DOL Proposes Changes to the Voluntary Fiduciary Correction Program (VFCP) and Related Prohibited Transaction Exemption

Practical Law Legal Update w-037-6464 (Approx. 7 pages)

DOL Proposes Changes to the Voluntary Fiduciary Correction Program (VFCP) and Related Prohibited Transaction Exemption

by Practical Law Employee Benefits & Executive Compensation

VFCP and PTE 2002-51 Background

The DOL established the VFCP to encourage voluntary compliance with ERISA by giving plan fiduciaries relief from civil liability if they disclose certain fiduciary violations in a VFCP application that is filed with the DOL's Employee Benefits Security Administration (EBSA).

EBSA will issue a no-action letter to a fiduciary regarding the breach identified in the application if:

The plan and the applicant meet the eligibility requirements of the VFCP (for example, the breach is one of the transactions covered by the VFCP) (see Practice Note, Voluntary Fiduciary Correction Program (VFCP): Eligible Transactions and Corrections).
The breach is corrected, as required by the VFCP, by a plan official (a plan sponsor, plan fiduciary, party in interest to the plan, or other person in a position to correct the breach).

The no-action letter provides that EBSA will not initiate a civil investigation or assess civil penalties.

EBSA grants a class exemption from the excise tax for VFCP applicants that generally covers six transactions, including delinquent contributions and loan repayments to pension plans.

Proposed Changes to the VFCP

EBSA is proposing numerous changes to the VFCP in an effort to streamline the program and encourage plan fiduciaries to correct breaches and reimburse plan losses.

Self-Correction Procedure for Delinquent Participant Contributions to Pension Plans

Under the current VFCP, plan fiduciaries must submit a formal VFCP application to correct delinquent participant contributions and loan repayments to pension plans. EBSA is proposing to amend the VFCP to allow fiduciaries of any pension plan— regardless of the number of plan participants or the amount of plan assets—to self-correct these delinquent participant contributions and loan repayments. According to EBSA, transactions involving delinquent contributions and loan repayments are the most frequently corrected under the VFCP and involve small amounts of money, and streamlining the process would encourage more voluntary corrections by fiduciaries.

To be eligible for relief under the self-correction option:

The amount of lost earnings must be $1,000 or less (not including any excise taxes).
The delinquent contributions or loan repayments had to have been remitted to the plan within 180 calendar days of withholding or receipt.
The applicant must:
- use the correction method specified by EBSA;
- electronically file a self-correction notice (SCC Notice) with EBSA that meets certain content requirements; and
- submit a retention record checklist and required documents.

Applicants using the self-correction option would not receive a no-action letter.

EBSA did not propose a limit on how many times the self-correction option could be used during a specified period of time but solicited comments on this issue.

Loans and Plan Assets

Regarding below market interest rate loans to parties in interest, the proposed amendments would:

Eliminate the requirement that an independent fiduciary provide a written validation of the process used in determining the fair market interest rate for loans that do not exceed $10,000. Instead, fiduciaries would be allowed to submit the independent commercial lender's written determination of the fair market interest rate.
Require a narrative description of the process used in determining the interest rate when the loan was made.

For more information, see Practice Note, Voluntary Fiduciary Correction Program (VFCP): Below Market Interest Rate Loans to Parties in Interest.

Among other changes, the proposed amendments would also add new payment or correction alternatives for:

Below market interest rate loans to non-parties in interest.
Below market interest rate loans solely due to a delay in perfecting the plan's security interest.
Purchases of assets by a plan from a party in interest when the purchase cannot be reversed.
Sales of assets by a plan to a party in interest.

Additionally, the proposed amendments would expand the transaction involving the sale and leaseback of real property to the plan sponsor to cover leases of real property to the plan sponsor's affiliates.

Definitions

Under the VFCP, plan fiduciaries are ineligible to participate in the VFCP if either the plan or the applicant is under investigation for a breach of fiduciary duty by, among other entities, EBSA.

