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McKay Hochman Commentary on the Updated VFCP Program
Rev. 04/27/06, E-mail Alert 2006

Background
The Voluntary Fiduciary Correction Program (VFCP) of the Department of Labor’s (DOL’s) Employee Benefit Security Administration(EBSA) allows employers to voluntarily correct specific fiduciary breach violations of the Employee Retirement Income Security Act(ERISA). Applicants must fully correct any violations, restore to the plan any losses or profits with interest, and distribute any supplemental benefits owed to eligible participants and beneficiaries. A “no action” letter is given to plan officials who properly correct violations. The Program was originally issued in the Federal Register of March 28, 2002. An expanded and simplified VFCP update, which was immediately effective, was issued April 6, 2005. This VFCP update was finalized a little over a year later on April 19, 2006. EBSA also updated PTE 2002-51.

The effective date is May 19, 2006 (30 days after publication in the Federal Register).

The VFCP describes

how to apply for relief;
the specific transactions covered;
acceptable methods for correcting violations; and
examples of potential violations and corrective actions.

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.D.1.of the program.

EBSA encourages potential applicants to discuss eligibility and similar issues with the appropriate regional VFC Program coordinator.

The finalized VFCP made the following additions and modifications to the April 6, 2005 proposed changes to the VFCP program:

1.	Scope of relief. Corrections made under the final program provide relief from civil penalties under ERISA section 502(i) on prohibited transactions with respect to welfare and nonqualified pension plans.
2.	Covered transactions
	a.	Illiquid assets(section 7.4(f)) Addition of fourth scenario described as the acquisition of an asset from a party in interest to which a statutory or administrative exemption exists.
	b.	Participant loans. Additions include:
		i.	In section 7.3(a) a new category of participant loan transactions for breaches involving level amortization.
		ii.	In section 7.3(b), addition of a category of transactions for defaulted loans.
		iii.	For loans involving excess amounts or duration, VFCP coordination with EPCRS, applicant corrects under EPCRS and then submits a copy of the resulting EPCRS compliance statement, along with proof of payment of any amounts required.
	c.	Settlor expenses (section 7.6)
		i.	Violations involving the use of plan assets to pay expenses that should have been paid by the plan sponsor. 7.6(b) expenses including commissions and fees that should have been paid by the sponsor to a service provider for:
			1.	services appropriately characterized as plan expense which involved the administration and maintenance of the plan in circumstances where a plan provision requires such plan expenses be paid by the plan sponsor, or
			2.	services appropriately characterized as settler expenses, which relate to the activities of the plan sponsor in its capacity as settler.
			Correction requires restoration of principal plus the greater of lost earnings or restoration of profits.
		ii.	PTE also revised to permit this correction.
3.	Definition of Under Investigation
	The definition has been more narrowly focused on when an investigation (on-going or for which notice has been given) involves the plan or an act or transaction involving the plan.
	a.	A plan that is undergoing an employee plans examination by the Tax Exempt and Government Entities Division of the IRS is clearly considered to be “under investigation.”
	b.	An optional disclosure provision is being instituted by EBSA for non-criminal investigations and examinations of a plan, or the applicant or the plan sponsor in connection with an act or transaction directly related with the plan by the PBGC or certain state agency officials.
		i.	Potential applicants who choose to disclose such an investigation will be able to apply under the VFCP program.
		ii.	Potential applicants who choose not to disclose may not file under VFCP as they will be considered “under investigation.”
	c.	If the applicant discloses in writing an existing investigation, EBSA will promptly notify the investigating agency of the VFCP application in order for EBSA to be provided with information relevant to the investigation or examination. EBSA will take suitable action as a result of information received from the investigating agency. This may include declining to issue a no action letter.
	d.	If EBSA completes an investigation resulting in a referral to the IRS, eligibility to enter the IRS VCP program will be limited. Potential applicants continue to be eligible except for specific transactions identified in a written notice to a plan fiduciary about the referral to the IRS.
4.	Correction Methodology
	a.	Cash Settlement
		i.	Section 7.4(a). Additional method added which would allow the plan to retain an asset bought from a party in interest if that would be in the best interest of the participants and beneficiaries.
		ii.	Section 7.4(b). Modified so that a determination by an independent fiduciary will be needed only in the limited circumstances where the plan settles the transaction in cash.
	b.	Transaction Costs
		i.	“The general rule for determining the Principal Amount (section 5(b)(2)) requires, where appropriate, the inclusion of transaction costs associated with entering into the transaction that constitutes the Breach in the determination of the Principal Amount.”
5.	Program Calculations
	a.	Calculation of multiple transactions. If the prohibited transaction involved multiple transactions over time such as the sale of securities or repayment of debt securities over time, the correction may be performed in steps using the different recovery dates. The online calculator is generally able to this. If the facts do not fit into the online calculator's ability, a manual calculation must be done.
	b.	Corporate transactions. Stock splits, tenders or mergers should be accounted for. If the facts and circumstances involved can not be accommodated by the online calculator, the calculation should be done manually.
6.	Documentation Requirements
	a.	Summary Documentation. The April 2005 program permits summary documentation in two instances: Breaches involving amounts below $50,000, or amounts greater than $50,000 remitted within 180 calendar days by the employer. EBSA added the following: For the correction of delinquent participant contributions to insured welfare benefit plan (7.1(b)) and to welfare benefit plan trust (7.1(c)); simplified documentation for breaches involving amounts below $50,000 or amounts greater than $50,000 remitted within 180 calendar days by the employer.
			Note: Amounts below $50,000 or over $50,000 but beyond 180 days may be submitted under VFCP but may not use the summary documentation method. The 180-day rule for summary documentation is distinct from the 180-day standard for excise tax relief under the related class exemption for delinquent contribution or loan repayments to a pension plan; the 180-day standard applies regardless of the amount.
	b.	Online Calculator Documentation to Submit. Documentation required to be submitted has been clarified (6(d)). Specifically, applicants using the online calculator need to submit a copy of the final page(s) that results from using the “Print Viewable Results” function.
C.	De Minimis Excise Tax Amount For Notice to Interested Parties. IRS requested and EBSA adopted a rule to eliminate the requirement that the employer send a notification to interested persons of an excise tax due under Code Section 4975 for amounts equal to or less than $100.
D.	The effective date is May 19, 2006 (30 days after publication in the Federal Register).

