[Federal Register: April 6, 2005 (Volume 70, Number 65)]
[Notices]
[Page 17515-17547]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap05-154]
[[Page 17515]]
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Part II
Department of Labor
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Employee Benefits Security Administration
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Voluntary Fiduciary Correction Program Under the Employee Retirement
Income Security Act of 1974; Notice
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
RIN 1210-AB03
Voluntary Fiduciary Correction Program Under the Employee
Retirement Income Security Act of 1974
AGENCY: Employee Benefits Security Administration, DOL.
ACTION: Adoption of amended and restated Voluntary Fiduciary Correction
Program.
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SUMMARY: This Notice contains an update, which amends and restates the
Employee Benefits Security Administration's Voluntary Fiduciary
Correction Program (the VFC Program or Program). The VFC Program
permits certain persons to avoid potential civil actions and civil
penalties under the Employee Retirement Income Security Act (ERISA) by
voluntarily taking steps to correct violations that would ordinarily
give rise to such actions and penalties. Based on its experience since
adoption of the VFC Program in March 2002, the Employee Benefits
Security Administration (EBSA) has identified certain changes that will
both simplify and expand the original VFC Program, thereby making the
Program easier for, and more useful to, employers and others who wish
to avail themselves of the relief provided by the Program. EBSA is
inviting comments from interested persons on the revisions to the VFC
Program described in this document. At the same time, EBSA is making
the simplified and expanded Program available immediately to those who
wish to rely on the revisions in seeking VFC Program relief.
DATES: This Notice is effective April 6, 2005.
Written comments on the Notice should be received by EBSA on or
before June 6, 2005.
ADDRESSES: Comments on the amendments to the VFC Program (preferably at
least three copies) should be addressed to the Office of Regulations
and Interpretations, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-5669, 200 Constitution Avenue NW.,
Washington, DC 20210, Attn: Voluntary Fiduciary Correction Program.
Comments also may be submitted electronically to e-ori@dol.gov or to
http://www.regulations.gov.
All comments received will be available for public inspection at
the Public Disclosure Room, N-1513, Employee Benefits Security
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: For Questions Regarding the VFC
Program Amendments: Contact Kristen L. Zarenko, Office of Regulations
and Interpretations, Employee Benefits Security Administration, (202)
693-8510.
For General Questions Regarding the VFC Program: Contact Caroline
Sullivan, Office of Enforcement, Employee Benefits Security
Administration, (202) 693-8463. (These are not toll-free numbers.)
For Questions Regarding Specific Applications Under the VFC
Program: Contact the appropriate EBSA Regional Office listed in
Appendix C.
SUPPLEMENTARY INFORMATION:
A. Background
The Voluntary Fiduciary Correction Program was adopted by EBSA of
the Department of Labor (Department) on a permanent basis in March 2002
(the original VFC Program).\1\ The VFC Program is designed to encourage
employers and plan fiduciaries to voluntarily comply with ERISA and
allows those potentially liable for certain specified fiduciary
violations under ERISA to voluntarily apply for relief from enforcement
actions and certain penalties, provided they meet the VFC Program's
criteria and follow the procedures outlined in the VFC Program. Many
workers have also benefited from the VFC Program as a result of the
restoration of plan assets and payment of promised benefits.
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\1\ 67 FR 15062 (March 28, 2002). Prior to adoption in March
2002, the VFC Program was made available on an interim basis during
which the Department invited and considered public comments on the
Program. (See 65 FR 14164, March 15, 2000).
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The VFC Program describes: how to apply for relief; the specific
transactions covered;\2\ acceptable methods for correcting violations;
and examples of potential violations and corrective actions. Eligible
applicants that satisfy the terms and conditions of the VFC Program
receive a ``no-action letter'' from EBSA and are not subject to civil
monetary penalties. In 2002, the original VFC Program was further
expanded to include a class exemption (PTE 2002-51) providing excise
tax relief for four specific VFC Program transactions.\3\
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\2\ 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.
\3\ PTE 2002-51 published at 67 FR 70623 (Nov. 25, 2002).
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While the original VFC Program has been very successful in
encouraging and facilitating the correction of violations of ERISA's
fiduciary responsibility and prohibited transaction rules, EBSA
believes, based on its own experience to date, as well as comments from
employee benefit plan practitioners, that changes to the Program are
needed to further encourage utilization of the Program. These changes
will improve administration of the Program by EBSA's Regional Offices
by which the revised VFC Program will continue to be administered. To
this end, EBSA is publishing in this Notice an updated and revised VFC
Program containing several changes (the revised VFC Program), discussed
below, on which EBSA is inviting public comment. As also discussed
below, EBSA is making the revised VFC Program effective on publication
of this Notice in order to enable employers, plan fiduciaries and
others to avail themselves of the simplified processes and new covered
transactions during the interim period until the adoption of final
changes to the Program.
EBSA also is proposing amendments to PTE 2002-51 to accommodate a
new transaction contained in the revised VFC Program. These amendments
also appear in the Notice section of today's Federal Register. It is
important to note that the excise tax relief afforded by the amendments
to PTE 2002-51 is not available until such amendments are adopted in
final form and, therefore, the amendments cannot be relied upon for
relief during the interim period of the revised Program.
B. Overview of VFC Program Changes
Except as discussed below, the revised VFC Program, as set forth
herein, is unchanged from the Program adopted in 2002. The Program is
set forth in its entirety in this Notice to facilitate both utilization
and review by interested persons. The following is an overview of
changes applicable to the revised VFC Program.
1. Model Application Form
To encourage use of the Program, EBSA is making available a model
VFC Program application form. This model form is set forth in Appendix
E of this Notice. EBSA also will be making the model form available to
the public on its Web site.\4\ While use of the model form
[[Page 17517]]
is wholly voluntary, EBSA encourages applicants to consider using the
form in order to avoid common application errors that frequently result
in processing delays or rejections. Moreover, EBSA believes that use of
the model form will enable the Regional Offices to provide a more
expedient and consistent review of VFC Program applications.
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\4\ The model form will be accessible to applicants on EBSA's
Web site at http://www.dol.gov/ebsa.
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In brief, the model form provides an outline for applicants of the
information and supplemental documentation that must be included with
the application to help ensure that the applications are correct and
complete. The model form includes the Program's mandatory checklist,
which is also separately set forth in Appendix B of this Notice. Use of
the model form, however, is not a substitute for an applicant's careful
review of Program conditions and requirements. For example, all
applications must include a completed penalty of perjury statement.
2. Reduced Documentation
As part of its effort to streamline and simplify the VFC Program,
EBSA reviewed the supporting documents required to be filed as part of
the application process. On the basis of this review, EBSA concluded
that document requirements could be reduced in certain instances
without compromising EBSA's review of applications. In particular, EBSA
has made the following changes to the documentation requirements.
Section 6 of the Program has been revised to eliminate the
requirement that applicants provide certain information relating to the
plan's fidelity bond.
With regard to the correction of delinquent participant
contributions or loan repayments under Section 7.A.1. of the Program,
the Program is being revised to permit applicants correcting breaches
that involve (i) amounts below $50,000, or (ii) amounts greater than
$50,000 that were remitted within 180 calendar days after receipt by
the employer to provide summary documentation. EBSA believes that
introducing more simplified documentation requirements in certain cases
rather than the detailed information and copies of accounting and
payroll records required under the original VFC Program will streamline
the application process, increase the efficiency of EBSA's reviewers,
and be less burdensome for applicants making smaller corrections. Based
on EBSA's experience to date, the majority of VFC Program applicants,
under the revised Program, would be able to avail themselves of this
reduced documentation requirement.
3. Simplification of Correction Amount
In the course of EBSA's administration of the VFC Program, a number
of applicants expressed concern about the complexities attendant to
calculating amounts required for transaction corrections under the
Program. In an effort to address applicant concerns and facilitate
corrections for purposes of the revised Program, EBSA is simplifying
the definitions of both Lost Earnings and Restoration of Profits set
forth in Section 5(b) of the Program.\5\ Additionally, EBSA is also
providing a new Internet tool on its Web site, the Online Calculator,
to automatically perform Program calculations. Use of the Online
Calculator is discussed in detail below.
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\5\ The Department notes that the Program's correction criteria
represent EBSA enforcement policy with respect to applications under
the Program and are provided for informational purposes to the
public, but are not intended to confer enforceable rights on any
person correcting a violation.
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The Program has always required that Plan Officials 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 improper
use of plan assets, as required by section 409 of ERISA. The correction
amount generally consists of two components: (1) Principal Amount and
(2) Lost Earnings or Restoration of Profits. In broad terms, the
Principal Amount is the amount of plan assets that would have been
available to the plan if the breach had not occurred. Plan Officials
must always restore the Principal Amount to the plan.
(a) Lost Earnings Component
Under the original VFC Program, Plan Officials generally calculated
Lost Earnings by comparing two hypothetical amounts that a plan might
have earned on the Principal Amount between the date of the breach (the
Loss Date) and the date the Principal Amount is restored to the plan
(the Recovery Date), as well as any interest on such earnings because
of payment of Lost Earnings after the Recovery Date. The first earnings
amount assumed that the Principal Amount had been appropriately
invested under ERISA, while the second assumed that the Principal
Amount had earned interest at a rate defined in section 6621 of the
Internal Revenue Code (Code). Utilizing this approach, Plan Officials
were then required to restore the higher of these two hypothetical
amounts to the plan.
In an effort to simplify this component of the correction amount,
EBSA is revising the method of calculating Lost Earnings and interest,
if any, to use factors provided under IRS Revenue Procedure 95-17.\6\
These factors, which are displayed on EBSA's Web site in a tabular
format, incorporate daily compounding of an interest rate over a set
period of time.
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\6\ Rev. Proc. 95-17, 1995-1 C.B. 556 (Feb. 8, 1995).
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First, applicants must determine the applicable corporate
underpayment rate(s) established under section 6621(a)(2) of the Code
for each quarter (or portion thereof) for the period beginning with the
Loss Date and ending with the Recovery Date. These rates are displayed
on EBSA's Web site and will be updated when necessary. Second,
applicants must select the applicable factor(s) under IRS Revenue
Procedure 95-17 for such quarterly underpayment rate(s) for each
quarter (or portion thereof) of the period beginning with the Loss Date
and ending with the Recovery Date. Third, applicants multiply the
Principal Amount by the first applicable factor to determine the amount
of earnings for the first quarter (or portion thereof). If the Loss
Date and Recovery Date are within the same quarter, this initial
calculation is complete. However, if the Recovery Date is not in the
same quarter as the Loss Date, the applicable factor for each
subsequent quarter (or portion thereof) must be applied to the sum of
the Principal Amount and all earnings as of the end of the immediately
preceding quarter (or portion thereof), until Lost Earnings have been
calculated for the entire period, ending with the Recovery Date.
In situations when the Lost Earnings amount is paid to the plan
after the Recovery Date, applicants must calculate an amount of
interest that the Lost Earnings would have earned during the time
period between the Recovery Date and such payment date. This
calculation also has been simplified to use the factors provided under
IRS Revenue Procedure 95-17. Applicants must use the same method as in
calculating Lost Earnings, but referencing the period beginning on the
Recovery Date and ending with the payment date and applying the first
applicable factor to Lost Earnings instead of the Principal Amount.
Under the original Program, the Plan Official would have had to
calculate and compare two assumed amounts of interest that would have
been earned if the Lost Earnings amount had been restored to the plan
on the Recovery
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Date and then pay the greater of these two amounts.
If the sum of Lost Earnings and any interest on Lost Earnings
exceeds $100,000, applicants must then re-determine the amount of Lost
Earnings and any interest on Lost Earnings using the same method
discussed above, but substituting the applicable underpayment rates
under section 6621(c)(1) of the Code for the rates previously used
under section 6621(a)(2). These rates also are displayed on EBSA's Web
site and will be updated when necessary.
Applicants either may use the Online Calculator to facilitate the
calculation of these Lost Earnings amounts, as explained below, or
perform the calculation manually. In either case, information
sufficient to verify the correctness of the amounts to be paid to the
plan must be included as part of the VFC Program application.
(b) Restoration of Profits Component
In a limited set of circumstances, Plan Officials are required to
determine Restoration of Profits as a correction amount component.
Under the original VFC Program, Plan Officials generally calculated
Restoration of Profits when a breach involved the use of the Principal
Amount by a fiduciary, plan sponsor or other Plan Official for a
specific purpose resulting in an actual profit that could be
determined. Plan Officials were required to compare this actual profit
to a second amount that assumed that the Principal Amount had earned
interest at a rate defined in section 6621 of the Code. The higher of
these two amounts was defined as Restoration of Profits. Plan Officials
were then required to compare this Restoration of Profits amount to the
Lost Earnings amount and restore the higher amount to the plan.
In an effort to simplify this component of the correction amount,
EBSA is revising the Program to require the calculation of a
Restoration of Profits amount only when the Principal Amount was used
by a fiduciary, plan sponsor or other Plan Official for a specific
purpose such that a profit resulting from the breach is determinable.
EBSA's experience suggests that more commonly, the Principal Amount is
commingled with other funds of the plan sponsor or a fiduciary, so that
a profit from the use of the Principal Amount cannot definitively be
determined. As a consequence, EBSA anticipates that applicants under
the revised Program will be using the simplified Lost Earnings
calculation more frequently than Restoration of Profits.
Under the revised Program, Restoration of Profits is defined to
incorporate two amounts: (i) The amount of profit made on the use of
the Principal Amount, and (ii) if the profit is restored to the plan on
a date later than the date on which the profit was realized (i.e.,
received or determined), the amount of interest earned on such profit
from the date the profit was realized to the date on which the profit
is restored to the plan. Under the original Program, Plan Officials
would have had to calculate and compare two assumed amounts of interest
and then include the greater of these two amounts in Restoration of
Profits.
EBSA is simplifying the determination of Restoration of Profits
under the revised Program to use factors provided under IRS Revenue
Procedure 95-17 in calculating the interest amount. First, applicants
must determine the applicable corporate underpayment rate(s)
established under section 6621(a)(2) of the Code for each quarter (or
portion thereof) for the period beginning with the date the profit was
realized (i.e. received or determined) and ending with the date on
which the profit is paid to the plan. Second, applicants must select
the applicable factor(s) under IRS Revenue Procedure 95-17 for such
quarterly underpayment rate(s) for each quarter (or portion thereof) of
the period beginning with the date the profit was realized and ending
with the date on which the profit is paid to the plan. Third,
applicants multiply the profit on the Principal Amount, referred to
above, by the first applicable factor to determine the amount of
interest for the first quarter (or portion thereof). If the date the
profit was realized and the date the profit is paid to the plan are
within the same quarter, the initial calculation is complete. However,
if the date the profit was realized is not in the same quarter as the
date the profit was paid to the plan, the applicable factor for each
subsequent quarter (or portion thereof) must be applied to the sum of
the profit on the Principal Amount, and all interest as of the end of
the immediately preceding quarter (or portion thereof), until interest
has been calculated for the entire period, ending with the date the
profit amount is paid to the plan.
