FLASHPOINT: DOL Updated Voluntary Fiduciary Correction Program
Self-Correction or Self-Incrimination?

By: Alison J. Cohen, Esq.

In January 2025, the U.S. Department of Labor (“DOL”) issued an updated version of the Voluntary Fiduciary Correction Program (“VFCP”), including the formal establishment of a self-correction component (“SCC”). The original idea of this SCC was contained in a proposal issued in November 2022 and, based on comments submitted, the DOL made certain modifications. This new update becomes effective March 17, 2025. The immediate question had by some who read the 2022 proposal was whether the changes would make the SCC truly useable.

History of VFCP

The DOL initially created VFCP in 2002. The goal was to create a program that would allow a plan sponsor or other party to correct a prohibited transaction (“PT”), as defined in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) Section 406(a), and also in Internal Revenue Code (“Code”) Section 4975(c). The Code also covers transactions that occur in individual retirement accounts (“IRAs”).

A PT occurs when a Party-in-Interest (ERISA term) or Disqualified Person (Code term) enters into a direct or indirect transaction involving the plan or IRA. (We will use the term “Party-in-Interest” or “PII” in this article.) The presumption is that such a transaction is either a conflict of interest or an act of self-dealing. These rules are designed to create a bright line for plan sponsors to follow. The agencies hate the “I’m not touching you” game. (If you have kids or a sibling, you know what I mean.) Furthermore, the rules are meant to avoid even an appearance of impropriety on the part of people who have access to plan assets.

VFCP was modified over the years in 2005, 2006, and now in 2025.

When to Use VFCP

Certainly, if a PII inadvertently enters into a PT and later learns that it was prohibited, they would want to reverse the transaction and potentially avoid excise taxes. Additionally, a nonbreaching fiduciary that discovers a PT has potential liability if they helped to conceal or enable the PT, or if they find out about a PT and do nothing to remediate the problem. Therefore, there is a strong incentive for a nonbreaching fiduciary to use VFCP to help correct a PT. This would even apply for a service provider that has been engaged as a 3(16) designated plan administrator and learns about a PT, such as late or missing deferral deposits.

VFCP has limitations as to the type of transactions that can be corrected under the program. There are 19 identified transactions, with the failure to deposit deferrals and loan repayments timely as the top reason why fiduciaries use VFCP.

VFCP provides very specific instructions on how to correct each of the transactions available under the program. Something that is very important to note: if the VFCP application is flawed, the DOL can kick the application back without further contact (which starts the process all over again) or request additional information. If the application remains flawed and/or the request is not answered, the DOL can decide to negotiate for a different correction and impose the ERISA Section 502(l) 20% penalty, or it can choose to take any other “appropriate” action — including an investigation.

Restrictions on VFCP

Similar to the Internal Revenue Service (“IRS”) Employee Plans Compliance Resolution System (“EPCRS”), there are eligibility restrictions for an applicant to use VFCP. An Applicant cannot be under investigation by the DOL while filing under VFCP or have been informed in writing that the transaction in question has been referred to the IRS. The program may not be used to absolve any criminal activity; however, a PT involving criminal activity can be filed for VFCP by an innocent fiduciary if certain other requirements (including reporting the crime to law enforcement) are met.

The costs related to the VFCP process cannot be paid for by plan assets. These would include any earnings owed to the plan, legal fees, administrative fees for the work done on the calculations, all penalties and sanctions, and any filing fees or closing costs.

The methods for calculating both fair market value and earnings on late deposits are outlined in VFCP. For example, if the PT involved the inappropriate purchase or sale of property using plan assets, the fiduciary cannot just go online and check on Zillow to determine the value – an independent appraisal that meets industry standards is required. This is also where the magical DOL online calculator may come in. It is one of the perks of using VFCP: the online calculator is available to calculate the interest due on late deposits.

New (and Less Exciting) Self-Correction Component

One of the key features of the updated version of VFCP is the addition of the SCC. This program is very limited.  There are only two types of PTs that may be self-corrected: 1) delinquent participant contributions and loan repayments; and 2) eligible inadvertent participant loan failures.

What makes a deposit late? A deposit is late if it is not made within the timing set forth under Labor Reg. Section 2510.3-102; that is on “the earliest day on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” For large (i.e., 100 or more participants) plans, this is as soon as administratively feasible, which has been unofficially deemed to mean the date required under the employer’s deposit schedule for federal and state withholding in relation to a given payroll. For small plans, deferrals and loan payments must be deposited to the plan within 7 business days.

