DOL’s VFCP Final Rule Adds Limited ‘Self-Correction’ Program for Late Contributions, Participant Loan Failures

The Employee Benefits Security Administration recently released its final rule amending and restating the Voluntary Fiduciary Correction Program, along with corresponding amendments to a related class exemption, Prohibited Transaction Exemption 2002-51.

The Voluntary Fiduciary Correction Program (VFC Program) permits eligible employer-sponsored pension and welfare benefit plans and plan fiduciaries to correct certain prohibited transactions without US Department of Labor (DOL) civil enforcement actions and civil penalties through the submission of an application under the VFC Program. In addition, those subject to excise tax under section 4975 of the Internal Revenue Code of 1986, as amended (Code), (generally for-profit companies) can rely on the conditional relief provided by the DOL via Prohibited Transaction Exemption (PTE) 2002-51 from payment of excise taxes for transactions identified in PTE 2002-51 that are corrected under the VFC Program.

Among other changes, the final rule (Final Rule) adds a limited Self-Correction Component (SCC) for certain failures to timely transmit participant contributions (and participant loan repayments) to employer-sponsored retirement plans, and implements Section 305(b)(2) and (3) of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act) by adding a self-correction feature under the SCC for certain participant loan failures that are self-corrected under the Employee Plans Compliance Resolution System (EPCRS) published by the Internal Revenue Service (IRS). In addition, the amendments to PTE 2002-51 allow plans eligible for the VFC Program to take advantage of the relief provided by the VFC Program and PTE 2002-51 more than once every three years. This LawFlash focuses on the SCC and this related change.

Both the Final Rule and the amendments to PTE 2002-51 are effective March 17, 2025.

SCC PERMITS LIMITED ‘SELF-CORRECTION’ OF LATE-REMITTED PARTICIPANT CONTRIBUTIONS AND PARTICIPANT LOAN FAILURES, STILL REQUIRES FORMAL REPORTING TO EBSA

Previously, the VFC Program did not include any formal self-correction component and did not provide fiduciary relief with respect to any self-corrections. However, under the new SCC, the Employee Benefits Security Administration (EBSA) now allows employers and plan officials to “self-correct” two types of transactions in certain limited circumstances: (1) delinquent (i.e., late-remitted) participant contributions and loan repayments to employer-sponsored retirement plans remitted to the plan within 180 days of the date the delinquent contributions were withheld from payroll or received by the employer (provided the corresponding lost earnings total $1,000 or less), and (2) eligible inadvertent participant loan failures.

‘Self-Correction’ of Delinquent Participant Contributions and Loan Repayments

The DOL views the delinquent deposit of participant contributions and loan repayments to be an impermissible loan between the plan sponsor and the plan (i.e., the plan sponsor is retaining the use of those contributions until deposited). The DOL considers participant contributions (such as salary deferral contributions under 401(k) and 403(b) plans) and participant loan repayments to be delinquent when they are not deposited in the plan as soon as they can reasonably be segregated from general assets (for plans with 100 or more participants). In determining whether contributions are deposited late, the DOL looks at how long it typically takes the plan sponsor or responsible plan fiduciary to deposit contributions, which means that a slight hiccup or one-time glitch in the deposit timing under an otherwise seamlessly run plan can lead to a delinquent deposit issue.

Although EBSA’s addition of the SCC arguably helps plans correct such delinquent deposits in a slightly more streamlined fashion than required by the full VFC Program submission, several administrative hurdles must still be met—and, notably, self-correctors must still report the correction to EBSA, and be prepared to respond to EBSA requests for information and documentation about the correction.

Under the SCC, self-correctors must:

• Compute lost earnings on late-remitted participant contributions and loan repayments using the Online Calculator from the date the amounts were withheld from participants’ paychecks or receipt by the employer (not the “Loss Date” that is typically used for the Online Calculator under the full VFC Program). If the total amount attributable to each pay period is $1,000 or less, the plan sponsor may use the SCC to correct those pay periods.
• Remit the delinquent contributions to the plan within 180 calendar days from the date the delinquent contributions were withheld from participants’ paychecks or receipt by the employer (earnings can be remitted later).
• Pay any penalties, late fees, and other charges (i.e., these amounts, including lost earnings, may not be paid with plan assets or forfeitures). Any such penalties, late fees, or other charges must be paid by a “plan official” (i.e., a plan fiduciary, plan sponsor, party-in-interest with respect to the plan (including a plan service provider), or other person who is in a position to correct a fiduciary breach by filing a VFC Program application or submission of a “SCC Notice”).
• Ensure neither the self-corrector nor the plan is “under investigation,” as defined under the Final Rule (this is also a requirement of the VFC Program generally). Whether the self-corrector or the plan is under investigation depends on the agency investigating and the nature of the investigation.
• Notify EBSA of the self-correction by submitting the “SCC Notice” with the required information through EBSA’s web tool.
• Collect records related to the correction, including the SCC Retention Record Checklist and penalty of perjury statement set forth in Appendix F to the Final Rule, and provide a copy of the completed checklist and the required documentation to the plan administrator for recordkeeping. Note: EBSA may request a copy of this information to determine whether the requirements of the SCC are satisfied.

Observation: The SCC—DOL’s response to the industry’s often-requested and long-awaited improvement to the VFC Program—falls significantly short of meeting industry expectations. Unlike the Self-Correction Program provided by the IRS under EPCRS—which makes available a true self-correction alternative that permits plan sponsors to self-correct certain qualification failures over a much longer period of time, without regard to the dollar amount of the failures and without requiring plan sponsors to report their self-corrections of those failures to the IRS—the SCC appears to simply be a somewhat lighter, abbreviated version of the VFC Program.

