Voluntary Fiduciary Correction Program Under the Employee Retirement
Income Security Act of 1974; Notice [04/19/2006]
Volume 71, Number 75, Page 20261
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
RIN 1210-AB03
Voluntary Fiduciary Correction Program Under the Employee
Retirement Income Security Act of 1974
AGENCY: Employee Benefits Security Administration, DOL.
ACTION: Adoption of Updated Voluntary Fiduciary Correction Program.
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SUMMARY: This Notice includes an updated and streamlined version of the
Voluntary Fiduciary Correction Program (VFC Program or the Program)
under the Employee Retirement Income Security Act. The VFC Program is
designed to encourage the voluntary correction of fiduciary violations
by permitting persons to avoid potential civil actions and civil
penalties if they take steps to correct identified violations in a
manner consistent with the Program. The Program included in this Notice
reflects changes made in response to public comments received on the
VFC Program modifications implemented in April 2005. The final Program
includes additional transactions, reduced documentation requirements, a
simplified application form, a checklist, and availability of an online
calculator for determining the amount to be restored to plans. These
changes serve to both encourage and facilitate the use of the Program
as a means by which to correct covered fiduciary violations.
DATES: The VFC Program contained in this Notice is effective May 19,
2006.
FOR FURTHER INFORMATION CONTACT:
For Questions Regarding the VFC Program Amendments: Contact Kristen
L. Zarenko, Office of Regulations and Interpretations, Employee
Benefits Security Administration (EBSA), (202) 693-8510.
For General Questions Regarding the VFC Program: Contact Caroline
Sullivan, Office of Enforcement, EBSA, (202) 693-8463. (These are not
toll-free numbers.)
For Questions Regarding Specific Applications Under the VFC
Program: Contact the appropriate EBSA Regional Office listed in
Appendix C.
SUPPLEMENTARY INFORMATION:
A. Background
The Voluntary Fiduciary Correction Program was adopted by EBSA of
the Department of Labor (Department) on a permanent basis in March 2002
(the original VFC Program).\1\ The VFC Program is designed to encourage
employers and plan fiduciaries to voluntarily comply with ERISA and
allows those potentially liable for certain specified fiduciary
violations under ERISA to voluntarily apply for relief from enforcement
actions and certain penalties, provided they meet the VFC Program's
criteria and follow the procedures outlined in the VFC Program. Many
workers have also benefited from the VFC Program as a result of the
restoration of plan assets and payment of promised benefits.
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\1\ 67 FR 15062 (March 28, 2002). Prior to adoption in March
2002, the VFC Program was made available on an interim basis during
which the Department invited and considered public comments on the
Program. (See 65 FR 14164, March 15, 2000).
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The VFC Program describes how to apply for relief, the specific
transactions covered,\2\ acceptable methods for correcting violations,
and examples of potential violations and corrective actions. Eligible
applicants that satisfy the terms and conditions of the VFC Program
receive a ``no-action letter'' from EBSA and are not subject to civil
monetary penalties. In 2002, the original VFC Program was further
expanded to include a class exemption (PTE 2002-51) providing excise
tax relief for four specific VFC Program transactions.\3\
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\2\ EBSA acknowledges, based on its experience, that certain
transactions may fit within one or more of the listed categories of
transactions, even if not specifically named in the category, for
example certain transactions involving contributions in kind under
section 7.4(a) of the Program. EBSA encourages potential applicants
to discuss eligibility and similar issues with the appropriate
regional VFC Program coordinator.
\3\ PTE 2002-51 published at 67 FR 70623 (November 25, 2002).
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In April 2005, EBSA published revisions to the VFC Program (the
April 2005 VFC Program) \4\ containing, among other amendments, several
new covered transactions, on which EBSA invited public comment. EBSA
believed that these revisions, designed to both simplify and expand the
original Program, were needed to further encourage utilization of the
Program. EBSA made the April 2005 VFC Program effective upon
publication to permit use of the simplified processes and new covered
transactions during the interim period prior to the adoption of final
changes to the Program. Concurrently, EBSA proposed an amendment to the
related class exemption, PTE 2002-51,\5\ to accommodate a new
transaction contained in the April 2005 VFC Program. However, the
excise tax relief afforded by the amendments to PTE 2002-51 was not
immediately available and could not be relied upon for relief during
the interim period.
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\4\ 70 FR 17516 (April 6, 2005).
\5\ 70 FR 17476 (April 6, 2005).
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EBSA received six comment letters in response to the April 2005 VFC
Program and related class exemption. Copies of these comments are
posted on EBSA's Web site.\6\
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\6\ http://www.dol.gov/ebsa/regs/cmt_vfcp.html.
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After careful consideration of the issues raised by the comment
letters and input from EBSA Regional Office personnel charged with
administering the Program, EBSA is adopting final changes to the
Program (the final VFC Program) in this Notice. EBSA believes these
modifications will facilitate both the correction of violations of
ERISA's fiduciary responsibility and prohibited transaction rules and
the restoration of losses to participants resulting from the Breaches
(as defined in the VFC Program). The final VFC Program will continue to
be administered in EBSA Regional Offices. In tandem with today's
publication of the final VFC Program, EBSA is publishing a final
amendment to PTE 2002-51 in response to comments received and to
conform with certain revisions in the final VFC Program. This amendment
also appears in the Notice section of today's Federal Register.
B. Overview of Changes in the Final VFC Program
The final VFC Program retains the fundamentals of the original
Program, adopted in 2002. The original Program was revised on April 6,
2005 (70 FR 17516), and public comment was solicited. The final VFC
Program contained in this Notice includes additions to and
modifications of the April 2005 Program. Set forth below is an overview
of the changes to the April 2005 Program. To facilitate reference to
the Program, this Notice includes a restatement of the Program in its
entirety.
(1) Scope of Relief
Unlike the earlier versions of the Program, the final Program now
affords relief from the imposition of potential civil penalties under
section 502(i) of ERISA when correction is undertaken in accordance
with the Program. This modification was made to provide more thorough
and complete relief under the Program. In general, section 502(i)
permits the Secretary to assess a civil penalty on prohibited
transactions with respect to welfare plans and nonqualified pension
plans.
[[Page 20263]]
(2) Covered Transactions
(i) Illiquid Assets--Section 7.4(f)
The April 2005 Program included a correction for a transaction that
permits a plan to divest, rather than continue to hold in its
portfolio, a previously purchased asset that is determined to be
illiquid, within the meaning of the Program. The Program described
three scenarios for the plan's acquisition of the asset. Each
acquisition eventually resulted in the plan holding an illiquid asset,
for which the applicant must determine that the correction is
determined to be necessary. One commenter suggested that the
description of this transaction be expanded to include a fourth
scenario reflecting the acquisition of an asset from a party in
interest to which a statutory or administrative exemption applied. EBSA
has decided to adopt this suggestion and, accordingly, has modified the
description of the transaction in section 7.4(f) of the final Program.
The related class exemption has been similarly amended.
(ii) Participant Loans--Section 7.3
The April 2005 VFC Program added two new categories of transactions
involving plan loans to participants in section 7.C.1. These
transactions provided an approved correction method for situations
where participant loans exceeded the Internal Revenue Code (Code)
section 72(p) limitations on amount or duration, which were
incorporated into the plan. The statutory exemption from the prohibited
transaction provisions for participant loans provided by section
408(b)(1) of ERISA requires that participant loans are made in
accordance with plan terms regarding such loans. A violation would
therefore occur when the section 72(p) loan limitations were exceeded.
Several comment letters on the April 2005 Program urged expansion
of the categories of participant loan transactions. One commenter
suggested including loans violating plan terms that imposed more
stringent amount and duration limitations than Code section 72(p)
restrictions. One comment letter requested including loans that were
granted with inappropriate interest rates. Another commenter suggested
including situations when loan repayments are not properly withheld
from participants' wages (``default loans''), but instead are paid to
the participant. This commenter observed that such withholding failures
are administrative errors that frequently occur because of a change in
service provider, for example, following a merger or acquisition.
Several commenters asserted the necessity for coordination between EBSA
and the IRS and also requested assurance that the Program's loan
corrections would be compatible with resolution of the associated
income tax issues under the Voluntary Correction Program of the IRS''
Employee Plans Compliance Resolution System (EPCRS) corrections.
EBSA believes that the transactions covered by the VFC Program
should be as congruent as possible with the resolution of the related
income tax issues. EBSA also believes that correction of participant
loan issues under the VFC Program should be compatible with
coordinating changes that EBSA understands will be made in a revision
to the IRS'' EPCRS, based on informal discussions between EBSA and the
staffs of the Internal Revenue Service and Treasury Department.
Accordingly, section 7.3(a) of the final Program has been modified
to include a category of participant loan transactions for Breaches
involving level amortization in addition to the transactions previously
included for amount and duration Breaches. Section 7.3(b) also has been
revised to include a category of transactions for default loans. The
final Program's description of the loan transactions in section 7.3 is
applicable only to plan participants who are parties in interest with
respect to the plan based solely on their employee status with any
employer whose employees are covered by the plan.
To simplify and expedite the correction process, the final VFC
Program has been modified to require only that an applicant correct
participant loan violations under the coordinating IRS'' EPCRS
correction, when published, and then submit a copy of the resulting
EPCRS compliance statement, along with proof of payment of any required
amounts, to EBSA. Applicants are not required to submit any other
documentation under the Program.
(iii) Settlor Expenses--Section 7.6
The preamble to the April 2005 Program specifically requested
public input on viable additional transactions and reasonable methods
of correction for such additional transactions. One commenter suggested
the future development of transactions if and when additional fiduciary
errors were identified. A second commenter recommended the addition of
categories of transactions that might violate specific sections of
ERISA under 404(a)(1) and 406(b). The recommended categories included
the payment of expenses with plan assets in violation of ERISA section
404(a)(1)(A), (B) and (D), the holding of real estate in violation of
ERISA section 404(a)(1)(C) and the acquisition of plan assets in
violation of ERISA section 404(a)(1)(D).
