Frequently Asked Questions about the Voluntary Fiduciary Correction Program

What is the Voluntary Fiduciary Correction Program (VFCP)?

The VFCP is a voluntary enforcement program that encourages the correction of possible violations of Title I of ERISA.

The program allows plan officials to identify and fully correct certain transactions such as prohibited purchases, sales and exchanges, improper loans, delinquent participant contributions, and improper plan expenses.  The program includes 15 specific transactions and their acceptable means of correction, eligibility requirements, and application procedures. If an eligible party documents the acceptable correction of a specified transaction, the U.S. Department of Labor, Employee Benefits Security Administration (EBSA), will issue a no-action letter.

Why did the U.S. Department of Labor create the VFCP?

In part, the U.S. Department of Labor developed the VFCP in response to requests from the employee benefits community for a formal program that would reduce the risk of enforcement action and the imposition of the Section 502(l) penalty. Most of EBSA’s investigations are resolved by fiduciaries taking corrective action after EBSA identifies violations. The U.S. Department of Labor recognized that as the private benefit system evolves, there is a need for innovation in voluntary compliance. Publication of the VFCP provides an opportunity to inform plan fiduciaries of their obligations so that complete and fully acceptable corrections may be made without discussion or negotiation with the U.S. Department of Labor.

Who is eligible to participate in the program?

The U.S. Department of Labor will consider an application if neither the plan nor the applicant is under investigation and if the application contains no evidence of potential criminal violations as determined by EBSA.

How long will the U.S. Department of Labor operate the program?

The U.S. Department of Labor expects to operate the program indefinitely.

What if the U.S. Department of Labor receives an application from a plan sponsor that has not adequately corrected a violation?

The U.S. Department of Labor may need to negotiate with the sponsor for full correction. In that case, the Section 502(l) penalty may apply to amounts restored pursuant to the negotiation. Depending on the facts, EBSA may also need to conduct a civil or criminal investigation or take other action, such as seeking removal of persons from positions of authority with respect to a plan.

Are there any civil penalties involved in the program? 

If the applicant complies with the conditions of the program, no Section 502(l) penalty would apply to correction amounts paid to the plan or to participants. The U.S. Department of Labor is not precluded from referring information regarding the transaction to the IRS as required by Section 3003(c) of ERISA, or from imposing civil penalties under Section 502(c)(2) of ERISA based on the failure or refusal to file a timely, complete and accurate annual report Form 5500. However, the Department expanded the VFCP in November 2002 by publishing a class exemption providing relief from excise taxes for four VFCP transactions if the applicant meets certain conditions.

Will the program provide any certainty to the applicant if he or she complies with the conditions?

Yes. The U.S. Department of Labor acknowledged the need for plan sponsors and their service providers to know that the U.S. Department of Labor would take no further action if the applicant satisfied the terms of the program. Under those circumstances, the U.S. Department of Labor will issue a no-action letter to the applicant. The no-action letter states that the U.S. Department of Labor will not initiate a civil investigation under Title I of ERISA regarding the applicant’s responsibility for any transaction described in the no-action letter, nor assess a Section 502(l) penalty. However, the issuance of a no-action letter does not affect the ability of any other government agency, or any other person, to enforce their rights.

How do I apply for relief?

The program includes application procedures. Briefly, one must submit a written narrative and supporting documents describing the transaction and its correction, proof of restoration of losses, and an executed penalty of perjury statement.

Where do I apply?

Applications should be mailed to the appropriate EBSA regional office.

How can I find out more about the program?

Interested parties may contact the appropriate EBSA regional office. Regional coordinators assigned to the program will assist you with your questions. Information about the VFCP can also be obtained by calling EBSA's Toll-Free Hotline number at 1.866.444.EBSA (3272).

How do I determine when participant contributions to pension plans are late?

The Department’s regulation relating to the definition of Plan Assets - Participant Contributions (29 CFR 2510.3-102) describes a general rule and a maximum time period for pension benefit plans. The general rule provides that the assets of a plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.

The maximum time period for pension benefit plans for transmitting participant contributions shall in no event be later than the 15th business day of the month following the month in which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).

