Proposed Rule2022-24703
Voluntary Fiduciary Correction Program
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 21, 2022
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains an amended and restated Voluntary Fiduciary Correction Program (VFC Program or Program) under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and a request for comment. The VFC Program is designed to encourage correction of fiduciary breaches by permitting persons to avoid potential Department of Labor (Department) civil enforcement actions and civil penalties if they voluntarily correct eligible transactions in a manner that meets the requirements of the Program. Based on its experience since the last revision of the Program in 2006, the Employee Benefits Security Administration (EBSA) has identified certain changes that will both simplify and expand the original VFC Program, thereby making the Program easier for, and more useful to, employers and others who wish to avail themselves of the relief provided by the Program. Specifically, the Program amendments add a self-correction feature, clarify some existing transactions eligible for correction under the Program, expand the scope of other transactions currently eligible for correction, and simplify certain administrative or procedural requirements for participation in and correction of transactions under the VFC Program.
Full Text
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<title>Federal Register, Volume 87 Issue 223 (Monday, November 21, 2022)</title>
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[Federal Register Volume 87, Number 223 (Monday, November 21, 2022)]
[Proposed Rules]
[Pages 71164-71197]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-24703]
[[Page 71163]]
Vol. 87
Monday,
No. 223
November 21, 2022
Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Parts 2560 and 2570
Voluntary Fiduciary Correction Program; Proposed Rule
Federal Register / Vol. 87, No. 223 / Monday, November 21, 2022 /
Proposed Rules
[[Page 71164]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Parts 2560 and 2570
RIN 1210-AB64
Voluntary Fiduciary Correction Program
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Proposed program amendments; request for comment.
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SUMMARY: This document contains an amended and restated Voluntary
Fiduciary Correction Program (VFC Program or Program) under Title I of
the Employee Retirement Income Security Act of 1974, as amended (ERISA)
and a request for comment. The VFC Program is designed to encourage
correction of fiduciary breaches by permitting persons to avoid
potential Department of Labor (Department) civil enforcement actions
and civil penalties if they voluntarily correct eligible transactions
in a manner that meets the requirements of the Program. Based on its
experience since the last revision of the Program in 2006, the Employee
Benefits Security Administration (EBSA) has identified certain changes
that will both simplify and expand the original VFC Program, thereby
making the Program easier for, and more useful to, employers and others
who wish to avail themselves of the relief provided by the Program.
Specifically, the Program amendments add a self-correction feature,
clarify some existing transactions eligible for correction under the
Program, expand the scope of other transactions currently eligible for
correction, and simplify certain administrative or procedural
requirements for participation in and correction of transactions under
the VFC Program.
DATES: Written comments on the amended and restated VFC Program should
be submitted on or before January 20, 2023. The Department will notify
the public of the availability of the amended and restated VFC Program
in a subsequent Federal Register document.
ADDRESSES: You may submit written comments, identified by RIN 1210-
AB64, to one of the following addresses:
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">www.regulations.gov</a>. Follow
the instructions for submitting comments.
<bullet> Mail: Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5655, U.S. Department of
Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention:
Amendment and Restatement of Voluntary Fiduciary Correction Program.
Instructions: Persons submitting comments electronically are
encouraged not to submit paper copies. Comments will be available to
the public, without charge online at <a href="http://www.regulations.gov">www.regulations.gov</a>, at
<a href="http://www.dol.gov/agencies/ebsa">www.dol.gov/agencies/ebsa</a>, and at the Public Disclosure Room, EBSA,
U.S. Department of Labor, Suite N-1513, 200 Constitution Avenue NW,
Washington, DC 20210.
Warning: Do not include any personally identifiable or confidential
business information that you do not want publicly disclosed. Comments
are public records and can be retrieved by most internet search
engines.
FOR FURTHER INFORMATION CONTACT: Yolanda R. Wartenberg, Office of
Regulations and Interpretations, EBSA, (202) 693-8500, for questions
regarding the VFC Program amendments in this document. Susan Wilker,
Office of Exemption Determinations, EBSA, (202) 693-8540, for questions
regarding the proposed amendments to the associated class exemption PTE
2002-51. James Butikofer, Office of Research and Analysis, EBSA, (202)
693-8410, for questions regarding the regulatory impact analysis.
(These are not toll-free numbers.)
For general questions regarding the VFC Program: contact Dawn
Miatech-Plaska, Office of Enforcement, EBSA, (202) 693-8691. For
questions regarding specific applications and self-corrections under
the VFC Program: contact the appropriate EBSA Regional Office listed in
Appendix C. (These are not toll-free numbers.)
Customer Service Information: Individuals interested in obtaining
information from the Department concerning ERISA and employee benefit
plans may call the Employee Benefits Security Administration (EBSA)
Toll-Free Hotline, at 1-866- 444-EBSA (3272) or visit the Department's
website (<a href="http://www.dol.gov/ebsa">www.dol.gov/ebsa</a>).
SUPPLEMENTARY INFORMATION:
A. Summary Overview
The Department of Labor's (Department) authority to establish the
Voluntary Fiduciary Correction Program (VFC Program or Program) derives
from its authority to enforce the fiduciary standards in Title I of the
Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.
1132(a)(2) and 1132(a)(5), and thereby to establish policies on how
this authority will be implemented. The Department also has the
authority under section 408(a) of ERISA (29 U.S.C. 1108) to issue
exemptions from the prohibited transaction rules in sections 406 and
407 of ERISA (29 U.S.C. 1106 and 1107) and in section 4975 of the
Internal Revenue Code (Code).\1\
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\1\ Under Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at
252 (2020), the authority of the Secretary of Treasury to issue
exemptions pursuant to section 4975 of the Internal Revenue Code was
transferred, with certain exceptions not relevant here, to the
Secretary of Labor.
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The Employee Benefits Security Administration (EBSA) originally
adopted the VFC Program in 2002, and later revised it in 2005 and
2006.\2\ EBSA designed the VFC Program to encourage employers and plan
fiduciaries to voluntarily comply with ERISA and allow those
potentially liable for certain specified fiduciary breaches under ERISA
to voluntarily apply for relief from civil enforcement actions and
certain civil penalties, provided they meet the Program's criteria and
follow the procedures outlined in the Program. The existing VFC Program
describes how to apply for relief, lists the specific transactions
covered, and sets forth acceptable methods for correcting fiduciary
breaches under the Program.\3\ It also provides examples of potential
breaches and related permissible corrective actions. The Program
defines the term ``Breach'' to mean any transaction that is or may be a
violation of the fiduciary responsibilities contained in Part 4 of
Title I of ERISA. The Program also provides a model application form, a
checklist, and an Online Calculator for determining correction amounts.
Eligible applicants that satisfy the terms and conditions of the
existing VFC Program receive a no action letter from EBSA and are not
subject to civil monetary penalties for the corrected transactions.
Excise tax relief for six specific VFC Program transactions is
conditionally available under an associated class exemption, PTE 2002-
51.\4\ The VFC Program has been, and will continue to be, administered
in EBSA Regional Offices.
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\2\ 70 FR 17516 (2005), 71 FR 20262 (2006).
\3\ 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.
\4\ PTE 2002-51 at 67 FR 70623 (2002); amended at 71 FR 20135
(2006). The current exemptive relief for these six transactions
remains available while the proposed amendments to the exemption are
being finalized.
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While the VFC Program continues to be successful in encouraging and
facilitating the correction of violations
[[Page 71165]]
of ERISA's fiduciary responsibility and prohibited transaction rules,
based on a review of the current VFC Program, which was last revised in
2006,\5\ the Department concluded that certain revisions to the Program
would facilitate more efficient and less costly corrections of
fiduciary breaches under the Program, encourage greater participation
in the Program, and respond to requests from stakeholders for
adjustments based on their experiences using the Program.
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\5\ 71 FR 20262 (2006); 71 FR 20135 (2006).
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The most significant change to the Program is the addition of a new
self-correction feature contained in section 7.1(b) of the VFC Program
for certain failures to timely transmit participant contributions (and
participant loan repayments) to pension plans. Delinquent participant
contributions is the type of transaction most frequently corrected
under the Program. The Department has received input from stakeholders
who said the time and expense required to file a VFC Program
application with the Department is a disincentive to use the Program to
correct these transactions, especially when they involve small dollar
amounts. After carefully considering the issue, the Department agrees
that a self-correction feature for delinquent participant contributions
to pension plans that includes appropriately designed safeguards would
encourage more voluntary corrections by offering plan officials and
other responsible fiduciaries a streamlined correction process. It
would also enable EBSA to better allocate resources currently dedicated
to processing VFC Program applications for these transactions. The
other Program amendments contained in this document (1) clarify
existing transactions eligible for correction under the Program, (2)
expand the scope of certain transactions currently eligible for
correction, and (3) simplify certain administrative or procedural
requirements for participation in the VFC Program and correction of
transactions under the Program. A more detailed summary of the Program
revisions is set forth below in the section of this preamble entitled
``VFC Program 2022 Amendments.'' \6\
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\6\ As is the case under the current VFC Program, multiemployer
plans and multiple employer plans would be permitted to use the
amended VFC Program (including the new SC Component) when it becomes
available. The preamble to the 2006 revision of the VFC Program
stated that the definition of ``Plan official'' in cases of
multiemployer plans or multiple employer plans was not limited so
that an application could be made only by the ``plan administrator''
rather than by any contributing or adopting employer. 71 FR 20262,
20264 (April 19, 2006). The Department explained that the plan
administrator of such a plan could apply on behalf of the entire
plan, but any participating employer may apply on its own behalf.
The Department solicits comments on whether additional guidance on
those points would be helpful, and if so, what the guidance should
provide.
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In tandem with today's publication of amendments to the VFC
Program, EBSA is publishing a proposed amendment to PTE 2002-51, the
Program's associated class exemption, to make certain conforming
amendments to the class exemption. For a more comprehensive discussion
of the proposed changes to the class exemption and the request for
public comments on those proposed changes, see the proposed amendment
to PTE 2002-51 published elsewhere in today's issue of the Federal
Register.
As discussed in greater detail below in the section entitled
``Statement on Availability and Request for Comment,'' this amended and
restated VFC Program will become available to the public following
approval by the Office of Management and Budget (OMB) of the revised
information collections in the Program in accordance with the Paperwork
Reduction Act of 1995 (PRA). The availability will be announced by the
Department in a subsequent Federal Register Notice. Further, the
expanded excise tax relief afforded by the proposed amendments to PTE
2002-51 is not available until such amendments are adopted in final
form, which also will be communicated in the Federal Register. However,
the existing VFC Program and PTE 2002-51 remain available during the
Department's consideration of the changes.
B. VFC Program 2022 Amendments
The VFC Program 2022 Amendments set forth in this document would
retain the fundamentals of the current VFC Program. To facilitate
reference to the Program, this document includes a restatement of the
Program in its entirety. Stakeholders interested in a discussion of the
existing components of the VFC Program should review the Federal
Register notices announcing the original 2002 program and the 2005 and
2006 revisions to the Program.\7\ The following is an overview of the
VFC Program amendments contained in this document.
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\7\ See 67 FR 15062 (March 28, 2002), 70 FR 17516 (April 6,
2005), and 71 FR 20262 (April 19, 2006). 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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(1) Self-Correction Feature for Delinquent Participant Contributions to
Pension Plans--Section 7.1(b)
A major change, prompted by input from the regulated community, is
the addition of a new Self-Correction Component (SC Component or SCC)
to section 7, ``Description of Eligible Transactions and Corrections
Under the VFC Program.'' Specifically, section 7.1(b) ``Delinquent
Participant Contributions and Loan Repayments to Pension Plans under
the Self-Correction Component'' provides a new self-correction process
for pension plans.\8\
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\8\ To reflect the inclusion of the SCC into the Program,
section 6 in the amended program has been renamed ``VFC Program
Application and Self-Correction Component Procedures'' and the prior
section 6 has been renamed and re-designated as section 6.1 ``VFC
Program Application Procedures.''
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In the past, as noted in the preamble to the April 2006 VFC Program
Notice, EBSA was of the view that a self-correction feature would not
give the Department sufficient information and certainty of correction
compared to that afforded by the Program's application and approval
process. However, based on its experience with the Program and input
from stakeholders, EBSA is persuaded that delinquent participant
contribution/loan repayment transactions are suitable for a self-
correction procedure. EBSA expects that a well-designed self-correction
feature will mean more voluntary corrections and more participant
accounts receiving more timely correction amounts.
Certain other conditions apply to relief under the SC Component.
Relief under the SC Component for delinquent participant contributions
and delinquent plan loan repayments is available to any pension plan
regardless of the size of the plan's participant population or amount
of plan assets, but is limited to corrections where the amount of Lost
Earnings is $1,000.00 or less excluding any excise tax paid to the plan
under the associated class exemption, PTE 2002-51.\9\ The delinquent
participant contributions or loan repayments also must have been
remitted to the plan no more than 180 calendar days from the date of
withholding or receipt. These conditions are designed to exclude from
the SCC delinquencies involving lost earning amounts that suggest the
need for more active evaluation by EBSA of the circumstances
surrounding the Breach and timing of the correction.
