Proposed Changes to the Department of Labor’s Voluntary Fiduciary Correction Program

KEVIN NOLT, December 21, 2022

On November 21, 2022, the U.S. Department of Labor (DOL) published proposed updates to its Voluntary Fiduciary Correction Program (VFCP). VFCP is designed to encourage employers to voluntarily comply with the Employee Retirement Income Security Act of 1974 (ERISA) by voluntarily correcting certain prohibited transactions and submitting those corrections to the Program for approval. (The approval is evidenced by receipt of a DOL “no-action” letter.) The proposed changes are the first updates to VFCP since 2006 and provide, for the first time, a self-correction feature for delinquent participant contributions and loan repayments, the most common prohibited transactions under ERISA. Below is a summary of the proposed changes to the VFCP.

Self-Correction for Delinquent Participant 

The DOL generally requires that participant contributions and loan repayments be deposited as soon as the amounts can be reasonably segregated from the general assets of the employer. This is because, as of that time, these amounts become ERISA plan assets. An employer’s failure to timely deposit participant contributions and loan repayments results in a prohibited transaction because, under DOL rules, such late deposits amount to impermissible loans from the plan to the employer, given that the employer had use of those plan assets during the period of delinquency.

Employers are permitted to submit prohibited transactions to VFCP, but are not required to do so. However, by filing under the Program, plan fiduciaries obtain relief from the DOL for penalties that may be imposed and an agreement from the DOL not to investigate the plan fiduciaries by reason of the late deposits. VFCP also permits employers to calculate lost earnings by using the DOL’s on-line interest calculator. The calculator can be much simpler to use, and it may reduce the cost of the correction because the alternative is to calculate lost earnings using the participant’s actual investment elections on file with the plan. VFCP further provides for a waiver of the 15% excise tax in certain circumstances, pursuant to Prohibited Transaction Exemption (PTE) 2002-51. Notwithstanding the benefits of correcting late deposits under VFCP, employers often elect to correct the prohibited transaction outside the Program, using general correction principles. The reasons for correcting outside of VFCP vary, but include a desire to avoid the time and cost of the VFCP application process and a general hesitation to disclose errors to the DOL. 

Under the proposed changes to VFCP, self-correction would be allowed for certain delinquent participant
contributions and loan repayments, thus providing plan fiduciaries with DOL relief without the time and cost associated with preparing and filing a VFCP application. (Under the self-correction procedure, the DOL will not issue a no-action letter.) The self-correction procedure requires employers to notify the DOL’s Employee Benefits Security Administration (EBSA) electronically that they have self-corrected delinquent contributions and loan repayments, and the procedure is available only if:

  • Participant contributions or loan repayments are remitted to the plan no more than 180 calendar days from the date of withholding or receipt. 

TRUCKER HUSS COMMENT: This timing requirement applies to the contributions and repayments, not to the deposit of the lost earnings. All but the most egregious delinquencies are deposited well before the end of this 180-day period and thus should meet this timing requirement. 

  • Lost earnings do not exceed $1,000 calculated from date of withholding or receipt. 

TRUCKER HUSS COMMENT: The lost earnings are not calculated from the date the assets could be reasonably segregated. The most common delinquencies incur lost earnings significantly less than $1,000, so all but the largest errors should meet this requirement. 

  • The plan or self-corrector must not be under investigation as defined under VCFP .

TRUCKER HUSS COMMENT: “Under Investigation” generally includes both DOL investigations and IRS audits. See also the discussion below for the modifications to the definition of “Under Investigation.” 

  • Self-correctors must use VFCP’s online calculator to calculate lost earnings and an online web tool to complete and file the self-correction notice to the DOL. Self-correctors must also complete and retain the self-correction retention record checklist, which includes a brief statement explaining why the employer was late in forwarding participant contributions or loan repayments to the plan. Self-correctors must also retain proof of payment of the principal and lost earnings to the plan.

TRUCKER HUSS COMMENT: The information required for the retention record checklist is similar to the items submitted with the VFCP application. This information must be provided to the plan administrator and maintained with other plan records in accordance with ERISA’s record retention rules.

