Maintaining compliance with fiduciary responsibilities is a primary task for plan sponsors. Yet mistakes occur, especially given the complexity of the Employee Retirement Income Security Act (ERISA) of 1974. When certain fiduciary breaches or prohibited transactions are identified related to ERISA benefits, plan sponsors may look for remedies that can right the wrong. The Voluntary Fiduciary Correction Program (VFCP) provided by the Department of Labor (DOL) since 2006 is an option, but only for 19 specified prohibited transactions. A recent update to the VFCP, effective March 17, 2025, added a new self-correction component to the program. This article describes the VFCP and the update in its current form.
What is the Voluntary Fiduciary Correction Program?
The DOL offers this program to encourage fiduciaries to voluntarily fix losses suffered by employee benefit plans due to breaches of ERISA fiduciary duties. According to a DOL Fact Sheet, employers and plan sponsors that apply to the VFCP may benefit in several ways, including:
- Avoiding potential DOL civil enforcement.
- Gaining a better understanding of legal responsibilities.
- Strengthening the security of employee benefits.
Any fiduciary under ERISA can apply to the VFCP, as long as they are not currently “under investigation” as defined by program guidelines. To participate in the original program, plan sponsors compile information and submit a completed application to the DOL. If the DOL agrees with the application, the DOL issues a “no action” letter confirming that the remediation is complete.
How Does the VFCP Update Affect a Fiduciary’s Voluntary Correction?
Among other improvements, the updated VFCP provides an additional opportunity for plan sponsors and other fiduciaries of ERISA-related benefit plans known as the “Self-Correction Component” (SCC). Under the SCC, rather than complete the longer process, plan sponsors and other fiduciaries can self-correct errors made in two types of transaction:
- Delinquent Participant Contributions and Loan Repayments to Pension Plans (if lost earnings total $1,000 or less). This error occurs when an employer does not remit contributions or loan payments to the plan within the time allowed.
- Eligible Inadvertent Participant Loan Failures. Under ERISA, retirements plans may allow participants to take loans from their retirement accounts. However, plan sponsors and employers must follow very specific rules while administering these loans. For example, plan sponsors are required to follow the retirement plan’s loan policy, repayment schedule, and permissible loan amount.
Instead of submitting a VFCP application, the self-corrector submits an SCC Notice to the DOL through its web tool. The DOL simply acknowledges receipt of the notice without commenting on it.
Several things to note:
- The notification provided by the DOL during self-correction does not carry the same weight as the DOL’s “no action” letter. However, it does document the plan sponsor’s good faith effort to resolve the issue.
- In order to use the SCC, plan sponsors must self-correct within 180 days from when the amounts were withheld. Thus, instead of reviewing remittances only after the end of the plan year (for example, during the annual Form 5500 plan audit), employers should implement a procedure to identify late deposits on a more regular basis — by payroll date, monthly, or quarterly. Otherwise, delinquent loan repayments and contributions may not be identified in time to qualify for the new self-correction program.
- In order to obtain relief under the SCC, the plan sponsor must complete a SCC Record Retention Checklist and provide the completed checklist and the related documentation to the plan administrator (typically the employer sponsoring the plan), including the following:
- A brief statement explaining why the error occurred.
- Proof of payment for the correction, including lost earnings.
- Printable results page from the Online Calculator.
- A statement describing policies and procedures to prevent future issues.
- SCC Notice Acknowledgement and Summary page received after submission.
- Signed Penalty of Perjury Statement.
Regardless of the method used, prohibited transactions involving ERISA benefit plans must be corrected. It is also important to learn from the error and consider changing processes to help avoid the problem in the future.
Is Self-Correction through VFCP a Plan Sponsor’s Only Option?
Plan sponsors and employers who identify a mistake can correct it without applying for the VFCP or using the self-correction component. Generally, to correct a prohibited transaction, the employer would put everyone back in the position they would have been in had the error not occurred. This typically involves restoring amounts to the plan, plus lost earnings and paying an excise tax to the IRS using Form 5330. Taking those two steps will fully correct the prohibited transaction in the eyes of the IRS. However, even after taking those steps, the DOL could assert that the prohibited transaction was also a breach of ERISA fiduciary duty. To alleviate such exposure, employers may wish to participate in the VFCP.
It’s crucial that all fiduciaries managing employee benefit plans monitor the plan closely to ensure compliance and swiftly rectify errors that occur.
The Path Ahead
Clarification may be forthcoming, specifically regarding whether the SCC component applies to transactions that occurred before March 17, 2025, or only to transactions that occur after that date. On March 18, 2025, the DOL published a model Notice to Interested Parties that can be used for the SCC. Plan sponsors should determine which method of correction is most beneficial for their plan to ensure any errors are fully corrected in a timely manner.
For other questions related to retirement plans, please reach out to BDO’s Employee Benefits Plan Audits or Global Employer Services teams.