Bill Grossman, QPA The April 6, 2005 Revisions to VFCP include:
	•	three new eligible transactions that may be corrected under the VFC program:
		°	delinquent participant loan repayments,
		°	illiquid plan assets* sold to interested parties, and
		°	participant loans that violate certain plan restrictions on such loans;
	•	simpler methods of calculating the amounts due to make the plan whole and a brand new online calculator to determine plan asset restoration amounts;
	•	streamlined documentation and clarified eligibility requirements, and
	•	a model application form.
*Also on April 6, EBSA proposed an amendment to the existing VFC class exemption to permit the sale of illiquid assets. However, the illiquid assets addition to the VFC Program will not be available to be used until the PTE is finalized. Comments to EBSA had to be made by June 6, 2005.
Overview of Changes from April 6, 2005 Revisions to VFCP
1.	Model Application Form The DOL has created a model application form to avoid common application errors that frequently result in processing delay or rejections. Usage of the model form is voluntary. However, usage of the model form is recommended by EBSA because it incorporates:
	a.	an outline of the information EBSA requires,
	b.	the supplemental documentation that EBSA requires,
	c.	a VFC Program mandatory checklist, and the EBSA model penalty of perjury statement.
	d.	Whether the model form is used or not, a signed penalty of perjury statement must be included as part of the filing.
2.	Reduced Documentation
	a.	Certain information about the fidelity bond has been eliminated (in section 6).
	b.	Delinquent deposits or loan repayments. For amounts under $50,000 or over $50,000 but remitted within 180 calendar days after due, EBSA is going with summary documentation. EBSA believes that simplified documentation requirements for certain cases involving smaller corrections will make the VFCP work better for the applicant, who will be able to avail themselves of the program, and for the VFCP reviewers.
3.	Simplification of Correction Amount In response to concern from a number of applicants, EBSA has simplified the definitions of Lost Earnings and Restoration of Profits and added an online calculator for applicants to use to determine the adjustment amounts. Plan officials will continue (as under the prior program) to determine the correction amount to be restored to the plan based on either the losses to the plan resulting from a breach OR the profits gained from the improper use of plan assets (ERISA 409).
The correction generally consists of two parts:
1.	Principal Amount (which must always be restored to the plan)
2.	Lost earnings on restoration of profits.
Definitions for use in calculations
	Loss Date: The date the breach occurred – and the start date for calculations. Recovery Date: The date the Principal Amount is restored to the plan. Lost earnings: Earnings from the loss date through the recovery date. In addition, if the earnings are credited to the plan after the recovery date, interest must be calculated after the recovery date on the lost earnings through the payment date. Payment Date: If the lost earnings are deposited after the recovery date, the date it is deposited is the payment date. Revenue Procedure 95 -17: The source of the factors for the calculations. These factors have been displayed on EBSA’s website as factors.
	a.	Lost Earnings Component
		1.	Determine the applicable underpayment rates under section 6621(a)(2) for each quarter, or portion thereof, from the loss date to the recovery date. (Information is on EBSA’s website.)
		2.	Select the applicable factors from Rev. Proc. 95-17 for such quarterly rate(s) for each quarter or portion thereof from the loss date to the recovery date.
		3.	Determine the amount of lost earnings as follows:
			a.	For the first quarter or portion thereof: Multiply the Principal Amount by the first applicable factor.
			b.	For the second quarter: Multiply the Principal Amount plus the earnings determined for the first quarter by the applicable factor.
			c.	For subsequent quarters: Multiply the Principal Amount plus the earnings as of the end of the quarter immediately preceding the one being calculated by the applicable factor until the recovery date is reached.
			d.	If the Lost Earnings is paid to the plan after the Recovery Date, calculate the earnings from the recovery date to the payment date by the same method as a through c above, but begin on the recovery date and end on the payment date. The amount of interest is calculated on the lost earnings instead of on the principal.
		NOTE: If the Lost Earnings plus any interest on Lost Earnings exceeds $100,000.00 the applicant must re-determine the Lost earnings and any interest using the 6621(c)(1) rate instead of the 6621(a)(2) rate. These rates are on the EBSA website.