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\9\ See proposed amendments to PTE 2002-51 elsewhere in today's
Federal Register.
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The Department considered but did not include at this time a limit
on the frequency with which a self-corrector may use the SC Component
versus
[[Page 71166]]
following the application process for correcting delinquent participant
contributions. For example, the Department considered adopting a three-
year provision modeled on the provisions in the current VFC prohibited
transaction exemption (PTE) that precludes reliance on the PTE to avoid
excise taxes for similar VFC Program covered transactions more
frequently than once every three years.\10\ The Department concluded,
however, that the PTE provision was not comparable because it does not
preclude reliance on the VFC Program; it just limits relief from
applicable excise taxes and even that limitation was subject to several
exceptions. The Department was also concerned about a frequency limit
unintentionally creating disincentives to use the VFC Program and
encouraging corrections outside the VFC Program. Moreover, as discussed
in greater detail in the proposed PTE amendment, the Department is
soliciting public comments on a proposal to remove the three-year
limitation provision from the PTE. As noted above, no similar frequency
limitation applies to the use of the VFC Program so parties are able to
obtain a ``no action'' letter from the Department even in the case of
repeated use of the VFC Program for similar types of transactions. The
preamble to the proposed amendments to the PTE also notes that the
three-year provision was initially included in the PTE to prevent
parties from becoming lax in efforts to comply with their fiduciary
duties in connection with covered transactions because of the
availability of the exemption. However, the Department's experience
with the VFC Program and exemption indicated that the risk of such
behavior was low. Also, the application and reporting requirements
under the VFC Program and the SC Component together with the ``under
investigation'' ineligibility condition provide the Department with a
system under which it receives notice of repeat usage and a means of
protecting against any potentially inappropriate use of the exemption
in connection with covered transactions. Accordingly, the Department
decided that it would solicit comments on whether a frequency
limitation should be included in the PTE, and if so, what it should be
and should any exceptions apply. Nonetheless, the Department will be
monitoring for frequent use of the SCC and may communicate with repeat
users or open investigations to identify and correct systemic issues
leading to repeated failures to transmit participant contributions in a
timely fashion.
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\10\ The exemption is currently unavailable to VFC Program
applicants that have, within the previous three years, taken
advantage of the relief provided by the VFC Program or the exemption
for a similar type of transaction.
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Relief under the SCC is further conditioned on a particular
correction method being used. Correction amounts under the SC Component
consist of the (1) Principal Amount and (2) Lost Earnings.
Specifically, the Principal Amount is the amount of participant
contributions or loan repayments that would have been available to the
plan if the employer had not retained such amounts, while Lost Earnings
is the amount of earnings that would have been earned on the Principal
Amount but for the failure to timely remit such amounts to the plan.
The SC Component requires that Lost Earnings be paid from the ``Date of
Withholding or Receipt,'' and mandates the use of the Online Calculator
to determine the amount of the loss payable to the plan. For this
transaction, Date of Withholding or Receipt means the date the amount
would otherwise have been payable to the participant in cash in the
case of amounts withheld by an employer from a participant's wages, or
the day on which the participant contribution or loan payment is
received by the employer in the case of amounts that a participant or
beneficiary pays to an employer. Use of the Online Calculator and the
Date of Withholding or Receipt--which is a stricter standard than the
date on which participant contributions or loan repayments could
reasonably have been segregated from the employer's general assets--are
critical elements of the SCC that, in the Department's view, will help
ensure full correction without the need for the protections afforded by
the Program's application and approval process. These elements also
will provide self-correctors with assurance of the accuracy of their
calculations.
Under the SC Component, section 7.1(b)(2)(iii) details an
electronically filed notice requirement (SCC notice) which replaces the
paper application requirements in section 7.1(a)(3) of the Program. The
required data elements in the SCC notice include: the name and an email
address for the self-corrector; the plan name; the plan sponsor's nine-
digit number (EIN) and the plan's three-digit number (PN); the
Principal Amount; the amount of Lost Earnings and the date paid to the
plan; the Loss Date (Date(s) of Withholding or Receipt); and the number
of participants affected by the correction. The SCC notice must be
submitted electronically to EBSA using a new online VFC Program web
tool to be located on EBSA's website. Self-correctors using the web
tool will receive an automatic EBSA email acknowledging the SCC notice
submission.
Prior to submitting the SCC notice, self-correctors must calculate
the Lost Earnings amount using the VFC Program's Online Calculator. The
Lost Earnings calculation is intended to be a reasonable approximation
of the amount that would have been earned on the delinquent participant
contributions or loan repayments but for the employer's delinquent
transmission of the contributions or repayments. Lost Earnings is
calculated by entering the Principal Amount which is the total amount
of the delinquent participant contributions or loan repayments, the
Loss Date (Date of Withholding or Receipt) which may require multiple
entries based on delinquencies in multiple pay periods, and the date
the Lost Earnings amount is paid to the plan. The Date of Withholding
or Receipt is the date the amount would otherwise have been payable to
the participant in cash in the case of amounts withheld by an employer
from a participant's wages, or the day on which the participant
contribution or loan payment is received by the employer in the case of
amounts that a participant or beneficiary pays to an employer. Detailed
instructions for the VFC Program Online Calculator are on EBSA's
website. Definitions of capitalized terms are contained in sections 5
and 7.1(b).
Self-correctors also must complete the SCC Retention Record
Checklist in Appendix F, prepare or collect the documents listed in the
Appendix, and provide the completed checklist and required
documentation to the plan administrator as required by sections 6.2(d)
and 7.1(b)(3). This obligation applies even if the employer is the plan
administrator. Such ``dual role'' situations do not relieve the
employer as plan administrator from fiduciary recordkeeping and
obligations under ERISA. The plan administrator then must maintain
these documents as part of the plan's records as required by law.
Although self-correctors that satisfy the terms and conditions of the
VFC Program do not receive a no action letter from EBSA, similar to a
no action letter, the SCC provides that compliance with the SCC terms
and conditions results in not being subject to civil monetary penalties
or an EBSA civil enforcement action. As with an application under the
Program, however, and in accordance with section 2(b) ``Verification,''
EBSA reserves the right to investigate and take other actions with
respect to the transaction corrected through the SCC, including taking
steps to confirm the
[[Page 71167]]
corrective action was in fact taken. The relief does not extend to
criminal investigations or to persons other than the self-corrector.
Also, if EBSA determines that the terms and conditions of the SCC were
not satisfied, the ``self-corrector'' would, obviously, not be exempt
from civil penalties or EBSA enforcement actions related to relevant
participant contributions.
Other procedural requirements for self-correction are detailed in
section 6.2 ``VFC Program Self-Correction Component Procedures,''
including a Penalty of Perjury Statement. For convenience, a compliant
Penalty of Perjury Statement is included as part of the SCC Retention
Record Checklist in Appendix F.
EBSA is seeking comments from interested persons on the revisions
to the Program set forth in this document, including comments on the
SCC criteria and conditions and whether other criteria or conditions
would adequately protect plans and participants while being less
burdensome or less costly. For example, the Department invites public
comments on whether the SCC should incorporate additional protections
for pension plans that are classified as small based on their
participant population (generally those covering fewer than 100
participants).\11\ A possible additional protection would be to limit
the participation of small plans to only those whose plan sponsors
comply with the safe harbor standard in 29 CFR 2510.3-102(a)(2) for the
timely handling of participant contributions. Compliance could require,
for example, either an existing practice or an agreement to put in
place a customary practice of depositing participant contributions and
loan payments with the plan not later than the 7th business day
following the day on which such amount would otherwise have been
payable to the participant in cash in the case of amounts withheld by
an employer from a participant's wages, or the 7th business day
following the day on which the participant contribution or loan payment
is received by the employer in the case of amounts that a participant
or beneficiary pays to an employer. The additional protection that
would result from requiring compliance with the safe harbor as a
condition of SCC relief is that small employers would either have or
agree to implement clear procedures for the timely handling of
participant contributions. In the Department's view, the use of the
small plan safe harbor standard for large plans would be inappropriate.
EBSA expects that large plans generally can and should be depositing
participant contributions with the plan sooner than 7 business days
after the contributions are withheld or received by the employer.
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\11\ In determining whether a plan qualifies as a ``small''
plan, self-correctors can rely on the end of year participant count
reported on the latest Form 5500 or Form 5500-SF filed for the plan
because that would be the annual report count closest in time to use
of the SCC. If there is no Form 5500 or Form 5500-SF for the prior
year, the self-corrector should use the participant count for the
end of the year that would have been reported if a Form 5500 or Form
5500-SF were required or that will be reported when the prior year
Form 5500 or Form 5500-SF is filed. Images of the Form 5500 and Form
5500-SF filings for plan years after 2008 can be accessed on EBSA's
website at <a href="http://efast.dol.gov/5500search/">efast.dol.gov/5500search/</a>. The Department notes that
potential self-correctors who fail to meet the SCC conditions for
participating in the SCC may still be eligible to correct the
delinquency violation through the normal application process under
the VFC Program.
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(2) Conforming Revisions to Current Application Process Provisions for
Delinquent Participant Contributions (Sections 7.1(a), (c) and (d))
Section 7.1(a) has been renamed ``Delinquent Participant
Contributions and Loan Repayments to Pension Plans under VFC Program
Applications'' to clarify that it applies only to corrections pursuant
to Program applications in contrast to self-corrections under section
7.1(b). Additionally, section 7.1(a) has been revised to reflect the
Department's amendment of its regulation defining plan assets in 2010
to include participant loan repayments within these regulatory
principles. (See 29 CFR 2510.3-102(a)(1)). Language has also been added
to sections 7.1(a)(3)(ii)(A) and (iii)(A) to explain that the required
narrative in the application must include a description of any steps
taken to prevent future delinquencies. Language referring to
Restoration of Profits has been deleted from sections 7.1(a)(2)(i) and
(ii) to simplify the Program because in the Department's experience no
applicant has reported generating a profit through use of the
delinquent amounts.
Sections 7.1(b) ``Delinquent Participant Contributions to Insured
Welfare Plans'' and (c) ``Delinquent Participant Contributions to
Welfare Plan Trusts'' are being re-designated as sections 7.1(c) and
(d) respectively. A change also has been made to each of these sections
to clarify that the participant contributions were remitted to the
insurance provider in section 7.1(c)(3)(iii) and to the trust in
section 7.1(d)(3)(ii) rather than the plan as previously stated. A
change was also made to delete language referring to Restoration of
Profits in sections 7.1(d)(2)(i) and (ii) to simplify the Program
because, as stated above, no applicant has reported generating a profit
through use of the delinquent amounts.
The VFC Program does not include a correction for delinquent
matching employer contributions. Although some applications filed under
the current VFC Program for delinquent participant contributions have
sought relief for matching employer contributions, EBSA historically
concluded that the different characteristics of the plan asset and
fiduciary obligations that apply in the case of employer contributions
make it inappropriate to include matching employer contributions as a
transaction in a VFC Program. The Agency's position on that subject has
not changed. Nonetheless, to the extent that a Program application
provides that the employer will apply the same correction formula to
the employer matching contributions that it is required to apply to the
delinquent participant contributions, EBSA anticipates that it will not
reject or refuse to process such applications even though the
``correction'' of the employer contribution is not a covered
transaction under the VFC Program, is not entitled to any relief under
the Program, and will not be covered by any no action letter.
(3) Loans--Sections 7.2(b), (c) and (d)
The original VFC Program included as an eligible transaction ``Loan
at Below-Market Interest Rate to a Party in Interest with Respect to
the Plan.'' The corrective action in section 7.2(b) under both the
current and this amended and restated Program requires the payment of
the loan in full, plus penalties, and the greater of the Lost Earnings
or Restoration of Profits. In addition to the required section 6.1
documentation, an applicant currently must provide both a written copy
of an independent commercial lender's fair market interest rate
determination under section 7.2(b)(3)(ii) and a copy of an independent
fiduciary's dated, written approval of the fair market interest rate
determination under section 7.2(b)(3)(iii). To reduce applicants'
costs, the VFC Program 2022 Amendments would amend section
7.2(b)(3)(iii) to eliminate the requirement that an independent
fiduciary validate in writing the process used to determine the fair
market interest rate determination for loans in the amount of $10,000
or less. Thus, under these amendments to the Program, in the case of
below-market interest rate loans in the amount of $10,000 or less, a
copy of the independent commercial lender's written fair market
interest rate
[[Page 71168]]
determination will now suffice to validate the interest rate.
As a further clarifying change, the wording in section 7.2(b)(3)(i)
is being revised to require a narrative describing the process used to
determine the interest rate at the time the loan was made.