The date when participant contributions reasonably can be segregated from the employer’s general assets usually will be earlier than the maximum time period for pension plans in the regulation. Thus, when contributions reasonably can be segregated from the employer’s general assets in a shorter time period, delay in forwarding the contributions, even a delay that does not exceed the maximum time period under the regulation, may cause a breach of fiduciary duty under Title I of ERISA that may be corrected under the Voluntary Fiduciary Correction Program (VFCP). Moreover, where the contributions have been delinquent longer than the maximum time period and the contributions could have been segregated earlier than the maximum time period, the loss date (as defined in the program), for purposes of calculating lost earnings (as defined in the program), is the date on which the contributions reasonably could have been segregated and not the maximum time period.

How do I show the earliest date contributions can be segregated for purposes of preparing a VFCP application?

Program applicants are reminded that the program requires that the applicant document, under its particular circumstances, the earliest date on which the contributions reasonably could have been segregated from the employer’s general assets. This documentation may consist of the plan sponsor’s past withholding and remittance history, the sponsor’s withholding and remittance process, and the minimum period between withholding and remittance.

Participant contributions to the plan were delinquent, but the dollar amount to correct is very small. Do I have to participate in the VFCP?

If participant contributions are delinquent, plan officials must take appropriate action to correct the violation. Although plan officials are not required to file an application with the Department under the VFCP to correct a violation, the VFCP is available to correct a loss of any amount resulting from a transaction covered by the program. Participation in the VFCP is voluntary. However, if you do not file an application with the Department, you cannot obtain the relief available under the program. Moreover, if the Department discovers the violation on audit, and the correction was not complete for purposes of the program, a civil penalty may be assessed on any additional amount required by the Department to fully correct the violation following the Department’s audit of the plan.

Can I use the VFCP to correct a failure to forward participant loan repayments to a plan in a timely fashion?

Yes. In Advisory Opinion 2002-02A, the Department concluded that, while not subject to the participant contribution regulation (29 C.F.R. § 2510.3-102), participant loan repayments paid to or withheld by an employer for purposes of transmittal to an employee benefit plan are sufficiently similar to participant contributions to justify, in the absence of regulations providing otherwise, the application of principles similar to those underlying the final participant contribution regulation for purposes of determining when such repayments become assets of the plan. Specifically, the Advisory Opinion concluded that participant loan repayments paid to or withheld by an employer for purposes of transmittal to the plan become plan assets as of the earliest date on which such repayments can reasonably be segregated from the employer’s general assets. Given the similar treatment of participant contributions and loan repayments, the Department has determined that it is appropriate to permit delinquent participant loan repayments to be corrected under the VFCP in the same manner as delinquent participant contributions.

I have determined that participant contributions to the pension plan were delinquent and I want to correct under the program. How do I determine what rate of return to use for calculating earnings on the delinquent contributions?

In order to correct under the program, you will need to calculate the lost earnings on the delinquent contributions. For purposes of correction under the program, the rate of return to use is the highest of:

• The rate of return of the plan for non-participant directed plans or of individual participant accounts.

• Restoration of profits (as defined under the program).

• The Internal Revenue Code §6621 rate. How to calculate each of those amounts is demonstrated in the questions and answers below.

The plan investments are selected by the plan fiduciaries. How do I calculate the overall rate of return for the plan?

Where there are no distributions or expense disbursements during the period of delinquency, the overall rate of return for the plan is calculated by subtracting the amount of plan assets on the date contributions were due under the Department’s regulation from the amount of plan assets on the date the delinquent contributions are repaid to the plan, but not including the addition of the delinquent contributions, divided by the amount of assets on the date the contributions were due.

Where there have been distributions or expense disbursements during the period of delinquency, applicants may demonstrate the actual average rate of return of all the investments of the plan where they have evidence to show such rate of return. In the alternative, applicants may, for administrative convenience, calculate the overall rate of return by using a fraction where the numerator is the amount of plan assets on the date the contributions are repaid minus the amount of plan assets on the date contributions were due, but not including the addition of the delinquent contributions, plus any distributions and expense disbursements made between the date the contributions were repaid and the date the contributions were due, and the denominator is the amount of assets on the date the contributions were due.

Application of calculations is illustrated in the examples at the end of this document.

The plan investments are participant directed. How do I calculate the rate of return for purposes of determining lost earnings on delinquent contributions?

