Participant contributions to small employee benefit plans will not be considered "plan assets" before being placed in the plan if they are deposited within seven business days, under a new proposal from the Department of Labor published in today's Federal Register.  The proposal comes less than a month after a DOL Field Assistance Bulletin (FAB 2008-01A) squarely placed primary responsibility for collecting delinquent contributions on the plan trustee (see our earlier Client Alert for more detail).  The combination of the two new rules could increase compliance costs for trustees of small plans, especially if the seven-day safe harbor opportunity is enforced as the rule when DOL investigators come knocking.

Because the proposal is a safe harbor, the general rule under the plan asset/participant contribution regulations will continue to apply.  That means that participant contributions will still be required to be deposited into "an account of the plan" as soon as the amounts can reasonably be segregated from the plan sponsor's general assets.  The safe harbor will act as a deeming rule: if small plan sponsors deposit participant contributions within seven business days, they will be deemed to have satisfied the regulations' timing requirements.  For purposes of the safe harbor, a "small plan" is one with less than 100 participants at the beginning of the plan year.  Plans with 100 or more participants will not be allowed in the safe harbor, although the Department indicated a willingness to change its mind on that point if public comments are persuasive.

As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice.  We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.

Combine this with FAB 2008-01A , which makes trustees responsible for ensuring that contributions are forwarded to trust, and you may have the potential for trouble. As we noted earlier, the Department's recent FAB appears to expand the scope of trustee responsibility. Now the insurance companies serving in "trustee-like" roles and the trustee component of a bundled plan arrangement offered by a financial services company will need to vigilantly track the timing of employer and employee contributions.

The impact on contributory health plans is a bit unclear.  In an illustrative example included with the proposal, the Department indicates that COBRA premium payments made by former employees to a self-insured group health plan are deposited "with the plan" within seven days of having receiving them, the COBRA payments would be deemed to have been made within the required time frame. 

Under 1992 Labor Department non-enforcement policy, however, contributory health plans are permitted to avoid ERISA's trust and reporting/disclosure requirements, pending further consideration by the Department as to whether such plans should be exempt from the trust requirements all together.  The non-enforcement policy remains in place, as the Department has never formally articulated an exemption from ERISA trust requirement for contributory health plans.  Interestingly, however, in a footnote, the Department explains that since "most of these plans are not affected by the regulation, because they are not required to comply with ERISA's trust requirement," they need not be a part of the cost/benefit analysis. Given this somewhat conflicting guidance, we would expect the Department to receive some comments requesting clarification.