Section 7.2(c) ``Loan at Below-Market Interest Rate to a Person Who
is Not a Party in Interest With Respect to the Plan'' is also a
transaction that dates from the original VFC Program. Sections
7.2(c)(2)(i) and (ii) are being re-organized to clarify the required
correction for this transaction. Section 7.2(c)(2)(ii) also adds an
alternative to payment of the present value of the Principal Amounts
from the Recovery Date to the loan's maturity date. The present value
payment method must be coupled with the borrower's continued payment of
the outstanding loan balance under the original repayment schedule for
the duration of the loan. The new alternative permits the borrower's
payment of the amortized outstanding loan balance over the remaining
payment schedule of the loan at the interest rate that would have been
applicable if the loan had originally been made at the fair market
interest rate. When this new alternative is used, the applicant must
submit a copy of the loan repayment schedule for the re-amortized loan
repayments under section 7.2(c)(3)(iii). Any fair market interest rate
must be determined by an independent commercial lender.
The wording in section 7.2(c)(3)(i) is being revised in a similar
fashion to the wording in section 7.2(b)(3)(i) to require a narrative
describing the process used to determine the interest rate at the time
the loan was made.
Section 7.2(d) ``Loan at Below-Market Interest Rate Solely Due to a
Delay in Perfecting the Plan's Security Interest'' is another
transaction dating back to the original 2002 Program. It provides a
correction for when a plan made a purportedly secured loan to a non-
party in interest, but a delay occurred in recording or otherwise
perfecting the plan's interest in the loan collateral, resulting in the
loan being treated as an unsecured loan until the plan's security
interest was perfected. Section 7.2(d)(2) is being re-organized to
clarify the correction. Section 7.2(d)(2)(ii) specifically requires
that the plan's interest in the loan collateral be recorded or
perfected. For situations where the delay in perfecting the loan's
security caused a permanent change in the risk characteristics of the
loan, section 7.2(d)(2)(iii) is being amended to add an alternative to
the payment of the present value of the remaining Principal Amounts
from the date the loan is fully secured to the maturity date of the
loan. The present value payment method must be coupled with the
borrower's continued payment of the outstanding loan balance under the
original repayment schedule for the duration of the loan. The new
alternative permits the borrower's payment of the amortized outstanding
loan balance over the remaining payment schedule of the loan at the
interest rate that would have been applicable for a loan with the
changed risk characteristics. When this new alternative is used, the
applicant must submit a copy of the loan repayment schedule for the re-
amortized loan repayments under section 7.2(d)(3)(iii). Any fair market
interest rate must be determined by an independent commercial lender.
In a related modification applicable to these three types of loans,
section 5(a) is being revised to include a specific explanation in
section 5(a)(5) for when a commercial lender will be considered to be
``independent'' using the same criteria as is used to determine the
``independence'' of an appraiser.
As an ongoing protection for plans and their participants, EBSA
staff, as part of the application review process, will continue to
monitor a commercial lender's interest rate determination process and
will object if it appears that a lender is not truly ``independent'' or
the interest rate determination process is otherwise flawed.
(4) Purchases, Sales and Exchanges--Section 7.4
Section 7.4(a) ``Purchase of an Asset (Including Real Property) by
a Plan from a Party in Interest'' provides a method of correction for
situations when the plan purchased an asset (including real property)
from a party in interest in a transaction to which no prohibited
transaction exemption applies. A plan's purchase from a party in
interest can be corrected by reversing the transaction provided the
plan receives the higher of the fair market value at resale or the
Principal Amount plus the greater of either Lost Earnings or
Restoration of Profits. As an alternative correction, a plan may retain
the asset plus receive an amount resulting from application of a
formulaic calculation, but only if an independent fiduciary determines
that the plan will realize a greater benefit from this alternative
correction than from the resale of the asset. Section 7.4(a)(2) is
being amended by adding a new paragraph (iii) that provides a third
method of correction in situations when the purchase cannot be reversed
or the asset retained because the plan no longer owns the asset (e.g.,
sales, maturity, destruction). Under this new correction, the plan can
receive a ``cash settlement'' if the asset has been sold and a Plan
Official provides a statement, as required by section 7.4(a)(3)(v),
that the sale was upon the advice of an independent fiduciary and not
in anticipation of applying for relief under the Program. The
determination of the cash settlement amount is prescribed in section
7.4(a)(2)(iii) and takes into account, among other factors, whether the
plan realized a profit on the resale of the asset, or a loss on the
resale, maturity or destruction of the asset.
As a further clarifying change, the wording in section
7.4(a)(2)(ii), is being modified to permit the subtraction of any
earnings received on the asset up to the Recovery Date from Lost
Earnings.
EBSA is also amending section 7.4(b) ``Sale of an Asset (Including
Real Property) by a Plan to a Party in Interest.'' Section 7.4(b)
provides a method of correction in situations when the plan sold an
asset for cash to a party in interest in a transaction to which no
prohibited transaction exemption applies. The amendment adds a
condition to the section 7.4(b)(2)(ii) correction to permit the plan to
receive the correction amount rather than to repurchase the asset by
permitting a Plan Official to determine that the asset cannot be
repurchased (e.g., destruction, maturity). This new condition in
section 7.4(b)(2)(ii) is an alternative to the section's existing
condition requiring an independent fiduciary to determine that the plan
will recognize a greater benefit from this correction than the
correction in section 7.4(b)(2)(i). As part of the required
documentation under section 7.4(b)(3)(iv), the Plan Official making
this determination must provide a written explanation of why the asset
cannot be repurchased.
(5) Sales/Leasebacks--Section 7.4(c)
Section 7.4(c) ``Sale and Leaseback of Real Property to Employer''
provides a method of correction for a plan sponsor that sells a parcel
of real property to the plan, which is then leased back to the plan
sponsor and is not otherwise exempt. To more accurately reflect the
statutory exemption provided by ERISA section 408(e), which does not
limit the transaction to the plan sponsor, the VFC Program 2022
Amendments would explicitly expand the transaction to allow correction
of leases to affiliates of the plan sponsor. Changes, where
appropriate, to the associated class exemption are being proposed for
consistency with these amendments.
[[Page 71169]]
(6) Illiquid Assets--Section 7.4(f)
The April 2005 Program revision added 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 and that had been acquired under three possible circumstances
described in the transaction. The transaction was further expanded in
2006 by adding a fourth scenario reflecting the acquisition of an asset
from a party in interest to which a statutory or administrative
exemption applied. This amendment of the VFC Program retains the four
scenarios that compose the transaction, as well as the correction
method, which permits the sale of the asset to a party in interest,
provided the plan receives the higher of (A) the fair market value of
the asset at the time of resale, without a reduction for the costs of
sale; or (B) the Principal Amount, plus Lost Earnings as described in
section 5(b). This correction encompasses a sale of the illiquid asset
to a party in interest by the plan even if the original purchase of the
asset by the plan was not a prohibited transaction or imprudent. In
this regard, the definition of Principal Amount is being modified to
take into account the possibility that the transaction being corrected
was neither a prohibited transaction nor a fiduciary Breach. Section
7.4(f)(2)(ii) will now define Principal Amount as either the amount
that would have been available had the Breach not occurred, or the
plan's original purchase price if the original purchase was not a
prohibited transaction or imprudent. The amendments also clarify that
in the case of an illiquid asset that is a parcel of real estate, no
party in interest may own real estate that is contiguous to the plan's
parcel of real estate on the Recovery Date.
(7) Definitions--Section 3
The definition of ``Under Investigation'' in section 3(b)(3)(i) is
being modified to state that an investigation of a plan resulting from
an EBSA staff review, which could include a review by an EBSA Benefits
Advisor, is considered an investigation by EBSA that automatically
makes an applicant, self-corrector or plan sponsor ineligible to
participate in the Program in connection with the plan provided that,
as is currently required, written or oral notice of an investigation,
review or examination has been received by the plan, a Plan Official,
or an authorized plan representative. However, section 3(b)(3) makes
clear that a plan will not be considered to be ``Under Investigation''
merely because EBSA staff has contacted the plan, the applicant, the
self-corrector, or the plan sponsor in connection with a participant
complaint, unless the participant complaint concerns the transaction
described in the application or identified in the SCC notice and the
plan has not received the correction amount due under the Program as of
the date EBSA staff contacted the plan, the applicant, the self-
corrector, or the plan sponsor.
There is a new limited exception to the definition of ``Under
Investigation'' for bulk applicants that is discussed more fully below.
Moreover, the existing exception from the definition of ``Under
Investigation'' in section 3(b)(3) for a work paper review of the
accountant of a plan by EBSA's Office of the Chief Accountant remains
unchanged.
(8) Eligibility Criteria--Section 4
Section 4 ``VFC Program Eligibility'' is being amended to add two
new limited exceptions to the existing eligibility requirements to
promote increased usage of the Program. Currently, in order to be
eligible to participate in the VFC Program there are two requirements
involving possible criminal activity. First, if ``any governmental
agency is conducting a criminal investigation of the plan, or of the
potential applicant, self-corrector or plan sponsor in connection with
an act or transaction directly related to the plan,'' such plan is
considered ``Under Investigation'' in accordance with section
3(b)(3)(iii) and is not eligible for relief under the Program. This
requirement remains. However, in addition to the first requirement, a
second eligibility requirement in section 4(b) requires that there can
be ``no evidence of potential criminal violations as determined by
EBSA.'' EBSA has received applications involving clear evidence of
potential criminal violations such as when a bookkeeper allegedly
embezzled money from the plan sponsor, including participant
contributions. In some situations, the plan sponsor repaid the money to
the plan, including Lost Earnings, and referred the embezzlement to the
local authorities who subsequently prosecuted the alleged embezzler. In
situations like this, EBSA does not believe an innocent applicant who
applies under the Program in such situations should be ineligible for
relief under the Program. Accordingly, an exception is being added in
paragraph (b)(2) to the section 4 requirements for eligibility to allow
participation in the Program by an innocent plan administrator, plan
sponsor or applicant for cases involving delinquent participant
contributions and loan repayments when (1) all funds have been repaid
to the plan; (2) the appropriate law enforcement agency has been
notified of the alleged criminal activity; and (3) the applicant
submits a statement (covered by the Penalty of Perjury Statement) with
the application providing contact information for the law enforcement
agency, asserting that the applicant was not involved in the alleged
criminal activity, and reporting whether a claim relating to the
potential criminal violation has been made under an ERISA section 412
fidelity bond. In light of that change, section 4(b) is re-named and
re-designated as section 4(b)(1), ``In general.'' EBSA always retains
the right to reject any VFC Program application based on its review of
the criminal activity involved.
With regard to the ERISA fidelity bond, although a copy was
originally required to be included with an application, the 2002
Program was modified to instead permit applicants to include
information concerning the plan's ERISA fidelity bond. This
informational requirement was eliminated in the 2006 Program. Although
the informational requirement is not being added back to the Program
under the VFC Program 2022 Amendments, EBSA emphasizes that these
modifications focused merely on streamlining the application process
and should not be misconstrued as eliminating or modifying the ERISA
section 412 bonding requirements that protect plans against loss by
reason of acts of fraud or dishonesty.\12\
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\12\ See FAB 2008-04, (Nov. 25, 2008); 29 CFR 2550.412-1 (1975)
and Part 2580 (1985).
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As noted above, a plan is automatically ineligible to participate
in the Program if it is considered ``Under Investigation'' by EBSA as
defined in section 3(b)(3) of the Program. Over the past several years,
EBSA has received Program applications from service providers to
correct Breaches involving multiple plans. Some of these applications
have involved hundreds, or even thousands, of plans, some of which are
Under Investigation by EBSA. Consequently under the 2006 Program, such
plans could not be included in any resulting no action letter. EBSA
would like to be able to issue a no action letter to the service
provider that covers all plans named in the application in certain
circumstances. Accordingly, an exception is being added in section 4(d)
to permit the submission of bulk applications by a single service
provider when certain conditions are met. To qualify: (1) the
application must cover at
[[Page 71170]]
least ten named plans and each plan must have participated in the
transaction being corrected; (2) the applicant must be a service
provider that is applying for relief only on its own behalf; (3) the
applicant is currently or was providing services to each of the named
plans at the time of the transaction being corrected; and (4) the
service provider cannot be Under Investigation by EBSA and the
corrective action cannot have been taken as a result of an EBSA
investigation or review of any named plan. EBSA, of course, retains the
right to determine whether the corrective action was taken as a result
of any investigation, and to exclude any plan involved in the
investigation from the no action letter. Also, section 6.1(d)(3) is
being amended to permit a bulk applicant to provide for each named plan
either the Annual Report Form 5500 filing information or the plan
sponsor's nine-digit number (EIN). This procedural change will avoid
undue delay while a service provider attempts to secure Annual Report
Form 5500 filing information, which may not be directly related to the
Breach. Section 6.1(g) is also being amended to permit a bulk applicant
with knowledge of the transaction that is the subject of the
application to sign and date the Penalty of Perjury Statement in which
the applicant certifies that it is not Under Investigation by EBSA
instead of requiring a signature from a plan fiduciary for each plan
covered by the application.