Nevertheless, the SCC, coupled with the expansion of the relief from the Code’s excise tax provisions under PTE 2002-51 to include self-corrections under the SCC, arguably is somewhat helpful for plan sponsors looking to correct isolated instances of delinquent participant contributions and loan repayments under their plans without being required to submit a formal application to the DOL under the VFC Program to obtain relief. However, the ability to use the SCC is limited based on the amounts involved and the timing of discovery of the delinquent deposit(s). Given the limited utility of the SCC and the SCC’s mandated reporting and document retention requirements, plan sponsors evaluating whether to utilize the SCC or the VFC Program may decide it is more desirable to take a few additional steps and submit a VFC Program application instead.

Observation: Occasionally, delinquent contribution errors are not discovered until the plan’s auditors review the plan’s contribution history in connection with the preparation of the audit report for the plan’s annual Form 5500 filing. In its preamble to the Final Rule, the DOL rejected comments it received arguing that the SCC’s 180-calendar day contribution remittance deadline was too restrictive, and refused to extend eligibility for the SCC to delinquent contributions that are deposited more than 180 days after they are withheld. In doing so, the DOL stated its belief that a failure to identify a delinquency and remit participant contributions or loan repayments due to the plan within 180 days is not consistent with the prudent administration of the plan.

Accordingly, plan sponsors may wish to review and evaluate their procedures for remitting participant contributions and loan repayments to the plan, as well as their procedures for identifying delinquencies, if they wish to take advantage of the SCC.

Self-Correction of Eligible Inadvertent Participant Loan Failures

The Final Rule provides that employers and plan officials may voluntarily self-correct “eligible inadvertent participant loan failures” (see our previous LawFlash for more information about eligible inadvertent failures), including the following:

• Loans that do not comply with plan terms that incorporate Code requirements regarding the amount, duration, or level amortization of the loan
• Loans that defaulted due to a failure to withhold payments from the participant's wages
• Failure to obtain spousal consent for a loan
• Loans that exceed the number of loans permitted under the plan

The eligible inadvertent loan failures must first be corrected under EPCRS. As with the self-correction of delinquent participant contributions and loan repayments, self-correctors of eligible inadvertent participant loan failures must then notify EBSA of the self-correction by submitting the SCC Notice with the required information through EBSA’s web tool. Likewise, self-correctors will also be required to complete and retain the penalty of perjury statement set forth in Appendix F to the Final Rule and may not be under examination. However, completion of the SCC Retention Record Checklist is not required.

Unlike applicants under the VFC Program, EBSA will not send a no action letter to a self-corrector under the SCC. Instead, EBSA will automatically send an email acknowledgement and summary of the SCC notice submission to the self-corrector without requiring EBSA review or approval. If the SCC’s terms and conditions are satisfied, EBSA will not initiate a civil investigation regarding the self-corrector’s responsibility for the breach identified in the SCC notice and will not assess civil penalties on the correction amount paid to the plan or its participants. However, EBSA reserves the right to conduct an investigation at any time to determine the truthfulness and completeness of the factual statements set forth in the SCC notice and that the corrective action was taken as described.

Observation: Under current annual reporting requirements applicable to ERISA-covered plans, delinquent payments to a plan, including the type and status of any corrections to such delinquent payments, are required to be reported on the plan’s Form 5500 return filed with the DOL and IRS via the DOL’s EFAST website. The DOL routinely scrutinizes this information to flag plans with delinquent payments for audit and will often send communications to plans reporting delinquent payments inviting them to voluntarily submit an application to the VFC Program to address the fiduciary violations.

Although it remains to be seen whether the introduction of SCC will result in increased audit enforcement activity and/or more urgent letters from the DOL suggesting plans voluntarily participate in the SCC, the DOL stated in the preamble to the Final Rule that its actions toward any repeat user for delinquent contribution failures would “depend on the facts and circumstances of the individual corrections.” In other words, the DOL will be monitoring SCC submissions and may contact or investigate frequent SCC users. Plan sponsors should also note that delinquent payments corrected under the SCC still must be reported on the plan’s Form 5500.

With respect to loan failures, the DOL indicated that it does not expect to take action except where there are material misrepresentations or omissions in the SCC Notice, abuse of the VFC Program, or criminal behavior.

EXPANDED EXCISE TAX RELIEF UNDER PTE 2002-51 AMENDMENTS FACILITATES SELF-CORRECTIONS

PTE 2002-51 provides relief from certain excise tax provisions under the Code section 4975(a) with respect to the prohibited transaction for each year (or part thereof) in the taxable period, provided that all requirements of the VFC Program and PTE 2002-51 are met, including late deposit of contributions/loan repayments and loans made at a fair market interest rate by plans to a disqualified person.

Under the existing PTE 2002-51, automatic waiver of the excise taxes otherwise applicable to prohibited transactions under Code section 4975 may be available to qualifying applicants correcting a fiduciary violation via the VFC Program who satisfy certain requirements, including notification of interested persons. However, this waiver was restricted to corrections made once within a three-year period. The amendments to PTE 2002-51 eliminate the once-every-three-years limitation.

In addition, the amendments to PTE 2002-51 will make excise tax relief available for transactions corrected under the SCC, provided self-correctors pay the amount of the excise tax owed to the plan. Because the SCC can only be used for a transaction where the amount of lost earnings for the delinquent contributions arising from the transaction is $1,000 or less, the maximum excise tax owed for each year would generally not exceed $150.

VFC Program applicants and self-correctors relying on PTE 2002-51 must meet all VFC Program requirements and receive either a no action letter or SCC email acknowledgment from EBSA. They must also comply with any transaction-specific conditions of PTE 2002-51, including any required notifications and documentation.