If the Restoration of Profits amount exceeds $100,000, applicants
must then recalculate the interest amount for Restoration of Profits
using the same method discussed above, but substituting the applicable
underpayment rates under section 6621(c)(1) of the Code for the rates
previously used under section 6621(a)(2).
To more easily perform these interest amount calculations,
applicants may use the Online Calculator. Applicants also may perform
these calculations manually. In either case, information sufficient to
verify the correctness of the amounts to be paid to the plan must be
included as part of the VFC Program application.
In situations when the Restoration of Profits amount can be
determined, the revised VFC Program requires the Plan Official to
restore Restoration of Profits to the plan as a component of the
correction amount only if Restoration of Profits exceeds the Lost
Earnings amount plus interest, if any.
4. Online Calculator
To facilitate use of the Program, EBSA is providing an Online
Calculator on its Web site, which is an Internet based compliance
assistance tool that may be used by applicants to automatically
calculate Lost Earnings and interest, if any, and the interest amount
for Restoration of Profits. Use of the Online Calculator will provide
accuracy, ensure consistency and expedite review of applications by
EBSA. While EBSA anticipates that most applicants will use the Online
Calculator under the revised Program, applicants also may perform a
manual calculation, as explained above, using the applicable factors
under IRS Revenue Procedure 95-17.
In using the Online Calculator to determine Lost Earnings and
interest, if any, applicants input four data elements: the (1)
Principal Amount, (2) Loss Date, and (3) Recovery Date, and if the
final payment will occur after the Recovery Date, (4) the date of such
final payment. The Online Calculator selects the applicable factors
under Revenue Procedure 95-17 after referencing the underpayment rates
over the relevant time period. The Online Calculator then automatically
applies the factors to provide applicants with the amount of Lost
Earnings and interest, if any, that must be paid to the plan.
In using the Online Calculator to determine the interest amount for
Restoration of Profits, applicants input three data elements: (1) The
amount of profit, (2) the date the amount of profit was realized (i.e.
received or determined), and (3) the date of payment of the Restoration
of Profits amount. The Online Calculator selects the applicable factors
under Revenue Procedure 95-17 after referencing the underpayment rates
over the relevant time period. The Online Calculator then automatically
applies the factors to provide applicants with the interest
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amount on the profit that must be paid to the plan.
5. New Covered Transactions
(a) Illiquid Assets
On the basis of EBSA's review of the VFC Program, EBSA believes it
is appropriate to revise the Program to include a correction of a
transaction that permits the plan to divest, rather than continuing to
hold in its portfolio, a previously purchased asset that is currently
classified as illiquid. This new transaction is described in Section
7.D.6. of the revised Program.
Specifically, the new transaction covers circumstances where a plan
is holding an illiquid asset and a plan fiduciary has determined that
continued holding of such asset is not in the best interest of the plan
or the plan's participants and beneficiaries, and following reasonable
efforts to dispose of the asset, the only available purchaser is a
party in interest. The revised Program describes three scenarios for
the plan's acquisition of the illiquid asset, each of which results in
the plan's holding of the illiquid asset, for which the correction is
determined to be necessary. In the first scenario, the plan purchases
an asset at a price not greater than fair market value at that time,
but because the acquisition was from a related party, it was
nonetheless a prohibited transaction. In the second scenario, the 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 fiduciary 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. In the third scenario, the 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 discharged 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 VFC Program 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 plan; 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 purchase price, or its
current fair market value, if greater. Illiquid assets, among other
things, could include restricted and thinly traded stock, limited
partnership interests, real estate and collectibles.
The required correction permits the sale of the illiquid asset to a
party in interest, provided the plan is returned to a financial
position that is no worse than if the acquisition had never taken
place. Accordingly, a plan must receive the higher of the fair market
value of the asset on the date of the correction or its original
purchase price, plus incidental costs. For purposes of the Class
Exemption, corrective relief would, upon adoption of the amendments,
extend to both the acquisition of the asset by the plan, if that
acquisition would otherwise have been a prohibited transaction, and the
disposition of the illiquid asset by sale to a party in interest, which
would itself be a prohibited transaction but for the exemption.
(b) Participant Loans
Often plans incorporate in their terms with respect to participant
loan programs a provision that a participant loan will not exceed the
limitations set by section 72(p) of the Code.\7\ The statutory
exemption from the prohibited transaction provisions for participant
loans provided by section 408(b)(1) of ERISA contains a requirement
that a participant loan be made in accordance with plan terms regarding
such loans. A violation of the prohibited transaction provisions of
ERISA, therefore, would occur when the section 72(p) loan limitations
are exceeded. According to practitioners, these loan violations
commonly occur and lack an approved correction method for the fiduciary
breach involved. EBSA recognizes that plan loans to participants can
result in prohibited transactions through no fault of the borrowers.
For example, a data processing system or record-keeping error could
result in a loan that fails to comply with the plan's written loan
provisions, and the borrower agrees to the loan terms unaware of the
error. To facilitate correction of such transactions, EBSA is expanding
the Program with the addition of two new categories of transactions
involving plan loans to participants. These transactions are being
added in Section 7.C.1. and 2. of the revised Program.
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\7\ See Code section 72(p)(2)(A) and (B).
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The new transactions describe situations when a plan extends a loan
(i) to a participant who is a party in interest with respect to the
plan based solely on his or her status as an employee, and (ii) either
the amount or duration of the loan exceeds that permitted under the
applicable plan provisions incorporating the limitations of section
72(p) of the Code. These loans are prohibited transactions that fail to
qualify for the statutory exemption in section 408(b)(1) of ERISA
because the loans were not made in accordance with the specific plan
loan provisions.
To correct a loan that exceeded the amount limitation, the Program
requires the participant to pay back to the plan the excess amount of
the loan. For example, if on the date the loan was made, a participant
should have received a loan no greater than $5,000, but the participant
erroneously received a loan for $7,000, then the participant must pay
$2,000 back to the plan on the date of correction. Then, Plan Officials
must reform the loan to amortize the remaining principal balance as of
the date of correction over the remaining duration of the original
loan, making any required adjustments to the monthly repayment amount.
Plan Officials otherwise must continue to enforce all other terms of
the original loan agreement.
To correct a loan that exceeded the duration limitation, the
Program requires that Plan Officials reform the duration of the loan to
complete repayment within the maximum term permitted under the plan
loan provisions. For example, if a loan should have been for a term of
five years, but the participant erroneously received a loan with
scheduled repayments over ten years, Plan Officials must reform the
loan. The reformed loan must be paid back within five years from the
date of loan origination, and Plan Officials must make any necessary
changes to the monthly repayment amount. If more than five years has
passed since the date of loan origination, then this correction is not
available. Plan Officials otherwise must continue to enforce all other
terms of the original loan agreement.
EBSA is aware that these plan loan transactions also have tax
consequences; they require income tax reporting as a deemed
distribution by the plan fiduciaries, which triggers income tax
liabilities for participants. Informal discussion between EBSA and the
staffs of the Internal Revenue Service (IRS) and Treasury Department
have confirmed their intent to develop a coordinating Employee Plans
[[Page 17520]]
Compliance Resolution System \8\ (EPCRS) correction for these plan loan
transactions under which certain tax consequences may be alleviated.
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\8\ Rev. Proc. 2003-44, 2003-1 C.B. 1051.
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(c) Delinquent Participant Loan Repayments
Subsequent to the publication of the original VFC Program, EBSA
issued Advisory Opinion 2002-02A (May 17, 2002) relating to the time
frames for repayment of participants' loans to pension plans. The
Department then issued guidance in a question and answer format under
the VFC Program stating that applicants could correct the failure to
forward participant loan repayments to a plan in a timely fashion under
the Program in the manner set forth in this Advisory Opinion. In
conjunction with this guidance, the Department included, in its final
class exemption providing relief for certain transactions described in
the Program,\9\ explicit language to cover the failure to transmit
participant loan repayments to a pension plan within a reasonable time
after withholding or receipt by the employer. Consistent with the
Department's prior guidance,\10\ EBSA is expanding the Program to
explicitly include delinquent participant loan repayments as an
eligible transaction in Section 7.A.1. of the Program.
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\9\ See infra 1.
\10\ See also Preamble to the final participant contribution
regulation, 29 CFR 2510.3-102, published at 61 FR 41220, 41226 (Aug.
7, 1996).
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6. Other Changes
In addition to the revisions described above, EBSA is making the
following changes in an effort to further refine the scope of the
Program and facilitate its administration of the Program via the
Regional Offices.
(a) Scope of the Term ``Under Investigation''
Eligibility to participate in the revised Program pursuant to
Section 4 (VFC Program Eligibility), paragraph (a), is conditioned on
neither the plan nor the applicant being ``Under Investigation.'' For
purposes of the revised VFC Program, EBSA has changed the definition of
``Under Investigation'' in Section 3(b)(3). Upon review of the prior
definition, EBSA concluded that in some respects the definition was too
broad and in other respects too narrow. For example, the original VFC
Program provided that a person would be considered ``Under
Investigation'' only if he or she were subject to an investigation
under either section 504 of ERISA by EBSA or any criminal statute
involving a transaction affecting the plan. EBSA believes that if
another Federal agency (e.g., IRS, SEC) is conducting an investigation
involving the plan, applicant or plan fiduciary in connection with an
act or transaction involving the plan, the acts or transaction at issue
should be subject to closer scrutiny than might otherwise be the case
in connection with the VFC Program, which is designed to deal with
routine correction issues. Accordingly, the definition of ``Under
Investigation'' includes investigations or examinations by other
Federal agencies whether of a criminal or civil nature.
EBSA further modified the ``Under Investigation'' definition to
include notice of a Federal agency's intent to conduct an
investigation, recognizing that the parties to the transaction may
actually be on notice of an agency's intent to conduct an investigation
well in advance of the beginning of the actual investigation. Again,
EBSA believes that, while mere contact by an agency official generally
is insufficient, communications notifying the parties of a Federal
agency's intent to conduct an investigation or examination should, for
purposes of eligibility for the VFC Program, be the same as if the
investigation had started. It should be noted, however, that the plan,
the applicant or plan sponsor will be considered ``Under
Investigation'' only if the investigation or examination at issue is in
connection with an act or transaction involving the plan. For example,
if a plan sponsor is notified by a Federal agency of an investigation
of the company regarding a Federal contract, such notification would
not affect the plan's eligibility to participate in the VFC Program
because the investigation does not involve the plan or an act or
transaction involving the plan.
(b) Modification of Penalty of Perjury Statement
For purposes of the revised VFC Program, EBSA also has modified the
Penalty of Perjury Statement required by Section 6(g) of the Program.
This amendment significantly simplifies the statement and more closely
conforms the required representations to the revised Program's
eligibility criteria. Under the revised Program, the statement will
continue to require a declaration that the application and all
supporting documents, based on knowledge and belief, are true, correct,
and complete.
(c) Requests for Additional Documentation
For purposes of the revised VFC Program, EBSA has added a provision
to the Application Procedures set forth in Section 6(j) of the Program,
Submission of Additional Documentation. This provision is intended to
make clear that EBSA retains the right to make written requests for any
supplemental documentation necessary for a complete examination and
review of the application under the Program. If an applicant fails to
respond with the requested documentation within the specified time
period, EBSA may suspend further review of the application and consider
what, if any, other action may be appropriate with respect to the
identified violations. EBSA believes that this new provision will
improve the efficiency of the Program and encourage timely
communications among Program applicants and EBSA reviewers.
7. Miscellaneous Issues
(a) 502(l) Penalty If Application Is Rejected Or Closed As Incomplete
If a person files an application under the VFC Program, but the
corrective action falls short of a complete and acceptable correction,
EBSA may reject the application and consider appropriate action,
including assessment of a section 502(l) penalty. However, no section
502(l) penalty would be imposed on the basis of any amounts restored to
the plan prior to filing a Program application. The penalty would only
apply to the additional recovery amount, if any, paid to the plan
pursuant to a court order or a settlement agreement with the
Department.
(b) Actions By Parties Other Than the Department
Full correction under the VFC Program does not preclude any other
person or governmental agency, including the IRS, from exercising any
rights it may have with respect to the transactions that are the
subject of the application. The IRS has indicated to the Department
that the federal tax treatment of a breach and correction under the VFC
Program (including the federal income and employment tax consequences
to participants, beneficiaries, and plan sponsors) are determined under
the Code and that, based on its review of the revised Program, except
in those instances where the fiduciary breach or its correction involve
a tax abuse, a correction under the VFC Program for a breach that
constitutes a prohibited transaction under section 4975 of the Code
generally will constitute correction for purposes of section 4975 and a
correction under the VFC Program
[[Page 17521]]
for a breach that also constitutes an operational plan qualification
failure generally will constitute correction for purposes of the IRS's
EPCRS program.
C. Notice and Request for Comments
Although the Department is not required to seek public comments on
an enforcement policy, the Department solicits comments from the public
on the revisions to the VFC Program discussed in this Notice, including
whether there are different ways in which the new transactions included
in the Program could be corrected in accordance with the goals of the
Program.
At the same time, the Department has determined that the relief
afforded by the revised VFC Program should be made available upon
publication of the revised Program in the Federal Register in order to
ensure that interested parties may avail themselves of the Program
changes on the earliest possible date. EBSA does not believe that a
delay in the implementation of the changes discussed herein would serve
any useful purpose and is unnecessary, depriving potential applicants
of the ability to take advantage of the clarified procedures and
additional transactions included in the revised Program. As with the
original VFC Program, implementation of the revised Program does not
foreclose resolution of fiduciary breaches by other means, including
entering into settlement agreements with the Department. The Department
expects that the availability of the revised Program will encourage
fiduciaries, which otherwise might not do so, to correct violations and
reimburse plan losses. Alternatively, VFC Program applicants may pursue
relief under the original VFC Program until such time as final changes
are adopted by the Department.
D. Impact of Program Amendments
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f) of the Executive
Order, a ``significant regulatory action'' is an action that is likely
to result in a rule (1) having an annual effect on the economy of $100
million or more, or adversely and materially affecting a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or tribal governments or communities
(also referred to as ``economically significant''); (2) creating
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order. OMB has
determined that this action is not a ``significant regulatory action''
under Executive Order 12866, section 3(f). Accordingly, an assessment
of the potential costs and benefits under section 6(a)(3) of that order
is not required. In order to better inform the public, however, the
Department has included below a brief analysis of the costs and
benefits attributable to the updated and revised Program.