(9) Miscellaneous Modifications
This document contains assorted other clarifying changes to update
the Program, assist Program users and maintain consistency among
provisions. For example, section 5(d) ``Distributions'' reflects the
cessation of both the Internal Revenue Service (IRS) and Social
Security Administration letter forwarding services for missing
participants and now provides revised guidance on locating individuals
who are owed supplemental distributions. Another example is sections
7.3(a)(3) and (b)(3). Those sections provide that only certain
supporting documentation must be provided with the application. The
words ``unless otherwise requested by EBSA'' have been added to confirm
that EBSA may in individual cases request copies of other supporting
documentation. Similarly, references to self-corrector, self-correction
and the SCC notice have been added to various provisions where
appropriate. Additionally, in sections 7.4(d) and (e) dealing with
transactions at greater and less than fair market value respectively,
the documentation requirement for the qualified, independent
appraiser's report has been revised to correctly specify value rather
than fair market value at the time of the transaction. In section 7.5
``Benefits,'' concerning the distribution of overvalued plan assets in
a defined contribution plan, the correction specifically requires the
restoration to the plan of the amount that exceeded the paid
distribution amount to which all affected participants were entitled
under the terms of the plan, plus Lost Earnings as described in section
5(b) on the overpaid distributions.
C. Statement on Availability and Request for Comments
Although the Department is not required to seek public comments on
an enforcement policy, the Department solicits comments from the public
on the revisions to the VFC Program discussed in this document,
including whether there are different ways in which the new
transactions included in the Program could be corrected in accordance
with the goals of the Program. Additionally, as the VFC Program
includes information collections that are subject to the PRA, the
Department seeks public comment below on the revisions to the
information collections included in this amended and restated VFC
Program. The Department will then seek approval of the revisions from
OMB in accordance with procedures established by the PRA. A separate
notice will be published in the Federal Register with a 30-day comment
period when the Department submits the VFC Program to OMB seeking OMB's
approval of the revised information collections. This amended and
restated VFC Program, including the SC Component, will become available
following OMB approval and the Department will announce the
availability in a subsequent Federal Register Notice. Until such time,
the existing VFC Program remains available.
The amendments to the associated class exemption, PTE 2002-51, are
proposed so that its conditional relief also is not available until the
amendments are published in final form; however, relief remains
available under the conditions of the existing exemption. The
Department expects that the availability of the amended and restated
Program will encourage employers and fiduciaries, which otherwise might
not do so, to correct Breaches and reimburse plan losses. Of course,
implementation of this amended and restated Program does not foreclose
resolution of fiduciary Breaches by other means, including entering
into settlement agreements with the Department.
Comments may be submitted on any aspect of the VFC Program,
including the amendments being announced in this document. The
Department is particularly interested in comments on whether the
Program should be further expanded in four respects.
First, EBSA has undertaken a nationwide compliance initiative to
help retirement plans focus on practices to maintain complete and
accurate census information, communicate with participants and
beneficiaries about their eligibility for benefits, and implement
effective policies and procedures to locate missing participants and
beneficiaries. The Agency has a national enforcement project focused on
these issues in defined benefit plans, has issued a compliance
assistance release, and published a set of best practices that the
fiduciaries of defined benefit and defined contribution plans, such as
401(k) plans, can follow to ensure that plan participants and
beneficiaries receive promised benefits when they reach retirement age.
The Department is interested in public comments on whether the VFC
Program should include a transaction for correction of fiduciary
breaches involved in such recordkeeping, communication, and benefit
payment failures.
Second, the VFC Program contains a transaction for certain
participant loans that fail to qualify for ERISA's statutory exemption
for plan loan programs in ERISA section 408(b)(1). The covered
transaction is for a loan the terms of which did not comply with plan
provisions that incorporated requirements of section 72(p) of the Code.
The VFC Program requires that the plan official voluntarily correct the
loan with IRS approval under the Voluntary Correction Program of the
IRS' Employee Plans Compliance Resolution System (EPCRS). The
Department is interested in public comments on whether there are other
circumstances in which the VFC Program could be integrated with
corrections under EPCRS. For example, the IRS now allows participant
loan transactions to be corrected under the Self-Correction Program
component of EPCRS, but the VFC Program does not have a corollary self-
correction component for participant loan transactions and requires
that applicants correct participant loan transactions under the normal
EPCRS procedures to be eligible for VFC Program correction under Title
I of ERISA. Further, the latest updated version of EPCRS in Rev.
[[Page 71171]]
Proc. 2021-30 makes improvements to the program's rules for correcting
benefit overpayments from defined benefit (DB) pension plans that give
DB plan fiduciaries new options for correcting such overpayments and
addressing inequities that may arise if the plan seeks to place a
repayment burden on the participant. The Department has issued guidance
that the hardship of a participant or beneficiary resulting from a
recovery attempt, or the cost of collection efforts, may be such that
it would be prudent for the plan not to seek recovery notwithstanding
the fact that an overpayment of benefits to a participant or
beneficiary may involve a fiduciary's failure to properly administer
the plan in accordance with the terms of the plan's governing
documents. See Advisory Opinions 77-07, 77-08, 77-32A, 77-33, 77-34.
The Department is interested in comments on whether changes should be
made to better integrate the VFC Program provisions on participant loan
transactions with the IRS EPCRS and whether a transaction for
correcting overpayments from DB pension plans should be added to the
VFC Program that is integrated with correction of the overpayment under
the IRS EPCRS.
Third, the Department is considering revising the program to either
permit or require that VFC Program applications be submitted
electronically. The Department is evaluating available alternative
approaches to e-submission, e.g., email versus an internet or web-based
portal, but is particularly interested in comments on whether e-
submission should be required and whether applicants or classes of
applicants have issues or challenges with e-submission that the
Department should consider ways to accommodate. The VFC Program
application process is currently administered out of EBSA's Regional
Offices. Some EBSA Regional Offices have email boxes that can be used
for e-submission of VFC Program applications and supporting documents.
As an interim step while EBSA considers a more uniform approach, text
is being added to the VFC Program to encourage applicants to contact
the relevant Regional Office about email submission options and format
requirements, e.g., penalty of perjury statements.
Fourth, on June 3, 2022, the IRS announced a pre-audit compliance
pilot program for retirement plans. See Employee Plans News [verbar]
Internal Revenue Service at <a href="http://www.irs.gov/retirement-plans/employee-plans-news">www.irs.gov/retirement-plans/employee-plans-news</a>. Under the program, the IRS will send a pre-audit letter to
plan sponsors whose retirement plans have been selected for audit
giving the plan sponsor a 90-day window to review the plan's documents
and operations to determine if they meet current tax law requirements.
If that review reveals mistakes, the plan sponsor may be able to self-
correct or request a closing agreement, notify the IRS of correction
actions taken and potentially avoid or limit the scope of the IRS
examination. The goal is to reduce taxpayer burden and reduce the
amount of time spent on retirement plan examinations. The IRS
newsletter states that at the end of the pilot, the IRS intends to
evaluate its effectiveness and determine if it should continue to be
part of the IRS' overall compliance strategy. This is a change from the
IRS' existing position that generally allows voluntary correction only
until the IRS had identified the plan for audit. The VFC Program
includes a similar principle under which persons are ineligible to use
the VFC Program if they have received written or oral notice of an
investigation, review, or examination by EBSA, IRS, and certain other
governmental authorities. The Department is interested in comments on
whether it should adopt a pre-audit program similar to the IRS pilot
program, and if so, whether the ``under investigation'' provisions of
the VFC Program should be revised to accommodate voluntary correction
of covered transactions in connection with such a pre-audit program.
D. Regulatory Impact Analysis
The following is a discussion of the examination of the effects of
this regulatory action as required by Executive Order 12866,\13\
Executive Order 13563,\14\ the Paperwork Reduction Act of 1995,\15\ the
Regulatory Flexibility Act,\16\ section 202 of the Unfunded Mandates
Reform Act of 1995,\17\ Executive Order 13132,\18\ and the
Congressional Review Act.\19\
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\13\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\14\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 18, 2011).
\15\ 44 U.S.C. 3506(c)(2)(A) (1995).
\16\ 5 U.S.C. 601 et seq. (1980).
\17\ 2 U.S.C. 1501 et seq. (1995).
\18\ Federalism, 64 FR 153 (Aug. 4, 1999).
\19\ 5 U.S.C. 804(2) (1996).
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Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing and streamlining rules, and
of promoting flexibility.
Under Executive Order 12866, ``significant'' regulatory actions are
subject to the requirements of the executive order and review by the
Office of Management and Budget (OMB). Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as an action that is
likely to result in a rule (1) having an annual effect on the economy
of $100 million or more, or adversely and materially 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. For
this purpose, a ``rule'' includes ``an agency statement of general
applicability and future effect . . . that is designed to implement,
interpret, or prescribe . . . policy or to describe the procedure or
practice requirements of an agency.''
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, OMB has reviewed this action, and
the Department has assessed the costs and benefits of its amended
enforcement policy and related PTE proposal.
The VFC Program is designed to provide an efficient, cost-effective
method for Plan Officials to correct a variety of ERISA fiduciary
breaches and prohibited transactions and receive Departmental
recognition of the correction. The Department expects that the
amendments to the VFC Program will increase efficiency and
accessibility for potential applicants and self-correctors. These
changes, described further below, include in part, a new Self-
Correction Component for delinquent participant contributions and loan
repayments involving Lost Earnings less than or equal to $1,000,
acceptance of bulk applications with modified requirements, and
increased flexibility in the procedures for a variety of other
transactions. These changes
[[Page 71172]]
also include proposed elimination from the exemption of a three-year
limitation for VFC Program applicants that take advantage of the relief
provided by the VFC Program and the exemption for a similar type of
transaction.
All pension and welfare plans can utilize the VFC Program if they
have a fiduciary breach for which there is an eligible transaction.
Parties that are covered by section 4975 of the Code can rely on the
related class exemption for excise tax relief for transactions
identified in the exemption that are corrected under the VFC Program.
In 2019 there were 686,809 defined contribution plans and 46,870
defined benefit plans that would be impacted by these changes.\20\ In
2021 there were 2,468,363 health plans \21\ and 673,000 other welfare
benefit plans that would also be impacted by these changes.\22\
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\20\ Employee Benefits Security Administration. ``Private
Pension Plan Bulletin: Abstract of 2019 Form 5500 Annual Reports.''
(September 2021).
\21\ U.S. Department of Labor, EBSA calculations using the 2021
Medical Expenditure Panel Survey, Insurance Component (MEPS-IC), the
Form 5500 and 2019 Census County Business Patterns.
\22\ U.S. Department of Labor, EBSA calculations using non-
health welfare plan Form 5500 filings and projecting non-filers
using estimates based on the non-filing health universe.
---------------------------------------------------------------------------
An average of 1,429 applicants per year used the VFC Program from
2018 to 2020. Since the Department does not have data on the Self-
Correction Component, as it is new, the Department assumes that 74
percent of VFC Program applicants will move to the Self-Correction
Component.\23\ The Department projects that the changes to the VFC
Program will result in two new Program users filing bulk applications,
367 Program users filing non-bulk applications,\24\ 1,072 plans using
the new Self-Correction Component,\25\ for a total of 1,441 users of
the program and PTE.\26\
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\23\ The Department estimates that the Self-Correction Component
will streamline the process for the 74 percent of small and large
VFC Program applicants involving lost earnings less than or equal to
$1,000.
\24\ 1,429 applicants x (100% minus 74.3%) = 367 non-bulk
applicants.
\25\ The estimate includes a one percent increase in the number
of self-corrections, resulting from the removal of the three-year
limitation provision for self-correctors. (1,429 applicants x 74.3%
x 1.01 = 1,072.)
\26\ 1,072 self-correctors + 2 bulk applicants + 367 non-bulk
applicants = 1,441 Program Users.
---------------------------------------------------------------------------
The Department believes that the benefits of the amended VFC
Program and related PTE justify its costs. Because participation is
voluntary, the VFC Program imposes no costs unless Plan Officials
choose to avail themselves of the opportunity to correct a potential
fiduciary breach under the terms of the VFC Program. The Department
expects that the revised VFC Program will be easier and more useful for
potential applicants. The greater efficiency and accessibility that
will result from the availability of a Self-Correction Component for
delinquent participant contributions, and other expansions and
clarifying modifications of the Program, are expected to make the
Program easier to use, to lessen the cost of participation in many
instances, and to increase efficiency for both applicants and
reviewers.
The VFC Program has been very successful to date in encouraging and
facilitating the correction of violations. The Department anticipates
that the revised VFC Program will encourage Plan Officials, who
otherwise might not do so, to correct violations and reimburse plan
losses. The Department is unable to predict with certainty either the
reduction in application costs that will arise from the revisions to
the Program, or the potential increase in participation that will be
associated with these revisions. However, these changes to the VFC
Program will reduce associated costs by reducing the number of hours
required to make corrections and file applications. Compared with the
existing VFC Program, the Department expects the amended Program's per-
user costs to be lower because the amendments could move 74 percent of
VFC Program applications to the Self-Correction Component.\27\
Moreover, implementing the Self-Correction Component will reduce the
recordkeeping and reporting cost for Plan Officials with small amounts
of delinquent participant contributions and loan repayments, because
they no longer will have to submit an application to the Department
with extensive supporting documentation, but merely submit a self-
correction notice with minimal data to the Department and provide
corroborating documentation to the plan administrator. This Self-
Correction Component provides additional flexibility to Plan Officials.
