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Guest Article

Deloitte logo

(From the April 11, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Updates Voluntary Fiduciary Correction Program


The Department of Labor's Employee Benefits Security Administration (EBSA) on April 6, 2005 issued proposals to expand and simplify the Voluntary Fiduciary Correction (VFC) Program, which the EBSA implemented on a permanent basis in 2002. 70 FR 17516 (April 6, 2005). For example, the proposals add three new transactions to the list of transactions eligible for correction under the VFC Program, simplify the methods for calculating amounts that must be restored, and streamline documentation requirements. Even though the changes are proposed, employers and other fiduciaries can begin using the amended and restated VFC Program immediately.

Background on VFC Program

The VFC Program permits ERISA fiduciaries to voluntarily correct certain prohibited transactions and other transactions that constitute a breach (or potential breach) of their fiduciary duties. If the fiduciary is eligible for the VFC Program and satisfies all the Program's requirements, the DOL will issue a "no action" letter effectively waiving its rights to initiate a civil enforcement action and to assess a 20 percent civil penalty under ERISA § 502(l). A separate prohibited transaction exemption (PTE 2002-51) also provides excise tax relief for certain prohibited transactions corrected under the VFC Program.

The April 6, 2005, Federal Register notice ("updated VFC Program") outlines the procedures for using the VFC Program to correct violations. The four basic steps are as follows:

  1. Identify any violations and determine whether they fall within the transactions covered by the VFC Program;
  2. Follow the process for correcting specific violations;
  3. Calculate and restore any losses or profits with interest, if applicable, and distribute any supplemental benefits to participants; and
  4. File an application with the appropriate EBSA regional office including documentation showing evidence of the corrective action taken.

Significantly, it is not necessary to consult or negotiate with EBSA to use the VFC Program.

Eligibility to Use the VFC Program

The VFC Program is not available if the applicant or the plan is "under investigation." According to the updated VFC Program, a plan or applicant is "under investigation" if "EBSA or any other Federal agency is conducting an investigation or examination of the plan, the applicant, or the plan sponsor in connection with a act or transaction involving the plan, or if a written or oral notice of intent to conduct such an investigation or examination has been received by the plan, a Plan Official, or other plan representative." A plan or applicant is not under investigation just because EBSA staff has contacted the plan, applicant, or plan sponsor about a participant complaint unless the participant complaint involves the transaction that is the subject of the VFC Program application.

Significantly, the preamble to the updated VFC Program clarifies that a plan, plan sponsor, or applicant is considered "under investigation" only if the investigation at issue is in connection with an act or transaction involving the plan. For example, if a plan sponsor is under investigation regarding a federal contract, the plan still would be eligible to participate in the VFC Program.

Eligible Transactions

The updated VFC Program is available to correct the following 18 transactions, including three new transactions (the new transactions are marked with an asterisk ("*")):

  • 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 With Parties in Interest
  • Below Market Interest Rate Loans With Parties in Interest
  • Below Market Interest Rate Loans With Non Parties in Interest
  • Below Market Interest Rate Loans Due to Delay in Perfecting Security Interest
  • Participant Loan Amount Exceeds Plan Limitations*
  • Participant Loan Duration Exceeds Plan Limitations*
  • 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 Other Than Fair Market Value
  • Sale of Assets to Non Parties in Interest at Other 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
  • Payment of Dual Compensation to Plan Fiduciaries

Participant Loans

The new transactions relating to plan loans are available to correct plan loans that are prohibited transactions due to problems with the loan amount or repayment duration. Under IRC § 72(p), qualified plans generally may not allow participants to borrow more than half their vested accrued benefits, or $50,000 if less. Such loans generally must be repaid within five years. Loans that violate either of these requirements are prohibited transactions.

Employers can use the updated VFC Program to correct loans that exceed the amount limitation by requiring the participant to return the excess loan amount to the plan, and amortizing the remaining principal balance as of the date of correction over the remaining duration of the original loan. For loans that exceed the duration limitation, plans must reform the loan to require repayment within five years of the loan origination date. Of course, this correction is not available if, at the time of correction, more than five years have passed since the loan origination date.

Illiquid Assets

A fiduciary of a plan that has previously acquired an illiquid asset-- such as restricted stock, limited partnership interests, real estate, and collectibles-- may determine it is no longer in the plan's or the participants' best interests to continue holding the asset. But the fiduciary may not be able to sell the asset because the only available purchaser is a party in interest with respect to the plan. (Transactions between a plan and a party in interest are prohibited transactions under ERISA § 406(a)(1)(A).) The updated VFC Program permits fiduciaries in this situation to sell the illiquid asset to the party in interest so long as "the plan is returned to a financial position that is no worse than if the acquisition had never taken place."

Along with the updated VFC Program, the EBSA issued a proposed amendment to PTE 2002-51 that would provide relief from the prohibited transaction excise tax for this transaction. 70 FR 17476 (April 6, 2005). (The proposed PTE also would provide relief for the acquisition of the illiquid asset if the acquisition otherwise was a prohibited transaction.) It is important to note, however, that the proposed amendment to PTE 2002-51 cannot provide excise tax relief until it is adopted in final form.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J.D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955

Copyright 2005, Deloitte.


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