Adoption of Voluntary Fiduciary Correction Program [Notices] [03/28/2002]
Adoption of Voluntary Fiduciary Correction Program [03/28/2002]
Volume 67, Number 60, Page 15061-15083
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Part V
Department of Labor
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Pension and Welfare Benefits Administration
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Adoption of Voluntary Fiduciary Correction Program; Notices
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
RIN 1210-AA76
Adoption of Voluntary Fiduciary Correction Program
AGENCY: Pension and Welfare Benefits Administration, Labor.
SUMMARY: The Department of Labor adopts the Voluntary Fiduciary
Correction Program (VFC Program or Program) by the Department of
Labor's Pension and Welfare Benefits Administration (PWBA). The VFC
Program allows certain persons to avoid potential Employee Retirement
Income Security Act of 1974, as amended (ERISA), civil actions
initiated by the Department of Labor and the assessment of civil
penalties under section 502(l) of ERISA in connection with
investigation or civil action by the Department. The VFC Program is
designed to benefit workers by encouraging the voluntary and timely
correction of possible fiduciary breaches of Part 4 of Title I of
ERISA.
EFFECTIVE DATE: April 29, 2002.
ADDRESSES: Address questions regarding specific applications for relief
under the VFC Program to the appropriate PWBA Regional Office listed in
Appendix C.
FOR FURTHER INFORMATION CONTACT: For Specific Applications Under the
VFC Program: Contact the appropriate PWBA Regional Office listed in
Appendix C.
For General Questions Regarding the VFC Program: Contact the
appropriate PWBA Regional Office listed in Appendix C or Jeffrey A.
Monhart, Lead Investigator, Office of Enforcement, Pension and Welfare
Benefits Administration, U.S. Department of Labor, Washington, DC,
(202) 693-8454, or Elizabeth A. Goodman, Pension Law Specialist, Office
of Regulations and Interpretations, Pension and Welfare Benefits
Administration, U.S. Department of Labor, Washington, DC, (202) 693-
8510. (These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION:
Discussion of the Program and Comments
Background
Title I of ERISA, 29 U.S.C. section 1001 et seq., establishes
certain standards with which officials of employee benefit plans
covered by ERISA must comply. PWBA helps the public to understand the
requirements of Title I of ERISA. In addition, PWBA conducts
investigations to deter and correct violations of ERISA.
Based on PWBA's experience with the Pension Payback Program, 61 FR
9203 (March 7, 1996) (Pension Payback Program), and continued public
interest in such programs, PWBA decided to establish the VFC Program on
an interim basis (Interim VFC Program). The Interim VFC Program was
published in the Federal Register on March 15, 2000 (65 FR 14164), and
has been administered out of each of PWBA's ten regional offices since
April 14, 2000. The VFC Program is designed to assist Plan Officials
(as defined in Section 3) by specifying the steps necessary to correct
certain potential violations of Title I of ERISA. Based on its
experience with administering the Program on an interim basis and the
public comments received, PWBA has decided to implement the Program on
a permanent basis. The Program will continue to be operated out of the
ten regional PWBA offices.
Section 409 of ERISA provides that a fiduciary who breaches any of
the responsibilities, obligations, or duties imposed upon fiduciaries
by Part 4 of Title I of ERISA shall be personally liable to make good
to a plan any losses to the plan resulting from each breach, and to
restore to the plan any profits of such fiduciary which have been made
through the use of assets of the plan by the fiduciary. Where more than
one fiduciary is liable for a breach, liability is joint and several.
The Secretary of Labor has the authority, under sections 502(a)(2) and
502(a)(5), to bring civil actions to enforce the provisions of Title I
of ERISA. Section 502(l) requires the assessment of a civil penalty in
an amount equal to 20 percent of the amount recovered under any
settlement agreement with the Secretary or ordered by a court in an
action initiated by the Secretary under section 502(a)(2) or 502(a)(5)
with respect to any breach of fiduciary responsibility under (or other
violation of) Part 4 by a fiduciary. Under section 502(l)(1)(B), this
civil penalty also is assessed against knowing participants in a
breach.
PWBA believes that the possibility of investigation, commencement
of a civil action, and imposition of a civil penalty under section
502(l) of ERISA may constrain persons who have engaged in a possible
breach of fiduciary responsibility under Part 4 of Title I of ERISA
from identifying themselves and working with PWBA to correct the breach
fully and make the plan whole. To encourage the full correction of
certain breaches of fiduciary responsibility and the restoration to
participants and beneficiaries of losses resulting from those breaches,
PWBA has decided to implement the VFC Program on a permanent basis.
Under the Program, persons who are potentially liable for a breach are
relieved of the possibility of civil investigation of that breach and/
or civil action by the Secretary with respect to that breach, and
imposition of civil penalties under section 502(l), if they satisfy the
conditions for correcting the breach as described in the VFC Program.
If a person files an application under the VFC Program, but the
corrective action falls short of a complete and acceptable correction,
PWBA may reject the application and pursue enforcement, including
assessment of a section 502(l) penalty. However, no section 502(l)
penalty would be imposed on any amounts already restored to the plan by
the applicant prior to filing the VFC Program application. The penalty
would only apply to the additional recovery amount, if any, paid to the
plan pursuant to a court order or a settlement agreement with the
Department.
The March 15, 2000 Interim VFC Program
The Interim VFC Program was set forth in seven sections and three
appendices. It was structured to maximize the ability of Plan Officials
to identify and correct possible breaches that are within the scope of
the Program without the need to consult with PWBA. As noted in Section
1, Purpose and Overview of the Voluntary Fiduciary Correction Program,
PWBA believed that the VFC Program would assist Plan Officials in
understanding the requirements of Part 4 of Title I of ERISA and would
facilitate the correction of transactions and the restoration of losses
to employee benefit plans resulting from fiduciary breaches.
Section 2, Effect of the VFC Program, made clear that the applicant
must be careful to ensure that the eligibility requirements are met and
the corrections specified for individual transactions are performed
before an application is filed under the VFC Program. Generally, if an
applicant is in full compliance with all of the terms and procedures
set forth in the VFC Program, PWBA will issue a ``no action letter'' in
the format shown in Appendix A with respect to the breach described in
the application. Relief under the Interim VFC Program was limited to
the transactions identified in the application and to the persons who
corrected those transactions. In certain cases, such as where PWBA
might become aware of possible criminal behavior, material
misrepresentations or omissions in the VFC Program
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application, or other abuse of the VFC Program, relief would not be
available under the Interim VFC Program. In those cases, the Department
reserved the right to initiate an investigation, which could lead to
enforcement action. PWBA expected that such cases would be unusual.
Full correction under the Interim VFC Program did not preclude any
other governmental agency, including the Internal Revenue Service
(IRS), from exercising any rights it might have had with respect to the
transactions that were the subject of an application. PWBA sought
comments on possible areas of coordination between PWBA and the IRS
that would facilitate voluntary correction of breaches of Title I of
ERISA. PWBA noted that based on its preliminary review of the VFC
Program, the IRS had indicated that except in those instances where the
fiduciary breach or its correction results in a tax abuse situation or
a plan qualification failure, a correction under this Program generally
would be acceptable under the Internal Revenue Code.
The Interim VFC Program was designed to address a wide variety of
situations where plans have been harmed as a result of possible
breaches of fiduciary duty. Section 3, Definitions, made clear that a
transaction may be corrected without a determination that there is an
actual breach; there need only be a possible breach. In addition,
persons who may correct a fiduciary breach include not only any
breaching fiduciary, but also plan sponsors, parties in interest or
other persons in a position to correct a breach. However, the
definition of Under Investigation, along with the criteria set forth in
Section 4, Program Eligibility, provided that persons or plans who are
the subject of pending investigations for violations of Title I of
ERISA, or who appear to have engaged in criminal violations, could not
take advantage of the VFC Program. Further, PWBA reserved the right to
reject an application when warranted by the facts and circumstances of
a particular case.
The Interim VFC Program noted that PWBA believes that it must
assess a penalty under section 502(l) of ERISA to the extent that it
negotiates relief owed to the plan as a result of a transaction in
exchange for a no action letter to the potentially liable persons.
Accordingly, the Interim VFC Program was structured so that applicants
have the maximum information available to identify eligible
transactions and make complete and fully acceptable corrections without
discussion or negotiation with the Department.
Section 5, General Rules for Acceptable Correction, set forth
issues that are likely to be present with regard to any transaction
described in Section 7. For example, Section 5 described how fair
market value determinations must be made, how correction amounts must
be determined, and what documentation is required for all applications.
Section 5 also made clear that the cost of correction must be borne by
the applicant and not the plan. In addition, Section 5 stated when
notice must be provided to participants and when former employees who
have already been cashed out of a plan must also be included in any
amount restored to a plan.
Section 6, Application Procedures, specified the requirements for
the application, including documentation and the penalty of perjury
statement that must be signed by a plan fiduciary with knowledge of the
transaction and the applicant's authorized representative, if any.
Section 6 was supplemented by Appendix B, the VFC Program Checklist
that was designed to help the applicant determine whether he or she has
met all of the application requirements, including all necessary
documentation, prior to submission to PWBA.
Section 7, Description of Eligible Transactions and Methods of
Correction, set forth five types of transactions that may be corrected
pursuant to the VFC Program. The first, ``Delinquent Participant
Contributions to Pension Plans,'' was included in the Interim VFC
Program based on PWBA's experience with the Pension Payback Program.
Unlike the Pension Payback Program, the Interim VFC Program did not
exempt from excise taxes any violations of section 4975 of the Internal
Revenue Code (the Code). PWBA included the other types of transactions
based on its enforcement experience. For the interim stage of the VFC
Program, PWBA took a conservative approach and limited the eligible
transactions to those where the nature of the transaction and the
required correction could be described accurately without reference to
specific circumstances, and thus could be corrected satisfactorily
without consultation and negotiation with PWBA. PWBA sought comments on
whether different correction methods or earnings calculation methods
should be available in the Program.
Comments on the Interim VFC Program
In General
In general, comments received on the VFC Program were favorable.
Commenters expressed support for a formal program that encourages
identification and correction of potential breaches of fiduciary duty.
Among the advantages cited were increased fiduciary oversight of plans,
reduction of litigation costs, and security of benefits.
Some commenters represented generally, however, that the VFC
Program contains disincentives to participation. Other commenters
stated that Section 2(c)(6) (Other actions not precluded) will deter
potential applicants. These comments noted that Section 2(c)(6) does
not preclude PWBA from seeking injunctive relief against any person
responsible for a transaction, referring information concerning the
transaction to the IRS, or imposing civil penalties under section
502(c)(2) of ERISA. Commenters also pointed out that other parties,
including participants, could file suit against applicants. Several
comments observed that PWBA reserves the right to reject an application
if the facts and circumstances warrant, and that PWBA may initiate a
civil or criminal investigation in certain cases. Commenters suggested
these provisions might discourage potential applicants from
participating in the Program.
Several commenters expressed concern that the Department might
target VFC Program applicants for investigation. Commenters believe
that the lingering risk of enforcement action creates a disincentive
for potentially liable parties to identify themselves to the
Department. These comments suggested that the Department should offer
public assurances that applicants will not be investigated. The
commenters also questioned whether the Department would target an
applicant plan for other potential violations for which VFC Program
relief had not been requested. Commenters suggested the Department
should offer VFC Program relief for violations of sections 403 and
404(a) of ERISA if those violations relate to a transaction corrected
under the Program.
