Delayed Deposits of Employee Salary Deferrals Due to Covid -19

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Nevada is representative of a common inquiry related to the timely depositing of employee salary deferrals to a 401(k) plan. “In a recent conversation with one of my plan sponsor clients, the business owner said that he heard it was OK to delay depositing employee salary deferrals to his 401(k) plan because of Covid-19. Can that be true?” 

Highlights of the Discussion

Under limited circumstances, explained next, it may be possible to delay the deposit of deferrals, but we suggest exercising extreme caution in doing so, and carefully documenting the reasons for the delay. According to new guidance in EBSA Disaster Relief Notice 2020-01,  it may be possible to delay remitting to a plan employee salary deferrals that have been withheld from participants’ pay without sanction only if the delay is due to the Covid-19 outbreak. Moreover, “Employers and service providers must act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.”1

The Department of Labor (DOL) has strict rules addressing the timing of deferral remission. Generally, the plan sponsors of large 401(k) plans (with 100 or more participants) must deposit deferrals as soon as they can be reasonably segregated from the employer’s assets, but not later than 15 business days following the month the deferrals are withheld from the participants’ pay [DOL Reg. 2510-3-102(a)(1) and (b)(1)].  A safe harbor deadline applies for small plans (fewer than 100 participants); the plan sponsor has seven business days following the day on which such amounts were withheld to deposit them to the plan [DOL Reg. 2510-3-102(a)(2)].

EBSA Disaster Relief Notice 2020-01 relaxes the remittance requirements for some employers. Specifically, the notice states: 

The Department recognizes that some employers and service providers may not be able to forward participant payments and withholdings to employee pension benefit plans within prescribed timeframes during the period beginning on March 1, 2020, and ending on the 60th day following the announced end of the National Emergency. In such instances, the Department will not – solely on the basis of a failure attributable to the COVID-19 outbreak – take enforcement action with respect to a temporary delay in forwarding such payments or contributions to the plan. 

The phrase, “… solely on the basis of a failure attributable to the COVID-19 outbreak,” is narrow. Therefore, if a delay has necessary, while it is still “fresh,” we suggest that a prudent course of action would be to clearly document and provide detail in the plan records (a.k.a., the “fiduciary file”) why the delay was attributable to COVID-19, and how the plan complied as soon as administratively practicable under the circumstances.   

Conclusion

The timely deposit of employee salary deferral has always been a top concern of the DOL. While EBSA Disaster Relief Notice 2020-01 provides limited enforcement relief from missed deferral deposit deadlines caused by Covid-19 hurdles, employers and service providers must still act reasonably, prudently, and in the best interest of employees by depositing the deferrals as soon as practicable.