United States: Simplified and Expanded Voluntary Fiduciary Correction Program

The Employee Benefits Security Administration (ESBA) recently proposed changes to the Voluntary Fiduciary Correction (VFC) Program. Although the changes are not yet final, plan fiduciaries can use the revised and expanded VFC program immediately.

The VFC program provides relief from ESBA enforcement actions and certain penalties for employers, plans and plan fiduciaries for specific fiduciary breaches under the Employee Retirement Income Security Act of 1974 (ERISA). The program describes the specific violations for which relief is available, the acceptable methods to correct such violations and the VFC application procedures. The proposed changes are designed to encourage employers, plans and fiduciaries to take advantage of the program.

The ESBA simplified the VFC application process in several ways. The program now provides a model application form, simplifies the calculation of correction amounts and requires reduced documentation in certain circumstances. Although use of the model application form is wholly voluntary, fiduciaries should find the list of required information and documentation helpful.

Along with the model form, the revised VFC program simplifies calculation of correction amounts. Previously, the program required a fiduciary to restore the greater of "profits" obtained through the breach or "lost earnings" to the plan, with "lost earnings" defined as the greater of the earnings the plan would have received had the breach not occurred and the amount of earnings at a prescribed interest rate under the Internal Revenue Code (Code). Now, the program requires the restoration of lost earnings, which are computed using prescribed Code interest rates, and rarely requires the restoration of profits resulting from the breach. Thus, the revised VFC Program eliminates the need to compare the results of multiple calculations. To further simplify the process, the ESBA internet site now provides an online calculator so applicants may determine correction amounts by entering only four pieces of data.

Finally, the revised VFC Program reduces the amount of supporting documentation required in many filings. For example, employers and plan fiduciaries may now provide a summary of late contributions and repayments when breaches involve amounts less than $50,000, or even when breaches involve amounts greater than $50,000 if such amounts are remitted within 180 days after receipt by the employer. This abbreviated documentation replaces the more detailed information, including copies of accounting and payroll records, normally required for each contribution withheld or made to the plan.

Under the new rules, a plan or plan fiduciary "under investigation" cannot use the VFC program. The revised program expands the term "under investigation" to include those applicants currently under investigation or examination by any federal agency, including the mere notice of intent to conduct an investigation by any federal agency.

The VFC program now covers three additional transactions: participant loans that violate Code limitations, the sale of a previously purchased illiquid asset and a plan sponsor’s delinquent remittance of participant loan repayments.

First, the program permits correction of participant loans when the amount or duration of the loan exceeds permitted Code limits. Correction requires that the participant repay excess loan amounts to the plan with the remaining amount of the loan re-amortized or requires that the plan reform the duration of the loan with adjusted monthly repayment amounts, as applicable.

Second, the program allows a plan fiduciary to divest an illiquid plan asset to a party in interest. To divest the illiquid asset, the plan fiduciary must determine that the asset has failed either to appreciate or to provide a reasonable rate of return, that the sale of the illiquid asset is in the plan’s best interest and that, despite reasonable efforts, the illiquid asset cannot immediately be sold for its original purchase price or current market value (if greater). In this instance, the plan fiduciary may sell the illiquid asset to a party in interest for an amount derived from a prescribed formula.

Lastly, the program now explicitly covers a plan sponsor’s failure to transmit participant loan repayments within a reasonable time after withholding or receipt from a participant. The revised program incorporates correction of this failure into the general rules that cover other late plan contributions as previously indicated in an earlier ESBA Advisory Opinion issued in 2002.

Employers and plan fiduciaries historically have been hesitant to take advantage of the VFC program for numerous reasons, including the absence of anonymity in the submission procedures and limited excise tax relief. However, even if employers and plan fiduciaries choose not to use the revised VFC program, the correction methods set forth under the program should prove useful in shaping plans’ self-correction methods. The revised program provides a number of helpful examples of correction methods, and the online calculator helps employers and plan fiduciaries more readily determine the costs of such corrections.

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