DOL update: changes to Voluntary Fiduciary Correction Program expands relief ability.

• Author: White, Nick
• Position: PROFESSIONALISSUES - Department of Labor

The Department of Labor issued an updated version of its Voluntary Fiduciary Correction Program in April, adding transactions that can be corrected under the program and expanding the ability to obtain relief from prohibited transactions.

The program's expansion follows the pattern we have seen in the IRS Voluntary Correction Programs for plan qualification defects. Those programs began narrowly, then gradually expanded as the IRS became more comfortable with them. We are now seeing the same type of expansion with the VFC program.

Before getting into the changes, let's look at the background.

Under the VFC program, individuals who could be liable for a fiduciary breach can avoid a DOL civil investigation or other DOL action with respect to that breach if all of the conditions for relief have been satisfied.

In addition, the DOL will waive any penalties under ERISA Sec. 502(1) (which impose a 20 percent penalty on the "applicable recover amount" in a civil action or settlement involving the DOL), and the civil penalties under ERISA Sec. 502(i) for certain prohibited transactions.

Only certain types of fiduciary breaches are eligible for relief under VFC, all of which deal with transactions involving valuation and prohibited transaction issues under Title 1 of ERISA.

The purpose behind the revised VFC program, according to the DOL, is to update, simplify and expand the program. The changes were effective May 19, 2006.

WHAT ARE THE CHANGES?

The 2006 update expands VFC by adding three covered transactions:

1. Participant Loans: Breach of Fiduciary Duty for Failure to Meet the Level Amortization Requirement.

   Under ERISA, it is a prohibited transaction for any plan fiduciary to permit a loan by a plan to a participant-in-interest (including plan participants) unless there is an exemption. In addition, prohibited transactions also constitute fiduciary breaches.

   Loans to participants are exempt if various conditions are met, including the requirement that the loan be based on a level amortization repayment schedule.

   By including this breach in VFC, the DOL has increased the number of covered transactions involving participant loans to four. The others include:

   * participant loans that exceed the maximum limit under Internal Revenue Code Sec. 72(p);

   * participant loans with repayment terms that exceed the maximum under IRC Sec. 72(p); and

   * participant loans that meet the compliance requirements at the time they were made, but those terms were not...