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401(k)s are now money in the bank.

The Department of Labor drastically shortened the period employers may hold employees' 401 (k) contributions before investing them. Currently employers have 90 days, but the new rule, which takes effect February 3, 1997, will require deposit within 15 business days after the end of the month. The DOL believes the current time period tempts companies with cash-flow problems to "borrow" employees' contributions as interest-free loans.

The new rule is in line with comments sent to the DOL by the American Institute of CPAs employee benefits taxation committee, according to Robert J. Dema, the committee's chairman. An earlier DOL proposal had called for aligning the 401 (k) deposit rules with each company's payroll depository system, which in most cases would have made plan contributions due within 1 to 3 days. This could have forced some companies with multiple locations and payroll systems to make deposits many times throughout the month, according to Dema. The vast majority of the approximately 600 comment letters the DOL received on this issue protested this short time period. Even the current version has received considerable criticism from business. "That earlier proposal would have created tremendous difficulty," said Dema, "but the final version is something I think everyone can live with." He does not anticipate any problems for companies' 401(k) administrators when the new rule becomes effective.

Marc M. Herman, controller of a $15 million privately held corporation, sees no difficulty with the new regulations. "We already beat the new guidelines by almost two weeks. I ware employee deductions to our pension administration company two working days after the applicable payday. In my opinion, companies that delay sending in employee deductions past a reasonable time limit--such as 15 days--are abusing their employees' retirement funds." Herman does not believe a long time period is necessary to calculate the amount of each employee's contributions. "Any chief financial officer or controller should be able to calculate each employee's contributions by pay day"

See "Avoid the Employment Tax Delinquency Trap," page 43, for discussion of a similar tax problem.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1996
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