DOL correction and compliance programs.

In an effort to assist employers, plan officials, service providers and others in complying with the fiduciary responsibility, reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974 (ERISA), the Department of Labor (DOL) adopted two employee benefit plan correction programs--the Voluntary Fiduciary Correction Program (VFCP) and the Delinquent Filer Voluntary Compliance Program (DFVCP). This item explains the rules and eligibility requirements for filing under each program, as well as outlining the benefits of taking advantage of these initiatives.

VFCP

On March 15, 2000, the Pension and Welfare Benefits Administration (PWBA) established the VFCP on an interim basis. The program became permanent on April 29, 2002. It is intended to benefit workers by (1) encouraging the voluntary and timely correction of possible fiduciary breaches, (2) encouraging the full correction of certain breaches of fiduciary responsibility and (3) restoring to participants and beneficiaries losses resulting from fiduciary breaches. Under VFCP, certain persons can avoid potential ERISA civil actions and the assessment of civil penalties from DOL investigations or civil actions; see 67 Fed. Reg. 15062-15083.

Essentially, any employee benefit plan sponsor, official and parties-in-interest may voluntarily apply for relief from liability for ERISA fiduciary violations. However, the sponsor must fully and accurately correct violations; incomplete or unacceptable applications may be rejected.

Correction method: Violations can be fully and correctly resolved as follows:

1. Identify any violations and determine whether they are included on the VFCP's list of 15 transactions;

2. Follow the process for correcting the specific violations provided for each transaction listed;

3. Calculate and restore any losses to the plan (with interest) and distribute any incorrect supplemental benefits to participants; and

4. File an application with the Employee Benefits Security Administration (EBSA) (the successor to the PWBA) that includes documentation showing evidence of corrected financial transactions.

The effect of the VFCP is that the EBSA will generally issue a no-action letter to the applicant for a breach identified in the application.

Transactions types: The 15 transactions reduce to five different categories--delinquent participant contributions; loans; purchases; sales and exchanges; and benefits and plan expenses.

Delinquent participant contributions made to pension plan, insured welfare plan and welfare plan trusts remitted to a trust on an untimely basis require remittance of delinquent participant contributions, a repayment of the principal amount plus the restoration of profits from an employer's use of the funds (or lost earnings, if greater). Repayment is required by the earliest date on which such contributions can be reasonably segregated from the employer's general assets, but not later than the 15th business day of the month following the month in which the employer received the participant contributions; see 29 CFR Section 2510.3-102. Similarly, prohibited loans must generally be reversed, with lost earnings or profits restored.

Purchase, sale and exchange violations are repaired either by reversing the transactions or receiving the Fair market value (FMV), plus lost earnings or restoration of profits.

When a plan makes benefit payments without properly valuing the plan assets on which such payments are based, the correct value of the improperly valued asset for each plan year must be established; plan participants must be recompensed for any underpayment.

Under the revised program, applicants must also provide proof of payment to participants and beneficiaries. To participate in the VFCP, neither the plan nor the applicant may be under a DOL investigation. Further, an application may not contain evidence of potential criminal violations; all costs of corrections must be borne by the fiduciary, plan sponsor or other plan officials.

No excise tax: Additionally, the DOL granted a class exemption providing limited relief from the excise tax imposed on prohibited transactions under Sec. 4975 for:

1. Failure to timely remit participant contributions to plans:

2. Loans made at fair market interest rates by plans with parties-in-interest;

3. Purchases and sales of assets between plans and parties-in-interest at FMV; and

4. Sales of real property to plans by employers, and leaseback of the property at FMV and fair market rental value, respectively.

The exemption requires delinquent contributions to be paid to plans no more than 180 days from the date the money would be payable to participants in cash. It also requires, except in the case of delinquent participant contributions, that no more than 10% of the plan assets' FMV be involved. In addition, notice of the transaction and the correction must be provided to interested parties.

