Dept. of Labor Expands Voluntary Fiduciary Compliance Program
Earlier this year, the Department of Labor (DOL) released new rules for its Voluntary Fiduciary Compliance Program (VFCP). Happily, the rules include a new, long-awaited self-correction feature for plan sponsors.
What is VFCP? The DOL’s VFCP is a program that enables employers and plan sponsors to correct fiduciary breaches and other prohibited transactions while also generally avoiding DOL civil enforcement actions and penalties.
Certain violations corrected under VFCP are also eligible for relief from excise taxes associated with the breach or prohibited transaction. Though not entirely comparable, the DOL’s VFCP is often thought of as similar to the IRS’s Voluntary Corrections Program (VCP): VFCP allows plans to correct violations related to duties under Employment Retirement Income Security Act (ERISA), and VCP allows plans to correct violations related to requirements under the Tax Code.
Who is eligible for VFCP? Employers are generally eligible so long as: (1) they are not under investigation by a relevant government agency, (2) the application does not show evidence of possible criminal violations of ERISA, and (3) the employer has not been subject to a DOL investigation related to this matter for which the DOL sent a referral to the IRS.
Pursuant to the DOL’s VFCP guidelines, a plan or other VFCP applicant is generally considered “under investigation” if:
(1) The DOL has notified a plan official of a plan investigation or an investigation of the potential VFCP applicant or plan sponsor in connection with an act or transaction directly related to the plan.
(2) A governmental agency is conducting a criminal investigation of the plan, the potential VFCP applicant, or plan sponsor in connection with an act or transaction directly related to the plan.
(3) The IRS Tax Exempt and Governmental Entities division is conducting an examination of the plan, or
(4) The Pension Benefit Guaranty Corporation (PBGC), any state attorney general, or any state insurance commission is looking into the plan, the potential VFCP applicant, or the plan sponsor in connection with an act or transaction directly related to the plan (unless the VFCP applicant gives the DOL sufficient notice).
What can plan sponsors self-correct? Until very recently, there were no self-correction options under VFCP— meaning that all corrections pursuant to VFCP required filing a correction application with the DOL and waiting on DOL approval. Beginning in May of this year, plan sponsors may now self-correct failures related to: (1) late-deposited participant contributions and (2) plan loans. Additionally, for certain types of errors that are eligible under VFCP, the DOL release expands Prohibited Transaction Exemption (PTE) 2002-51 to permit retroactive excise tax relief.
The issue of late-deposited participant contributions is one plan sponsors frequently encounter — and, until this year, generally required correction via a lengthy filing with the DOL. Now, plan sponsors may generally self-correct these errors so long as: (1) the total lost earnings amount due to the plan is $1,000 or less and (2) the correction is made within 180 days of the initial withholding. This 180-days limit has been the subject of some industry frustration. For small plans, it is often common practice to look for late contributions only at year-end during a TPA’s review of plan data — meaning that some late contributions may fall outside of the 180-day window by the time the plan sponsor finds the error.
Plans may also self-correct “eligible inadvertent” plan loan mistakes — generally meaning that the loan failure must have occurred despite reasonable policies and procedures, the loan failure cannot be “egregious,” and the loan failure cannot represent abusive tax avoidance or a misuse of plan assets.
What does the self-correction process look like? VFCP’s new self-correction process doesn’t mean plan sponsors and officials don’t have to file anything with the DOL. The new amendments to VFCP require that notice of self-correction be filed with the DOL and include brief information about the plan, the plan sponsor, the error, and the number of impacted participants. Applicants who submit the notice will receive confirmation of the DOL’s receipt but need not wait on DOL approval. Applicants hoping to take advantage of the new retroactive excise tax relief under PTE 2002-51 must also provide a notice of the correction to certain interested parties. Especially regarding late deposited participant contributions, plan sponsors should be excited to hear that the DOL now permits them to correct fiduciary errors without a formal application filing.
By Hannah Munn, Partner, Poyner Spruil (Plan Sponsor Quarterly Update)
