Qualified employer-sponsored retirement plans have become a fundamental fringe benefit for many employers today. However, if your organization sponsors one, you know how complex administration and compliance can be. It’s not uncommon for plan sponsors (such as employers) or administrators to make mistakes.
In 2002, the U.S. Department of Labor (DOL) introduced the Voluntary Fiduciary Correction Program (VFCP). It allows plan sponsors and administrators to voluntarily correct violations of the Employee Retirement Income Security Act (ERISA) and Internal Revenue Code committed under qualified plans, including 401(k)s and pensions. On January 14, the DOL’s Employee Benefits Security Administration (EBSA), which runs the VFCP, announced an important update.
Program mechanics
Historically, the VFCP has enabled plan sponsors and administrators to correct eligible transactions within 19 categories. Examples include:
- Participant loans that fail to comply with plan provisions for amount, duration or level amortization,
- Purchase or sale of assets from or to parties in interest,
- Sale and leaseback of property to sponsoring employers,
- Purchase or sale of assets from or to nonparties in interest at more or less than fair market value,
- Payment of duplicate, excessive or unnecessary compensation, and
- Improper payment of expenses by the plan.
To correct these violations, the program requires applicants to follow a series of steps. First, plan sponsors or administrators must identify ERISA violations and determine whether they fall within VFCP-covered transactions. Second, sponsors or administrators need to obtain a qualified valuation of plan assets.
Third, applicants must calculate and restore any losses or profits with interest, if applicable, and distribute any supplemental benefits to participants. They also need to pay all expenses incurred for correcting erroneous transactions, such as appraisal costs and fees for recalculating participants’ balances.
Finally, plan sponsors or administrators must file an application with the appropriate EBSA regional office that includes documentation showing evidence of the corrective action taken. If plan corrections satisfy the VFCP’s terms, the EBSA will issue a “no action” letter. This essentially means that the agency accepts the correction and won’t impose any further sanctions.
Self-correct tool
This year’s update to the VFCP introduces what the EBSA calls the “Self-Correction Component” (SCC). It’s essentially a tool that allows plan sponsors or administrators to fix certain transactions without going through the traditional VFCP application process. Instead, self-correctors can submit an SCC Notice through the EBSA’s web tool and provide the required information.
Only two types of transactions are currently eligible for the SCC. They are:
- Delinquent participant contributions and loan repayments to pension plans, and
- Qualifying inadvertent participant loan failures.
An EBSA fact sheet provides further details about each type of transaction. On the fact sheet, the agency also notes that it has made several other improvements to the VFCP. For example, additional correction options will soon be available for prohibited loan transactions and prohibited purchase and sale transactions involving plans. As of this writing, the effective date for all the EBSA’s 2025 VFCP revisions — including the SCC — is March 17, 2025.
Complexity and challenges
The forthcoming addition of the SCC represents an important, if incremental, improvement to the VFCP. It also highlights the complexity of offering a qualified retirement plan and the challenges of complying with ERISA and the Internal Revenue Code.
Contact The CJ Group for help identifying and assessing the costs, risks and potential upsides of any fringe benefits you’re administering or considering. The CJ Group provides expertise in employee benefit audits to help your organization protect your investment.
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