Recent Developments in Washington

Bankruptcy Reform
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256) was signed by the President on April 20, 2005.

In addition to its general overhaul of the bankruptcy law, the Act contains some provisions specifically relevant to employee benefit plans:

  • Expanded Exclusion.The Act extends the exclusion from a debtor’s estate to encompass all benefit plans held in programs subject to Section 401, 403, 408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986, as amended. (Previously, only plans covered by ERISA were exempt.) However, the exclusion for IRAs is limited to $1 million (not including rollovers from qualified plans).
  • Plan Loan Repayments.The Act exempts payroll deductions to repay plan loans from the automatic stay provision. This means that payroll deduction repayments could continue during the pendency of the bankruptcy proceeding and thus loan default could be avoided. The Act also provides that a plan loan obligation cannot be discharged in bankruptcy.
  • Executive Compensation.The Act makes it significantly more difficult for an employer in bankruptcy to pay retention bonuses and severance pay to key employees. For example, retention bonuses and severance benefits for key employees would be limited to ten times the amount of any similar payment made to nonmanagement employees.
  • Effective Date.The Act is effective on October 20, 2005.

Expansion of Department of Labor Correction Program
The Department of Labor’s (“DOL”) Voluntary Fiduciary Correction Program (“VFC”) was originally adopted on a permanent basis in 2002. The program is designed to encourage employers and fiduciaries to voluntarily correct certain fiduciary violations and thereby avoid enforcement actions and certain penalties.

On April 6, 2005 the DOL announced some changes in VFC that are designed to encourage more widespread use of the program. These changes are as follows:

  • Model Application Form.Applicants are encouraged (but not required) to use a new application form, designed to help applicants avoid common errors that can result in processing delays.
  • Reduced Documentation.Some of the requirements relating to the application have been eliminated. For example, it is no longer necessary to provide information about a plan’s fidelity bond. In addition, documentation requirements are relaxed for applications involving the correction of delinquent participant contributions or loan repayments. In these cases, summary documentation is permitted for corrections involving:
    • amounts less than $50,000; and
    • any amount, if the correction is made within 180 days after the payments were received by the employer.
  • Simplification of Correction Amount.Generally, the VFC has required that the correction amount to be restored to the plan consist of two components:
    • The Principal Amount: the amount of plan assets that the plan would have had if the breach had not occurred.
    • Lost Earnings or Restoration of Profits: the amount the plan might have earned on the principal amount between the date of the breach and the date the principal amount is repaid to the plan.

    Both components of the correction amount may now be calculated using factors specified in Revenue Procedure 95–17, 1995–1 C.B. 556 (February 8, 1995). This simplified method of calculating the restoration of profits component is available only where the principal amount was commingled with other funds of the fiduciary or plan sponsor so that specific profits from the use of the principal amount cannot be determined.

    In addition, to facilitate calculation of the correct amount, the DOL is providing an “Online Calculator” that may be used to calculate lost earnings and the interest amount for restoration of profits. The Online Calculator can be found at

  • Expansion of Program to Cover Additional Transactions.The VFC is now available to correct the following additional situations:
    • Participant Loans. A loan to an individual who is a party in interest with respect to the plan solely because of his or her status as an employee, which is a prohibited transaction because either the amount or the duration of the loan exceeds the section 72(p) limitations as stated in the plan, may now be corrected using VFC.
    • Delinquent Participant Loan Repayments. By practice the DOL has allowed this correction under VFC. This practice is now formalized in the VFC program.
    • Divestiture of Illiquid Asset. This correction is available where the fiduciary has determined that the continued holding of the asset is not in the best interests of the plan and the only available purchaser is a party in interest. The revised VFC states the conditions that must be met in order to make such a correction.
  • Comment.The VFC program has not been widely used in the past. These changes, which expand the program and simplify its use, may encourage more plan sponsors to consider using the VFC program.