In response to these comments, EBSA has revised the transactions in
section 7.6 ``Plan Expenses'' to clarify that violations involving the
use of plan assets to pay expenses that should have been paid by the
plan sponsor may be corrected under the Program, as described more
fully below. The related class exemption has also been revised to
provide excise tax relief for certain plan expense violations corrected
under the Program.
Beyond this expansion, however, EBSA believes that the addition of
general categories of transactions, in contrast with the precisely
described transactions currently included in the Program, would raise
questions about the adequacy of the corrections. Program corrections
depend on facts and circumstances and must be sufficiently uniform to
obviate all need for negotiation and the consequent triggering of ERISA
section 502(l) penalties.
The final Program includes a new section 7.6(b) ``Expenses
Improperly Paid by a Plan.'' The description of this transaction posits
that a plan used plan assets to pay expenses, including commissions or
fees, which should have been paid by the plan sponsor, to a service
provider for (A) services appropriately characterized as plan expenses,
which involved the administration and maintenance of the plan, in
circumstances where a plan provision requires that such plan expenses
be paid by the plan sponsor, or (B) services appropriately
characterized as settlor expenses, which relate to the activities of
the plan sponsor in its capacity as settlor. The correction requires
that the applicant restore the Principal Amount plus the greater of
Lost Earnings or Restoration of Profits. For purposes of this
transaction, the Principal Amount is defined as the entire amount
improperly paid by the plan to the service provider for expenses that
should have been paid by the plan sponsor.
Section 7.6(a) also has been revised and the definition of the
Principal Amount for each of the described variations of the
transaction has been clarified. A new example has also been added to
illustrate a situation where the use of plan assets to pay compensation
was a Breach because the compensation was for services that were simply
unnecessary, in that they were not helpful or appropriate in carrying
out the purposes for which the plan is maintained. Section 7.6(c)
``Payment of
[[Page 20264]]
Dual Compensation to a Plan Fiduciary'' has not been substantively
altered in the final Program.
(3) Definitions
(i) Under Investigation
Several commenters suggested clarifying the changes made to the
April 2005 Program's definition of ``Under Investigation.'' One
commenter expressed concern that the current definition, which bars
applicants if EBSA or any other federal agency is conducting an
investigation in connection with a plan transaction, might prevent
Program applications where an investigation has only an indirect impact
on the plan, such as an employment tax audit resulting in misclassified
employees. Another commenter suggested that the definition be modified
to permit applications by financial institutions subject to ongoing
investigations that are not plan specific, but might arguably
``involve'' the plan, such as annual examinations by the Federal
Reserve.
EBSA has decided to amend the definition to more narrowly focus on
situations when an investigation, either ongoing or for which notice
has been given, involves the plan or an act or transaction involving
the plan. For example, a plan would be ``Under Investigation'' if
undergoing an Employee Plans examination by the Tax Exempt and
Government Entities Division of the IRS. For non-criminal
investigations and examinations of a plan, or of the applicant or plan
sponsor in connection with an act or transaction directly related to
the plan, by the Pension Benefit Guaranty Corporation (PBGC) or certain
state agency officials, EBSA is instituting an optional disclosure
provision. Potential applicants who choose to disclose such an
investigation may apply under the final Program, while potential
applicants who opt for nondisclosure cannot apply because they are
considered ``Under Investigation.''
If an applicant discloses the existence of an investigation to EBSA
in writing when submitting an application, EBSA will promptly notify
the investigating agency of such application. EBSA's written notice is
designed to afford the investigating agency an opportunity to provide
EBSA with information relevant to the investigation or examination.
EBSA will take suitable action in response to information received from
the investigating agency and as a result, in appropriate circumstances,
may decline to issue a no action letter to the applicant.
If EBSA has completed an investigation resulting in a referral of
transactions to the IRS, eligibility to participate in the VFC Program
to correct such transactions is limited. Section 4(c) has been revised
to clarify that potential applicants continue to be eligible except
with regard to the specific transactions identified by EBSA in a
written notice to a plan fiduciary concerning the referral to the IRS.
(ii) Plan Official
One commenter suggested that the definition of ``Plan Official'' be
revised to provide that in cases of multiemployer plans or multiple
employer plans, an application could be made only by the ``plan
administrator,'' rather than by any contributing or adopting employer.
EBSA has decided to retain the existing definition of ``Plan
Official,'' because the current definition provides maximum flexibility
as to who may apply under the Program to correct violations involving
multiemployer plans or multiple employer plans. The Program, of course,
allows the plan administrator of such a plan to apply on behalf of the
entire plan; any participating employer may apply on its own behalf.
(4) Correction Methodology
(i) Cash Settlement
One commenter requested that the correction for a plan's purchase
of an asset from a party in interest under section 7.4(a) be amended to
allow the plan to retain the asset and settle the correction amount in
cash if doing so is determined to be in the best interest of
participants and beneficiaries. The April 2005 Program required that a
plan's purchase of an asset from a party in interest be corrected by
selling the asset back to the party in interest, or to a non-party in
interest. EBSA has decided to modify the correction under the final
Program to permit the suggested alternative correction. A plan will be
permitted to retain an asset purchased from a party in interest by
settling the correction amount in cash, provided an independent
fiduciary determines that the plan will realize a greater benefit from
this correction than it would from the resale of the asset. An
independent fiduciary is not required if the plan sells the asset back
to the party in interest, because this correction is in essence a
reversal of the original sale. EBSA believes that the determination to
resell the asset to the party in interest may be properly determined by
a plan fiduciary.
The correction for a plan's sale of an asset to a party in interest
under section 7.4(b) is also being revised under the final Program.
Although this correction already permitted both a cash settlement and
the reversal of the transaction by the plan's repurchase of the asset
from the party in interest, it is being modified to require a
determination by an independent fiduciary only in the limited
circumstances where the plan settles the transaction in cash. The
related class exemption is being amended for consistency with these
changes.
(ii) Credit for Voluntary Contributions
One commenter requested that the correction for delinquent
participant contributions under section 7.1(a) be modified to permit an
employer, which failed to timely remit withheld participant
contributions to a contributory defined benefit plan, to credit any
employer contribution in excess of amounts legally required by the
minimum funding standard or bargaining agreements against the Program's
required Lost Earnings or Restoration of Profits for that same plan
year. EBSA has decided to retain the existing correction because it
adequately addresses the Breach. EBSA believes that the proposed
modification would create uncertainty and contravene sound funding
policy.
(iii) Transaction Costs
In the interest of accurate applications and the desire to provide
timely review by EBSA staff, EBSA wishes to emphasize that the general
rule for determining the Principal Amount under section 5(b)(2)
requires, where appropriate, the inclusion of any transaction costs
associated with entering into the transaction that constitutes the
Breach in the determination of the Principal Amount.
(5) Program Calculations
(i) Multiple Recovery Dates
One commenter asked for clarification regarding Program
transactions that involve more than one correction period and result in
separate calculations and multiple Recovery Dates. This commenter
offered as examples: A plan's purchase of securities in a prohibited
transaction where such securities are sold over time in more than one
transaction, and the repayment of debt securities over time in
installments of principal and interest. Corrections under the Program,
which may involve multiple transactions with different time periods,
may be corrected by performing the calculations in steps using
different Recovery Dates. The Online Calculator is generally available
[[Page 20265]]
to perform such calculations; however, if the factual circumstances
surrounding the correction cannot be accommodated by the Online
Calculator's functions, a manual calculation may be submitted.
(ii) Lost Earnings Formulation
One commenter observed that certain language in the original
Program's formulation of Lost Earnings, which allowed applicants in
appropriate circumstances to subtract ``actual net earnings or realized
net appreciation'' or to add ``net loss to the plan as a result of the
transaction,'' was not included in the April 2005 Program. EBSA
deliberately eliminated such language from the April 2005 Program in an
effort to provide more straightforward calculations. The April 2005
Program was designed to provide simplicity and uniformity in correction
amount calculations; EBSA eliminated complicated requirements for the
computation of actual plan earnings, as well as the associated
additions and subtractions for net gains and losses. Instead, the April
2005 Program focused on the IRC section 6621 rate in its Lost Earnings
calculation. The final Program retains this approach.
(iii) Corporate Transactions
One commenter asked whether the Online Calculator can accommodate
corporate transactions such as stock splits, tenders, and mergers, or
if such transactions had to be accounted for manually. EBSA believes
that is the responsibility of applicants to take into account any
adjustments necessary because of corporate transactions before entering
data into the Online Calculator in order to ensure that the results are
current and correct. In the event the factual circumstances surrounding
the correction cannot be accommodated by the Online Calculator,
applicants may submit a manual calculation.
(6) Documentation Requirements
(i) Summary Documentation
With regard to the correction of delinquent participant
contributions or loan repayments to pension plans, the April 2005
Program under section 7.A.1. permitted applicants correcting Breaches
that involved (A) amounts below $50,000 or (B) amounts greater than
$50,000 that were remitted within 180 calendar days after receipt by
the employer to provide summary documentation. EBSA has decided to
expand the summary documentation requirements to two additional
transactions involving the delinquent remittance of participant funds.
Specifically, with regard to the correction of delinquent
participant contributions to insured welfare plans under section 7.1(b)
and to welfare plan trusts under section 7.1(c), the final VFC Program
permits the use of simplified documentation requirements for applicants
correcting Breaches that involved (A) amounts below $50,000 or (B)
amounts greater than $50,000 that were remitted within 180 calendar
days after receipt by the employer. EBSA believes that extending the
summary documentation requirements to these additional transactions not
only minimizes the paperwork burden on applicants making smaller
corrections, but provides consistency among all three transactions in
section 7.1 of the final Program.
Applicants who fail to meet the $50,000 and 180 day standards may
still be eligible to correct transactions involving the delinquent
remittance of participant funds under the Program, but are simply
precluded from submitting summary documentation to substantiate their
applications. It should also be noted that the 180 day standard for
summary documentation is separate and distinct from the 180 day
standard for excise tax relief under the related class exemption for
delinquent participant contributions or loan repayments to pension
plans; for purposes of the exemption, the 180 day standard applies
regardless of the amount involved.
