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A How-To for the DOL’s Voluntary Fiduciary Correction Program

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by Scott Tuxbury October 18, 2011

If your company offers a salary deferred contribution plan subject to the Employee Retirement Income Security Act (ERISA) – a 401(k), for example – it is important to remember that plan sponsors are responsible for ensuring that all plan transactions meet the fiduciary standards ERISA has established. Even with careful planning, many companies will discover, through an internal audit or other means, that they have unintentionally become liable for a fiduciary breach. Mistakes do happen. The liability could result from something the company itself has done or failed to do, the most common example would be a missed contributions payment. A breach will in most cases incur a 15% excise tax per prohibited transaction from the IRS, and could lead to issuance of the U.S. Department of Labor (DOL)’s standard 20% penalty per transaction, as well as civil or criminal prosecution. If your company is liable, do you know how to make amends and avoid these penalties?

The VFC Program

The Employee Benefits Security Administration (EBSA), an agency of the DOL, has created the Voluntary Fiduciary Correction (VFC) Program to help those with fiduciary responsibility for ERISA-subject plans to voluntarily correct and report breaches before the launch of an official investigation. The reason for the development of such a program was to allow plan sponsors the ability to self correct. This arrangement is a lot more preferable for the liable party because the alternative is a DOL audit or investigation, which would cost the employer or fiduciaries more money. The VFC Program does not apply to non-ERISA plans, nor can it be used in cases where there is evidence of criminal liability. The DOL has produced the following list[1] describing which prohibited transactions are covered under this correction program:

  • 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

Resolving Violations through the VFC Program

If you or your company is potentially liable for a breach, there is no need to contact or negotiate with EBSA, the agency responsible for enforcing ERISA. Instead, proceed by following these four steps:

  1. Determine whether this program applies. This step is as simple as identifying the violation and then checking the above list to see if it is covered under the VFC Program.
  2. Before submitting an application, you must first correct the violations using the procedure outlined in the program. Each covered violation can be matched to a proscribed correction; these corrections are described in Part Three of the April 19, 2006 Federal Register, a 25-page document hosted here in PDF format on the DOL website.
  3. Calculate and then restore losses or profits resulting from the violation, with interest. In a basic sense, the above corrections usually involve putting any gains resulting from the violation back into the plan, or otherwise financially compensating those affected. The DOL has created an online calculator to assist with this step, which can be found here.
  4. File your application. The calculations for restoration and the application itself are often completed with the help of an experienced consultant, especially in cases where violations or their corrections become exceedingly complex, or in cases where applicants are attempting to resolve multiple violations.

If your application is accepted, and if your case meets all of the VFC Program deadlines, you will receive a “no-action” letter, essentially saying that the DOL will not launch a civil investigation or attribute the otherwise applicable 20% penalty for covered transactions. While you will avoid the penalty in this situation, you will still have to pay the 15% excise tax levied against prohibited transactions, unless your particular case meets specific criteria for exemption.

More Information

To learn more about the VFC program, please feel free to reach out to our Retirement Plan Advisory Practice or another trusted business advisor specializing in retirement plan administration.



[1]   List reproduced from the DOL's VFC Program fact sheet, located at http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html.

 

New Wealth Advisors is an affiliate company of MFA – Moody, Famiglietti & Andronico, LLP. The views, opinions, positions or strategies expressed by New Wealth Advisors, the authors of this blog post and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of MFA – Moody, Famiglietti & Andronico, LLP.  MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this blog post and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.

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New Wealth Advisors, LLC (New Wealth Advisors) is an SEC registered investment adviser with its principal place of business in the State of Massachusetts. New Wealth Advisors and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which New Wealth Advisors maintains clients. New Wealth Advisors may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by New Wealth Advisors with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

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Scott D. Tuxbury
Director of Retirement & Investments
(978) 569-2947
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