DFVCP

The DFVCP gives plan administrators who have not yet been notified in writing by the DOL for failing to file a timely annual report, the opportunity to pay reduced civil penalties for voluntarily complying with the annual reporting requirements under ERISA Title I. The requirements exclude filers of Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, and Form 5500, Annual Return/Report of Employee Benefit Plan, for plans without employees. With the DFVCP, the DOL is targeting all plan years beginning after 1987--the effective date of ERISA Section 502(c)(2).

Both the IRS and the Pension Benefit Guaranty Corporation (PBGC) provide penalty relief to plan administrators who file under, and meet the conditions of, the DFVCP. Under Notice 2002-23, the Service will not impose Secs. 6652(c)(1), (d) and (e) and 6692 penalties (related to Form 5500) on a person who is eligible for, and satisfies, the DFVCP requirements for filing Form 5500. The IRS coordinates with the DOL in determining which late filers are eligible for the relief; thus, a separate relief application need not be filed. The PBGC will not assess a late-filing penalty under ERISA Section 4071 for filing Form 5500 late, if the plan administrator has complied with the DFVCP's conditions.

Background: The DFVCP was adopted on April 27, 1995 but, to encourage delinquent plan administrators to comply with the annual reporting requirements, the DOL modified it, effective March 28, 2002.

The modification created a new penalty structure with reduced penalty caps. Specifically, the per-day late-filing penalty for plan administrators taking part in the DFVCP was reduced for large and small plans from $50 per day to $10 per day.

For a single late annual report filing, the cumulative daily penalty for a plan year is capped at $750 for small plans and $2,000 for large plans. For multiple-plan years, the per-plan cap is $1,500 for a small plan and $4,000 for a large plan and is applied on a submission-by-submission basis (i.e., if more than one plan year is filed in one submission, the maximum penalty would be capped at $1,500 for small plans and $4,000 for large plans, regardless of the number of plan years under consideration). Thus, in this instance, the more years a plan administrator has tailed to file, the more cost effective it is to file under the DFVCP--as long as the administrator files before the DOL contacts it. Plan administrators are personally liable for the penalty; penalties may not be paid from plan assets.

Eligibility: To participate in the DFVCP, two sets of Forms 5500 must be filed. The first must include a complete Form 5500, with all schedules and attachments, and should be sent to the EBSA at the ERISA Filing Acceptance System (EFAST) address (filers can find the address in the instructions to the most recent Form 5500).The second should be submitted to: DFVCP Program, P.O. Box 530292, Atlanta, GA 30353-0292. It should include all Forms 5500 (without schedules and attachments) and a check for the applicable penalty, made payable to the U.S. Department of Labor. If the submission is for a small plan sponsored by a Sec. 501(c)(3) organization, a special notation in red, "501 (c)(3) Plan," must be included at the top of the first page of Form 5500 in the Atlanta submission, but not in the EBSA filing. Except for the aforementioned notation for a Sec. 501(c)(3) plan, the top of Form 5500 should not contain any annotations in red ink; however, filers using 2001 and subsequent versions of Form 5500 should check box D of Form 5500 and attach the required statement to it.

Plan administrators aware of a delinquent filing situation, but without the information to prepare complete Forms 5500, can also file under the DFVCP. Although no written guidance exists, the DOL and the IRS should accept a DFVCP filing even if it includes Forms 5500 that are incomplete. If a plan administrator shows that a good-faith effort was made to obtain and report all required information for all affected years, the protection offered under the DFVCP will be given for all years included in the filing.

For example, the plan administrator should include a cover letter stating that the plan is filing Forms 5500 for XX years, but that Forms 5500 for years X, Y and Z are incomplete, due to unavailable information for those years. The filing must include at least the first and second pages of Form 5500, including the plan name, employer identification number, plan number and the number of participants.

Conclusion

Taxpayers can use VFCP and the DFVCP to save on excise taxes and penalties, but they must act before the DOL contacts them. Waiting for the DOL to make the first move can be a costly and time-consuming mistake.

FROM EILEEN M. COONEY, CPA, AND DAVID WASSERSTRUM, CPA, MBA, New YORK, NY