Voluntary Correction Program - 401(k) Plan operating like an ESOP and stock unfunded / no ESOP provisions

Plan has been operating like an ESOP by issuing participants employer stock (not publicly traded) that is not funded.  When an employee terminates his / her employment, the stock is not returned to the company but is reallocated to remaining participants.  No written procedures on how the stock is managed.  Now having trouble paying distributions.  

Can such issues be corrected although not specifically contemplated under the VCP or DOL VFCP?  

3 hours ago, youngbenefitslawyer said:

employer stock (not publicly traded) that is not funded

Not sure what you mean by this. Are you saying stock is not being deposited and held in the plan's trust?

If this is a trustee directed pooled PS plan, then I do not think there is a prohibition on employer stock being an investment and I do not think there is a limit (like 10% in a DBP). However, by NOT being designated an ESOP, you do not get the advantage of statutory "free pass" on investing primarily in employer stock. Therefore, you likely have a fiduciary issue with respect to the prudence of plan investments. That would lean toward DOL VFCP, but I don't know what correction they would mandate or allow - whether retroactively changing the plan type to a designated ESOP (IRS might also need to be involved in that conversation), or requiring the plan to divest employer stock down to a level deemed prudent.

Good luck.