The Department is also providing additional flexibility by proposing to
eliminate the three-year limitation in the PTE. The Department
estimates that the total cost savings associated with the Self-
Correction Component is $206,550.\28\
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\27\ The Department estimates that the Self-Correction Component
will streamline the process for 74 percent of small and large VFC
cases involving lost earnings less than or equal to $1,000.
\28\ The Department estimates that the quantified cost of the
VFC Program before the addition of the Self-Correction Component
would have been $794,724. The Department estimates that the
quantified cost of the VFC Program with the Self-Correction
Component is $588,174. Thus, the Department estimates that total
cost savings associated with the Self-Correction Component is
$206,550 ($794,724-$588,174).
---------------------------------------------------------------------------
Plans or their service providers will need to familiarize
themselves with the changes to the VFC Program and amendments to the
PTE. Service providers can help multiple plans in a year or across
years, so although it could take a service provider multiple hours to
review the amended requirements the actual burden impact on an
individual plan would be less. With an hourly rate for the in-house
compensation and benefits manager of $124.75 per hour,\29\ the
Department estimates that the total cost burden for compensation and
benefit managers to become familiar with the changes to the VFC Program
and amended PTE will be $359,530.\30\
---------------------------------------------------------------------------
\29\ Internal DOL calculation based on 2021 labor cost data. For
a description of the Department's methodology for calculating labor
rates, see: <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf</a>.
\30\ 1,441 users x 2 hours x $124.75 = $359,530.
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Overall, the Department estimates that the costs of the VFC Program
and the associated class exemption, in their amended forms, would total
approximately $1,359,006 ($1,289,305 in annual equivalent costs
reflecting the monetized cost of the work performed by in-house
personnel and outside service providers and $69,701 in annual cost
burden reflecting the cost of materials and postage). These costs are
quantified and discussed in more detail in the Paperwork Reduction Act
section, below. This total represents a cost savings due to the new
Self-Correction Component.
Benefits for Plan Officials who are granted relief under the VFC
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 by
the Department based on the breach. An additional and significant
benefit of the VFC Program accrues to participants and beneficiaries
through the correction of fiduciary breaches 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 changes to the VFC Program will
allow Plan Officials to obtain the above benefits at a reduced cost.
The Department hopes that this cost reduction may encourage other Plan
Officials to correct previously undetected and unreported fiduciary
breaches, which would enhance the retirement income security of
participants and beneficiaries; however,
[[Page 71173]]
it has no data to reliably predict the extent of the increased usage.
The Department will continue to actively monitor the use of the VFC
Program in order to better evaluate its benefits and costs.
Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) \31\ imposes certain
requirements with respect to federal rules that are subject to the
notice and comment requirements of section 553(b) of the Administrative
Procedure Act, or any other law, and are likely to have a significant
economic impact on a substantial number of small entities.\32\ Unless
the head of an agency certifies that a proposed rule will not have a
significant economic impact on a substantial number of small entities,
section 603 of the RFA requires the agency to prepare and make
available for public comment an initial regulatory flexibility analysis
of the proposed rule.\33\
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\31\ 5 U.S.C. 601 et seq. (1980).
\32\ 5 U.S.C. 551 et seq. (1946).
\33\ 5 U.S.C. 604 (1980).
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This document describes an enforcement policy of the Department
that is not being issued as a general notice of proposed rulemaking.
Therefore, the RFA does not apply. However, the Department is also
issuing a proposed amendment to a class exemption (PTE 2002-51) to
which the Regulatory Flexibility Act does apply. The Department
certifies that the amendments to PTE 2002-51 will not have a
significant economic impact on a substantial number of small entities.
However, EBSA considered the potential costs and benefits of this
action for small pension plans and the Plan Officials in developing the
proposed amendment to the class exemption and believes that its greater
simplicity and accessibility would make the Program more useful to
small employers who wish to avail themselves of the relief offered
under the exemption. Below is the factual basis for the certification.
As mentioned previously, all pension and welfare plans can utilize
the VFC Program with the related PTE if they have a fiduciary breach
for which there is an eligible transaction. In 2019 there were 600,165
small defined contribution plans and 39,586 small defined benefit plans
and plan officials that would be impacted by these changes.\34\ In 2021
there were 2,386,024 small health plans that would also be impacted by
these changes.\35\ Currently 1,429 plan fiduciaries make use of the VFC
Program in a given year and the Department projects a small increase to
1,441 fiduciaries making use of the VFC Program in a given year. An
estimated 1,072 plans will utilize the new Self-Correction Component in
a given year.
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\34\ Employee Benefits Security Administration. ``Private
Pension Plan Bulletin: Abstract of 2019 Form 5500 Annual Reports.''
(September 2021).
\35\ U.S. Department of Labor, EBSA calculations using the 2021
Medical Expenditure Panel Survey, Insurance Component (MEPS-IC), the
Form 5500 and 2019 Census County Business Patterns.
---------------------------------------------------------------------------
The Department is proposing to amend the related PTE so that excise
tax relief will be available for transactions that are corrected under
the Self-Correction Component. The Department is also proposing to
amend the PTE to eliminate the three-year limitation. Thus, all plans
eligible to use the VFC Program would be eligible to use the PTE more
than just once every three years. However, the Department estimates
that, of the total number of pension and welfare plans significantly
less than one percent will use the PTE in a given year.\36\
---------------------------------------------------------------------------
\36\ In 2019, there were 733,678 pension plans. (Source:
Employee Benefits Security Administration. ``Private Pension Plan
Bulletin: Abstract of 2019 Form 5500 Annual Reports.'' (September
2021).) In 2021, there were 673,000 welfare benefit plans. (Source:
U.S. Department of Labor, EBSA calculations using non-health welfare
plan Form 5500 filings and projecting non-filers using estimates
based on the non-filing health universe.) Thus, 0.08% of all pension
and welfare plans will use the PTE in a given year. (1,072 plans/
(733,678 plans + 673,000 welfare benefit plans) = 0.08%.)
---------------------------------------------------------------------------
The proposed amended PTE would provide excise tax relief for self-
correctors if they pay the amount of the excise tax owed to the plan.
The Self-Correction Component can only be used in situations where the
size of lost earnings is $1,000 or less. Section 4975(a) imposes an
excise tax on each prohibited transaction equal to 15 percent of the
amount involved with respect to the prohibited transaction for each
year (or part thereof) in the taxable period. Therefore, the maximum
excise tax owed for each year would generally not exceed $150.\37\
---------------------------------------------------------------------------
\37\ Under Reorganization Plan No. 4 of 1978, supra n. 1, the
Secretary of the Treasury retains interpretive authority over Code
sections 4975(a) and (b).
---------------------------------------------------------------------------
Plans or their service providers will need to familiarize
themselves with the amendments to the PTE. Service providers can help
multiple plans in a year or across years, so although it could take a
service provider multiple hours to review the amended requirements the
actual burden impact on an individual plan would be less. The
Department estimates that all 1,072 self-correctors will use the new
provisions of the amended class exemption.\38\ The per-plan cost for
rule familiarization would be $125.\39\
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\38\ Internal DOL calculation based on 2021 labor cost data. For
a description of the Department's methodology for calculating labor
rates, see: <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf</a>.
\39\ With an hourly rate for the in-house compensation and
benefits manager of $124.75 per hour and one hour of burden
allocated to a plan the burden be plan would be $125 (rounded).
---------------------------------------------------------------------------
For plans with the maximum lost earnings of $1,000 and an excise
tax of 15 percent the maximum excise tax in each year would generally
not exceed $150. Including the cost of rule familiarization of $125,
the total expense could be $275 in a year. Based on the foregoing, the
Department hereby certifies that these proposed amendments will not
have a significant economic impact on a substantial number of small
entities. Therefore, the Department has not prepared an Initial
Regulatory Flexibility Analysis.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
provide the general public and federal agencies with an opportunity to
comment on proposed and continuing collections of information in
accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C.
3506(c)(2)(A)). This helps to ensure that requested data can be
provided in the desired format, reporting burden (time and financial
resources) is minimized, collection instruments are clearly understood,
and the impact of collection requirements on respondents can be
properly assessed.
The ICRs in the VFC Program and PTE 2002-51 are currently approved
under OMB Control Number 1210-0118. A copy of the ICRs may be obtained
by contacting the office listed in the Addresses section below.
The Department is seeking comment the revisions to the information
collections in the enforcement policy and proposed amendments to PTE
2002-51. The Department is particularly interested in comments that:
<bullet> Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
<bullet> Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
[[Page 71174]]
<bullet> Enhance the quality, utility, and clarity of the
information to be collected; and
<bullet> Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Dates: Written comments must be submitted to the office shown in
the Addresses section on or before January 20, 2023.
Addresses: Comments should be sent to James Butikofer, Office of
Research and Analysis, U.S. Department of Labor, Employee Benefits
Security Administration, 200 Constitution Avenue NW, Room N-5718,
Washington, DC 20210 or email: <a href="/cdn-cgi/l/email-protection#86e3e4f5e7a8e9f6f4c6e2e9eaa8e1e9f0"><span class="__cf_email__" data-cfemail="45202736246b2a353705212a296b222a33">[email protected]</span></a>.
The amended VFC Program, described above, includes a Self-
Correction Component for delinquent participant contributions and loan
repayments to pension plans involving Lost Earnings less than or equal
to $1,000, streamlined requirements for bulk applications, and it
expands and modifies transactions that are currently eligible for the
VFC Program. The Self-Correction Component permits applicants to self-
correct, and then provide EBSA with a notice of the self-correction
through the online VFC Program web tool. Service providers are able to
submit bulk applications to the VFC Program, under the existing terms
and requirements of the Program, with some easing of the eligibility
and information requirements. Under the new bulk applicant provisions,
the bulk applicant will receive a no action letter providing relief
only to the service provider correcting transactions involving each of
the plans named in the application.
An average of 1,429 applicants per year used the VFC Program from
2018 to 2020. Since the Department does not have data on the Self-
Correction Component, as it is new, the Department assumes that 74
percent of VFC Program applicants will move to the Self-Correction
Component.\40\ The Department projects that the changes to the VFC
Program will result in two new Program users filing bulk applications,
367 Program users filing non-bulk applications,\41\ 1,072 plans using
the new Self-Correction Component,\42\ for a total of 1,441 users of
the program and PTE.\43\
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\40\ The Department estimates that the Self-Correction Component
will streamline the process for the 74 percent of small and large
VFC Program applicants involving lost earnings less than or equal to
$1,000.
\41\ 1,429 applicants x (100% minus 74.3%) = 367 non-bulk
applicants.
\42\ The estimate includes a one percent increase in the number
of self-corrections, resulting from the removal of the three-year
limitation provision for self-correctors. (1,429 applicants x 74.3%
x 1.01 = 1,072.)
\43\ 1,072 self-correctors + 2 bulk applicants + 367 non-bulk
applicants = 1,441 Program Users.
---------------------------------------------------------------------------
In addition to the VFC Program, the Department is publishing a
proposed amendment to the associated class exemption PTE 2002-51, which
applies only to qualifying applicants and self-correctors participating
in the VFC Program. The exemption is currently unavailable to VFC
Program applicants that have, within the previous three years, taken
advantage of the relief provided by the VFC Program and the exemption
for a similar type of transaction. The Department is proposing to
eliminate the three-year limitation. The three-year provision was
initially included in the exemption to prevent parties from becoming
lax in complying with fiduciary and other ERISA duties because of the
availability of the exemption. Based on the Department's experience
with the VFC Program and the exemption, the Department concluded that
the risk of such behavior is low.
The overall paperwork burden for the amended VFC Program and the
amended PTE 2002-51 is provided below.
VFC Program
For the VFC Program, the Department estimates that Plan Officials
will devote 2.5 hours of clerical staff gathering paperwork, one hour
of a compensation and benefits manager calculating Lost Earnings, and
one hour of clerical staff engaging in recordkeeping activities for
each non-bulk application or self-correction. The Department estimates
that for each bulk application, Plan Officials will devote 25 hours of
clerical staff gathering paperwork, 10 hours of a compensation and
benefits manager calculating Lost Earnings, and 10 hours of clerical
staff engaging in recordkeeping activities. Therefore, total burden
hours for Plan Officials will equal approximately 6,566 hours.\44\ With
an hourly rate for the in-house compensation and benefits manager of
$124.75 per hour \45\ and an hourly rate for in-house clerical staff of
$58.66 per hour,\46\ this results in an equivalent cost of
approximately $481,558.\47\
---------------------------------------------------------------------------
\44\ [((1,072 self-correctors) + 367 non-bulk applicants) x (2.5
hours of gathering paperwork + 1 hour of calculating Lost Earnings +
1 hour of recordkeeping)] + [2 bulk applicants x (25 hours of
gathering paperwork + 10 hours of calculating Lost Earnings + 10
hours of recordkeeping)] = 6,566 hours.
\45\ Internal DOL calculation based on 2021 labor cost data. For
a description of the Department's methodology for calculating labor
rates, see: <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf</a>.