EBSA is proposing to modify the definition of "under investigation" to provide that an investigation resulting from an EBSA staff review (including review by an EBSA benefits advisor) is treated as an EBSA investigation for VFCP eligibility purposes. The proposed amendment would clarify, however, that a plan is not considered under investigation if EBSA has contacted the plan, applicant, self-corrector, or plan sponsor regarding a participant complaint unless:

The participant complaint relates to the transaction contained in the VFCP application or the SCC Notice.
The plan has not received the correction amount by the date when EBSA contacts the plan, applicant, self-corrector, or plan sponsor.

Eligibility Requirements

To be eligible for the VFCP, the VFCP application cannot contain evidence of criminal violations, as determined by EBSA. The proposed amendments would add an exception for an innocent plan administrator, plan sponsor, or applicant for delinquent participant contributions and loan repayments if:

All funds have been repaid to the plan.
The appropriate law enforcement agency has been notified about the alleged criminal activity.
The applicant submits a statement containing the law enforcement agency's contact information, asserting that the applicant was not involved in the alleged criminal activity, and indicating whether a claim relating to the alleged criminal activity has been made under an ERISA fidelity bond (see Practice Note, ERISA Bonding Requirements).

EBSA is also proposing to allow bulk applications by a service provider covering multiple plans, provided the following requirements are met:

The applicant covers at least ten named plans and each plan participated in the transaction needing correction.
The applicant is a service provider and is only seeking relief for itself.
The applicant provided services to the named plans at the time of the transaction at issue.
The service provider is not under investigation by EBSA, and the corrective action is not being taken in response to an EBSA investigation or review of one of the named plans.

Bulk applicants would also be permitted to sign the penalty of perjury statement, rather than requiring a signature from the plan fiduciary for each plan, provided the applicant has knowledge of the relevant transaction.

Applicability to Health and Welfare Plans

In issuing its proposed amendments, EBSA reiterated that all welfare and pension plans may use the VFCP if they have a fiduciary breach for which there is an eligible transaction. The proposals would make only minor changes to the eligible transactions for welfare plans—one of which involves delinquent participant contributions to an insured health plan. Under this transaction:

Plan benefits are provided exclusively through insurance contracts issued by an insurer or similar organization.
An employer receives directly from participants (or withholds from employees' paychecks) amounts that the employer forwards to an insurer to provide group health or other welfare benefits (see Group Health Plans and Health Insurance Toolkit).

However, the employer in the transaction fails to forward these amounts consistent with either:

The governing plan terms, including any insurance contract provisions.
Maximum timing rules for participant contributions set out in the DOL's implementing regulations (29 C.F.R. § 2510.3-102).

The transaction further assumes that there were no claim denials or coverage lapses resulting from the failure to timely transmit the participant contributions.

The correction for this transaction is for the plan to pay the insurer the principal amount (in addition to any penalties, late fees, or other charges) necessary to prevent a coverage lapse due to the failure. Any penalties, late fees, or other such charges must be paid by the employer and not from participant contributions.

Proposed Changes to PTE 2002-51

In a related proposed rulemaking, EBSA issued proposed amendments to PTE 2002-51, which provides a class exemption from the excise tax for VFCP applicants (see Practice Note, Voluntary Fiduciary Correction Program (VFCP): Excise Tax Exemption).

The proposed amendments would:

Grant excise tax relief for transactions corrected under the proposed self-correction component of the VFCP.
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 the VFCP and the excise tax exemption.
Modify the requirements for the notice to interested persons to provide a special rule for self-correctors of delinquent participant contributions or loan repayments.
Provide a model notice to interested persons.
Make various other changes to reflect the amendments to the VFCP.

Practical Impact

Adding self-correction for common errors such as failing to send employee salary withholding contributions and participant loan repayments is a welcome change for retirement plan sponsors. This will help to streamline the correction process for plan sponsors (and practitioners who assist plan sponsors) to correct inadvertent plan administration errors.

DOL Proposes Changes to the Voluntary Fiduciary Correction Program (VFCP) and Related Prohibited Transaction Exemption | Practical Law