The Department continues to believe that the benefits of the VFC
Program substantially outweigh its costs, because participation is
voluntary, the administrative cost of correcting a potential fiduciary
breach through voluntary participation in the VFC Program is lower than
the administrative cost of a correction in connection with a civil
action and civil penalties, and the value and security of the assets of
the plans participating in the VFC Program are preserved or increased.
The VFC Program imposes no costs unless Plan Officials choose to avail
themselves of the opportunity to correct a potential fiduciary breach
under the terms of the VFC Program. Costs to Plan Officials in applying
under the VFC Program include the expenses related to making a
correction in accordance with Program conditions, and completing the
application to be submitted to the Department. Benefits for Plan
Officials include the reduction of risk and savings of penalties that
would otherwise be payable on the amount of assets recovered following
a civil action, in addition to the savings of resources that might have
been devoted to such a civil action.
An additional benefit of the VFC Program accrues to participants
and beneficiaries through the correction of violations and restoration
of losses or profits that arise from the reversal of impermissible
transactions, resulting in greater security of plan assets and future
benefits.
The Department expects that the revised VFC Program will be easier
and more useful for potential applicants. The greater efficiency and
accessibility that will result from the availability of a model
application form, the reduced documentation requirements,
simplification of the correction amount calculation, including the
introduction of the Online Calculator and the factors provided under
IRS Revenue Procedure 95-17, addition of new transaction categories,
and other clarifying modifications are expected to make the Program
easier to use, to lessen the cost of participation in many instances,
and to increase efficiency for both applicants and reviewers.
The VFC Program has been very successful to date in encouraging and
facilitating the correction of violations. The Department anticipates
that the revised VFC Program will encourage Plan Officials, who
otherwise might not do so, to correct violations and reimburse plan
losses.
The Department is unable to predict with certainty either the
reduction in application costs that will arise from simplification of
application and procedural requirements, or the potential increase in
participation that will be associated with these revisions. However,
based on the Department's experience to date, and comments from
employee benefit plan practitioners, the availability of the model
application form, streamlining of documentation requirements, and
simplification of the correction amount calculation would make the
Program substantially easier to use. The voluntary model form should
offer an easily accessible outline for applicants to use in ensuring
that their applications are complete, which will reduce or eliminate
common application errors that result in processing delays and
potential rejections.
The reduction in the extent of documentation required for
corrections involving delinquent contributions, in particular, should
decrease the cost of participation for many Plan Officials because the
vast majority of applications based on the delinquent remittance of
participant funds have entailed breaches that involve amounts below
$50,000, or amounts greater than $50,000 that were repaid within 180
days. The delinquent remittance of participant contributions is also
the most common type of violation corrected to date under the VFC
Program. Where it applies, this reduction is substantial in that it
permits the submission of summary information rather than the detailed
accounting records previously required.
Similarly, the modification of the method of calculating Lost
Earnings or Restoration of Profits will simplify the correction in two
significant ways. First, the revision in most cases eliminates the need
for multiple calculations and a comparison of the two hypothetical
amounts representing losses based on
[[Page 17522]]
actual rates and losses based on Code section 6621 rates. Second, the
calculation of correction amounts will be facilitated considerably by
the availability of the Online Calculator and the factors provided
under IRS Revenue Procedure 95-17. As explained in detail above, the
Online Calculator and IRS factors will be simpler, easier to use, and
lessen the opportunity for errors. As noted, the Online Calculator and
IRS factors will also facilitate calculations in connection with
differences in Code section 6621 rates over time applicable to Lost
Earnings, interest on Lost Earnings and interest for the Restoration of
Profits. Further, the Online Calculator and IRS factors will facilitate
these calculations for transactions causing large losses or resulting
in large restorations where the Code section 6621(c)(1) large corporate
underpayment rate must be used.
Again, the Department anticipates that this simplification will
have a sizeable aggregate effect. This is because the Online Calculator
is expected to be particularly useful in the correction of violations
involving the delinquent remittance of participant contributions. Not
only is this the most common type of violation corrected to date, it is
also a violation likely to involve multiple Loss Dates, further
complicating the computation of correction amounts. The revised Program
does retain flexibility for applicants by permitting manual
calculations using the IRS factors.
The Department previously estimated the average administrative cost
of participation at about $3,000, consisting of about 39 hours of
purchased professional services and Plan Official time for the
correction and application. The actual cost is expected to be highly
variable. However, if the model form, streamlined documentation, and
simplification of correction amount calculation together served to
reduce the average application time by eight to ten hours, spread over
purchased professional services and Plan Officials, the average cost
per applicant would be reduced to between $2,500 and $2,300. For the
700 plans estimated to participate in the VFC Program annually, this
would amount to an aggregate savings of about $400,000 to $500,000 per
year. This cost contrasts with fiscal year 2004 corrections in 474
cases restoring over $260 million.
The Department is unable to estimate the increase in participation
in the Program that may result from these revisions, largely because
participation has continued to increase substantially. Participation
roughly doubled between fiscal years 2003 and 2004. Many factors may
contribute to this steady increase, such that it is not possible to
observe a relationship between the administrative cost of participation
in the Program and the decision to participate. Although the degree to
which perceived complexities in the Program have discouraged
participation is unknown, information provided by practitioners
suggests that these changes will encourage greater participation.
The inclusion in the Program of new covered transactions, involving
certain loans to participants, the delinquent remittance of participant
loan repayments, and the purchases and sales, of illiquid assets as
determined under the VFC Program, along with the proposed prohibited
transaction class exemption also published today that relates to the
purchase and sale of illiquid assets, is also expected to make the
relief available under the Program accessible to more Plan Officials
and further increase participation. This assumption is based on both
feedback from potential applicants, and on the experience of the
Department in administering the Program. The Department has not
ascertained a basis for estimating the volume of increased
participation that might result from these new covered transactions and
related prohibited transaction class exemption.
The Department actively monitors the use of the Program, and will
continue at this time to project annual Program utilization by about
700 plans until the rate of participation has become more consistent.
Beyond these administrative impacts, the Department has also
considered the potential economic impacts of eliminating the
requirement for the comparison of two hypothetical correction amounts
for the calculation of correction amounts. Plan Officials were
previously required to restore the higher of earnings as though the
principal had been invested appropriately under ERISA, and earnings as
though the principal had accrued interest at the rates specified in
Code section 6621. The Department acknowledges that the correction
amount under the revised Program may in some instances be lower than
the higher of the former two hypothetical amounts.
In eliminating dual calculation methods and offering the Online
Calculator and IRS factors, the Department has attempted to strike a
reasonable balance between the advantages of simplicity, which may
include lower administrative costs and a greater likelihood of a timely
correction, and the potentially greater precision of applying multiple
rates of return based on the investment alternatives involved. The
Department welcomes comments on the possible economic consequences of
the revised provisions relating to the correction amount.
Paperwork Reduction Act
The Information Collection Request (ICR) included in the 2002
Program and PTE 2002-51 is currently approved by the Office of
Management and Budget under control number 1210-0118. This approval is
scheduled to expire on December 31, 2006. The amendments to the
original VFC Program described earlier in this preamble may be expected
to modify burden to some degree. However, with the exception of the
change in the documentation requirements for the delinquent remittance
of participant funds, these amendments do not in the Department's view
constitute a substantive or material modification of the existing ICR.
Accordingly, the Department has not addressed changes other than those
made to Section 7.A.1.c. in a submission for the approval of a revision
to the ICR in connection with these amendments, or with the proposed
amendments to PTE 2002-51, published separately in this issue of the
Federal Register.
As noted, to facilitate applicants' use of the Program, the
Department has developed an optional model application form (Appendix
E). Potential applicants and practitioners have strongly encouraged
EBSA to develop such a form to assist applicants to readily identify
the Program requirements, and to verify that they have provided all of
the information and supplementary documentation necessary for a valid
application. Use of the form may help applicants avoid common errors
that frequently result in processing delays or rejections.
Although the model form may reduce burden, it follows the
requirements set forth in the Program, and would not collect
information not already required to be provided by an applicant under
the existing Program. As such, the model application form will provide
ready access to Program requirements previously set out in the text of
the Program, and increase certainty about compliance with the
application requirements, without altering the existing ICR.
Completion and submission of the checklist (Appendix B) was
required in the original program, and is revised in only its more user-
friendly format. Elements of the checklist now appear on a separate
Appendix. It should be noted that the required checklist appears twice
within the Appendices to the Program.
[[Page 17523]]
While it is required to be submitted only once, it is included as the
separate Appendix B for applicants who do not choose to use the model
application in Appendix E, and as the final item in the model
application for ease of use for those who do choose to use the model
application.
The Department has also modified the VFC Program's application
requirements by clarifying certain terms and representations to be made
in the application, by describing the process by which the Department
when necessary may request additional documentation, and eliminating
previously required information related to the plan's fidelity bond.
These modifications are also made with intention of making the Program
easier and more efficient to use, but do not substantively or
materially alter the existing ICR.
In the Department's view, the amendments to Section 7.A.1.c. do
constitute a substantive and material change to the existing ICR
because they will substantially reduce burden. The revision of the
currently approved ICR pertains to documentation requirements for
Delinquent Participant Contributions and Delinquent Participant Loan
Repayments to Pension Plans. Revised provision 7.A.1.c. eliminates
under specific circumstances the requirement for the applicant to
provide accounting and payroll records to document the date and amount
of each contribution at issue. The Plan Official is relieved from
providing the more detailed documentation if restored participant
contributions and/or repayments (exclusive of Lost Earnings) total
$50,000 or less, or exceed $50,000 and were remitted to the plan within
180 days from the date such amounts were received by the employer or
otherwise payable to the participant in cash. This program change is
intended to reduce the burden of participation in the Program.
This revision is expected to impact the burden of the currently
approved information collection because the vast majority of violations
corrected under the Program involve delinquent participant
contributions that totaled $50,000 or less, or were remitted within 180
days. Thus a burden reduction is expected for more than 90% of
applicants.
The information collection burden of the VFC Program and related
PTE 2002-51 is estimated as follows. The estimates include updated
assumptions for compensation rates and mailing costs, and an increase
in the number of respondents over the number currently in OMB
inventory. For each of 700 plans, 8 hours of time of Plan Officials at
$68 per hour, and 5 hours of service provider time at $83 per hour will
be required to meet information collection requirements. These
components account for 5,600 burden hours and $290,500 in burden cost.
Total burden cost includes $2 in mailing costs, for a total of
$291,900.
Assuming as many as one-half of applicants also make use of the
class exemption when using the Program and that all work is performed
by service providers, an additional cost burden of $29,000 arises from
developing required notices to interested persons at $83 per hour, and
mailing at first class rates for 10% of those notices and the notices
to the Department, assuming an average of 136 participants per plan. It
is assumed that the remaining notices are delivered electronically.
Total cost burden for the information collection provisions of the
exemption is $30,900. The total cost of the information collection
provisions of the VFC Program and exemption before this revision is
$322,800.
The revision in Section 7.A.1.c is estimated to reduce the hours
and costs required to comply with the Program's information collection
request by about one-half. The burden associated with the exemption is
unchanged.
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
can be provided in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the impact of collection requirements on respondents
can be properly assessed.
Currently, EBSA is soliciting comments concerning the revision of
the currently approved information collection request (ICR) included in
this Amended and Restated Voluntary Fiduciary Correction Program. A
copy of the ICR may be obtained by contacting the PRA addressee shown
below.
The Department has submitted a copy of the revised ICR to OMB in
accordance with 44 U.S.C. 3507(d) for review of its information
collections. The Department and OMB are particularly interested in
comments that:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. Although comments may be
submitted through June 6, 2005, OMB requests that comments be received
within 30 days of publication of the Notice of Adoption of Amended and
Restated Voluntary Fiduciary Correction Program.
PRA Addressee: Address requests for copies of the ICR to Gerald B.
Lindrew, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue,
NW., Room N-5647, Washington, DC 20210. Telephone (202) 693-8410; Fax:
(202) 219-5333. These are not toll-free numbers.
Type of Review: Revision of currently approved collection of
information.
Agency: Department of Labor, Employee Benefits Security
Administration.
Title: Voluntary Fiduciary Correction Program.
OMB Number: 1210-0118.
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
Respondents: 700.
Frequency of Response: On occasion.
Responses: 5,810.
Estimated Total Burden Hours: 1,200 for existing ICR; 3,500 for
revised ICR.
Total Annual Cost (Operating and Maintenance): $66,000 for existing
ICR; $177,600 for revised ICR.
Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval of the information
collection request; they will also become a matter of public record.
[[Page 17524]]
Regulatory Flexibility Act
This document describes an enforcement policy of the Department,
and is not being issued as a general notice of proposed rulemaking.
Therefore, the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
does not apply and the Department is not required to either certify
that the rule will not have a significant economic impact on a
substantial number of small entities, or conduct a regulatory
flexibility analysis. However, EBSA considered the potential costs and
benefits of this action for small plans and the Plan Officials in
developing the revised Program, and believes that its greater
simplicity and accessibility will make the Program more useful to small
employers who wish to avail themselves of the relief offered.
Congressional Review Act
The VFC Program is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to the Congress and
the Comptroller General for review. The Program is not a ``major rule''
as that term is defined in 5 U.S.C 804 because it is not likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers, individual
industries, or federal, state, or local government agencies, or
geographic regions; or (3) significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in domestic or export markets.
Unfunded Mandates Reform Act
Pursuant to provisions of the Unfunded Mandates Reform Act of 1995
(Pub. L. 104-4), this regulatory action does not include any Federal
mandate that may result in annual expenditures by State, local, or
tribal governments, or the private sector, of $100 million or more.
E. Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. This Program would not have federalism
implications because it has no substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Section 514 of ERISA provides, with certain
exceptions specifically enumerated that are not pertinent here, that
the provisions of Titles I and IV of ERISA supersede any and all laws
of the States as they relate to any employee benefit plan covered under
ERISA. The requirements implemented in this Program do not alter the
fundamental provisions of the statute with respect to employee benefit
plans, and as such would have no implications for the States or the
relationship or distribution of power between the national government
and the States.
Authority: Secretary of Labor's Order 1-2003, 68 FR 5374 (Feb 3,
2003). ERISA Sec. 502(a)(2) and (a)(5) also issued under 29 U.S.C.
1132(a)(2) and (a)(5), ERISA Sec. 506(b) also issued under 29 U.S.C.
1136(b).