\46\ Ibid.
\47\ [((1,072 self-correctors) + 367 non-bulk applicants) x (2.5
hours of gathering paperwork x $58.66 + 1 hour of calculating Lost
Earnings x $124.75 + 1 hour of recordkeeping x $58.66)] + [2 bulk
applicants x (25 hours of gathering paperwork x $58.66 + 10 hours of
calculating Lost Earnings x $124.75 + 10 hours of recordkeeping x
$58.66)] = $481,558.
---------------------------------------------------------------------------
The Department estimates that external service providers will spend
about 10 minutes completing and submitting the online Self-Correction
Component notice, 20 hours completing and submitting bulk applications,
and two hours completing and submitting all other applications.\48\
Therefore, total hour burden for external service providers will be 952
hours.\49\ With a rate of $108.04 per hour for an accounting
professional,\50\ the hour burden is equivalent to approximately
$102,926.\51\
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\48\ It should be noted that the required checklist for
applications filed with the Department under the Program appears
twice within the Appendices to the Program. While it is required to
be submitted only once, it is included as the separate Appendix B
for applicants who do not choose to use the model application in
Appendix E, and separately as the final item in the model
application for ease of use for those who do choose to use the model
application.
\49\ (1,072 self-correctors 10 minutes) + (367 non-bulk
application x 2 hours) + (2 bulk application x 20 hours) = 952
hours.
\50\ Internal DOL calculation based on 2021 labor cost data. For
a description of the Department's methodology for calculating labor
rates, see: <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf</a>.
\51\ (1,072 self-correctors x 10 minutes x $108.04) + (367 non-
bulk application x 2 hours x $108.04) + (2 bulk application x 20
hours x $108.04) = $102,926.
---------------------------------------------------------------------------
Factoring in mailing costs of $10 per application for all
applications except those under the Self-Correction Component, the
total cost burden for applicants will be approximately $3,690.\52\
---------------------------------------------------------------------------
\52\ (367 non-bulk applications + 2 bulk applications) x $10
materials and postage per application = $3690.
---------------------------------------------------------------------------
The total hour burden associated with the VFC Program will be 7,518
hours with an equivalent cost of $584,484. The total cost burden
associated with the VFC Program will be $3,690.
VFCP Class Exemption (PTE 2002-51)
The Department estimates that all 1,072 self-correctors and 286 of
the VFC Program applicants will use the amended class exemption. The
Department has determined that service
[[Page 71175]]
providers will prepare the documentation required by the exemption at a
cost of $108.04 per hour, which will require approximately one hour for
completion and delivery. The hour burden associated with the exemption
therefore is 1,358 hours with an equivalent cost of $146,718.\53\
---------------------------------------------------------------------------
\53\ 1 hour x 1,358 users = 1,358 hours; 1 hour x 1,358 users x
$108.04 per hour x = $146,718.
---------------------------------------------------------------------------
Of the 286 VFC Program applicants using the exemption, 167 VFC
Program applicants are required to send notices to their participants
and beneficiaries.\54\ Mailing notices to these 167 VFC Program
applicants' estimated 242,956 participants and beneficiaries will
result in a cost burden of $66,011 \55\ and a hour burden of 3,385
hours \56\ and an equivalent cost of $198,574.
---------------------------------------------------------------------------
\54\ The 1,072 self-correctors that meet the requirements of
section IV D. of the exemption and 167 VFC Program applicants for
whom a small amount of excise taxes otherwise would be imposed and
that meet the requirement of section IV C. of the exemption are not
required to provide the notice.
\55\ For materials and postage for paper notices. 242,956
notices x 41.8% paper notices x ($0.65 per paper notice)] = $66,011.
Electronic notices will be distributed at de minimis cost.
\56\ For labor costs for paper notices. 242,956 notices x 41.8%
paper notices x 2 minutes = 3,385; 242,956 notices x 41.8% paper
notices x 2 minutes x $58.66 = $198,574. Electronic notices will be
distributed at de minimis cost.
---------------------------------------------------------------------------
The total hour burden associated with the VFCP exemption will be
4,743 hours with an equivalent cost of $345,292. The total cost burden
associated with the VFCP exemption will be $66,011.
Summary
The total aggregate annual hour burden for the information
collection arising from the VFC Program and the exemption is estimated
at 12,261 hours with an equivalent cost of $929,776 (7,518 hours with
an equivalent cost of $584,484 for the VFC Program, 4,743 hours with an
equivalent cost of $345,292 for VFCP exemption).
The total aggregate annual cost burden for the information
collection arising from the VFC Program and the exemption is estimated
at $69,701 ($3,690 for the VFC Program and $66,011 for VFCP exemption).
In summary, the categories in the table below encompass the numbers
for both the 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: 1,442.
Frequency of Response: On occasion.
Responses: 244,397.
Estimated Total Burden Hours: 12,261.
Total Annual Cost (Operating and Maintenance): $69,701.
Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the information
collection request; they will also become a matter of public record.
The Department notes that persons are not required to respond to the
revised information collection unless it displays a currently valid OMB
control number.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, this action does not include
any Federal mandate that may result in expenditures by State, local, or
tribal governments in the aggregate of more than $100 million, adjusted
for inflation, or increase expenditures by the private sector of more
than $100 million, adjusted for inflation.
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
States, or on the distribution of power and responsibilities among the
various levels of government. Federal agencies promulgating regulations
that have federalism implications must consult with State and local
officials and describe the extent of their consultation and the nature
of the concerns of State and local officials. This action does 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 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
amendments of the VFC Program in this document 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 1-2011, 77 FR 1088
(January 9, 2012). 29 U.S.C. 1132(a)(2) and (a)(5), 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 Determinations
(b) Correction Amount
(c) Costs of Correction
(d) Distributions
(e) De Minimis Exception
Section 6. VFC Program Application and Self-Correction Component
Procedures
6.1 VFC Program Application Procedures
6.2 VFC Program Self-Correction Component Procedures
Section 7. Description of Eligible Transactions and Corrections Under
the VFC Program
7.1 Delinquent Remittance of Funds
(a) Delinquent Participant Contributions and Loan Repayments to
Pension Plans Under VFC Program Applications
(b) Delinquent Participant Contributions and Loan Repayments to
Pension Plans Under the Self-Correction Component
(c) Delinquent Participant Contributions to Insured Welfare Plans
(d) 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
[[Page 71176]]
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 Application Checklist (Required)
Appendix C. List of EBSA Regional Offices
Appendix D. Lost Earnings Example
Appendix E. Model Application Form (Optional)
Appendix F. SCC Retention Record Checklist (Required)
Section 1. Purpose and Overview of the VFC Program
The purpose of the Voluntary Fiduciary Correction Program (VFC
Program or Program), including its Self-Correction Component (SC
Component or SCC), is to protect the financial security of workers by
encouraging identification and correction of transactions that violate
or may 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 breach of fiduciary
responsibility by a co-fiduciary. 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)(1) Effect of a no action letter. EBSA generally will issue to
the applicant a no action letter \57\ with respect to a Breach
identified in the Program 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.
---------------------------------------------------------------------------
\57\ See Appendix A.
---------------------------------------------------------------------------
(2) Effect of correction under the SCC. EBSA will not issue a no
action letter to a self-corrector under the Self-Correction Component
of the Program. A self-corrector will receive an acknowledgment and
summary of the SCC notice submission by email. If the self-corrector
satisfies the eligibility requirements of section 4 and corrects a
Breach, as defined in section 3, in accordance with the requirements of
sections 5, 6 and 7, EBSA will not initiate a civil investigation under
Title I of ERISA regarding the self-corrector's responsibility for the
Breach identified in the SCC notice or assess civil penalties under
section 502(l) or 502(i) of ERISA on the correction amount paid to the
plan or its participants.
(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 Program
application or the SCC notice and (2) that the corrective action was,
in fact, taken.
(c) Limits on the effect of a no action letter under 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 Breaches not specifically
described in the Program, the relief afforded by the Program would not
extend to such additional Breaches.
(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 issuing a rejection 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 from making the appropriate referrals of criminal
violations as required by section 506(b) of ERISA.\58\
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\58\ 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:
[[Page 71177]]
(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 as required by section 3003(c) of ERISA; \59\
or
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\59\ 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, the Secretary
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) Limits on the effect of self-correction under the SCC. (1) In
general. Any relief afforded by a self-correction under the SCC is
limited to the Breaches described in section 7.1(b) of the Program and
to the Plan Officials who complete the Penalty of Perjury Statement in
accordance with section 6.2(e). If a transaction gives rise to Breaches
not specifically described in section 7.1(b) of the Program, the relief
afforded by the SCC will not extend to such additional Breaches.
(2) Self-corrector fails to satisfy the terms of the SCC. If a
self-corrector fails to satisfy the terms of the SCC, 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
self-correction.
(3) Criminal investigations not precluded. Participation in the SCC
will not preclude:
(i) EBSA or any other governmental agency from conducting a
criminal investigation of the transactions identified in section 7.1(b)
of the Program;
(ii) EBSA's assistance to such other agency; or
(iii) EBSA from making the appropriate referrals of criminal
violations as required by section 506(b) of ERISA.\60\
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\60\ See supra note 58.
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(4) Other actions not precluded. Compliance with the terms of the
SCC 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; or
(ii) 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. Self-correctors should be aware that amended
annual report filings may be required if action is taken to correct a
Breach in accordance with submitting an SCC notice.
(5) Not binding on others. Compliance with the SCC 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 regarding
the Breach corrected under the SCC.
Example. The plan sponsor withheld monies from employees'
paychecks, which were to be contributed, in part, to both a 401(k) plan
and an insured health benefit plan. The plan sponsor did not remit the
funds to either plan until four months after the Date of Withholding or
Receipt. The plan sponsor corrects both Breaches and pays the
appropriate Lost Earnings amount to each of the plans. The plan sponsor
properly completes and submits an SCC notice to EBSA identifying the
transaction involving the 401(k) plan. Assuming all conditions of the
SCC have been met, relief under the Program is provided to the plan
sponsor as the self-corrector for the delinquent participant
contributions to the 401(k) plan, but not for the delinquent
participant contributions to the insured health benefit plan. However,
the plan sponsor may submit an application to correct the Breach
involving the insured health benefit plan contributions under section
7.1(c) of the Program.
(e) Correction. The correction criteria listed in the VFC Program
represent EBSA enforcement policy with respect to both applications
under the Program and use of the SC Component, 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 Breach.
Applicants and self-correctors 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).\61\ 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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\61\ 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 federal tax treatment of a violation
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. The IRS has indicated
that, unless and until the Department of the Treasury and the IRS
issue further guidance, 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 be treated
as correction for purposes of section 4975. Also, a correction under
the VFC Program for a breach that also constitutes an operational
plan qualification failure generally will be treated as correction
for purposes of the IRS' EPCRS.
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(f) 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 or SCC
notice 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 SCC notice, 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.
(g) Confidentiality. EBSA will maintain the confidentiality of any
documents submitted under the VFC Program, to the extent permitted by
law. However, as noted in paragraphs (c)(5) and (6) and (d)(3) and (4)
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.
[[Page 71178]]
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 violation of the fiduciary responsibility provisions 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 by filing an
application or submitting a self-correction notice in accordance with
the VFC Program's requirements.
(3) Under Investigation. For purposes of section 4(a), a plan,
potential applicant or self-corrector shall be considered to be ``Under
Investigation'' if any investigation, review or examination described
in (i), (ii), (iii), (iv) or (v) of this section 3 exists, and the
plan, a Plan Official, or any authorized plan representative has
received a written or oral notice of the investigation, review or
examination.
(i) EBSA is conducting an investigation or review of the plan;
(ii) EBSA is conducting an investigation of the potential
applicant, self-corrector 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, self-
corrector or plan sponsor in connection with an act or transaction
directly related to the plan;
(iv) the IRS is conducting an Employee Plans examination of the
plan; or
(v) Other than investigations identified in sections 3(b)(3)(i),
(ii), (iii), or (iv), the Pension Benefit Guaranty Corporation (PBGC),
any state attorney general, any federal governmental agency, or any
state insurance commissioner is conducting an investigation or
examination of the plan, or of the applicant, self-corrector or plan
sponsor in connection with an act or transaction directly related to
the plan, unless in the case of a VFC Program application, the
applicant notifies EBSA, in writing, of such an investigation or
examination at the time of the application.
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, the self-corrector or the plan sponsor in
connection with a participant complaint, unless the participant
complaint concerns the transaction described in the application or
identified in the SCC notice and the plan has not received the
correction amount due under the Program as of the date EBSA staff
contacted the plan, the applicant, the self-corrector 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 based on
such accountant's audit of the plan 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) The plan, the applicant, or the self-corrector is not Under
Investigation.
(b)(1) In general. The Program application contains no evidence of
potential criminal violations as determined by EBSA.
