TRUE CONFESSIONS PROGRAM FOR FIDUCIARIES?

ERISA provides that a fiduciary who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by Part 4 of Title I of ERISA shall be personally liable to make good to a plan any losses to the plan resulting from such breach, and to restore to the plan any profits made through the use of plan assets by the fiduciary. Where more than one fiduciary is liable for a breach, liability is joint and several.

ERISA requires the assessment of a civil penalty equal to 20 percent of the amount recovered under any settlement agreement with the Secretary or ordered by a court in an action initiated by the Secretary under with respect to a breach of fiduciary responsibility. This civil penalty may also be assessed against other knowing participants in a breach.

DOL believes that some individuals, facing the possibility of investigation, civil action, and civil penalty, may be reluctant to identify themselves to DOL and to correct the breach fully and make the plan whole. To encourage the full correction of certain breaches of fiduciary responsibility, DOL has decided to implement the VFC Program

. Under this Program, persons who are potentially liable for a breach will be relieved of the possibility of civil investigation of that breach and/or civil action by the Secretary with respect to that breach, and imposition of civil penalties under ERISA section 502(l), if they satisfy the conditions for correcting the breach, as described in the VFC Program.

DOL believes that it must assess a penalty under section 502(l) of ERISA to the extent that it negotiates relief owed to the plan. Accordingly, the VFC Program is structured so that applicants have the maximum information available to identify eligible transactions and make complete and fully acceptable corrections without discussion or negotiation with the Department.

Generally, if an applicant is in full compliance with all of the terms and procedures set forth in the VFC Program, DOL will issue a "no action letter", indicating that no civil investigation, civil action, and penalty will ensue. However, relief under the VFC Program is limited to the transactions identified in the application and the persons who corrected those transactions. In certain cases, such as where DOL becomes aware of possible criminal behavior, any material misrepresentations or omissions in the VFC application, or other abuse of the VFC Program, relief will not be available under the VFC Program and the Department may initiate an investigation which may lead to enforcement action. DOL expects that such cases will be unusual. Full correction under the VFC Program does not preclude any other governmental agency, including the IRS, from exercising any rights it may have with respect to the transactions that are the subject of the application.

A transaction may be corrected without a determination that there is an actual breach; there need only be a possible breach. In addition, persons who may correct a fiduciary breach include not only the breaching fiduciary, but also plan sponsors, parties in interest or other persons who are in a position to correct a breach.

DOL notes that, unlike the Pension Payback Program, the VFC Program does not exempt from excise taxes any violations of section 4975 of the Internal Revenue Code.

Description of Eligible Transactions

The VFC Program is limited to 13 specific types of breaches, as described below:

(a) Contributions

 Delinquent Participant Contributions to Pension Plans

(b) Loans

Loan at Fair Market Interest Rate to a Party in Interest with Respect to the Plan

Loan at Below-Market Interest Rate to a Party in Interest with Respect to the Plan

Loan at Below-Market Interest Rate to a Person Who is Not a Party in Interest with Respect to the Plan

Loan at Below-Market Interest Rate Solely Due to a Delay in Perfecting the Plan's Security Interest

(c) Purchases, Sales and Exchanges

 Purchase of an Asset (Including Real Property) by a Plan from a Party in Interest

Sale of an Asset (Including Real Property) by a Plan to a Party in Interest

Sale and Leaseback of Real Property to Employer

Purchase of an Asset (Including Real Property) By a Plan from a Person Who is Not a Party in Interest with Respect to the Plan at a Price Other Than Fair Market Value

Sale of an Asset (Including Real Property) By a Plan to a Person Who is Not a Party in Interest with Respect to the Plan at a Price Other Than Fair Market Value

(d) Benefits

 Payment of Benefits Without Properly Valuing Plan Assets on Which Payment is Based

(e) Plan Expenses

 Duplicative, Excessive, or Unnecessary Compensation Paid by a Plan

Payment of Dual Compensation to a Plan Fiduciary

Correction Amount.

Many of the transactions described in the VFC Program result in a loss to the plan or a profit to some party to the transaction. Determining the amount of the loss to the plan requires calculating how much money the plan would have now if a particular transaction had not occurred. In general, the VFC Program requires the fiduciary or other Plan Official to restore to the employee benefit plan the Principal Amount, plus the greater of (i) Lost Earnings from the Loss Date to the Recovery Date or (ii) Restoration of Profits resulting from the use of the Principal Amount for the same period.

