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U.S. Department of Labor
Employee Benefits Security Administration
May 2006
On April 19, 2006, the Department of Labor published in
the Federal Register
a 2006 Update of the Voluntary Fiduciary Correction Program (VFCP), which
simplified and expanded the original VFCP published in 2002. The VFCP is
designed to encourage employers to voluntarily comply with the Employee
Retirement Income Security Act (ERISA) by self-correcting certain
violations of the law. Many workers can benefit from the VFCP as a result
of the increased retirement security associated with restoration of plan
assets and payment of additional benefits. It also will help plan
officials understand the law. The 2006 Update of the VFCP describes how to
apply, the 19 categories of transactions covered, acceptable methods for
correcting violations, and examples of potential violations and corrective
actions. The Department issued the Update in response to public and
internal comments on the preliminary revision of the VFCP published in
April 2005. The 2006 Update of the VFCP was effective May 19, 2006.
The Department also provides applicants conditional
relief from payment of excise taxes for certain VFCP transactions under a
class exemption related to the VFCP, which is discussed in more detail
below. The amended class exemption was also effective on May
19, 2006.
Who Is Eligible
Anyone who may be liable for fiduciary violations under
ERISA, including employee benefit plan sponsors, officials, and parties in
interest, may voluntarily apply for relief from enforcement actions,
provided they comply with the criteria and satisfy the procedures outlined
in the VFCP.
VFCP Criteria
Persons using the VFCP must fully and accurately
correct violations. Incomplete or unacceptable applications may be
rejected. If rejected, applicants may be subject to enforcement action,
including assessment of civil monetary penalties under Sections 502(l) and
502(i) of ERISA.
How To Apply
Applicants do not need to consult or negotiate with
EBSA to use the VFCP. They merely need to follow the procedures outlined
in the notice published in the April 19, 2006, Federal Register.
Violations can be fully and correctly resolved in four easy steps:
-
Identify any violations and
determine whether they fall within the transactions covered by the
VFCP;
-
Follow the process for correcting
specific violations (e.g., improper loans or incorrect valuation of
plan assets);
-
Calculate and restore any losses or
profits with interest, if applicable, and distribute any supplemental
benefits to participants; and
-
File an application with the
appropriate EBSA regional office that includes documentation showing
evidence of corrective action taken.
Covered Transactions
The VFCP provides descriptions of 19 categories of
transactions and their methods of correction. Corrective remedies are
prescribed for the following fiduciary violations involving employee
benefit plans:
-
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 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
Acceptable Corrections
The VFCP provides rules for making acceptable
corrections involving the transactions listed above. Applicants generally
must:
-
Conduct valuations of plan assets
using generally recognized markets for the assets or obtain written
appraisal reports from qualified professionals that are based on
generally accepted appraisal standards;
-
Restore to the plan the principal
amount involved, plus the greater of lost earnings, starting on the
date of the loss and extending to the recovery date, or profits
resulting from the use of the principal amount, starting on the date
of the loss and extending to the date the profit is realized;
-
Pay the expenses associated with
correcting transactions, such as appraisal costs or fees associated
with recalculating participant account balances; and
-
Make supplemental distributions when
appropriate to former employees, beneficiaries, or alternate payees,
and provide proof of the payments.
VFCP Documentation
Under the VFCP, applicants must provide supporting
documentation to the appropriate regional office of EBSA. Required
documentation generally includes:
-
Copy of relevant portions of plan
and related documents;
-
Documents supporting transactions,
such as leases and loan documents, and applicable corrections;
-
Documentation of lost earnings
amounts;
-
Documentation of restored profits,
if applicable;
-
Proof of payment of required
amounts;
-
Specific documents required for
relevant transactions, as outlined in Section 7 of the VFCP;
-
Signed checklist; and
-
Penalty of perjury statement.
The VFCP also provides a model application form. While
use of this model application form is entirely voluntary, EBSA encourages
its use to avoid common application errors that frequently result in
processing delays or rejections.
Restitution To Plans
Applicants must restore the plan, participants, and
beneficiaries to the condition they would have been in had the breach not
occurred. The VFCP includes an online
calculator to assist applicants by automatically calculating
correction amounts that must be paid to the plan. Plans must then file,
where necessary, amended returns to reflect corrected transactions or
valuations.
Applicants also must provide proof of payment to
participants and beneficiaries, or properly segregate the affected assets
in cases where the plan is unable to identify the location of missing
individuals. Payment of the correction amount may be made directly to the
plan where distributions to separated participants would be less than $20
and the cost of correction exceeds the distributions owed.
Excise Tax Exemption
The Department has adopted an amendment
to PTE 2002-51 to expand the relief under the exemption to additional
transactions included in the 2006 Update of the VFCP. The class exemption
provides relief from certain excise tax provisions of the Internal Revenue
Code if the terms of the Program and exemption are met.
Prior to the 2006 amendment, the exemption covered most
transactions involving:
-
Failure to timely remit participant
contributions to plans;
-
Loans made at fair market interest
rate by plans with parties in interest;
-
Purchases or sales of assets between
plans and parties in interest at fair market value;
-
Sales of real property to plans by
employers and leaseback of the property at fair market value and fair
market rental value, respectively.
The amended exemption continues to provide excise tax
relief for these four transactions, and also provides relief for two
additional transactions:
-
Prohibited transaction violations
involved in the purchase of an asset by a plan when the asset has been
determined to be illiquid, and/or the subsequent sale of the illiquid
asset by the plan.;
-
Use of plan assets to pay expenses to a service provider for services
that are characterized as “settlor expenses,” provided such
payments were not expressly prohibited in the plan documents.
Additionally, for de minimis situations involving
delinquent participant contributions and/or the failure to transmit
participant loan repayments, the Department has eliminated the notice
requirement.
Please refer to the class exemption to determine if you
meet all the terms.
Contacts For Additional Information
For additional information, VFCP applicants may contact
the appropriate EBSA regional
office at our toll-free number: 866.444.3272 and request the
VFCP coordinator.
This fact sheet has been developed by the U.S. Department of Labor,
Employee Benefits Security Administration, Washington, DC 20210. It will
be made available in alternate formats upon request: Voice phone:
202.693.8664; Text telephone: 202.501.3911. In addition, the information in this fact
sheet constitutes a small entity compliance guide for purposes of the
Small Business Regulatory Enforcement Fairness Act of 1996.
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