2006 Updates to the Voluntary Fiduciary Correction Program

The Voluntary Fiduciary Correction Program (“VFC Program”), issued by the Employee Benefits Security Administration of the Department of Labor, is designed to encourage self-correction of certain violations of the Employee Retirement Income Security Act of 1974. The VFC Program was permanently adopted in 2002 and revised in 2005. In April 2006 the DOL issued further revisions and adopted the final VFC Program effective as of May 19, 2006.

Generally, employee benefit plan sponsors, fiduciaries, plan officials and parties in interest may apply under the VFC Program, which is administered by the regional EBSA offices. Six classes of transactions may be corrected under the VFC Program:

  • delinquent remittance of participant funds;
  • participant loans;
  • purchases, sales and exchanges;
  • benefits; and
  • plan expenses.

An applicant must fully correct the violation in accordance with VFC requirements before applying under the program. The applicant must fully pay the costs of correction and may not pass on those costs to participants or beneficiaries.

The VFC Program provides valuable benefits to those who use it. Applicants who comply with the requirements receive a “No-Action” letter stating that EBSA will not initiate a civil investigation under Title I of ERISA or assess a 20% penalty under ERISA section 502(l) or penalties under ERISA Section 502(i), and Prohibited Transaction Class Exemption 2002–51 (“PTCE 2002–51”) provides relief from excise taxes for transactions that qualify.

Highlights of the 2006 changes

The following is an overview of significant changes made to the 2006 VFC Program:

  • The VFC Program now provides relief from civil penalties imposed under ERISA section 502(i). ERISA section 502(i) states that the DOL may impose a civil penalty on prohibited transactions in connection with welfare plans and non-qualified pension plans.
  • Corrections can now be calculated for multiple transactions with different time periods. The DOL provides an on-line calculator to assist with calculations for the VFC Program.
  • Three new types of transactions are now covered:
    • participant loans that violated level amortization requirements, where correction is made under the IRS Employee Compliance Resolution System (“EPCRS”). Participant loan violations may now be corrected by complying with the EPCRS program and then submitting a copy to EBSA of the EPCRS compliance statement and proof of payment of EPCRS fees. No other documentation is required;
    • a plan’s sale of an illiquid asset to a party in interest; and
    • payment by the plan of expenses that are considered to be settlor expenses or that the plan sponsor should have paid.
  • New correction methods have been added for party-in-interest transactions. The types of purchases that may be corrected have been expanded to include the purchase of an asset from a party in interest where a statutory or administrative exemption applied. When a plan purchases an asset from a party in interest, the plan may now retain the asset and receive a cash settlement amount as correction for the transaction. Plans are no longer required to sell the asset in all cases, but in order for the plan to retain the asset and receive a cash settlement, an independent fiduciary must determine that the plan will realize a greater benefit from the cash settlement than from reversing the transaction.
  • Plans “under investigation” by the DOL may not participate in the VFC Program, and the DOL revised the definition of “under investigation” this year. The definition has been narrowed to focus on situations in which an investigation, either ongoing or for which notice has been given, involves the plan or a transaction or act concerning the plan. The DOL has instituted an optional disclosure provision for non-criminal investigations and examinations of the plan by the Pension Benefit Guaranty Corporation, a state attorney general or a state insurance commissioner. Potential applicants who opt for non-disclosure may not apply under the VFC Program because they are considered to be “under investigation,” but those applicants who choose to disclose will remain eligible to participate in the VFC Program.
  • Documentation requirements have been reduced.

Changes to PTCE 2002–51

PTCE 2002–51 has been expanded to provide relief from excise taxes for two additional categories of VFC transactions. The new transactions covered are:

  • the plan’s acquisition of an illiquid asset and subsequent sale to a party in interest; and
  • the use of plan assets to pay for settlor expenses.

The requirement to provide notice to “interested parties” of correction under the VFC Program for failure to submit participant contributions and loan repayments to a pension plan in a timely manner has been eliminated for those instances in which:

  • the excise tax due under Section 4975 of the Internal Revenue Code for the failure does not exceed $100.00;
  • the excise tax that otherwise would be owed and payable is contributed to the plan; and
  • the contribution of excise tax is allocated to the acounts of the plan’s participants and beneficiaries in a manner consistent with the plan’s provisions for the allocation of plan earnings.

Conclusion and Additional Resources

In deciding whether to use the VFC Program, fiduciaries will want to consider the cost of the process and the amount of back-up documentation that is required to be supplied under the program. These costs must be weighed against the benefits of obtaining the no-action letter, the certainty of the correction methodology, and relief from potential excise taxes imposed by the IRS. It is also advisable to review the plan for other potential fiduciary breaches or prohibited transactions before submitting a VFC Program application.

Additional information about the VFC Program can be found on the DOL’s website, and the DOL has also provided answers to frequently asked questions. The DOL has provided helpful resources on their website, including a sample no-action letter, examples showing the calculation of “lost earnings,” a program checklist and a model application form. The use of the model application form may reduce common application errors and speed processing of the application.