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DOL and IRS Update Voluntary Correction Programs

The Department of Labor and the Internal Revenue Service recently modified their voluntary correction programs to make it easier for plan sponsors and fiduciaries to remedy certain violations. The modifications affect the DOL’s Voluntary Fiduciary Correction Program (“VFCP”) and the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). CHANGES TO VFCP The VFCP, which has existed since 2002, permits fiduciaries to avoid DOL civil actions and civil penalties resulting from certain fiduciary errors. Under the program, the fiduciary must engage in a voluntary compliance process designed to reverse the error and make the plan whole. The DOL expanded the VFCP in 2005 to cover certain asset sales to a party-in-interest if it was the only available purchaser, and to permit correction of participant loans of excessive amount or duration. The most recent changes to the VFCP, which are effective immediately, build on the updates from 2005 to expand and simplify the program. The following are some of the most significant changes:

  • Plan sponsors now may correct improperly paid expenses, such as administrative fees paid by the plan that should have been paid by the sponsor;
  • The VFCP now covers participant loans that failed to require that repayments be made in level installments;
  • The new rules narrow the definition of “under investigation.” Because plans “under investigation” are not eligible to participate in the VFCP, this change will make relief available to more plan sponsors; and
  • Civil penalty relief now includes the prohibited transaction penalties of ERISA Section 502(i).

To assist those applying for relief under the VFCP, the DOL also has created an online calculator to compute the amounts that must be paid to the plan to correct fiduciary errors. CHANGES TO EPCRS Since 1998, the IRS has maintained the EPCRS to allow plan sponsors to voluntarily correct failures that could disqualify a plan. Plans qualified under Code Section 401(a), Section 403(b) arrangements, simplified employee pensions (“SEPs”), and savings incentive match plans for employees using IRAs (“SIMPLE IRAs”) are all eligible for the EPCRS. The EPCRS consists of three programs. In order of increasing IRS involvement and fees, these are the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“Audit CAP”). All three programs are affected by the updated rules. Among the recent changes to the EPCRS are the following:

  • Additional correction methods to correct plan loan failures and failures to obtain spousal consent;
  • Revised methods to correct the failure to include an eligible employee in a 401(k) plan;
  • Reduced compliance fees;
  • A streamlined process for correcting failures to adopt plan amendments, such as those required by the Economic Growth and Tax Relief Reconciliation Act of 2001; and
  • Expanded correction opportunities for orphan plans, terminated plans, and governmental Section 457(b) plans.

Most provisions of the updated EPCRS take effect on September 1, 2006, but plan sponsors may choose to use the new provisions immediately.