DOL Issues New Guidance Streamlining the Voluntary Fiduciary Correction Program

Seyfarth Synopsis: The Department of Labor (DOL) has issued a much awaited amendment to its Voluntary Fiduciary Correction Program (VFC Program). Notably, the amendment adds a self-correction feature for the delinquent transmittal of participant contributions and loan repayments under certain circumstances. This self-correction program allows plan fiduciaries, including plan sponsors, to correct these types of transactions without the additional hassle and expense of formally submitting an application with the DOL’s Employee Benefits Security Administration (EBSA) for approval and relief.

Background

The VFC Program is a correction program that may be used to correct certain fiduciary breaches voluntarily by following requirements set out under the VFC Program and filing with the DOL for relief. Under the VFC Program, there are 19 categories of transactions that are eligible for voluntary correction.

In order to be eligible for the VFC Program, neither the applicant nor the plan may be “under investigation” by the EBSA. Applicants do not need to consult EBSA to voluntarily correct. Instead, applicants must generally identify the violations and determine if they qualify, follow the VFC Program correction process, calculate and restore any losses or profits with interest, distribute any supplemental benefits to participants, and file an application with their regional EBSA office with necessary documentation of their corrective actions. Applicants that satisfy the requirements of the VFC Program application process receive a “no action” letter from EBSA and are not subject to civil monetary penalties for the corrected transactions.

On January 15, 2025, EBSA published an amendment to the VFC Program that generally tracks the updates issued in November 2022. The VFC Program amendment clarifies and expands the scope of existing transactions eligible for correction under the VFC Program and simplifies certain administrative or procedural requirements for participation in, and correction of, transactions under the VFC Program. Most notably, the amendment to the VFC Program adds a self-correction feature for delinquent transmittal of participant contributions and loan repayments withheld from participants’ salary to a plan under certain circumstances. The amendment also implements new rules approving self-correction of participant loan failures. 

The Self-Correction Component (SCC)

Delinquent Participant Contributions and Loan Repayments

The new Self-Correction Component (SCC) under the amended VFC Program allows the late deposit of participant contributions and loan repayments, the most frequently corrected transaction under the VFC Program, to be corrected without submitting an application to the EBSA. A late deposit of employee contributions occurs when deferrals and/or loan repayments are not deposited within certain timeframes set by the DOL (generally, as soon as the amounts withheld from payroll can reasonably be segregated from the employer’s general assets). If this occurs, the employer is considered to have committed a prohibited transaction by being in possession of plan assets. To correct, the employer must deposit the late deferrals and loan repayments to the trust with an earnings adjustment.

Under the new SCC, a delinquent participant contribution or loan repayment to a plan is eligible for self-correction if:

1. The lost earnings total $1,000 or less when computed from the date of withholding from participants’ paychecks (note – this is not the date the funds would otherwise have been timely deposited),
2. The delinquent amounts are remitted to the plan within 180 days from the date of withholding from participants’ paychecks,
3. Penalties, late fees, or other charges are paid by the employer or plan official, and
4. Neither the applicant, nor the plan, are “under investigation” by the EBSA. Note, a plan is not considered to be under investigation if EBSA has contacted the plan, applicant, self-corrector, or plan sponsor regarding a participant complaint unless the participant complaint relates to the transaction contained in the VFC Program application or the SCC Notice and the correction amount has not been remitted to the plan by the date when EBSA contacts the plan, applicant, self-corrector, or plan sponsor.

To use the SCC, the applicant must submit an electronic notice to the DOL through an online VFC Program web tool and complete a penalty of perjury statement. The applicant must also complete a “Record Retention Checklist.” Applicants using the self-correction option will not receive a no-action letter. Instead, they will receive an email acknowledgment of the submission.

In making this change, the DOL acknowledged that the time and expense required to file a VFC Program application with the DOL may be a disincentive to use the VFC Program, especially when they involve small dollar amounts. While self-correction is still limited, and still requires notice of the correction to the DOL, this is certainly a welcome step in the right direction by the DOL.

Eligible Inadvertent Participant Loans Failures

SECURE 2.0 greatly expanded the ability of plan sponsors to self-correct “eligible inadvertent failures,” including certain plan loan failures, without filing a correction application with the Internal Revenue Service (IRS). Specifically, SECURE 2.0 required the DOL to treat eligible inadvertent failures related to participant loans that are self-corrected under the IRS’s Employee Plans Compliance Resolution System (EPCRS) as meeting the requirements of the VFC Program. However, SECURE 2.0 permitted the DOL to impose reporting or other procedural requirements on parties that intend to rely on the VFC Program for correction of these eligible inadvertent failures.

In response to this direction under SECURE 2.0, the updates to the VFC Program provide that SCC is available to self-correct violations of eligible inadvertent participant loan failures, including the failure to adhere to plan terms about the number of loans available, loan amount, duration, amortization, or spousal consent and the failure to withhold participant wages resulting in a loan default.

Similar to the notice requirement discussed above, to utilize the SCC for this purpose, the employer is required to give notice to the DOL using the VFC Program web tool, complete a penalty of perjury statement and a “Record Retention Checklist.”

Amendment to DOL Prohibited Transaction Exemption 2002-51

By way of  background, DOL Prohibited Transaction Exemption (PTE) 2002-51 has for many years offered limited relief from certain excise tax provisions of the Internal Revenue Code, provided that the plan filed for relief under the VFC Program and met certain requirements, including providing a notice to impacted participants where the amount that would otherwise be due for the tax is paid into the plan.

In connection with the SCC, the DOL issued a corresponding amendment to PTE 2002-51 to expand excise tax relief to include corrections made through the SCC (even when a filing was not made under the VFC Program). To use this exemption for self-correction, the applicant must meet all the other VFC Program requirements, and receive an email acknowledgment from the DOL. Importantly, self-correctors will not be required to provide notice to interested persons of the transactions for which relief is sought pursuant to the VFC Program where the amount of the excise tax is paid into the plan. Practically, this means that plans will still have to complete a Form 5330 in order to calculate the amount of the excise tax it will pay into the plan and retain a copy for proof of such amount.

Additional Changes to the VCP Program

In addition to the SCC program described above, the updated VFC Program allows for expanded correction options for prohibited loans, purchases, and sale transactions; expanded relief for prohibited sale and leaseback of real property to affiliates of the plan sponsor; corrections of criminal violations of delinquent payments to the plan so long as the applicant did not participate in the criminal activity; “bulk” applications from service providers of multiple plans; and exemptions from excise taxes for some SCC corrections.

Administrative Considerations and Next Steps

The amendment to the VFC Program is effective on March 17, 2025. The SCC component encourages the early detection and correction of delinquent participant contributions and loan repayments, so employers are encouraged to continue to monitor the timeliness of remittances to the plans and escalate and correct any delays. We encourage you to speak with your Seyfarth Shaw Employee Benefits attorney if you have any questions about the changes to the VFC Program and availability of self-correction.