number of SIMPLE IRAs (300,000) divided by the average number of

employees (50) equals the estimated 6,000 employers offering this

form of retirement account.

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(4) Description of Compliance Requirements and Classes of Small

Entities Subject to Requirements

The proposed rule would impose no additional reporting,

recordkeeping or other compliance requirements. Rather, by harmonizing

a recently issued Title I regulation with the Code, eligible small

employers that make salary reduction elective contributions to SIMPLE

plans that involve SIMPLE IRAs will have a longer maximum time period

to comply with requirement that participant contributions be placed in

trust. The proposed rule may affect classes of small entities to the

extent that the entities choose to establish such plans and to the

extent that the such contributions cannot be segregated from the

entities' general assets earlier than the maximum time period.

(5) Duplicative, Overlapping, or Conflicting Federal Rules

The Department is not aware of any relevant federal rules that

duplicate, overlap or conflict with the proposed rule. It is the view

of the Department that harmonizing the Title I definition of plans

assets with respect to participant contributions with section 408(p) of

the Code, thereby establishing a uniform set of rules for salary

reduction contributions to SIMPLE plans that involve SIMPLE IRAs, will

simplify plan establishment and administration.

(6) Available Alternatives

There are no significant alternatives to the proposed rule which

would accomplish the stated objectives of the Act yet have less of an

impact on small entities than the proposed rule. One purpose of the Act

is to encourage small employers to adopt retirement plans by permitting

them to use simplified retirement plans not subject to the complex

rules ordinarily applicable to tax-qualified plans. 5 The proposed

rule reflects the accommodation to small entities provided by the Act.

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5 See House Report 104-586 (filed May 20, 1996).

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Executive Order 12866

This regulatory action is not a ``significant rule'' within the

meaning of Executive Order 12866 (58 FR 51735, Oct. 4, 1993), because

it is not likely to result in: (1) an annual effect on the economy of

$100 million or more, or an adverse and material effect on a sector of

the economy, productivity, competition, jobs, the environment, public

health or safety, or State, local, or tribal governments or

communities; (2) the creation of a serious inconsistency or

interference with an action taken or planned by another agency; (3) a

material alteration in the budgetary impacts of entitlement, grants,

user fees, or loan programs or the rights and obligations of recipients

thereof; or (4) raising of novel legal or policy issues arising out of

legal mandates, the President's priorities, or the principles set forth

in Executive Order 12866.

Paperwork Reduction Act

The rule proposed in this notice is not subject to the requirements

of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) because

it does not contain an ``information collection request'' as defined in

44 U.S.C. 3502(11).

[[Page 14762]]

Unfunded Mandates Reform Act

For purposes of Title II of the Unfunded Mandates Reform Act of

1995, 5 U.S.C. 1531-1538, as well as Executive Order 12875, this

proposed rule does not contain any federal mandate that may result in

increased expenditures in either federal, State, local and tribal

governments in the aggregate, or impose an annual burden exceeding $100

million on the private sector.

Statutory Authority

The proposed rule 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.

For the reasons set out in the preamble, 29 CFR part 2510 is

proposed to be amended as follows:

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 47713, October 17, 1978), effective December

31, 1978 (44 FR 1065, January 3, 1978); 3 CFR 1978 Comp. 332.

2. Paragraph (b) of Sec. 2510.3-102, as published in the Federal

Register on August 7, 1996 at 61 FR 41233, is proposed to be amended to

read as follows:

Sec. 2510.3-102 Definition of ``plan assets''--participant

contributions.

* * * * *

(b) Maximum time period for pension benefit plans.

(1) Except as provided in paragraph (b)(2) of this section, 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).

(2) With respect to a SIMPLE plan that involves SIMPLE IRAs (i.e.,

Simple Retirement Accounts, as described in section 408(p) of the

Internal Revenue Code), in no event shall the date determined pursuant

to paragraph (a) of this section occur later than the 30th calendar day

following the month in which the participant contribution amounts would

otherwise have been payable to the participant in cash.

* * * * *

Signed at Washington, DC, this 21st day of March 1997.

Olena Berg,

Assistant Secretary for Pension and Welfare Benefits, Department of

Labor.

[FR Doc. 97-7709 Filed 3-26-97; 8:45 am]

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