On Jan. 15, 2025, the Department of Labor (DOL) published updates to its Voluntary Fiduciary Correction Program (VFCP) to allow certain delinquent participant contributions, delinquent loan repayments and improper loans to be self-corrected without the need to file a formal application with the DOL. The DOL also issued amendments to Prohibited Transaction Exemption 2002-51 to expand the list of prohibited transactions that are eligible for relief from certain excise taxes. These changes will become effective on March 17, 2025.

2025 VFCP Update: Self-Correction Component

The VFCP is the voluntary enforcement program that allows plan administrators, plan sponsors and other plan officials of tax-qualified retirement plans to identify and correct certain ERISA violations, such as delinquent participant contributions, improper plan expenses, delinquent loan payments, improper loans, and prohibited transactions. The Self-Correction Component (SCC) of the VFCP allows these plan officials to complete certain self-corrections without needing to submit a VFCP application for DOL approval.  Thus, SCC simplifies the correction process and saves the plan official the time and expense of a formal VFCP application.

Delinquent Participant Contributions and Delinquent Plan Loan Repayments

A participant contribution or loan repayment becomes delinquent when the plan sponsor fails to remit the required payment within the time period established under 29 CFR 2510.3-102 (which generally requires that the contribution or payment be remitted as of the earliest date on which it can reasonably be segregated from the plan sponsor’s general assets, but in no event later than the 15th business day of the next month). The VFCP update allows plan sponsors to self-correct delinquent participant contributions and delinquent plan loan repayments when the lost earnings on such contributions or repayments do not exceed $1,000 (calculated from the date the amounts were withheld and excluding excise tax amounts) without submitting a VFCP application to the DOL, if they comply with all of the following:

• use the online calculator to compute lost earnings on the delinquent amount from the date of withholding from the participant’s paycheck or receipt by the plan sponsor;
• remit delinquent amounts within 180 calendar days from the date of withholding from the participant’s paycheck or receipt by the plan sponsor;
• pay penalties, late fees, and any other charges;
• ensure that the plan is not “under investigation” as defined by the VFCP; and
• notify the DOL of the self-correction by electronically filing the SCC Notice (described below) through the DOL’s new web tool.

The SCC Notice is an electronically-filed notification that informs the DOL that a plan has been self-corrected and provides certain plan-identifying information. The electronic filing process is aimed at reducing the burden associated with the VFCP’s paper application process.

Once the self-correction process is complete and the plan sponsor has filed the SCC Notice, the plan sponsor will receive an automatic email of acknowledgement from the DOL. After receiving the DOL’s email of acknowledgement, the plan sponsor must collect and retain all records related to the correction, including the DOL’s email of acknowledgment, for recordkeeping.

Self-Correction of Inadvertent Participant Loan Transaction Failures

Since July of 2021, the IRS has allowed plan administrators to self-correct certain participant loan transaction failures under the IRS’s Employee Plans Compliance Resolution System (EPCRS), but there remained open questions as to whether or not the DOL would honor such corrections. The SECURE 2.0 Act, which was issued in December of 2022, required the DOL to treat eligible participant loan failures that are self-corrected under the IRS’s EPCRS as meeting the requirements of the VFCP. Under these VFCP updates, the DOL has officially aligned itself with the IRS and the SECURE 2.0 self-correction processes.

As a result, the VFCP update now allows a plan administrator to self-correct certain participant loan failures under the EPCRS without also submitting a VFCP application to the DOL. Participant loan failures that are eligible for self-correction include:

• loans that do not comply with certain plan terms regarding amount, duration, or level of amortization;
• loans that defaulted due to the plan sponsor’s failure to withhold loan repayments from the participant’s wages;
• loans for which spousal consent was not obtained as required; and
• allowing a loan that exceeds the maximum number permitted under the terms of the plan.

This self-correction method is available even if the plan is “under investigation” as defined by the VFCP. Plan administrators seeking to self-correct eligible participant loan failures can self-correct by completing the steps outlined under the EPCRS. Once complete, the plan administrator must notify the DOL of the self-correction by submitting the SCC Notice via the DOL web tool and complete and retain the penalty of perjury statement. Note that this updated self-correction method does not apply to a participant loan failure that is “egregious” or related to an abusive tax avoidance structure.

Prohibited Transaction Exemption Excise Tax Relief

The DOL amended Prohibited Transaction Exemption 2002-51 (PTE 2002-51), to expand the list of prohibited transactions that are eligible for relief from excise taxes under section 4975 of the Internal Revenue Code when the transaction is corrected pursuant to the SCC. The amendment also removes the three-year limit on the number of corrections available under PTE 2002-51. The expanded exemption covers the below prohibited transactions:

• failure to remit participant contributions or participant loan repayments to plans within the allotted time period;
• loans made at a fair market interest rate by plans to a disqualified person;
• purchase or sale of assets between a plan and a disqualified person at fair market value;
• sale of real property to a plan by an employer (or its affiliate) at fair market value and leaseback of the property at fair market rental value;
• purchase or sale of illiquid assets by plans; and
• use of plan assets to pay “settlor expenses” by the plan sponsor, provided that the payment of such expenses was not expressly prohibited by a plan provision relating to the payment of expenses by the plan.

To use this exemption, the plan official must meet all VFCP requirements, receive a “no action” letter or SCC acknowledgment from the DOL, and comply with any transaction-specific requirements.

Action Steps

While there are no immediate steps that plan officials need to take based on these DOL updates, plan officials should be regularly conducting internal reviews of their operations, as applicable, to ensure that participant contributions and loan payments are being timely deposited, participant loans are being properly handled, and prohibited transactions are not occurring.  If any compliance issues are identified, speak to an employee benefits specialist to determine whether the SCC is an option for correction.

The Nelson Mullins Employee Benefits Group is ready to assist with questions or compliance steps. Please contact one of our Employee Benefits attorneys or the Nelson Mullins attorney with whom you work.