The Wagner Law Group 2026-06-18T16:04:25Z https://www.wagnerlawgroup.com/feed/atom/ WordPress /wp-content/uploads/sites/1101401/2021/06/cropped-wagner-fav-icon-2-32x32.png by WLG https://www.wagnerlawgroup.com/?p=58934 2022-11-28T14:06:51Z 2022-11-22T13:53:45Z

Voluntary Fiduciary Correction Program (“VFCP”), a free program designed to encourage plan fiduciaries to voluntarily correct certain fiduciary breaches under ERISA, thereby avoiding civil enforcement actions and penalties. The VFCP was modified in 2005 and 2006 and has not been updated since that time. On November 18, 2022, the DOL proposed what it termed “significant” updates. Since its inception, the VFCP has most commonly been used to correct delinquent participant contributions, where an employer withheld money from an employee’s paycheck as per that employee’s valid election but did not transfer the money to the employee’s plan account in a timely manner. This is technically a prohibited transaction under ERISA, because the retention by the employer of these amounts constitutes the use of plan assets for the benefit of a party in interest, the employer. As its name indicates, the VFCP is purely voluntary, and plan administrators have always had the option to correct these issues on their own without utilizing any formal procedure. Correcting them outside of the VFCP, however, leaves the issues open to potential discovery on future audit, and the possibility that the DOL could deem the correction implemented by the plan administrator to be unacceptable, leading to possible civil enforcement actions and penalties. The benefit of utilizing the VFCP process is that it provides the comfort of the DOL’s “blessing” of the plan sponsor’s correction, which the plan fiduciary can use as a proverbial “get out of jail free” card for the specific issues addressed in the VFCP submission if discovered during a future DOL audit. Unlike the Internal Revenue Service’s Employee Plans Compliance Resolution System (“EPCRS”), the VFCP has never provided an official mechanism for self-correction. In the 2022 VFCP update, however, the DOL proposes what it calls a “Self-Correction Component” (“SCC”) with respect to delinquent participant contributions and loan repayments, subject to several conditions discussed below. It is important to note that the self-correction contemplated by the VFCP update differs from the self-correction afforded under EPCRS, because it would still require a submission to the DOL – albeit a streamlined one. Relief under the new SCC is limited to the following conditions:

1. SCC only applies to corrections in which the amount of lost earnings is $1,000 or less, excluding any applicable excise tax paid to the plan under Prohibited Transaction Exemption 2002-51.
2. The delinquent participant contributions or loan repayments must have been remitted to the plan no more than 180 days after the date of withholding or receipt.
3. The lost earnings on the amount of participant contributions or loan repayments that would have been available to the plan must be determined by using the DOL online calculator and must be paid from the date of withholding or receipt (note that plan sponsors have some freedom under EPCRS in determining a method of calculation of lost earnings).
4. The self-corrector must submit a compliance notification electronically to EBSA using a new online VFCP webtool to be made available on EBSA’s website.
5. Self-correctors must complete a SCC Retention Record Checklist which is provided as an appendix to the updated VFCP, prepare or collect the documents listed in the appendix, and provide the completed checklist and required documentation to the plan administrator. The DOL indicated that this latter requirement applies even if, as will frequently be the case, the self-corrector is the plan administrator of the plan.

Potential self-correctors who fail to meet all of the conditions for participating in the SCC may still be able to correct the violation through the normal application process under the VFCP. The DOL pointed out that the VFCP still does not include a correction for delinquent matching employer contributions, which are operational failures under the Internal Revenue Code (rather than fiduciary breaches under ERISA) for which correction is only available under EPCRS. It is important to note that upon receipt and review of a submission under the SCC, EBSA could determine that the terms and conditions of the SCC were not satisfied, and then the self-corrector would “not be exempt from civil penalties or EBSA enforcement actions.” This uncertainty has the potential to deter plan administrators from using the SCC. In addition, it is unclear how much time self-correctors will save under the SCC as compared to the normal VFCP process, because virtually all documents required under the VFCP still need to be gathered and retained by the self-corrector, and all applicable excise taxes still need to be calculated and paid. It is questionable, therefore, whether potential self-correctors will choose to make use of the SCC rather than submitting the correction under the standard VFCP, or by simply correcting outside of VFCP and taking their chances under audit. While the new SCC program is the most notable proposed change to the VFCP, other proposed modifications to the VFCP include:

