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Delayed Deposits of Employee Salary Deferrals Due to Covid-19

“In a recent conversation with one of my plan sponsor clients, the business owner said that he had heard it was OK to delay depositing employee salary deferrals to his 401(k) plan because of Covid-19. Can that be true?”

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.

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, plan sponsors of large 401(k) plans (those with 100 or more participants) must deposit deferrals as soon as they can be reasonably segregated from the employers’ 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 (those fewer than 100 participants) (i.e., plan sponsors in this case have seven business days following the day on which such amounts were withheld to deposit them to their plans [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 is 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.

[1] EBSA Disaster Relief Notice 2020-01

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Fiduciary Enforcement: A Camel’s Nose Under the Tent?

By W. Andrew Larson, CPC

Retirement Learning Center

We closed our eyes. We held our breath. June 9, 2017, came and passed, and the new Department of Labor (DOL) fiduciary rules for financial advisors became applicable, albeit subject to a relaxed transition period that runs through July 1, 2019. Gee, it didn’t seem so bad after all. Perhaps the new regulations aren’t the media event many of us made them out to be. Or is there more to the regulations than we realize that will lead to more serious and less desirable consequences down the line. Is there a camel putting its nose under the tent?

Clearly, the new regulations have resulted in broker-dealers implementing significant changes to their platforms, pricing, processes and products. These changes will have long-term effects for consumers, advisors and broker dealers. Originally, the concern over the regulations focused on the application of certain Employee Retirement Income Security Act (ERISA) rules to IRAs and rollover transactions. Under the new rules, previously commonplace transactions, such as recommending a rollover to an IRA, become a prohibited transaction and, potentially, subject to penalty unless an advisor follows an exclusion (e.g., providing education not advice) or the Best Interest Contract exemption (BICE) from the regulations. One immediate impact of these changes for advisors is increased oversight and the need for intensified documentation of IRA-related transactions—in particular—rollovers. One immediate impact on consumers seems to be reduced choice with their IRA accounts.

What about enforcement of the new rules? Well, according to DOL Field Assistance Bulletin No. 2017-02 and the DOL’s extension to the special transition period, until July 1, 2019, under a temporary enforcement policy, the DOL will not take any enforcement action against, “… fiduciaries who are working diligently and in good faith to comply with the fiduciary exemptions.” Likewise the IRS will not IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy applies. But, I am less concerned about the DOL and IRS, and their enforcement and reporting initiatives. The good news regarding federal-level initiatives, whatever they may be, is that they create a level playing field applicable to all players in essentially the same manner.

No, my concern with the new regulations is not at the federal level but rather at the state level. Under the regulations “state camels” may be placing their noses under the retirement tent. What could possibly go wrong? Before we explore the new state level issues let’s review the traditional ERISA and the Internal Revenue Code (IRC) enforcement environment.

The governance and control of retirement plans sits with the Federal government and courts. The DOL writes the rules for both retirement plans and IRAs. The DOL has enforcement authority over retirement plans under ERISA, and the IRS has enforcement authority over IRAs through the IRC. While there is no private right of action for IRAs, the IRC’s prohibited transaction provisions generally prohibit IRA fiduciaries from self-dealing, enforced through an excise tax.

The Federal venue offers several significant advantages. Federal law is uniformly applicable in all 50 states: One set of rules; one level playing field. In general, Federal rulings result in consistent interpretation (usually!) of the applicable laws. Next, Federal litigation is expensive. This means the issues brought forth are usually legitimate and not frivolous. Litigation occurs with significant issues when the plaintiffs believe they have a winnable case.

How are states able to become involved in retirement enforcement and litigation? Let’s examine how the regulations bring state courts into the retirement arena. Recall many IRA providers and advisors will utilize the BICE to avoid prohibited transactions. The BICE is a contract between the client (e.g., an IRA owner) and the advisor or other service provider. Contract law is based at the state level. Thus, if a plaintiff believes the advisor, provider, etc., has violated one or more elements of the BICE contract he or she can seek relief in state court. As the rule stands today, a BICE contract is enforceable under state law, and must provide for the right to sue in a class action.

And it gets worse. Each state’s contract law is unique. Much contract law is similar but not completely so. Thus, a BICE contract violation in one state may not be a BICE contract violation in another state. Theoretically, large retirement vendors will need to concern themselves with 50 sets of state ERISA BICE contract rules.

I would argue the States are not well versed in, nor facile with, the complexities of the Federal retirement regulatory environment. At a recent conference, one of the speakers was the official responsible for launching a state-run retirement program for small businesses. This state program requires most small businesses to offer a Roth IRA retirement program to employees. Again, this was an IRA-based program. I was, honestly, appalled at the official’s lack of insight and understanding of IRA programs, retirement plans and retirement regulations. Perhaps this is unfair of me, but I don’t see why states should commit resources to an area where the federal government and its agencies have done a credible job with enforcement and the protection of workers and their retirement benefits and rights. Another level of enforcement will simply increase costs that ultimately are paid by investors. I fail to see the benefit or the need for this new level of enforcement.

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