PWBA believes that the benefits of participating in the VFC Program
should outweigh any concern about possible enforcement by the
Department in response to an application. As noted in the preamble to
the Interim VFC Program, the Department generally does not anticipate
taking enforcement action in response to an application except in the
unusual situation where PWBA becomes aware of possible criminal
behavior, material misrepresentations or omissions in the VFC Program
application, or other abuse of the Program. Moreover, although the VFC
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Program does not provide specifically for relief from violations of
section 403 and 404 of ERISA, the Department anticipates that as a
general matter applicants will have corrected violations of section 403
and 404 that are integrally related to transactions corrected under the
Program. PWBA continues to believe, however, that transactions
violative of section 403 and 404 are not appropriate for the Program
because unlike the transactions selected for the Program, the nature of
the corrections required for violations of sections 403 and 404 will
vary under the facts and circumstances of the particular transactions,
and thus, proper correction is likely to require negotiations subject
to the section 502(l) penalty. PWBA encourages plan officials who
discover a transaction that is a breach of both section 404 and 406 to
make full correction under the Program and to take any additional
action necessary to correct the section 404 violations in conjunction
with the appropriate regional office. PWBA emphasizes in this regard
that only amounts actually negotiated as settlement in excess of those
paid under the VFC Program, or otherwise paid to the plan by the
correcting officials after discussion with PWBA, are potentially
subject to section 502(l) penalties.
Specific Comments
Excise Tax Relief
Several commenters requested that the VFC Program be amended to
provide for relief from excise taxes in addition to the Program's
relief from ERISA section 502(l) penalties. Commenters noted that the
Department granted relief from excise taxes in its Pension Payback
Program. Commenters stated that they believed that the possibility of
referral by the Secretary of Labor to the Internal Revenue Service as
mandated by section 3003 of ERISA and the absence of any relief under
the VFC Program from the Code's requirement that excise taxes be paid
in full for the transactions at issue would provide significant
disincentives for participating in the Program.
As discussed in more detail in the preamble to the Notice of
Proposed Class Exemption, published in this issue of the Federal
Register simultaneously with the adoption of the VFC Program (Class
Exemption),\1\ PWBA has determined that limited excise tax relief is
appropriate for the correction of certain transactions under the
Program.
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\1\ All references to the Class Exemption hereafter include the
Proposed Class Exemption until finalized.
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PWBA also notes that applicants who would not otherwise be liable
for excise taxes under section 4975(a) of the Code, but who are in a
position to correct a breach, are not made liable for excise taxes
solely by virtue of their participation in the Program.
Notice to Participants
The majority of commenters requested that PWBA eliminate or reduce
the notice requirements in Section 5, General Rules for Acceptable
Corrections. Commenters noted that the Department generally does not
require notice of correction to participants when the Department
resolves investigations through voluntary compliance or lawsuits.
Commenters stated that the notice requirement might invite participant
litigation concerning the transaction described in a VFC Program
application. Other commenters maintained that notice of the correction
might erode employee morale, and that participants would receive
sufficient notice simply by observing any increase in their account
balance. One commenter explicitly supported the notice requirement in
the Interim VFC Program.
PWBA believes that informed participants promote the goals of sound
plan administration and protection of benefits. PWBA agrees, however,
that the original notice requirements could discourage correction
through participation in the VFC Program, and therefore eliminate
opportunities to protect and restore plan benefits. Accordingly, in the
permanent VFC Program, PWBA has omitted those notice requirements
specified in section 5(e) of the Interim VFC Program. To the extent
that the applicant avails him or herself of excise tax relief under the
Class Exemption, however, the notice requirements described therein
must be followed. PWBA also expects that if correction under the
Program involves an adjustment of account balances or supplemental
distributions, the plan will explain to the affected participants and
beneficiaries the basis for such adjustment or distribution.
Protection of Participant Privacy Data
Commenters objected to the fact that requiring production on
request to participants of the entire application and supporting
documents, which was part of the original notice requirement in section
5(e) of the Interim VFC Program, if read literally, could be
interpreted to require the production of protected privacy data.
Although the notice requirement, which included a notice of the right
to obtain a copy of the application, has been eliminated from the
Program, PWBA believes that participants have a right to obtain copies
of the application and supporting documentation. PWBA believes that it
would be required to produce portions of the application under the
Freedom of Information Act. Therefore, such information will be made
available by PWBA to any participant or beneficiary who formally seeks
such information, but no privacy data that would be protected under law
will be disclosed. PWBA encourages plan officials to give copies of
applications directly to participants, but recognizes that privacy data
need not be disclosed.
Voluntary Self-Correction
A number of commenters suggested that PWBA expand the VFC Program
to include voluntary self-correction similar to that in IRS Rev. Proc.
2001-16 (now Rev. Proc. 2001-17).\2\ These commenters suggested that
the VFC Program provide that if a plan official were to correct a
transaction in accordance with the Program without making an
application, that PWBA would not take action against potentially liable
parties if the transaction in question were discovered on audit.
Commenters suggested that adding a self-correction option would
encourage correction of minor technical breaches by plan officials and
would obviate the need for PWBA to process applications for such types
of transactions.
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\2\ The Interim VFC Program referred to IRS Rev. Proc. 2000-16.
IRS Rev. Proc. 2001-17 superceded IRS Rev. Proc. 2000-16. For
convenience, all references to the IRS correction programs and
procedures are to IRS Rev. Proc. 2001-17 and include reference to
any subsequent versions in future years.
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PWBA has decided not to include a formal self-correction option in
the VFC Program. PWBA believes that an important result under the VFC
Program is certainty that applicants have complied with the terms of
the Program and have revealed the details of the transaction and the
correction under penalty of perjury. PWBA does not believe that it is
possible to offer relief under the VFC Program without the opportunity
to scrutinize details of the transaction and correction as would be
provided in a formal application. Nonetheless, PWBA notes that an ERISA
section 502(l) penalty is assessed only on amounts obtained pursuant to
a settlement agreement with the Secretary or ordered by a court to be
paid in a judicial proceeding instituted by the Secretary under
subsection 502(a)(2) or (5). Accordingly, if a potentially liable party
were to have corrected a transaction as specified by the Program and
the transaction with the correction were later to be discovered on
audit, any
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penalty to be assessed on an applicable recovery amount within the
meaning of section 502(l) would be limited to any additional amount
that might be required by PWBA to be paid following the audit.\3\
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\3\ PWBA notes that if it discovered on audit a prohibited
transaction that is subject to section 4975 of the IRC, it would
have an obligation under section 3003 of ERISA to make a referral to
the IRS. When plan officials desire to correct a prohibited
transaction, plan officials should make sure they satisfy the
requirements of both the Department of Labor and the IRS.
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Expansion of the VFC Program To Include Additional Transactions
PWBA sought input from the public on whether the VFC Program should
be expanded to include additional transactions. Some commenters
believed that the VFC Program should not be limited to specific
transactions, but rather should include all types of fiduciary
breaches. Other commenters suggested that certain specific transactions
be added to the VFC Program. These transactions included plan contracts
that result in excessive surrender charges, losses due to a failure to
monitor investments, failure to diversify plan investments and problems
with Summary Plan Descriptions (SPDs), Form 5500s and qualified
domestic relations order (QDRO) administration. PWBA believes that
these transactions are not appropriate for the VFC Program because the
adequacy of the correction depends on facts and circumstances and
therefore is not sufficiently uniform to be described in the Program in
a manner that would obviate the need for any negotiation to ensure full
correction. In addition, a separate voluntary compliance program (the
Delinquent Filer Voluntary Compliance Program) is maintained for
resolution of annual reporting (Form 5500 series) compliance issues.
After considering the comments, PWBA has decided to maintain the basic
structure of the Interim VFC Program and limit relief to the
transactions specified. PWBA believes that the transactions currently
included in the Program represent those with respect to which plans
will maximize recoveries by voluntary correction without requiring
negotiation between applicants and the Department. The Program has been
expanded to add correction of delinquent employee contributions to both
insured and funded welfare plans. PWBA will continue to review the
scope of the VFC Program as it gains more experience with administering
the Program. In this regard, PWBA invites members of the public to
submit additional comments on viable transactions and reasonable
methods of correction through the VFC Program for those suggested
transactions.
Use of Alternative Correction Methods
PWBA requested input from the public on additional or different
correction methods. Commenters generally favored having more
flexibility in choosing correction options. After evaluating the
comments, however, PWBA continues to believe that giving applicants
complete flexibility in choosing correction methods will necessitate a
level of review and negotiation by PWBA that would result in a
settlement agreement within the meaning of ERISA section 502(l).
Accordingly, PWBA will not make any changes to the VFC Program to
permit alternative correction methods.
Use of New Prohibited Transactions as an Alternative Correction Method
One commenter suggested, with respect to proposed alternative
correction methods, that the VFC Program permit engaging in a new
prohibited transaction to correct the breach where the new prohibited
transaction is the most viable way to correct the transaction that is
the subject of the application. The Interim VFC Program contains
correction methods that do not involve engaging in a new prohibited
transaction because a new prohibited transaction would require
exemptive relief or be subject to excise taxes.
Parties who believe that it is not feasible to correct a
transaction through the VFC Program because the only viable correction,
in the applicant's opinion, involves a new prohibited transaction may
seek voluntary compliance with the Department outside of the VFC
Program or may apply for individual relief from the prohibited
transaction provisions for the new transaction from the Office of
Exemption Determinations. In such circumstances, the corrected
transaction would be subject to any applicable excise taxes and ERISA
section 502(l) penalties, but the new transaction would not require the
payment of excise taxes. PWBA notes in this regard that Prohibited
Transaction Exemption 94-71 exempts from excise taxes new prohibited
transactions that are used to correct a past transaction where the
Department in a written settlement agreement approves the new
prohibited transaction. However, PTE 94-71 does not relieve liable
parties from excise taxes for the corrected transaction.
Proof of Payment to Missing Individuals Who Are Entitled to
Distributions Under the VFC Program
The correction procedures under the Interim VFC Program required
applicants to provide evidence that all participants and beneficiaries
entitled to an additional distribution have been paid. One commenter
noted that it can take a significant amount of time to locate former
employees who are not in current pay status with the plan, their
beneficiaries, and alternate payees, and suggested that the Program be
amended to provide, similar to the IRS correction programs in Rev.
Proc. 2001-17, that the applicant be required only to demonstrate that
it has segregated funds for missing individuals and is taking
appropriate steps to locate and pay those individuals. PWBA agrees that
requiring proof of payment to all entitled individuals could
significantly delay an applicant's ability to obtain relief under the
Program. PWBA therefore has amended Section 5(d) of the VFC Program to
require proof of payment only to participants and beneficiaries whose
current location is known to the plan and/or applicant. For missing
individuals who need to be located, applicants need only demonstrate
that they have segregated adequate funds to pay the missing individuals
and demonstrate that they have commenced the process of locating those
individuals using either the IRS and Social Security Administration
locator services, or other comparable means.
Comments Suggesting Changes Where Correction Includes Distribution to
Participants
One commenter suggested that because the cost of making the
distribution may sometimes exceed the amount of the distribution, PWBA
should use a ``reasonableness standard'' with some flexibility where
either the costs of full correction exceed the actual benefit to the
plan or it is impossible to make full correction. The Interim VFC
Program did not have a de minimus exception for making required
distributions. Another commenter suggested that the VFC Program be
modified to take into account situations where the costs of correction
exceed the benefit to the plan. The IRS Rev. Proc. 2001-17 has an
exception for making required distributions where the amount of the
distribution is less than $20 and the cost of the distribution exceeds
the distribution.
