Worth it to file VFCP with DOL?

[chris]

401(k) plan has issue re late deferrals for a number of pay periods. Apparently, company would write one check per quarter for e/ee deferrals, e.g., company would wait until Apr. 1 to write check for e/ee deferrals for Jan/Feb/March. Is it worth it to go through the DOL's VFCP filing or better off just computing the requisite interest and self-correcting it?

[jaemmons]

Since the late deferral deposits would be considered a prohibited transaction, in order to avoid any DOL penalties or investigations, I would suggest the VFCP.

Although the fiduciary avoid the DOL civil penalty of 20% under ERISA Section 502(l), I still would think that they are liable for the IRS 10% excise tax.?. I know that under Rev Proc 2001-17 under Part III, Section 6 paragraph 6.07 indicates that excise taxes are not waived under the EPCRS program. I assume this would also apply to the VFCP.

[Guest LauraH]

About a year ago the IRS was considering a "class exemption" for certain 4975 sanctions (Announcement 2002-31). Also see March 28, 2002 Federal Register. There was a proposed class exemption for a handful of the prohibited transactions that are covered through the VFC program. Was this proposal finalized - does anyone know?

At any rate, about this time last year we had a client who was mulling over the idea of entering the VFC program for reasons similar to yours - except the failure to deposit was a tad less deliberate . . . it was primarily negligence.

We had calculated the interest he owed the participants for the "borrowed" money and the excise tax for the prohibited transaction, and the client was sweating. Within days the final VFC program was out, and lo and behold there was the blurb on the excise tax exemption, and how to take advantage of it. It does involve the employer revealing the infraction and its correction to the employees. In other words, you can't take advantage of the exemption if you are closeting the fact that you are making this correction to the plan.

The excise tax exemption was supposedly available at the time the VFC program was finalized, even though it was still in "proposed form." Whether or not more has come of it since last March I don't know. Our client chose to take advantage of it though.

[Guest carsca]

If the 15% excise tax is not a material amount, I would generally correct using VFC principles, but I don't see the advantage in actually using the program and filing with DOL.

Anybody else agree/disagree?

[jaemmons]

Correcting under "the principles" of the VFCP does not insulate the fiduciary from DOL civil penalties and investigation. Once they pay the excise tax on the Form 5330 they may trigger a DOL investigation. Plus, if the individual preparing the Form 5500 answers the related question on applicable Schedules which disclose this problem to the DOL, they may trigger an investigation. The VFCP would alleviate what is generally not a pleasant experience from the employer's end .

I guess you could "roll the dice and take your chances" but if the DOL comes in to investigate, the client may have to open their checkbook.

[KJohnson]

I agree with the points about the audit trigger and if you think there are other problems "out there" this could be a concern. Also, you have to factor in the administrative costs of responding to an audit.

However, if you have self-corrected according to VFC guidelines and the failure to remit deferrals is the only other problem that exists, then I think the cost-benefit analysis changes.

It would seem that the DOL might be able to get the 5% penalty under 502(i). But again, you are only dealing with the "amount involved" which is just the interest on deferrals. I am not sure what penalty that could obtain under 502(l) if the problem has already been self-corrected before they even begin their investigation. Then, of course, there is the issue of whether you will be audited at all (rolling the dice). Finally, the 502(l) penalty is offset by the 502(i) penalty and 4975 excise tax.

Of course DOL still might take action to "remove fiduciaries" but I would think that unlikely in an instance where deferrals were late a time or two over a several year period.

I try and set this all out for companies who run into this problem.