Denver retirement plan fiduciaries who want to take advantage of the Employee Plan Compliance Resolution System will soon have more opportunities. This is thanks to revised changes to the DOL’s Voluntary Fiduciary Correction Program (VFCP). The proposed revisions would allow for certain fiduciary errors to be corrected (including the late transmittal of employee contributions), participant loan issues, and much more. Since this is the first time the program has been changed in 16 years, the DOL wants to receive feedback through the open comment period. To help clients, prospects, and others, Hanson & CO has provided a summary of the key details below.
What is the Voluntary Fiduciary Correction Program?
The Employee Benefits Security Administration (EBSA) first established the VFCP in 2002. Its purpose has been to encourage self-correction when plan fiduciaries notice deficiencies with ERISA compliance requirements. To qualify, the plan and its applicant must not already be under DOL investigation and must be free of potential criminal violations.
When plans voluntarily report certain fiduciary breaches, they can avoid penalties and enforcement actions. Currently, there are 19 transaction categories that qualify for relief, including;
- Delinquent Participant Contributions and Participant Loan Repayments to Pension Plans
- Delinquent Participant Contributions to Insured Welfare Plans
- Delinquent Participant Contributions to Welfare Plan Trusts
- Fair Market Interest Rate Loans to Parties in Interest
- Below Market Interest Rate Loans to Parties in Interest
- Below Market Interest Rate Loans to Non-Parties in Interest
- Below Market Interest Rate Loans Due to Delay in Perfecting Security Interest
- Participant Loans Failing to Comply with Plan Provisions for Amount, Duration, or Level Amortization
- Defaulted Participant Loans
- Purchase of Assets by Plans from Parties in Interest
- Sale of Assets by Plans to Parties in Interest
- Sale and Leaseback of Property to Sponsoring Employers
- Purchase of Assets from Non-Parties in Interest at More Than Fair Market Value
- Sale of Assets to Non-Parties in Interest at Less Than Fair Market Value
- Holding of an Illiquid Asset Previously Purchased by Plan
- Benefit Payments Based on Improper Valuation of Plan Assets
- Payment of Duplicate, Excessive, or Unnecessary Compensation
- Improper Payment of Expenses by Plan
- Payment of Dual Compensation to Plan Fiduciaries
To correct a fiduciary breach, plan sponsors or fiduciaries must follow a four-step process:
- Conduct valuations of plan assets.
- Restore the principal amount owed plus the greater of lost earnings or profits.
- Pay any expenses associated with fixing the transactions, like appraisal fees.
- Make supplemental distributions as needed and provide proof of payment.
From there, documentation must be sent to the plan’s regional EBSA office.
Incomplete or incorrect application forms are among some of the errors that can void participation. To help prevent any errors, plans can use a sample application form and online calculator to determine correction amounts.
The Program has not been updated since 2006. In its last revision, EBSA expanded relief for excise tax provisions, extending relief from four classes of transactions to six. Changes also included adding four additional transaction categories, simplifying the method for calculating correction amounts, and adding the online calculator.
Proposed 2023 Changes to Voluntary Benefit Plan Compliance
Currently, the most often corrected transaction is delinquent participant contributions. Especially when the dollar amounts may be small, plans and employers have found it difficult to go through the process of voluntarily correcting the mistake because of the time, complexity, and cost involved.
The most notable proposed change for 2023 is the addition of a new self-correction feature “for certain failures to timely transmit participant contributions (and participant loan repayments) to pension plans.” The new proposed streamlined correction process would allow plans to notify EBSA electronically if they have satisfied the requirements to self-correct.
To qualify for the new electronic self-correction feature, plans must meet all four conditions below.
- The deadline to repay participant contributions or loans is 180 calendar days from the date of withholding or receipt.
- The maximum amount of lost earnings is $1,000, calculated from the date of withholding or receipt.
- The plan or applicant must not currently be under investigation.
- The plan must use online tools to complete the application, including a calculator to determine correction amounts, a transmittal form, and a self-correction checklist.
The $1,000 amount is inclusive of plan size; it does not matter how many participants or the number of assets are in a pension plan. This amount does not include any exempt excise taxes. The 180-day requirement is a stricter interpretation than what is currently used, as it could be an earlier date from when the amounts were first removed.
The date of withholding or receipt is defined as “the date the amount would otherwise have been payable to the participant in cash in the case of amounts withheld by an employer from a participant’s wages, or the day on which the employer receives the participant contribution or loan payment in the case of amounts that a participant or beneficiary pays to an employer.” This is a stricter requirement than what the standard application uses. In its comments, the DOL noted that this benchmark would give the department enough information and “certainty of correction” compared to the existing process.
When an eligible plan uses the new self-correction feature, it must also keep the checklist and the penalty of perjury statement on file; the plan fiduciary or an authorized representative (like an attorney or accountant) and any plan official seeking relief must also sign the perjury statement and notice of self-correction. Plans would be prohibited from using plan assets to pay for any related self-correction service fees.
Other proposed changes include:
- Renaming or redesignating certain sections and updating wording in those sections.
- Amended corrective actions for purchases, sales, exchanges, or leasebacks of real property and illiquid asset transactions.
The definition of Under Investigation has been revised to clarify that a plan is not under investigation simply because EBSA contacts the plan, applicant, self-corrector, or plan sponsor related to a participant complaint unless the complaint is related to the transaction in the plan’s VFCP application.
Finally, eligibility to participate has been expanded to include an exception to potential criminal activity. If, for example, the plan’s bookkeeper allegedly embezzled money from the plan, but the amount was repaid and appropriate legal action was taken, the plan could still participate in the Program.
Since the comment period recently closed, it is unlikely the DOL will announce revisions to the proposed regulations for some time. However, plan fiduciaries should be familiar with these updates as the final rules will likely not be significantly different. If you have questions about the information outlined above or need assistance with your next plan audit, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.