[Federal Register Volume 65, Number 51 (Wednesday, March 15, 2000)]
[Notices]
[Pages 14164-14179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6256]



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Part VI





Department of Labor





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Pension and Welfare Benefits Administration



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Voluntary Fiduciary Correction Program; Notice

  Federal Register / Vol. 65, No. 51 / Wednesday, March 15, 2000 / 
Notices  

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

RIN 1210-AA76


Voluntary Fiduciary Correction Program

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Voluntary Fiduciary Correction Program.

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SUMMARY: The Department of Labor adopts a Voluntary Fiduciary 
Correction Program (VFC Program) by the Department of Labor's Pension 
and Welfare Benefits Administration (PWBA). The VFC Program allows 
certain persons to avoid potential Employee Retirement Income Security 
Act (ERISA) civil actions initiated by the Department of Labor, and the 
assessment of civil penalties under section 502(l) of ERISA in 
connection with investigation or civil action by the Department. The 
VFC Program is designed to benefit workers by encouraging the voluntary 
and timely correction of possible fiduciary breaches of Part 4 of Title 
I of ERISA. Although the VFC Program is being put into effect 30 days 
after publication in the Federal Register, the Department is seeking 
comments from the public on all aspects of the program.

DATES: Written comments must be received by the Department by May 15, 
2000.
    Effective Date: April 14, 2000.

ADDRESSES: Address questions regarding specific applications for relief 
under the VFC Program to the appropriate PWBA Regional Office listed in 
Appendix C.
    Address comments on the VFC Program in writing to: VFC Program, 
Office of Enforcement, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, Room N5702, 200 Constitution Ave., NW, 
Washington, DC 20210. Written comments may also be sent by Internet to: 
[email protected].
    Address comments that concern information collection requirements 
to the Office of Information and Regulatory Affairs, Office of 
Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503; Attention: Desk Officer for the Pension and 
Welfare Benefits Administration.

FOR FURTHER INFORMATION CONTACT:
    For Specific Applications Under the VFC Program: Contact the 
appropriate PWBA Regional Office listed in Appendix C.
    For General Questions Regarding the VFC Program: Contact the 
appropriate PWBA Regional Office listed in Appendix C or Jeffrey A. 
Monhart, Investigator, Office of Enforcement, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, Washington, DC (202) 
219-8820.
    For Comments on the VFC Program: Contact Elizabeth A. Goodman, 
Pension Law Specialist, Office of Regulations and Interpretations, 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Washington, DC (202) 219-8671. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

Background

    Title I of ERISA, 29 USC section 1001 et seq., establishes certain 
standards with which officials of employee benefit plans covered by 
ERISA must comply. PWBA helps the public to understand the requirements 
of Title I of ERISA. In addition, PWBA conducts investigations to deter 
and correct violations of ERISA.
    Based on PWBA's experience with the Pension Payback Program, 61 FR 
9203 (March 7, 1996) (Pension Payback Program), and continued interest 
in such programs, PWBA has decided to establish the VFC Program. The 
project will be administered out of each of PWBA's ten regional 
offices. The VFC Program is designed to assist Plan Officials (as 
defined in Section 3) by specifying the steps necessary to correct 
certain potential violations of Title I of ERISA.
    Section 409 of ERISA provides that a fiduciary who breaches any of 
the responsibilities, obligations, or duties imposed upon fiduciaries 
by Part 4 of Title I of ERISA shall be personally liable to make good 
to a plan any losses to the plan resulting from each such breach, and 
to restore to such plan any profits of such fiduciary which have been 
made through the use of assets of the plan by the fiduciary. Where more 
than one fiduciary is liable for a breach, liability is joint and 
several. The Secretary of Labor has the authority, under sections 
502(a)(2) and 502(a)(5), to bring civil actions to enforce the 
provisions of Title I of ERISA. Section 502(l) of ERISA requires the 
assessment of a civil penalty in an amount equal to 20 percent of the 
amount recovered under any settlement agreement with the Secretary or 
ordered by a court in an action initiated by the Secretary under 
section 502(a)(2) or 502(a)(5) with respect to any breach of fiduciary 
responsibility under (or other violation of) Part 4 by a fiduciary. 
Under ERISA section 502(l)(1)(B), this civil penalty may also be 
assessed against knowing participants in a breach.
    PWBA believes that the possibility of investigation, commencement 
of a civil action, and imposition of a civil penalty under section 
502(l) of ERISA may constrain persons who have engaged in a possible 
breach of fiduciary responsibility under Part 4 of Title I of ERISA 
from identifying themselves and working with PWBA to correct the breach 
fully and make the plan whole. To encourage the full correction of 
certain breaches of fiduciary responsibility and the restoration to 
participants and beneficiaries of losses resulting from those breaches, 
PWBA has decided to implement the VFC Program. Under this Program, 
persons who are potentially liable for a breach will be relieved of the 
possibility of civil investigation of that breach and/or civil action 
by the Secretary with respect to that breach, and imposition of civil 
penalties under ERISA section 502(l), if they satisfy the conditions 
for correcting the breach, as described in the VFC Program.
    If a person files an application under the VFC Program, but the 
corrective action falls short of a complete and acceptable correction, 
PWBA may reject the application and pursue enforcement, including 
assessment of a section 502(l) penalty. However, no section 502(l) 
penalty would be imposed on the basis of any amounts restored to the 
plan prior to filing the VFC Program application. The penalty would 
only apply to the additional recovery amount, if any, paid to the plan 
pursuant to a court order or a settlement agreement with the 
Department.

Description of Voluntary Fiduciary Correction Program

    The VFC Program is set forth in seven sections and three 
appendices. The VFC Program has been structured to maximize the ability 
of Plan Officials to identify and correct possible breaches that are 
within the scope of the Program without the need to consult with PWBA. 
As noted in Section 1, Purpose and Overview of the Voluntary Fiduciary 
Correction Program, PWBA believes that the VFC Program will assist Plan 
Officials in understanding the requirements of Part 4 of Title I of 
ERISA and will facilitate the correction of transactions and the 
restoration of losses to employee benefit plans resulting from 
fiduciary breaches.
    Section 2, Effect of the VFC Program, makes clear that the 
applicant must be careful to ensure that the eligibility requirements 
are met and the corrections specified for individual transactions are 
performed before an application is filed under the VFC Program. 
Generally, if an applicant is in

[[Page 14165]]

full compliance with all of the terms and procedures set forth in the 
VFC Program, PWBA will issue a ``no action letter'' in the format shown 
in Appendix A with respect to the breach described in the application. 
We note, however, that relief under the VFC Program is limited to the 
transactions identified in the application and the persons who 
corrected those transactions. In certain cases, such as where PWBA 
becomes aware of possible criminal behavior, any material 
misrepresentations or omissions in the VFC application, or other abuse 
of the VFC Program, relief will not be available under the VFC Program 
and the Department may initiate an investigation which may lead to 
enforcement action. PWBA expects that such cases will be unusual. Full 
correction under the VFC Program does not preclude any other 
governmental agency, including the Internal Revenue Service (IRS), from 
exercising any rights it may have with respect to the transactions that 
are the subject of the application. The Department seeks comments on 
possible areas of coordination between PWBA and the IRS that would 
facilitate voluntary correction of breaches of Title I of ERISA. The 
Department notes that based on its preliminary review of the VFC 
Program, the IRS has indicated that except in those instances where the 
fiduciary breach or its correction result in a tax abuse situation or a 
plan qualification failure, a correction under this program generally 
will be acceptable under the Internal Revenue Code.
    The VFC Program is designed to address a wide variety of situations 
where plans have been harmed as a result of possible breaches of 
fiduciary duty. Section 3, Definitions, makes clear that a transaction 
may be corrected without a determination that there is an actual 
breach; there need only be a possible breach. In addition, persons who 
may correct a fiduciary breach include not only the breaching 
fiduciary, but also plan sponsors, parties in interest or other persons 
who are in a position to correct a breach. However, the definition of 
Under Investigation, along with the criteria set forth in Section 4, 
Program Eligibility, provides that persons or plans who are the subject 
of pending investigations for violations of Title I of ERISA, or who 
appear to have engaged in criminal violations, may not take advantage 
of the VFC Program. Further, PWBA reserves the right to reject an 
application when warranted by the facts and circumstances of a 
particular case.
    PWBA believes that it must assess a penalty under section 502(l) of 
ERISA to the extent that it negotiates relief owed to the plan as a 
result of a transaction in exchange for a no action letter to the 
potentially liable persons. Accordingly, the VFC Program is structured 
so that applicants have the maximum information available to identify 
eligible transactions and make complete and fully acceptable 
corrections without discussion or negotiation with the Department.
    Section 5, General Rules for Acceptable Correction, sets forth 
issues that are likely to be present with regard to any transaction 
described in Section 7. For example, Section 5 describes how fair 
market value determinations must be made, how correction amounts must 
be determined, and what documentation is required for all applications. 
Section 5 also makes clear that the cost of correction must be borne by 
the applicant and not the plan. In addition, Section 5 states when 
notice must be provided to participants and when former employees who 
have already been cashed out of a plan must also be included in any 
amount restored to a plan.
    Section 6, Application Procedures, specifies the requirements for 
the application, including the required documentation and the penalty 
of perjury statement that must be signed by a plan fiduciary with 
knowledge of the transaction and the authorized representative, if any. 
Section 6 is supplemented by Appendix B, the VFC Program Checklist, 
that helps the applicant to determine whether he or she has met all of 
the application requirements, including all documentation, prior to 
submission to PWBA.
    Section 7, Description of Eligible Transactions and Methods of 
Correction sets forth five types of transactions which may be corrected 
pursuant to the VFC Program. The first, ``delinquent participant 
contributions to pension plans,'' is included in the Program based on 
PWBA's experience with the Pension Payback Program. PWBA notes that, 
unlike the Pension Payback Program, the VFC Program does not exempt 
from excise taxes any violations of section 4975 of the Internal 
Revenue Code (the Code). PWBA included the other types of transactions 
based on its enforcement experience. For the current stage of the VFC 
Program, PWBA has taken a conservative approach and has limited the 
eligible transactions to those where the nature of the transaction and 
the required correction could be described accurately without reference 
to a specific situation, and thus could be corrected satisfactorily 
without consultation and negotiation with PWBA.