PWBA has decided to amend the VFC Program by adding Section 5(e),
De Minimus Exception, to parallel the IRS
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correction programs with respect to former employees, their
beneficiaries and alternate payees who have neither account balances
with, nor a right to future benefits, from the plan. Under the new
section 5(e), where correction under the Program requires distributions
to such individuals in amounts of less than $20 per individual, 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 as part of the correction.
Instead, the applicant need only make payment to the plan in the
required amount and the payments will be treated as any other payments
or credits to the plan that are not allocated to individual accounts.
Another commenter noted that in situations where assets of the plan
are overvalued, such as those situations described in section 7(d) of
the Interim VFC Program, correction requires the applicant to make good
the losses to the plan, without regard to whether assets are recovered
from any participants or beneficiaries who might have received an
overpayment. That commenter suggested that the VFC Program should be
revised to allow plan fiduciaries first to attempt to collect any
overpayment from a participant or beneficiary before the applicant is
required to restore the amount overpaid to the plan. PWBA has
determined not to amend the VFC Program in this regard. PWBA is
concerned that encouraging applicants to pursue participants and
beneficiaries for excess benefit payments will unduly delay making the
plan whole.
Use of Alternative Earnings Calculations
PWBA also requested comments from the public on whether different
earnings calculations might be appropriate to correct some or all of
the transactions in the Program. Generally, commenters believed that
alternative methods should be permitted so long as they provide
adequate recovery. Some commenters believed that the methods described
in the Program were too rigid. Others believed that certain of the
methods provided more relief than could be obtained by the Department
in litigation. Evaluation of alternative earnings calculations,
however, would require discussions and negotiations between PWBA and
the applicant. Thus, PWBA continues to believe that applicants must use
the earnings calculation methods described in the VFC Program in order
to obtain relief under the Program and has not amended the Program in
this regard.
PWBA also received comments on certain specific aspects of the
earnings calculations for the Program. PWBA notes that the correction
methods, including earnings calculations in the Program, are fairly
closely patterned on those in the IRS correction methods for prohibited
transactions (see 26 CFR 53.4941(e)-1(c)) and in the IRS correction
programs (Rev. Proc. 2001-17).
One commenter suggested that using the Internal Revenue Code
section 6621 rate as a ``floor'' provided an inappropriate windfall to
the plan. According to the commenter, profits made on the use of the
plan funds rather than the loss to the plan should only be required
where there is proof of a causal connection between the use of the
funds and the profits gained by the breaching party. PWBA has
determined not to amend the Program in this regard. Section 409 of
ERISA provides that any person who is a fiduciary with respect to a
plan who breaches any of the responsibilities, obligations, or duties
imposed upon fiduciaries by this title shall be personally liable to
make good to the plan any losses to the plan resulting from each
breach, and to restore to the plan any profits of such fiduciary which
have been made through the use of assets of the plan by the fiduciary.
The VFC Program is structured to make the plan whole without the need
for investigation and suit and the costs attendant thereto in exchange
for relief from penalties under section 502(l).
Another commenter suggested that for an ERISA section 404(c)-type
plan, it would be more appropriate to use a blended rate, as opposed to
the highest rate of return, if, for administrative convenience as was
permitted under the Interim VFC Program, the applicant was not using
the actual return an individual participant would have earned based on
his or her investment allocations. PWBA notes that IRS Rev. Proc. 2001-
17, Appendix B, permits IRS program applicants to use the highest rate
of return for administrative convenience when adding funds to a plan
participant's account as part of a correction. Rev. Proc. 2001-17
provides, however, that the employer correcting the violations may use
the blended overall return for the plan only if a plan participant has
not made any investment allocations and funds are being added to his or
her account as part of the correction. PWBA has decided to amend
Section 5(b)(5) of the VFC Program to track more closely the IRS
correction programs. The VFC Program is modified to permit the use of a
blended rate for affected participants who have not made any investment
allocations. Where participants have made elections, the applicant must
still either calculate the actual rate of return or use the investment
with the highest rate of return among the designated broad range of
investment alternatives available to the participants.
Certain commenters, as well as applicants who have participated in
the Interim VFC Program, identified ambiguities in the earnings
calculation methods for lost earnings with respect to delinquent
participant contributions to pension plans. PWBA recognizes that
calculating lost earnings, particularly for delinquent contributions to
401(k) plans, may be complicated, depending on the length of the
delinquency, the number of investment options and the performance of
those options. PWBA has elected not to change the VFC Program with
respect to the earnings calculations; it believes that only a general
formula will address the myriad situations that may arise. PWBA has
however, slightly modified the examples to eliminate some references to
annualized yields for short correction periods to lessen any possible
confusion in applying the principles set forth in the examples.
Nonetheless, PWBA recognizes that there may be situations, depending on
the duration of the delinquency and the information available to the
correcting officials regarding investment performance, where use of a
fraction of an annualized yield may be appropriate.
Form 5500 Filings Associated With VFC Program
PWBA received several comments with respect to Form 5500 filings
associated with the VFC Program. Commenters generally were concerned
that they not be subject to penalties for improper filings if they
filed an amended return in connection with the VFC Program. One
commenter suggested that the Delinquent Filer Voluntary Compliance
Program be consolidated with the VFC Program. Another commenter
suggested that there be no penalties associated with any filings
required by the VFC Program. One commenter suggested that PWBA
eliminate any requirement for filing amended returns to reflect the
transactions corrected by the VFC Program.
PWBA has decided to keep the filing requirements associated with
the VFC Program as published in the Interim VFC Program. PWBA believes
that where a plan has engaged in a prohibited transaction or plan
assets have been valued improperly, Forms 5500 must be amended to
reflect these
[[Page 15067]]
important reporting items. PWBA notes that filing an amended return for
these purposes will not trigger a penalty, and accordingly, there is no
need to provide special relief under section 502(c)(2). Penalties
attach under section 502(c)(2) for delinquent and non-filers. If a plan
has filed a return that is inadequate, PWBA can reject the return. If
the filer does not correct the return within 45 days of rejection by
the Office of the Chief Accountant, PWBA may then assess a penalty.
PWBA does not anticipate that amended Forms 5500 filed to reflect
transactions or valuations corrected in accordance with the terms of
the VFC Program will be subject to rejection for those amendments
alone.
The Delinquent Filer Voluntary Compliance Program, as currently
operated, applies only to delinquent and non-filers. PWBA anticipates
that applicants under the VFC Program will need only to amend their
previously filed Forms 5500 to the extent the prohibited transactions
or improper valuations were not reported adequately. Accordingly, there
is no need to merge the two programs. Nonetheless, if a plan has filing
problems and transactions that could be corrected through the VFC
Program, all of which need to be corrected, plan officials may wish to
consider applying to both programs simultaneously.
Anonymous Presubmissions
Commenters suggested that the public would benefit from the ability
of potentially liable parties to presubmit applications anonymously to
PWBA prior to filing a formal application for relief under the Program.
Certain commenters suggested that if the determination as to the type
of transaction to be included in an application and the correction
method to be used were negotiated on an anonymous basis, PWBA could
negotiate the precise relief necessary without engaging in a settlement
agreement within the meaning of section 502(l). PWBA does not believe
that it is either practical or appropriate to amend the VFC Program to
provide for a formal anonymous presubmission process. A formal process
would result in duplicative effort and could be cumbersome to
administer. In addition, PWBA believes that negotiation of the type of
transaction and the appropriate correction could lead to a settlement
within the meaning of section 502(l) even if the negotiations took
place on an anonymous basis. PWBA notes that each regional PWBA office
has a VFC Program Coordinator. Members of the public are free to
contact the VFC Program Coordinator and discuss on an informal,
hypothetical basis general issues regarding the scope of the Program,
including the types of transactions appropriate for an application and
the types of correction that would satisfy the Program.
Ability To Amend Application To Avoid Final Rejection
One commenter requested that the VFC Program expressly provide for
amendment of applications. The commenter suggested that Plan Officials
be given the opportunity to conduct their own compliance reviews after
submitting a preliminary application outlining suspected but
uncorrected breaches. The comment stated that such a procedure would
enable fiduciaries to resolve known and undiscovered breaches during
the compliance review. The commenter suggested that the Department
defer any enforcement action pending its receipt of the final
application. The commenter also suggested that the VFC Program provide
that if the Department intended to reject an application, it provide
notice to the applicant, the basis for rejection, and a deadline for
correcting deficiencies. The Department believes a formal procedure for
amendment of applications as proposed by the commenter is not
necessary. The Department emphasizes that the VFC Program includes no
limitations on amendment of applications provided such change does not
result from negotiation with PWBA. Accordingly, PWBA does not believe
it is necessary to amend the VFC Program to provide for a formal
procedure. In its administration of the VFC Program, PWBA anticipates
providing applicants sufficient opportunity, as the circumstances
warrant, to correct defects.
Tolling Agreements
One commenter suggested that certain applicants might desire to
enter into tolling agreements with PWBA. This commenter requested that
tolling agreements be made part of the VFC Program. PWBA believes that
only in rare situations would it be necessary to use tolling agreements
in connection with the VFC Program. PWBA believes that in most
situations, the transaction that is the subject of the application will
be fully corrected in accordance with the VFC Program and there will be
no extenuating circumstances that would warrant a tolling agreement
with respect to the transaction or related transactions. However, in
situations where an applicant believes that it will need additional
time to complete an application or to file additional applications for
related transactions, PWBA will consider entering into tolling
agreements with the applicant. The mere fact that an applicant has
entered into a tolling agreement with respect to a transaction or
transactions ultimately corrected pursuant to a formal application
under the VFC Program will not itself take the application out of the
VFC Program and subject the applicant to the possibility of the
imposition of section 502(l) penalties. PWBA does not believe, however,
that it is necessary to amend the VFC Program formally to permit or
require tolling agreements.
Whether Persons Other Than the Applicant Should Be Entitled to Relief
Under the VFC Program
Various commenters expressed concern that the relief under the VFC
Program was limited to the Program applicant and was not extended to
all persons who might have participated in the breach. PWBA does not
believe that it is appropriate to extend relief to persons who have not
participated in the application process. The application process
requires persons in a position to correct the breach to evaluate the
transaction and correction and to attest under penalty of perjury as to
the accuracy of the application, including whether the correction has
been made in accordance with the VFC Program. PWBA notes that more than
one party can submit an application. Thus, for example, if a plan
sponsor, as the named fiduciary, decides to correct a transaction, and
all the plan fiduciaries involved in the transaction join in the
submission of the application, including executing the penalty of
perjury statement, the relief provided under the VFC Program would
extend to all the fiduciaries participating in the application. The
Program has been amended to make clear that any number of Plan
Officials may be applicants who sign the penalty of perjury statement.
Penalty of Perjury Statement
PWBA received numerous comments that the penalty of perjury
statement (Section 6(g)) needed clarification. Several comments noted
that the penalty of perjury statement appears to be broader than the
eligibility standards (Section 4, VFC Program Eligibility). One
commenter questioned why both a plan fiduciary with knowledge of the
transaction and the applicant's authorized representative (if any) must
sign and date the statement. The commenter represented that the
transaction at issue would typically be beyond the personal knowledge
of the representative. PWBA has decided to retain the language of the
original
[[Page 15068]]
penalty of perjury statement. The penalty of perjury statement,
eligibility provisions, and PWBA's reservation of the right to reject
an application when warranted by facts and circumstances are all
intended to help the potential applicant evaluate whether participation
in the VFC Program is appropriate. PWBA believes these provisions are
necessary to limit its review to the application only and to avoid
follow-up investigations that could render the Program less efficient
and focused. PWBA believes the review and signature of the authorized
representative is a necessary safeguard that presents an insignificant
burden.