 Lost Earnings. For purposes of the VFC Program, Lost Earnings to be restored to a plan is the greater of (i) the amount that otherwise would have been earned on the Principal Amount from the Loss Date to the Recovery Date had the Principal Amount been invested during such period in accordance with applicable plan provisions and Title I of ERISA, less actual net earnings or realized net appreciation (or, if applicable, plus any net loss to the plan as a result of the transaction), or (ii) the amount that would have been earned on the Principal Amount at an interest rate equal to the underpayment rate defined in section 6621(a)(2) of the Code, less actual net earnings or realized net appreciation (or, if applicable, plus any net loss to the plan as a result of the transaction). In addition, if the date on which the Lost Earnings is paid to the plan is a date after the Recovery Date, payment must include an additional amount that is the greater of (i) the amount that would have been earned by the plan on the Lost Earnings if it had been paid on the Recovery Date, or (ii) the amount that would have been earned on the Lost Earnings at an interest rate equal to the underpayment rate defined in section 6621(a)(2) of the Code. For a participant-directed defined contribution plan, the Lost Earnings to be restored to the plan is the amount that each participant would have earned on the Principal Amount from the Loss Date to the Recovery Date. However, for administrative convenience, the Lost Earnings amount for a participant- directed defined contribution plan may be calculated using the rate of return of the investment alternative that earned the highest rate of return among the designated broad range of investment alternatives available under the plan during the applicable period.

 Restoration of Profits. "Restoration of Profits" is the amount of profit made on the use of the Principal Amount, or the property purchased with the Principal Amount, by the fiduciary or party in interest who engaged in the Breach, or by a knowing participant in the Breach. If the Principal Amount was used for a specific purpose such that the actual profit can be determined, that actual profit must be calculated from the Loss Date to the Recovery Date and returned to the plan. If the Principal Amount was commingled with other funds so that the actual profit cannot be determined, the Restoration of Profits will be calculated as interest on the Principal Amount at an interest rate equal to the underpayment rate defined in section 6621(a)(2) of the Code. In addition, if the date on which the Restoration of Profits is paid to the plan is a date after the Recovery Date, payment must include an additional amount that is the greater of (i) the amount that would have been earned by the plan on the Restoration of Profits if it had been paid on the Recovery Date, or (ii) the amount that would have been earned on the Restoration of Profits at an interest rate equal to the underpayment rate defined in section 6621(a)(2) of the Code.

Fair Market Value Determinations.

 Many corrections require that the current or fair market value of an asset be determined as of a particular date, usually either the date the plan originally acquired the asset or the date of the correction, or both. In order to be acceptable as part of a VFC Program correction, the valuation must meet the following conditions:

 (1) If there is a generally recognized market for the property (e.g., the New York Stock Exchange), the fair market value of the asset is the average value of the asset on such market on the applicable date, unless the plan document specifies another objectively determined value (e.g., the closing price).

 (2) If there is no generally recognized market for the asset, the fair market value of that asset must be determined in accordance with generally accepted appraisal standards by a qualified, independent appraiser and reflected in a written appraisal report signed by the appraiser.

(3) An appraiser is "qualified" if he or she has met the education, experience, and licensing requirements that are generally recognized for appraisal of the type of asset being appraised.

(4) An appraiser is "independent" if he or she is not one of the following, does not own or control any of the following, and is not owned or controlled by, or affiliated with, any of the following: (i) The prior owner of the asset, if the asset was purchased by the plan;

 (ii) The purchaser of the asset, if the asset was or is now being sold by the plan;

(iii) Any other owner of the asset, if the plan is not the sole owner;

(iv) A fiduciary of the plan;

(v) A party in interest with respect to the plan (except to the extent the appraiser becomes a party in interest when retained to perform this appraisal for the plan); or

(vi) The VFC Program applicant.

DOL Giveth, and DOL Taketh Away

Compliance with the terms of the VFC Program will not preclude PWBA from taking any of the following actions: (i) Seeking removal from positions of responsibility with respect to a plan or other non-monetary injunctive relief against any person responsible for the transaction at issue;

 (ii) referring information regarding the transaction to the IRS as required by section 3003(c) of ERISA; or

 (iii) imposing civil penalties under section 502(c)(2) of ERISA based on the failure or refusal to file a timely, complete and accurate annual report Form 5500. Applicants should be aware that amended annual report filings may be required if possible breaches of ERISA have been identified, or if action is taken to correct possible breaches in accordance with the VFC Program.

Also, the VFC Program is limited to DOL, and it is not binding on the IRS or others.

EXAMPLES

Example 1.

An employer who sponsors a plan with a qualified cash or deferred arrangement within the meaning of section 401(k)(2) of the Code ("401(k) plan") normally deposits participant contributions in the plan's trust account within two business days of each pay day. For this employer, the second business day after pay day is the date on which the participant contributions become plan assets, because it is the earliest date on which this employer can reasonably segregate the participant contributions from the employer's general assets. However, for the pay period ending January 31, a Monday, participant contributions totaling $10,000 were not deposited until March 2.

The Principal Amount is $10,000. The Loss Date is February 2, the date on which the participant contributions became plan assets and should have been deposited in the plan's trust account. The Recovery Date is March 2, the date that the participant contributions were deposited in the plan's trust account. The 401(k) plan offers five investment alternatives. During the month of February, one of the plan's mutual funds had a 12% annualized yield, including all reinvestment earnings. This was the highest return earned by any of the five investment alternatives in this period. The employer elects to use this rate of return for the loss calculations. Accordingly, the Lost Earnings amount is $100 ($10,000 times 12% annual yield times one-twelfth of a year).