Voluntary Fiduciary Correction Program
Section 1. Purpose and Overview of the VFC Program
Section 2. Effect of the VFC Program
Section 3. Definitions
Section 4. VFC Program Eligibility
Section 5. General Rules for Acceptable Corrections
(a) Fair Market Value Determinations
(b) Correction Amount
(c) Costs of Correction
(d) Distributions
(e) De Minimus Exception
Section 6. Application Procedures
Section 7. Description of Eligible Transactions and Corrections
Under the VFC Program
A. Delinquent Remittance of Participant Funds
1. Delinquent Participant Contributions and Participant Loan
Repayments to Pension Plans
2. Delinquent Participant Contributions to Insured Welfare Plans
3. Delinquent Participant Contributions to Welfare Plan Trusts
B. Loans
1. Loan at Fair Market Interest Rate to a Party in Interest with
Respect to the Plan
2. Loan at Below-Market Interest Rate to a Party in Interest
with Respect to the Plan
3. Loan at Below-Market Interest Rate to a Person Who is Not a
Party in Interest with Respect to the Plan
4. Loan at Below-Market Interest Rate Solely Due to a Delay in
Perfecting the Plan's Security Interest
C. Participant Loans
1. Loan Amount in Excess of Plan Limitations
2. Loan Duration in Excess of Plan Limitations
D. Purchases, Sales and Exchanges
1. Purchase of an Asset (Including Real Property) by a Plan from
a Party in Interest
2. Sale of an Asset (Including Real Property) by a Plan to a
Party in Interest
3. Sale and Leaseback of Real Property to Employer
4. Purchase of an Asset (Including Real Property) by a Plan from
a Person Who is Not a Party in Interest with Respect to the Plan at
a Price Other Than Fair Market Value
5. Sale of an Asset (Including Real Property) by a Plan to a
Person Who is Not a Party in Interest with Respect to the Plan at a
Price Other Than Fair Market Value
6. Holding of an Illiquid Asset Previously Purchased by a Plan
E. Benefits
1. Payment of Benefits Without Properly Valuing Plan Assets on
Which Payment is Based
F. Plan Expenses
1. Duplicative, Excessive, or Unnecessary Compensation Paid by a
Plan
2. Payment of Dual Compensation to a Plan Fiduciary
Appendix A. Sample VFC Program No Action Letter
Appendix B. VFC Program Checklist (Required)
Appendix C. List of EBSA Regional Offices
Appendix D. Lost Earnings Example
Appendix E. Model Application Form (Optional)
Section 1. Purpose and Overview of the VFC Program
The purpose of the Voluntary Fiduciary Correction Program (VFC
Program or Program) is to protect the financial security of workers by
encouraging identification and correction of transactions that violate
Part 4 of Title I of the Employee Retirement Income Security Act of
1974, as amended (ERISA). Part 4 of Title I of ERISA sets out the
responsibilities of employee benefit plan fiduciaries. Section 409 of
ERISA provides that a fiduciary who breaches any of these
responsibilities shall be personally liable to make good to the plan
any losses to the plan resulting from each breach and to restore to the
plan any profits the fiduciary made through the use of the plan's
assets. Section 405 of ERISA provides that a fiduciary may be liable,
under certain circumstances, for a co-fiduciary's breach of his or her
fiduciary responsibilities. In addition, under certain circumstances,
there may be liability for knowing participation in a fiduciary breach.
In order to assist all affected persons in understanding the
requirements of ERISA and meeting their legal responsibilities, the
Employee Benefits Security Administration (EBSA) is providing guidance
on what constitutes adequate
[[Page 17525]]
correction under Title I of ERISA for the breaches described in this
Program.
Section 2. Effect of the VFC Program
(a) In general. EBSA generally will issue to the applicant a no
action letter \11\ with respect to a breach identified in the
application if the eligibility requirements of Section 4 are satisfied
and a Plan Official corrects a breach, as defined in Section 3, in
accordance with the requirements of Sections 5, 6 and 7. Pursuant to
the no action letter it issues, EBSA will not initiate a civil
investigation under Title I of ERISA regarding the applicant's
responsibility for any transaction described in the no action letter,
or assess a civil penalty under section 502(l) of ERISA on the
correction amount paid to the plan or its participants.
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\11\ See Appendix A.
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(b) Verification. EBSA reserves the right to conduct an
investigation at any time to determine (1) the truthfulness and
completeness of the factual statements set forth in the application and
(2) that the corrective action was, in fact, taken.
(c) Limits on the effect of the VFC Program. (1) In general. Any no
action letter issued under the VFC Program is limited to the breach and
applicants identified therein. Moreover, the method of calculating the
correction amount described in this Program is only intended to correct
the specific breach described in the application. Methods of
calculating losses other than, or in addition to, those set forth in
the Program may be more appropriate, depending on the facts and
circumstances, if the transaction violates provisions of ERISA other
than those that can be corrected under the Program. If a transaction
gave rise to violations not specifically described in the Program, the
relief afforded by the Program would not extend to such additional
violations.
(2) No implied approval of other matters. A no action letter does
not imply Departmental approval of matters not included therein,
including steps that the fiduciaries take to prevent recurrence of the
breach described in the application and to ensure the plan's future
compliance with Title I of ERISA.
(3) Material misrepresentation. Any no action letter issued under
the VFC Program is conditioned on the truthfulness, completeness and
accuracy of the statements made in the application and of any
subsequent oral and written statements or submissions. Any material
misrepresentations or omissions will void the no action letter,
retroactive to the date that the letter was issued by EBSA, with
respect to the transaction that was materially misrepresented.
(4) Applicant fails to satisfy terms of the VFC Program. If an
application fails to satisfy the terms of the VFC Program, as
determined by EBSA, EBSA reserves the right to investigate and take any
other action with respect to the transaction and/or plan that is the
subject of the application, including refusing to issue a no action
letter.
(5) Criminal investigations not precluded. Participation in the VFC
Program will not preclude:
(i) EBSA or any other governmental agency from conducting a
criminal investigation of the transaction identified in the
application;
(ii) EBSA's assistance to such other agency; or
(iii) EBSA making the appropriate referrals of criminal violations
as required by section 506(b) of ERISA.\12\
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\12\ Section 506(b) provides that the Secretary of Labor shall
have the responsibility and authority to detect and investigate and
refer, where appropriate, civil and criminal violations related to
the provisions of Title I of ERISA and other related Federal laws,
including the detection, investigation, and appropriate referrals of
related violations of Title 18 of the United States Code.
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(6) Other actions not precluded. Compliance with the terms of the
VFC Program will not preclude EBSA from taking any of the following
actions:
(i) Seeking removal from positions of responsibility with respect
to a plan or other non-monetary injunctive relief against any person
responsible for the transaction at issue;
(ii) Referring information regarding the transaction to the
Internal Revenue Service (IRS) as required by section 3003(c) of
ERISA;\13\ or
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\13\ Section 3003(c) provides that, whenever the Secretary of
Labor obtains information indicating that a party in interest or
disqualified person is violating section 406 of ERISA, she shall
transmit such information to the Secretary of the Treasury.
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(iii) Imposing civil penalties under section 502(c)(2) of ERISA
based on the failure or refusal to file a timely, complete and accurate
annual report Form 5500. Applicants should be aware that amended annual
report filings may be required if possible breaches of ERISA have been
identified, or if action is taken to correct possible breaches in
accordance with the VFC Program.
(7) Not binding on others. The issuance of a no action letter does
not affect the ability of any other government agency, or any other
person, to enforce any rights or carry out any authority they may have,
with respect to matters described in the no action letter.
(8) Example. A plan fiduciary causes the plan to purchase real
estate from the plan sponsor under circumstances to which no prohibited
transaction exemption applies. In connection with this transaction, the
purchase causes the plan assets to be no longer diversified, in
violation of ERISA section 404(a)(1)(C). If the application reflects
full compliance with the requirements of the Program, the Department's
no action letter would apply to the violation of ERISA section
406(a)(1)(A), but would not apply to the violation of section
404(a)(1)(C).
(d) Correction. The correction criteria listed in the VFC Program
represent EBSA enforcement policy with respect to applications under
the Program and are provided for informational purposes to the public,
but are not intended to confer enforceable rights on any person who
purports to correct a violation. Applicants are advised that the term
``correction'' as used in the VFC Program is not necessarily the same
as ``correction'' pursuant to section 4975 of the Internal Revenue Code
(Code).\14\ Correction may not be achieved under the Program by
engaging in a prohibited transaction that is not subject to a
prohibited transaction administrative exemption.
---------------------------------------------------------------------------
\14\ See section 4975(f)(5) of the Code; section 141.4975-13 of
the temporary Treasury Regulations and section 53.4941(e)-1(c) of
the Treasury Regulations. The IRS has indicated that the federal tax
treatment of a breach and correction under the VFC Program
(including the federal income and employment tax consequences to
participants, beneficiaries, and plan sponsors) are determined under
the Code and that, based on its review of the Program, except in
those instances where the fiduciary breach or its correction involve
a tax abuse, a correction under the VFC Program for a breach that
constitutes a prohibited transaction under section 4975 of the Code
generally will constitute correction for purposes of section 4975
and a correction under the VFC Program for a breach that also
constitutes an operational plan qualification failure generally will
constitute correction for purposes of the IRS's Employee Plans
Compliance Resolution Program (EPCRS).
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(e) EBSA's authority to investigate. EBSA reserves the right to
conduct an investigation and take any other enforcement action relating
to the transaction identified in a VFC Program application in certain
circumstances, such as prejudice to the Department that may be caused
by the expiration of the statute of limitations period, material
misrepresentations, or significant harm to the plan or its participants
that is not cured by the correction provided under the VFC Program.
EBSA may also conduct a civil investigation and take any other
enforcement action relating to matters not covered by the VFC Program
application or relating to other plans sponsored by the same plan
sponsor, while a VFC Program application involving the plan or the plan
sponsor is pending.
[[Page 17526]]
(f) Confidentiality. EBSA will maintain the confidentiality of any
documents submitted under the VFC Program, to the extent permitted by
law. However, as noted in (c)(5) and (6) of this section, EBSA has an
obligation to make referrals to the IRS and to refer to other agencies
evidence of criminality and other information for law enforcement
purposes.
Section 3. Definitions
(a) The terms used in this document have the same meaning as
provided in section 3 of ERISA, 29 U.S.C. section 1002, unless
separately defined herein.
(b) The following definitions apply for purposes of the VFC
Program:
(1) Breach. The term ``Breach'' means any transaction that is or
may be a breach of the fiduciary responsibilities contained in Part 4
of Title I of ERISA.
(2) Plan Official. The term ``Plan Official'' means a plan
fiduciary, plan sponsor, party in interest with respect to a plan, or
other person who is in a position to correct a Breach.
(3) Under Investigation. For purposes of section 4(a), a plan or an
applicant shall be considered to be ``Under Investigation'' if EBSA or
any other Federal agency is conducting an investigation or examination
of the plan, the applicant, or the plan sponsor in connection with an
act or transaction involving the plan, or if a written or oral notice
of an intent to conduct such an investigation or examination has been
received by the plan, a Plan Official, or other plan representative.
For purposes of section 4(a), a plan shall not be considered to be
``Under Investigation'' merely because EBSA staff has contacted the
plan, the applicant, or the plan sponsor in connection with a
participant complaint, unless the participant complaint concerns the
transaction described in the application. A plan also is not considered
to be ``Under Investigation'' if the accountant of the plan is
undergoing a work paper review by EBSA's Office of the Chief Accountant
under the authority of ERISA section 504(a).
Example 1. On March 1 the plan sponsor of a profit sharing plan
received written notification from an agent of the IRS that the plan
has been scheduled for examination. As of March 1, the plan is
ineligible for participation in the VFC Program because the plan
sponsor has received a notice from the IRS concerning the IRS's
intent to examine the plan.
Example 2. Assume the same facts as in Example 1, except that
the plan sponsor received written notification from a Federal agency
of an investigation of the company regarding an alleged workplace
safety violation. The plan's eligibility to participate in the VFC
Program would not be affected because the investigation does not
involve the plan or an act or transaction involving the plan.
Section 4. VFC Program Eligibility
Eligibility for the VFC Program is conditioned on the following:
(a) Neither the plan nor the applicant is Under Investigation.
(b) The application contains no evidence of potential criminal
violations as determined by EBSA.
Section 5. General Rules for Acceptable Corrections
(a) Fair Market Value Determinations. Many corrections require that
the current or fair market value of an asset be determined as of a
particular date, usually either the date the plan originally acquired
the asset or the date of the correction, or both. In order to be
acceptable as part of a VFC Program correction, the valuation must meet
the following conditions:
(1) If there is a generally recognized market for the property
(e.g., the New York Stock Exchange), the fair market value of the asset
is the average value of the asset on such market on the applicable
date, unless the plan document specifies another objectively determined
value (e.g., the closing price).
(2) If there is no generally recognized market for the asset, the
fair market value of that asset must be determined in accordance with
generally accepted appraisal standards by a qualified, independent
appraiser and reflected in a written appraisal report signed by the
appraiser.
(3) An appraiser is ``qualified'' if he or she has met the
education, experience, and licensing requirements that are generally
recognized for appraisal of the type of asset being appraised.
(4) An appraiser is ``independent'' if he or she is not one of the
following, does not own or control any of the following, and is not
owned or controlled by, or affiliated with, any of the following:
(i) The prior owner of the asset, if the asset was purchased by the
plan;
(ii) The purchaser of the asset, if the asset was, or is now being,
sold by the plan;
(iii) Any other owner of the asset, if the plan is not the sole
owner;
(iv) A fiduciary of the plan;
(v) A party in interest with respect to the plan (except to the
extent the appraiser becomes a party in interest when retained to
perform this appraisal for the plan); or
(vi) The VFC Program applicant.
(b) Correction Amount. (1) In general. For purposes of the VFC
Program, the correction amount is the amount that must be paid to the
plan as a result of the Breach in order to make the plan whole. In most
instances, the correction amount will be a combination of the Principal
Amount involved in the transaction (see subparagraph (2)), the Lost
Earnings amount, which is earnings that would have been earned on the
Principal Amount for the period of the transaction (see subparagraph
(5)), and any interest on Lost Earnings. However, in circumstances when
the Restoration of Profits amount (see subparagraph (6)) exceeds the
Lost Earnings amount and any interest on Lost Earnings, the correction
amount will be a combination of the Principal Amount and the
Restoration of Profits amount.
(2) Principal Amount. ``Principal Amount'' is the amount that would
have been available to the plan for investment or distribution on the
date of the Breach, had the Breach not occurred. The Principal Amount,
when applicable, must be determined for each transaction by reference
to Section 7 of the VFC Program. Generally, the Principal Amount is the
base amount on which Lost Earnings and, if applicable, Restoration of
Profits is calculated. The Principal Amount shall also include, where
appropriate, any transaction costs associated with entering into the
transaction that constitutes the Breach.