(ii) Bonding
In the April 2005 VFC Program, section 6 was modified to eliminate
the requirement that applicants provide certain information relating to
the plan's fidelity bond. This modification was not changed in the
final VFC Program, but this decision should not be misconstrued as
eliminating the bonding requirement itself. This change focuses merely
on streamlining the application process to eliminate documentation of
the bond, and not on compliance with the substantive bonding
requirements of ERISA.
(iii) Online Calculator
One commenter observed that the provisions requiring the submission
of documents and information in support of calculations in
circumstances where the Online Calculator is used to perform Program
calculations were unclear. In response to this comment, EBSA has
modified section 6(d), ``Detailed Narrative,'' which lists documents
and information that must be submitted with an application.
Subparagraph (ii) of section 6(d)(6) clarifies that applicants using
the Online Calculator for Program calculations only need to submit a
copy of the final page(s) that results from using the ``Print Viewable
Results'' function. This function is used after inputting all data
elements and completing all calculations using the Online Calculator.
(7) EBSA Procedures
(i) Investigations
One commenter inquired whether EBSA would commence investigations
related to already filed Program applications if the statute of
limitations for the transaction described in the application was close
to expiring. As stated in the preamble to the original Program, EBSA
generally does not anticipate taking enforcement action in response to
an application, except where EBSA becomes aware of possible criminal
behavior, material misrepresentations or omissions, or other abuses of
the Program. In rare and appropriate circumstances, EBSA will consider
entering into tolling agreements with applicants, but EBSA is not
amending the VFC Program to require tolling agreements as a matter of
course.
(ii) Timing
One commenter inquired whether relief under the Program remains
available for transactions covered by a filed application if an
investigation were to begin after the application is filed, but before
a no action letter is issued. Relief under the Program is available for
covered transactions if, at the time the application is filed, the plan
or applicant is not considered to be ``Under Investigation'' as defined
in section 3(b)(3) and meets the conditions under section 4 ``VFC
Program Eligibility.''
(iii) Self Correction Component
One commenter requested that EBSA expand the VFC Program to include
a voluntary self correction component within the Program. EBSA has
decided not to include a formal self correction component. EBSA
continues to believe that an important result under the Program is the
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 in their applications.
(8) Miscellaneous
(i) Reporting
One commenter requested that EBSA implement a de minimis filing
rule under the Program so that applicants would be required to correct
previously filed Forms 5500 only in circumstances
[[Page 20266]]
where the Breach involved a reasonable and defined threshold of the
plan's assets. EBSA has declined to adopt this suggestion. EBSA
believes that when a plan has engaged in a prohibited transaction or
plan assets have been improperly valued, previously filed Forms 5500
must be amended to reflect these important reporting items. Applicants
are directed to the instructions for the Form 5500 to determine their
reporting obligations.
(ii) Application of Program to Other Plans
One commenter requested that EBSA provide relief under the Program
and the related class exemption for breaches involving plans that
currently are not eligible to participate in the Program.\7\ The
commenter suggested that it would be administratively convenient if a
Program applicant, who had caused a number of plans, including plans
subject only to provisions in the Code, to engage in a violation
subject to correction under the Program, could correct and receive a no
action letter with respect to all of the plans. The Department has
determined that it cannot expand the Program as requested by the
commenter, as it lacks jurisdiction to issue a no action letter under
the Program with respect to violations of the Code.
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\7\ Certain individual retirement accounts and other types of
plans are regulated solely under the provisions of the Code.
Compliance with and enforcement of those provisions are not within
the jurisdiction of the Department of Labor.
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C. De Minimis Excise Tax
The IRS requested a modification to the requirement in the related
class exemption that employers notify interested persons in writing of
transactions corrected under the VFC Program. Specifically, the IRS
requested that the notice requirement not apply in those instances when
the excise tax otherwise due under section 4975 of the Code would be
less than or equal to $100.00. The IRS requested that the amount of the
excise tax otherwise due be contributed to the plan, and that the
contribution be allocated to the plan's participants and beneficiaries
in a manner consistent with the plan's provisions for allocating
earnings. The Department has adopted this request, which is discussed
further in the preamble to the amendment to PTE 2002-51 published
simultaneously with this Notice.
D. Effective Date
The Department has determined that the relief afforded to
applicants under the final VFC Program will be available thirty days
following publication of the final Program in the Federal Register.
EBSA believes that any further delay for potential applicants in the
availability of the provisions of the final Program would serve no
useful purpose. During the thirty day period following publication of
the final Program, applicants may continue to pursue relief by filing
applications under either the original VFC Program or the April 2005
VFC Program. These applications will be processed under the provisions
of the applicable Program. However, upon expiration of the 30 day
period following publication of the final Program in the Federal
Register, both the April 2005 VFC Program and original VFC Program will
be superseded by the final VFC Program.
The Department notes that implementation of the final Program does
not foreclose resolution of fiduciary breaches by other means,
including entering into settlement agreements with the Department.
E. Impact of Program Amendments
Executive Order 12866 Statement
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) of the Executive
Order, a ``significant regulatory action'' is 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 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. OMB has
determined that this action is significant under section 3(f)(4)
because it raises novel legal or policy issues arising from the
President's priorities. Accordingly, the Department has assessed the
costs and benefits of the regulation. OMB has reviewed this regulatory
action.
As stated in its previous analysis in the preamble to the April
2005 Program published in April, 2005, the Department believes that the
benefits of the VFC Program justify its costs. The Program is designed
to provide an efficient, cost-effective method for correcting a variety
of fiduciary Breaches and prohibited transactions and receiving
Departmental recognition of the correction. The methods of correction
set out in the Program provide the required conditions for correction,
which are adequate and protective of the rights of participants and
beneficiaries. Participation in the Program is voluntary. The
Department believes that the costs to a plan and its fiduciaries of
correcting a potential fiduciary Breach through voluntary participation
in the VFC Program are lower than if correction were imposed in
connection with a civil action; further, correction of potential
fiduciary Breaches and prohibited transactions through the Program
satisfactorily protects the assets of the participating plans.
The VFC Program imposes costs only when Plan Officials choose to
use the Program to correct a potential fiduciary Breach. Such costs to
Plan Officials generally include payment of the correction amount
required by the Program and preparation and submission of the
application to the Department. Benefits for Plan Officials who apply
for relief under the Program include elimination of risks arising from
an otherwise uncorrected fiduciary Breach, as well as savings of
resources that otherwise might have been needed to defend against a
civil action based on the Breach.
An additional and significant benefit of the VFC Program accrues to
participants and beneficiaries through the correction of fiduciary
violations and the restoration to the plan of amounts representing
losses or improperly generated profits arising from impermissible
transactions, resulting in greater security of plan assets and future
benefits.
The Department expects that the improvements to the final VFC
Program published today will increase efficiency and accessibility for
potential applicants. These improvements, described above, include:
Extending to welfare plans the summary documentation requirements
permitted for certain delinquent participant contributions to pension
plans; clarifying the availability of a correction for the improper use
of plan assets to pay expenses that should have been paid by a plan
sponsor based on a plan provision or that are properly characterized as
settlor expenses; expanding the correctable categories of
[[Page 20267]]
defective participant plan loans and simplifying the loan documentation
requirements; and permitting the use of a cash settlement as a
correction methodology when a plan decides to retain an improperly
purchased asset and an independent fiduciary approves such decision.
The Department has determined that the particular changes made to
the final Program will reduce costs by reducing the number of hours
required to make corrections and file applications. The Department has
also estimated that participation in the Program will continue to rise
in the future due to a combination of factors, including increases in
the number and types of correctable transactions and increased public
familiarity. Although the Department is unable to estimate accurately
the extent to which the particular changes made in the final Program
will contribute to this projected increase in participation in the
Program, the Department is projecting that participation in the Program
will increase from 985 in fiscal year 2005 to an annual application
level of 1,250. See discussion below under Paperwork Reduction Act. The
Department will continue to actively monitor the use of the Program in
order to better evaluate its strengths and weaknesses.
Paperwork Reduction Act
The Information Collection Request (ICR) included in the 2002
edition of the Program and PTE 2002-51 was originally approved by the
Office of Management and Budget (OMB) under control number 1210-0118.
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520) (PRA 95), the Department submitted the revision to the existing
ICR attributable to changes made to section 7.A.1(c) of the April 2005
Program to OMB for review and clearance at the time the April 2005 VFC
Program was published in the Federal Register (April 6, 2005). At that
time, the Department solicited public comment on the revision to the
ICR. No comments were received on the information collection provisions
contained in the revision to the ICR. OMB approved the revision on
September 26, 2005, under the same control number, 1210-0118. A copy of
the ICR, with applicable supporting documentation, may be obtained by
contacting the Department of Labor, Departmental Clearance Office, Ira
Mills, at (202) 693-4122. (This is not a toll-free number.) Certain of
the additional changes being made in the final VFC Program as a result
of public comment on the April 2005 Program, as described above, will
cause adjustment of the prior ICR and the estimates of burden. These
adjustments and their effect on the estimates of the overall paperwork
burden imposed by the final Program are discussed below.
The final VFC Program extensively simplifies the documentation
requirements for correction of certain participant loan and welfare
plan contribution violations. In the final VFC Program, the Department
requires voluntary correction of certain participant loans to employees
under the IRS'' Employee Plans Compliance Resolution System (EPCRS) as
a prerequisite to application for relief under the Program. Following
correction under the EPCRS, applicants must only provide the Department
with a copy of the compliance statement received from the IRS and proof
of payment of any required correction amounts. No additional
documentation is required. The Department also simplified the
documentation requirements for applicants correcting delinquent
participant contributions to insured welfare plans and welfare plan
trusts. The April 2005 Program permitted summary documentation, rather
than detailed payroll and accounting records, in support of
applications for delinquent participant contributions or loan
repayments to pension plans; the Department decided to extend these
reduced requirements for Breaches involving delinquent participant
contributions to welfare plans that are within certain amount and
duration thresholds. Finally, the Department clarified that applicants
using the Online Calculator to perform required calculations are not
required to submit detailed documentation in support of the
calculations; rather, they are simply asked to provide a copy of the
final page(s) that results from using the ``Print Viewable Results''
feature of the Online Calculator.