Request for Notice and Comments

    Although the Department is not required to seek public comments on 
an enforcement policy, the Department solicits comments from the public 
on all aspects of this Program, including whether there are different 
ways in which the transactions included in the VFC Program could be 
corrected in accordance with the goals of the Program, as well as 
whether there are additional transactions involving fiduciary breaches 
that could be included in the VFC Program. At the same time, the 
Department has determined that the relief afforded by the VFC Program 
should be made available during and after the comment period. Delaying 
implementation of this Program until after the end of the comment 
period would serve no useful purpose and is unnecessary. Even without 
publication of this notice, the Department would have the authority to 
decline to investigate a potential breach of Title I of ERISA in a 
situation where it has received evidence of adequate correction. Delay 
in implementing the VFC Program would only deprive persons of the 
ability to use the clearly set forth procedural aspects of the Program 
during the comment period. The purpose of the VFC Program is to permit 
persons who may have violated certain provisions of Title I of ERISA to 
correct the violations and obtain assurance that the Department will 
take no further action with respect to the matter, including the 
assessment of a civil money penalty. Participation in the VFC Program 
is entirely voluntary and is favorable to those fiduciaries who meet 
the requirements. Implementation of the VFC Program does not foreclose 
resolution of fiduciary breaches by other means including entering into 
settlement agreements with the Department. Immediate implementation 
also favors participants of plans for which violations are corrected 
pursuant to the Program. Moreover, as explained above, the Department 
expects that the availability of the VFC Program will encourage 
fiduciaries, who otherwise might not do so, to correct violations and 
reimburse plan losses. As a result, the Department has determined that 
the VFC Program shall be implemented 30 days after publication in the 
Federal Register.
    Although the Department is implementing the VFC Program effective 
30 days after publication in the Federal Register, it believes that 
rapid implementation of a final version of the VFC Program would 
benefit the public.

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Accordingly, the Department plans to implement a final version of the 
VFC Program within 180 days following the close of the 60 day period 
for comments on the VFC Program.

Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order. Pursuant to the terms 
of the Executive Order, it has been determined that this action is 
``significant'' and subject to OMB review under section 3(f)(4) of the 
Executive Order.
    In the Department's view, the benefits of the VFC Program will 
substantially outweigh its costs, because participation is voluntary, 
the administrative cost of correcting a potential fiduciary breach 
through voluntary participation in the VFC Program will be lower than 
the cost of a correction resulting from investigation and litigation, 
and the value and security of the assets of plans participating in the 
VFC Program will be increased.
    No costs will be imposed by the VFC Program unless Plan Officials 
choose to avail themselves of the opportunity to correct a potential 
fiduciary breach under the terms of the Program. Participation is 
expected to occur only when the projected benefit outweighs the 
anticipated cost for the Plan Official. The costs of electing to 
correct potential breaches of fiduciary responsibility under terms of 
the VFC Program are expected to arise from fair market value 
determinations; computations of losses or profits on the use of plan 
assets; the administrative costs of supplemental distributions, 
recomputation of account balances and distribution of notices to 
participants concerning recomputation; transaction costs for disposal 
of assets; and the description and documentation of the correction for 
purposes of the application to the Department.
    The value of assets or losses restored to employee benefit plans as 
a result of Plan Officials' participation in the VFC Program is not 
viewed as a cost to Plan Officials, but rather as a transfer from a 
fiduciary or other party in interest to the participants and 
beneficiaries of the plan. Plan Officials may not transfer the costs of 
compliance with the terms of the VFC Program to participants and 
beneficiaries.
    The principal benefit of the VFC Program will accrue to 
participants and beneficiaries through restoration of losses to the 
plan or reversal of impermissible transactions involving the assets of 
the plan, resulting in greater security of their plan assets. Benefits 
will also accrue to plan fiduciaries through both risk reduction and 
the savings of civil penalties that would otherwise be payable on the 
amount of assets recovered by plans following a civil investigation or 
litigation. Where the Department determines that it will take no civil 
enforcement action and recommend no legal action in response to a 
complete application under the VFC Program, the fiduciary will be 
relieved of potential demands on its resources that might be 
represented by a civil investigation and any subsequent litigation.
    The VFC Program will also allow the Department to encourage 
compliance with Part 4 of Title I of ERISA while making even more 
effective use of its limited enforcement resources. The Department 
believes that the correction of violations through the VFC Program will 
be less costly than correction through active intervention, and that 
VFC Program applicants have a high likelihood of accomplishing an 
appropriate correction of a potential violation. To the extent that 
Plan Officials who wish to correct potential violations do so 
voluntarily and appropriately, the Department may direct its resources 
toward other areas where active intervention is more likely to be 
necessary.
    More generally, publication of the specific examples of 
transactions which may violate ERISA and the activities required to 
correct those violations will serve to better inform plan fiduciaries 
and assist them in satisfying their fiduciary obligations in future 
transactions involving plan assets.
    The Department estimates the cost of the VFC Program for the number 
of Plan Officials estimated to choose to make use of it will total 
$1,877,400. The total benefit to participants and beneficiaries is 
estimated at approximately $80 million, while the benefit to Plan 
Officials, to the extent it can be quantified, is estimated at $5.4 
million. These figures do not include an estimate of the potential 
benefit to Plan Officials of the reduced risk of investigation and 
litigation, or the benefit to the Department, to participants and 
beneficiaries, and to the public in general of realizing efficiencies 
in the use of enforcement resources, because these elements of the 
Program's benefit are not readily quantifiable. Because the VFC Program 
is voluntary, the Department assumes that Plan Officials will in no 
event make use of the Program unless the projected benefit outweighs 
the estimated cost of participation.
    A discussion of the elements of the costs and benefits of the VFC 
Program and estimates of their magnitude where they can be specifically 
quantified follows. The Department projects that Plan Officials of 
approximately 700 plans will apply for and use the VFC Program. This 
estimate is based on the Department's previous experience with the 
Pension Payback Program in which approximately 0.1 percent of plans 
which permitted employee contributions elected to participate during 
the six month period in which the Pension Payback Program was in 
effect.
    The Department expects a similar rate of participation among the 
approximately 200,000 plans which currently permit employee 
contributions. However, it assumes this participation by Plan Officials 
of 200 plans will occur over an annual period in the absence of the 
six-month time limitation included in the Pension Payback Program.
    Because the VFC Program permits correction of several other types 
of transactions in addition to the repayment of delinquent employee 
contributions, the Department has assumed that the annual rate of 
participation in the VFC Program by Plan Officials of plans other than 
those which permit employee contributions will be comparable to the 0.1 
percent assumed for those which permit employee contributions, 
resulting in participation by Plan Officials of about 500 additional 
plans, and total participation of 700 plans. The Department views this 
estimate as an upper bound; actual participation may be somewhat 
smaller depending on the cost effectiveness of correcting the actual 
transactions involved, the complexity of the legal and factual

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issues involved in a given transaction, and the degree of similarity 
between an actual transaction and a transaction and correction 
described by the terms of the VFC Program. The Department recognizes 
that Plan Officials may not view the VFC Program as offering a cost 
effective means of correcting all potential violations.
    The Department also estimates that $79,870,000, or an average of 
$114,300 per plan, will be recovered by plans annually as a result of 
participation in the VFC Program. Based on its enforcement experience, 
the Department estimates that about 70 percent of this total, or $56 
million, will consist of restored principal and earnings losses, and 
restored profits on the use of plan assets by fiduciaries or parties in 
interest. The total estimated recovery represents the midpoint between 
the average monetary recovery (excluding assets recovered through 
litigation) per plan that resulted from civil investigations completed 
by the Department in the year ended September 30, 1998, and the average 
per plan monetary recovery which arose from the Pension Payback 
Program, as applied to the 700 plans assumed to elect to participate in 
the VFC Program. The Department believes this estimate is reasonable in 
light of the range of transactions which may be corrected under the VFC 
Program. It is estimated that approximately 88,000 participants, or an 
average of 126 participants per plan, will be affected annually by 
corrections under the VFC Program.
    Based on its recent experience with the collection of civil 
penalties under section 502(l), the Department estimates that Plan 
Officials will be relieved of approximately $5.4 million in civil 
penalties as a result of correction of transactions through the VFC 
Program. This estimate is based on the 700 plans assumed to 
participate, and the average section 502(l) penalty actually collected 
per plan subject to the penalty in the last two fiscal years. Actual 
collections take into account the offset of any excise tax payable as a 
result of a violation of section 4975 of the Code, which is also 
consistent with the terms of the VFC Program.
    The costs to Plan Officials to participate in the VFC Program will 
arise from a range of possible required activities depending on the 
nature of the transaction to be corrected, including evaluation by Plan 
Officials and their professionals of the need and usefulness of 
participation in the VFC Program, obtaining market value 
determinations, executing asset transactions, adjusting account 
balances and benefit distributions, documenting the correction, and 
completing and mailing the application to participate in the Program. 
The Department anticipates that Plan Officials will in most cases seek 
the services of a professional (typically an attorney, accountant, or 
professional administrator) to conduct the applicable activities, 
although the resources of Plan Officials are expected to be needed as 
well to gather information, and prepare, sign, and photocopy the 
application. It is estimated that the entire correction will require 
approximately 40 hours to complete, including 8 hours of the Plan 
Official's time, and 32 hours of professional time.
    At the assumed rate of participation, the total cost of these 
activities is estimated to amount to $1,877,400 (or an average of 
$2,700 per Plan Official), assuming an average cost of $55 per hour for 
work performed in house by Plan Officials and their employees, and a 
rate of $70 per hour for purchased services. This estimate also 
includes application materials and mailing costs.

