On November 21, 2022, the Department of Labor’s Employee Benefits Security Administration (“EBSA”) published a proposed rule updating its Voluntary Fiduciary Correction Program (“VFCP”). The proposal makes several changes, most notably creating a new Self-Correction Component (“SCC”) to simplify the process for defined contribution pension funds to report corrections of late participant deferrals and loan repayments.
The VFCP, which was originally implemented by EBSA in 2002 and most recently updated in 2006, is designed to encourage plan fiduciaries to make voluntary corrections to comply with ERISA and thereby avoid civil enforcement actions and penalties. Although many defined contribution funds use the VFCP’s online calculator to correct late participant deferrals and loan repayments on an informal basis, formal correction of errors under the VFCP requires a written application to EBSA. The proposed changes are intended to facilitate more efficient and less costly corrections under the VFCP, to encourage greater participation in the VFCP, and to respond to stakeholders’ concerns that participating formally in the VFCP is too timely and too costly.
Currently, funds that wish to formally correct the late remittance of participant deferrals and loan repayments must submit an application to EBSA, provide documentation including a penalty of perjury statement, and await EBSA’s approval of the correction. Under the proposed rule, the SCC would enable plan fiduciaries to electronically notify EBSA after self-correcting certain delinquent participant deferrals and loan repayments, provided the following requirements are met:
- Lost earnings on the delinquent participant contributions and delinquent loan repayments must not exceed $1,000;
- The participating employer(s) must have remitted the delinquent participant contributions or loan repayments no more than 180 calendar days from the date the employer withheld or received such amounts;
- Self-correctors must use the VFCP’s Online Calculator to calculate lost earnings and must complete and retain the self-correction retention record checklist;
- The fund must not be “under investigation” as defined in the VFCP. The proposed rule makes clear that a fund is not considered to be under investigation merely because it receives a participant-initiated inquiry from an EBSA investigator, unless the transaction being corrected is the basis of the inquiry; and
- Lost earnings under the SCC must be calculated from the payroll date, and not from any later date when the deferrals may have been due under DOL regulations.
Unlike with existing VFCP applications, correctors under the SCC will not receive a “no action” letter from EBSA, but the proposed rule clarifies that self-correction in accordance with the SCC requirements will nevertheless exempt funds from penalties or civil enforcement actions. Along with the proposed VFCP updates, EBSA proposed a corresponding amendment to the Prohibited Transaction Class Exemption 2002-51 to provide excise tax relief for transactions that are corrected pursuant to the SCC.
Further, in addition to introducing the SCC, the proposed rule also makes a number of technical changes to existing VFCP correction methods for plan transactions involving, for example, the sale of real property or illiquid assets to parties in interest. These changes generally appear to offer greater flexibility to funds that wish to correct a possible prohibited transaction.
EBSA and the Department of Labor have invited public comments on the proposed amendments, which must be submitted by January 20, 2023. They are particularly interested in comments on the SCC criteria and conditions, whether additional protections for small funds should be incorporated, and whether the VFCP should be further expanded in certain respects.
We will continue to monitor this issue, including any changes that may be adopted as part of a final rule. Please contact Slevin & Hart for more on how the proposed changes to the VFCP could affect your fund.
Attorneys
This publication is intended to provide general information only, and is not intended to provide legal advice. The distribution of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship. Permission is granted to make and redistribute, without charge, copies of this entire document provided that such copies are complete and unaltered and identify Slevin & Hart, P.C. as the author. All other rights reserved.