On November 18, 2022, the Employee Benefit Security Administration (“EBSA”), an arm of the Department of Labor (“DOL” or “Department”), released a proposed amendment and restatement of the Voluntary Fiduciary Correction Program (“VFCP”). First established in 2002, and last restated in 2006, VFCP allows parties to voluntarily correct certain breaches of fiduciary duty to avoid civil enforcement actions and penalties from the Department of Labor by following the application and correction process described in the program. The major proposed changes to the program include the addition of a self-correction feature, clarification and expansion of the types of transactions eligible for correction, and simplification of the requirements to participate in the program.
In a separate proposed amendment released on the same date, the EBSA also released changes to Prohibited Transaction Exemption (‘PTE”) 2002-51, which allows exemption from excise tax for certain types of prohibited transactions corrected under VFCP, to align with the proposed changes made to the VFCP. The proposed rule also eliminates the three-year limit for corrections of transactions of the same type under VFCP, allowing employers to submit applications for relief for transactions of the same type as frequently as needed.
Self-Correction Component
The new self-correction component (“SCC”) of the Program is available for delinquent participant contributions and delinquent loan repayments, two of the most common errors corrected under the program. Self-correction is available for plans of any asset size and number of participants, but is limited to corrections involving lost earnings (as determined by the DOL calculator) of $1,000 or less. The amount of the 15% excise tax on these lost earnings that would have been paid to the IRS, is instead paid to the plan. In addition, to be eligible for correction, the delinquent participant contributions or loan repayments must have been remitted to the plan within 180 calendar days of withholding or receipt. Self-correction also requires the use of certain calculation methods listed in the program to determine correction amounts.
Delinquent contributions and loan payments occasionally are discovered during the Form 5500 audit. However, by then self-correction typically will not be available due to the 180-day correction deadline. Therefore, plan administrators may want to consider more frequent reviews of the timing of participant contributions and loan payments so that self-correction will be available if necessary.
To self-correct, correctors must submit an online application that includes corrector information, plan information, and details of the correction, as well as a document retention checklist, documents related to the plan and correction, and a Penalty of Perjury statement. The submitting party will receive an email acknowledgement immediately after submission. The Department is considering, but has not yet proposed, a limit on the amount of self-corrections a party may make before being required to submit an application for the VFCP. Unlike other VFCP submissions, self-correction does not result in the issuance of a “no action” letter from the EBSA, but compliance with the terms of the SCC, will allow the corrector to avoid enforcement and civil and monetary penalties from the Department. However, EBSA reserves the right to take other action in relation to the correction, including investigating whether the corrective action was actually taken.
Eligibility Expansion
Previously, in addition to not being “under investigation” (see discussion of expansion of this definition below), to apply for relief under VFCP, applicants (including the plan and plan sponsor) could not have evidence of potential criminal violations, as determined by EBSA, to be eligible to apply for relief. To provide relief to applicants not directly responsible for the criminal violations, (e.g., an employee embezzles participant funds) an exception has been added to allow “innocent” plan sponsors, plans, or applicants to apply in cases involving delinquent participant contribution or loan repayment where (1) all funds have been repaid to the plan; (2) the appropriate law enforcement agency has been notified; and (3) the applicant submits a statement affirming they are not involved and provides details on the law enforcement agencies involved and the effect of the incident on any fidelity bonds.
An exception has also been added to allow bulk applications by service providers in situations involving breeches across many plans. This expansion will allow the EBSA to issue a “no action” letter covering all plans included in the application. There are several conditions for a bulk application: (1) that the service provider be applying for relief only on its own behalf; (2) that at least 10 plans are named in the application (3) that the applicant submit a statement that the provider was or is currently providing services for each of the plans; and (4) that the service provider is not currently under investigation by the EBSA. The service provider may identify each plan by providing an EIN or submitting the plan’s Form 5500 filing.
Expanded Definition of Under Investigation
The definition of “under investigation” for purposes of determining whether an applicant is eligible to correct under VFCP, has been expanded to include “investigation of a plan resulting from an EBSA staff review, which could include review by an EBSA Benefits Advisor” as long as the plan (or an authorized representative) has received written or oral notice of an investigation, review or examination. The preamble clarifies that contact by an EBSA representative in regards to a participant complaint is not considered an investigation, unless that complaint relates to a transaction for which an application has been submitted, or if amounts required to be received by the plan in connection with self-correction have not been received by the plan at the time of contact.
Additional Changes
In the proposed amendment and restatement, the Department eliminated the requirement that applications to correct a loan at below-market rate to a party in interest for loan amounts under $10,000 contain an independent fiduciary’s written approval of the independent lender’s fair market interest rate determination. Instead, the applicant must provide additional narrative describing how the fair market interest rate was determined.
Correction options have been expanded for below-market rate loans to a party who is not a party in interest. In addition to payment of the present value principal amount from the recovery date to the maturity date, applicants may now choose to pay the amortized outstanding loan balance over the remaining payment schedule at the interest rate that would have applied had the loan been issued at fair market value. Applicants using this method must submit documentation showing the revised amortization schedule, and proof that the fair market interest rate was determined by an independent commercial lender. This additional correction method is also available as a new alternative to correct loans made at a below-market interest rate solely due to the failure to perfect the Plan’s security interest as an alternative to recording or perfecting the plan’s interest.
A new correction option has been added to remedy the purchase of an asset from a party in interest where the plan no longer has control of an asset. In addition to reversing the transaction or retaining the asset with additional payment, a third option has been added to allow a “cash settlement” of a correction amount accounting for losses associated with the purchase and holding of the asset. To implement this correction, the applicant must provide a statement from plan officials saying the asset was sold at the advice of an independent fiduciary, and not in anticipation of this correction. The cash settlement option is also an alternative to correcting a prohibited sale to a party in interest.
The correction for a prohibited sale of real estate involving sale or leaseback of the property to the plan sponsor has been expanded to include sale or leaseback to the plan sponsor and its affiliates, where appropriate, to align with the existing exemption rules under 408(e) of ERISA.
Comments on the proposed amended and restated VFCP program and amendments to PTE 2002-51 can be submitted through January 20, 2023.