Paperwork Reduction Act

    The Department of Labor has submitted the information collection 
request (ICR) included in the Voluntary Fiduciary Correction Program to 
OMB using emergency review procedures for review and clearance in 
accordance with the Paperwork Reduction Act of 1995 (PRA 95) (44 U.S.C. 
Chapter 35). OMB approval has been requested by April 14, 2000. The 
Department and OMB are particularly interested in comments which:
     Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Pension and Welfare Benefits Administration. Although comments may be 
submitted through May 15, 2000, OMB requests that comments be received 
within 10 days of publication of this Voluntary Fiduciary Correction 
Program to ensure their consideration.
    The Department, as part of its continuing effort to reduce 
paperwork and respondent burden, conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with PRA 95. This helps to ensure that 
requested data can be provided in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the impact of collection requirements on 
respondents can be properly assessed. Currently, PWBA is soliciting 
comments concerning the ICR included in the Voluntary Fiduciary 
Correction Program.
    Requests for copies of the ICR may be addressed to: Gerald B. 
Lindrew, Office of Policy and Research, U.S. Department of Labor, 
Pension and Welfare Benefits Administration, 200 Constitution Avenue, 
NW, Room N-5647, Washington, DC 20210. Telephone: (202) 219-4782; Fax: 
(202) 219-4745 (these are not toll-free numbers).
    The VFC Program will permit Plan Officials to correct voluntarily 
certain potential violations of Part 4 of Title I of ERISA, and to 
avoid the possibility of civil action and the assessment of civil 
penalties, provided specific conditions are met. The ICR included in 
the VFC Program would require the Plan Official to describe the 
correction of the potential breach of fiduciary duty and provide 
supporting documentation with respect to the correction. The type of 
supporting documentation will vary with the nature of the transaction 
involved, but is described in the VFC Program in as specific a manner 
as deemed feasible. The Plan Official is also required to complete an 
application which includes identification of the employee benefit plan 
and the Plan Official or representative, relevant plan documents 
including a fidelity bond, a statement under penalty of perjury that 
must be signed by a plan fiduciary with knowledge of the transaction 
and the authorized representative, if any, and signature. Under certain 
circumstances a Plan Official may also be required to prepare and 
distribute notices informing participants and beneficiaries of changes 
in their account balances. The information submitted to the Department 
will permit the Department

[[Page 14168]]

to verify the correction of potential fiduciary breaches and 
restoration of losses, to evaluate the adequacy of actions taken by a 
Plan Official pursuant to the VFC Program, and to determine whether 
further action is necessary to protect the rights of participants and 
beneficiaries.
    It is estimated that Plan Officials of 700 employee benefit plans 
will avail themselves of the opportunity to correct potential 
violations pursuant to the VFC Program annually. The Department 
estimates that approximately 8 hours of Plan Officials' time will be 
required to assemble documents and complete and sign the application to 
participate in the VFC Program. It is further assumed that evaluation, 
correction and documentation of transactions under the VFC Program will 
require approximately 32 hours, and that Plan Officials will generally 
elect to hire service providers to complete this work. Only 6 hours of 
this total is expected to be associated with the information collection 
requirements of the VFC Program (including descriptions and 
documentation, copying relevant supporting statements, preparing 
notices, etc.) The assumed hourly rate for purchased services related 
to fulfilling information collection requirements is estimated to be 
$70 per hour, for a total cost to the 700 Plan Officials of $295,400. 
This includes an allowance of $2 per application for materials and 
mailing costs.
    Type of Review: New.
    Agency: Pension and Welfare Benefits Administration, Department of 
Labor.
    Title: Voluntary Fiduciary Correction Program.
    OMB Number: 1210-NEW.
    Affected Public: Individuals or households; business or other for-
profit; not-for-profit institutions.
    Frequency of Response: On occasion.
    Total Respondents: 700.
    Total Responses: 700.
    Estimated Burden Hours: 5,600.
    Estimated Annual Costs (Operating and Maintenance): $295,400.

    Persons are not required to respond to the collection of 
information unless it displays a currently valid OMB control number. 
Comments submitted in response to this notice will be summarized and/or 
included in the request for OMB approval of the information collection 
request; they will also become a matter of public record.

Regulatory Flexibility Act

    This document reflects an enforcement policy of the Department and 
is not being issued as a general notice of proposed rulemaking. 
Therefore, the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
does not apply. However, PWBA has considered the potential costs and 
benefits of this action for small plans and small Plan Officials in the 
development of the VFC Program. The Department is interested in 
comments which would suggest alternatives to the provisions of the VFC 
Program which would accomplish the stated purpose of the Program while 
minimizing the impact on small entities.
    PWBA generally considers a small entity to be an employee benefit 
plan with fewer than 100 participants. The basis of this definition is 
found in section 104(a)(2) of ERISA, which permits the Secretary of 
Labor to prescribe simplified annual reports for pension plans which 
cover fewer than 100 participants. However, because the VFC Program 
specifically prohibits the cost of participation from being borne by 
the plan and participants, this program will impose no costs on the 
plans which realize the benefits of the correction of potential 
violations. Costs will be borne instead by the Plan Officials of an 
estimated 700 employee benefit plans each year. Plan Officials may 
include both individual fiduciaries, plan sponsors, or parties in 
interest, and businesses in their roles as fiduciaries, plan sponsors, 
or parties in interest.
    Although the number of Plan Officials of small plans that will 
elect to avail themselves of the opportunity to correct potential 
breaches of fiduciary duty under the terms of the VFC Program is not 
known, the potential costs and benefits to each Plan Official is 
summarized below, on the basis of the assumption that each of the 
participating Plan Officials will itself be a small entity.
    Participation in the VFC Program is entirely voluntary, and as 
such, it is assumed that Plan Officials will elect to participate only 
when the potential benefits to a Plan Official are expected to exceed 
the cost of participation. Benefits may include the reduction of 
exposure to the risk of investigation and subsequent litigation, the 
potential cost of which cannot be specifically quantified, and the 
savings of penalties under section 502(l) of ERISA which would 
otherwise be payable on amounts required to be restored to plans by 
fiduciaries pursuant to a settlement agreement with the Department or 
court order.
    As described in detail above, to the extent that the per small Plan 
Official costs and benefits of participation in the VFC Program can be 
quantified, assuming all participating Plan Officials are small 
entities, administrative costs of participation are estimated to amount 
to an average of $2,700 per Plan Official, while savings of section 
502(l) penalties are estimated at $7,754 per Plan Official. While the 
average value of assets estimated to be restored to plans as a result 
of participation in the VFC Program, or $114,300 per plan, may be 
viewed as an expense by Plan Officials, in the Department's view, this 
expense arises from a potential breach of fiduciary duty rather than 
from participation in the VFC Program. The fiduciary's potential 
liability for a breach of fiduciary duty and the cost of remedial 
relief are expected to be comparable, regardless of whether a violation 
is corrected under the terms of the VFC Program, or as a result of an 
investigation and any subsequent litigation.
    On this basis, small Plan Officials electing to correct potential 
fiduciary breaches through participation in the VFC Program are 
expected to derive a net benefit, even without consideration of the 
potential savings associated with the reduction of risk and exposure to 
the use of its resources in connection with an investigation or 
litigation. Because penalties and additional resource demands are often 
relatively more burdensome for small entities than large, the 
Department views the VFC Program as offering a flexible and 
economically advantageous alternative to currently available methods of 
correcting potential breaches of fiduciary duty which recognizes the 
special circumstances of small entities. The Department invites 
comments on this analysis, and on alternatives which further reduce the 
potential burden of participation in the VFC Program for small Plan 
Officials.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this regulatory action does 
not include any Federal mandate that may result in expenditures by 
State, local, or tribal governments, and will not impose an annual 
burden of $100 million or more on the private sector.

Voluntary Fiduciary Correction Program

Section 1. Purpose and Overview of the VFC Program
Section 2. Effect of the VFC Program
Section 3. Definitions
Section 4. VFC Program Eligibility
Section 5. General Rules for Acceptable Corrections
    (a) Fair Market Value Determinations
    (b) Correction Amount
    (c) Costs of Correction
    (d) Distributions
    (e) Notice
Section 6. Application Procedures

[[Page 14169]]

Section 7. Description of Eligible Transactions and Methods of 
Correction
    (a) Contributions
    1. Delinquent Participant Contributions to Pension Plans
    (b) Loans
    1. Loan at Fair Market Interest Rate to a Party in Interest with 
Respect to the Plan
    2. Loan at Below-Market Interest Rate to a Party in Interest 
with Respect to the Plan
    3. Loan at Below-Market Interest Rate to a Person Who is Not a 
Party in Interest with Respect to the Plan
    4. Loan at Below-Market Interest Rate Solely Due to a Delay in 
Perfecting the Plan's Security Interest
    (c) Purchases, Sales and Exchanges
    1. Purchase of an Asset (Including Real Property) by a Plan from 
a Party in Interest
    2. Sale of an Asset (Including Real Property) by a Plan to a 
Party in Interest
    3. Sale and Leaseback of Real Property to Employer
    4. Purchase of an Asset (Including Real Property) By a Plan from 
a Person Who is Not a Party in Interest with Respect to the Plan at 
a Price Other Than Fair Market Value
    5. Sale of an Asset (Including Real Property) By a Plan to a 
Person Who is Not a Party in Interest with Respect to the Plan at a 
Price Other Than Fair Market Value
    (d) Benefits
    1. Payment of Benefits Without Properly Valuing Plan Assets on 
Which Payment is Based
    (e) Plan Expenses
    1. Duplicative, Excessive, or Unnecessary Compensation Paid by a 
Plan
    2. Payment of Dual Compensation to a Plan Fiduciary
Appendix A. Sample VFC Program No Action Letter
Appendix B. VFC Program Checklist
Appendix C. List of PWBA Regional Offices

Section 1. Purpose and Overview of the VFC Program

    The purpose of the VFC Program is to protect the financial security 
of workers by encouraging identification and correction of transactions 
that violate Part 4 of Title I of ERISA. Part 4 of Title I of ERISA 
sets out the responsibilities of employee benefit plan fiduciaries. 
Section 409 of ERISA provides that a fiduciary who breaches any of 
these responsibilities shall be personally liable to make good to the 
plan any losses to the plan resulting from each breach and to restore 
to the plan any profits the fiduciary made through the use of the 
plan's assets. Section 405 of ERISA provides that a fiduciary may, 
under certain circumstances, be liable for a co-fiduciary's breach of 
his or her fiduciary responsibilities. In addition, under certain 
circumstances, there may be liability for knowing participation in a 
fiduciary breach. In order to assist all affected persons in 
understanding the requirements of ERISA and meeting their legal 
responsibilities, PWBA is providing guidance on what constitutes 
adequate correction under Title I of ERISA for the breaches described 
in this Program.

