This article provides practical guidance regarding how plan sponsors and fiduciaries should address delays in remitting participant salary deferral contributions and plan loan payments to their defined contribution plans resulting from the coronavirus (also known as COVID-19). For more information on legal issues relating to the coronavirus, see Coronavirus (COVID-19) Resource Site.
EBSA Disaster Relief Notice 2020-01
In EBSA Disaster Relief Notice 2020-01, the U.S. Department of Labor (“DOL”) announced the extension of certain deadlines so that plan fiduciaries and plan sponsors have additional time to meet their obligations under Title I of the Employees Retirement Income Security Act of 1974, as amended (“ERISA”), during the COVID-19 outbreak.
One of the compliance requirements addressed in the Notice is the deadline by which employers must deposit employees’ salary deferral contributions and loan payments with the plan following the withholding of such amounts from the employees’ pay.
The DOL recognizes that some employers and plan service providers may not be able to forward participant payments and withholdings to their plans within the normal timeframes under ERISA because of the COVID-19 pandemic. Therefore, the DOL will not take enforcement action with respect to a temporary delay in forwarding such payments or contributions to a plan, provided such delay results solely from a failure attributable to the COVID-19 outbreak during the period from March 1, 2020 through the 60th day following the announced end of the COVID-19 national emergency.
The General ERISA Rule on Timely Plan Deposits
Under ERISA, amounts that a participant or beneficiary pays to an employer, or amounts that are withheld from a participant’s wages by an employer, for contribution or repayment of a participant’s loan to a plan are treated as assets of the plan even if still held in the employer’s general account. As assets of the plan, ERISA fiduciary duties and obligations apply to the funds as soon as the employer receives the funds. Generally, these amounts must be forwarded to the plan on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets. This compliance standard is typically measured by past practice and how quickly the employer has demonstrated that it is able to remit amounts to the plan following the date on which they were paid to or withheld by the employer.
For plans with fewer than 100 participants, a safe harbor rule allows deposits to be deemed timely if they are deposited no later than the seventh business day following the day on which the amount is received by the employer or the day on which the amount would have been payable to the participant in cash.
The Scope of the Relief Provided by the Notice
Although relief was provided by the DOL, this relief is limited in scope and is primarily focused on administrative hardships that are beyond the reasonable control of a plan sponsor or its third-party service providers. Employers, plan fiduciaries, and service providers must continue to act reasonably, prudently, and in the best interest of participants in complying with the ERISA contribution deposit rules. Therefore, deposits must still be made as soon as administratively practicable. This Notice does not provide blanket relief from the ERISA timing rules relating to these contributions and loan repayments, and, importantly, it does not give employers the freedom to address adverse changes in cash flow by holding participant funds in the company’s general assets.
Plan sponsors must proceed with caution when faced with potential plan deposit delays. Delinquent deposits are “prohibited transactions” under ERISA and are a very common focus of participant complaints and DOL plan investigations. These investigations can expose plan sponsors and fiduciaries to costly correction, penalties, and, in the case of the intentional mishandling of participant funds, even criminal prosecution under ERISA.
Best Practices for Demonstrating Prudence in the Face of Delays
In light of this new guidance, a plan sponsor should follow these steps if it anticipates that plan deposit delays will be likely because of the impact of COVID-19 on its administrative procedures:
- Confirm the plan’s normal standard timeframe for completing deposits before the COVID-19 emergency;
- Document the plan’s normal administrative process for calculating contributions and loan repayments, withholding contributions and loan repayments from participants’ pay, and remitting those amounts to the plan, and identify all personnel and vendors that play a role in that process;
- Describe the nature of any disruptions to this normal process that are caused by COVID-19, including whether such disruptions (i) occur at the employer’s or an administrative service provider’s business, and (ii) relate to changes to key plan administrative staff due to COVID-19 furloughs, reassignments, or reductions in force;
- As quickly as possible, identify an updated timeframe within which it will be reasonable to complete plan deposits during the period from March 1, 2020 through the 60th day following the announced end of the COVID-19 national emergency; and
- Continue to monitor plan deposits to ensure compliance with the updated administrative standard and respond to additional changes in processes and procedures.
Following these steps will help a plan’s sponsor and fiduciaries demonstrate that they acted reasonably and prudently to address administrative delays caused by COVID-19. Also, since a plan’s fiduciaries have the duty to actively monitor the plan’s service providers, it is not sufficient for an employer to ignore delays just because they originate at a vendor’s business. Chronic failures by a vendor to provide services that serve the best interests of plan participants and beneficiaries may require the plan to seek a new service provider.
Find and Correct Plan Errors
If, after following the above-described steps, a plan sponsor concludes that plan deposits were completed outside of the timeframe allowed by ERISA, it may voluntarily correct these errors with limited financial exposure.
Under the DOL’s Voluntary Fiduciary Correction Program, a plan sponsor may voluntarily correct these errors and obtain protection from enforcement. To qualify for this relief, the sponsor must: identify all contributions and loan repayments that were remitted to the plan outside of the usual timeframe; ensure that the principal amount of all contributions and loan repayments has been deposited; remit lost earnings to the plan using the online interest calculator provided by the DOL; and complete a filing with the DOL that includes all of this information. There is no filing fee for taking advantage of this program, and the resulting compliance statement that will be returned to the plan by the DOL will protect the plan from future investigation relating to the errors addressed in the voluntary correction submission.
In light of COVID-19’s impact on many businesses and workforces, the DOL has provided valuable relief from the ERISA requirements relating to the deadline for segregating plan contributions and loan repayments from the employer’s assets and depositing them in the plan. This relief, however, is limited and addresses reasonable and unavoidable delays that are beyond the control of an employer or its vendors. Plan sponsors and fiduciaries must remain engaged and continue to monitor their plan processes to ensure that they remain reasonable given the ever-evolving facts and circumstances. Following best practices now will help the plan remain compliant both now and after the COVID-19 emergency comes to an end.
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