	b.	Restoration of Profits Component In a limited set of circumstances, Plan Officials are required to determine the Restoration of Profits as a correction component. To simplify this process from the original program, the Restoration of Profits will only be calculated when the Principal Amount was used by the fiduciary, plan sponsor or plan official for a specific purpose such that a profit resulting from the breach is determinable. Thus, because commonly the funds are intermingled with other assets, EBSA anticipates that this amount will not be determinable. Definition: the amount of profit made on the use of the Principal Amount and the interest on the profit from the time it is realized until the time it is returned to the plan.
		To calculate the restoration of profits:
		1.	Determine the applicable corporate underpayment rates for each quarter from section 6621(a)(c) for the period beginning when the profit was realized (i.e. received or determined) and ending with the date the profit is paid to the plan.
		2.	Select the applicable factor from Rev. Proc. 95-17 for each quarterly period from when the profit was realized until it was restored to the plan.
		3.	Multiply the profit on the Principal Amount by the applicable factor for the first quarter.
		4.	For subsequent quarters: Multiply the Profit from the Principal Amount plus the earnings as of the end of the quarter immediately preceding the one being calculated by the applicable factor until the profit amount is repaid to the plan.
		NOTE: If the Restoration of Profits amount exceeds $100,000.00 the applicant must re-determine the interest amount on the Profits using the same method as above but using the 6621(c)(1) rate instead of the 6621(a)(2) rate. The online calculator may be used for this calculation.
4.	Internet Based Online Calculator on EBSA site Applicants may use this calculator to determine lost earnings and interest after the recovery date (If any) as well as the interest amount for Restoration of Profits. The calculator will ensure consistency and expedite processing of the application. The applicable factors for Rev. Proc. 95-17 are in the online calculator making it simpler to use. However, EBSA will accept the manual calculation method. Calculating with the online calculator Calculating Lost earnings and interest requires the input of four factors: 1. Principal Amount 2. Loss Date 3. Recovery Date 4. Final Payment Date (if different then the recovery date) Calculating the Restoration of Profits requires the input of three factors: 1. The amount of profit 2. The date the amount of profit was realized (i.e. received or determined) 3. The date of payment of the restoration of profits amount
5.	New Covered Transactions
	a.	Illiquid Transactions This new transaction covers when a plan has an illiquid asset and the fiduciary has determined that continuing to hold the asset is not in the best interest of the plans’ participants and beneficiaries and after following reasonable attempts to dispose of the asset, the only purchaser is a party in interest. There are three scenarios described:
		1.	Plan purchases an asset at a price not greater than fair market value, but because the acquisition was from a related party, it was a prohibited transaction.
		2.	Plan purchases an asset from an unrelated third party in an acquisition that was not a prohibited transaction under ERISA, but the plan fiduciary failed to appropriately discharge his or her duties with respect to the purchase. For example, the fiduciary’s purchase of a limited partnership interest from an unrelated third party was imprudent and inconsistent with the objectives contained in the plan’s investment guidelines.
		3.	Plan purchases an asset from an unrelated third party in an acquisition that was not a prohibited transaction under ERISA, and the plan fiduciary appropriately discharges his or her fiduciary duties with respect to the purchase.
	Subsequent to an acquisition pursuant to one of the foregoing scenarios, the plan fiduciary concludes that the continued holding of the asset is not in the interest of the plan. To correct the transaction, the revised VFCP requires the fiduciary to classify the asset as illiquid by making the following determinations:
		1.	That the asset has failed to appreciate, failed to provide a reasonable rate of return or has caused a loss to the plan;
		2.	that the sale of the asset is in the best interest of the participants and beneficiaries; and
		3.	following reasonable efforts to sell the asset to a non-party in interest, that the asset cannot immediately be sold for its original price, or its current fair market value, if greater.