Section 2. Effect of the VFC Program

    (a) In general. PWBA generally will issue to the applicant a no 
action letter \1\ with respect to a breach identified in the 
application if the eligibility requirements of section 4 are satisfied 
and a Plan Official corrects a breach, as defined in section 3, in 
accordance with the requirements of sections 5, 6 and 7. Pursuant to 
the no action letter it issues, PWBA will not initiate a civil 
investigation under Title I of ERISA regarding the applicant's 
responsibility for any transaction described in the no action letter, 
or assess a civil penalty under section 502(l) of ERISA on the 
correction amount paid to the plan or its participants.
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    \1\ See Appendix A.
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    (b) Verification. PWBA reserves the right to conduct an 
investigation at any time to determine (1) the truthfulness and 
completeness of the factual statements set forth in the application and 
(2) that the corrective action was, in fact, taken.
    (c) Limits on the effect of the VFC Program. (1) In general. Any no 
action letter issued under the VFC Program is limited to the breach and 
persons identified therein. Moreover, the method of calculating the 
correction amount described in this Program is only intended to correct 
the specific breach described in the application. Other methods of 
calculating losses may be more appropriate, depending on the facts and 
circumstances. This Program assumes that the transaction is otherwise 
an appropriate investment decision for the plan. If a transaction gave 
rise to violations not addressed in the Program, such as imprudence not 
addressed in the Program or a failure to diversify plan assets, the 
relief afforded by the Program would not extend to such additional 
violations.
    (2) No implied approval of other matters. A no action letter does 
not imply Departmental approval of matters not included therein, 
including steps that the fiduciaries take to prevent recurrence of the 
breach described in the application and to ensure the plan's future 
compliance with Title I of ERISA.
    (3) Material misrepresentation. Any no action letter issued under 
the VFC Program is conditioned on the truthfulness, completeness and 
accuracy of the statements made in the application and of any 
subsequent oral and written statements or submissions. Any material 
misrepresentations or omissions will void the no action letter, 
retroactive to the date that the letter was issued by PWBA, with 
respect to the transaction that was materially misrepresented.
    (4) Applicant fails to satisfy terms of the VFC Program. If an 
application fails to satisfy the terms of the VFC Program, as 
determined by PWBA, PWBA reserves the right to investigate and take any 
other action with respect to the transaction and/or plan that is the 
subject of the application, including refusing to issue a no action 
letter.
    (5) Criminal investigations not precluded. Compliance with the 
terms of the VFC Program will not preclude:
    (i) PWBA or any other governmental agency from conducting a 
criminal investigation of the transaction identified in the 
application;
    (ii) PWBA's assistance to such other agency; or
    (iii) PWBA making the appropriate referrals of criminal violations 
as required by section 506(b) of ERISA.\2\
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    \2\ Section 506(b) provides that the Secretary of Labor shall 
have the responsibility and authority to detect and investigate and 
refer, where appropriate, civil and criminal violations related to 
the provisions of Title I of ERISA and other related Federal laws, 
including the detection, investigation, and appropriate referrals of 
related violations of Title 18 of the United States Code.
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    (6) Other actions not precluded. Compliance with the terms of the 
VFC Program will not preclude PWBA from taking any of the following 
actions:
    (i) Seeking removal from positions of responsibility with respect 
to a plan or other non-monetary injunctive relief against any person 
responsible for the transaction at issue;
    (ii) referring information regarding the transaction to the IRS as 
required by section 3003(c) of ERISA; \3\ or
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    \3\ Section 3003(c) provides that, whenever the Secretary of 
Labor obtains information indicating that a party in interest or 
disqualified person is violating section 406 of ERISA, she shall 
transmit such information to the Secretary of the Treasury.
---------------------------------------------------------------------------

    (iii) imposing civil penalties under section 502(c)(2) of ERISA 
based on the failure or refusal to file a timely, complete and accurate 
annual report Form 5500. Applicants should be aware that amended annual 
report filings may be required if possible breaches of ERISA have been 
identified, or if action is taken to correct possible breaches in 
accordance with the VFC Program.
    (7) Not binding on others. The issuance of a no action letter does 
not affect the ability of any other government agency, or any other 
person, to enforce any rights or carry out any authority they may have, 
with respect to matters described in the no action letter.

[[Page 14170]]

    (8) Example. A plan fiduciary causes the plan to purchase real 
estate from the plan sponsor under circumstances to which no prohibited 
transaction exemption applies. In connection with this transaction, the 
purchase causes the plan assets to be no longer diversified, in 
violation of ERISA section 404(a)(1)(C). If the application reflects 
full compliance with the requirements of the Program, the Department's 
no action letter would apply to the violation of ERISA section 
406(a)(1)(A), but would not apply to the violation of section 
404(a)(1)(C).
    (d) Correction. The correction criteria listed in the VFC Program 
represent PWBA enforcement policy and are provided for informational 
purposes to the public, but are not intended to confer enforceable 
rights on any person who purports to correct a violation. Applicants 
are advised that the term ``correction'' as used in the VFC Program is 
not necessarily the same as ``correction'' pursuant to section 4975 of 
the Code.\4\ Correction may not be achieved under the Program by 
engaging in a new prohibited transaction.
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    \4\ See section 4975(f)(5) of the Internal Revenue Code (IRC); 
section 141.4975-13 of the temporary Treasury Regulations and 
section 53.4941(e)-1(c) of the Treasury Regulations. The Internal 
Revenue Service has indicated that except in those instances where 
the fiduciary breach or its correction result in a tax abuse 
situation or a plan qualification failure, a correction under this 
program generally will be acceptable under the Internal Revenue 
Code.
---------------------------------------------------------------------------

    (e) PWBA's authority to investigate. PWBA reserves the right to 
conduct an investigation and take any other enforcement action relating 
to the transaction identified in a VFC Program application in certain 
circumstances, such as prejudice to the Department that may be caused 
by the expiration of the statute of limitations period, material 
misrepresentations, or significant harm to the plan or its participants 
that is not cured by the correction provided under the VFC Program. 
PWBA may also conduct a civil investigation and take any other 
enforcement action relating to matters not covered by the VFC Program 
application, or relating to other plans sponsored by the same plan 
sponsor, while a VFC Program application involving the plan or the plan 
sponsor is pending.
    (f) Confidentiality. PWBA will maintain the confidentiality of any 
documents submitted under the VFC Program, to the extent permitted by 
law. However, as noted in (c)(5) and (6) of this section, PWBA has an 
obligation to make referrals to the IRS and to refer to other agencies 
evidence of criminality and other information for law enforcement 
purposes.

Section 3. Definitions

    (a) The terms used in this document have the same meaning as 
provided in section 3 of ERISA, 29 USC section 1002, unless separately 
defined herein.
    (b) The following definitions apply for purposes of the VFC 
Program:
    (1) Breach. The term ``Breach'' means any transaction which is or 
may be a breach of the fiduciary responsibilities contained in Part 4 
of Title I of ERISA.
    (2) Plan Official. The term ``Plan Official'' means a plan 
fiduciary, plan sponsor, party in interest with respect to a plan, or 
other person who is in a position to correct a Breach.
    (3) Under Investigation. The term ``Under Investigation'' means a 
plan or person that is being investigated pursuant to ERISA section 
504(a) or any criminal statute affecting a transaction which involves 
an employee benefit plan. A plan that is Under Investigation by PWBA 
includes any plan for which a Plan Official, or a representative, has 
received oral or written notification from PWBA of an investigation of 
the plan. A plan is not considered to be Under Investigation by PWBA 
merely because PWBA staff have contacted a Plan Official or 
representative in connection with a complaint, unless the complaint 
concerns the transaction described in the application.

Section 4. VFC Program Eligibility

    Eligibility for the VFC Program is conditioned on the following:
    (a) Neither the plan nor the applicant is Under Investigation.
    (b) The application contains no evidence of potential criminal 
violations as determined by PWBA.

Section 5. General Rules for Acceptable Corrections

    (a) Fair Market Value Determinations. Many corrections require that 
the current or fair market value of an asset be determined as of a 
particular date, usually either the date the plan originally acquired 
the asset or the date of the correction, or both. In order to be 
acceptable as part of a VFC Program correction, the valuation must meet 
the following conditions:
    (1) If there is a generally recognized market for the property 
(e.g., the New York Stock Exchange), the fair market value of the asset 
is the average value of the asset on such market on the applicable 
date, unless the plan document specifies another objectively determined 
value (e.g., the closing price).
    (2) If there is no generally recognized market for the asset, the 
fair market value of that asset must be determined in accordance with 
generally accepted appraisal standards by a qualified, independent 
appraiser and reflected in a written appraisal report signed by the 
appraiser.
    (3) An appraiser is ``qualified'' if he or she has met the 
education, experience, and licensing requirements that are generally 
recognized for appraisal of the type of asset being appraised.
    (4) An appraiser is ``independent'' if he or she is not one of the 
following, does not own or control any of the following, and is not 
owned or controlled by, or affiliated with, any of the following:
    (i) The prior owner of the asset, if the asset was purchased by the 
plan;
    (ii) The purchaser of the asset, if the asset was or is now being 
sold by the plan;
    (iii) Any other owner of the asset, if the plan is not the sole 
owner;
    (iv) A fiduciary of the plan;
    (v) A party in interest with respect to the plan (except to the 
extent the appraiser becomes a party in interest when retained to 
perform this appraisal for the plan); or
    (vi) The VFC Program applicant.
    (b) Correction Amount. (1) In general. Many of the transactions 
described in the VFC Program result in a loss to the plan or a profit 
to some party to the transaction. Determining the amount of the loss to 
the plan requires calculating how much money the plan would have now if 
a particular transaction had not occurred. In general, the VFC Program 
requires the fiduciary or other Plan Official to restore to the 
employee benefit plan the Principal Amount, plus the greater of (i) 
Lost Earnings from the Loss Date to the Recovery Date or (ii) 
Restoration of Profits resulting from the use of the Principal Amount 
for the same period.
    (2) Principal Amount. ``Principal Amount'' is the amount that would 
have been available to the plan for investment or distribution on the 
date of the Breach, had the Breach not occurred. What constitutes the 
Principal Amount is identified for each transaction set forth in 
section 7 of the VFC Program. The generic term ``Principal Amount'' is 
the base on which Lost Earnings are calculated.
    (3) Loss Date. ``Loss Date'' is the date that the plan lost the use 
of the Principal Amount.
    (4) Recovery Date. ``Recovery Date'' is the date that the Principal 
Amount is restored to the plan.
    (5) Lost Earnings. For purposes of the VFC Program, Lost Earnings 
to be restored to a plan is the greater of (i) the amount that 
otherwise would have been earned on the Principal Amount from