Scope of the Term ``Under Investigation''
PWBA received several comments requesting clarification of Section
3(b)(3) (Under Investigation) of the VFC Program. In response to the
comments, PWBA is amending the definition of Under Investigation to
clarify that the definition does not include work paper reviews
initiated by PWBA's Office of Chief Accountant under authority of
section 504(a) of ERISA. Although PWBA is not making any further
amendments to the definition, PWBA also notes, by way of clarification,
that a party is Under Investigation if it has received oral or written
notification from PWBA of a PWBA investigation of the plan concerning
any issue. However, a plan is not Under Investigation if PWBA staff
have contacted a Plan Official or representative in connection with a
participant complaint that does not relate to a transaction described
in the VFC Program application.
Required Documentation Under the VFC Program
Commenters suggested that various types of documentation required
by the VFC Program are unnecessary or overly burdensome. One commenter
suggested that there is no reason to require the provision of a
fidelity bond. Another commenter questioned the need to provide a copy
of the entire plan document as part of the application and suggested
that providing the relevant portion of the plan should be adequate.
PWBA has determined to retain generally all of the documentation
requirements of the VFC Program. The documentation is necessary for
PWBA to evaluate fully the application and the transaction at issue.
However, PWBA believes that streamlining the documentation requirements
may encourage additional participation in the VFC Program. Accordingly,
PWBA is eliminating the requirement in Section 6(e)(i) of the Interim
VFC Program that applicants produce a copy of the fidelity bond.
Instead, Section 6(e)(i) of the VFC Program now provides that
applicants need only identify in their application the current fidelity
bond that meets the requirements of section 412 of ERISA. In addition,
the Program is amended to require only production of relevant portions
of the plan with the initial application. There may be situations where
PWBA will want to examine additional provisions of the plan when
reviewing the application. Accordingly, the VFC Program now provides
that as part of the application process, applicants may be required to
produce the entire plan document on request.
Departmental Approval of Preventive Measures Taken by Applicants
Section 2(c)(2) (Effect of the VFC Program--No implied approval of
other matters) states that a no action letter does not imply approval
of steps that fiduciaries take to prevent recurrence of the breach
described in an application and to ensure future compliance with Title
I of ERISA. Appendix B (VFC Program Checklist) at item 12 asks whether
the plan has implemented measures to ensure that the transactions
specified in the application do not recur. Appendix B states that PWBA
will not opine on the adequacy of these measures. One commenter
requested that Plan Officials be given the opportunity to request and
obtain PWBA's approval of preventive measures. PWBA believes such a
procedure is beyond the scope of the VFC Program. A VFC Program
application is an insufficient record upon which this type of opinion
could be rendered, and PWBA designed the Program to avoid conducting
additional inquiries.
Required Use of Independent and Expert Evaluations and Written
Appraisals
Each of the Loan and Purchase, Sale, and Exchange corrections
described in Section 7(b) and (c) of the Interim VFC Program requires
that an independent party provide a specific determination or report.
Additionally, the correction of Benefits and Plan Expenses transactions
described in Sections 7(d) and (e) requires action by an independent
appraiser and an estimator, respectively. Commenters generally
represented that these requirements were unnecessary and impractical.
One commenter suggested that PWBA clarify that ERISA does not mandate
independent written appraisals prior to the sale of an asset that is
not publicly traded. Another comment suggested that certification by
the applicant or other alternative evidence of a fair market interest
rate should suffice. The VFC Program's principle of independence
derives in part from PWBA's prohibited transaction exemption program.
PWBA believes the requirement for a neutral, qualified independent
party is an established and proper safeguard. The unilateral nature of
PWBA's application review also compels the requirement of an
independent judgment. An objective of the Program is that PWBA need not
audit the circumstances of the transaction and its correction. The VFC
Program is designed to provide a record free of any appearance of self-
dealing or imprudence in the correction of transactions. Accordingly,
PWBA has decided not to amend the requirements for the use of
independent and expert evaluations and appraisals.
The Revised VFC Program
The VFC Program as adopted here retains the same basic structure as
the Interim VFC Program, while adding two new transactions. The effect
of the VFC Program, the eligibility requirements, and the application
procedures are unchanged. As discussed in more detail above in the
responses to specific public comments, the major changes to the Program
are the proposal to provide relief from some excise taxes associated
with transactions that can be corrected under the Program and the
elimination of the requirement of notice to participants, as described
in Section 5(e) of the Interim VFC Program. As stated previously, where
the applicant is eligible for and elects to take advantage of the
excise tax relief available under the Class Exemption, the separate
notice requirements of the Class Exemption must be met. The
documentation requirements have been simplified to permit applicants to
provide a statement that they have a fidelity bond, rather than provide
a copy of the bond itself. Additionally, applicants need only submit
relevant portions of the applicable plan documents with the
application, rather than the entire plan document.
Executive Order 12866
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million or
more, or adversely and materially
[[Page 15069]]
affecting a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local or tribal
governments or communities (also referred to as ``economically
significant''); (2) creating serious inconsistency or otherwise
interfering with an action taken or planned by another agency; (3)
materially altering the budgetary impacts of entitlement grants, user
fees, or loan programs or the rights and obligations of recipients
thereof; or (4) raising novel legal or policy issues arising out of
legal mandates, the President's priorities, or the principles set forth
in the Executive Order.
Pursuant to the terms of the Executive Order, it has been
determined that this action would create a novel method for
accomplishing compliance while reducing regulatory burdens and making
effective use of federal resources. As such, this notice is consistent
with the principles of the Executive Order. Therefore, this action is
``significant'' and subject to OMB review under section 3(f)(4) of the
Executive Order.
In the Department's view, the benefits of the VFC Program will
substantially outweigh its costs, because participation is voluntary,
the administrative cost of correcting a potential fiduciary breach
through voluntary participation in the Program is lower than the cost
of a correction resulting from investigation and litigation, and the
value and security of the assets of plans participating in the Program
will be increased.
No costs are imposed by the VFC Program unless Plan Officials
choose to avail themselves of the opportunity to correct a potential
fiduciary breach under the terms of the Program. Because the decision
to participate in the VFC Program is made by the relevant Plan
Officials, participation is expected to occur only when the projected
benefit outweighs the anticipated cost for the plan. The costs of
electing to correct potential breaches of fiduciary responsibility
under the terms of the VFC Program are expected to arise from the
requirement for those participating in the VFC Program to obtain fair
market value determinations, computations of losses or profits on the
use of plan assets, the administrative costs of supplemental
distributions, recomputations of account balances, transaction costs
for disposal of assets, and the description and documentation of the
correction for purposes of the application to the Department.
The value of assets or losses restored to employee benefit plans as
a result of Plan Officials' participation in the VFC Program is viewed
as a transfer from a fiduciary or other party in interest to the
participants and beneficiaries of the plan. Plan Officials may not
transfer the costs of compliance with the terms of this VFC Program to
participants and beneficiaries.
The principal benefit of this VFC Program accrues to participants
and beneficiaries through restoration of losses to the plan or reversal
of impermissible transactions involving the assets of the plan,
resulting in greater security of their plan assets. Benefits also
accrue to plan fiduciaries through both risk reduction and the savings
of civil penalties that would otherwise be payable on the amount of
assets recovered by plans following a civil investigation or
litigation. Where the Department determines that it will take no civil
enforcement action and recommend no further legal action in response to
a completed application under the VFC Program, the fiduciary is
relieved of potential demands on its resources that might be imposed by
a civil investigation and any subsequent litigation.
The VFC Program also allows the Department to encourage compliance
with Part 4 of Title I of ERISA while making even more effective use of
its limited enforcement resources. The Department believes that the
correction of violations through the VFC Program is less costly than
correction through active intervention, and that VFC Program applicants
have a high likelihood of accomplishing an appropriate correction of a
potential violation. To the extent that Plan Officials who wish to
correct potential violations do so voluntarily and appropriately, the
Department may direct its resources toward other areas where active
intervention is more likely to be necessary.
More generally, publication of the specific examples of
transactions which may violate ERISA and the activities required to
correct those violations will serve to better inform plan fiduciaries
and assist them in satisfying their fiduciary obligations in future
transactions involving plan assets.
Under the Interim VFC Program, the total benefit to participants
and beneficiaries is estimated at approximately $80 million, while the
benefit to Plan Officials, to the extent it can be quantified, is
estimated at $5.4 million. The Department originally estimated the cost
of the Interim VFC Program for the Plan Officials who chose to
participate at $1.9 million. Because the Department has amended the VFC
Program by streamlining documentation requirements, the overall
benefits and costs of the Program as adopted vary from those proposed
in the Interim VFC Program only to the extent that the estimated cost
for applying to the Program for 700 Plan Officials has been reduced to
$1.8 million as a result of the modification in the documentation
requirements. Under the Interim VFC Program, initial estimates of costs
and benefits were based on the upper bound of the number of Plan
Officials that might avail themselves of the Program based on the
transactions eligible for correction. Because the actual number of Plan
Officials that have taken advantage of the program, averaged over a
nine-month period, has not contradicted the original estimates, the
Department continues to believe that 700 Plan Officials remains a
reasonable estimate of the number of applicants that will avail
themselves of the VFC Program. The number of Program participants
during the initial months of the Program has been lower than originally
projected. However, the addition of a transaction to the permanent
Program, the availability of the related exemption, and the elimination
of the notice requirement except for that in the related exemption, is
expected to increase participation.
Finally, these figures do not include an estimate of the potential
benefit to Plan Officials of the reduced risk of investigation and
litigation, or the benefit to the Department, to participants and
beneficiaries, and to the public in general of realizing efficiencies
in the use of enforcement resources because these elements are not
readily quantifiable. Because this VFC Program is voluntary, the
Department assumes that Plan Officials will in no event make use of the
VFC Program unless the projected benefit outweighs the estimated cost
of participation.
A discussion of the elements of the costs and benefits of this VFC
Program and estimates of their magnitude where they can be specifically
quantified follows. Based on the Department's previous experience with
the Pension Payback Program, in which approximately 0.1 percent of
plans that permitted employee contributions elected to participate
during the six-month period when the Pension Payback Program was in
effect, the Department projects that Plan Officials of approximately
700 plans will apply for and use the VFC Program. The Department
expects a similar rate of participation among the approximately 200,000
plans that currently permit employee contributions. However, it assumes
the participation by Plan Officials of 200 plans will occur over an
[[Page 15070]]
annual period in the absence of the six-month time limitation included
in the Pension Payback Program. Because the VFC Program permits
correction of several other types of transactions in addition to the
repayment of delinquent employee contributions, the Department has
assumed that the annual rate of participation in the VFC Program by
Plan Officials of plans other than those which permit employee
contributions will be comparable to the 0.1 per cent assumed for those
which permit employee contributions, resulting in participation by Plan
Officials of about 500 additional plans, and total participation of 700
plans. The Department views this estimate as an upper bound; actual
participation may be somewhat smaller depending on the cost
effectiveness of correcting the actual transactions involved, the
complexity of the legal and factual issues involved in a given
transaction, and the degree of similarity between a specific
transaction representing a breach of fiduciary responsibility and a
transaction and correction described by the terms of the VFC Program.
The Department recognizes that Plan Officials may not view the VFC
Program as offering a cost-effective means of correcting all potential
violations.