1. Loans at below market interest rate to a party in interest:For loans up to $10,000, EBSA would eliminate the requirement that an independent fiduciary validate in writing the process used to determine the fair market interest rate determination. A copy of the independent commercial lender’s written fair market interest rate determination would still be required.
2. Loans at a below market interest rate to a person who is not a party in interest with respect to a plan:EBSA would permit the borrower’s payment of the amortized outstanding loan balance over the remaining term 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.
3. Loans at below market interest rate solely due to a delay in perfecting the plan’s security interest:EBSA would permit the borrower’s payment of the 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 because of the delay in securing the loan.
4. Purchase of an asset by a party in interest in a transaction in which no prohibited transaction exemption applied:EBSA would add a method of correction in a situation in which the transaction could not be reversed or the asset retained, such as sales, maturity, or destruction. Under this new correction method, the plan can receive a cash settlement if the asset has been sold and a plan official provides a statement that the sale was upon the advice of an independent fiduciary and not in anticipation of applying for relief under the VFCP.
5. Sale of an asset to a party in interest:If the plan asset can no longer be repurchased, EBSA would permit a plan official to confirm in writing the reasons that the plan asset cannot be repurchased.
6. Sale and Leaseback of Real Property to Employer:VFCP relief has been extended to an affiliate of the employer.
7. Illiquid assets:EBSA would permit a sale of the illiquid asset to a party in interest, even if the original purchase of the plan asset was neither a breach of fiduciary duty nor imprudent. The amendment to this section of the VFCP would also clarify that in the case of any 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.
8. Under Investigation:The update clarifies the circumstances under which a plan is under investigation, which would make it ineligible for the VFCP. In addition, there are new limited exceptions to the definition of “Under Investigation “ for bulk applications by certain service providers, and for innocent plan administrators in cases involving delinquent participant contributions and loan repayments in which the party corrected a third party’s criminal activity.

In addition to these VFCP modifications, the DOL has proposed amendments to associated Prohibited Transaction Exemption 2002-51 to conform to the revised VFCP, and to eliminate the once-every-three-year frequency requirement. The amended and restated VFCP will become available to the public following a public comment period and final approval by the Office of Management and Budget. The DOL will announce its availability in a subsequent Federal Register Notice. Similarly, the expanded excise tax relief under Prohibited Transaction Exemption 2002-51 will not be available until such amendments are adopted in final form, which also will be communicated in the Federal Register. In the interim the existing VFCP and Prohibited Transaction Exemption 2002-51 remain available.]]> by WLG https://www.wagnerlawgroup.com/?p=58273 2022-10-17T08:37:14Z 2022-09-15T14:41:37Z

The time period during which accountants and firms are prohibited from financial interests in the plan or plan sponsor.

 For purposes of determining independence, there is no de minimis rule.  Under IB 75-9, the holding of even a single share of plan sponsor stock by an accountant, the firm, or any member of the firm during the period to be audited, can be a “direct interest,” or “material indirect interest” in the plan sponsor, disqualifying an otherwise qualified public accountant. Under the updated guidance in IB 2022-01, the accountant or firm will not be disqualified from accepting a new audit engagement if the interest is disposed of prior to the period of the professional engagement. Under this guidance, accountants will have a divestiture window between the time when there is an oral agreement or understanding that a new client has selected them to perform the plan audit and the time that an initial engagement letter or other written agreement is signed or audit procedures commence, whichever is sooner. This new audit engagement exception is limited to publicly traded securities, appears to include options to purchase, and expands the group who must divest to include the accountant, his or her firm, shareholder employees, partners, professional employees and the immediate families (spouse and dependents) of each of the foregoing.

2. Other services an accountant or firm may provide to a plan or plan sponsor.

 The New IB continues the current guideline that prohibits an accountant or firm from certain plan or plan sponsor related employment but that permits an accountant, firm, or its members to engage in certain professional services to the plan or plan sponsor that are not connected to an audit or review of a plan’s financial statements.  The new IB gives as an example, that an accountant will not be regarded as failing the independence requirement solely by reason of the rendering of actuarial services by an actuary associated with the accountant or firm, or retention or engagement by the plan or plan sponsor of the accountant, the firm or its members for non-plan work. However, the DOL cautions that certain positions or connections, originally enumerated in IB 75-9, are still prohibited, that the independence test is a facts and circumstances test, and that the DOL would give appropriate consideration to all relevant circumstances in determining whether an accountant or accounting firm is  independent. Additionally, the DOL continues to warn of the necessity to avoid prohibited transactions in connection with multiple services arrangements.

3. Definition of office for purposes of determining who is a member of a firm for an “independence” analysis.

Under the 1975 IB, one part of the definition of “member” was an accountant, shareholder employee, or professional employee participating in an audit or “located in an office” of the firm “participating in a significant portion of the audit.”  In recognition of the fact that the concept of office for workplace purposes has been changed to focus more on workgroups than on physical locations, the updated IB guidelines in IB 2022-01 define “office” as “ a reasonably distinct subgroup within a firm, whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters regardless of the physical location of the individual.” The updated IB guidelines also provide, for the first time, although without preamble explanation, that the definition of “member” includes “. . . the firm’s employee benefit plans; or an entity whose operating, financial, or accounting policies can be controlled by individuals or entities [within the general definition of “member”], or by two or more individuals or entities acting together.” Conclusion  It may be of interest that this guidance, as with its predecessor IB, is issued as an interpretive bulletin, guidance that is not required to be issued with notice and opportunity for public comment, but will be entitled to deference by courts as an agency’s interpretation of its enabling statute under Skidmore v. Swift, 323 U.S.134 (1944).  This new IB guidance will be effective as an interpretation immediately, and should be taken into account by plan sponsors of pension plan requiring audited financial statements for the 2022 plan year, perhaps by requesting an independence verification statement in an audit agreement. In the coming months, we will continue to review and explain the new IB guidance as needed.  Should you have any questions about the new IB 2022-01, you may contact Susan Rees, Barry Salkin, or Sholom Fine.]]>