[[Page 14171]]

the Loss Date to the Recovery Date had the Principal Amount been 
invested during such period in accordance with applicable plan 
provisions and Title I of ERISA, less actual net earnings or realized 
net appreciation (or, if applicable, plus any net loss to the plan as a 
result of the transaction), or (ii) the amount that would have been 
earned on the Principal Amount at an interest rate equal to the 
underpayment rate defined in section 6621(a)(2) of the Code, less 
actual net earnings or realized net appreciation (or, if applicable, 
plus any net loss to the plan as a result of the transaction). In 
addition, if the date on which the Lost Earnings is paid to the plan is 
a date after the Recovery Date, payment must include an additional 
amount that is the greater of (i) the amount that would have been 
earned by the plan on the Lost Earnings if it had been paid on the 
Recovery Date, or (ii) the amount that would have been earned on the 
Lost Earnings at an interest rate equal to the underpayment rate 
defined in section 6621(a)(2) of the Code. For a participant-directed 
defined contribution plan, the Lost Earnings to be restored to the plan 
is the amount that each participant would have earned on the Principal 
Amount from the Loss Date to the Recovery Date. However, for 
administrative convenience, the Lost Earnings amount for a participant-
directed defined contribution plan may be calculated using the rate of 
return of the investment alternative that earned the highest rate of 
return among the designated broad range of investment alternatives 
available under the plan during the applicable period.
    (6) Restoration of Profits. ``Restoration of Profits'' is the 
amount of profit made on the use of the Principal Amount, or the 
property purchased with the Principal Amount, by the fiduciary or party 
in interest who engaged in the Breach, or by a knowing participant in 
the Breach. If the Principal Amount was used for a specific purpose 
such that the actual profit can be determined, that actual profit must 
be calculated from the Loss Date to the Recovery Date and returned to 
the plan. If the Principal Amount was commingled with other funds so 
that the actual profit cannot be determined, the Restoration of Profits 
will be calculated as interest on the Principal Amount at an interest 
rate equal to the underpayment rate defined in section 6621(a)(2) of 
the Code. In addition, if the date on which the Restoration of Profits 
is paid to the plan is a date after the Recovery Date, payment must 
include an additional amount that is the greater of (i) the amount that 
would have been earned by the plan on the Restoration of Profits if it 
had been paid on the Recovery Date, or (ii) the amount that would have 
been earned on the Restoration of Profits at an interest rate equal to 
the underpayment rate defined in section 6621(a)(2) of the Code.
    (7) The principles of this paragraph (b) are illustrated by the 
following examples:

    Example 1. An employer who sponsors a plan with a qualified cash 
or deferred arrangement within the meaning of section 401(k)(2) of 
the Code (``401(k) plan'') normally deposits participant 
contributions in the plan's trust account within two business days 
of each pay day. For this employer, the second business day after 
pay day is the date on which the participant contributions become 
plan assets, because it is the earliest date on which this employer 
can reasonably segregate the participant contributions from the 
employer's general assets.\5\ However, for the pay period ending 
January 31, a Monday, participant contributions totaling $10,000 
were not deposited until March 2.
---------------------------------------------------------------------------

    \5\ See 29 CFR 2510.3-102.
---------------------------------------------------------------------------

    The Principal Amount is $10,000. The Loss Date is February 2, 
the date on which the participant contributions became plan assets 
and should have been deposited in the plan's trust account. The 
Recovery Date is March 2, the date that the participant 
contributions were deposited in the plan's trust account.
    The 401(k) plan offers five investment alternatives. During the 
month of February, one of the plan's mutual funds had a 12% 
annualized yield, including all reinvestment earnings. This was the 
highest return earned by any of the five investment alternatives in 
this period. The employer elects to use this rate of return for the 
loss calculations. Accordingly, the Lost Earnings amount is $100 
($10,000 times 12% annual yield times one-twelfth of a year).
    The employer had the use of $10,000 of the 401(k) plan's assets 
between February 2 and March 2, while the participant contributions 
remained commingled with the employer's general assets. The 
employer's cost of funds (the actual profit from the use of the 
participant contributions) cannot readily be determined; therefore, 
the Restoration of Profits amount is calculated using the 
underpayment rate defined in Code section 6621(a)(2). Assuming the 
section 6621 rate was 9%, the Restoration of Profits amount is $75 
($10,000 times 9% per annum times one-twelfth of a year).
    In this example, the Lost Earnings amount ($100) is greater than 
the Restoration of Profits amount ($75). Since the Principal Amount 
of $10,000 was paid to the plan on March 2, the total correction 
amount to be paid to the plan is the Lost Earnings of $100.
    Assume further, in this example, that although the Principal 
Amount of $10,000 was paid to the plan on March 2, the Lost Earnings 
of $100 were not paid to the plan until a year later. Accordingly, 
an additional $12 ($100 times 12 percent--the plan's annual yield), 
must be paid to the Plan along with the $100 Lost Earnings amount.
    Example 2. On March 15, a plan's trustees authorized the 
purchase of 1,000 shares of stock. The plan paid $75 per share when 
the fair market value was $70 per share.\6\ The Principal Amount is 
$5,000 (1,000 shares times the $5 per share overpayment). The Loss 
Date is March 15, the date of the overpayment. The Recovery Date 
will be the date on which the fiduciary or other person repays to 
the plan the correction amount.
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    \6\ If a plan's fiduciaries authorized the purchase of a 
specific dollar amount of stock rather than the purchase of a 
specific number of shares, and the plan acquired fewer shares than 
it should have as a result of paying too much per share, the amount 
lost equals the number of additional shares that the plan should 
have acquired, plus any appreciation, dividends, or stock splits 
associated with those additional shares.
---------------------------------------------------------------------------

    Assume that the plan recoups the $5,000 overpayment a year after 
the original purchase. During this year, the plan's other 
investments earned 9%, including all reinvestment earnings. The Lost 
Earnings amount is $450 ($5,000 times 9% annual yield times one 
year). If the Restoration of Profit amount is less than $450, the 
total amount to be paid to the plan is $5,450 (the Principal Amount 
of $5,000 plus Lost Earnings of $450).
    Example 3. Assume the same facts as in Example 2, except that 
the proceeds of the sale were used to make another investment which 
yielded a 15% annual rate of return, the Restoration of Profits 
amount is $750 ($5,000 times 15% per annum times one year). In this 
example, the Restoration of Profits amount ($750) is greater than 
the Lost Earnings amount ($450). The total amount to be paid to the 
plan is $5,750 (the Principal Amount of $5,000 plus Restoration of 
Profits of $750).
    Example 4. On April 20, a plan paid $6,000 in legal fees for 
legal services that the plan sponsor, not the plan, was obligated to 
pay. The Principal Amount is $6,000. The Loss Date is April 20, the 
date the plan improperly paid the plan sponsor's legal expenses. The 
Recovery Date will be the date on which the plan sponsor reimburses 
the plan $6,000. Assume that the plan sponsor reimburses the plan on 
October 20, six months after the Loss Date. During this period, the 
plan's investments earned 10% per annum, including all reinvestment 
earnings. The Lost Earnings amount is $300 ($6,000 times 10% annual 
yield multiplied by one-half).
    The plan sponsor had constructive use of $6,000 from April 20 
until October 20. The plan sponsor's cost of funds (the actual 
profit from the use of the money) cannot readily be determined; 
therefore, the Restoration of Profits amount is calculated using the 
underpayment rate defined in Code section 6621(a)(2). Assuming the 
section 6621 rate was 8% during the whole period, the Restoration of 
Profits amount is $240 ($6,000 times 8% per annum multiplied by one-
half).
    In this example, the Lost Earnings amount ($300) is greater than 
the Restoration of Profits amount ($240). The total amount to be 
paid to the plan is $6,300 (the Principal Amount of $6,000 plus Lost 
Earnings of $300).

    (c) Costs of Correction. (1) The fiduciary, plan sponsor or other 
Plan

[[Page 14172]]

Official, not the plan, shall pay the costs of correction.
    (2) The principle of paragraph (c)(1) is illustrated in the 
following example and in (d) below:

    Example: The plan fiduciaries did not obtain a required 
independent appraisal in connection with a transaction described in 
Section 7. In connection with correcting the transaction, the plan 
fiduciaries now propose to have the appraisal performed as of the 
date of purchase. The plan document permits the plan to pay 
reasonable and necessary expenses; the fiduciaries have objectively 
determined that the cost of the proposed appraisal is reasonable and 
is not more expensive than the cost of an appraisal contemporaneous 
with the purchase. The plan may therefore pay for this appraisal. 
However, the plan may not pay any costs associated with 
recalculating participant account balances to take into account the 
new valuation. There would be no need for these additional 
calculations or any increased appraisal cost if the plan's assets 
had been valued properly at the time of the purchase. Therefore, the 
cost of recalculating the plan participants' account balances is not 
a reasonable plan expense, but is part of the Costs of Correction.

