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New Voluntary ERISA Fiduciary Compliance Program: Gift or Trojan Horse?
April 24, 2000
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Thelen Reid Brown Raysman & Steiner LLP
The Department of Labor has published the Voluntary Fiduciary
Correction Program, which will allow voluntary corrections
of ERISA fiduciary violations. Participation in the this new
voluntary fiduciary compliance program will reduce the risk
of penalties for covered fiduciary violations and should narrow,
though not eliminate, Department of Labor fiduciary audits.
The VFC Program took effect April 14 but is open to public
comment until May 15.
Covered Violations
Thirteen specific transactions are covered by the new program,
including delinquent employer contributions, certain prohibited
loans, loans with inadequate collateral or security, certain
improper sales or purchases (including prohibited transactions),
improper valuation of assets that affects benefits, and payment
of excessive or duplicate plan expenses. The VFC Program may
be used for actual or possible fiduciary breaches. It will
be available only for the specified fiduciary breaches and
cannot be used for any other breach.
Anyone who may be liable for, or can correct, ERISA fiduciary
violations (such as a plan sponsor, named fiduciary or party-in-interest)
is eligible for the new program. However, plans already under
investigation by the Department of Labor are ineligible for
participation. Furthermore, the plan will be ineligible if
during review of a correction submission under the VFC Program
the Department of Labor discovers any evidence of potential
criminal violations.
Correction Methods
To correct a covered fiduciary violation, the applicable fiduciary
must fully correct the violation and then notify the Department
of Labor of the correction through a signed, sworn statement
under penalty of perjury. The statement must include a list
of all persons materially involved in the breach, an explanation
of the violation, the correction and specific calculations
of the amounts used to correct the problem. The fiduciary
will have to submit proof that the necessary corrections have
been made, and any violations not fully corrected may be subject
to penalties for any negotiated corrections. The program does
not allow a plan fiduciary to propose corrections anonymously.
Participants must be notified of corrections and the use of
the VFC Program. The notice generally is due no later than
the deadline for summary annual reports.
Once the Department of Labor approves the submission, it will
send a letter of acknowledgment analogous to a Securities
and Exchange Commission "no action" letter. However, the Department
of Labor reserves the right to conduct investigations to determine
truthfulness, completeness and full correction.
Trends and Caveats
The new program may be viewed as yet another sign of a trend
by government agencies to encourage self-policing and self-correction
by employee benefit plans.
Like its cousins (the Delinquent Filer Voluntary Correction
Program of the Department of Labor and the Employee Plans
Compliance Resolution System of the IRS), the VFC Program
is intended to provide certainty and finality regarding correction
methods and government enforcement action. The announcement
notes that the IRS generally should accept correction under
the VFC Program except when the breach or correction results
in tax abuse or plan disqualification. The new program should
deter litigation by plan participants regarding the corrected
violations because participation in the program requires full
correction.
However, participation in the new program does not shield
plan fiduciaries from investigation by the government into
fiduciary violations not disclosed or not covered by the program.
Further, applicants who fail to fully correct fiduciary violations
will be rejected and become subject to enforcement action
and civil penalties. Moreover, the Department of Labor is
not precluded from referring information regarding a violation
to the IRS or from imposing civil penalties under ERISA for
the failure or refusal to file a timely, complete and accurate
annual report Form 5500. But if the history of the DFVC Program
and EPCRS is any guidance, it is anticipated that the new
program will not be used as a targeting tool and will be expanded
in the future to cover more complex fiduciary violations and
more flexible correction methods.
Comments on the VFC Program may be addressed to: VFC Program,
Office of Enforcement, Pension and Welfare Benefits Administration,
U.S. Department of Labor, Room N5702, 200 Constitution Ave.,
N.W., Washington, D.C. 20210 or by Internet to vcf-program@pwba.dol.gov.
Preventive Maintenance
The new compliance program will work best if the employer
or other fiduciary undergoes a thorough ERISA audit of the
operations of the employer's plans. This is best done
by or through outside counsel because the attorney-client
privilege may be available. An ERISA audit acts as "preventive
maintenance" by advising the employer of any violations and
offers alternative methods of correction, including the new
program.
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For more information about the issues covered in this report, please contact David S. Foster in our San Francisco office at 415-369-7020 or at dsfoster@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2000
Thelen Reid Brown Raysman & Steiner LLP
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