The ``Fees and Expenses'' category of transactions in the final VFC
Program has been restructured to clarify that applicants may correct
Breaches involving the improper use of plan assets to pay plan expenses
that should have been paid by the plan sponsor based on a plan
provision or that are properly characterized as settlor expenses.
Applicants must provide copies of the plan's accounting records showing
the date and amount of the improperly paid expenses in addition to the
supporting documentation generally required by the Program.
As a further change, the final VFC Program permits plans to utilize
a cash settlement as a correction methodology when a plan decides to
retain an improperly purchased asset, such as real estate. Plans that
pursue this type of correction must hire an independent fiduciary to
determine that the plan will realize a greater benefit from this
correction than a reversal of the original transaction. If a plan
chooses this method of correction, its application to the VFC Program
must include a report of the independent fiduciary's determination
explaining the basis for his or her conclusion that the plan will
receive a greater benefit than if the plan had reversed the purchase by
reselling the asset in accordance with Program requirements.
The overall paperwork burden of the final VFC Program and the
amended PTE 2002-51 is estimated as follows. The Department projects an
increase in the number of respondents from 985 in fiscal year 2005 to
1,250 annually. For the final VFC Program alone, Plan Officials will
have to devote 3.5 hours to each application; they will spend an
additional 1 hour on recordkeeping. Therefore, total burden hours for
Plan Officials will equal 5,625 hours (4.5 hrs. x 1,250).
Service providers will need about 2 hours (at $34.50 per hour) for
their work preparing plans' applications. The total burden cost for
service providers equates to $86,250 ($34.50 x 2 hrs. x 1,250).
Factoring in mailing costs of $8 per application ($10,000), the
complete burden costs for applicants will be $96,250 ($86,250 +
$10,000).
In addition to the Program, the Department is publishing an
amendment to the class exemption PTE 2002-51, which applies only to
qualifying applicants participating in the final VFC Program. A
detailed discussion of the economic impact under Executive Order 12866
and the paperwork burdens under the Paperwork Reduction Act for the
exemption, together with a table summarizing the relevant numbers, can
be found in the preamble to the amendment to PTE 2002-51 published
simultaneously with this Notice in today's Federal Register. In brief,
the Department calculates that 250 of the applicants to the final VFC
Program will be covered by the class exemption. The Department has
determined that service providers will prepare the requisite
documentation, which will require approximately one hour for completion
and delivery. The paperwork burden cost of the exemption therefore
equals $8,625 ($34.50 x 1 hr. x 250). Total mailing costs for the
paperwork under the exemption will be $4,427. The Department assumes,
however, that all applicants who send interested party notices will
send the Department its
[[Page 20268]]
copy of the notice by mail, using certified or overnight delivery
services and that this copy will be included in the application package
described above under costs for the VFC Program. The annual mailing
costs for notices to interested persons and the Department is therefore
estimated at $4,427. In total, the paperwork burden costs entailed by
PTE 2002-51, as amended, is $13,052 ($8,625 + $4,427).
In summary, the categories in the table below encompass the numbers
for both the final VFC Program and the amended class exemption:
Type of Review: Revision of currently approved collection of
information.
Agency: Department of Labor, Employee Benefits Security
Administration.
Title: Voluntary Fiduciary Correction Program.
OMB Number: 1210-0118.
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
Respondents: 1,250.
Frequency of Response: On occasion.
Responses: 11,790.
Estimated Total Burden Hours: 5,625.
Total Annual Cost (Operating and Maintenance): $109,302.
Persons are not required to respond to the revised information
collection unless it displays a currently valid OMB control number.
Regulatory Flexibility Act
This document describes 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 and the Department is not required to either certify
that the rule will not have a significant economic impact on a
substantial number of small entities, or conduct a regulatory
flexibility analysis. However, EBSA considered the potential costs and
benefits of this action for small plans and the Plan Officials in
developing the final Program, and believes that its greater simplicity
and accessibility will make the Program more useful to small employers
who wish to avail themselves of the relief offered.
Congressional Review Act
The VFC Program is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to the Congress and
the Comptroller 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
United States-based enterprises to compete with foreign-based
enterprises in domestic or export markets.
Unfunded Mandates Reform Act
Pursuant to provisions of the Unfunded Mandates Reform Act of 1995
(Pub. L. 104-4), this regulatory action does not include any Federal
mandate that may result in annual expenditures by State, local, or
tribal governments, or the private sector, of $100 million or more.
F. Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. This Program would not have federalism
implications because it has no substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Section 514 of ERISA provides, with certain
exceptions specifically enumerated that are not pertinent here, that
the provisions of Titles I and IV of ERISA supersede any and all laws
of the States as they relate to any employee benefit plan covered under
ERISA. The requirements implemented in this Program do not alter the
fundamental provisions of the statute with respect to employee benefit
plans, and as such would have no implications for the States or the
relationship or distribution of power between the national government
and the States.
Authority: Secretary of Labor's Order 1-2003, 68 FR 5374
(February 3, 2003). ERISA Sec. 502(a)(2) and (a)(5) also issued
under 29 U.S.C. 1132(a)(2) and (a)(5), ERISA Sec. 506(b) also issued
under 29 U.S.C. 1136(b).
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 Minimis Exception
Section 6. Application Procedures
Section 7. Description of Eligible Transactions and Corrections
Under the VFC Program
7.1 Delinquent Remittance of Participant Funds
(a) Delinquent Participant Contributions and Participant Loan
Repayments to Pension Plans
(b) Delinquent Participant Contributions to Insured Welfare
Plans
(c) Delinquent Participant Contributions to Welfare Plan Trusts
7.2 Loans
(a) Loan at Fair Market Interest Rate to a Party in Interest
With Respect to the Plan
(b) Loan at Below-Market Interest Rate to a Party in Interest
With Respect to the Plan
(c) Loan at Below-Market Interest Rate to a Person Who is Not a
Party in Interest With Respect to the Plan
(d) Loan at Below-Market Interest Rate Solely Due to a Delay in
Perfecting the Plan's Security Interest
7.3 Participant Loans
(a) Loans Failing to Comply With Plan Provisions for Amount,
Duration, or Level Amortization
(b) Default Loans
7.4 Purchases, Sales and Exchanges
(a) Purchase of an Asset (Including Real Property) by a Plan
From a Party in Interest
(b) Sale of an Asset (Including Real Property) by a Plan to a
Party in Interest
(c) Sale and Leaseback of Real Property to Employer
(d) 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 More Than Fair Market Value
(e) 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 Less Than Fair Market Value
(f) Holding of an Illiquid Asset Previously Purchased by a Plan
7.5 Benefits
(a) Payment of Benefits Without Properly Valuing Plan Assets on
Which Payment is Based
7.6 Plan Expenses
(a) Duplicative, Excessive, or Unnecessary Compensation Paid by
a Plan
(b) Expenses Improperly Paid by a Plan
(c) Payment of Dual Compensation to a Plan Fiduciary
Appendix A. Sample VFC Program No Action Letter
Appendix B. VFC Program Checklist (Required)
Appendix C. List of EBSA Regional Offices
Appendix D. Lost Earnings Example
[[Page 20269]]
Appendix E. Model Application Form (Optional)
Section 1. Purpose and Overview of the VFC Program
The purpose of the Voluntary Fiduciary Correction Program (VFC
Program or Program) is to protect the financial security of workers by
encouraging identification and correction of transactions that violate
Part 4 of Title I of the Employee Retirement Income Security Act of
1974, as amended (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, the
Employee Benefits Security Administration (EBSA) 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. EBSA generally will issue to the applicant a no
action letter \8\ 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, EBSA 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 civil penalties under either section 502(l) or 502(i) of
ERISA on the correction amount paid to the plan or its participants.
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\8\ See Appendix A.
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(b) Verification. EBSA 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. If a transaction
gave rise to violations not specifically described in the Program, 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 EBSA, 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 EBSA, EBSA 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. Participation in the VFC
Program will not preclude:
(i) EBSA or any other governmental agency from conducting a
criminal investigation of the transaction identified in the
application;
(ii) EBSA's assistance to such other agency; or
(iii) EBSA making the appropriate referrals of criminal violations
as required by section 506(b) of ERISA.\9\
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\9\ 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 EBSA 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
Internal Revenue Service (IRS) as required by section 3003(c) of ERISA;
\10\ or
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\10\ 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 EBSA enforcement policy with respect to applications under
the Program 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 Internal Revenue Code
(Code).\11\
[[Page 20270]]
Correction may not be achieved under the Program by engaging in a
prohibited transaction that is not subject to a prohibited transaction
administrative exemption.
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\11\ See section 4975(f)(5) of the Code; section 141.4975-13 of
the temporary Treasury Regulations and section 53.4941(e)-1(c) of
the Treasury Regulations. The IRS has indicated that the federal tax
treatment of a breach and correction under the VFC Program
(including the Federal income and employment tax consequences to
participants, beneficiaries, and plan sponsors) are determined under
the Code and that, based on its review of the Program, except in
those instances where the fiduciary breach or its correction involve
a tax abuse, a correction under the VFC Program for a breach that
constitutes a prohibited transaction under section 4975 of the Code
generally will constitute correction for purposes of section 4975
and a correction under the VFC Program for a breach that also
constitutes an operational plan qualification failure generally will
constitute correction for purposes of the IRS' Employee Plans
Compliance Resolution System (EPCRS).
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(e) EBSA's authority to investigate. EBSA 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 omissions, other abuses of the VFC Program, or
significant harm to the plan or its participants that is not cured by
the correction provided under the VFC Program. EBSA 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. EBSA 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, EBSA 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. 1002, unless separately
defined herein.
