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A recent call with a financial advisor in Nebraska is representative of the types of questions regarding self-correction procedures.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“I heard that the Department of Labor (DOL) has added a self-correction process to the Voluntary Fiduciary Compliance Program (VFCP). Can you give me more information about this process?”
The DOL released new rules that add a self-correction process to the VFCP, effective March 17, 2025. Specifically, the new procedures permit a plan sponsor to self-correct two of the most common plan errors related to 1) delinquent participant contributions and loan repayments, and 2) eligible inadvertent participant loan failures.
As background, historically, the DOL’s VFCP has permitted plan fiduciaries to correct certain fiduciary breaches (e.g., late deposits of contributions and loan repayments, among others) by formally applying to the Employee Benefits Security Administration (EBSA) division of the DOL for approval of the correction. A plan fiduciary was required to file an application with the EBSA outlining the details of the failure and how it would be corrected. If the correction was approved, the EBSA would issue a “no-action” letter to the plan sponsor. This letter gave a plan sponsor the assurance that the EBSA would not take any civil enforcement action, including legal action or the assessment of civil penalties, against the plan sponsor regarding the corrected fiduciary breach. Plan sponsors could also seek relief from excise taxes for certain failures. As the VFCP stood, and unlike the IRS’s plan correction program, there was no self-correction option for plan sponsors. That has now changed, effective March 17, 2025.
The DOL considers participant contributions and loan repayments as delinquent when employers retain these payments without contribution to the plan beyond the time permitted by the DOL, in general, as soon as they can be segregated from the employer’s general assets. Under the new program, plan sponsors can self-correct this error if the following occurs:
The plan sponsor calculates the lost earnings on the delinquent payments, using the DOL’s online calculator, from the date the amount was withheld to the date it is deposited into the participant’s account.
The lost earnings owed on the late deposits are $1,000 or less.
The delinquent payments are deposited within 180 days from the date of withholding from the participant’s paychecks or the date of receipt by the employer.
The plan sponsor pays all penalties, late fees, and other charges; and
The plan sponsor files the self-correction Notice (SCC Notice), which provides the name, email address and tax identification number of the plan sponsor; the plan name and three digit number; the number of participants affected; and a description of the failure, including, but not limited to, the date the failure occurred, the date the failure was corrected and the amount of lost earnings.
Like the traditional VFCP correction, in order to be eligible to use the self-correction program, neither the plan nor the plan sponsor can be “under investigation” by the DOL.
If a plan sponsor corrects under the self-correction program, it must notify the EBSA of the self-correction by submitting an SCC Notice with the required information through the EBSA’s website. The plan sponsor must also keep all documents relating to the correction, including the SCC Retention Record Checklist and a penalty of perjury statement, in the plan’s records. Unlike a correction under the VFCP, a plan sponsor will not receive a “no action” letter. Instead, the plan sponsor will simply receive an email acknowledgment. The late contributions will still need to be disclosed on the Form 5500.
Following the directive set forth in the SECURE Act 2.0, the self-correction process also permits the correction of inadvertent plan loan failures that are eligible for correction under the IRS’ Employee Plans Compliance Resolution System (EPCRS).
Inadvertent plan loan failures include:
Non-compliance with IRS rules regarding the amount, duration, or level of amortization of the loan;
Loans that default due to a failure to withhold from a participant’s wages;
Failure to obtain spousal consent for a loan; or
Allowing a loan that exceeds the number of loans permitted under the plan.
Like the correction for delinquent contributions, plan sponsors must notify EBSA of the self-correction by submitting the SCC Notice and completing and retaining the relevant documents and penalty of perjury statement. However, the SCC Retention Record Checklist is not required for the correction of this failure.
In addition to the changes to the VFCP, the DOL has amended Prohibited Transaction Exemption (PTE) 2002-51, which provides relief from certain excise tax provisions of the Internal Revenue Code, as long as all of the requirements of the VFCP and exemptions are met, to provide excise tax relief for these self-corrected failures, as long as an SCC acknowledgment email is received.
The amendment also removed the requirement that prevented an applicant from receiving excise tax relief if it had been granted such relief in the previous three years.
The self-correction process to the VFCP is a much-needed and welcome addition for plan sponsors and will make it easier for plan sponsors to correct the most common errors and seek excise tax relief.