    (d) Distributions. Some plans will have to make supplemental 
distributions to former employees, beneficiaries receiving benefits, or 
alternate payees, if the original distributions were too low because of 
the Breach. In these situations, the Plan Official or plan 
administrator must determine who received distributions from the plan 
during the time period affected by the Breach, recalculate the account 
balances, and determine the amount of the underpayment to each affected 
individual. The applicant must demonstrate in writing to PWBA that the 
plan has used best efforts to locate and pay any former employee, 
beneficiary, or alternate payee who has received a lump sum 
distribution but is due an additional distribution as a result of the 
correction of the transaction. The costs of such efforts would be part 
of the Costs of Correction.
    (e) Notice. (1) In general. The applicant or the plan administrator 
must provide written notice of the correction to all plan participants. 
The notice shall state that the correction was made pursuant to the 
applicant's participation in the VFC Program, and that the individuals 
receiving notice may obtain a copy of the application, including all 
supporting documentation, from the plan administrator upon written 
request. The notification must also state that the application has been 
submitted to the VFC Program Coordinator at the appropriate Regional 
Office of the United States Department of Labor, Pension and Welfare 
Benefits Administration and include the address and phone number of 
such Regional Office. Generally, notice must be provided no later than 
the date required for distribution of the Summary Annual Report. Notice 
may be accomplished by posting, regular mail, or electronic mail. The 
notice must be distributed or posted in a manner reasonably calculated 
to inform participants in the affected plan of the applicant's 
participation in the VFC Program.
    (2) Special Notice Requirements. (i) Supplemental distributions. 
When the correction involves a supplemental distribution, a notice 
explaining the distribution must also be sent to each individual 
entitled to the supplemental distribution at the same time as the 
supplemental distribution.
    (ii) Adjustment of plan account balances. When the correction 
involves an adjustment to the account balance of a participant, 
beneficiary receiving benefits, or alternate payee, a notice explaining 
the adjustment must be provided at the same time that the individual is 
furnished with the benefit statement that includes the adjustment. This 
provision does not require the creation of additional benefit 
statements. The notice is provided whenever the benefit statement is 
ordinarily provided.

Section 6. Application Procedures

    (a) In general. Each application must adhere to the requirements 
set forth below. Failure to do so may render the application invalid.
    (b) Preparer. The application must be prepared by a Plan Official 
or his or her authorized representative (e.g., attorney, accountant, or 
other service provider). If a representative of the Plan Official is 
submitting the application, the application must include a statement 
signed by the Plan Official that the representative is authorized to 
represent the Plan Official.
    (c) Contact person. Each application must include the name, address 
and telephone number of a contact person. The contact person must be 
familiar with the contents of the application, and have authority to 
respond to inquiries from PWBA.
    (d) Detailed narrative. The applicant must provide to PWBA a 
detailed narrative describing the Breach and the corrective action. The 
narrative must include:
    (i) a list of all persons materially involved in the Breach and its 
correction (e.g., fiduciaries, service providers, borrowers);
    (ii) the EIN number and address of the plan sponsor and 
administrator;
    (iii) the date the plan's most recent Form 5500 was filed;
    (iv) an explanation of the Breach, including the date it occurred;
    (v) an explanation of how the Breach was corrected, by whom and 
when; and (vi) specific calculations demonstrating how Principal Amount 
and Lost Earnings or Restoration of Profits were computed and an 
explanation of why payment of Lost Earnings or Restoration of Profits 
was chosen to correct the Breach.
    (e) Supporting documentation. The applicant must also include:
    (i) the current fidelity bond for the plan;
    (ii) a copy of the plan document, and any other pertinent documents 
(such as the adoption agreement, trust agreement, or insurance 
contract) with the relevant sections identified;
    (iii) documentation that supports the narrative description of the 
transaction and correction;
    (iv) documentation establishing the Lost Earnings amount, including 
documentation of the return on the plan's other investments during the 
time period on which the Lost Earnings is calculated with respect to 
the transaction described in the VFC Program application;
    (v) documentation establishing the amount of Restoration of 
Profits;
    (vi) all documents described in Section 7 with respect to the 
transaction involved;
    (vii) proof of payment of Principal Amount and Lost Earnings or 
Restoration of Profits; and
    (viii) a copy of the sample notification to all affected 
participants.
    (5) Examples of supporting documentation. (i) Examples of 
documentation supporting the description of the transaction and 
correction are leases, appraisals, notes and loan documents, service 
provider contracts, invoices, settlement documents, deeds, perfected 
security interests, and amended annual reports.
    (ii) Examples of acceptable proof of payment include copies of 
canceled checks, executed wire transfers, a signed, dated receipt from 
the recipient of funds transferred to the plan (such as a financial 
institution), and bank statements for the plan's account.
    (g) Penalty of Perjury Statement. Each application must also 
include a Penalty of Perjury statement. The statement shall be signed 
and dated by a plan fiduciary with knowledge of the transaction that is 
the subject of the application and the authorized representative, if 
any. The statement must accompany the application and any subsequent 
additions to the

[[Page 14173]]

application. The statement shall read as follows:
    I certify under penalty of perjury that I have reviewed this 
application and all supporting documents and that to the best of my 
belief the contents are true and complete and comply with all terms and 
conditions of the VFC Program. I further certify under penalty of 
perjury that at the date of this certification neither the Department 
nor any other Federal agency has informed me of an intention to 
investigate or examine the plan or otherwise made inquiry with respect 
to the transaction described in this application. I further certify 
under penalty of perjury that neither I nor any person acting under my 
supervision or control with respect to the operation of an ERISA-
covered employee benefit plan:
    (1) is the subject of any criminal investigation or prosecution 
involving any offense against the United States; \7\
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    \7\ For purposes of this paragraph, an ``offense'' includes 
criminal activity for which the Department of Justice may seek civil 
injunctive relief under the Racketeer Influenced and Corrupt 
Organizations statute (18 U.S.C. 1964(b)). A ``subject'' is any 
individual or entity whose conduct is within the scope of any 
ongoing inquiry being conducted by a Federal investigator(s) who is 
authorized to investigate criminal offenses against the United 
States.
---------------------------------------------------------------------------

    (2) has been convicted of a criminal offense involving employee 
benefit plans at any time or any other offense involving financial 
misconduct which was punishable by imprisonment exceeding one year for 
which sentence was imposed during the preceding thirteen years or which 
resulted in actual imprisonment ending within the last thirteen years, 
nor has such person entered into a consent decree with the Department 
or been found by a court of competent jurisdiction to have violated any 
fiduciary responsibility provisions of ERISA during such period; or
    (3) has sought to assist or conceal the transaction described in 
this application by means of bribery, graft payments to persons with 
fiduciary responsibility for this plan or with the knowing assistance 
of persons engaged in ongoing criminal activity.
    (h) Checklist. The checklist in Appendix B must be completed, 
signed, and submitted with the application.
    (i) Where to apply. The application shall be mailed to the 
appropriate Regional PWBA office listed in Appendix C.
    (j) Record keeping. The applicant must maintain copies of the 
application and any subsequent correspondence with PWBA for the period 
required by section 107 of ERISA.

Section 7. Description of Eligible Transactions and Corrections 
Under the VFC Program

    PWBA has identified certain Breaches and methods of correction that 
are suitable for the VFC Program. Any Plan Official may correct a 
Breach listed in this Section in accordance with the applicable 
correction method. The correction methods set forth are strictly 
construed and are the only acceptable correction methods under the VFC 
Program for the transactions described in this Section. PWBA will not 
accept applications concerning correction of breaches not described in 
this Section.

A. Contributions

1. Delinquent Participant Contributions to Pension Plans
    (a) Description of Transaction. An employer receives directly from 
participants, or withholds from employees' paychecks, certain amounts 
for contribution to a pension plan. Instead of forwarding the 
contributions for investment in accordance with the provisions of the 
plan and within the time frames described in the Department's 
regulation at 29 CFR 2510.3-102, the employer retains the contributions 
for a longer period of time.
    (b) Correction of Transaction. (1) Unpaid contributions. For 
participant contributions not yet paid to the plan, pay to the plan the 
Principal Amount, plus the greater of (i) Lost Earnings or (ii) 
Restoration of Profits resulting from the employer's use of the 
Principal Amount, as described in Section 5(b). The Principal Amount is 
the amount of the unpaid participant contributions. The Loss Date for 
each participant contribution is the earliest date on which it could 
reasonably have been segregated from the employer's general assets. In 
no event shall the Loss Date be later than the applicable maximum time 
period described in the Department's regulation at 29 CFR 2510.3-102.
    (2) Late contributions. If the participant contributions were 
remitted to the plan outside the time period required by the 
regulation, the only correction required is to pay to the plan the 
greater of (i) Lost Earnings or (ii) Restoration of Profits resulting 
from the employer's use of the Principal Amount, as described in 
Section 5(b).
    (3) Examples. The principles of this paragraph (b) are illustrated 
in the following examples:

    Example 1. See Example 1 under Section 5(b).
    Example 2. Employer X is a large national corporation which 
sponsors a section 401(k) plan. X is able to segregate participant 
contributions no later than 10 business days after the end of the 
month in which participant contributions were withheld from 
employees' paychecks. For the pay period ending June 15, participant 
contributions totaling $900,000 were not deposited until August 14.
    The Principal Amount is $900,000. The Loss Date is July 14 (the 
tenth business day in July), the date on which the participant 
contributions became plan assets and should have been deposited in 
the plan's trust account. The Recovery Date is August 14, the date 
that the participant contributions were deposited in the plan's 
trust account.
    The 401(k) plan offers eight investment alternatives with daily 
asset valuation. From July 14 through August 14, most of the plan 
participants experienced a decline in their account balances due to 
a decline in the stock market; however, some participants had a net 
investment gain. The Code section 6621(a)(2) rate during this period 
was 8% and was greater than the profit to the employer from the use 
of the funds during the pertinent time period.
    For the participants whose account balances declined, the 
employer pays the Principal Amount plus the Restoration of Profits 
amount, calculated at 8%. For the other participants, the employer 
pays the Principal Amount plus the higher of each participant's 
actual investment earnings between July 14 and August 14 or the 
Restoration of Profits amount calculated at 8%. Since the Principal 
Amount of $900,000 has already been paid to the plan, the correction 
amount to be paid to the plan is no less than the Restoration of 
Profits of $6,000 ($900,000 times 8% per annum times one-twelfth of 
a year).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) for participant contributions received from participants, a 
copy of the accounting records which identify the date and amount of 
each contribution received;
    (2) for participant contributions withheld from employees' 
paychecks, a copy of the payroll documents showing the date and amount 
of each withholding;
    (3) a statement from a Plan Official identifying the earliest date 
on which the participant contributions reasonably could have been 
segregated from the employer's general assets, along with the 
supporting documentation on which the Plan Official relied in reaching 
this conclusion; and
    (4) a sample notice to participants, including any former employee, 
beneficiary receiving benefits, or alternate payee who is entitled to a 
supplemental distribution.