(b) The following definitions apply for purposes of the VFC
Program:
(1) Breach. The term ``Breach'' means any transaction that 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. For purposes of section 4(a), a plan or
potential applicant shall be considered to be ``Under Investigation''
if:
(i) EBSA is conducting an investigation of the plan;
(ii) EBSA is conducting an investigation of the potential applicant
or plan sponsor in connection with an act or transaction directly
related to the plan;
(iii) Any governmental agency is conducting a criminal
investigation of the plan, or of the potential applicant or plan
sponsor in connection with an act or transaction directly related to
the plan;
(iv) The Tax Exempt and Government Entities Division of the IRS is
conducting an Employee Plans examination of the plan; or
(v) The Pension Benefit Guaranty Corporation (PBGC), any state
attorney general, or any state insurance commissioner is conducting an
investigation or examination of the plan, or of the applicant or plan
sponsor in connection with an act or transaction directly related to
the plan, unless the applicant notifies EBSA, in writing, of such an
investigation or examination at the time of the application;
and the plan, a Plan Official, or any authorized plan representative
has received a written or oral notice of an investigation or
examination described in (i), (ii), (iii), (iv), or (v).
An applicant notifying EBSA of an investigation or examination
under section 3(b)(3)(v) must submit the name of the examining agency
and a contact person at such agency. Upon receipt of an application
including such information, EBSA will promptly notify the investigating
agency in writing of the VFC Program application. EBSA's notice will
afford the examining agency an opportunity to provide EBSA with
information relevant to the investigation or examination. In response
to the information received from the investigating agency, EBSA, in its
sole discretion, may decline to issue a no action letter to the
applicant.
For purposes of section 4(a), a plan shall not be considered to be
``Under Investigation'' merely because EBSA staff has contacted the
plan, the applicant, or the plan sponsor in connection with a
participant complaint, unless the participant complaint concerns the
transaction described in the application and the plan has not received
the correction amount due under the Program as of the date EBSA staff
contacted the plan, the applicant, or the plan sponsor. A plan also is
not considered to be ``Under Investigation'' if the accountant of the
plan is undergoing a work paper review by EBSA's Office of the Chief
Accountant under the authority of ERISA section 504(a).
Example 1. On March 1 the plan sponsor of a multiple employer
welfare arrangement (MEWA) received written notification from an
agent of the state insurance commissioner's office that the MEWA has
been scheduled for examination. The applicant does not notify EBSA
of the examination. As of March 1, the plan is ineligible for
participation in the VFC Program because the plan sponsor has
received a notice from the state insurance commissioner's office
concerning its intent to examine the plan, and the applicant did not
provide EBSA written notice of the examination with the application.
Example 2. Assume the same facts as in Example 1, except that
the applicant chooses to notify EBSA in writing of the examination.
The plan's eligibility to apply under the VFC Program would not be
affected because the applicant provides written notice of the
examination to EBSA with the application. EBSA will promptly notify
the state insurance commissioner of the pending VFC Program
application so that the state insurance commissioner's office has an
opportunity to provide information about its examination to EBSA.
EBSA will include the information received from the state insurance
commissioner's office in its review of the VFC Program application.
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 EBSA.
(c) EBSA has not conducted an investigation which resulted in
written notice to a plan fiduciary that the transaction, for which the
potential applicant could otherwise have sought relief under the
Program, has been referred to the IRS. This condition applies only to
those transactions specifically identified in EBSA's written notice of
referral to the IRS.
Section 5. General Rules for Acceptable Corrections
(a) Fair Market Value Determinations. Many corrections require that
the current or fair market value (FMV) 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 FMV of the asset is the
average value of the asset on such market on the applicable date,
unless the plan document specifies
[[Page 20271]]
another objectively determined value (e.g., the closing price).
(2) If there is no generally recognized market for the asset, the
FMV 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. For purposes of the VFC
Program, the correction amount is the amount that must be paid to the
plan as a result of the Breach in order to make the plan whole. In most
instances, the correction amount will be a combination of the Principal
Amount involved in the transaction (see paragraph (b)(2) of this
section), the Lost Earnings amount, which is earnings that would have
been earned on the Principal Amount for the period of the transaction
(see paragraph (b)(5) of this section), and any interest on Lost
Earnings. However, in circumstances when the Restoration of Profits
amount (see paragraph (b)(6) of this section) exceeds the Lost Earnings
amount and any interest on Lost Earnings, the correction amount will be
a combination of the Principal Amount and the Restoration of Profits
amount.
(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. The Principal Amount,
when applicable, must be determined for each transaction by reference
to section 7 of the VFC Program. Generally, the Principal Amount is the
base amount on which Lost Earnings and, if applicable, Restoration of
Profits is calculated. The Principal Amount shall include any
transaction 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. (i) General. ``Lost Earnings'' is intended to
approximate the amount that would have been earned by the plan on the
Principal Amount, but for the Breach. For purposes of this Program,
Lost Earnings shall be calculated in accordance with this paragraph.
(ii) Initial Calculation. Lost earnings shall be calculated by: (A)
Determining the applicable corporate underpayment rate(s) established
under section 6621(a)(2) of the Code \12\ for each quarter (or portion
thereof) for the period beginning with the Loss Date and ending with
the Recovery Date; (B) determining, by reference to IRS Revenue
Procedure 95-17,\13\ the applicable factor(s) for such quarterly
underpayment rate(s) for each quarter (or portion thereof) of the
period beginning with the Loss Date and ending with the Recovery Date;
and (C) multiplying the Principal Amount by the first applicable factor
to determine the amount of earnings for the first quarter (or portion
thereof). If the Loss Date and Recovery Date are within the same
quarter, the initial calculation is complete. If the Recovery Date is
not in the same quarter as the Loss Date, the applicable factor for
each subsequent quarter (or portion thereof) must be applied to the sum
of the Principal Amount and all earnings as of the end of the
immediately preceding quarter (or portion thereof), until Lost Earnings
have been calculated for the entire period, ending with the Recovery
Date.
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\12\ These underpayment rates are displayed on EBSA's Web site
and will be updated when necessary.
\13\ Rev. Proc. 95-17, 1995-1 C.B. 556 (Feb. 8, 1995). These
factors, which are displayed on EBSA's Web site in a tabular format,
incorporate daily compounding of an interest rate over a set period
of time.
---------------------------------------------------------------------------
(iii) Payment of Lost Earnings after Recovery Date. If Lost
Earnings are not paid to the plan on the Recovery Date along with the
Principal Amount, payment of Lost Earnings shall include interest on
the amount of Lost Earnings determined in accordance with paragraph
(b)(5)(ii) above. Such interest shall be calculated in the same manner
as Lost Earnings described in paragraph (b)(5)(ii) above, for the
period beginning on the Recovery Date and ending on the date the Lost
Earnings are paid to the plan.
(iv) Special Rule for Transactions Causing Large Losses. If the
amount of Lost Earnings (determined in accordance with paragraph
(b)(5)(ii) above) and any interest added to such Lost Earnings
(determined in accordance with paragraph (b)(5)(iii) above), exceed
$100,000, the amount of Lost Earnings and interest, if any, to be paid
to the plan shall be determined in accordance with paragraphs
(b)(5)(ii) and (iii) above, substituting the applicable underpayment
rates under section 6621(c)(1) of the Code \14\ in lieu of the rates
under section 6621(a)(2).
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\14\ These underpayment rates are displayed on EBSA's Web site
and will be updated when necessary.
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(v) Method of Calculation. For purposes of calculating Lost
Earnings and interest, if any, a Plan Official may either (A) use the
Online Calculator described in paragraph (b)(7) below, or (B) perform a
manual calculation in accordance with subparagraphs (i) through (iv) of
this paragraph (b)(5). A Plan Official using the Online Calculator or
performing a manual calculation shall include as part of the VFC
Program application sufficient information to verify the correctness of
the amounts to be paid to the plan.
(6) Restoration of Profits. (i) General. If the Principal Amount
was used for a specific purpose such that a profit on the use of the
Principal Amount is determinable, the Plan Official must calculate the
Restoration of Profits amount and compare it to the Lost Earnings
amount to determine the correction amount (see paragraph (b)(1) of this
section). ``Restoration of Profits'' is a combination of two amounts:
(A) The amount of profit made on the use of the Principal Amount by the
fiduciary or party in interest who engaged in the Breach, or by a
person who knowingly participated in the Breach, and (B) if the profit
is returned to the plan on a date later than the date on which the
profit was realized (i.e., received or determined), the amount of
interest earned on such profit from the date the profit was realized to
the date on which the profit is paid to the plan. The amount of such
interest shall be determined in accordance with paragraph (b)(6)(ii)
below.
If the Restoration of Profits amount exceeds Lost Earnings and
interest, if any, the Restoration of Profits amount must be paid to the
plan instead of Lost Earnings.
(ii) Calculation of Interest. Interest shall be calculated by: (A)
Determining the applicable corporate underpayment
[[Page 20272]]
rate(s) established under section 6621(a)(2) of the Code for each
quarter (or portion thereof) for the period beginning with the date the
profit was realized (i.e. received or determined) and ending with the
date on which the profit is paid to the plan; (B) determining, by
reference to IRS Revenue Procedure 95-17, the applicable factor(s) for
such quarterly underpayment rate(s) for each quarter (or portion
thereof) of the period beginning with the date the profit was realized
and ending with the date on which the profit is paid to the plan; and
(C) multiplying the first applicable factor by the profit on the
Principal Amount, referred to in paragraph (b)(6)(i)(A) above, to
determine the amount of interest for the first quarter (or portion
thereof). If the date the profit was realized and the date the profit
is paid to the plan are within the same quarter, the initial
calculation is complete. If the date the profit was realized is not in
the same quarter as the date the profit was paid to the plan, the
applicable factor for each subsequent quarter (or portion thereof) must
be applied to the sum of the profit on the Principal Amount, referred
to in paragraph (b)(6)(i)(A) above, and all interest as of the end of
the immediately preceding quarter (or portion thereof), until interest
has been calculated for the entire period, ending with the date the
profit is paid to the plan.
(iii) Special Rule for Transactions Resulting in Large
Restorations. If the amount of Restoration of Profits (determined in
accordance with paragraph (b)(6)(i) above) exceeds $100,000, the amount
of any interest on the Restoration of Profits to be paid to the plan
shall be determined in accordance with paragraph (b)(6)(ii), above,
substituting the applicable underpayment rates under section 6621(c)(1)
of the Code in lieu of the rates under section 6621(a)(2).