The employer had the use of $10,000 of the 401(k) plan's assets between February 2 and March 2, while the participant contributions remained commingled with the employer's general assets. The employer's cost of funds (the actual profit from the use of the participant contributions) cannot readily be determined; therefore, the Restoration of Profits amount is calculated using the underpayment rate defined in Code section 6621(a)(2). Assuming the section 6621 rate was 9%, the Restoration of Profits amount is $75 ($10,000 times 9% per annum times one-twelfth of a year).

In this example, the Lost Earnings amount ($100) is greater than the Restoration of Profits amount ($75). Since the Principal Amount of $10,000 was paid to the plan on March 2, the total correction amount to be paid to the plan is the Lost Earnings of $100.

Assume further, in this example, that although the Principal Amount of $10,000 was paid to the plan on March 2, the Lost Earnings of $100 were not paid to the plan until a year later. Accordingly, an additional $12 ($100 times 12 percent--the plan's annual yield), must be paid to the Plan along with the $100 Lost Earnings amount.

Example 2. On March 15, a plan's trustees authorized the purchase of 1,000 shares of stock. The plan paid $75 per share when the fair market value was $70 per share.\a\ The Principal Amount is $5,000 (1,000 shares times the $5 per share overpayment). The Loss Date is March 15, the date of the overpayment. The Recovery Date will be the date on which the fiduciary or other person repays to the plan the correction amount.

\a\ If a plan's fiduciaries authorized the purchase of a specific dollar amount of stock rather than the purchase of a specific number of shares, and the plan acquired fewer shares than it should have as a result of paying too much per share, the amount lost equals the number of additional shares that the plan should have acquired, plus any appreciation, dividends, or stock splits associated with those additional shares.

Assume that the plan recoups the $5,000 overpayment a year after the original purchase. During this year, the plan's other investments earned 9%, including all reinvestment earnings. The Lost Earnings amount is $450 ($5,000 times 9% annual yield times one year). If the Restoration of Profit amount is less than $450, the total amount to be paid to the plan is $5,450 (the Principal Amount of $5,000 plus Lost Earnings of $450).

Example 3. Assume the same facts as in Example 2, except that the proceeds of the sale were used to make another investment which yielded a 15% annual rate of return, the Restoration of Profits amount is $750 ($5,000 times 15% per annum times one year). In this example, the Restoration of Profits amount ($750) is greater than the Lost Earnings amount ($450). The total amount to be paid to the plan is $5,750 (the Principal Amount of $5,000 plus Restoration of Profits of $750).

Example 4. On April 20, a plan paid $6,000 in legal fees for legal services that the plan sponsor, not the plan, was obligated to pay. The Principal Amount is $6,000. The Loss Date is April 20, the date the plan improperly paid the plan sponsor's legal expenses. The Recovery Date will be the date on which the plan sponsor reimburses the plan $6,000. Assume that the plan sponsor reimburses the plan on October 20, six months after the Loss Date. During this period, the plan's investments earned 10% per annum, including all reinvestment earnings. The Lost Earnings amount is $300 ($6,000 times 10% annual yield multiplied by one-half).

The plan sponsor had constructive use of $6,000 from April 20 until October 20. The plan sponsor's cost of funds (the actual profit from the use of the money) cannot readily be determined; therefore, the Restoration of Profits amount is calculated using the underpayment rate defined in Code section 6621(a)(2). Assuming the section 6621 rate was 8% during the whole period, the Restoration of Profits amount is $240 ($6,000 times 8% per annum multiplied by one- half).

In this example, the Lost Earnings amount ($300) is greater than the Restoration of Profits amount ($240). The total amount to be paid to the plan is $6,300 (the Principal Amount of $6,000 plus Lost Earnings of $300).

Update 03/28/02:

The Voluntary Fiduciary Correction Program ("VFC"), announced in 2000, had two problems that prevented it's widespread application: it didn't prevent IRS from imposing prohibited transaction penalties on the corrected transaction, and it required that participants be notified of the correction. Today's program does not require notice to the participants, and it offers limited protection from the PT excise tax for four types of transactions. (However, one condition of that relief is to provide notice to "interested parties").

The VFC program is limited to fourteen specific transactions, and it describes a correction process that is intended to make the plan and participants "whole", and recover any profits made by offending fiduciaries. The fourteen transactions are:

Delinquent Participant Contributions to Pension Plans

Delinquent Participant Contributions to Welfare Plans

Fair Market Interest Rate Loans With Parties-in-Interest

Below Market Interest Rate Loans With Parties-in-Interest

Below Market Interest Rate Loans With Non Parties-in-Interest

Below Market Interest Rate Loans Due to Delay in Perfecting Security Interest

Purchase of Assets by Plans from Parties-in-Interest

Sale of Assets by Plans to Parties-in-Interest

Sale and Leaseback of Property to Sponsoring Employers

Purchase of Assets from Non Parties-in-Interest at Below Market Value

Sale of Assets to Non Parties-in-Interest at Below Market Value

Benefit Payments Based on Improper Valuation of Plan Assets

Payment of Duplicate, Excessive or Unnecessary Compensation

Payment of Dual Compensation to Plan Fiduciaries