Advisory Opinion

May 17, 2002

Mr. Richard M. Steinberg, Chair
Employee Benefit Plans Expert Panel
Department of Labor Liaison Task Force
American Institute of Certified Public Accountants
1455 Pennsylvania Avenue, NW
Washington, DC 20004-1081

2002-02A
2510.3-101
406

Dear Chairman Steinberg:

This is in response to your request for guidance under the Employee Retirement Income Security Act of 1974 (ERISA) regarding participant loan repayments. You request the Department's views with respect to when participant loan repayments withheld from employee wages by an employer become plan assets subject to the prohibited transaction rules under section 406 of ERISA.

You represent that practitioners within the accounting industry treat remittance of participant loan repayments in one of two ways. Some practitioners treat funds withheld from employee wages for loan repayments as subject to 29 C.F.R. § 2510.3-102 (the final participant contribution regulation).(1) These practitioners deem the untimely remittance of participant loan repayments as prohibited transactions pursuant to section 406 of ERISA. Other practitioners, however, take a contrary position because they do not view participant loan repayments as subject to the final participant contribution regulation.

Section 406(a) of ERISA prohibits a plan fiduciary from causing the plan to engage in, among other things, the lending of money or other extension of credit between the plan and a party in interest, and the transfer to, or use by or for the benefit of, a party in interest of the assets of a plan. Section 406(b) of ERISA provides that, among other things, a fiduciary shall not deal with the assets of a plan in his own interest or for his own account. Section 3(14) of ERISA defines a party in interest to include a fiduciary with respect to a plan and an employer any of whose employees are covered by such plan. As a result, the employer's failure to remit participant loan repayments to a plan as soon as the repayments are considered assets of the plan would be a prohibited transaction under section 406 of ERISA.

Under the final participant contribution regulation, the Department stated that amounts paid by a participant or withheld by an employer from a participant's wages for contribution to the plan become plan assets as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets. Generally, participant contributions to a pension plan would be considered plan assets under the final participant contribution regulation in no event later than the 15th business day of the month immediately following the month in which the participant contributions 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 participants wages). However, the Department stated in the preamble(2) to the regulation that the question of when participant loan repayments become plan assets was beyond the scope of the final participant contribution regulation.

It is the opinion of the Department that, while not subject to the participant contribution regulation, participant loan repayments paid to or withheld by an employer for purposes of transmittal to an employee benefit plan are sufficiently similar to participant contributions to justify, in the absence of regulations providing otherwise, the application of principles similar to those underlying the final participant contribution regulation for purposes of determining when such repayments become assets of the plan.(3) Accordingly, it is the Department's opinion that participant loan repayments, made to the employer for purposes of transmittal to the plan or withheld from employee wages by the employer for transmittal to the plan, become plan assets as of the earliest date on which such repayments can reasonably be segregated from the employer's general assets.

We note that the final participant contribution regulation contained the requirement that in no event shall the date on which such contributions become plan assets occur later than the 15th business day of the month immediately following the month in which the participant contributions 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). While these maximum periods do not govern repayment of participant loans, we believe that holding participant loan repayments beyond such periods would raise serious questions as to whether the employer forwarded the repayments to the plan as soon as they were reasonably segregable from its general assets.

This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions.

Sincerely,

Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretation

Footnotes

  1. 61 Fed. Reg. 41220, 41233 (Aug. 7, 1996). The final participant contribution regulation was amended on November 25, 1997, 62 Fed. Reg. 62934, 62936, to harmonize the rules in Title I of ERISA 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). The amendment simplifies compliance by small businesses.

  2. 61 Fed. Reg. 41226.

  3. Without relying on the regulation, courts have concluded that payroll deduction contributions become plan assets after they are withheld from the employees' paychecks. See Pension Benefit Guar. Corp. v. Solmsen, 671 F. Supp. 938, 946 (E.D.N.Y. 1987); see also Coleman v. Coleman, 231 B.R. 393, 396 (Bankr. S.D. Ga. 1999). In United States v. Grizzle, 933 F.2d 943 (11th Cir.), cert. denied, 502 U.S. 897 (1991), a criminal embezzlement conviction, the court cited the regulation, but did not rely on it because it did not take effect until after the crime. The court stated that the regulation was consistent with the provisions of ERISA that require that plan assets be held in trust and never inure to the benefit of the employer. 933 F.2d 947 n.3.