Recently, the U.S. Department of Labor (DOL) proposed a self-correction option under its Voluntary Fiduciary Correction Program. Specifically, proposed updates would allow fiduciaries to self-correct specific transactions like late deposits to a 401(k) plan. The voluntary program currently allows eligible participants to correct certain prohibited transactions and fiduciary breaches to avoid a civil penalty. Along with the corrections, fiduciaries must restore any benefit losses incurred and pay excise taxes for the prohibited transactions. Subsequently, violations of the Employee Retirement Income Security Act (ERISA) can result in significant fines and penalties. In fact, in September 2022, a financial institution paid $131.8 million to settle ERISA violations.

Overview of the Voluntary Fiduciary Correction Program

The Voluntary Fiduciary Correction Program is a voluntary enforcement program under the Employee Benefits Security Administration (EBSA). The program allows plan officials to identify and correct specific errant transactions. In detail, these transactions may include prohibited purchases, sales and exchanges, improper loans, delinquent participant contributions, and improper plan expenses. In sum, the program provides for 19 specific transactions. The program outlines each transaction’s acceptable means of correction, eligibility requirements, and application procedures.

When an eligible program participant documents a transaction correction, EBSA issues a no-action letter and will take no civil enforcement action against the participant with respect to the specific breach. Eligible participants under the Voluntary Fiduciary Correction Program include anyone who may be liable for fiduciary violations under ERISA, including employee benefit plan sponsors, officials, and parties in interest, provided they meet the criteria and follow the procedures outlined in the program.

Common Plan Fiduciary Errors

Of the 19 specific transactions correctable under the Voluntary Fiduciary Correction Program, the most common are late deposits of participant deferrals and loan repayments. Other common transaction errors include:

  • participant loans non-compliance with plan provisions, specifically with regards to amount, duration, or level amortization;
  • improper plan expenses; and
  • prohibited transactions such as the sale or purchase from non-parties of interest.

While late deposit errors are the most common plan error, fiduciaries don’t often use the program to rectify the error because of the time and expenses involved in the application process.

Proposed Updates to the Voluntary Fiduciary Correction Program

In part, to encourage participation in the Voluntary Fiduciary Correction Program, the DOL proposed to allow fiduciaries to make self-corrections to the aforementioned common errors. However, participants in the program must also notify the DOL of the self-correction. Other proposed changes to the program include:

  • clarifying existing eligible transactions;
  • expanding eligible transactions;
  • streamlining administrative and procedural requirements; and
  • amending the associated prohibited transaction class exemption.

Employer Takeaways

Proposed changes to the Voluntary Fiduciary Correction Program were submitted to the Federal Register on November 21. They will be open for public comment until January 10th, 2023. As these proposed changes have not yet been finalized, program participants will still need to file a formal correction with the program, especially if any late plan deposit fails to satisfy the DOL’s standards for self-correction. In detail, these standards include that any lost earnings do not exceed $1,000, not including excise taxes, delinquent contributions or repayments were not remitted later than 180 days from withholding, the self-corrector is not under investigation, and that lost earnings for the late deposits were calculated using the program’s online calculator. Finally, employers should review the retention requirements for employee benefit records under ERISA so that related documentation is sufficient to determine the benefits due or which may become due to such employees.