On March 15, 2000, the Department of Labor published the Voluntary Fiduciary Correction Program ("VFC Program") that will allow voluntary corrections of ERISA fiduciary violations. Participation in the VFC Program will reduce the risk of DOL penalties with respect to covered fiduciary violations and should narrow, though not eliminate, Department of Labor fiduciary audits. The VFC Program is effective April 14, but open to public comment until May 15.
Covered Violations
Thirteen specific transactions are covered by the new program, such as repayment of delinquent employer contributions, certain prohibited loans, loans with inadequate collateral or security, certain improper sales or purchases (including prohibited transactions), improper valuation of assets which affects benefits, and payment of excessive or duplicate plan expenses. The VFC Program may be used for actual or possible fiduciary breaches. At present, it will be available only for the specified fiduciary breaches and cannot be used for any other breach.
Anyone who may be liable for, or can correct, ERISA fiduciary violations (such as a plan sponsor, named fiduciary or party-in-interest) is eligible for the new program. However, plans already under investigation by the Department of Labor are ineligible for participation. Furthermore, if during review of a correction submission under the VFC Program the Department of Labor discovers any evidence of potential criminal violations, the plan will be ineligible.
Correction Methods
To correct a covered fiduciary violation, the applicable fiduciary must fully correct the violation and then notify the Department of Labor of the correction through a signed, sworn statement, under penalty of perjury. The statement must include a list of all persons materially involved in the breach, an explanation of the violation, the correction, and specific calculations of the amounts used to correct the problem. The fiduciary will have to submit proof that the necessary corrections have been made, and any violations not fully corrected may be subject to penalties for any negotiated corrections. The program does not allow any plan fiduciary to propose corrections anonymously.
Participants must be notified of corrections and the use of the VFC Program. The notice is generally due no later than the deadline for summary annual reports.
Once the Department approves the submission, it will send a letter of acknowledgment analogous to a Securities and Exchange Commission "no action" letter. However, the Department reserves the right to conduct investigations to determine truthfulness, completeness, and full correction.
Trends and Caveats
The new program may be viewed as yet another sign of a trend by government agencies to encourage self-policing and self-correction by employee benefit plans.
Like its cousins (the Delinquent Filer Voluntary Correction (DFVC) Program of the Department of Labor and the Employee Plans Compliance Resolution System (EPCRS) of the IRS), the VFC Program is intended to provide certainty and finality regarding correction methods and government enforcement action. The announcement notes that the IRS should generally accept correction under the VFC Program, except where the breach or correction results in tax abuse or plan disqualification. Moreover, the new program should deter litigation by plan participants regarding the corrected violations since participation in the program requires full correction.
However, participation in the new program does not shield plan fiduciaries from investigation by the government into fiduciary violations not disclosed or not covered by the program. Further, applicants who fail to fully correct fiduciary violations will be rejected and become subject to enforcement action and civil penalties. Moreover, the Department is not precluded from referring information regarding a violation to the IRS or from imposing civil penalties under ERISA for the failure or refusal to file a timely, complete and accurate annual report form 5500. But if the history of the DFVC Program and EPCRS is any guidance, the new program will not be used as a targeting tool and will be expanded in the future to cover more complex fiduciary violations and more flexible correction methods.
Comments on the VFC Program may be addressed to: VFC Program, Office of Enforcement, Pension and Welfare Benefits Administration, U.S. Department of Labor, Room N5702, 200 Constitution Ave., N.W., Washington, D.C. 20210 or by internet to vcf-program@pwba.dol.gov.
Preventive Maintenance
The new compliance program will work best if the employer or other fiduciary undergoes a thorough ERISA audit of the operations of the employer's plans. This is best done by or through outside counsel because the attorney-client privilege may be available. In brief, an ERISA audit acts as "preventive maintenance" by advising the employer of any violations and offers alternative methods of correction, including the new program.