(iv) Method of Calculation. For purposes of calculating the
interest amount for Restoration of Profits, pursuant to paragraphs
(b)(6)(ii) and (iii) above, a Plan Official may either (A) use the
Online Calculator described in paragraph (b)(7) below, or (B) perform a
manual calculation in accordance with subparagraphs (ii) and (iii) of
this paragraph (b)(6). A Plan Official using the Online Calculator or
performing a manual calculation shall include as part of the VFC
Program application sufficient information to verify the correctness of
the amounts to be paid to the plan.
(7) Online Calculator. ``Online Calculator'' is an Internet based
compliance assistance tool provided on EBSA's Web site that permits
applicants to calculate the amount of Lost Earnings, any interest on
Lost Earnings, and the interest amount for Restoration of Profits, if
applicable, for certain transactions. The Online Calculator will be
updated as necessary.
(i) Lost Earnings and Interest. To calculate Lost Earnings,
applicants must input the (A) Principal Amount, (B) Loss Date, (C)
Recovery Date, and, if the final payment will occur after the Recovery
Date, (D) the date of such final payment. The Online Calculator selects
the applicable factors under Revenue Procedure 95-17 after referencing
the underpayment rates over the relevant time period. The Online
Calculator then automatically applies the factors to provide applicants
with the amount of Lost Earnings and interest, if any, that must be
paid to the plan.
(ii) Interest Amount for Restoration of Profits. To calculate the
interest amount on the profit, applicants must input (A) the amount of
profit, (B) the date the amount of profit was realized (i.e. received
or determined), and (C) the date of payment of the Restoration of
Profits amount. The Online Calculator selects the applicable factors
under Revenue Procedure 95-17 after referencing the underpayment rates
over the relevant time period. The Online Calculator then automatically
applies the factors to provide applicants with the interest amount on
the profit that must be paid to the plan.
(8) The principles of paragraph (b) of this Section are illustrated
by example in Appendix D.
(c) Costs of Correction. (1) The fiduciary, plan sponsor or other
Plan Official, shall pay the costs of correction, which may not be paid
from plan assets.
(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) of this Section is
illustrated in the following example and in paragraph (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 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 Minimis 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 minimis
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 timely
forward participant contributions to 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-
[[Page 20273]]
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, which 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. Any fees paid to such representative for
services relating to the preparation and submission of the application
may not be paid from plan assets.
(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 EBSA.
(d) Detailed narrative. The applicant must provide to EBSA a
detailed narrative describing the Breach and the corrective action. The
narrative must include:
(1) A list of all persons materially involved in the Breach and its
correction (e.g., fiduciaries, service providers, borrowers);
(2) The employer identification number (EIN), plan number, and
address of the plan sponsor and administrator;
(3) The date the plan's most recent Form 5500 was filed;
(4) An explanation of the Breach, including the date it occurred;
(5) An explanation of how the Breach was corrected, by whom and
when; and
(6)(i) If the applicant performs a manual calculation in accordance
with paragraphs (b)(5)(i) through (iv) of section 5, specific
calculations demonstrating how Principal Amount and Lost Earnings or,
if applicable, Restoration of Profits were computed;
(ii) If the applicant uses the Online Calculator in accordance with
(b)(7) of section 5, the data elements required to be input into the
Online Calculator under paragraphs (b)(7)(i) and/or (ii) of section 5,
as applicable (to satisfy this requirement, applicants may submit a
copy of the page(s) that results from the ``View Printable Results''
function used after inputting data elements and completing use of the
Online Calculator); and
(iii) 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:
(1) Copies of the relevant portions of the plan document and any
other pertinent documents (such as the adoption agreement, trust
agreement, or insurance contract); \15\
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\15\ Applicants must supply complete copies of the plan
documents and other pertinent documents if requested by EBSA during
its review of the application.
---------------------------------------------------------------------------
(2) Documentation that supports the narrative description of the
transaction and its correction;
(3) Documentation establishing the Lost Earnings amount;
(4) Documentation establishing the amount of Restoration of
Profits, if applicable;
(5) All documents described in section 7 with respect to the
transaction involved; and
(6) Proof of payment of Principal Amount and Lost Earnings or
Restoration of Profits.
Applicants using the Online Calculator may satisfy the requirements
of paragraph (e)(3) above, with respect to Lost Earnings, and paragraph
(e)(4) above, as to the amount of interest, if any, payable with
respect to the profit amount, by complying with the requirements of
paragraph (d)(6)(ii) of this section. Except for proof of payment, as
described in paragraph (e)(6) above, applicants correcting participant
loan transactions in section 7.3 are not required to submit the other
documentation described above.
(f) Examples of supporting documentation. (1) 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.
(2) 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 include the
following statement: ``Under penalties of perjury I certify that I am
not Under Investigation (as defined in section 3(b)(3)) and that I have
reviewed this application, including all supporting documentation, and
to the best of my knowledge and belief the contents are true, correct,
and complete.'' The statement must 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, each Plan Official applying under the VFC Program must
sign and date the Penalty of Perjury statement. The statement must
accompany the application and any subsequent additions to the
application. Use of the Penalty of Perjury Statement included with the
Model Application Form in Appendix E will satisfy the requirements of
paragraph (g) of this section.
(h) Checklist. The checklist in Appendix B must be completed,
signed, and submitted with the application. Use of the checklist
included with the Model Application Form in Appendix E also will
satisfy the requirements of paragraph (h) of this section.
(i) Where to apply. The application shall be mailed to the
appropriate EBSA Regional Office listed in Appendix C.
(j) Submission of Additional Documentation. If EBSA determines that
required information is missing from the application or that additional
documentation is needed to complete EBSA's review, EBSA will request
such documentation in writing from the applicant or authorized
representative. If EBSA does not receive the requested documentation
within a time period specified in writing by the EBSA reviewer, EBSA
may suspend its review of the application and consider appropriate
action. EBSA will notify the applicant or authorized representative in
writing regarding such suspension.
(k) Recordkeeping. The applicant must maintain copies of the
application and any subsequent correspondence with EBSA for the period
required by section 107 of ERISA.
Section 7. Description of Eligible Transactions and Corrections Under
the VFC Program
EBSA 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
[[Page 20274]]
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. EBSA will only accept applications concerning correction of
Breaches described in this section.
7.1 Delinquent Remittance of Participant Funds
(a) Delinquent Participant Contributions and Participant Loan
Repayments to Pension Plans
(1) Description of Transaction. An employer receives directly from
participants, or withholds from employees' paychecks, certain amounts
for either contribution to a pension plan or for repayment of
participants' plan loans. Instead of forwarding participant
contributions for investment in accordance with the provisions of the
plan and by reference to the principles of the Department's regulation
at 29 CFR 2510.3-102, the employer retains such contributions for a
longer period of time. Similarly, in the case of participant loan
repayments, instead of applying such repayments to outstanding loan
balances within a reasonable period of time determined by reference to
the guiding principles of 29 CFR 2510.3-102 and in accordance with the
provisions of the plan, the employer retains such repayments for a
longer period of time.
(2) Correction of Transaction. (i) Unpaid Contributions or
Participant Loan Repayments. Pay to the plan the Principal Amount plus
the greater of (A) Lost Earnings on the Principal Amount or (B)
Restoration of Profits resulting from the employer's use of the
Principal Amount, as described in section 5(b). The Loss Date for such
contributions is the date on which each contribution reasonably could
have been segregated from the employer's general assets. In no event
shall the Loss Date for such contributions be later than the applicable
maximum time period described in 29 CFR 2510.3-102. The Loss Date for
such repayments is the date on which each repayment reasonably could
have been segregated from the employer's general assets consistent with
the guiding principles of 29 CFR 2510.3-102.\16\ Any penalties, late
fees or other charges shall be paid by the employer and not from
participant loan repayments.
---------------------------------------------------------------------------
\16\ Although the maximum time periods described in 29 CFR
2510.3-102 are not directly applicable to participant loan
repayments, retaining repayments beyond such periods raises a
question as to whether the employer forwarded repayments to the plan
as soon as they could reasonably be segregated from the employer's
general assets. See Advisory Opinion 2002-02A (May 17, 2002).
---------------------------------------------------------------------------
(ii) Late Contributions or Participant Loan Repayments. If
participant contributions or loan repayments were remitted to the plan
outside of the time periods described above, the only correction
required is to pay to the plan the greater of (A) Lost Earnings or (B)
Restoration of Profits resulting from the employer's use of the
Principal Amount as described in section 5(b). Any penalties, late fees
or other charges shall be paid by the employer and not from participant
loan repayments.
(iii) For this transaction, the Principal Amount is the amount of
delinquent participant contributions or loan repayments retained by the
employer.
(iv) Example. The principles of paragraph (a)(2) of this section
are illustrated by example in Appendix D.
(3) Documentation. In addition to the documentation required by
section 6, submit the following documents:
(i) A statement from a Plan Official identifying the earliest date
on which the participant contributions and/or repayments reasonably
could have been segregated from the employer's general assets, along
with the supporting documentation on which the Plan Official relied in
reaching this conclusion;
(ii) If restored participant contributions and/or repayments
(exclusive of Lost Earnings) (A) total $50,000 or less; or (B) exceed
$50,000 and were remitted to the plan within 180 calendar days from the
date such amounts were received by the employer, or the date such
amounts otherwise would have been payable to the participants in cash
(regarding amounts withheld by an employer from employees' paychecks),
submit:
(1) A narrative describing the applicant's contribution and/or
repayment remittance practices before and after the period of unpaid or
late contributions and/or repayments; and
(2) Summary documents demonstrating the amount of unpaid or late
contributions and/or repayments; and
(iii) If restored participant contributions and/or repayments
(exclusive of Lost Earnings) exceed $50,000 and were remitted more than
180 calendar days after the date such amounts were received by the
employer, or the date such amounts otherwise would have been payable to
the participants in cash (regarding amounts withheld by an employer
from employees' paychecks), submit:
(A) A narrative describing the applicant's contribution and/or
repayment remittance practices before and after the period of unpaid or
late contributions and/or repayments;
(B) For participant contributions and/or repayments received from
participants, a copy of the accounting records which identify the date
and amount of each contribution received; and
(C) For participant contributions and/or repayments withheld from
employees' paychecks, a copy of the payroll documents showing the date
and amount of each withholding.