[[Page 14174]]

B. Loans

1. Loan at Fair Market Interest Rate to a Party in Interest with 
Respect to the Plan
    (a) Description of Transaction. A plan made a loan to a party in 
interest at an interest rate no less than that for loans with similar 
terms (for example, the amount of the loan, amount and type of 
security, repayment schedule, and duration of loan) to a borrower of 
similar creditworthiness. The loan was not exempt from the prohibited 
transaction provisions of Title I of ERISA.
    (b) Correction of Transaction. Pay off the loan in full, including 
any prepayment penalties. An independent commercial lender must also 
confirm in writing that the loan was made at a fair market interest 
rate for a loan with similar terms to a borrower of similar 
creditworthiness.
    (c) Documentation. In addition to the documentation required by 
Section 6, submit a narrative describing the process used to determine 
the fair market interest rate at the time the loan was made, validated 
in writing by an independent commercial lender.
2. Loan at Below-Market Interest Rate to a Party in Interest with 
Respect to the Plan
    (a) Description of Transaction. A plan made a loan to a party in 
interest with respect to the plan at an interest rate which, at the 
time the loan was made, was less than the fair market interest rate for 
loans with similar terms (for example, the amount of loan, amount and 
type of security, repayment schedule, and duration of the loan) to a 
borrower of similar creditworthiness. The loan was not exempt from the 
prohibited transaction provisions of Title I of ERISA.
    (b) Correction of Transaction. Pay off the loan in full, including 
any prepayment penalties. (1) Pay to the plan the Principal Amount, 
plus the greater of (i) the Lost Earnings as described in Section 5(b), 
or (ii) the Restoration of Profits, if any, as described in Section 
5(b).
    (2) For purposes of this transaction, the Principal Amount is equal 
to the excess of the interest payments that would have been received if 
the loan had been made at the fair market interest rate (from the 
beginning of the loan until the Recovery Date) over interest payments 
actually received under the loan terms during such period. For purposes 
of the VFC Program, the fair market interest rate must be determined by 
an independent commercial lender.
    (3) Pay any supplemental distributions that are due, as described 
in Section 5(d).

    Example: The plan made to a party in interest a $150,000 
mortgage loan, secured by a first Deed of Trust, at a fixed interest 
rate of 4% per annum. The loan was to be fully amortized over 30 
years. The fair market interest rate for comparable loans, at the 
time this loan was made, was 7% per annum. The party in interest or 
Plan Official must repay the loan in full plus any applicable 
prepayment penalties. The party in interest or Plan Official also 
must pay the difference between what the plan would have received 
through the Recovery Date had the loan been made at 7% and what, in 
fact, the plan did receive from the commencement of the loan to the 
Recovery Date, plus lost earnings on that amount as described in 
Section 5(b).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) a narrative describing the process used to determine the fair 
market interest rate at the time the loan was made;
    (2) a copy of the independent commercial lender's fair market 
interest rate determination(s);
    (3) a copy of the independent fiduciary's dated, written approval 
of the fair market interest rate determination(s); and
    (4) a sample notice to participants, including any former employee, 
beneficiary receiving benefits, or alternate payee who is entitled to a 
supplemental distribution.
3. Loan at Below-Market Interest Rate to a Person Who is Not a Party in 
Interest with Respect to the Plan
    (a) Description of Transaction. A plan made a loan to a person who 
is not a party in interest with respect to the plan at an interest rate 
which, at the time the loan was made, was less than the fair market 
interest rate for loans with similar terms (for example, the amount of 
loan, amount and type of security, repayment schedule, and duration of 
the loan) to a borrower of similar creditworthiness.
    (b) Correction of Transaction. (1) Pay to the plan the Principal 
Amount, plus Lost Earnings through the Recovery Date, as described in 
Section 5(b).
    (2) Each loan payment has a Principal Amount equal to the excess of 
(a) interest payments that would have been received until the Recovery 
Date if the loan had been made at the fair market interest rate over 
(b) the interest actually received under the loan terms. The fair 
market interest rate must be determined by an independent commercial 
lender.
    (3) From the inception of the loan to the Recovery Date, the amount 
to be paid to the plan is the Lost Earnings on the series of Principal 
Amounts, calculated in accordance with Section 5(b).
    (4) From the Recovery Date to the maturity date of the loan, the 
amount to be paid to the plan is the present value of the remaining 
Principal Amounts, as determined by an independent commercial lender. 
Instead of calculating the present value, it is acceptable for 
administrative convenience to pay the sum of the remaining Principal 
Amounts.
    (5) The principles of this paragraph (b) are illustrated in the 
following example:

    Example: The plan made a $150,000 mortgage loan, secured by a 
first Deed of Trust, at a fixed interest rate of 4% per annum. The 
loan was to be fully amortized over 30 years. The fair market 
interest rate for comparable loans, at the time this loan was made, 
was 7% per annum. The borrower or the Plan Official must pay the 
excess of what the Plan would have received through the Recovery 
Date had the loan been made at 7% over what, in fact, the plan did 
receive from the commencement of the loan to the Recovery Date, plus 
Lost Earnings on that amount as calculated in Section 5(b). The Plan 
Official must also pay on the Recovery Date the difference in the 
value of the remaining payments on the loan between the 7% and the 
4% for the duration of the time the plan is owed repayments on the 
loan.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) a narrative describing the process used to determine the fair 
market interest rate at the time the loan was made;
    (2) a copy of the independent commercial lender's fair market 
interest rate determination(s); and
    (3) a copy of the supplemental distribution notice, if applicable.
4. Loan at Below-Market Interest Rate Solely Due to a Delay in 
Perfecting the Plan's Security Interest
    (a) Description of Transaction. For purposes of the VFC Program, if 
a plan made a purportedly secured loan to a person who is not a party 
in interest with respect to the plan, but there was a delay in 
recording or otherwise perfecting the plan's interest in the loan 
collateral, the loan will be treated as an unsecured loan until the 
plan's security interest was perfected.
    (b) Correction of Transaction. (1) Pay to the plan the Principal 
Amount, plus Lost Earnings as described in Section 5(b), through the 
date the loan is fully secured.
    (2) The Principal Amount is equal to the difference between (a) 
interest payments actually received under the loan terms and (b) the 
interest payments

[[Page 14175]]

that would have been received if the loan had been made at the fair 
market interest rate for an unsecured loan. The fair market interest 
rate must be determined by an independent commercial lender.
    (3) In addition, if the delay in perfecting the loan's security 
caused a permanent change in the risk characteristics of the loan, the 
fair market interest rate for the remaining term of the loan must be 
determined by an independent commercial lender. In that case, the 
correction amount includes an additional payment to the plan. The 
amount to be paid to the plan is the present value of the remaining 
Principal Amounts from the date the loan is fully secured to the 
maturity date of the loan. Instead of calculating the present value, it 
is acceptable for administrative convenience to pay the sum of the 
remaining Principal Amounts.
    (4) The principles of this paragraph (b) are illustrated in the 
following examples:

    Example 1: The plan made a mortgage loan, which was supposed to 
be secured by a Deed of Trust. The plan's Deed was not recorded for 
six months, but, when it was recorded, the Deed was in first 
position. The interest rate on the loan was the fair market interest 
rate for a mortgage loan secured by a first-position Deed of Trust. 
The loan is treated as an unsecured, below-market loan for the six 
months prior to the recording of the Deed of Trust.
    Example 2: Assume the same facts as in Example 1, except that, 
as a result of the delay in recording the Deed, the plan ended up in 
second position behind another lender. The risk to the plan is 
higher and the interest rate on the note is no longer commensurate 
with that risk. The loan is treated as a below-market loan (based on 
the lack of security) for the six months prior to the recording of 
the Deed of Trust and as a below-market loan (based on secondary 
status security) from the time the Deed is recorded until the end of 
the loan.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) a narrative describing the process used to determine the fair 
market interest rate for the period that the loan was unsecured and, if 
applicable, for the remaining term of the loan;
    (2) a copy of the independent commercial lender's fair market 
interest rate determination(s); and
    (3) a copy of the supplemental distribution notice, if applicable.

C. Purchases, Sales and Exchanges

1. Purchase of an Asset (Including Real Property) by a Plan From a 
Party in Interest
    (a) Description of Transaction. A plan purchased an asset with cash 
from a party in interest with respect to the plan, and under the 
circumstances, no prohibited transaction exemption applies.
    (b) Correction of Transaction. (1) The transaction must be 
corrected by the sale of the property back to the party in interest who 
originally sold the asset to the plan or to a person who is not a party 
in interest. Whether the asset is sold to a person who is not a party 
in interest with respect to the plan or is sold back to the original 
seller, the plan must receive the higher of (i) the fair market value 
(FMV) of the asset at the time of resale, without a reduction for the 
costs of sale; or (ii) the Principal Amount, plus the greater of (A) 
Lost Earnings on the Principal Amount as described in Section 5(b), or 
(B) the Restoration of Profits, if any, as described in Section 5(b).
    (2) For this transaction, the Principal Amount is the plan's 
original purchase price.
    (3) The principles of this paragraph (b) are illustrated in the 
following example:

    Example: A plan purchased from the plan sponsor a parcel of real 
property. The plan does not lease the property to any person. 
Instead, the plan uses the property as an office. The Plan Official 
obtains from a qualified, independent appraiser an appraisal of the 
property reflecting the FMV of the property at the time of purchase. 
The appraiser values the property at $100,000, although the plan 
paid the plan sponsor $120,000 for the property. As of the Recovery 
Date the property is valued at $110,000. To correct the transaction, 
the plan sponsor repurchases the property for $120,000 with no 
reduction for the costs of sale and reimburses the plan for the 
initial costs of sale. The plan sponsor also must pay the plan the 
greater of the plan's Lost Earnings and the price the plan paid the 
plan sponsor or the sponsor's profits on this amount. This example 
assumes that the plan sponsor did not make a profit on the $120,000 
proceeds from the original sale of the property to the plan.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) documentation of the plan's purchase of the real property, 
including the date of the purchase, the plan's purchase price, and the 
identity of the seller;
    (2) a narrative describing the relationship between the original 
seller of the asset and the plan; and
    (3) the qualified, independent appraiser's report addressing the 
FMV of the asset purchased by the plan, both at the time of the 
original purchase and at the recovery date.