		Illiquid assets could include, among other things:
			a.	restricted and thinly traded stock,
			b.	limited partnership interests,
			c.	real estate,
			d.	collectibles.
		The required correct of illiquid assets:
			•	permits the sale of the illiquid asset to a party in interest;
			•	must restore the plan to a financial position that is no worse off than if the acquisition had never taken place;
			•	that the plan must receive:
				a	the higher of the fair market value of the asset on the day of correction OR
				b.	its original price, plus incidental costs.
		Note: A PTE was proposed at the same time as the proposed regulations. The PTE would extend to the acquisition and the disposition of the illiquid asset by sale to a party in interest. The PTE has been finalized on April 19, 2006.
	b.	Participant Loans Loan that exceeds the permitted limit under the plan provisions. To correct this, the participant must pay back to the plan the excess amount of the loan. Example: Participant is eligible for a loan of $15,000 and receives a loan of $20,000. The participant must return the $5,000. to the plan. The plan administrator must re-amortize the remaining loan payments as of the day the $5,000 is repaid. The other terms of the original loan must be followed. Loans that exceeds the 5-year term. The loan duration must be reformed to the maximum loan term permitted. The repayments must be re-amortized to be completed within that term. Example: A loan should have been for 5 years but was scheduled for ten years of repayments. The reformed loan must be repaid within 5 years from the original date of the loan origination. The repayment amounts are to be re-amortized to fit the remainder of the 5 year schedule. If more than 5 years had passed since the loan origination, this correction is not available. IRS will make an addition to the EPCRS correction programs in order to match the DOL program so that the participant will not be subject to taxation due to the IRS deemed loan requirements.
	c.	Delinquent Participant Loan Repayments Delinquent loan repayments have been added to the VFCP to be corrected in the same manner as late deposit of deferrals. This was originally issued as guidance in Advisory Opinion Letter 2002-02A and has been added here to conform the VFCP to the Advisory Opinion
6.	Other Changes
	a.	Scope of the Term “Under Investigation” Eligibility to be in the program is conditioned on both the plan and the applicant not being “under investigation.” The definition of “under investigation” includes investigations or examinations by other Federal agencies whether of a civil or criminal nature. This includes notice of the intent of Federal agencies to investigate if the investigation or examination at issue is in connection with an act or transaction involving the plan. Example: if a Federal agency notified the company of an investigation regarding a Federal contract, such notification would not affect the plan’s eligibility to participate in the VFCP as the investigation has nothing to do with the plan or a transaction involving the plan.
	b.	Modification of Penalty of Perjury Statement The statement is simplified and conforms more closely to the required representations in the revised Program’s criteria. The declaration that the application and all supporting documents are based on knowledge and belief that all are true, correct and complete.
	c.	Requests for Additional Documentation This new provision of the program makes clear that EBSA retains the right to make written requests for any supplemental documentation necessary for a complete examination and review under the Program. If documentation is not submitted within the timeframe requested, EBSA may suspend the VFCP request and consider what, if any, other actions may be appropriate with respect to the identified provisions.
7.	Miscellaneous Issues
	a.	502(l) Penalty If Application Is Rejected Or Closed As Incomplete If a person files an application under VFCP but the correction is short or unacceptable, EBSA may reject the application and subject the plan to a penalty which would not be charged to the extent that the plan was corrected before the filing. The penalty would only apply to the amount not corrected or short.
	b.	Actions By Parties Other Than the Department Generally, a VFCP correction of a transaction under Code section 4975 will constitute a correction for purposes of 4975 – unless there is a fiduciary breach involving a tax abuse. Also, a VFCP correction for a breach that also is an operational plan qualification failure generally will be considered corrected under EPCRS.

Bill Grossman, QPA

To learn more, call 973-492-1880 or e-mail info@mhco.com.