In recent weeks, there have been a number of reports that the US Department of Labor (DOL) has been taking a more aggressive approach in enforcement actions involving late participant contributions and loan repayments and other errors self-reported by ERISA plans on their Forms 5500. These reports underscore the importance of timely, full correction when a plan discovers such late contributions and loan repayments, and other fiduciary breaches.
Under applicable DOL rules, participant contributions and loan repayments must be remitted to the plan’s trust as soon as the money can reasonably be segregated from the employer’s assets (and no later than 15 days, unless the plan qualifies for a small plan exception). The DOL’s view is that it is a breach of fiduciary duty when the payments are made into the plan’s trust later than that. The delay is treated as an unauthorized loan of plan assets and, therefore, a nonexempt prohibited transaction. The DOL has treated these breaches as an enforcement priority and regularly reviews this issue during its plan investigations (the DOL having primary investigatory authority of ERISA’s fiduciary duty provisions, and a robust investigatory program). The DOL frequently cites ERISA plan fiduciaries for fiduciary breaches due to such late contributions and loan repayments.
In circumstances where an ERISA plan discovers such late contributions—whether on its own or through a DOL investigation—a common approach is for the plan to self-correct such failures. Such self-correction can be done by determining the lost earnings and paying them into the plan’s trust (necessary to stop the prohibited transaction), and filing a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, with the Internal Revenue Service (IRS) and paying the associated excise tax. The correction is then reported to the IRS and DOL on the annual Form 5500, Annual Return/Report of Employee Benefit Plan. (There may also need to be correction of an operational error if the plan document requires timely contributions.)
In our experience, the DOL has accepted this self-correction, including as a remedy in investigations where it has identified untimely contributions. However, in recent weeks, there have been reports that the agency has been taking a more aggressive position that rejects this self-correction. In particular, it has been reported that at least one DOL regional office (Chicago) has been issuing letters to plans stating that if the plans have late contributions they must make the correction through the agency’s Voluntary Fiduciary Correction Program (VFCP) or face an enforcement action. The VFCP is administered by the DOL and provides a formal mechanism for fixing certain ERISA breaches and receiving the DOL’s sign-off on the correction. As the name suggests, the program is supposed to be a “voluntary” option and not the only, or required, form of correction. There have also been reports that the Philadelphia regional office has been issuing similar letters, directing plans to file with the VFCP when such plans report other nonexempt prohibited transactions on the Form 5500.
After complaints to the DOL by the plan sponsor community regarding these letters, the DOL clarified that its position—requiring a VFCP application—was only intended to apply in circumstances where a plan had not completed any correction at all.
In our view, where late contributions and loan repayments are timely and fully corrected, we see no reason to depart from the traditional alternative self-correction approach, unless the excise tax is sufficiently large to make it beneficial to pursue the VFCP instead (which, in our experience, is rare) or there are other exceptional circumstances. Nonetheless, these DOL letters are a reminder of the importance of correcting fiduciary breaches when they are discovered, and if possible, before a DOL investigation. If an ERISA plan suspects that a fiduciary breach may have occurred, such as untimely remittances, the plan should consider timely and full correction. Please reach out to the authors or your Morgan Lewis contact if you need assistance with possible corrections.