(b) Delinquent Participant Contributions to Insured Welfare Plans
(1) Description of Transaction. Benefits are provided exclusively
through insurance contracts issued by an insurance company or similar
organization qualified to do business in any state or through a health
maintenance organization (HMO) defined in section 1310(c) of the Public
Health Service Act, 42 U.S.C. 300e-9(c). An employer receives directly
from participants or withholds from employees' paychecks certain
amounts that the employer forwards to an insurance provider for the
purpose of providing group health or other welfare benefits. The
employer fails to forward such amounts in accordance with the terms of
the plan (including the provisions of any insurance contract) or the
requirements of the Department's regulation at 29 CFR 2510.3-102. There
are no instances in which claims have been denied under the plan, nor
has there been any lapse in coverage, due to the failure to transmit
participant contributions on a timely basis.
(2) Correction of Transaction. (i) Pay to the insurance provider or
HMO the Principal Amount, as well as any penalties, late fees or other
charges necessary to prevent a lapse in coverage due to such failure.
Any penalties, late fees or other such charges shall be paid by the
employer and not from participant contributions.
(ii) For this transaction, the Principal Amount is the amount of
delinquent participant contributions retained by the employer.
(3) Documentation. In addition to the documentation required by
section 6, submit the following documents:
(i) A statement from a Plan Official: (A) 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 in reaching
this conclusion; (B) attesting that there are no instances in which
claims have been denied under the plan for nonpayment,
[[Page 20275]]
nor has there been any lapse in coverage; and (C) attesting that any
penalties, late fees or other such charges have been paid by the
employer and not from participant contributions;
(ii) Copies of the insurance contract or contracts for the group
health or other welfare benefits for the plan; and
(iii) If restored participant contributions (A) total $50,000 or
less, or (B) exceed $50,000 and were remitted to the plan within 180
calendar days from the date such amounts were received by the employer,
or the date such amounts otherwise would have been payable to the
participants in cash (regarding amounts withheld by an employer from
employees' paychecks), submit:
(1) A narrative describing the applicant's contribution practices
before and after the period of unpaid or late contributions, and
(2) Summary documents demonstrating the amount of unpaid or late
contributions; and
(iv) If restored participant contributions exceed $50,000 and were
remitted more than 180 calendar days after the date such amounts were
received by the employer, or the date such amounts otherwise would have
been payable to the participants in cash (regarding amounts withheld by
an employer from employees' paychecks), submit:
(A) A narrative describing the applicant's contribution remittance
practices before and after the period of unpaid or late contributions,
(B) For participant contributions received directly from
participants, a copy of the accounting records which identify the date
and amount of each contribution received, and
(C) For participant contributions withheld from employees'
paychecks, a copy of the payroll documents showing the date and amount
of each withholding.
(c) Delinquent Participant Contributions to Welfare Plan Trusts
(1) Description of Transaction. An employer receives directly from
participants or withholds from employees' paychecks certain amounts
that the employer forwards to a trust maintained to provide, through
insurance or otherwise, group health or other welfare benefits. The
employer fails to forward such amounts in accordance with the terms of
the plan or the requirements of the Department's regulation at 29 CFR
2510.3-102. There are no instances in which claims have been denied
under the plan, nor has there been any lapse in coverage, due to the
failure to transmit participant contributions on a timely basis.
(2) Correction of Transaction. (i) Unpaid Contributions. Pay to the
trust (A) the Principal Amount, and, where applicable, any penalties,
late fees or other charges necessary to prevent a lapse in coverage due
to the failure to make timely payments, and (B) the greater of (1) Lost
Earnings on the Principal Amount or (2) Restoration of Profits
resulting from the employer's use of the Principal Amount as described
in section 5(b). The Loss Date for such contributions is the date on
which each contribution would become plan assets under 29 CFR 2510.3-
102. Any penalties, late fees or other charges shall be paid by the
employer and not from participant contributions.
(ii) Late Contributions. If participant contributions were remitted
to the trust outside of the time period required by the regulation, the
only correction required is to pay to the trust the greater of (A) Lost
Earnings or (B) Restoration of Profits resulting from the employer's
use of the Principal Amount as described in section 5(b). Any
penalties, late fees or other such charges shall be paid by the
employer and not from participant contributions.
(iii) For this transaction, the Principal Amount is the amount of
delinquent participant contributions retained by the employer.
(3) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(i) A statement from a Plan Official: (A) 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 in reaching
this conclusion, and (B) attesting that there are no instances in which
claims have been denied under the plan for nonpayment, nor has there
been any lapse in coverage;
(ii) If restored participant contributions (exclusive of Lost
Earnings) (A) total $50,000 or less, or (B) exceed $50,000 and were
remitted to the plan within 180 calendar days from the date such
amounts were received by the employer, or the date such amounts
otherwise would have been payable to the participants in cash
(regarding amounts withheld by an employer from employees' paychecks),
submit:
(1) A narrative describing the applicant's contribution practices
before and after the period of unpaid or late contributions, and
(2) Summary documents demonstrating the amount of unpaid or late
contributions; and
(iii) If restored participant contributions (exclusive of Lost
Earnings) exceed $50,000 and were remitted more than 180 calendar days
after the date such amounts were received by the employer, or the date
such amounts otherwise would have been payable to the participants in
cash (regarding amounts withheld by an employer from employees'
paychecks), submit:
(A) A narrative describing the applicant's contribution remittance
practices before and after the period of unpaid or late contributions,
(B) For participant contributions received directly from
participants, a copy of the accounting records which identify the date
and amount of each contribution received, and
(C) For participant contributions withheld from employees'
paychecks, a copy of the payroll documents showing the date and amount
of each withholding.
7.2 Loans
(a) Loan at Fair Market Interest Rate to a Party in Interest With
Respect to the Plan
(1) Description of Transaction. A plan made a loan to a party in
interest at an interest rate no less than that for loans with similar
terms (for example, the amount of the loan, amount and type of
security, repayment schedule, and duration of loan) to a borrower of
similar creditworthiness. The loan was not exempt from the prohibited
transaction provisions of Title I of ERISA.
(2) Correction of Transaction. Pay off the loan in full, including
any prepayment penalties. An independent commercial lender must also
confirm in writing that the loan was made at a fair market interest
rate for a loan with similar terms to a borrower of similar
creditworthiness.
(3) Documentation. In addition to the documentation required by
section 6, submit a narrative describing the process used to determine
the fair market interest rate at the time the loan was made, validated
in writing by an independent commercial lender.
(b) Loan at Below-Market Interest Rate to a Party in Interest With
Respect to the Plan
(1) Description of Transaction. A plan made a loan to a party in
interest with respect to the plan at an interest rate which, at the
time the loan was made, was less than the fair market interest
[[Page 20276]]
rate for loans with similar terms (for example, the amount of loan,
amount and type of security, repayment schedule, and duration of the
loan) to a borrower of similar creditworthiness. The loan was not
exempt from the prohibited transaction provisions of Title I of ERISA.
(2) Correction of Transaction. (i) Pay off the loan in full,
including any prepayment penalties. Pay to the plan the Principal
Amount, plus the greater of (A) the Lost Earnings as described in
section 5(b), or (B) the Restoration of Profits, if any, as described
in section 5(b).
(ii) For purposes of this transaction, each loan payment has a
Principal Amount equal to the excess of the loan payment that would
have been received if the loan had been made at the fair market
interest rate (from the beginning of the loan until the Recovery Date)
over the loan payment actually received under the loan terms during
such period. Under the VFC Program, the fair market interest rate must
be determined by an independent commercial lender.
Example: The plan made to a party in interest a $150,000
mortgage loan, secured by a first Deed of Trust, at a fixed interest
rate of 4% per annum. The loan was to be fully amortized over 30
years. The fair market interest rate for comparable loans, at the
time this loan was made, was 7% per annum. The party in interest or
Plan Official must repay the loan in full plus any applicable
prepayment penalties. The party in interest or Plan Official also
must pay the difference between what the plan would have received
through the Recovery Date had the loan been made at 7% and what, in
fact, the plan did receive from the commencement of the loan to the
Recovery Date, plus Lost Earnings on that amount as described in
section 5(b).
(3) Documentation. In addition to the documentation required by
section 6, submit the following documents:
(i) A narrative describing the process used to determine the fair
market interest rate at the time the loan was made;
(ii) A copy of the independent commercial lender's fair market
interest rate determination(s); and
(iii) A copy of the independent fiduciary's dated, written approval
of the fair market interest rate determination(s).
(c) Loan at Below-Market Interest Rate to a Person Who Is Not a Party
in Interest With Respect to the Plan
(1) Description of Transaction. A plan made a loan to a person who
is not a party in interest with respect to the plan at an interest rate
which, at the time the loan was made, was less than the fair market
interest rate for loans with similar terms (for example, the amount of
loan, amount and type of security, repayment schedule, and duration of
the loan) to a borrower of similar creditworthiness.
(2) Correction of Transaction. (i) Pay to the plan the Principal
Amount, plus Lost Earnings through the Recovery Date, as described in
section 5(b).
(ii) For purposes of this transaction, each loan payment has a
Principal Amount equal to the excess of the loan payment that would
have been received if the loan had been made at the fair market
interest rate (from the beginning of the loan until the Recovery Date)
over the loan payment actually received under the loan terms during
such period. Under the VFC Program, the fair market interest rate must
be determined by an independent commercial lender.
(iii) From the inception of the loan to the Recovery Date, the
amount to be paid to the plan is the Lost Earnings on the series of
Principal Amounts, calculated in accordance with section 5(b).
(iv) From the Recovery Date to the maturity date of the loan, the
amount to be paid to the plan is the present value of the remaining
Principal Amounts, as determined by an independent commercial lender.