  • Late deposits that are self-corrected through the Program would also qualify for excise tax relief via a corresponding change to PTE 2002-51.

TRUCKER HUSS COMMENT: PTE 2002-51 would be amended to allow an employer to obtain excise tax relief for self-corrected late contributions meeting certain conditions and to provide that no notice to interested persons is required in connection with self-corrected late deposits. It also would eliminate the provision that makes applicants ineligible if, during the three years before submission of the current application, the applicant sought relief for a similar transaction under VFCP and the excise tax exemption.

The DOL considered, but did not include at this time, a limit on the frequency with which a self-corrector may use the self-correction feature instead of the formal application process for correcting delinquent participant contributions and loan repayments. However, the DOL notes that it will be monitoring for frequent use and may investigate plans to identify and correct systemic issues.

The DOL requires disclosure, in a supplemental schedule to the Form 5500, of whether the delinquent participant contributions and loan repayments are corrected in or outside of VFCP. It is not clear whether there will be any changes to the way this information is reported, given the addition of the self-correction component.

Updates to Existing Transactions Eligible for VFCP

The DOL’s proposed changes to VFCP also clarify and simplify the existing transactions eligible for correction under the Program, and include the following proposed changes:

  • Conform revisions to the current application process for late participant contributions and loan repayments to reflect the new self-correction component.
  • For transactions involving below-market interest rate loans to parties-in-interest, eliminate the requirement that an independent fiduciary validate in writing the process used to determine the fair market interest rate determination for loans in the amount of $10,000 or less. Instead, the plan fiduciaries would be allowed to submit the independent commercial lender’s written determination of the fair market interest rate.
  • For transactions involving below-market interest rate loans to persons who are not parties-in-interest, add an alternative payment method which permits the borrower’s payment of the amortized outstanding loan balance over the remaining payment schedule of the loan at the interest rate that would have been applicable if the loan had originally been made at the fair market interest rate. Currently, the borrower pays the present value of the excess of the remaining payments at the fair market interest rate while continuing to pay the outstanding loan balance under the original repayment schedule for the duration of the loan.
  • For transactions involving the plan’s purchase of an asset (including real property) from a party-in-interest, add a third method of correction in situations when the purchase cannot be reversed or the asset retained because the plan no longer owns the asset (e.g., sale of the asset). Under the proposal, the plan can receive credit for the sale of the asset if a plan official provides a statement that the sale was upon the advice of an independent fiduciary and not in anticipation of applying for relief under VFCP. Currently, the plan does not get credit for any earnings on the sale which can result in a windfall to the plan because it could receive both earnings on the asset plus full correction under VFCP.
  • For transactions involving the plan’s sale of an asset (including real property) to a party-in-interest, the plan would be permitted to receive the correction amount (which is generally the amount by which the fair market value of the asset exceeds the sale price, plus lost earnings) rather than having to repurchase the asset, by permitting a plan official to determine that the asset cannot be repurchased (e.g., the asset has been destroyed). Previously, receipt of the correction amount was permitted only if an independent fiduciary determined that the plan would realize a greater benefit from that amount than it would from repurchasing the asset.
  • For a sale and leaseback of real property to the employer, clarify that the correction is not limited to transactions involving the plan sponsor, but that it also applies to affiliates of the plan sponsor. 
  • Modify the definition of “Under Investigation” to provide that it includes an investigation of a plan which results from an EBSA staff review, which could include a review by an EBSA Benefits Advisor, if the plan received written or oral notice of the review.  However, a plan would not be “Under Investigation” merely because EBSA staff has contacted the plan in connection with a participant complaint, unless the participant complaint concerns the transaction described in the application.

The DOL believes these changes would encourage more voluntary corrections by offering plan officials and other responsible fiduciaries a streamlined correction process.  The DOL also believes the changes would enable it to better allocate resources currently dedicated to processing VFCP applications for the transactions at issue.

The DOL is seeking public comments on the changes to VFCP through January 20, 2023 and will finalize the amended VFCP in a subsequent publication. We will notify our readers of any further developments as they arise. 

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