The Department also estimates that $80 million, or an average of
$114,300 per plan, will be recovered by plans annually as a result of
participation in the VFC Program. Based on its enforcement experience,
the Department estimates that about 70 per cent of this total, or $56
million, will consist of restored principal and earnings losses, and
restored profits on the use of plan assets by fiduciaries or parties in
interest. The total estimated recovery represents the midpoint between
the average monetary recovery (excluding assets recovered through
litigation) per plan that resulted from civil investigations completed
by the Department in the year ended September 30, 1998, and the average
per plan monetary recovery which arose from the Pension Payback
Program, as applied to the 700 plans assumed to elect to participate in
the VFC Program. The Department believes this estimate is reasonable in
light of the range of transactions which may be corrected under the VFC
Program. It is estimated that approximately 88,000 participants, or an
average of 126 participants per plan, will be affected annually by
corrections under the VFC Program.
Based on its recent experience with the collection of civil
penalties under section 502(l), the Department estimates that Plan
Officials will be relieved of approximately $5.4 million in civil
penalties as a result of correction of transactions through the VFC
Program. This estimate is based on the 700 plans assumed to
participate, and the average 502(l) penalty actually collected per plan
subject to the penalty in the last two fiscal years. Actual collections
take into account the offset of any excise tax payable as a result of a
violation of section 4975 of the Code. Relief from section 4975 excise
taxes under the Code is available to Plan Officials under the newly
proposed Class Exemption to Permit Certain Transactions identified in
the Voluntary Fiduciary Correction Program, also published
simultaneously in this issue of the Federal Register (Application No.
D-10933).
The costs for Plan Officials to participate in the VFC Program
arise from a range of possible required activities depending on the
nature of the transaction to be corrected, including evaluation by Plan
Officials and their professionals of the need and usefulness of
participation in the VFC Program, obtaining market value
determinations, executing asset transactions, adjusting account
balances and benefit distributions, documenting the correction, and
completing and mailing the application to participate in the Program.
The Department anticipates that Plan Officials will in most cases seek
the services of a professional (typically an attorney, accountant, or
professional administrator) to conduct the applicable activities,
although the resources of Plan Officials are expected to be needed as
well to gather information, and prepare, sign, and photocopy the
application. It is estimated that the entire correction will require
approximately 39 hours to complete, including 8 hours of the Plan
Official's time, and 31 hours of a professional's time.
At the assumed rate of participation, the total cost of these
activities is estimated to amount to $1.8 million (or an average of
$2,600 per Plan Official), at an average cost of $57 per hour for work
performed in house by Plan Officials and their employees, and a rate of
$70 per hour for purchased services. This estimate also includes
application materials and mailing costs.
Paperwork Reduction Act
At the time of publication of the Interim VFC Program in the
Federal Register (65 FR 14164, Mar. 15, 2000), the Department submitted
to OMB the information collection request (ICR) included in the Interim
VFC Program using emergency procedures for review and clearance in
accordance with the Paperwork Reduction Act of 1995 (PRA 95) (44 U.S.C.
Chapter 35). Although the Department requested emergency review of the
ICR by April 14, 2000, and OMB granted approval of the ICR through
September 30, 2000, the Department continued to receive comments until
May 15, 2000. The OMB number assigned to the ICR is 1210-0118. The
Department subsequently applied for and was granted approval by OMB for
an extension of the information collection request. The current OMB
approval for this ICR will expire on November 30, 2003. Based on
comments received from the public after the Notice in the Federal
Register and additional consideration by the Department, modifications
in the documentation and notification requirements were made to the
Interim VFC Program. No comments were received in response to the
Department's solicitation of comments concerning the ICR included in
the Interim VFC Program. The changes in the hour and cost burdens
reflected below are therefore the result of changes made by the
Department to the VFC Program as adopted.
The VFC Program permits Plan Officials voluntarily to correct
certain potential violations of Part 4 of Title I of ERISA, resulting
in the receipt of a ``no action'' letter from the Department signifying
that the applicant had been relieved of the possibility of civil
investigation for that breach and/or civil action by the Secretary with
respect to that breach, as well as the imposition of civil penalties
under section 502(l) of ERISA. Comments received, however, requested
that the Department also consider granting relief from the excise taxes
imposed on prohibited transactions under section 4975 of the Code
because the taxes were considered by Plan Officials to be a
disincentive for participation in the VFC Program. In response, the
Department is publishing simultaneously the proposed Class Exemption.
Under the Interim VFC Program, notification to interested persons
of the application and correction of the eligible transaction was
considered a condition for obtaining a ``no action'' letter. A number
of commenters, however, observed that a notice of correction was not
generally required by the Department in other circumstances where
corrections have occurred and that notification was therefore
unnecessary and burdensome. While the Department agreed to remove the
notice requirement from the VFC Program, the Department also determined
that where a Plan Official intended to seek relief from section 4975 of
the Code, interested persons should be made aware of the material facts
of the eligible transaction and the resulting correction.
[[Page 15071]]
Therefore, under the VFC Program as adopted, the notice requirement has
been eliminated as a part of the application process; however, a notice
requirement has been included among the conditions for relief under the
Class Exemption. For purposes of the PRA, the ICR previously described
under the Interim VFC Program has been revised to indicate that
notification is now a requirement under the Class Exemption rather than
under the VFC Program as implemented on a permanent basis. Because the
Class Exemption is only used in connection with the VFC Program, the
Class Exemption also published simultaneously herewith is treated for
purposes of the PRA as a modification of the information collection
requirements of the VFC Program.
Based on additional observations received from commenters, the
Department has also reduced the documentation required to be included
with an application. Proof of bonding, formerly indicated by including
a copy of the bond with the application, has been simplified by
permitting a Plan Official to simply state in the application that the
plan has a current fidelity bond that meets the requirements of section
412 of ERISA. Finally, the Program has been amended to require only
production of relevant portions of the employee benefit plan, instead
of a copy of the entire plan, with the initial application.
The ICR included in the VFC Program as adopted requires a Plan
Official to describe the correction of the potential breach of
fiduciary duty and to provide supporting documentation with respect to
the correction. The type of supporting documentation will vary with the
nature of the transaction involved, but is described in this VFC
Program in as specific a manner as feasible. The Plan Official is also
required to complete an application, which includes identification of
the employee benefit plan and the Plan Official, or representative,
relevant plan documents, a statement under penalty of perjury, and
signature. Under certain circumstances, for instance if the correction
under the Program involves an adjustment of account balances or
supplemental distributions for participants or beneficiaries, the plan
is expected to explain the basis for the adjustment or distribution.
Because plans regularly report to participants or beneficiaries on
changes in their account balance, the Department has not attributed an
additional cost for disseminating this information. The information
submitted to the Department will permit the Department to verify the
correction of potential fiduciary breaches and restoration of losses,
to evaluate the adequacy of actions taken by a Plan Official pursuant
to the VFC Program, and to determine whether further action is
necessary to protect the rights of participants and beneficiaries.
It is estimated that Plan Officials of 700 employee benefit plans
will avail themselves of the opportunity to correct potential
violations pursuant to the VFC Program. The Department estimates that
approximately 8 hours of a Plan Official's time will be required to
assemble documents and complete and sign the application to participate
in the VFC Program. For 700 Plan Officials, the total hour burden is
5,600 hours. At a cost of $57 per hour for a financial manager's time,
the administrator most likely to compile the necessary documents, the
cost of the hour burden is $319,200.
It is further assumed that evaluation, correction, and
documentation of transactions under the VFC Program will require
approximately 31 hours, and that Plan Officials will generally elect to
hire service providers to complete this work. The Department originally
allotted six hours of a service provider's time for the completion of
work attributed to the information collection. This included preparing
descriptions and documentation, copying relevant supporting statements,
and completing the application. Based on comments received on the
Interim VFC Program, the Department has reduced the amount of
supporting documentation required for the application process (i.e.,
requiring that only relevant parts of plan documents be submitted and
acknowledging that a statement fidelity bonding is sufficient to
replace a copy of the bond) and removed the notice requirement from the
VFC Program as adopted and included it with the proposed exemption.
Because of the changes in document production and notification, the
Department has reduced by one hour the number of hours expected to be
associated with information collection by service providers under the
Program as adopted. Based on the reduction from six to five hours for
purchased services, and at an assumed hourly rate of $70 per hour, the
total estimated cost to 700 Plan Officials is $246,400. This includes
an allowance of $2 per application for materials and mailing costs.
Agency: Pension and Welfare Benefits Administration, Department of
Labor.
Title: Voluntary Fiduciary Correction Program.
OMB Number: 1210-0118.
Affected Public: Business or other for-profit; Not-for-profit
institutions.
Frequency of Response: On occasion.
Total Respondents: 700.
Total Responses: 700.
Estimated Burden Hours: 5,600 for existing ICR.
Estimated Annual Costs (Operating and Maintenance): $246,400.
Persons are not required to respond to the collection of
information unless it displays a currently valid OMB control number.
Regulatory Flexibility Act
This document reflects an enforcement policy of the Department and
is not being issued as a general notice of proposed rulemaking.
Therefore, the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
does not apply. However, PWBA considered the potential costs and
benefits of this action for small plans and their Plan Officials in
developing the VFC Program.
PWBA generally considers a small entity to be an employee benefit
plan with fewer than 100 participants. The basis of this definition is
found in section 104(a)(2) of ERISA, which permits the Secretary of
Labor to prescribe simplified annual reports for pension plans, which
cover fewer than 100 participants. However, because the VFC Program
specifically prohibits the cost of participation from being borne by
the plan and participants, this Program will impose no costs on the
plans, which realize the benefits of the correction of potential
violations. Costs will be borne instead by the Plan Officials of an
estimated 700-employee benefit plans each year. Plan Officials may
include both individual fiduciaries, plan sponsors, or parties in
interest, and businesses in their roles as fiduciaries, plan sponsors,
or parties in interest.
Although the number of Plan Officials of small plans that will
elect to avail themselves of the opportunity to correct potential
breaches of fiduciary duty under the terms of the VFC Program is not
known, the potential costs and benefits to each Plan Official are
summarized below, on the basis of the assumption that each of the
participating Plan Officials will itself be a small entity.
Participation in the VFC Program is entirely voluntary, and as
such, it is assumed that Plan Officials will elect to participate only
when the potential benefits to a Plan Official are expected to exceed
the cost of participation. Benefits may include the reduction of
exposure to the risk of investigation and subsequent litigation, the
potential cost of which cannot be specifically
[[Page 15072]]
quantified, and the saving of penalties under section 502(l) of ERISA
which would otherwise be payable on amounts required to be restored to
plans by fiduciaries pursuant to a settlement agreement with the
Department or court order.
As described in detail above, to the extent that the per small Plan
Official costs and benefits of participation in the VFC Program can be
quantified, assuming all participating Plan Officials are small
entities, administrative costs of participation are estimated to amount
to an average of $2,600 per Plan Official, while savings of section
502(l) penalties are estimated at $7,754 per Plan Official. While the
average value of assets estimated to be restored to a plan as a result
of participation in the VFC Program ($114,300 per plan) may be viewed
as an expense by Plan Officials, the Department believes that this
expense arises from a previously occurring breach of fiduciary duty
rather than from participation in the VFC Program. The fiduciary's
potential liability for a breach of fiduciary duty and the cost of
remedial relief are expected to be comparable regardless of whether a
violation is corrected under the terms of the VFC Program or as a
result of an investigation and any subsequent litigation.
On this basis, Plan Officials of small plans electing to correct
previously occurring fiduciary breaches through participation in the
VFC Program are expected to derive a net benefit, even without
consideration of the potential savings associated with the reduction of
risk of exposure of its resources in connection with an investigation
or litigation. Because penalties and additional resource demands are
often relatively more burdensome for small entities than large, the
Department views the VFC Program as offering a flexible and
economically advantageous alternative to currently available methods of
correcting potential breaches of fiduciary duty.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, this regulatory action does
not include any Federal mandate that may result in expenditures by
State, local, or tribal governments, and will not impose an annual
burden of $100 million or more on the private sector.