When calculating the rate of return for participant-directed plans, it is necessary to calculate the rate of return for each individual participant account. The same method used for calculating the overall plan rate of return for a plan where the investments are selected by the plan fiduciaries is used for each participant account. For administrative convenience, the applicant may use the highest rate of return of any plan investment option as the rate of return for each individual participant account.

If the plan investments are participant directed and certain participants have not designated any investment options, what rate of return do I use for those participants for purposes of determining earnings on delinquent contributions?

For those participants in a participant-directed plan who have not designated any investment options, the applicant may use the plan’s overall rate of return for those participants during the period of the delinquency.

How do I determine what is the restoration of profits amount for purposes of determining earnings on delinquent contributions?

The restoration of profits amount is the amount earned by the fiduciary or party in interest on the use of the monies that should have been forwarded to the plan for the duration of the delinquency. If the purpose for which the monies were used and the earnings thereon are ascertainable, then those actual earnings are the amount of the restoration of profits.

What is the IRC §6621 rate and how do I find out what the rate was for the applicable time period?

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and underpayments. The VFCP uses the underpayment rate as the rate of return that must be examined for determining lost earnings where it is not possible to ascertain the restoration of profits amount. The Internal Revenue Service publishes the §6621(a)(2) rate quarterly. The rate announcements can be found on the internet.

Example 1 - For simplicity, we have not attempted to illustrate calculations for typical numbers of participants or dollar amounts likely to be involved in actual plan transactions.

This example demonstrates correction of delinquent contributions for one pay period for a plan that is not participant-directed.

ABC Products, Inc. sponsors a 401(k) plan that allows participant contributions. ABC pays its employees and withholds the contributions on a bi-weekly basis. The plan does not provide for participant direction of investments and the plan fiduciary invests the plan assets in a diversified portfolio of investments. Employee contributions totaling $10,000.00 were not forwarded for the first pay period in June 2000. As a result, the participant contributions that normally would have been forwarded and which in fact reasonably could have been segregated from ABC’s general assets on the 19th of June (the first Monday following the end of the pay period) remained in ABC’s general assets.

A participant received her quarterly statement and noted that the amount withheld from her paychecks exceeded the amount credited to her plan account. This participant then contacted the ABC plan fiduciary for an explanation. Upon review, the plan fiduciary noted that the June 19th contribution remittance had not been made and deposited the contribution amount on October 2, 2000.

During the period June 19th to October 2nd the plan’s rate of return was 6%. There were no distributions or expense disbursements during the relevant time period. The plan’s rate of return was determined by calculating the increase in value of the plan assets between June 19th and October 2nd, divided by the value of the assets as of June 19th. This resulted in an annualized rate of return of 6%. The IRC §6621 rate was 8% for the relevant time period. The ABC plan fiduciary uses, as required by the program, the higher of the two figures (8%), and multiplied 8% by the number of days the employee contributions were outstanding (105 days), divided by 366 (the year 2000 was a leap year), multiplied by the principal amount (as defined in the program). The calculation of lost earnings is as follows:

(.08 (rate of return) * 105 (days))/366 = .023 (loss rate)
.023 (loss rate) * $10,000.00 (principal amount) = $230.00

Full correction requires that ABC pay an additional amount representing the rate of return on this $230.00 lost earnings amount during the 14-day period between October 2nd (the date the principal amount was forwarded to the plan) and October 16th (the date the full correction amount is paid to the plan). This calculation is made in the same manner as the lost interest calculation above.(1) The calculation of earnings on lost earnings is as follows:

(.08 (rate of return) * 14 (days) )/366 = .0031 (loss rate)
.0031 (loss rate)* $230.00 (lost earnings amount) = $.71

The ABC Company makes payment of the lost earnings and earnings on lost earnings of $230.71 on October 16th. The total payment is allocated among individual participant accounts in the same proportion as the individual contributions that were delinquent have to the total amount that was delinquent. Where the amount owed to individual accounts for former employees, their beneficiaries and alternative payees who have neither account balances with nor a right to future benefits from the plan is less than $20, and the applicant demonstrates in its submission that the cost of making the distribution exceeds the cost of correction, the applicant need not make distributions to those individuals who have separated from the plan and who would receive less than $20. Instead, the applicant need only make payment to the plan in the required amount rather than making the distributions to the former employees, their beneficiaries and alternative payees.

Example 2 - This example shows how to calculate the amount due to the plan when no payments are made for a number of pay periods.