Despite many comments received from practitioners, the final SCC includes the same restrictions on eligibility that were in the proposed version, even though they likely detract from SCC’s appeal to plan sponsors and practitioners. One restriction is that the earnings on the late deposits can’t be more than $1,000. The other restriction is that late payments under VFCP must be deposited to the plan within 180 days of when they were received by the employer or the date on which the amounts would otherwise have been paid to the participants (i.e., the payroll date). For example, if a plan has one late deposit in February 2025 and it gets caught by the large plan auditor in September 2026, it will already be too late to use SCC. If these limitations are not met, then a full VFCP filing is needed (if the plan official chooses to correct using VFCP), even for late deposits.

SCC also permits self-correction of eligible inadvertent participant loan failures, i.e., any loan failure that can be self-corrected under the IRS’s EPCRS program. These covered failures include:

• Noncompliance with plan terms, including the amount, duration, or level amortization of the loan
• Loans that defaulted due to failure to withhold from the participant’s wages
• Failure to obtain mandatory spousal consent
• Allowing a loan that exceeds the number of loans permitted under the plan

A question that has come up numerous times is how to classify a failure by the employer to deposit the loan repayments timely, despite timely removal of the payment amount from the participant’s payroll or actual remittance by the participant to the plan. As a result of the failure to deposit the loan repayments, the loan may be defaulted, so does this qualify for this SCC option? Or is it a late deposit failure? The answer is that it’s a late deposit failure by the employer, which can be corrected under EPCRS self-correction (thereby avoiding taxation of the loan to the participant) and also under SCC for a late deposit; it is not an inadvertent participant loan failure.

What Does PTE 2002-51 Do?

Prohibited Transaction Exemption (“PTE”) 2002-51 provides the VFCP Applicant with relief from certain excise taxes if all the requirements of VFCP are met. This exemption only applies, however, to 6 of the 19 PTs that can be corrected under VFCP:

• Failure to timely remit participant contributions and/or loan repayments
• Loans made at a fair market interest rate by the plan to a PII
• Purchase or sale of assets at fair market value between a plan and a PII
• Sale of real property to a plan by an employer at fair market value and leaseback of the property at fair market rental value
• Purchase or sale of illiquid assets by plans
• Use of plan assets to pay fees that are “settlor” expenses to service providers, if such payments are not expressly prohibited in the plan document

What is the New SCC Process?

Unlike the self-correction program under EPCRS, the SCC Applicant must make a submission to the DOL. The Applicant must still prepare and retain everything as if they were filing a regular VFCP application, but the submission to the DOL only includes an SCC notice, model authorization, and SCC Record Retention Checklist (Appendix F of the new VFCP). All of this is uploaded through a new online VFCP website.

One key piece that must be retained is a penalty of perjury statement signed and dated by each plan official who is seeking relief under the SCC. When you have a multiple or multiemployer plan, only the participating employer impacted by the PT will need to sign the penalty of perjury.

In exchange for all of this work, all the employer gets back is an acknowledgement email. And, for fun, there is no assurance that the DOL won’t pick the case up for investigation. This is precisely the reason why many practitioners don’t advise using VFCP for late deposits or loan issues except in very unusual circumstances. Unlike filing the Voluntary Correction Program through the IRS, which protects the transaction from any possible examination review, there is nothing in the VFCP affording a plan sponsor any such protection.

Does a Plan Sponsor have to use VFCP?

The first word in VFCP is VOLUNTARY. No, there is no requirement to file through VFCP. Plan sponsors still need to correct the late deposits with earnings and file the Form 5330 to pay applicable excise taxes, but they don’t need to file under VFCP. Without a VFCP filing, however, the plan may not use the DOL Online Calculator to determine the lost earnings. The IRS earnings method from EPCRS should be used instead.

Historically, a number of plan sponsors that reported late deposits on Form 5500 received a “love note” from the DOL telling them about the VFCP opportunity. If this happens, tell your clients not to panic. The plan sponsor should reply to the letter that they have corrected the failure in accordance with the requirements and thank the DOL for the notice. There is no negative impact for skipping the VFCP filing should the client later be investigated.

Conclusion

While VFCP has no user fee, caveat emptor (or let the buyer beware) still applies. The cost for preparing a proper filing, plus the risk that the DOL will reject the proposed filing for technical reasons and initiate an investigation, may make the entire thing not worthwhile for just a few late deposits. And there’s one more thing that makes VFCP less attractive than one might presume: a plan sponsor may only get one bite at this apple. If they are repeat offenders with late deposits and they try to use the SCC multiple times, they will likely find themselves in an investigation, as noted by the DOL in the Preamble. They would do better to tighten up their procedures instead.

If you have a client with a PT that wants to file through VFCP to avoid extensive excise taxes, contact us! We are your ERISA solution!

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If instead you are going to NIPA NAFE in Austin May 4-7, please come see us as Ilene, Adrienne, and Alison will speaking there (& come to our legendary NIPAmania outing).