ESBA Proposes New Self Correction Option

Managing an employer-sponsored retirement plan can be quite challenging. There are several regulatory, compliance, and reporting requirements imposed by the IRS and the Department of Labor. Matters can become more complicated when dealing with a large plan. New requirements such as an annual plan audit, which peers into virtually every aspect of operations, need to be conducted.  Attention is placed on the plan’s functions and whether compliance requirements are met.  Given the complexities, it is not uncommon for plans to commit unintentional errors in plan management. For this reason, the IRS developed various resolution programs that allow for the streamlined correction of such mistakes.  

Last month, the Department of Labor (DOL) issued a proposed rule which calls for modifications to the Voluntary Fiduciary Correction Program (VFCP). The proposal calls for the addition of a self-correction program for those companies that do not send employee withholdings or participant loan repayments in a timely manner. The purpose is to give plans the opportunity to avoid fines and penalties if errors are corrected. This is expected to allow for more effective and less costly error correction for fiduciary breaches. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Proposed Self-Correction Program

The most significant update is the addition of a self-correction program. The proposed changes are expected to help address the most common error identified in the VFCP – late contribution submissions. Under the program, eligible plans will be able to notify the Employee Benefits Security Administration (EBSA) electronically about the failure and take corrective action. This program can only be used if the following conditions have been met:

• Participant contributions or loan repayments to the plan must be remitted no more than 180 calendar days from the date of withholding or receipt.
• Lost earnings must not exceed $1,000 calculated from the date of withholding or receipt.
• The plan or self-corrector must not be under investigation as defined in the program. 
• Self-correctors must calculate lost earnings and an online web tool to complete and file the self-correction component notice. Self-correctors must also complete and retain the self-correction retention record checklist. 

Program Details

There is no restriction on the size of a plan which may participate (regardless of plan assets and size). However, there are limitations when the amount of lost earnings is $1,000 or less. The missed participant contributions or loan repayments must have been set to the plan no more than 180 days after the initial withholding or payment receipt. This criterion is designed to exclude situations where lost earning amounts require additional scrutiny of situational details by the EBSA.

The correction amount consists of the principal amount and lost earnings. The principal amount is the amount of contribution or loan repayment that would have been available if the company had not retained it. Lost earnings are the earnings that would have been earned on the principal amount but were missed. Self-correction requires that lost earnings be paid from the date of withholding or receipt.

Eligibility Exceptions

While most plans can participate there were to changes made. As a review, the existing rule that a plan cannot participate if under criminal investigation remains. It states that there can be no evidence of potential criminal violations as determined by EBSA.

Yet, there are situations where evidence may exist, but the plan acted properly. For this reason, the proposed rule has made additional exceptions. Specifically, situations where all funds have been repaid to the plan, law enforcement has been notified, and an application has been submitted (under penalty of perjury) providing law enforcement contact information to the EBSA.  There must also be an assertion that the plan was not involved in the alleged criminal activity and a report on whether a claim to the potential activity has been made under an ERISA 412 fidelity bond. These changes have led the DOL to propose a change. The above-referenced statement to the EBSA always retains the right to reject participation in its review of criminal activity.

Submitting Self-Correction Notices

The proposed rules require the plan official or authorized representative (accountant, lawyer, etc.) to be the party responsible for making the submission. If an authorized representative submits the notice, then the plan administrator must retain a statement that the representative is empowered to represent the plan. It is important to note that any professional fees charged for services related to correction cannot be paid from plan assets. In addition, notices need to be submitted electronically using a new VFCP web tool that will be located on the EBSA’s website.

Contact Us

The proposed self-correction program is welcome news for plans that have made late participant deferral and loan repayment errors. While it is only a proposed rule, it is expected that after the comment period, it will be made final. If you have questions about the information outlined above or need assistance with your annual plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.