(2) Exception for VFC Program applications correcting transactions
described in Section 7.1(a). Participation in the VFC Program to
correct delinquent participant contributions and loan repayments is
permitted in cases where there is evidence of potential criminal
violation by parties other than the plan administrator, the plan
sponsor or the applicant provided:
(i) all funds have been repaid to the plan;
(ii) the appropriate law enforcement agency has been notified of
the potential criminal violation; and
(iii) the applicant submits to the appropriate EBSA office a
statement (A) providing contact information for the law enforcement
agency that has been notified of the alleged criminal activity; (B)
asserting that the applicant was not involved in the potential criminal
violation; and (C) stating whether a claim relating to the criminal
activity has been made under an ERISA section 412 fidelity bond.
Example. The bookkeeper of the plan sponsor of a 401(k) plan
allegedly embezzled funds from the plan sponsor, including amounts
which had been withheld from employees' paychecks but not yet forwarded
to the plan. As a result of the embezzlement, participant contributions
were remitted to the plan two months later than the plan sponsor's
usual practice. The owner of the company sponsoring the plan was not
involved in the embezzlement and notified local law enforcement of the
embezzlement. This owner is eligible to submit an application for
relief under the VFC Program despite the potential criminal violation
if the requirements under section 4(b)(2) are met. Note that the owner
is not eligible for relief under the SCC because the exception under
section 4(b)(2) is only available to applicants under the VFC Program
and not the SC Component.
(c) EBSA has not conducted an investigation which resulted in
written notice to a plan fiduciary that the transaction, for which the
potential applicant or self-corrector could otherwise have sought
relief under the Program, has been referred to the IRS. This condition
applies only to those transactions specifically identified in
[[Page 71179]]
EBSA's written notice of referral to the IRS.
(d) Exception for Bulk VFC Program Applicants. An applicant is
eligible to submit a bulk application under the VFC Program, even if
one or more of the plans named in the application (``named plans'') is
Under Investigation, and to receive a no action letter covering each of
the named plans provided: (1) the applicant is a service provider that
is seeking the relief afforded by the Program only on its own behalf;
(2) the applicant was providing services to each of the named plans at
the time of the transaction being corrected; (3) the application
includes at least ten named plans; (4) all named plans participated in
the transaction being corrected; and (5) the corrective action was not
taken as a result of an investigation of any named plan. A
determination by EBSA that the corrective action was taken as a result
of an investigation of any named plan results in the no action letter
specifically excluding such plan.
Example. A bank provides investment management services to pension
plans. As part of these services, it bought bonds on behalf of its plan
clients directly from a broker dealer's inventory. The bank
independently discovered that the broker dealer is an affiliate of the
bank and consequently, a party in interest to the plans (PII). No
available class exemption permitted these purchases. The bank's review
showed it had bought bonds for thirty-three (33) of its plan clients
from the PII broker dealer. The bank, as a service provider to the
plans, may submit a bulk application correcting the transaction in
compliance with section 7.4(a) of the Program provided the application
names all 33 plans that participated in the transaction and the bank is
seeking relief only on its own behalf under the Program. Assuming the
applicant has complied with the terms of the VFC Program, EBSA will
issue a no action letter to the service provider, which includes the
name of each of the participating plans.
Section 5. General Rules for Acceptable Corrections
(a) Fair Market 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 conditions in (1) through (4) below. Other corrections require that
a fair market interest rate be determined as of a particular date,
usually the date the loan was made. In order to be acceptable as part
of a VFC Program correction, this determination must be made by an
independent commercial lender, which meets the conditions in (5) below:
(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 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 the appraiser 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 the appraiser 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 (except to the extent the appraiser
becomes a fiduciary when retained to perform this appraisal for 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.
(5) a commercial lender is ``independent'' if it 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) a person or entity who was involved in securing or maintaining
the loan, or in determining or modifying the terms of the loan at any
time during the life of the loan;
(ii) a fiduciary of the plan (except to the extent the commercial
lender becomes a fiduciary when retained to provide this service for
the plan);
(iii) a party in interest with respect to the plan (except to the
extent the commercial lender becomes a party in interest when retained
to provide this service for the plan); or
(iv) 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)(6) of this section, and also see paragraph (b)(3) of
this section for a special rule for Loss Date under the SCC), and any
interest on Lost Earnings. However, in circumstances when the
Restoration of Profits amount (see paragraph (b)(7) 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. The responsible fiduciary, plan sponsor
or other Plan Official, must pay the correction amount and any costs of
correction. No part of the correction amount or costs of correction can
be paid from plan assets, including charges against participant
accounts or plan forfeiture accounts.
(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, which were paid by the plan.
(3) Loss Date. (i) In general ``Loss Date'' is the date that the
plan lost the use of the Principal Amount.
(ii) Special rule under the SCC. ``Loss Date'' is the Date of
Withholding or Receipt.
(4) Date of Withholding or Receipt. ``Date of Withholding or
Receipt'' is the date the amount would otherwise have been payable to
the participant in cash in the case of amounts withheld by an employer
from a participant's wages, or the day on which the participant
contribution or loan payment is received by the employer in the case of
amounts that a participant or beneficiary pays to an employer. Date of
Withholding or Receipt is not the same date as the date on which
contributions
[[Page 71180]]
or loan repayments could reasonably have been segregated from the
employer general assets.
Example 1. An employer pays its employees' wages on the 1st and the
15th of each month. Participant contributions to a pension plan are
withheld from employees' wages on these dates. The employer determined
that it could reasonably take two business days to segregate these
withholdings from its general assets for transmittal to the plan. The
``Date of Withholding or Receipt'' is the 1st and 15th of each month.
For purposes of a Program application to correct delinquent participant
contributions, without taking into account any non-business days, the
``Loss Date'' would be the 3rd and 17th of each month.
Example 2. Assuming the same facts as Example 1, except the
delinquent participant contributions are being corrected using the SC
Component. The ``Date of Withholding or Receipt'' is the 1st and 15th
of each month. For purposes of using the SCC to correct delinquent
participant contributions, the ``Loss Date'' would be the 1st and 15th
of each month.
(5) Recovery Date. ``Recovery Date'' is the date that the Principal
Amount is restored to the plan.
(6) 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 \62\ 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,\63\ 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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\62\ These underpayment rates are displayed on EBSA's website
and will be updated when necessary.
\63\ Rev. Proc. 95-17, 1995-1 C.B. 556 (Feb. 8, 1995). These
factors, which are displayed on EBSA's website in a tabular format,
incorporate daily compounding of an interest rate over a set period
of time.
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(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. Such interest shall be calculated in the
same manner as Lost Earnings described in paragraph (b)(6)(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)(6)(ii) above) and any interest added to such Lost Earnings
(determined in accordance with paragraph (b)(6)(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)(6)(ii) and (iii) above, substituting the applicable underpayment
rates under section 6621(c)(1) of the Code \64\ in lieu of the rates
under section 6621(a)(2).
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\64\ These underpayment rates are displayed on EBSA's website
and will be updated when necessary.
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(v) Method of Calculation for VFC Program Applications. For
purposes of calculating Lost Earnings and interest, if any, a Plan
Official may either (A) use the Online Calculator described in
paragraph (b)(8) below, or (B) perform a manual calculation in
accordance with subparagraphs (i) through (iv) 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.
(vi) Method of Calculation under the SCC. For purposes of
calculating Lost Earnings and interest, if any, the self-corrector must
use the Online Calculator described in paragraph (b)(8) below.
(7) 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). 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. ``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)(7)(ii) below. There is no requirement to calculate a
Restoration of Profits amount for corrections of delinquent participant
contributions including loan repayments, if any, under section 7.1 of
the Program.
(ii) Calculation of Interest. Interest shall be calculated by: (A)
determining the applicable corporate underpayment 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)(7)(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)(7)(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.
[[Page 71181]]
(iii) Special Rule for Transactions Resulting in Large
Restorations. If the amount of Restoration of Profits (determined in
accordance with paragraph (b)(7)(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)(7)(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 VFC Program Applications. For
purposes of calculating the interest amount for Restoration of Profits,
pursuant to paragraphs (b)(7)(ii) and (iii) above, a Plan Official may
either (A) use the Online Calculator described in paragraph (b)(8)
below, or (B) perform a manual calculation in accordance with
subparagraphs (ii) and (iii) of this paragraph (b)(7). 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.
(8) Online Calculator. ``Online Calculator'' is an internet based
compliance assistance tool provided on EBSA's website that permits
applicants and self-correctors 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 or self-correctors 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 and self-correctors 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.
(9) 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, must pay the costs of correction. The costs of
correction cannot be paid from plan assets, including charges against
participant accounts or plan forfeiture accounts.
(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 methods involving
nominal expense such as certified mail and electronic search
technologies as well as checking related plan records and with any
designated plan beneficiary. If these methods are unsuccessful, the
applicant should consider the use of commercial locator services,
credit reporting agencies, information brokers and investigation
databases as well as analogous computer services depending on the
amount of underpayment in relation to the cost of the services. The
costs of such efforts are part of the costs of correction. See Missing
Participants--Best Practices for Pension Plans for more information on
fiduciary best practices that, based on EBSA's experience working with
plans have proven effective at minimizing and mitigating the problem of
missing or nonresponsive participants (available at <a href="http://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/retirement/missing-participants-guidance">www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/retirement/missing-participants-guidance</a>).
(e) De Minimis Exception. Where correction under the Program
requires distributions in amounts less than $35 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 $35 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-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 $35,
[[Page 71182]]
and Employer X demonstrates that the cost of making the distribution to
those former employees is $42 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.\65\ Employer X must make distributions
to the five former employees who are entitled to receive distributions
of more than $35.
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\65\ For example, the Department has taken the position that
where a plan document is silent as to the payment of reasonable
administrative expenses, the plan may pay reasonable administrative
expenses. Where a plan document provides that the employer will pay
any such expenses, and if the employer has reserved the right to
amend the plan document, ERISA would not prevent the employer from
amending the plan to require, prospectively, that the relevant
expenses be paid by the plan. The Department does not believe that
ERISA would permit a fiduciary to implement a plan amendment that
attempted to retroactively relieve the employer of an obligation to
pay plan expenses.
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Section 6. VFC Program Application and Self-Correction Component
Procedures
6.1 VFC Program 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) Applicant. The application must be prepared by a Plan Official
or an 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, including charges to participants
accounts or plan forfeiture accounts.
(c) Contact person. Each application must include the name, address
(street and email) 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 plan sponsor's nine-digit number (EIN), plan number, and
address of the plan sponsor and administrator;
(3) the date the plan's most recent Form 5500 was filed; or, in the
case of a bulk VFC Program application, for each plan named in the
application, either the date the most recent Form 5500 was filed or the
plan sponsor's nine-digit number (EIN);
(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)(6)(i) through (iv) of section 5 or paragraphs
(b)(7)(i) through (iii), 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
paragraph (b)(8) of section 5, the data elements required to be input
into the Online Calculator under paragraphs (b)(8)(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); \66\
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\66\ Applicants must supply complete copies of the plan
documents and other pertinent documents if requested by EBSA during
its review of the application.
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(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 unless requested by EBSA.
(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) of the VFC
Program) 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.''
(1) Applicants in general. The Penalty of Perjury 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.
(2) Bulk Applicants. The Penalty of Perjury Statement must be
signed and dated by the bulk applicant with knowledge of the
transaction that is the subject of the application and the authorized
representative of the bulk applicant, if any. 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,
[[Page 71183]]
dated 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 submitted to the
appropriate EBSA Regional Office listed in Appendix C. Applicants
should check with the relevant EBSA Regional Office whether the office
accepts email submissions of applications and supporting documentation.
(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. If EBSA does not receive the
requested documentation within a reasonable time after providing notice
of the suspension, EBSA will issue a rejection letter.
(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.
6.2 VFC Program Self-Correction Component Procedures
(a) In general. Each self-corrector must adhere to the requirements
set forth below. Failure to do so may render the self-correction
invalid.
(b) Self-corrector. The SCC notice must be submitted by the self-
corrector who is a Plan Official or an authorized representative (e.g.,
attorney, accountant, or other service provider). If a representative
of the Plan Official is submitting the SCC notice, the plan
administrator must retain a statement signed by the Plan Official that
the representative is authorized to represent the Plan Official. Use of
the model authorization included in the SCC Retention Record Checklist
in Appendix F will satisfy this requirement. Any fees paid to such
representative for services relating to the correction under the SCC
may not be paid from plan assets.
(c) Submission of SCC notice. The self-corrector must notify EBSA
of participation in the SC Component by submitting the SCC notice
through the online VFC Program web tool in accordance with paragraph
7.1(b)(2)(iii).\67\ EBSA will acknowledge receipt of a properly
completed and submitted SCC notice in an email addressed to the self-
corrector.
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\67\ The online VFC Program web tool will be located on EBSA's
website.
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(d) SCC Retention Record Checklist. The self-corrector must
complete the SCC Retention Record Checklist in Appendix F, prepare or
collect the documents listed in this Appendix, and provide copies of
the completed checklist and required documentation to the plan
administrator.