Federalism
The Department has reviewed this rule in accordance with Executive
Order 13132 regarding Federalism. The order requires that agencies, to
the extent possible, refrain from limiting state policy options,
consult with states prior to taking any action, which would restrict
state policy options or impose substantial direct compliance costs on
state and local governments, and take such action only when there is
clear constitutional authority and the presence of a problem of
national significance. Since this rule does not limit state policy
options or impose costs on state and local governments, it does not
have federalism implications, and thus Executive Order 13132 does not
require a certification that the VFC Program complies with the order.
Congressional Review Act
The VFC Program is subject to the provisions of the Congressional
Review Act (5 U.S.C. 801 et seq.) and will be transmitted to Congress
and the Controller General for review. The program is not a ``major
rule'' as that term is defined in 5 U.S.C. 804 because it is not likely
to result in (1) an annual effect on the economy of $100 million or
more; (2) a major increase in costs or prices for consumers, individual
industries, or federal, State, or local government agencies, or
geographic regions; or (3) significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
the United States-based enterprises to compete with foreign-based
enterprises in domestic or export markets.
Voluntary Fiduciary Correction Program
Section 1. Purpose and Overview of the VFC Program
Section 2. Effect of the VFC Program
Section 3. Definitions
Section 4. VFC Program Eligibility
Section 5. General Rules for Acceptable Corrections
(a) Fair Market Value Determinations
(b) Correction Amount
(c) Costs of Correction
(d) Distributions
(e) De Minimus Exception
(f) Confidentiality
Section 6. Application Procedures
Section 7. Description of Eligible Transactions and Methods of
Correction
(a) Delinquent Participant Contributions
1. Delinquent Participant Contributions to Pension Plans
2. Delinquent Participant Contributions to Insured Welfare Plans
3. Delinquent Participant Contributions to Welfare Plan Trusts
(b) Loans
1. Loan at Fair Market Interest Rate to a Party in Interest with
Respect to the Plan
2. Loan at Below-Market Interest Rate to a Party in Interest
with Respect to the Plan
3. Loan at Below-Market Interest Rate to a Person Who is Not a
Party in Interest with Respect to the Plan
4. Loan at Below-Market Interest Rate Solely Due to a Delay in
Perfecting the Plan's Security Interest
(c) Purchases, Sales and Exchanges
1. Purchase of an Asset (Including Real Property) by a Plan from
a Party in Interest
2. Sale of an Asset (Including Real Property) by a Plan to a
Party in Interest
3. Sale and Leaseback of Real Property to Employer
4. Purchase of an Asset (Including Real Property) by a Plan from
a Person Who is Not a Party in Interest with Respect to the Plan at
a Price Other Than Fair Market Value
5. Sale of an Asset (Including Real Property) by a Plan to a
Person Who is Not a Party in Interest with Respect to the Plan at a
Price Other Than Fair Market Value
(d) Benefits
1. Payment of Benefits Without Properly Valuing Plan Assets on
Which Payment is Based
(e) Plan Expenses
1. Duplicative, Excessive, or Unnecessary Compensation Paid by a
Plan
2. Payment of Dual Compensation to a Plan Fiduciary
Appendix A. Sample VFC Program No Action Letter
Appendix B. VFC Program Checklist
Appendix C. List of PWBA Regional Offices
Section 1. Purpose and Overview of the VFC Program
The purpose of the VFC Program is to protect the financial security
of workers by encouraging identification and correction of transactions
that violate Part 4 of Title I of ERISA. Part 4 of Title I of ERISA
sets out the responsibilities of employee benefit plan fiduciaries.
Section 409 of ERISA provides that a fiduciary who breaches any of
these responsibilities shall be personally liable to make good to the
plan any losses to the plan resulting from each breach and to restore
to the plan any profits the fiduciary made through the use of the
plan's assets. Section 405 of ERISA provides that a fiduciary may be
liable, under certain circumstances, for a co-fiduciary's breach of his
or her fiduciary responsibilities. In addition, under certain
circumstances, there may be liability for knowing participation in a
fiduciary breach. In order to assist all affected persons in
understanding the requirements of ERISA and meeting their legal
responsibilities, PWBA is providing guidance on what constitutes
adequate correction under Title I of ERISA for the breaches described
in this Program.
Section 2. Effect of the VFC Program
(a) In general. PWBA generally will issue to the applicant a no
action letter \4\
[[Page 15073]]
with respect to a breach identified in the application if the
eligibility requirements of Section 4 are satisfied and a Plan Official
corrects a breach, as defined in Section 3, in accordance with the
requirements of Sections 5, 6 and 7. Pursuant to the no action letter
it issues, PWBA 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, or assess a civil penalty under
section 502(l) of ERISA on the correction amount paid to the plan or
its participants.
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\4\ See Appendix A.
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(b) Verification. PWBA reserves the right to conduct an
investigation at any time to determine (1) the truthfulness and
completeness of the factual statements set forth in the application and
(2) that the corrective action was, in fact, taken.
(c) Limits on the effect of the VFC Program. (1) In general. Any no
action letter issued under the VFC Program is limited to the breach and
applicants identified therein. Moreover, the method of calculating the
correction amount described in this Program is only intended to correct
the specific breach described in the application. Methods of
calculating losses other than, or in addition to, those set forth in
the Program may be more appropriate, depending on the facts and
circumstances, if the transaction violates provisions of ERISA other
than those that can be corrected under the Program. In this regard, the
Program assumes, for example, that the transaction is otherwise an
appropriate investment decision for the plan. If a transaction gave
rise to violations not addressed in the Program, such as imprudence not
addressed in the Program or a failure to diversify plan assets, the
relief afforded by the Program would not extend to such additional
violations.
(2) No implied approval of other matters. A no action letter does
not imply Departmental approval of matters not included therein,
including steps that the fiduciaries take to prevent recurrence of the
breach described in the application and to ensure the plan's future
compliance with Title I of ERISA.
(3) Material misrepresentation. Any no action letter issued under
the VFC Program is conditioned on the truthfulness, completeness and
accuracy of the statements made in the application and of any
subsequent oral and written statements or submissions. Any material
misrepresentations or omissions will void the no action letter,
retroactive to the date that the letter was issued by PWBA, with
respect to the transaction that was materially misrepresented.
(4) Applicant fails to satisfy terms of the VFC Program. If an
application fails to satisfy the terms of the VFC Program, as
determined by PWBA, PWBA reserves the right to investigate and take any
other action with respect to the transaction and/or plan that is the
subject of the application, including refusing to issue a no action
letter.
(5) Criminal investigations not precluded. Compliance with the
terms of the VFC Program will not preclude:
(i) PWBA or any other governmental agency from conducting a
criminal investigation of the transaction identified in the
application;
(ii) PWBA's assistance to such other agency; or
(iii) PWBA making the appropriate referrals of criminal violations
as required by section 506(b) of ERISA.\5\
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\5\ Section 506(b) provides that the Secretary of Labor shall
have the responsibility and authority to detect and investigate and
refer, where appropriate, civil and criminal violations related to
the provisions of Title I of ERISA and other related Federal laws,
including the detection, investigation, and appropriate referrals of
related violations of Title 18 of the United States Code.
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(6) Other actions not precluded. Compliance with the terms of the
VFC Program will not preclude PWBA from taking any of the following
actions:
(i) Seeking removal from positions of responsibility with respect
to a plan or other non-monetary injunctive relief against any person
responsible for the transaction at issue;
(ii) referring information regarding the transaction to the IRS as
required by section 3003(c) of ERISA; \6\ or
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\6\ Section 3003(c) provides that, whenever the Secretary of
Labor obtains information indicating that a party in interest or
disqualified person is violating section 406 of ERISA, she shall
transmit such information to the Secretary of the Treasury.
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(iii) 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. Applicants should be aware that amended annual
report filings may be required if possible breaches of ERISA have been
identified, or if action is taken to correct possible breaches in
accordance with the VFC Program.
(7) Not binding on others. The issuance of a no action letter does
not affect the ability of any other government agency, or any other
person, to enforce any rights or carry out any authority they may have,
with respect to matters described in the no action letter.
(8) Example. A plan fiduciary causes the plan to purchase real
estate from the plan sponsor under circumstances to which no prohibited
transaction exemption applies. In connection with this transaction, the
purchase causes the plan assets to be no longer diversified, in
violation of ERISA section 404(a)(1)(C). If the application reflects
full compliance with the requirements of the Program, the Department's
no action letter would apply to the violation of ERISA section
406(a)(1)(A), but would not apply to the violation of section
404(a)(1)(C).
(d) Correction. The correction criteria listed in the VFC Program
represent PWBA enforcement policy and are provided for informational
purposes to the public, but are not intended to confer enforceable
rights on any person who purports to correct a violation. Applicants
are advised that the term ``correction'' as used in the VFC Program is
not necessarily the same as ``correction'' pursuant to section 4975 of
the Code.\7\ Correction may not be achieved under the Program by
engaging in a new prohibited transaction.
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\7\ See section 4975(f)(5) of the Internal Revenue Code (IRC);
section 141.4975-13 of the temporary Treasury Regulations and
section 53.4941(e)-1(c) of the Treasury Regulations. The Internal
Revenue Service has indicated that except in those instances where
the fiduciary breach or its correction result in a tax abuse
situation or a plan qualification failure, a correction under this
Program generally will be acceptable under the Internal Revenue
Code.
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(e) PWBA's authority to investigate. PWBA reserves the right to
conduct an investigation and take any other enforcement action relating
to the transaction identified in a VFC Program application in certain
circumstances, such as prejudice to the Department that may be caused
by the expiration of the statute of limitations period, material
misrepresentations, or significant harm to the plan or its participants
that is not cured by the correction provided under the VFC Program.
PWBA may also conduct a civil investigation and take any other
enforcement action relating to matters not covered by the VFC Program
application or relating to other plans sponsored by the same plan
sponsor, while a VFC Program application involving the plan or the plan
sponsor is pending.
(f) Confidentiality. PWBA will maintain the confidentiality of any
documents submitted under the VFC Program, to the extent permitted by
law. However, as noted in (c)(5) and (6) of this section, PWBA has an
obligation to make referrals to the IRS and to refer to other agencies
evidence of criminality and other information for law enforcement
purposes.
Section 3. Definitions
(a) The terms used in this document have the same meaning as
provided in section 3 of ERISA, 29 U.S.C. section 1002, unless
separately defined herein.
[[Page 15074]]
(b) The following definitions apply for purposes of the VFC
Program:
(1) Breach. The term ``Breach'' means any transaction which is or
may be a breach of the fiduciary responsibilities contained in Part 4
of Title I of ERISA.
(2) Plan Official. The term ``Plan Official'' means a plan
fiduciary, plan sponsor, party in interest with respect to a plan, or
other person who is in a position to correct a Breach.
(3) Under Investigation. The term ``Under Investigation'' means a
plan or person that is being investigated pursuant to ERISA section
504(a) or any criminal statute involving a transaction which affects an
employee benefit plan. A plan that is Under Investigation by PWBA
includes any plan for which a Plan Official, or a plan representative,
has received oral or written notification from PWBA of a PWBA
investigation of the plan. A plan is not considered to be Under
Investigation by PWBA merely because PWBA staff have contacted a Plan
Official or representative in connection with a participant complaint,
unless the participant complaint concerns the transaction described in
the application. A plan also is not considered to be Under
Investigation where it is undergoing a work paper review by PWBA's
Office of the Chief Accountant under the authority of ERISA section
504(a).