(3) Loss Date. ``Loss Date'' is the date that the plan lost the use
of the Principal Amount.
(4) Recovery Date. ``Recovery Date'' is the date that the Principal
Amount is restored to the plan.
(5) Lost Earnings. (A) General. ``Lost Earnings'' is intended to
approximate the amount that would have been earned by the plan on the
Principal Amount, but for the Breach. For purposes of this Program,
Lost Earnings shall be calculated in accordance with this paragraph.
(B) Initial Calculation. Lost earnings shall be calculated by: (i)
Determining the applicable corporate underpayment rate(s) established
under section 6621(a)(2) of the Code \15\ for each quarter (or portion
thereof) for the period beginning with the Loss Date and ending with
the Recovery Date; (ii) determining, by reference to IRS Revenue
Procedure 95-17,\16\ the applicable factor(s) for such quarterly
underpayment rate(s) for each quarter
[[Page 17527]]
(or portion thereof) of the period beginning with the Loss Date and
ending with the Recovery Date; and (iii) multiplying the Principal
Amount by the first applicable factor to determine the amount of
earnings for the first quarter (or portion thereof). If the Loss Date
and Recovery Date are within the same quarter, the initial calculation
is complete. If the Recovery Date is not in the same quarter as the
Loss Date, the applicable factor for each subsequent quarter (or
portion thereof) must be applied to the sum of the Principal Amount and
all earnings as of the end of the immediately preceding quarter (or
portion thereof), until Lost Earnings have been calculated for the
entire period, ending with the Recovery Date.
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\15\ These underpayment rates are displayed on EBSA's Web site
and will be updated when necessary.
\16\ Rev. Proc. 95-17, 1995-1 C.B. 556 (Feb. 8, 1995). These
factors, which are displayed on EBSA's Web site in a tabular format,
incorporate daily compounding of an interest rate over a set period
of time.
---------------------------------------------------------------------------
(C) Payment of Lost Earnings after Recovery Date. If Lost Earnings
are not paid to the plan on the Recovery Date along with the Principal
Amount, payment of Lost Earnings shall include interest on the amount
of Lost Earnings determined in accordance with subparagraph (5)(B),
above. Such interest shall be calculated in the same manner as Lost
Earnings described in subparagraph (5)(B) above, for the period
beginning on the Recovery Date and ending on the date the Lost Earnings
are paid to the plan.
(D) Special Rule for Transactions Causing Large Losses. If the
amount of Lost Earnings (determined in accordance with subparagraph
(5)(B)) and any interest added to such Lost Earnings (determined in
accordance with subparagraph (5)(C)) above, exceed $100,000, the amount
of Lost Earnings and interest, if any, to be paid to the plan shall be
determined in accordance with subparagraphs (5)(B) and (C), above,
substituting the applicable underpayment rates under section 6621(c)(1)
of the Code \17\ in lieu of the rates under section 6621(a)(2).
---------------------------------------------------------------------------
\17\ These underpayment rates are displayed on EBSA's Web site
and will be updated when necessary.
---------------------------------------------------------------------------
(E) Method of Calculation. For purposes of calculating Lost
Earnings and interest, if any, a Plan Official may either (i) use the
Online Calculator described in Section 5(b)(7), below, or (ii) perform
a manual calculation in accordance with subparagraphs (B) through (D)
of this paragraph (5). A Plan Official using the Online Calculator or
performing a manual calculation shall include as part of the VFC
Program application sufficient information to verify the correctness of
the amounts to be paid to the plan.
(6) Restoration of Profits. (A) General. If the Principal Amount
was used for a specific purpose such that a profit on the use of the
Principal Amount is determinable, the Plan Official must calculate the
Restoration of Profits amount and compare it to the Lost Earnings
amount to determine the correction amount (see paragraph (b)(1)).
``Restoration of Profits'' is a combination of two amounts: (i) The
amount of profit made on the use of the Principal Amount by the
fiduciary or party in interest who engaged in the Breach, or by a
person who knowingly participated in the Breach, and (ii) if the profit
is returned to the plan on a date later than the date on which the
profit was realized (i.e., received or determined), the amount of
interest earned on such profit from the date the profit was realized to
the date on which the profit is paid to the plan. The amount of such
interest shall be determined in accordance with subparagraph (B),
below.
If the Restoration of Profits amount exceeds Lost Earnings and
interest, if any, the Restoration of Profits amount must be paid to the
plan instead of Lost Earnings.
(B) Calculation of Interest. Interest shall be calculated by: (i)
Determining the applicable corporate underpayment rate(s) established
under section 6621(a)(2) of the Code for each quarter (or portion
thereof) for the period beginning with the date the profit was realized
(i.e. received or determined) and ending with the date on which the
profit is paid to the plan; (ii) determining, by reference to IRS
Revenue Procedure 95-17, the applicable factor(s) for such quarterly
underpayment rate(s) for each quarter (or portion thereof) of the
period beginning with the date the profit was realized and ending with
the date on which the profit is paid to the plan; and (iii) multiplying
the first applicable factor by the profit on the Principal Amount,
referred to in paragraph (A)(i), above, to determine the amount of
interest for the first quarter (or portion thereof). If the date the
profit was realized and the date the profit is paid to the plan are
within the same quarter, the initial calculation is complete. If the
date the profit was realized is not in the same quarter as the date the
profit was paid to the plan, the applicable factor for each subsequent
quarter (or portion thereof) must be applied to the sum of the profit
on the Principal Amount, referred to in paragraph (A)(i), above, and
all interest as of the end of the immediately preceding quarter (or
portion thereof), until interest has been calculated for the entire
period, ending with the date the profit is paid to the plan.
(C) Special Rule for Transactions Resulting in Large Restorations.
If the amount of Restoration of Profits (determined in accordance with
subparagraph (6)(A)) above exceeds $100,000, the amount of any interest
on the Restoration of Profits to be paid to the plan shall be
determined in accordance with subparagraph (6)(B), above, substituting
the applicable underpayment rates under section 6621(c)(1) of the Code
in lieu of the rates under section 6621(a)(2).
(D) Method of Calculation. For purposes of calculating the interest
amount for Restoration of Profits, pursuant to subparagraphs (6)(B) and
(C) above, a Plan Official may either (i) use the Online Calculator
described in Section 5(b)(7), below, or (ii) perform a manual
calculation in accordance with subparagraphs (B) and (C) of this
paragraph (6). A Plan Official using the Online Calculator or
performing a manual calculation shall include as part of the VFC
Program application sufficient information to verify the correctness of
the amounts to be paid to the plan.
(7) Online Calculator. ``Online Calculator'' is an Internet based
compliance assistance tool provided on EBSA's Web site that permits
applicants to calculate the amount of Lost Earnings, any interest on
Lost Earnings, and the interest amount for Restoration of Profits, if
applicable, for certain transactions. The Online Calculator will be
updated as necessary.
(A) Lost Earnings and Interest. To calculate Lost Earnings,
applicants must input the (1) Principal Amount, (2) Loss Date, and (3)
Recovery Date, and if the final payment will occur after the Recovery
Date, (4) the date of such final payment. The Online Calculator selects
the applicable factors under Revenue Procedure 95-17 after referencing
the underpayment rates over the relevant time period. The Online
Calculator then automatically applies the factors to provide applicants
with the amount of Lost Earnings and interest, if any, that must be
paid to the plan.
(B) Interest Amount for Restoration of Profits. To calculate the
interest amount on the profit, applicants must input (1) the amount of
profit, (2) the date the amount of profit was realized (i.e. received
or determined), and (3) the date of payment of the Restoration of
Profits amount. The Online Calculator selects the applicable factors
under Revenue Procedure 95-17 after referencing the underpayment rates
over the relevant time period. The Online Calculator then automatically
applies the factors to provide applicants with
[[Page 17528]]
the interest amount on the profit that must be paid to the plan.
(8) The principles of this paragraph (b) are illustrated by example
in Appendix D.
(c) Costs of Correction. (1) The fiduciary, plan sponsor or other
Plan Official, shall pay the costs of correction, which may not be paid
from plan assets.
(2) The costs of correction include, where appropriate, such
expenses as closing costs, prepayment penalties, or sale or purchase
costs associated with correcting the transaction.
(3) The principle of paragraph (c)(1) is illustrated in the
following example and in (d) below:
Example: The plan fiduciaries did not obtain a required
independent appraisal in connection with a transaction described in
Section 7. In connection with correcting the transaction, the plan
fiduciaries now propose to have the appraisal performed as of the
date of purchase. The plan document permits the plan to pay
reasonable and necessary expenses; the fiduciaries have objectively
determined that the cost of the proposed appraisal is reasonable and
is not more expensive than the cost of an appraisal contemporaneous
with the purchase. The plan may therefore pay for this appraisal.
However, the plan may not pay any costs associated with
recalculating participant account balances to take into account the
new valuation. There would be no need for these additional
calculations or any increased appraisal cost if the plan's assets
had been valued properly at the time of the purchase. Therefore, the
cost of recalculating the plan participants' account balances is not
a reasonable plan expense, but is part of the costs of correction.
(d) Distributions. Plans will have to make supplemental
distributions to former employees, beneficiaries receiving benefits, or
alternate payees, if the original distributions were too low because of
the Breach. In these situations, the Plan Official or plan
administrator must determine who received distributions from the plan
during the time period affected by the Breach, recalculate the account
balances, and determine the amount of the underpayment to each affected
individual. The applicant must demonstrate proof of payment to
participants and beneficiaries whose current location is known to the
plan and/or applicant. For individuals whose location is unknown,
applicants must demonstrate that they have segregated adequate funds to
pay the missing individuals and that the applicant has commenced the
process of locating the missing individuals using either the IRS and
Social Security Administration locator services, or other comparable
means. The costs of such efforts are part of the costs of correction.
(e) De Minimus Exception. Where correction under the Program
requires distributions in amounts less than $20 to former employees,
their beneficiaries and alternate payees, who neither have account
balances with, nor have a right to future benefits from the plan, and
the applicant demonstrates in its submission that the cost of making
the distribution to each such individual exceeds the amount of the
payment to which such individual is entitled in connection with the
correction of the transaction that is the subject of the application,
the applicant need not make distributions to such individuals who would
receive less than $20 each as part of the correction. However, the
applicant must pay to the plan as a whole the total of such de minimus
amounts not distributed to such individuals.
Example. Employer X sponsors Plan Y. Employer X submits an
application under the VFC Program to correct a failure to timely
forward participant contributions to Plan Y. Employer X had paid the
delinquent contributions six months late, but had not paid lost
earnings on the delinquency. The correction under the VFC Program,
therefore, required only payment of Lost Earnings for the six-month
delinquency. During the six-month period 25 employees separated from
service and rolled over their plan accounts to individual retirement
accounts. The amount of lost earnings due to 20 of those former
employees is less than $20, and Employer X demonstrates that the
cost of making the distribution to those former employees is $27 per
individual. Employer X need not make distributions to those 20
former employees. However, the total amount of distributions that
would have been due to those former employees must be paid to Plan
Y. The payment to Plan Y may be used for any purpose that payments
or credits to Plan Y that are not allocated directly to participant
accounts are used. Employer X must make distributions to the five
former employees who are entitled to receive distributions of more
than $20.
Section 6. Application Procedures
(a) In general. Each application must adhere to the requirements
set forth below. Failure to do so may render the application invalid.
(b) Preparer. The application must be prepared by a Plan Official
or his or her authorized representative (e.g., attorney, accountant, or
other service provider). If a representative of the Plan Official is
submitting the application, the application must include a statement
signed by the Plan Official that the representative is authorized to
represent the Plan Official. Any fees paid to such representative for
services relating to the preparation and submission of the application
may not be paid from plan assets.
(c) Contact person. Each application must include the name, address
and telephone number of a contact person. The contact person must be
familiar with the contents of the application, and have authority to
respond to inquiries from EBSA.
(d) Detailed narrative. The applicant must provide to EBSA a
detailed narrative describing the Breach and the corrective action. The
narrative must include:
(i) a list of all persons materially involved in the Breach and its
correction (e.g., fiduciaries, service providers, borrowers);
(ii) the employer identification number (EIN), plan number, and
address of the plan sponsor and administrator;
(iii) the date the plan's most recent Form 5500 was filed;
(iv) an explanation of the Breach, including the date it occurred;
(v) an explanation of how the Breach was corrected, by whom and
when;
(vi) specific calculations demonstrating how Principal Amount and
Lost Earnings or, if applicable, Restoration of Profits were computed
and an explanation of why payment of Lost Earnings or Restoration of
Profits was chosen to correct the Breach.
(e) Supporting documentation. The applicant must also include:
(i) copies of the relevant portions of the plan document and any
other pertinent documents (such as the adoption agreement, trust
agreement, or insurance contract); \18\
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\18\ Applicants must supply complete copies of the plan
documents and other pertinent documents if requested by EBSA during
its review of the application.
---------------------------------------------------------------------------
(ii) documentation that supports the narrative description of the
transaction and its correction;
(iii) documentation establishing the Lost Earnings amount;
(iv) documentation establishing the amount of Restoration of
Profits, if applicable;
(v) all documents described in Section 7 with respect to the
transaction involved; and
(vi) proof of payment of Principal Amount and Lost Earnings or
Restoration of Profits.
(f) Examples of supporting documentation. (i) Examples of
documentation supporting the description of the transaction and
correction are leases, appraisals, notes and loan documents, service
provider contracts, invoices, settlement documents, deeds, perfected
security interests, and amended annual reports.
[[Page 17529]]
(ii) Examples of acceptable proof of payment include copies of
canceled checks, executed wire transfers, a signed, dated receipt from
the recipient of funds transferred to the plan (such as a financial
institution), and bank statements for the plan's account.
(g) Penalty of Perjury Statement. Each application must include the
following statement: ``Under penalties of perjury I certify that I am
not Under Investigation (as defined in Section 3(b)(3)) and that I have
reviewed this application, including all supporting documentation, and
to the best of my knowledge and belief the contents are true, correct,
and complete.'' The statement must be signed and dated by a plan
fiduciary with knowledge of the transaction that is the subject of the
application and the authorized representative of the applicant, if any.
In addition, each Plan Official applying under the VFC Program must
sign and date the Penalty of Perjury statement. The statement must
accompany the application and any subsequent additions to the
application. Use of the Penalty of Perjury Statement included with the
Model Application Form in Appendix E will satisfy the requirements of
this Section 6(g).
(h) Checklist. The checklist in Appendix B must be completed,
signed, and submitted with the application. Use of the checklist
included with the Model Application Form in Appendix E also will
satisfy the requirements of this Section 6(h).
(i) Where to apply. The application shall be mailed to the
appropriate regional EBSA office listed in Appendix C.
