January 03, 2023

The Department of Labor (DOL) is moving forward with updates to the Voluntary Fiduciary Correction Program (VFCP) for the first time since 2006. The proposed changes include a new self-correction option for delinquent participant contributions to retirement plans, as well as additional flexibility for correcting several other types of ERISA violations. Another proposal would amend the related prohibited transaction class exemption (PTE 2002-51) that provides excise tax relief for a subset of VFCP corrections. DOL also has asked for comments about a broader expansion of the program, including whether to better align some parts of the VFCP with IRS’s Employee Plans Compliance Resolution System (EPCRS). Comments on the VFCP and PTE proposals are due Jan. 20.

Modernizing the VFCP

VFCP provides a reprieve from DOL enforcement actions and civil penalties for plan sponsors and fiduciaries that voluntarily correct any of 19 categories of ERISA violations, including failure to transmit participant contributions or loan payments on time. When an applicant makes a correction that meets VFCP requirements, DOL issues a no-action letter saying the agency won’t recommend legal action or assess civil penalties against the applicant for the corrected issue. DOL proposes updating VFCP to provide more “efficient and less costly” corrections in hopes of encouraging greater program participation. Plan sponsors and fiduciaries can still use the existing VFCP until the changes are finalized.

Self-correcting delinquent retirement plan contributions

The most notable proposed change is the addition of a self-correction component for delinquent participant contributions and loan payments to retirement plans. Correction of delinquent contributions is by far the most commonly used VFCP component, but some plan officials choose to self-correct outside the program to avoid the associated costs and administrative requirements. DOL believes letting plan officials self-correct under VFCP will increase voluntary corrections and improve allocation of the agency’s resources. DOL estimates that 74% of current applications would qualify for self-correction, but the agency isn’t able to predict whether this change will increase VFCP participation by plan officials who are currently self-correcting these issues outside the program.

The proposal includes these details on how this type of self-correction component would work:

  • Eligibility for self-correction. To self-correct, plan officials would have to remit delinquent contributions or loan payments to the plan within 180 days from the date of withholding or receipt, and lost earnings couldn’t exceed $1,000. DOL intends these conditions to exclude transactions that may require more active evaluation but asks whether to include other conditions. For example, should the program limit self-correction to small retirement plans relying on DOL’s seven-business-day safe harbor for participant contributions?

  • Self-correction method. Plan officials would have to calculate lost earnings from the date of withholding or receipt using DOL’s online VFCP calculator. Notably, this date may precede the date the contributions or payments become ERISA “plan assets.” DOL considers this calculation critical to ensure full correction without requiring use of the VFCP application and approval process.

  • Electronic notice to DOL. Self-correction would require plan officials to use a new online tool to notify DOL about the correction. Instead of a no-action letter, DOL will send an automatic email acknowledging receipt of the submission. The plan administrator would have to retain supporting documents, including a standard checklist. (The proposal wouldn’t change the requirement to report all delinquent participant contributions — including those corrected through VFCP — on Schedules H and I of Form 5500, Annual Return/Report of Employee Benefit Plan.)

  • No frequency limit. The program wouldn’t limit how often plan officials could use self-correction. However, DOL will monitor for frequent use of self-correction and may open investigations of repeat users.

  • Not applicable to employer match or welfare plans. DOL emphasizes that VFCP still won’t include a correction for employer matching contributions. (Employer match corrections are covered under EPCRS.) VFCP’s new self-correction also wouldn’t be available for delinquent participant contributions to insured welfare plans or welfare plan trusts.

New flexibility for some existing corrections

DOL is proposing to modify several types of existing VFCP corrections to provide additional flexibility:

  • Correcting a loan at a below-market interest rate to a party in interest would no longer require an independent fiduciary’s written approval of the fair market interest rate determination if the loan is $10,000 or less.

  • A plan’s earnings on an asset purchased from a party in interest could be credited against lost earnings when the plan retains the asset.

  • New correction options would be available for the following categories of violations:

    • Loans at below-market interest rates to a person who isn’t a party in interest
    • Loans at below-market interest rates solely due to a delay perfecting the plan’s security interest
    • Purchases and sales of assets between a plan and party in interest that can’t be reversed
  • The existing correction for a sale and lease-back of real property to an employer would extend to transactions with affiliates of the plan sponsor.

  • A clarification to the correction for a plan’s holding of an illiquid asset would address situations in which the plan’s original purchase of the asset didn’t involve a prohibited transaction or fiduciary breach.

