The Voluntary Fiduciary Correction Program (“VFCP”), sponsored by the Employee Benefits Security Administration of the Department of Labor, provides relief from civil liability and an exemption from excise taxes under the Internal Revenue Code (“IRC”). VFCP is designed to encourage self-correction of certain violations and fiduciary breaches of the Employee Retirement Income Security Act of 1974.
VFCP covers many different transactions. One of the most commonly violated transactions that it covers is delinquent contributions.
Plan sponsors have a fiduciary responsibility to ensure that participant contributions are deposited in a plan’s trust on a timely basis. Participant contributions are defined as any amounts withheld from wages by an employer for a participant or received by an employer from a participant, such as after-tax contributions and elective deferrals. Participant contributions are treated as plan assets as of the date they can reasonably be segregated from the employer’s general assets. Department of Labor regulations state that participant contributions are reasonably segregated and become plan assets on the earlier of (i) the 15th business day of the month following the month in which the contribution is withheld by the employer from the employee’s wages or (ii) the earliest date on which the contributions can reasonably be segregated from the employer’s general assets. There is no definitive time frame used to determine the “earliest reasonable date” participant contributions can be segregated from an employer’s general assets.
Delinquent deposits result in a prohibited transaction under IRC §4975. The penalty on a prohibited transaction is at least 15% of the lost earnings associated with the late deposits, with possible additional penalties assessed by the Department of Labor. The VFCP provides an opportunity for employers to apply for a waiver of the related excises taxes.
The VFCP provides applicants with both relief from excise taxes and assurance from the Department of Labor that it will not recommend the plan for audit for the fiduciary breaches associated with the delinquent deposits. Relief under the VFCP for plan fiduciaries can be found by following these four basic steps:
1. Identify any violations and confirm that they fall within the 19 transactions covered by the VFCP;
2. Follow the process for correcting and/or undoing specific violations;
3. Calculate and restore any losses or profits with interest, if applicable, and distribute any supplemental benefits to participants; and
4. File a VFCP Application with the appropriate EBSA regional office.
Corrective measures are necessary for both large and small scale delinquencies.
A VFCP Application will typically be supported by copies of relevant portions of plan documents; documents supporting the transactions (for example, deposits and account statements); documents demonstrating applicable corrections; statements of lost earnings amounts and/or restored profits; online calculator calculations, and confirmation of payments to the plan and/or its participants. The violation must be fully corrected before applying under the VFCP.
Participant contributions that are untimely deposited should be corrected as quickly as possible by transferring the funds from the employer’s general assets into the plan’s trust after the error is discovered. Lost earnings on the late deposits will be calculated through the Department of Labor’s online calculator and allocated to affected plan participants. This allocation is required because participants are considered to have lost the opportunity to earn investment income on their contributions while those amounts were held by the employer. Lost earnings are calculated from the “earliest reasonable date” those contributions could have been deposited into the plan’s trust through the actual deposit date.
The VFCP provides valuable benefits to fiduciaries. Applicants who satisfy the requirements of the application receive a “No-Action” letter stating that EBSA will not initiate a civil investigation under Title I of ERISA or assess a 20% penalty under ERISA section 502(l) or penalties under ERISA Section 502(i), and Prohibited Transaction Class Exemption 2002–51, and provides relief from excise taxes for transactions that qualify.
The use of the VFCP does not come without reservations. Employers must consider the time and cost of the application process. The documentation required for submittal under the VFCP can be substantial and prohibitive. These reservations are weighed against the advantages of receiving a No Action Letter, the certainty of an audit not occurring, and its confirmed relief from excise taxes.
The Department of Labor has taken increased it interests in delinquent deposits of participant contributions. The Department of Labor has heightened its review and monitoring of Forms 5500s. Employers and fiduciaries examination of its payroll procedures will help to prevent the occurrence of late deposits and will allow for the early detection of late deposits if they should occur. When late deposits are discovered, employers and fiduciaries should make corrections as soon as possible and pay all amounts due to the plan and its participants. Thereafter, corrective measures under the VFCP can be considered.