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Benefits

Does the DOL Have a Correction Program for 401(k) Plans That Fail to Follow ERISA?

EBIA  

EBIA  

QUESTION: I know the IRS has a correction program for certain retirement plan errors, but the Department of Labor (DOL) also enforces rules affecting 401(k) plans. Does the DOL have a separate correction program to help plan administrators correct failures to follow ERISA?

ANSWER: Yes, the DOL has a Voluntary Fiduciary Correction (VFC) Program to encourage persons who are potentially liable for certain fiduciary breaches to voluntarily correct them in exchange for a no-action letter and relief from penalties. Each correction requires the applicant (generally, the plan sponsor, a plan fiduciary, or another person who is in a position to correct a breach) to restore to the plan the amount that is needed to make the plan whole, to document the correction, and to file an application with the regional Employee Benefits Security Administration (EBSA) office. In conjunction with the VFC Program, the DOL issued a prohibited transaction exemption (PTE) that offers relief from IRS excise taxes under Code § 4975 for some, but not all, of the transactions that are eligible for the VFC Program.

The program allows retirement plans (including 401(k) plans) to correct 17 specified fiduciary breaches. (Two other correctable breaches relate solely to welfare benefit plans.) Eligible breaches include delinquent remittance of participant contributions and loan repayments; various loan failures, including loans at below market interest rates and failures to comply with the lending plan’s provisions for the amount, duration, or level amortization of loans; certain impermissible purchases and sales of plan assets; failures to properly value plan assets when making distributions; and improper payments of compensation and plan expenses.

An eligible breach may be corrected under the VFC Program only if the plan and applicant are not “under investigation.” A plan or applicant is under investigation if—(1) the DOL is conducting an investigation of the plan, or an investigation of the potential applicant or plan sponsor in connection with an act or transaction directly related to the plan; (2) any governmental agency is conducting a criminal investigation of the plan, or of the potential applicant in connection with a plan-related act or transaction; or (3) the IRS is conducting an examination of the plan. Certain other investigations or examinations (e.g., by state officials) will also be disqualifying unless they are disclosed at the time of the application. Importantly, oral notice of an investigation or examination is sufficient to make the VFC Program unavailable.

Applications may only be filed for breaches that have been properly corrected before applying. The application must include a written narrative and supporting documents describing the transaction and correction, a completed program checklist, proof of correction, and a signed penalty of perjury statement. The DOL has prepared a model application form, but its use is not required. There is also an online calculator to help potential applicants determine the amount that must be paid to the plan to correct.

If an application is accepted and the violation was adequately corrected, the DOL will provide a no-action letter stating that it will not initiate a civil investigation under ERISA for the transaction, nor will it assess a penalty under ERISA § 502(l). The DOL may still, however, impose certain civil penalties, such as the penalty for failure to file a complete and accurate Form 5500. The DOL will refer information about prohibited transactions to the IRS, but, as noted above, excise taxes for certain corrected transactions may also be waived.

For more information, see EBIA’s 401(k) Plans manual at Section XXXVI (“Correcting Plan Mistakes: DOL’s VFC Program”).

Contributing Editors: EBIA Staff.

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