Don’t be late
The Voluntary Fiduciary Correction Program can help

One of the most common ERISA violations is an employer’s failure to timely remit participant salary deferrals or participant loan repayments to a qualified plan. Fortunately, the Voluntary Fiduciary Correction Program (VFCP) provides employers with an easy way to self-correct ERISA violations such as this. VFCP updates make the program simpler to use and expand the types of correctable transactions.

No safe harbor deadline

If you ask many employers with 401(k) plans when they’re required to deposit deferrals, the most common response would be the 15th day of the following month. This understanding stems from the DOL’s regulations that require an employer to deposit amounts withheld from an employee’s wages for contribution to a plan as of the earliest date the employer can reasonably segregate the amounts from the employer’s general assets, but no later than the 15th business day of the month following the month the employer withheld the amounts.

Most employers took that to mean they had until the 15th day of the following month to deposit all withheld amounts, even if they could have segregated the funds sooner. The DOL is now emphasizing that the outside deadline isn’t a safe harbor.

According to the DOL, if the employer can deposit the deferrals before the 15th business day of the month following, that earlier date is the maximum time period. In other words, the time period is set by how soon you can segregate the amounts from general assets and deposit them into the plan trust.

In addition, employers that have different payroll frequencies, such as weekly for some employees and monthly for others, can’t hold the weekly assets and deposit them with the monthly payroll. With most payroll systems, plan administrators can segregate deferral amounts in a matter of days, if not almost immediately.

Use the VFCP

So what happens if you fail to make a timely deposit? The process under the VFCP consists of four steps:

1. Identify violations and determine if the VFCP covers the transaction.
2. Follow the procedures outlined in the program for correcting the specific violation.
3. Calculate and restore profits or losses with interest and distribute residual benefits to participants no longer in the plan.
4. File an application with your region’s Employee Benefits Security Administration (EBSA) office documenting the corrections you made.

So what are some ways to correct a violation? Let’s take a closer look.

Correct the late deposit

To correct for the late deposit of participants’ funds, the plan sponsor must first determine the earliest date the amounts could have reasonably been segregated from the company’s general assets. Then, for participant contributions or loan repayments deposited after this date, you have to calculate lost earnings on all delinquent deposits. The sponsor must pay the greater of:

1. Lost earnings on the delinquent participant contributions or loan repayments, or
2. Profits resulting from the employer’s use of the delinquent amounts.

You’ll be able to calculate profits only if you used the amounts for a specific purpose and you can determine a profit. This isn’t normally the case. In almost all situations, the plan sponsor deposits lost earnings.

The lost earnings calculation approximates the amount that would have been earned under the plan if the sponsor had made the deposit on time. You calculate the earnings from the lost date (the date the sponsor should have made the deposit) through the recovery date (the date the sponsor made the deposit). In addition to the lost earnings, the sponsor must pay any penalties, late fees or other charges the participant incurs because of the late deposit.

The VFCP now makes it easy for plan sponsors to calculate the lost earnings and any interest on the lost earnings. The DOL/EBSA Web site provides an online calculator for both lost earnings and any interest on those earnings.

Qualify for relief

After you fully comply with the correction methods and properly file under VFCP, the DOL will issue a no-action letter. The letter states that the DOL won’t initiate a civil investigation under ERISA and won’t assess any penalties.

In addition, VFCP offers relief from excise tax provisions of the Internal Revenue Code under a class exemption. Sponsors don’t have to apply for the relief but qualify if they have met all requirements under the VFCP and have received a no-action letter from the DOL.

Additional information

The VFCP updates also provide detailed information on what corrections are eligible, examples on how to correct violations, information on how to apply and the documentation required. You can find complete information on the VFCP on the DOL/EBSA Web site, http://www.dol.gov/ebsa. Even if you choose not to file with the DOL, you should always correct the violation and restore the lost earnings to the plan. •