Assume the same set of facts as in Example 1, except that no participant contributions were forwarded for the pay periods ending June 14th, June 28th, July 12th, and July 26th. On August 2nd, all outstanding participant contributions were restored. Contributions are reasonably segregable on the first Monday following the end of the pay period (June 19th, July 3rd, July 17th, July 31st).

Contributions normally forwarded and that were in fact reasonably segregable from the employer’s general assets on June 19th were 44 days late, on July 3rd were 30 days late, on July 17th were 16 days late, and on July 31st were 2 days late. For the pay period ending on June 19th, lost earnings are calculated as follows: determine the rate of return for the period June 19th – August 2nd,(2) multiplied by 44 days (the period delinquent), divided by 366, multiplied by the principal amount. The same formula would apply for pay periods 2, 3, and 4 (determine rate of return multiplied by the number of days delinquent divided by 366 multiplied by the principal amount).

The calculation is as follows:

The total lost earnings amount is $201.40, as of August 16th.

Earnings on the lost earnings from August 2nd (the date the principal amount was paid to the plan) to August 16th (the date lost earnings were paid to the plan) are as follows:

(0.08 * 14 days) / 366 days = 0.0031
(0.0031) * ($201.40)(3) = $00.62 = Payment of earnings on earnings

A total payment of $202.02 is made to the plan on August 16th.

Example 3 - This example shows how to calculate lost earnings for a participant-directed plan.

Assume the same facts as in Example 1, except that the plan allows participant direction of contributions in any combination of four investment options. The principal amount, consisting of participant contributions, was deposited on October 2nd. The full correction amount (lost earnings and earnings on lost earnings) was deposited fourteen days later, on October 16th.

During the preparation of the VFCP application the applicant determines the annualized rates of return for the four investment options. For the period June 19th -October 2nd, the annualized rate of return for Option 1 was 4%, Option 2 was 6%, Option 3 was 10%, and Option 4 was 20%. Further, the applicant determined that during this period the IRC §6621(a)(2) rate was 8%. The applicant also determined that plan participants A, B, C made their allocations as follows:

During the June 19th - October 2nd period, the applicant determines each participant’s rate of return by taking the sum of each option’s allocation percentage multiplied by that option’s rate of return. For example, participant A’s actual rate of return equals (.25 * .04) + (.25 * .06) + (.25 * .10) + (.25 * .20) for an overall rate of return during the period of 10 percent (.10). Similarly, the rates of return are calculated for the remaining participants and compared to the IRC §6621(a)(2) rate. The results are shown as follows:

The applicant calculates lost earnings by multiplying the calculation rate (far right column above) by the number of days the contributions were delinquent, divided by 366. That number is multiplied by the dollar amount of the participants’ allocations. Note that full correction requires payment of an additional amount representing the earnings on lost earnings as explained in Example 1.

The calculations, based on each participant’s calculation rate, are as follows:

The applicant also has the option of using, for administrative convenience, the highest rate during the applicable period for all participants. In this example that rate would be a 20% calculation rate (Option 4). Note again that full correction requires that ABC pay an additional amount representing the earnings on lost earnings as explained in Example 1.

The calculation for participant A, based on the highest rate during the applicable period, is as follows:

(0.20 * 105 days) / 366 days = 0.06
(0.06) * ($300.00) = $18.00 = lost earnings
(0.20 * 14 days / 366 = 0.008
(0.008) * ($18.00) = $0.14 = Payment of earnings on lost earnings

Total payment for participant A is $18.14. The calculation is applied to each participant’s contribution amount.

Example 4 - This example shows calculation of lost earnings and earnings on lost earnings where contributions are late each pay period for several pay periods and the plan is participant-directed.

LMN, Inc. (LMN) sponsors a 401(k) plan that allows participant direction of contributions in any combination of four investment options. Participants may change their investment allocations on a daily basis. LMN pays its employees and withholds contributions that total $10,000.00 on a monthly basis during 2000. Pay day is the last day of each month. The applicant determines that the employer is able to segregate the contributions on the second business day of the month following pay day. The applicant also finds that lost earnings are due to the plan because of delinquencies. The following table reflects LMN’s remittance of participant contributions:

For the months in which contributions were forwarded after the reasonably segregable date, the applicant has determined:

The last row of the above table reflects the return for each option from the first reasonably segregable date (2/2) through the last actual date forwarded (5/26).