Instead of calculating the present value, it is acceptable for
administrative convenience to pay the sum of the remaining Principal
Amounts.
(v) The principles of paragraph (c)(2) of this section are
illustrated in the following example:
Example: The plan made a $150,000 mortgage loan, secured by a
first Deed of Trust, at a fixed interest rate of 4% per annum. The
loan was to be fully amortized over 30 years. The fair market
interest rate for comparable loans, at the time this loan was made,
was 7% per annum. The borrower or the Plan Official must pay the
excess of what the plan would have received through the Recovery
Date had the loan been made at 7% over what, in fact, the plan did
receive from the commencement of the loan to the Recovery Date, plus
Lost Earnings on that amount as described in section 5(b). The Plan
Official must also pay on the Recovery Date the difference in the
value of the remaining payments on the loan between the 7% and the
4% for the duration of the time the plan is owed repayments on the
loan.
(3) Documentation. In addition to the documentation required by
section 6, submit the following documents:
(i) A narrative describing the process used to determine the fair
market interest rate at the time the loan was made; and
(ii) A copy of the independent commercial lender's fair market
interest rate determination(s).
(d) Loan at Below-Market Interest Rate Solely Due to a Delay in
Perfecting the Plan's Security Interest
(1) Description of Transaction. For purposes of the VFC Program, if
a plan made a purportedly secured loan to a person who is not a party
in interest with respect to the plan, but there was a delay in
recording or otherwise perfecting the plan's interest in the loan
collateral, the loan will be treated as an unsecured loan until the
plan's security interest is perfected.
(2) Correction of Transaction. (i) Pay to the plan the Principal
Amount, plus Lost Earnings as described in section 5(b), through the
date the loan became fully secured.
(ii) For purposes of this transaction, each loan payment has a
Principal Amount equal to the excess of the loan payment that would
have been received if the loan had been made at the fair market
interest rate for an unsecured loan (from the beginning of the loan
until the Recovery Date) over the loan payment actually received under
the loan terms during such period. Under the VFC Program, the fair
market interest rate must be determined by an independent commercial
lender.
(iii) In addition, if the delay in perfecting the loan's security
caused a permanent change in the risk characteristics of the loan, the
fair market interest rate for the remaining term of the loan must be
determined by an independent commercial lender. In that case, the
correction amount includes an additional payment to the plan. The
amount to be paid to the plan is the present value of the remaining
Principal Amounts from the date the loan is fully secured to the
maturity date of the loan. Instead of calculating the present value, it
is acceptable for administrative convenience to pay the sum of the
remaining Principal Amounts.
(iv) The principles of paragraph (d)(2) of this section are
illustrated in the following examples:
Example 1: The plan made a mortgage loan, which was supposed to
be secured by a Deed of Trust. The plan's Deed was not recorded for
six months, but, when it was recorded, the Deed was in first
position. The interest rate on the loan was the fair market interest
rate for a mortgage loan secured by a first-position Deed of Trust.
The loan is treated as an unsecured, below-market loan for the six
months prior to the recording of the Deed of Trust.
Example 2: Assume the same facts as in Example 1, except that,
as a result of the delay in recording the Deed, the plan ended up in
second position behind another lender. The risk to the plan is
higher and the interest rate on the note is no longer commensurate
with that risk. The loan is treated as a below-
[[Page 20277]]
market loan (based on the lack of security) for the six months prior
to the recording of the Deed of Trust and as a below-market loan
(based on secondary status security) from the time the Deed is
recorded until the end of the loan.
(3) Documentation. In addition to the documentation required by
section 6, submit the following documents:
(i) A narrative describing the process used to determine the fair
market interest rate for the period that the loan was unsecured and, if
applicable, for the remaining term of the loan; and
(ii) A copy of the independent commercial lender's fair market
interest rate determination(s).
7.3 Participant Loans
(a) Loans Failing to Comply With Plan Provisions for Amount, Duration
or Level Amortization
(1) Description of Transaction. A plan extended a loan to a plan
participant who is a party in interest with respect to the plan based
solely on his or her status as an employee of any employer whose
employees are covered by the plan, as defined in section 3(14)(H) of
ERISA. The loan was a prohibited transaction that failed to qualify for
ERISA's statutory exemption for plan loan programs because the loan
terms did not comply with applicable plan provisions, which
incorporated the requirements of section 72(p) of the Code concerning:
(i) The amount of the loan,
(ii) The duration of the loan, or
(iii) The level amortization of the loan repayment.
(2) Correction of Transaction. Plan Officials must make a voluntary
correction of the loan with IRS approval under the Voluntary Correction
Program of the IRS' Employee Plans Compliance Resolution System
(EPCRS).
(3) Documentation. The applicant is not required to submit any of
the supporting documentation listed in section 6(e), except that the
applicant must provide (i) proof of payment, as described in paragraph
(e)(6) of section 6, and (ii) a copy of the IRS compliance statement.
(b) Default Loans
(1) Description of Transaction. A plan extended a loan to a plan
participant who is a party in interest with respect to the plan based
solely on his or her status as an employee of any employer whose
employees are covered by the plan, as defined in section 3(14)(H) of
ERISA. At origination, the loan qualified for ERISA's statutory
exemption for plan loan programs because the loan complied with
applicable plan provisions, which incorporated the requirements of
section 72(p) of the Code. During the loan repayment period, the Plan
Official responsible for loan administration failed to properly
withhold a number of loan repayments from the participant's wages and
included the amount of such repayments in the participant's wages based
on administrative or systems processing errors. The failure to withhold
is a Breach causing the loan to become non-compliant with applicable
plan provisions, which incorporated the requirements of section 72(p)
of the Code.
(2) Correction of Transaction. Plan Officials must make a voluntary
correction of the loan with IRS approval under the Voluntary Correction
Program of the IRS' EPCRS.
(3) Documentation. The applicant is not required to submit any of
the supporting documentation listed in section 6(e), except that the
applicant must provide (i) proof of payment, as described in paragraph
(e)(6) of section 6, and (ii) a copy of the IRS compliance statement.
7.4 Purchases, Sales and Exchanges
(a) Purchase of an Asset (Including Real Property) by a Plan From a
Party in Interest
(1) Description of Transaction. A plan purchased an asset with cash
from a party in interest with respect to the plan, in a transaction to
which no prohibited transaction exemption applies.
(2) Correction of Transaction. (i) The plan may sell the asset back
to the party in interest who originally sold the asset to the plan \17\
or to a person who is not a party in interest. Whether the asset is
sold to a person who is not a party in interest with respect to the
plan or is sold back to the original seller, the plan must receive the
higher of (A) the fair market value (FMV) of the asset at the time of
resale, without a reduction for the costs of sale, plus restoration to
the plan of the party in interest's investment return from the proceeds
of the sale, to the extent they exceed the plan's net profits from
owning the property; or (B) the Principal Amount, plus the greater of
(1) Lost Earnings on the Principal Amount as described in section 5(b),
or (2) the Restoration of Profits, if any, as described in section
5(b).
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\17\ The resale of the same property to the party in interest
from whom the asset was purchased is a reversal of the original
prohibited transaction. The resale is not a new prohibited
transaction and therefore does not require an exemption.
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(ii) As an alternative to the correction described in paragraph
(a)(2)(i) above, the plan may retain the asset and receive (A) the
greater of (1) Lost Earnings or (2) the Restoration of Profits, if any,
as described in section 5(b), on the Principal Amount, but only to the
extent that such Lost Earnings or Restoration of Profits exceeds the
difference between the FMV of the asset as of the Recovery Date and the
original purchase price; and (B) the amount by which the Principal
Amount exceeded the FMV of the asset (at the time of the original
purchase), plus the greater of (1) Lost Earnings or (2) Restoration of
Profits, if any, as described in section 5(b), on such excess; provided
an independent fiduciary determines that the plan will realize a
greater benefit from this correction than it would from the resale of
the asset described in paragraph (a)(2)(i) above.
(iii) For this transaction, the Principal Amount is the plan's
original purchase price.
(iv) The principles of paragraph (a)(2) of this section are
illustrated in the following examples:
Example 1: A plan purchased a parcel of real property from the
plan sponsor. The plan does not lease the property to any person.
Instead, the plan uses the property as an office. The plan paid
$120,000 for the property and $5,000 in transaction costs. As part
of the correction, the Plan Official obtains two appraisals from a
qualified, independent appraiser in order to determine the FMV of
the property at the time of the purchase and at the time of the
correction (the ``Recovery Date''). The FMV of the property at the
time of purchase was $100,000 ($20,000 less than the plan paid for
the property). As of the Recovery Date, the appraiser values the
property at $110,000. To correct the transaction, the plan sponsor
repurchases the property for $120,000 with no reduction for the
costs of sale and reimburses the plan for the $5,000 in initial
costs of sale. The plan sponsor also must pay the plan the greater
of the plan's Lost Earnings or the sponsor's investment return on
these amounts. The determination of an independent fiduciary is not
required because the applicant is correcting the transaction by
selling the asset back to the party in interest pursuant to
paragraph (a)(2)(i) of this Section.
Example 2: On February 1, 2002, a plan purchased from a party in
interest a parcel of commercial real estate for $120,000, and
incurred $5,000 in costs of sale. The plan initially uses the
property as an office. At the same time it is discovered that the
original purchase was a prohibited transaction, the plan enters into
a lucrative lease with an unrelated party for use of the property to
begin January 1 of the following year. Due to commercial
developments in adjacent properties, the Plan Official believes that
the property will increase in value and that the plan would be able
to obtain substantially increasing rental payments for the use of
the property. As part of the correction, the Plan Official obtains
two appraisals from a qualified, independent appraiser in order to
[[Page 20278]]
determine the FMV of the asset at the time of the purchase and at
the time of the correction (the ``Recovery Date''). The FMV of the
property at the time of purchase was $120,000 (the same as the
original purchase price). As of the Recovery Date, the property is
valued at $150,000. Lost Earnings are calculated through September
30, 2005, the anticipated Recovery Dat |
