For the first time since the Department of Labor (DOL) adopted its Voluntary Fiduciary Correction Program (VFC Program) in 2002, retirement plan sponsors will now have the opportunity to utilize self-correction as an effective method to address their most common compliance failures. These failures primarily involve late transmittals of participant retirement plan contributions and loan repayments.
The DOL has finalized an update to its VFC Program, introducing the Self-Correction Component (SCC) specifically for these fiduciary failures. Additionally, an amendment to an existing prohibited transaction exemption (PTE) has been finalized, which provides excise tax relief for transactions that have been self-corrected.
The SCC feature and the associated excise tax relief will take effect on March 17, 2025.
The VFC Program – Section 409 of the Employee Retirement Income Security Act of 1974 (ERISA) stipulates that retirement plan fiduciaries who breach their responsibilities may be personally liable for any losses incurred by the plan due to such breaches. They may also be required to restore any profits made through the use of the plan’s assets.
The VFC Program is designed to encourage plan sponsors to voluntarily correct breaches of fiduciary obligations under ERISA. In return, they receive relief from civil enforcement actions and, in some cases, penalties for these breaches. To participate, plan sponsors must fully correct errors according to the procedures outlined in the VFC Program and submit an application to the DOL. This application requires a detailed description of the breach, the corrective actions taken, documentary proof of these actions, and other specified information.
However, the application process can be quite burdensome and, in some instances, resembles a DOL audit. Consequently, some plan sponsors have been hesitant to utilize it, opting instead to correct fiduciary breaches independently.
Self-Correction Component – The new SCC option allows plan sponsors to correct eligible transactions without the need to file a VFC Program application. Furthermore, when a plan sponsor opts for the SCC, the updated VFC Program waives the requirement for plan sponsors to notify participants and other interested parties about prohibited transactions and the corrective steps taken.
However, utilizing the SCC does require the self-corrector to electronically submit an SCC Notice via the new online DOL VFC Program web tool. This notice must include the following information:
- Self-corrector’s name and address
- Plan name
- Plan sponsor’s Employment Identification Number
- Principal amount
- Amount of lost earnings and the date paid to the plan
- Loss date
- Number of participants affected by the correction
After submitting this notice, the plan sponsor will receive an email acknowledgment from the DOL, but will not receive the typical “no action” letter that accompanies DOL approval of a VFC Program application. The plan administrator must retain a “penalties of perjury” certification and other documentation related to the correction. This certification must confirm that the plan is not under investigation and acknowledge receipt and review of the SCC notice. A plan fiduciary is required to sign and date this certification.
To be eligible for self-correction, the following criteria must be met:
- The lost earnings from delinquent contributions cannot exceed US$1,000.
- Delinquent payments, including lost earnings, must be remitted to the plan within 180 days of the date payments are withheld from participants’ paychecks or received by the employer.
- Neither the plan nor the self-corrector may be under investigation.
- All penalties, late fees, and other charges related to the delinquent contributions must be paid.
Excise Tax Relief – In conjunction with the VFC Program update, the DOL has amended PTE 2002-51 to extend excise tax relief to prohibited transactions eligible for self-correction under the updated VFC Program. This amendment provides relief from the 15 percent excise tax that the DOL typically imposes when participant contributions and loan repayments are not timely remitted to a 401(k) plan. Relief is available if the plan receives an acknowledgment of self-correction from the DOL and complies with other VFC Program requirements. Instead of paying the excise tax, the plan sponsor must contribute an amount equal to the excise tax to the self-corrected plan.
Excise tax relief will be available regardless of whether the plan has previously utilized the VFC Program or PTE 2002-51. Prior to this amendment, PTE 2002-51 was generally unavailable to plans that had utilized the VFC Program or the PTE for similar transactions within the previous three years.
Additional Items to Note
The VFC Program update clarifies existing transactions eligible for correction, expands the scope of certain transactions currently eligible for correction, and simplifies various administrative and procedural requirements for VFC Program participation and corrections. Importantly, correction through the VFC Program does not exempt plans from reporting late participant contributions on Form 5500 or 5500-SF. Neither the update to the VFC Program nor the PTE amendment alters this reporting requirement.
Please contact your Squire Patton Boggs attorney or the authors for additional information regarding this employee benefit plan update.