Section 4. VFC Program Eligibility
Eligibility for the VFC Program is conditioned on the following:
(a) Neither the plan nor the applicant is Under Investigation.
(b) The application contains no evidence of potential criminal
violations as determined by PWBA.
Section 5. General Rules for Acceptable Corrections
(a) Fair Market Value Determinations. Many corrections require that
the current or fair market value of an asset be determined as of a
particular date, usually either the date the plan originally acquired
the asset or the date of the correction, or both. In order to be
acceptable as part of a VFC Program correction, the valuation must meet
the following conditions:
(1) If there is a generally recognized market for the property
(e.g., the New York Stock Exchange), the fair market value of the asset
is the average value of the asset on such market on the applicable
date, unless the plan document specifies another objectively determined
value (e.g., the closing price).
(2) If there is no generally recognized market for the asset, the
fair market value of that asset must be determined in accordance with
generally accepted appraisal standards by a qualified, independent
appraiser and reflected in a written appraisal report signed by the
appraiser.
(3) An appraiser is ``qualified'' if he or she has met the
education, experience, and licensing requirements that are generally
recognized for appraisal of the type of asset being appraised.
(4) An appraiser is ``independent'' if he or she is not one of the
following, does not own or control any of the following, and is not
owned or controlled by, or affiliated with, any of the following:
(i) The prior owner of the asset, if the asset was purchased by the
plan;
(ii) The purchaser of the asset, if the asset was, or is now being
sold, by the plan;
(iii) Any other owner of the asset, if the plan is not the sole
owner;
(iv) A fiduciary of the plan;
(v) A party in interest with respect to the plan (except to the
extent the appraiser becomes a party in interest when retained to
perform this appraisal for the plan); or
(vi) The VFC Program applicant.
(b) Correction Amount. (1) In general. Many of the transactions
described in the VFC Program result in a loss to the plan or a profit
to some party to the transaction. Determining the amount of the loss to
the plan requires calculating how much money the plan would have now if
a particular transaction had not occurred. In general, the VFC Program
requires the fiduciary or other Plan Official to restore to the
employee benefit plan the Principal Amount, plus the greater of (i)
Lost Earnings from the Loss Date to the Recovery Date or (ii)
Restoration of Profits resulting from the use of the Principal Amount
for the same period.
(2) Principal Amount. ``Principal Amount'' is the amount that would
have been available to the plan for investment or distribution on the
date of the Breach, had the Breach not occurred. What constitutes the
Principal Amount is identified for each transaction set forth in
Section 7 of the VFC Program. The generic term ``Principal Amount'' is
the base on which Lost Earnings are calculated. The Principal Amount
shall also include, where appropriate, any transaction costs, such as
closing costs, associated with entering into the transaction that
constitutes the Breach.
(3) Loss Date. ``Loss Date'' is the date that the plan lost the use
of the Principal Amount.
(4) Recovery Date. ``Recovery Date'' is the date that the Principal
Amount is restored to the plan.
(5) Lost Earnings. For purposes of the VFC Program, Lost Earnings
to be restored to a plan is the greater of (i) the amount that
otherwise would have been earned on the Principal Amount from the Loss
Date to the Recovery Date had the Principal Amount been invested during
such period in accordance with applicable plan provisions and Title I
of ERISA, less actual net earnings or realized net appreciation (or, if
applicable, plus any net loss to the plan as a result of the
transaction), or (ii) the amount that would have been earned on the
Principal Amount at an interest rate equal to the underpayment rate
defined in section 6621(a)(2) of the Code, less actual net earnings or
realized net appreciation (or, if applicable, plus any net loss to the
plan as a result of the transaction). In addition, if the date on which
the Lost Earnings is paid to the plan is a date after the Recovery
Date, payment must include an additional amount that is the greater of
(i) the amount that would have been earned by the plan on the Lost
Earnings if it had been paid on the Recovery Date, or (ii) the amount
that would have been earned on the Lost Earnings at an interest rate
equal to the underpayment rate defined in section 6621(a)(2) of the
Code. For a participant-directed defined contribution plan, the Lost
Earnings to be restored to the plan is the amount that each participant
would have earned on the Principal Amount from the Loss Date to the
Recovery Date. However, for administrative convenience, the Lost
Earnings amount for a participant-directed defined contribution plan
may be calculated using the rate of return of the investment
alternative that earned the highest rate of return among the designated
broad range of investment alternatives available under the plan during
the applicable period. For participants who have not made any
participant directions, plan officials may use the plan's average of
the rates of return earned by all the designated investment
alternatives weighted by the portion of plan assets invested in these
alternatives.
(6) Restoration of Profits. ``Restoration of Profits'' is the
amount of profit made on the use of the Principal Amount, or the
property purchased with the Principal Amount, by the fiduciary or party
in interest who engaged in the Breach, or by a knowing participant in
the Breach. If the Principal Amount was used for a specific purpose
such that the actual profit can be determined, that actual profit must
be calculated from the Loss Date to the Recovery Date and returned to
the plan. If the Principal Amount was commingled with other
[[Page 15075]]
funds so that the actual profit cannot be determined, the Restoration
of Profits will be calculated as interest on the Principal Amount at an
interest rate equal to the underpayment rate defined in section
6621(a)(2) of the Code. In addition, if the date on which the
Restoration of Profits is paid to the plan is a date after the Recovery
Date, payment must include an additional amount that is the greater of
(i) the amount that would have been earned by the plan on the
Restoration of Profits if it had been paid on the Recovery Date, or
(ii) the amount that would have been earned on the Restoration of
Profits at an interest rate equal to the underpayment rate defined in
section 6621(a)(2) of the Code.
(7) The principles of this paragraph (b) are illustrated by the
following examples:
Example 1. An employer who sponsors a plan with a qualified cash
or deferred arrangement within the meaning of section 401(k)(2) of
the Code (``401(k) plan'') could have reasonably paid participant
contributions into the plan's trust account within two business days
of each pay day. For this employer, the second business day after
pay day was therefore the date on which the participant
contributions become plan assets, because it is the earliest date on
which this employer reasonably could have segregated the participant
contributions from the employer's general assets.\8\ However, for
the pay period ending January 31, a Monday, participant
contributions totaling $10,000 were not deposited until March 2.
---------------------------------------------------------------------------
\8\ See 29 CFR 2510.3-102.
---------------------------------------------------------------------------
The Principal Amount is $10,000. The Loss Date is February 2,
the date on which the participant contributions became plan assets
and should have been deposited in the plan's trust account. The
Recovery Date is March 2, the date that the participant
contributions were deposited in the plan's trust account.
The 401(k) plan offers five investment alternatives representing
a broad range of investment alternatives. During the month of
February, one of the plan's mutual funds had a one percent return,
including all reinvestment earnings. This was the highest return
earned by any of the five investment alternatives in this period.
The employer elects to use this rate of return for the loss
calculations. Accordingly, the Lost Earnings amount is $100 ($10,000
multiplied by one percent).
The employer had the use of $10,000 of the 401(k) plan's assets
between February 2 and March 2, while the participant contributions
remained commingled with the employer's general assets. The
employer's cost of funds (the actual profit from the use of the
participant contributions) cannot readily be determined; therefore,
the Restoration of Profits amount is calculated using the
underpayment rate defined in Code section 6621(a)(2). Assuming the
section 6621 rate was 9% (annualized yield for the relevant
quarter), the Restoration of Profits amount is $75 ($10,000
multiplied by 9% per annum times one-twelfth of a year).
In this example, the Lost Earnings amount ($100) is greater than
the Restoration of Profits amount ($75). Since the Principal Amount
of $10,000 was paid to the plan on March 2, the total correction
amount to be paid to the plan is the Lost Earnings of $100.
Assume further, in this example, that although the Principal
Amount of $10,000 was paid to the plan on March 2, the Lost Earnings
of $100 were not paid to the plan until a year later. The plan's
annual yield for the highest earning fund was 12 percent. The
employer elects to use the highest yielding fund for administrative
convenience. Accordingly, an additional $12 ($100 multiplied by 12
percent--the annual yield), must be paid to the plan along with the
$100 Lost Earnings amount.
Example 2. On March 15, a plan's trustees authorized the
purchase of 1,000 shares of stock. The plan paid $75 per share when
the fair market value was $70 per share.\9\ The Principal Amount is
$5,000 (1,000 shares multiplied by the $5 per share overpayment).
The Loss Date is March 15, the date of the overpayment. The Recovery
Date will be the date on which the fiduciary or other person repays
to the plan the correction amount.
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\9\ If a plan's fiduciaries authorized the purchase of a
specific dollar amount of stock rather than the purchase of a
specific number of shares, and the plan acquired fewer shares than
it should have as a result of paying too much per share, the amount
lost equals the number of additional shares that the plan should
have acquired, plus any appreciation, dividends, or stock splits
associated with those additional shares.
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Assume that the plan recoups the $5,000 overpayment a year after
the original purchase. During this year, the plan's other
investments earned 9%, including all reinvestment earnings. The Lost
Earnings amount is $450 ($5,000 multiplied by 9% annual yield for
one year). If the Restoration of Profit amount is less than $450,
the total amount to be paid to the plan is $5,450 (the Principal
Amount of $5,000 plus Lost Earnings of $450).
Example 3. Assume the same facts as in Example 2, except that
the proceeds of the sale were used to make another investment, which
yielded a 15% annual rate of return. The Restoration of Profits
amount is $750 ($5,000 multiplied by 15% per annum times one year).
In this example, the Restoration of Profits amount ($750) is greater
than the Lost Earnings amount ($450). The total amount to be paid to
the plan is $5,750 (the Principal Amount of $5,000 plus Restoration
of Profits of $750).
Example 4. On April 20, a plan paid $6,000 in legal fees for
legal services that the plan sponsor, not the plan, was obligated to
pay. The Principal Amount is $6,000. The Loss Date is April 20, the
date the plan improperly paid the plan sponsor's legal expenses. The
Recovery Date will be the date on which the plan sponsor reimburses
the plan $6,000. Assume that the plan sponsor reimburses the plan on
October 20, six months after the Loss Date. During this period, the
plan's investment earnings totaled five percent, including all
reinvestment earnings. The Lost Earnings amount is $300 ($6,000
multiplied by five percent).
The plan sponsor had constructive use of $6,000 from April 20
until October 20. The plan sponsor's cost of funds (the actual
profit from the use of the money) cannot readily be determined;
therefore, the Restoration of Profits amount is calculated using the
underpayment rate defined in Code section 6621(a)(2). Assuming the
published section 6621 rate was 8% per annum for the duration of the
period April 20 to October 20, the Restoration of Profits amount is
$240 ($6,000 times 8% per annum multiplied by one-half).
In this example, the Lost Earnings amount ($300) is greater than
the Restoration of Profits amount ($240). The total amount to be
paid to the plan is $6,300 (the Principal Amount of $6,000 plus Lost
Earnings of $300).
(c) Costs of Correction. (1) The fiduciary, plan sponsor or other
Plan Official, not the plan, shall pay the costs of correction.
(2) The costs of correction include, where appropriate, such
expenses as closing costs, prepayment penalties, or sale or purchase
costs associated with correcting the transaction.