(e) Penalty of Perjury Statement. The plan administrator must
retain the following statement: ``Under penalties of perjury I certify
that I am not Under Investigation (as defined in section 3(b)(3) of the
VFC Program) and that I have reviewed the SCC notice acknowledgment and
summary, the checklist, and all the required 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 self-
correction and the authorized representative of the plan sponsor, if
any. In addition, each Plan Official who is seeking the relief afforded
under the Program must sign and date the Penalty of Perjury Statement.
Use of the Penalty of Perjury Statement included in Appendix F will
satisfy the requirements of paragraph (e) of this section.
(f) Recordkeeping. The plan administrator must retain a copy of the
SCC Retention Record Checklist in Appendix F along with copies of the
required documentation, the authorization form, if any, and a signed
Penalty of Perjury Statement, 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 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 and the SC Component for the identified transactions
described in this section.
7.1 Delinquent Remittance of Funds
(a) Delinquent Participant Contributions and Loan Repayments to Pension
Plans under VFC Program Applications
(1) Description of Transaction. An employer receives directly from
participants, or withholds from employees' paychecks, certain amounts
for either participants' contribution to a pension plan or for
repayment of participants' plan loans. Instead of forwarding such
contributions or loan repayments to the plan 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 amounts for a longer period of time.
(2) Correction of Transaction. (i) Unpaid Participant Contributions
or Loan Repayments. Pay to the plan the Principal Amount plus Lost
Earnings on the Principal Amount as described in section 5(b). The Loss
Date for such contributions or repayments 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
or repayments be later than the applicable maximum time period
described in 29 CFR 2510.3-102.\68\ Any penalties, late fees or other
charges shall be paid by the employer and not from such contributions
or loan repayments.
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\68\ The Department amended paragraph (a)(1) of 29 CFR 2510.3-
102 to extend the application of the regulation to amounts paid by a
participant or beneficiary or withheld by an employer from a
participant's wages for purposes of repaying a participant's loan
(regardless of plan size). 75 FR 2068 (2010).
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(ii) Late Participant Contributions or 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 Lost Earnings as described in section
5(b). Any penalties, late fees or other charges shall be paid by the
employer and not from participant contributions or 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 6.1, 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
[[Page 71184]]
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) either total $50,000 or less, or 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:
(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 including any steps taken to
prevent future delinquencies, and
(B) 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 to the
plan 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 including any steps taken to
prevent future delinquencies;
(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 and Loan Repayments to
Pension Plans under the Self-Correction Component
(1) Description of Transaction. (i) An employer receives directly
from participants, or withholds from employees' paychecks, certain
amounts for either participants' contribution to a pension plan or for
repayment of participants' plan loans. Instead of forwarding such
contributions or loan repayments to the plan 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 amounts for a longer period of time. \69\
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\69\ See 29 CFR 2510.3-102(a)(2), 75 FR 2068 (2010).
---------------------------------------------------------------------------
(ii) For this transaction: (A) the amount of Lost Earnings
resulting from the correction of the delinquent participant
contributions or loan repayments is less than or equal to $1,000,
excluding any excise tax amounts paid to the plan under the related
class exemption PTE 2002-51; and
(B) the delinquent participant contributions or loan repayments
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).
(2) Correction of Transaction. (i) Unpaid Participant Contributions
or Loan Repayments. Pay to the plan the Principal Amount plus Lost
Earnings on the Principal Amount as described in section (5)(b). The
Loss Date for such contributions or repayments is the Date of
Withholding or Receipt in accordance with section 5(b)(3)(ii). All
calculations must be made using the Online Calculator in accordance
with section 5(b)(6)(vi). Any penalties, late fees or other charges
shall be paid by the employer and not from participant contributions or
loan repayments.
(ii) Principal Amount. For this transaction, the Principal Amount
is the amount of delinquent participant contributions or loan
repayments retained by the employer.
(iii) SCC Notice. The self-corrector must input the required
information in the fields provided in the SCC notice and submit the
notice to EBSA through the online VFC Program web tool.\70\ The
required information includes certain data elements listed below:
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\70\ The online VFC Program web tool will be located on EBSA's
website.
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(A) name and email address of the self-corrector;
(B) plan name;
(C) plan sponsor's nine-digit number (EIN) and the plan's three-
digit number (PN);
(D) Principal Amount;
(E) amount of Lost Earnings and the date paid to the plan;
(F) Loss Date (Date(s) of Withholding or Receipt); and
(G) number of participants affected by the correction.
(3) Documentation. The self-corrector must complete the SCC
Retention Record Checklist in Appendix F, prepare or collect the
documents listed in this Appendix, and provide copies of the completed
checklist and required documentation to the plan administrator.
(c) 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 licensed 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 6.1, 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, 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;
[[Page 71185]]
(ii) Copies of the insurance contract or contracts for the group
health or other welfare benefits for the plan;
(iii) If restored participant contributions either total $50,000 or
less, or exceed $50,000 and were remitted to the insurance provider
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:
(A) a narrative describing the applicant's contribution practices
before and after the period of unpaid or late contributions, and
(B) summary documents demonstrating the amount of unpaid or late
contributions; and
(iv) If restored participant contributions exceed $50,000 and were
remitted to the insurance provider 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
including any steps taken to prevent future delinquencies,
(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.
(d) 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) Lost Earnings on
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 Lost Earnings 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 6.1, 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) either total $50,000 or less, or exceed $50,000 and were
remitted to the trust 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:
(A) a narrative describing the applicant's contribution practices
before and after the period of unpaid or late contributions including
any steps taken to prevent future delinquencies, and
(B) 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 to the trust 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 6.1, 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 that, 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. 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
[[Page 71186]]
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 6.1, submit the following documents:
(i) A narrative describing the process used to determine the
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), except for below-
market interest rate loans of $10,000 or less.
(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
Amounts from the inception of the loan until the Recovery Date, plus
Lost Earnings on the series of Principal Amounts through the Recovery
Date, as described in section 5(b).
(ii) In addition, the applicant or other party must pay to the plan
the present value of the Principal Amounts from the Recovery Date to
the maturity date of the loan, as determined by an independent
commercial lender. The borrower must continue to pay to the plan the
outstanding loan balance according to the repayment schedule for the
duration of the loan. Alternatively, instead of the applicant or other
party paying the present value of the Principal Amounts, the borrower
may pay to the plan the outstanding loan balance amortized over the
remaining payment schedule for the duration of the loan at the interest
rate that would have been applicable if the loan had been made at the
fair market interest rate.
(iii) 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 inception 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.
(iv) 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
applicant or other person 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 (the Principal Amounts from the loan's
inception until the Recovery Date), plus Lost Earnings on that amount
as described in section 5(b). The applicant must also pay on the
Recovery Date the present value of the difference of what the plan
would have received between the 7% and the 4% interest rate for the
remaining payments on the loan for the duration of the time the plan is
owed repayments on the loan (the Principal Amounts from the Recovery
Date until the loan's maturity date). The borrower must continue to
repay the outstanding loan balance based on the loan's repayment
schedule.
(3) Documentation. In addition to the documentation required by
section 6.1, submit the following documents:
(i) A narrative describing the process used to determine the
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) If applicable, a copy of the loan repayment schedule for the
re-amortized loan repayments.
(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
Amounts through the date the loan became fully secured, plus Lost
Earnings on the series of Principal Amounts, as described in section
5(b).
(ii) Record or perfect the plan's interest in the loan collateral.
(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
applicant must pay to the plan the present value of the Principal
Amounts from the date the loan is fully secured to the maturity date of
the loan, as determined by an independent commercial lender. The
borrower must continue to pay to the plan the outstanding loan balance
according to the repayment schedule for the duration of the loan.
Alternatively, instead of the applicant paying the present value of the
Principal Amounts, the borrower may pay to the plan the outstanding
loan balance amortized over the remaining payment schedule for the
duration of the loan at the interest rate that would have been
applicable if the loan had been made at the fair market interest rate
that would have been applicable for a loan with the changed risk
characteristics.
(iv) 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 inception of the loan
until the Recovery Date) over the loan payment actually received under
the
[[Page 71187]]
loan terms during such period. Under the VFC Program, the fair market
interest rate must be determined by an independent commercial lender.
(v) 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-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 6.1, 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;
(ii) A copy of the independent commercial lender's fair market
interest rate determination(s); and
(iii) If applicable, a copy of the loan repayment schedule for the
re-amortized loan repayments.
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 their 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 6.1(e) unless otherwise
requested by EBSA, except that the applicant must provide (i) proof of
payment, as described in paragraph (e)(6) of section 6.1, 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 their 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 6.1(e) unless otherwise
requested by EBSA, except that the applicant must provide (i) proof of
payment, as described in paragraph (e)(6) of section 6.1, 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 \71\
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 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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\71\ 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.
---------------------------------------------------------------------------
(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 less any earnings received on the asset up
to the Recovery Date 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) As a cash settlement alternative, when the plan no longer
owns the asset and the transaction cannot be reversed or the asset
cannot be retained as described respectively in paragraphs (a)(2)(i)
and (ii) above, the plan may accept in cash the amounts specified in
(A) plus (B) where (A) is--the greater of (1) Lost Earnings less any
earnings received on the asset up to the Recovery Date or (2) the
Restoration of Profits, if any, as described in section 5(b), on the
Principal Amount, and (3) with the resulting amount from (1) or (2)
reduced by any profit if the asset were resold or matured at a gain, or
increased by any
[[Page 71188]]
loss including Lost Earnings on such loss if either the asset was
resold at a loss or the plan otherwise ceased to own the asset (e.g.,
maturity; destruction); and (B) is--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. If the
plan sold the asset, the asset must have been sold upon the advice of
an independent fiduciary and not in anticipation of applying under the
VFC Program.
(iv) For this transaction, the Principal Amount is the plan's
original purchase price.
(v) 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 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 Date. The Online
Calculator determined that Lost Earnings is $26,098.23 on the Principal
Amount of $125,000 (purchase price plus transaction costs). There were
no determinable profits. The increase in the FMV, $30,000, is greater
than Lost Earnings or Restoration of Profits. Because the property is
rapidly appreciating in value, and because the Plan Official expects to
realize significant rental income from the property, the Plan Official
would like to correct by retaining the property pursuant to paragraph
(a)(2)(ii) of this section rather than selling the asset back to the
party in interest pursuant to paragraph (a)(2)(i) of this section. The
Plan Official must obtain a determination by an independent fiduciary
that the plan will realize a greater benefit by retaining the asset
than by selling the asset back to the party in interest. Because the
original purchase price was the same as the FMV, and the increase in
the FMV is greater than any earnings or investment return on the
original purchase price, the only cash payment to the plan involved in
this correction is the $5,000 in costs of sale, plus Lost Earnings.
Example 3: The plan purchased bonds from a party in interest on
November 30, 2011 (the ``Loss Date'') at a face value of $100,000 with
a yield of 2% interest annually. The purchase was at FMV and the bonds'
maturity date was November 30, 2012. The plan received $102,000 on
November 30, 2012 (the ``Recovery Date''). In January 2013, the plan
trustee realized that the original purchase was a prohibited
transaction because the seller is a party in interest. There were no
determinable profits. Under these facts, because the plan no longer
owns the asset, the transaction cannot be reversed under paragraph
(a)(2)(i) above. Similarly, the plan cannot use the correction under
paragraph (a)(2)(ii) above. A Plan Official may correct the transaction
under paragraph (a)(2)(iii) by paying to the plan on January 7, 2013
(the ``Final Payment Date'') an amount of cash equal to the Lost
Earnings as calculated using the Online Calculator less the interest
paid on the bonds ($3,055.55 - $2,000).
(3) Documentation. In addition to the documentation required by
section 6.1, submit the following documents:
(i) Documentation of the plan's purchase of the asset, including
the date of the purchase, the plan's purchase price, and the identity
of the seller;
(ii) A narrative describing the relationship between the original
seller of the asset and the plan;
(iii) The qualified, independent appraiser's report addressing the
FMV of the asset purchased by the plan, both at the time of the
original purchase and at the recovery date;
(iv) If applicable, a report of the independent fiduciary's
determination that the plan will realize a greater benefit by receiving
the correction amount described in paragraph (a)(2)(ii) of this section
than by reselling the asset pursuant to paragraph (a)(2)(i) of this
section; and
(v) In a transaction involving a cash settlement correction under
section 7.4(a)(2)(iii) where the plan sold the asset, a statement by a
Plan Official that the asset was sold upon the advice of an independent
fiduciary and not in anticipation of applying under the VFC Program.
(b) Sale of an Asset (Including Real Property) by a Plan to a Party
in Interest
(1) Description of Transaction. A plan sold an asset for cash to 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 repurchase the
asset from the party in interest \72\ at the lower of (A) the price for
which it originally sold the property or (B) the FMV of the property as
of the Recovery Date plus restoration to the plan of the party in
interest's net profits from owning the property, to the extent they
exceed the plan's investment return from the proceeds of the sale.
---------------------------------------------------------------------------
\72\ The repurchase of the same property from the party in
interest to whom the asset was sold is a reversal of the original
prohibited transaction. The repurchase is not a new prohibited
transaction and therefore does not require an individual proh
[…truncated; see source link]Indexed from Federal Register on November 21, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.