(j) Submission of Additional Documentation. If EBSA determines that
required information is missing from the application or that additional
documentation is needed to complete EBSA's review, EBSA will request
such documentation in writing from the applicant or authorized
representative. If EBSA does not receive the requested documentation
within a time period specified in writing by the EBSA reviewer, EBSA
may suspend its review of the application and consider appropriate
action. EBSA will notify the applicant or authorized representative in
writing regarding such suspension.
(k) Record keeping. The applicant must maintain copies of the
application and any subsequent correspondence with EBSA for the period
required by section 107 of ERISA.
Section 7. Description of Eligible Transactions and Corrections Under
the VFC Program
EBSA has identified certain Breaches and methods of correction that
are suitable for the VFC Program. Any Plan Official may correct a
Breach listed in this Section in accordance with Section 5 and the
applicable correction method. The correction methods set forth are
strictly construed and are the only acceptable correction methods under
the VFC Program for the transactions described in this Section. EBSA
will not accept applications concerning correction of breaches not
described in this Section.
A. Delinquent Remittance of Participant Funds
1. Delinquent Participant Contributions and Participant Loan Repayments
to Pension Plans
(a) Description of Transaction. An employer receives directly from
participants, or withholds from employees' paychecks, certain amounts
for either contribution to a pension plan or for repayment of
participants' plan loans. Instead of forwarding participant
contributions for investment in accordance with the provisions of the
plan and by reference to the principles of the Department's regulation
at 29 CFR 2510.3-102, the employer retains such contributions for a
longer period of time. Similarly, in the case of participant loan
repayments, instead of applying such repayments to outstanding loan
balances within a reasonable period of time determined by reference to
the guiding principles of 29 CFR 2510.3-102 and in accordance with the
provisions of the plan, the employer retains such repayments for a
longer period of time.
(b) Correction of Transaction. (1) Unpaid Contributions or
Participant Loan Repayments. Pay to the plan the Principal Amount plus
the greater of (i) Lost Earnings on the Principal Amount or (ii)
Restoration of Profits resulting from the employer's use of the
Principal Amount, as described in Section 5(b). The Loss Date for such
contributions is the date on which each contribution reasonably could
have been segregated from the employer's general assets. In no event
shall the Loss Date for such contributions be later than the applicable
maximum time period described in 29 CFR 2510.3-102. The Loss Date for
such repayments is the date on which each repayment reasonably could
have been segregated from the employer's general assets consistent with
the guiding principles of 29 CFR 2510.3-102.\19\ Any penalties, late
fees or other charges shall be paid by the employer and not from
participant loan repayments.
---------------------------------------------------------------------------
\19\ Although the maximum time periods described in 29 CFR
2510.3-102 are not directly applicable to participant loan
repayments, retaining repayments beyond such periods raises a
question as to whether the employer forwarded repayments to the plan
as soon as they could reasonably be segregated from the employer's
general assets. See Advisory Opinion 2002-02A (May 17, 2002).
---------------------------------------------------------------------------
(2) Late Contributions or Participant Loan Repayments. If
participant contributions or loan repayments were remitted to the plan
outside of the time periods described above, the only correction
required is to pay to the plan the greater of (i) Lost Earnings or (ii)
Restoration of Profits resulting from the employer's use of the
Principal Amount as described in Section 5(b). Any penalties, late fees
or other charges shall be paid by the employer and not from participant
loan repayments.
(3) For this transaction, the Principal Amount is the amount of
delinquent participant contributions or loan repayments retained by the
employer.
(4) Example. The principles of this paragraph (b) are illustrated
by example in Appendix D.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) A statement from a Plan Official identifying the earliest date
on which the participant contributions and/or repayments reasonably
could have been segregated from the employer's general assets, along
with the supporting documentation on which the Plan Official relied in
reaching this conclusion;
(2) If restored participant contributions and/or repayments
(exclusive of Lost Earnings) (A) total $50,000 or less; or (B) exceed
$50,000 and were remitted to the plan within 180 calendar days from the
date such amounts were received by the employer, or the date such
amounts otherwise would have been payable to the participants in cash
(regarding amounts withheld by an employer from employees' paychecks),
submit:
(i) A narrative describing the applicant's contribution and/or
repayment remittance practices before and after the period of unpaid or
late contributions and/or repayments; and
(ii) Summary documents demonstrating the amount of unpaid or late
contributions and/or repayments; and
(3) If restored participant contributions and/or repayments
(exclusive of Lost Earnings) exceed $50,000 and were remitted more than
[[Page 17530]]
180 calendar days after the date such amounts were received by the
employer, or the date such amounts otherwise would have been payable to
the participants in cash (regarding amounts withheld by an employer
from employees' paychecks), submit:
(i) A narrative describing the applicant's contribution and/or
repayment remittance practices before and after the period of unpaid or
late contributions and/or repayments;
(ii) For participant contributions and/or repayments received from
participants, a copy of the accounting records which identify the date
and amount of each contribution received; and
(iii) For participant contributions and/or repayments withheld from
employees' paychecks, a copy of the payroll documents showing the date
and amount of each withholding.
2. Delinquent Participant Contributions to Insured Welfare Plans
(a) Description of Transaction. Benefits are provided exclusively
through insurance contracts issued by an insurance company or similar
organization qualified to do business in any state or through a health
maintenance organization (HMO) defined in section 1310(c) of the Public
Health Service Act, 42 U.S.C. 300e-9(c). An employer receives directly
from participants or withholds from employees' paychecks certain
amounts that the employer forwards to an insurance provider for the
purpose of providing group health or other welfare benefits. The
employer fails to forward such amounts in accordance with the terms of
the plan (including the provisions of any insurance contract) or the
requirements of the Department's regulation at 29 CFR 2510.3-102. There
are no instances in which claims have been denied under the plan, nor
has there been any lapse in coverage, due to the failure to transmit
participant contributions on a timely basis.
(b) Correction of Transaction. (1) Pay to the insurance provider or
HMO the Principal Amount, as well as any penalties, late fees or other
charges necessary to prevent a lapse in coverage due to such failure.
Any penalties, late fees or other such charges shall be paid by the
employer and not from participant contributions.
(2) For this transaction, the Principal Amount is the amount of
delinquent participant contributions retained by the employer.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) For participant contributions received directly from
participants, a copy of the accounting records which identify the date
and amount of each contribution received;
(2) For participant contributions withheld from employees'
paychecks, a copy of the payroll documents showing the date and amount
of each withholding;
(3) A statement from a Plan Official identifying the earliest date
on which the participant contributions reasonably could have been
segregated from the employer's general assets, along with the
supporting documentation on which the Plan Official relied in reaching
this conclusion;
(4) Copies of the insurance contract or contracts for the group
health or other welfare benefits for the plan;
(5) A statement from a Plan Official attesting that there are no
instances in which claims have been denied under the plan for
nonpayment, nor has there been any lapse in coverage; and
(6) A statement from a Plan Official attesting that any penalties,
late fees or other such charges have been paid by the employer and not
from participant contributions.
3. Delinquent Participant Contributions to Welfare Plan Trusts
(a) Description of Transaction. An employer receives directly from
participants or withholds from employees' paychecks certain amounts
that the employer forwards to a trust maintained to provide, through
insurance or otherwise, group health or other welfare benefits. The
employer fails to forward such amounts in accordance with the terms of
the plan or the requirements of the Department's regulation at 29 CFR
2510.3-102. There are no instances in which claims have been denied
under the plan, nor has there been any lapse in coverage, due to the
failure to transmit participant contributions on a timely basis.
(b) Correction of Transaction. (1) Unpaid Contributions. Pay to the
trust (1) the Principal Amount, and, where applicable, any penalties,
late fees or other charges necessary to prevent a lapse in coverage due
to the failure to make timely payments, and (2) the greater of (i) Lost
Earnings on the Principal Amount or (ii) Restoration of Profits
resulting from the employer's use of the Principal Amount as described
in Section 5(b). The Loss Date for such contributions is the date on
which each contribution would become plan assets under 29 CFR 2510.3-
102. Any penalties, late fees or other charges shall be paid by the
employer and not from participant contributions.
(2) Late Contributions. If participant contributions were remitted
to the trust outside of the time period required by the regulation, the
only correction required is to pay to the trust the greater of (i) Lost
Earnings or (ii) Restoration of Profits resulting from the employer's
use of the Principal Amount as described in Section 5(b). Any
penalties, late fees or other such charges shall be paid by the
employer and not from participant contributions.
(3) For this transaction, the Principal Amount is the amount of
delinquent participant contributions retained by the employer.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) For participant contributions received directly from
participants, a copy of the accounting records which identify the date
and amount of each contribution received;
(2) For participant contributions withheld from employees'
paychecks, a copy of the payroll documents showing the date and amount
of each withholding;
(3) A statement from a Plan Official identifying the earliest date
on which the participant contributions reasonably could have been
segregated from the employer's general assets, along with the
supporting documentation on which the Plan Official relied in reaching
this conclusion; and
(4) A statement from a Plan Official attesting that there are no
instances in which claims have been denied under the plan for
nonpayment, nor has there been any lapse in coverage.
B. Loans
1. Loan at Fair Market Interest Rate to a Party in Interest With
Respect to the Plan
(a) Description of Transaction. A plan made a loan to a party in
interest at an interest rate no less than that for loans with similar
terms (for example, the amount of the loan, amount and type of
security, repayment schedule, and duration of loan) to a borrower of
similar creditworthiness. The loan was not exempt from the prohibited
transaction provisions of Title I of ERISA.
(b) Correction of Transaction. Pay off the loan in full, including
any prepayment penalties. An independent commercial lender must also
confirm in writing that the loan was made at a fair market interest
rate for a loan with similar terms to a borrower of similar
creditworthiness.
(c) Documentation. In addition to the documentation required by
Section 6,
[[Page 17531]]
submit a narrative describing the process used to determine the fair
market interest rate at the time the loan was made, validated in
writing by an independent commercial lender.
2. Loan at Below-Market Interest Rate to a Party in Interest With
Respect to the Plan
(a) Description of Transaction. A plan made a loan to a party in
interest with respect to the plan at an interest rate which, at the
time the loan was made, was less than the fair market interest rate for
loans with similar terms (for example, the amount of loan, amount and
type of security, repayment schedule, and duration of the loan) to a
borrower of similar creditworthiness. The loan was not exempt from the
prohibited transaction provisions of Title I of ERISA.
(b) Correction of Transaction. Pay off the loan in full, including
any prepayment penalties. (1) Pay to the plan the Principal Amount,
plus the greater of (i) the Lost Earnings as described in Section 5(b),
or (ii) the Restoration of Profits, if any, as described in Section
5(b).
(2) For purposes of this transaction, each loan payment has a
Principal Amount equal to the excess of the loan payment that would
have been received if the loan had been made at the fair market
interest rate (from the beginning of the loan until the Recovery Date)
over the loan payment actually received under the loan terms during
such period. Under the VFC Program, the fair market interest rate must
be determined by an independent commercial lender.
Example: The plan made to a party in interest a $150,000
mortgage loan, secured by a first Deed of Trust, at a fixed interest
rate of 4% per annum. The loan was to be fully amortized over 30
years. The fair market interest rate for comparable loans, at the
time this loan was made, was 7% per annum. The party in interest or
Plan Official must repay the loan in full plus any applicable
prepayment penalties. The party in interest or Plan Official also
must pay the difference between what the plan would have received
through the Recovery Date had the loan been made at 7% and what, in
fact, the plan did receive from the commencement of the loan to the
Recovery Date, plus Lost Earnings on that amount as described in
Section 5(b).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) A narrative describing the process used to determine the fair
market interest rate at the time the loan was made;
(2) A copy of the independent commercial lender's fair market
interest rate determination(s); and
(3) A copy of the independent fiduciary's dated, written approval
of the fair market interest rate determination(s).
3. Loan at Below-Market Interest Rate to a Person Who Is Not a Party in
Interest With Respect to the Plan
(a) Description of Transaction. A plan made a loan to a person who
is not a party in interest with respect to the plan at an interest rate
which, at the time the loan was made, was less than the fair market
interest rate for loans with similar terms (for example, the amount of
loan, amount and type of security, repayment schedule, and duration of
the loan) to a borrower of similar creditworthiness.
(b) Correction of Transaction. (1) Pay to the plan the Principal
Amount, plus Lost Earnings through the Recovery Date, as described in
Section 5(b).
(2) For purposes of this transaction, each loan payment has a
Principal Amount equal to the excess of the loan payment that would
have been received if the loan had been made at the fair market
interest rate (from the beginning of the loan until the Recovery Date)
over the loan payment actually received under the loan terms during
such period. Under the VFC Program, the fair market interest rate must
be determined by an independent commercial lender.
(3) From the inception of the loan to the Recovery Date, the amount
to be paid to the plan is the Lost Earnings on the series of Principal
Amounts, calculated in accordance with Section 5(b).
(4) From the Recovery Date to the maturity date of the loan, the
amount to be paid to the plan is the present value of the remaining
Principal Amounts, as determined by an independent commercial lender.
Instead of calculating the present value, it is acceptable for
administrative convenience to pay the sum of the remaining Principal
Amounts.
(5) The principles of this paragraph (b) are illustrated in the
following example:
Example: The plan made a $150,000 mortgage loan, secured by a
first Deed of Trust, at a fixed interest rate of 4% per annum. The
loan was to be fully amortized over 30 years. The fair market
interest rate for comparable loans, at the time this loan was made,
was 7% per annum. The borrower or the Plan Official must pay the
excess of what the plan would have received through the Recovery
Date had the loan been made at 7% over what, in fact, the plan did
receive from the commencement of the loan to the Recovery Date, plus
Lost Earnings on that amount as described in Section 5(b). The Plan
Official must also pay on the Recovery Date the difference in the
value of the remaining payments on the loan between the 7% and the
4% for the duration of the time the plan is owed repayments on the
loan.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) A narrative describing the process used to determine the fair
market interest rate at the time the loan was made; and
(2) A copy of the independent commercial lender's fair market
interest rate determination(s).
4. Loan at Below-Market Interest Rate Solely Due to a Delay in
Perfecting the Plan's Security Interest
(a) Description of Transaction. For purposes of the VFC Program, if
a plan made a purportedly secured loan to a person who is not a party
in interest with respect to the plan, but there was a delay in
recording or otherwise perfecting the plan's interest in the loan
collateral, the loan will be treated as an unsecured loan until the
plan's security interest was perfected.
(b) Correction of Transaction. (1) Pay to the plan the Principal
Amount, plus Lost Earnings as described in Section 5(b), through the
date the loan became fully secured.