Adjustments to VFCP eligibility requirements

VFCP isn’t available when a plan or an applicant is “under investigation” or evidence indicates criminal violations may have occurred. The proposal would make several changes to these exclusions:

  • Staff review would be an investigation. A “review” of a plan by the agency’s Employee Benefit Security Administration (EBSA) staff, including an EBSA benefits advisor, would be considered a disqualifying investigation once the plan receives oral or written notice of that review.

  • Participant assistance generally wouldn’t be an investigation. A plan or an applicant wouldn’t be considered under investigation merely because EBSA staff contacts the plan or applicant about a participant complaint. However, if the complaint concerns the issue being corrected through VFCP and the plan hasn’t yet received the correction amount, VFCP wouldn’t be available.

  • Exception for applicants innocent of criminal violations. Applicants could correct delinquent participant contributions and loan payments to retirement plans if any evidence of criminal violations — such as embezzlement — does not involve the plan administrator, sponsor, or applicant, and the appropriate law enforcement agency has been notified. This exception wouldn’t apply to the new self-correction option (discussed above).

  • Bulk applications. Service providers could submit bulk VFCP applications covering at least 10 named plans, some of which may be under investigation, subject to certain conditions.

Modifications to related PTE

DOL has proposed several changes to the accompanying PTE, which gives relief from excise taxes for six kinds of retirement plan transactions corrected through VFCP. Plan sponsors and fiduciaries can continue using the existing PTE until any changes are effective. The proposed PTE changes include:

  • Elimination of three-year limit. VFCP currently lets an applicant use the PTE only once every three years for similar types of transactions. DOL proposes to remove this limitation.

  • Incorporation of new self-correction. DOL proposes to incorporate the new VFCP self-correction for delinquent participant contributions and loan payments. The PTE would require the amount of excise tax otherwise payable on these amounts (no matter how small) to be remitted to the plan and allocated to participants in the same manner as plan earnings. Self-correctors using VFCP wouldn’t have to file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, with IRS or provide a copy to DOL. However, employers and plan administrators would have to retain a completed Form 5330 or other written documentation showing the excise tax calculation, as well as proof of payment to the plan.

  • Model notice to interested persons. For transactions that require a notice to interested persons, the agency is proposing a model notice in an appendix to the PTE, though VFCP applicants won’t be required to use the model.

Request for comments on VFCP expansion

DOL requests comments on all aspects of the proposal by Jan. 20. The agency has asked specifically for input on the following items — not included in the proposal — that would broaden the scope of VFCP:

  • Missing participants. DOL’s proposal updates the VFCP provision on locating missing participants to add a detailed list of search methods. This change reflects the discontinuation of the IRS and Social Security Administration locator services. Given DOL’s national enforcement project and recent subregulatory guidance on missing participants, the agency also asks whether to add a new correction for fiduciary breaches involving participant recordkeeping, communication and benefit payment failures.

  • EPCRS alignment. DOL asks whether to add a correction for overpayments from defined benefit (DB) plans, consistent with IRS’s most recent EPCRS updates. DOL also asks whether the agency should extend VFCP to participant loan transactions corrected under the EPCRS Self-Correction Program (SCP). However, a provision of the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328) — enacted after the proposal’s release — directs DOL to treat these EPCRS loan corrections as meeting VFCP requirements, subject to any reporting or other procedural requirements the agency may adopt.

  • Adoption of a pre-audit program. DOL is interested in whether it should adopt a pre-audit program — similar to IRS’s new pre-examination compliance pilot program — under which plan officials could make corrections through VFCP. The IRS program gives plan sponsors 90 days to review plan documents and operations for compliance with tax law and self-correct eligible errors.

  • Electronic VFCP applications. DOL asks whether it should require electronic submission of VFCP applications and whether some VFCP users might have challenges with electronic submission.

To VFCP, or not to VFCP

After more than 15 years without any VFCP updates, plan officials may welcome the proposed changes to the program and accompanying PTE. However, whether the changes will convince plan officials to use VFCP more regularly is unknown. Unlike SCP under EPCRS — which doesn’t require sponsors to notify IRS — the self-correction under VFCP would require that plan officials alert DOL any time they correct delinquent participant contributions or loan payments. The potential for DOL to target enforcement activity based on frequent self-correction might deter plan officials from using the VFCP self-correction component. In light of the administrative requirements for the proposed VFCP self-correction component and related PTE provisions, plan officials currently self-correcting delinquent contributions outside of VFCP (and paying the applicable prohibited transaction excise tax to IRS) may decide to continue doing so.

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Matthew Calloway
by Matthew Calloway

Principal, Mercer’s Law & Policy Group

Margaret Berger
by Margaret Berger

Partner, Mercer’s Law & Policy Group

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