(3) The principle of paragraph (c)(1) is illustrated in the
following example and in (d) below:
Example: The plan fiduciaries did not obtain a required
independent appraisal in connection with a transaction described in
Section 7. In connection with correcting the transaction, the plan
fiduciaries now propose to have the appraisal performed as of the
date of purchase. The plan document permits the plan to pay
reasonable and necessary expenses; the fiduciaries have objectively
determined that the cost of the proposed appraisal is reasonable and
is not more expensive than the cost of an appraisal contemporaneous
with the purchase. The plan may therefore pay for this appraisal.
However, the plan may not pay any costs associated with
recalculating participant account balances to take into account the
new valuation. There would be no need for these additional
calculations or any increased appraisal cost if the plan's assets
had been valued properly at the time of the purchase. Therefore, the
cost of recalculating the plan participants' account balances is not
a reasonable plan expense, but is part of the Costs of Correction.
(d) Distributions. Plans will have to make supplemental
distributions to former employees, beneficiaries receiving benefits, or
alternate payees, if the original distributions were too low because of
the Breach. In these situations, the Plan Official or plan
administrator must determine who received distributions from the plan
during the time period affected by the Breach, recalculate the account
balances, and determine the amount of the underpayment to each affected
individual. The applicant must demonstrate proof of payment to
participants and beneficiaries whose current location is known to the
plan
[[Page 15076]]
and/or applicant. For individuals whose location is unknown, applicants
must demonstrate that they have segregated adequate funds to pay the
missing individuals and that the applicant has commenced the process of
locating the missing individuals using either the IRS and Social
Security Administration locator services, or other comparable means.
The costs of such efforts are part of the Costs of Correction.
(e) De Minimus Exception. Where correction under the Program
requires distributions in amounts less than $20 to former employees,
their beneficiaries and alternate payees, who neither have account
balances with, nor have a right to future benefits from the plan, and
the applicant demonstrates in its submission that the cost of making
the distribution to each such individual exceeds the amount of the
payment to which such individual is entitled in connection with the
correction of the transaction that is the subject of the application,
the applicant need not make distributions to such individuals who would
receive less than $20 each as part of the correction. However, the
applicant must pay to the plan as a whole the total of such de minimus
amounts not distributed to such individuals.
Example. Employer X sponsors Plan Y. Employer X submits an
application under the VFC Program to correct a failure to forward
timely participant contributions to the Plan Y. Employer X had paid
the delinquent contributions six months late, but had not paid lost
earnings on the delinquency. The correction under the VFC Program,
therefore, required only payment of Lost Earnings for the six-month
delinquency. During the six-month period 25 employees separated from
service and rolled over their plan accounts to individual retirement
accounts. The amount of lost earnings due to 20 of those former
employees is less than $20, and Employer X demonstrates that the
cost of making the distribution to those former employees is $27 per
individual. Employer X need not make distributions to those 20
former employees. However, the total amount of distributions that
would have been due to those former employees must be paid to Plan
Y. The payment to Plan Y may be used for any purpose that payments
or credits to Plan Y that are not allocated directly to participant
accounts are used. Employer X must make distributions to the five
former employees who are entitled to receive distributions of more
than $20.
Section 6. Application Procedures
(a) In general. Each application must adhere to the requirements
set forth below. Failure to do so may render the application invalid.
(b) Preparer. The application must be prepared by a Plan Official
or his or her authorized representative (e.g., attorney, accountant, or
other service provider). If a representative of the Plan Official is
submitting the application, the application must include a statement
signed by the Plan Official that the representative is authorized to
represent the Plan Official.
(c) Contact person. Each application must include the name, address
and telephone number of a contact person. The contact person must be
familiar with the contents of the application, and have authority to
respond to inquiries from PWBA.
(d) Detailed narrative. The applicant must provide to PWBA a
detailed narrative describing the Breach and the corrective action. The
narrative must include:
(i) a list of all persons materially involved in the Breach and its
correction (e.g., fiduciaries, service providers, borrowers);
(ii) the EIN number and address of the plan sponsor and
administrator;
(iii) the date the plan's most recent Form 5500 was filed;
(iv) an explanation of the Breach, including the date it occurred;
(v) an explanation of how the Breach was corrected, by whom and
when; and
(vi) specific calculations demonstrating how Principal Amount and
Lost Earnings or Restoration of Profits were computed and an
explanation of why payment of Lost Earnings or Restoration of Profits
was chosen to correct the Breach.
(e) Supporting documentation. The applicant must also include:
(i) a statement that the plan has a current fidelity bond that
meets the requirements of section 412 of ERISA and the name of the
company providing the bond and the policy number;
(ii) copies of the relevant portions of the plan document and any
other pertinent documents (such as the adoption agreement, trust
agreement, or insurance contract);\10\
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\10\ Applicants must supply complete copies of the plan
documents and other pertinent documents if requested by PWBA during
its review of the application.
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(iii) documentation that supports the narrative description of the
transaction and correction;
(iv) documentation establishing the Lost Earnings amount, including
documentation of the return on the plan's other investments during the
time period on which the Lost Earnings is calculated with respect to
the transaction described in the VFC Program application;
(v) documentation establishing the amount of Restoration of
Profits;
(vi) all documents described in Section 7 with respect to the
transaction involved; and
(vii) proof of payment of Principal Amount and Lost Earnings or
Restoration of Profits.
(5) Examples of supporting documentation. (i) Examples of
documentation supporting the description of the transaction and
correction are leases, appraisals, notes and loan documents, service
provider contracts, invoices, settlement documents, deeds, perfected
security interests, and amended annual reports.
(ii) Examples of acceptable proof of payment include copies of
canceled checks, executed wire transfers, a signed, dated receipt from
the recipient of funds transferred to the plan (such as a financial
institution), and bank statements for the plan's account.
(g) Penalty of Perjury Statement. Each application must also
include a Penalty of Perjury statement. The statement shall be signed
and dated by a plan fiduciary with knowledge of the transaction that is
the subject of the application and the authorized representative of the
applicant, if any. In addition, all Plan Officials applying under the
VFC Program must execute the Penalty of Perjury statement in order to
be covered by the No Action Letter. The statement must accompany the
application and any subsequent additions to the application. The
statement shall read as follows:
I certify under penalty of perjury that I have reviewed this
application and all supporting documents and that to the best of my
belief the contents are true and complete and comply with all terms and
conditions of the VFC Program. I further certify under penalty of
perjury that at the date of this certification neither the Department
nor any other Federal agency has informed me of an intention to
investigate or examine the plan or otherwise made inquiry with respect
to the transaction described in this application. I further certify
under penalty of perjury that neither I nor any person acting under my
supervision or control with respect to the operation of an ERISA-
covered employee benefit plan:
(1) Is the subject of any criminal investigation or prosecution
involving any offense against the United States;\11\
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\11\ For purposes of this paragraph, an ``offense'' includes
criminal activity for which the Department of Justice may seek civil
injunctive relief under the Racketeer Influenced and Corrupt
Organizations statute (18 U.S.C. 1964(b)). A ``subject'' is any
individual or entity whose conduct is within the scope of any
ongoing inquiry being conducted by a Federal investigator(s) who is
authorized to investigate criminal offense against the United
States.
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[[Page 15077]]
(2) Has been convicted of a criminal offense involving employee
benefit plans at any time or any other offense involving financial
misconduct which was punishable by imprisonment exceeding one year for
which sentence was imposed during the preceding thirteen years or which
resulted in actual imprisonment ending within the last thirteen years,
nor has such person entered into a consent decree with the Department
or been found by a court of competent jurisdiction to have violated any
fiduciary responsibility provisions of ERISA during such period; or
(3) Has sought to assist or conceal the transaction described in
this application by means of bribery, or graft payments to persons with
fiduciary responsibility for this plan or with the knowing assistance
of persons engaged in ongoing criminal activity.
(h) Checklist. The checklist in Appendix B must be completed,
signed, and submitted with the application.
(i) Where to apply. The application shall be mailed to the
appropriate regional PWBA office listed in Appendix C.
(j) Record keeping. The applicant must maintain copies of the
application and any subsequent correspondence with PWBA for the period
required by section 107 of ERISA.
Section 7. Description of Eligible Transactions and Corrections
Under the VFC Program
PWBA has identified certain Breaches and methods of correction that
are suitable for the VFC Program. Any Plan Official may correct a
Breach listed in this Section in accordance with Section 5 and the
applicable correction method. The correction methods set forth are
strictly construed and are the only acceptable correction methods under
the VFC Program for the transactions described in this Section. PWBA
will not accept applications concerning correction of breaches not
described in this Section.
A. Contributions
1. Delinquent Participant Contributions to Pension Plans
(a) Description of Transaction. An employer receives directly from
participants, or withholds from employees' paychecks, certain amounts
for contribution to a pension plan. Instead of forwarding the
contributions for investment in accordance with the provisions of the
plan and within the time frames described in the Department's
regulation at 29 CFR 2510.3-102, the employer retains the contributions
for a longer period of time.
(b) Correction of Transaction. (1) Unpaid Contributions. Pay to the
plan the Principal Amount plus the greater of (i) Lost Earnings on the
Principal Amount or (ii) Restoration of Profits resulting from the
employer's use of the Principal Amount, as described in Section 5(b).
The Principal Amount is the amount of the unpaid participant
contributions and the Loss Date for each contribution is the earliest
date on which the contributions reasonably could have been segregated
from the employer's general assets. In no event shall the Loss Date be
later than the applicable maximum time period described in 29 CFR
2510.3-102.
(2) Late Contributions. If participant contributions were remitted
to the plan outside of the time period provided by the regulation, the
only correction required is to pay to the plan the greater of (i) Lost
Earnings or (ii) Restoration of Profits resulting from the employer's
use of the Principal Amount as described in Section 5(b).
(3) Examples. The principles of this paragraph (b) are illustrated
in the following examples:
Example 1. See Example 1 under Section 5(b).
Example 2. Employer X is a large national corporation, which
sponsors a section 401(k) plan. X reasonably is able to segregate
participant contributions no later than 10 business days after the
end of the month in which participant contributions were withheld
from employees' paychecks. For the pay period ending June 15,
participant contributions totaling $900,000 were not deposited until
August 14.
The Principal Amount is $900,000. The Loss Date is July 14 (the
tenth business day in July), the date on which the participant
contributions became plan assets and should have been deposited in the
plan's trust account. The Recovery Date is August 14, the date that the
participant contributions were deposited in the plan's trust account.
The 401(k) plan offers eight investment alternatives with daily
asset valuation. From July 14 through August 14, most of the plan
participants experienced a decrease in their account balances due to a
decline in the stock market; however, some participants had a net
investment gain. The Code section 6621(a)(2) rate during this period
was 8% (annual yield for all quarters) and was greater than the profit
to the employer from the use of the funds during the pertinent time
period.
For the participants whose account balances declined, the employer
pays the Principal Amount plus the Restoration of Profits amount,
calculated at 8% (annual yield). For the other participants, the
employer pays the Principal Amount plus the higher of each
participant's actual investment earnings between July 14 and August 14
or the Restoration of Profits amount calculated at 8%. Since the
Principal Amount of $900,000 has already been paid to the plan, the
correction amount to be paid to the plan is no less than the
Restoration of Profits of $6,000 ($900,000 times 8% per annum
multiplied by one-twelfth of a year).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) For participant contributions received from participants, a
copy of the accounting records which identify the date and amount of
each contribution received;
(2) For participant contributions withheld from employees'
paychecks, a copy of the payroll documents showing the date and amount
of each withholding; and
(3) A statement from a Plan Official identifying the earliest date
on which the participant contributions reasonably could have been
segregated from the employer's general assets, along with the
supporting documentation on which the Plan Official relied i |