(2) For purposes of this transaction, each loan payment has a
Principal Amount equal to the excess of the loan payment that would
have been received if the loan had been made at the fair market
interest rate for an unsecured loan (from the beginning of the loan
until the Recovery Date) over the loan payment actually received under
the loan terms during such period. Under the VFC Program, the fair
market interest rate must be determined by an independent commercial
lender.
(3) In addition, if the delay in perfecting the loan's security
caused a permanent change in the risk characteristics of the loan, the
fair market interest rate for the remaining term of the loan must be
determined by an independent commercial lender. In that case, the
correction amount includes an additional payment to the plan. The
amount to be paid to the plan is the present value of the remaining
Principal Amounts from the date the loan is fully secured to the
maturity date of the loan. Instead of calculating the present value, it
is acceptable for administrative convenience to pay the sum of the
remaining Principal Amounts.
(4) The principles of this paragraph (b) are illustrated in the
following examples:
Example 1: The plan made a mortgage loan, which was supposed to
be secured by a Deed of Trust. The plan's Deed was not
[[Page 17532]]
recorded for six months, but, when it was recorded, the Deed was in
first position. The interest rate on the loan was the fair market
interest rate for a mortgage loan secured by a first-position Deed
of Trust. The loan is treated as an unsecured, below-market loan for
the six months prior to the recording of the Deed of Trust.
Example 2: Assume the same facts as in Example 1, except that,
as a result of the delay in recording the Deed, the plan ended up in
second position behind another lender. The risk to the plan is
higher and the interest rate on the note is no longer commensurate
with that risk. The loan is treated as a below-market loan (based on
the lack of security) for the six months prior to the recording of
the Deed of Trust and as a below-market loan (based on secondary
status security) from the time the Deed is recorded until the end of
the loan.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) A narrative describing the process used to determine the fair
market interest rate for the period that the loan was unsecured and, if
applicable, for the remaining term of the loan; and
(2) A copy of the independent commercial lender's fair market
interest rate determination(s).
C. Participant Loans
1. Loan Amount in Excess of Plan Limitations
(a) Description of Transaction. A plan extended a loan to a plan
participant who is a party in interest with respect to the plan based
solely on his or her status as an employee of any employer whose
employees are covered by the plan, as defined in section 3(14)(H) of
ERISA. The amount of the loan exceeded the amount permitted under
applicable plan provisions incorporating the requirements of section
72(p) of the Code. The loan was a prohibited transaction that failed to
qualify for ERISA's statutory exemption for plan loan programs because
the loan amount exceeded the amount permitted under applicable plan
provisions.
(b) Correction of Transaction. (1) The participant must pay the
Principal Amount to the plan. Plan Officials must reform the
outstanding loan amount that was not in excess of the applicable plan
loan limit at origination (the date of Breach) into an ongoing plan
loan. In reformulating the loan, Plan Officials must make the necessary
adjustments to the monthly repayment amount so that the remaining
outstanding principal balance is amortized over the remaining duration
of the original loan and also enforce all other terms of the original
loan agreement. The Principal Amount is the loan amount in excess of
the applicable plan loan limit on the Loss Date. The Loss Date is the
date of loan origination.
(2) The principles of this paragraph (b) are illustrated in the
following example:
Example. On January 1, 2004, Participant A receives a $15,000
loan pursuant to the loan provisions of Plan X, which incorporate
the requirements of section 72(p) of the Code. Participant A is an
employee of Company Y, the plan sponsor. Participant A is not a
party in interest with respect to Plan X for any reason other than
his employment with Company Y. The terms of the loan include a five-
year repayment in equal monthly installments of principal and
interest at a then current market interest rate of 4.625%. Amortized
monthly payments for Participant A are determined to be $280.
However, in accordance with Plan X limitations on the amount of
participant loans and Participant A's account balance as of January
1, 2004, Participant A should not have received a loan in excess of
$10,000. The loan otherwise complies with Plan X's loan provisions.
In late 2004, a Plan Official discovers that the amount of
Participant A's loan exceeded applicable plan limitations. On
January 1, 2005, the Recovery Date, Participant A's outstanding loan
balance is $12,270. Participant A repays $5,000 to Plan X, the
amount by which his loan exceeded applicable plan limitations on
January 1, 2004. Plan Officials reform Participant A's loan on
January 1, 2005 based on the outstanding principal balance of
$7,270, to be paid back in equal monthly installments of principal
and interest at the original loan rate of 4.625%. Appropriate
adjustments are made to the monthly repayment amount, which will be
$166 over the 4-year period remaining on the loan's original 5-year
term. The reformed loan otherwise will comply with the terms of the
original loan.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) For each plan loan originated in violation of applicable plan
limits, the date, amount, duration, interest rate and repayment
schedule applicable to each plan loan and the amount of each
participant's nonforfeitable accrued benefit on such date;
(2) Date and amount of excess loan repaid by each participant prior
to reformulation;
(3) Date, amount and repayment schedule of each reformulated plan
loan being maintained as an ongoing plan loan;
(4) Date and amount of payments made by the participant with
respect to the original plan loan;
(5) A copy of the plan's loan provisions; and
(6) An explanation of any administrative practices or procedures
with respect to plan loans and any changes to such practices or
procedures designed to prevent this type of Breach from recurring.
2. Loan Duration in Excess of Plan Limitations
(a) Description of Transaction. A plan extended a loan to a plan
participant who is a party in interest with respect to the plan based
solely on his or her status as an employee of any employer whose
employees are covered by the plan, as defined in section 3(14)(H) of
ERISA. The duration of the loan exceeded the maximum repayment term
permitted under applicable plan provisions incorporating the
requirements of section 72(p) of the Code. The loan was a prohibited
transaction that failed to qualify for ERISA's statutory exemption for
plan loan programs because the duration of the loan exceeded the
maximum repayment term permitted under applicable plan provisions.
(b) Correction of Transaction. (1) Plan Officials must reform the
duration of the loan term so that repayment of the outstanding loan
will be completed by the date that complies with the maximum repayment
term permitted under applicable plan provisions. The duration of the
reformulated loan must be no longer than the maximum permissible term
under applicable plan provisions, measured from the date of loan
origination to the date of correction. In reformulating the loan, Plan
Officials must make the necessary adjustments to the monthly repayment
amount so that the remaining outstanding principal balance is amortized
over such duration and also enforce all other terms of the original
loan agreement. If the period of time elapsed between the date of loan
origination and the date Plan Officials discover the error equals or
exceeds the maximum permissible term permitted under applicable plan
provisions, then this correction is unavailable.
(2) The principles of this paragraph (b) are illustrated in the
following example:
Example. On January 1, 2004, Participant A receives a general
purpose $10,000 loan pursuant to the loan provisions of Plan X,
which incorporate the requirements of section 72(p) of the Code.
Participant A is an employee of Company Y, the plan sponsor.
Participant A is not a party in interest with respect to Plan X for
any reason other than his employment with Company Y. The terms of
the loan include a ten-year repayment in equal monthly installments
of principal and interest at a then current market interest rate of
4.75%. Amortized monthly payments for Participant A are determined
to be $105. However, in accordance with Plan X limitations on the
repayment term for general purpose participant loans, Participant A
should not have received a loan with a duration longer than five
years. The loan
[[Page 17533]]
otherwise complies with Plan X's loan provisions.
In late 2004, a Plan Official discovers that the duration of
Participant A's loan exceeded applicable plan limitations. Plan
Officials reform Participant A's loan on January 1, 2005, the date
of correction, based on the outstanding principal balance of $9,200,
to be paid back in equal monthly installments of principal and
interest at the original loan rate of 4.75%. Appropriate adjustments
are made to the monthly repayment amount, which will be $211 over
the remaining four-year repayment term that begins on the date of
correction. The reformed loan otherwise will comply with the terms
of the original loan.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) For each plan loan originated with a duration exceeding
applicable plan limits, the date, amount, duration, interest rate, and
repayment schedule applicable to each plan loan;
(2) Date, amount, duration, interest rate, and repayment schedule
of each reformulated plan loan being maintained as an ongoing plan loan
from the date of correction;
(3) Date and amount of payments made by the participant with
respect to the original plan loan;
(4) A copy of the plan's loan provisions; and
(5) An explanation of any administrative practices or procedures
with respect to plan loans and any changes to such practices or
procedures designed to prevent this type of Breach from recurring.
D. Purchases, Sales and Exchanges
1. Purchase of an Asset (Including Real Property) by a Plan From a
Party in Interest
(a) Description of Transaction. A plan purchased an asset with cash
from a party in interest with respect to the plan, and under the
circumstances, no prohibited transaction exemption applies.
(b) Correction of Transaction. (1) The transaction must be
corrected by the sale of the asset back to the party in interest who
originally sold the asset to the plan or to a person who is not a party
in interest. Whether the asset is sold to a person who is not a party
in interest with respect to the plan or is sold back to the original
seller, the plan must receive the higher of (i) the fair market value
(FMV) of the asset at the time of resale, without a reduction for the
costs of sale; or (ii) the Principal Amount, plus the greater of (A)
Lost Earnings on the Principal Amount as described in Section 5(b), or
(B) the Restoration of Profits, if any, as described in Section 5(b).
(2) For this transaction, the Principal Amount is the plan's
original purchase price.
(3) The principles of this paragraph (b) are illustrated in the
following example:
Example: A plan purchased from the plan sponsor a parcel of real
property. The plan does not lease the property to any person.
Instead, the plan uses the property as an office. The Plan Official
obtains from a qualified, independent appraiser an appraisal of the
property reflecting the FMV of the property at the time of purchase.
The appraiser values the property at $100,000, although the plan
paid the plan sponsor $120,000 for the property. As of the Recovery
Date, the property is valued at $110,000. To correct the
transaction, the plan sponsor repurchases the property for $120,000
with no reduction for the costs of sale and reimburses the plan for
the initial costs of sale. The plan sponsor also must pay the plan
the greater of the plan's Lost Earnings or the sponsor's profits on
this amount. This example assumes that the plan sponsor did not make
a profit on the $120,000 proceeds from the original sale of the
property to the plan.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Documentation of the plan's purchase of the real property,
including the date of the purchase, the plan's purchase price, and the
identity of the seller;
(2) A narrative describing the relationship between the original
seller of the asset and the plan; and
(3) The qualified, independent appraiser's report addressing the
FMV of the asset purchased by the plan, both at the time of the
original purchase and at the recovery date.
2. Sale of an Asset (Including Real Property) by a Plan to a Party in
Interest
(a) Description of Transaction. A plan sold an asset for cash to a
party in interest with respect to the plan, in a transaction that is
not exempt from the prohibited transaction provisions of Title I of
ERISA.
(b) Correction of Transaction. (1) The plan must receive the
Principal Amount plus the greater of (i) Lost Earnings as described in
Section 5(b), or (ii) the Restoration of Profits, if any, as described
in Section 5(b). As an alternative to repayment of the Principal
Amount, if it is determined that the plan will realize a greater
benefit by repurchasing the asset, the plan may repurchase the asset
from the party in interest \20\ at the lower of the price for which it
sold the property or the FMV of the property as of the Recovery Date
plus restoration to the plan of the party in interest's net profits
from owning the property, to the extent they exceed the plan's
investment return from the proceeds of the sale. The determination as
to which correction alternative the plan chooses must be made by an
independent fiduciary.
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\20\ The repurchase of the same property from the party in
interest to whom the asset was sold is a reversal of the original
prohibited transaction. The sale is not a new prohibited transaction
and therefore does not require an exemption.
---------------------------------------------------------------------------
(2) For this transaction, the Principal Amount is the amount by
which the FMV of the asset (at the time of the original sale) exceeds
the sale price.
(3) The principles of this paragraph (b) are illustrated in the
following example:
Example: A plan sold a parcel of unimproved real property to the
plan sponsor. The sponsor did not make any profit on the use of the
property. The Plan Official obtains from a qualified, independent
appraiser an appraisal of the property reflecting the FMV of the
property as of the date of sale. The appraiser valued the property
at $130,000, although the plan sold the property to the plan sponsor
for $120,000. However, the plan fiduciaries have reason to believe
that the property will substantially increase IN VALUE in the near
future based on the anticipated building of a shopping mall adjacent
to the property in question and, as of the Recovery Date, the
appraiser values the property at $140,000. An independent fiduciary
determines that the property is a prudent investment for the plan,
and will not result in any liquidity or diversification problems.
The plan corrects by repurchasing the property at the original sale
price, with the party in interest assuming the costs of the reversal
of the sale transaction.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Documentation of the plan's sale of the asset, including the
date of the sale, the sales price, and the identity of the original
purchaser;
(2) A narrative describing the relationship of the purchaser to the
asset and the relationship of the purchaser to the plan;
(3) The qualified, independent appraiser's report addressing the
FMV of the property at the time of the sale from the plan and as of the
Recovery Date; and
(4) The independent fiduciary's report that the property is a
prudent investment for the plan.
3. Sale and Leaseback of Real Property to Employer
(a) Description of Transaction. The plan sponsor sold a parcel of
real property to the plan, which then was leased back to the sponsor,
in a transaction that is not otherwise exempt.
[[Page 17534]]
(b) Correction of Transaction. (1) The transaction must be
corrected by the sale of the parcel of real property back to the plan
sponsor or to a person who is not a party in interest with respect to
the plan.\21\ The plan must receive the higher of (i) FMV of the asset
at the time of resale, without a reduction for the costs of sale; or
(ii) the Principal Amount, plus the greater of (A) Lost Earnings on the
Principal Amount as described in Section 5(b), or (B) the Restoration
of Profits, if any, as described in Section 5(b).
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\21\ If the plan purchased the property from the plan sponsor,
the sale of the same property back to the plan sponsor is a reversal
of the prohibited transaction. The sale is not a new prohibited
transaction and therefore does not require an individual prohibited
transaction exemption, as long as the plan did not make improvements
while it owned the property.
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(2) For purposes of this transaction, the Principal Amount is the
plan's original purchase price.
(3) If the plan has not been receiving rent at FMV, as determined
by a qualified, independent appraisal, the sale price of the real
property should not be based on the historic below-market rent that was
paid to the plan.
(4) In addition to the correction amount in subparagraph (1), if
the plan was not receiving rent at FMV, as determined by a qualified,
independent appraiser, the Principal Amount also includes the
difference between the rent actually paid and the rent that should have
been paid at FMV. The plan sponsor must pay to the plan this additional
Principal Amount, plus the greater of (i) Lost Earnings or (ii)
Restoration of Profits resulting from the plan sponsor's use of the
Principal Amount, as described in Section 5(b).
(5) The principles of this paragraph (b) are illustrated in the
following example:
Example: The plan purchased at FMV from the plan sponsor an
office building that served as the sponsor's primary business site.