To complete the VFCP application, the applicant must determine each participant’s allocation during each period and the associated rates of return. This calculation will result in the participant’s rate of return for the period, which will then be multiplied by the participant’s contribution amount multiplied by the days delinquent divided by 366 days. Note that full correction requires that LMN pay an additional amount representing the earnings on lost earnings as explained in Example 1. This amount is restored on May 30th.

For administrative convenience, the applicant decides not to determine the participants’ rate of return based on their daily investment reallocation but instead to utilize the highest rate of return for the entire period. That calculation would be: highest rate of return multiplied by the days delinquent divided by 366. That number is then multiplied by the principal amount.

Using the highest rate of return for administrative convenience, the LMN, Inc. plan fiduciary’s calculation would look as follows:

Total lost earnings = $333.00

Earnings on lost earnings, based on the difference between the date forwarded and the correction date (right column of chart A), must also be calculated and restored.

The plan’s rate of return is determined by calculating the increase in value of the plan assets between October 2 and October 16, divided by the value of the assets as of October 2, 2000. This results in an annualized rate of return of less than 8%.

See Example 1 for the proper method of calculating the rate of return.

Footnotes

1. The sum of the lost earnings. The plan’s rate of return is determined by calculating the increase in value of the plan assets between October 2 and October 16, divided by the value of the assets as of October 2, 2000. This results in an annualized rate of return of less than 8%.

2. See Example 1 for the proper method of calculating the rate of return.

3. The sum of the lost earnings.

Frequently Asked Questions about the VFCP Class Exemption

Briefly describe the VFC Class Exemption.

The class exemption was proposed in conjunction with the finalization of the Department’s Voluntary Fiduciary Correction Program. The class exemption provides relief from the excise tax provisions of the Internal Revenue Code. No relief is provided from the prohibited transaction provisions of ERISA because such relief is provided under the VFCP.

Why did the Department create the class exemption?

The Department received a number of comments in response to the interim VFCP stating that the lack of excise tax relief was a disincentive to participation in the VFCP. The Department wished to encourage plan fiduciaries to fully correct violations and restore to participants and beneficiaries any losses resulting therefrom.

Which transactions are covered by the class exemption?

The class exemption only covers four of the prohibited transactions identified in the VFCP. The four transactions are:

• The failure to transmit participant contributions to a pension plan within the time frames described in the Department’s regulations (29 C.F.R. section 2510.3-102) and/or the failure to transmit participant loan repayments to a pension plan within a reasonable time after withholding or receipt by the employer.

• The making of a loan by a plan at a fair market interest rate to a party in interest with respect to the plan.

• The purchase or sale of an asset (including real property) between a plan and a party in interest at fair market value.

• The sale of real property to a plan by the employer and the leaseback of such property to the employer, at fair market value and fair market rental value, respectively.

The class exemption covers the failure to transmit participant contributions to a pension plan within the time frames required by the Department’s regulations (29 CFR 2510.3-102). The class exemption also says you can only take advantage of the relief for a transaction once every three years. How do you define a “transaction” for purposes of the failure to transmit participant contributions? Does each pay period count as one transaction?

The Department has said informally that more than one pay period can be one transaction if the pay periods are close together in time and related to the same cause. So, for example, if the employee responsible for payroll leaves the company, and for the next few pay periods the employer is late in depositing contributions, that can be one transaction. On the other hand, if there is no real cause and the employer misses the deadline in December, March and June, but makes it on time the rest of the time, that is not really one transaction.

How do I apply for relief?

It is not necessary to apply to the Department for relief under the class exemption. However, parties must meet all of the applicable conditions in the exemption in order to obtain excise tax relief. In part, those conditions require participation in the VFCP. Parties must meet all of the VFCP’s applicable requirements, and must receive a no action letter from EBSA with respect to the prohibited transaction described in the VFCP application. Additionally, under the class exemption, parties must provide notice to interested persons regarding the transaction and its correction, and provide a copy of the notice to the appropriate Regional Office of the Department, within 60 days after submission of an application under the VFCP. (Parties should indicate on the checklist submitted with their VFCP application that they will provide notice to interested persons and the Department’s Regional Office.)

How can I find out more about the class exemption?

Questions may be referred to the Department of Labor’s Office of Exemption Determinations at 202.693.8540.

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