Simultaneously, the plan sponsor leased the building from the plan
at below the market rental rate. The Plan Official obtains from a
qualified, independent appraiser an appraisal of the property
reflecting the FMV of the property and rent. To correct the
transaction, the plan sponsor purchases the property from the plan
at the higher of the appraised value at the time of the resale or
the original sales price and also pays the Lost Earnings. Because
the rent paid to the plan was below the market rate, the sponsor
must also make up the difference between the rent paid under the
terms of the lease and the amount that should have been paid, plus
Lost Earnings on this amount, as described in Section 5(b).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Documentation of the plan's purchase of the real property,
including the date of the purchase, the plan's purchase price, and the
identity of the original seller;
(2) Documentation of the plan's sale of the asset, including the
date of sale, the sales price, and the identity of the purchaser;
(3) A narrative describing the relationship of the original seller
to the plan and the relationship of the purchaser to the plan;
(4) A copy of the lease;
(5) Documentation of the date and amount of each lease payment
received by the plan; and
(6) The qualified, independent appraiser's report addressing both
the FMV of the property at the time of the original sale and at the
Recovery Date, and the FMV of the lease payments.
4. Purchase of an Asset (Including Real Property) by a Plan From a
Person Who Is Not a Party in Interest With Respect to the Plan at a
Price Other Than Fair Market Value
(a) Description of Transaction. A plan acquired an asset from a
person who is not a party in interest with respect to the plan, without
determining the asset's FMV. As a result, the plan paid more than it
should have for the asset.
(b) Correction of Transaction. The Principal Amount is the
difference between the actual purchase price and the asset's FMV at the
time of purchase. The plan must receive the Principal Amount plus the
Lost Earnings, as described in Section 5(b).
(1) The principles of this paragraph (b) are illustrated in the
following example:
Example: A plan bought unimproved land without obtaining a
qualified, independent appraisal. Upon discovering that the purchase
price was $10,000 more than the appraised FMV, the Plan Official
pays the plan the Principal Amount of $10,000, plus Lost Earnings as
described in Section 5(b).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Documentation of the plan's original purchase of the asset,
including the date of the purchase, the purchase price, and the
identity of the seller;
(2) A narrative describing the relationship of the seller to the
plan; and
(3) A copy of the qualified, independent appraiser's report
addressing the FMV at the time of the plan's purchase.
5. Sale of an Asset (Including Real Property) by a Plan to a Person Who
Is Not a Party in Interest With Respect to the Plan at a Price Less
Than Fair Market Value
(a) Description of Transaction. A plan sold an asset to a person
who is not a party in interest with respect to the plan, without
determining the asset's FMV. As a result, the plan received less than
it should have from the sale.
(b) Correction of Transaction. The Principal Amount is the amount
by which the FMV of the asset as of the Recovery Date exceeds the price
at which the plan sold the property. The plan must receive the
Principal Amount plus Lost Earnings as described in Section 5(b).
(1) The principles of this paragraph (b) are illustrated in the
following example:
Example: A plan sold unimproved land without taking steps to
ensure that the plan received FMV. Upon discovering that the sale
price was $10,000 less than the FMV, the Plan Official pays the plan
the Principal Amount of $10,000 plus Lost Earnings as described in
Section 5(b).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Documentation of the plan's original sale of the asset,
including the date of the sale, the sale price, and the identity of the
buyer;
(2) A narrative describing the relationship of the buyer to the
plan; and
(3) A copy of the qualified, independent appraiser's report
addressing the FMV at the time of the plan's sale.
6. Holding of an Illiquid Asset Previously Purchased by a Plan
(a) Description of Transaction. A plan is holding an asset
previously purchased from (i) a party in interest with respect to the
plan at no greater than fair market value at that time in an
acquisition to which no prohibited transaction exemption applied, (ii)
a person who was not a party in interest with respect to the plan in an
acquisition in which a plan fiduciary failed to appropriately discharge
his or her fiduciary duties, or (iii) a person who was not a party in
interest with respect to the plan in an acquisition in which a plan
fiduciary appropriately discharged his or her fiduciary duties.
Currently, a plan fiduciary determines that such asset is an illiquid
asset because: (1) the asset failed to appreciate, failed to provide a
reasonable rate of return, or caused a loss to the plan; (2) the sale
of the asset
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is in the best interest of the plan; and (3) following reasonable
efforts to sell the asset to a person who is not a party in interest
with respect to the plan, the asset cannot immediately be sold for its
original purchase price, or its current FMV, if greater. Examples of
assets that may meet this definition include, but are not limited to,
restricted and thinly traded stock, limited partnership interests, real
estate and collectibles.
(b) Correction of Transaction. (1) The transaction may be corrected
by the sale of the asset to a party in interest, provided the plan
receives the higher of (i) the fair market value (FMV) of the asset at
the time of resale, without a reduction for the costs of sale; or (ii)
the Principal Amount, plus Lost Earnings as described in Section 5(b).
The Plan Official may cause the plan to sell the asset to a party in
interest. This correction provides relief for both the original
purchase of the asset, if required, and the sale of the illiquid asset
by the plan to a party in interest, provided the Plan Official also
satisfies the applicable conditions of the VFC Program class exemption.
(2) For this transaction, the Principal Amount is the plan's
original purchase price.
(3) The principles of this paragraph (b) are illustrated in the
following examples:
Example 1. A plan purchases undeveloped real property from a
party in interest with respect to the plan for $60,000 in June 1999.
In April 2004, Plan Officials determine that the property is an
illiquid asset. A qualified independent, appraiser appraises the
property at a current FMV of $20,000. The plan sponsor pays the plan
the Principal Amount of $60,000 plus Lost Earnings as described in
Section 5(b), and Plan Officials transfer the property from the plan
to the plan sponsor. The Plan Officials also comply with the
applicable terms of the related exemption.
Example 2. A plan purchases a limited partnership interest for
$60,000 in June 1999 from an unrelated party after plan fiduciaries
properly fulfill their fiduciary duties with respect to the
purchase. In April 2004, Plan Officials determine that the interest
is an illiquid asset because the interest has failed to generate a
reasonable rate of return. A qualified, independent appraiser
appraises the interest at a current FMV of $80,000. The plan sponsor
pays the plan the FMV of $80,000 without a reduction for the costs
of the sale, which is greater than the Principal Amount plus Lost
Earnings, and Plan Officials transfer the interest from the plan to
the plan sponsor. The Plan Officials also comply with the applicable
terms of the related exemption.
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Documentation of the plan's original purchase of the asset,
including the date of the purchase, the plan's purchase price, the
identity of the original seller, and a description of the relationship,
if any, between the original seller and the plan;
(2) The qualified, independent appraiser's report addressing the
FMV of the asset purchased by the plan at the recovery date;
(3) A narrative describing the plan's efforts to sell the asset to
persons who are not parties in interest with respect to the plan and
any documentation of such efforts to sell the asset;
(4) A statement from a Plan Official attesting that: (i) The asset
failed to appreciate, failed to provide a reasonable rate of return, or
caused a loss to the plan; (ii) the sale of the asset is in the best
interest of the plan; (iii) the asset is an illiquid asset; and (iv)
the plan made reasonable efforts to sell the asset to persons who are
not parties in interest with respect to the plan without success; and
(5) In the case of an illiquid asset that is a parcel of real
estate, a statement from a Plan Official attesting that no party in
interest owns real estate that is contiguous to the plan's parcel of
real estate on the Recovery Date.
E. Benefits
1. Payment of Benefits Without Properly Valuing Plan Assets on Which
Payment Is Based
(a) Description of Transaction. A defined contribution pension plan
pays benefits based on the value of the plan's assets. If one or more
of the plan's assets are not valued at current value, the benefit
payments are not correct. If the plan's assets are overvalued, the
current benefit payments will be too high. If the plan's assets are
undervalued, the current benefit payments will be too low.
(b) Correction of Transaction. (1) Establish the correct value of
the improperly valued asset for each plan year, starting with the first
plan year in which the asset was improperly valued. Restore to the plan
for distribution to the affected plan participants, or restore directly
to the plan participants, the amount by which all affected participants
were underpaid distributions to which they were entitled under the
terms of the plan, plus Lost Earnings as described in Section 5(b) on
the underpaid distributions. File amended Annual Report Forms 5500, as
detailed below.
(2) To correct the valuation defect, a Plan Official must determine
the FMV of the improperly valued asset per Section 5(a) for each year
in which the asset was valued improperly.
(3) Once the FMV has been determined, the participant account
balances for each year must be adjusted accordingly.
(4) The Annual Report Forms 5500 must be amended and refiled for
(i) the last three plan years or (ii) all plan years in which the value
of the asset was reported improperly, whichever is less.
(5) The Plan Official or plan administrator must determine who
received distributions from the plan during the time the asset was
valued improperly. For distributions that were too low, the amount of
the underpayment is treated as a Principal Amount for each individual
who received a distribution. The Principal Amount and Lost Earnings
must be paid to the affected individuals. For distributions that were
too high, the total of the overpayments constitutes the Principal
Amount for the plan. The Principal Amount plus the Lost Earnings, as
described in Section 5(b), must be restored to the plan or to any
participants who received distributions that were too low.
(6) The principles of this paragraph (b) are illustrated in the
following examples:
Example 1. On December 31, 1995, a profit sharing plan purchased
a 20-acre parcel of real property for $500,000, which represented a
portion of the plan's assets. The plan has carried the property on
its books at cost, rather than at FMV. One participant left the
company on January 1, 1997, and received a distribution, which
included her portion of the value of the property. The separated
participant's account balance represented 2% of the plan's assets.
As part of correction for the VFC Program, a qualified, independent
appraiser has determined the FMV of the property for 1996, 1997, and
1998. The FMV as of December 31, 1996, was $400,000. Therefore, this
participant was overpaid by $2,000 (($500,000-$400,000) multiplied
by 2%). The Plan Officials corrected the transaction by paying to
the plan the $2,000 Principal Amount plus Lost Earnings as described
in Section 5(b).
The plan administrator also filed an amended Form 5500 for plan
years 1996 and 1997, to reflect the proper values. The plan
administrator will include the correct asset valuation in the 1998
Form 5500 when that form is filed.
Example 2. Assume the same facts as in Example 1, except that
the property had appreciated in value to $600,000 as of December 31,
1996. The separated participant would have been underpaid by $2,000.
The correction consists of locating the participant and distributing
to her the $2,000 Principal Amount plus Lost Earnings as described
in Section 5(b), as well as filing the amended Forms 5500.
[[Page 17536]]
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) A copy of the qualified, independent appraiser's report for
each plan year in which the asset was revalued;
(2) A written statement confirming the date that amended Annual
Report Forms 5500 with correct valuation data were filed;
(3) If losses are restored to the plan, proof of payment to the
plan and copies of the adjusted participant account balances; and
(4) If supplemental distributions are made, proof of payment to the
individuals entitled to receive the supplemental distributions.
F. Plan Expenses
1. Duplicative, Excessive, or Unnecessary Compensation Paid by a Plan
(a) Description of Transaction. A plan paid excessive compensation,
including commissions or fees, to a service provider (such as an
attorney, accountant, actuary, financial advisor, or insurance agent);
a plan paid two or more persons to provide the same services to the
plan; or a plan paid a service provider for services that were not
necessary for the operation of the plan.
(b) Correction of Transaction. (1) Restore to the plan the
Principal Amount, plus the greater of (i) Lost Earnings or (ii)
Restoration of Profits resulting from the use of the Principal Amount,
as described in Section 5(b).
(2) The Principal Amount is the difference between (a) the amount
actually paid by the plan to the service provider during the six years
prior to the discontinuation of the payment of the excessive,
duplicative, or unnecessary compensation and (b) the reasonable market
value of the non-duplicative services.
(3) The principles of this paragraph (b) are illustrated in the
following example:
Example. Excessive compensation. A plan hired an investment
advisor who advised the plan's trustees about how to invest the
plan's entire portfolio. In accordance with the plan document, the
trustees instructed the advisor to limit the plan's investments to
equities and bonds. In exchange for his services, the plan paid the
investment advisor 3% of the value of the portfolio's assets. If the
trustees had inquired they would have learned that comparable
investment advisors charged 1% of the value of the assets for the
type of portfolio that the plan maintained. To correct the
transaction, the plan must be paid the Principal Amount of 2% of the
value of the plan's assets, plus Lost Earnings, as described in
Section 5(b).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) A written estimate of the reasonable market value of the
services;
(2) The estimator's qualifications; and
(3) The cost of the services at issue during the period that such
services were provided to the plan.
2. Payment of Dual Compensation to a Plan Fiduciary
(a) Description of Transaction. A plan pays a fiduciary for
services rendered to the plan when the fiduciary already receives full-
time pay from an employer or an association of employers, whose
employees are participants in the plan, or from an employee
organization whose members are participants in the plan. The plan's
payments to the plan fiduciary are not mere reimbursements of expenses
properly and actually incurred by the fiduciary.
(b) Correction of Transaction. (1) Restore to the plan the
Principal Amount, plus the greater of (i) Lost Earnings or (ii)
Restoration of Profits resulting from the fiduciary's use of the
Principal Amount for the same period.
(2) The Principal Amount is the difference between (a) the amount
actually paid by the plan during the six years prior to the
discontinuation of the payments to the fiduciary and (b) the amount
that represents reimbursements of expenses properly and actually
incurred by the fiduciary.
(3) The principles of this paragraph (b) are illustrated in the
following example:
Example. A union sponsored a health plan funded through
contributions by employers. The union president receives $50,000 per
year from the union in compensation for his services as union
president. He is appointed as a trustee of the health plan while
retaining his position as union president. In exchange for acting as
plan trustee, the union president is paid a salary of $200 per week
by the plan while still receiving the $50,000 salary from the union.
Since $50,000 is full-time pay, the plan's weekly salary payments
are improper. To correct the transaction, the plan must be paid the
Principal Amount, which is the $200 weekly salary amount for each
week that the salary was paid, plus the higher of Lost Earnings or
Restoration of Profits, as described in Section 5(b).
(c) Documentation. In addition to the documentation required by
Section 6, submit the following documents:
(1) Copies of the plan's accounting records which show the date and
amount of compensation paid by the plan to the identified fiduciary;
and
(2) If any of the amounts paid by the plan to the fiduciary
represent reimbursements of expenses properly and actually incurred by
the fiduciary, include copies of the plan records that indicate the
date, amount, and character of these payments.
Signed at Washington, DC, this 30th day of March, 2005.
Ann L. Combs,
Assistant Secretary for Employee Benefits Security Administration, U.S.
Department of Labor.
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[FR Doc. 05-6627 Filed 4-5-05; 8:45 am]
BILLING CODE 4150-29-P