2. Sale of an Asset (Including Real Property) by a Plan to a Party in 
Interest

    (a) Description of Transaction. A plan sold an asset for cash to a 
party in interest with respect to the plan, in a transaction that is 
not exempt from the prohibited transaction provisions of Title I of 
ERISA.
    (b) Correction of Transaction. (1) The plan must receive the 
Principal Amount plus the greater of (i) Lost Earnings as described in 
Section 5(b), or (ii) the Restoration of Profits, if any, as described 
in Section 5(b). As an alternative to repayment of the Principal 
Amount, if it is determined that the plan will realize a greater 
benefit by repurchasing the property, the plan may repurchase the asset 
from the party in interest \8\ at the lower of the price for which it 
sold the property or the FMV of the property as of the Recovery Date 
plus restoration of the party in interest's net profits from owning the 
property, to the extent they exceed the plan's investment return from 
the proceeds of the sale. The determination as to which correction 
alternative the plan chooses must be made by an independent fiduciary.
---------------------------------------------------------------------------

    \8\ The repurchase of the same property from the party in 
interest to whom the asset was sold is a reversal of the original 
prohibited transaction. The sale is not a new prohibited transaction 
and therefore does not require an exemption.
---------------------------------------------------------------------------

    (2) For this transaction, the Principal Amount is the amount by 
which the FMV of the asset (at the time of the original sale) exceeds 
the sale price.
    (3) The principles of this paragraph (b) are illustrated in the 
following example:

    Example: A plan sold a parcel of unimproved real property to the 
plan sponsor. The sponsor did not make any profit on the use of the 
property. The Plan Official obtains from a qualified, independent 
appraiser an appraisal of the property reflecting the FMV of the 
property as of the date of sale. The appraiser valued the property 
at $130,000, although the plan sold the property to the plan sponsor 
for $120,000. However, the plan fiduciaries have reason to believe 
that the property will substantially increase in the near future 
based on the anticipated building of a shopping mall adjacent to the 
property in question and, as of the Recovery Date, the appraiser 
values the property at $140,000. An independent fiduciary determines 
that the property is a prudent investment for the plan, and will not 
result in any liquidity or diversification problems. The plan 
corrects by repurchasing the property at the original

[[Page 14176]]

sale price, with the party in interest assuming the costs of the 
reversal of the sale transaction.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) documentation of the plan's sale of the asset, including the 
date of the sale, the sales price, and the identity of the original 
purchaser;
    (2) a narrative describing the relationship of the purchaser to the 
asset and the relationship of the purchaser to the plan;
    (3) the qualified, independent appraiser's report addressing the 
FMV of the property at the time of the sale from the plan and as of the 
Recovery Date; and
    (4) the independent fiduciary's report that the property is a 
prudent investment for the plan.
3. Sale and Leaseback of Real Property to Employer
    (a) Description of Transaction. The plan sponsor sold a parcel of 
real property to the plan, which then was leased back to the sponsor, 
in a transaction that is not otherwise exempt.
    (b) Correction of Transaction. (1) The transaction must be 
corrected by the sale of the parcel of real property back to the plan 
sponsor or to a person who is not a party in interest with respect to 
the plan.\9\ The plan must receive the higher of (i) FMV of the asset 
at the time of resale, without a reduction for the costs of sale; or 
(ii) the Principal Amount, plus the greater of (A) Lost Earnings on the 
Principal Amount as described in Section 5(b), or (B) the Restoration 
of Profits, if any, as described in Section 5(b).
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    \9\ If the plan purchased the property from the plan sponsor, 
the sale of the same property back to the plan sponsor is a reversal 
of the prohibited transaction. The sale is not a new prohibited 
transaction and therefore does not require an individual prohibited 
transaction exemption, as long as the plan did not make improvements 
while it owned the property.
---------------------------------------------------------------------------

    (2) If the plan has not been receiving rent at FMV, as determined 
by a qualified, independent appraisal, the sale price of the real 
property should not be based on the historic below-market rent that was 
paid to the plan.
    (3) In addition to the correction amount in subparagraph (1), if 
the plan was not receiving rent at FMV, as determined by a qualified, 
independent appraiser, the Principal Amount also includes the 
difference between the rent actually paid and the rent that should have 
been paid at FMV. The plan sponsor must pay to the plan this additional 
Principal Amount, plus the greater of (i) Lost Earnings or (ii) 
Restoration of Profits resulting from the plan sponsor's use of the 
Principal Amount, as described in Section 5(b).
    (4) The principles of this paragraph (b) are illustrated in the 
following example:

    Example: The plan purchased at FMV from the plan sponsor an 
office building that served as the sponsor's primary business site. 
Simultaneously, the plan sponsor leased the building from the plan 
at below the market rental rate. The Plan Official obtains from a 
qualified, independent appraiser an appraisal of the property 
reflecting the FMV of the property and rent. To correct the 
transaction, the plan sponsor purchases the property from the plan 
at the higher of the appraised value at the time of the resale or 
the original sales price and also pays the Lost Earnings. Because 
the rent paid to the plan was below the market rate, the sponsor 
must also make up the difference between the rent paid under the 
terms of the lease and the amount that should have been paid, plus 
Lost Earnings on this amount, as described in Section 5(b).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) documentation of the plan's purchase of the real property, 
including the date of the purchase, the plan's purchase price, and the 
identity of the original seller;
    (2) documentation of the plan's sale of the asset, including the 
date of sale, the sales price, and the identity of the purchaser;
    (3) a narrative describing the relationship of the original seller 
to the plan and the relationship of the purchaser to the plan;
    (4) a copy of the lease;
    (5) documentation of the date and amount of each lease payment 
received by the plan; and
    (6) the qualified, independent appraiser's report addressing both 
the FMV of the property at the time of the original sale and at the 
Recovery Date, and the FMV of the lease payments.
4. Purchase of an Asset (Including Real Property) By a Plan From a 
Person Who Is Not a Party in Interest With Respect to the Plan at a 
Price Other Than Fair Market Value
    (a) Description of Transaction. A plan acquired an asset from a 
person who is not a party in interest with respect to the plan, without 
determining the asset's FMV. As a result, the plan paid more than it 
should have for the asset.
    (b) Correction of Transaction. The Principal Amount is the 
difference between the actual purchase price and the asset's FMV at the 
time of purchase. The plan must receive the Principal Amount plus the 
Lost Earnings, as described in Section 5(b).
    (1) The principles of this paragraph (b) are illustrated in the 
following example:

    Example: A plan bought unimproved land without obtaining a 
qualified, independent appraisal. Upon discovering that the purchase 
price was $10,000 more than the appraised FMV, the Plan Official 
pays the plan the Principal Amount of $10,000, plus Lost Earnings as 
described in Section 5(b).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) Documentation of the plan's original purchase of the asset, 
including the date of the purchase, the purchase price, and the 
identity of the seller;
    (2) A narrative describing the relationship of the seller to the 
plan; and
    (3) A copy of the qualified, independent appraiser's report 
addressing the FMV at the time of the plan's purchase.
5. Sale of an Asset (Including Real Property) By a Plan to a Person who 
is not a Party in Interest with Respect to the Plan at a Price Less 
Than Fair Market Value
    (a) Description of Transaction. A plan sold an asset to a person 
who is not a party in interest with respect to the plan, without 
determining the asset's FMV. As a result, the plan received less than 
it should have from the sale.
    (b) Correction of Transaction. The Principal Amount is the amount 
by which the FMV of the asset as of the Recovery Date exceeds the price 
at which the plan sold the property. The plan must receive the 
Principal Amount plus Lost Earnings as described in Section 5(b).
    (1) The principles of this paragraph (b) are illustrated in the 
following example:

    Example: A plan sold unimproved land without taking steps to 
ensure that the plan received FMV. Upon discovering that the sale 
price was $10,000 less than the FMV, the Plan Official pays the plan 
the Principal Amount of $10,000 plus Lost Earnings as described in 
Section 5(b).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) Documentation of the plan's original sale of the asset, 
including the date of the sale, the sale price, and the identity of the 
buyer;
    (2) A narrative describing the relationship of the buyer to the 
plan; and
    (3) A copy of the qualified, independent appraiser's report 
addressing the FMV at the time of the plan's sale.

[[Page 14177]]

D. Benefits

1. Payment of Benefits Without Properly Valuing Plan Assets on Which 
Payment is Based
    (a) Description of Transaction. A defined contribution pension plan 
pays benefits based on the value of the plan's assets. If one or more 
of the plan's assets are not valued at current value, the benefit 
payments are not correct. If the plan's assets are overvalued, the 
current benefit payments will be too high. If the plan's assets are 
undervalued, the current benefit payments will be too low.
    (b) Correction of Transaction. (1) Establish the correct value of 
the improperly valued asset for each plan year, starting with the first 
plan year in which the asset was improperly valued. Restore to the plan 
for distribution to the affected plan participants, or restore directly 
to the plan participants, the amount by which all affected participants 
were underpaid distributions to which they were entitled under the 
terms of the plan, plus the higher of Lost Earnings or the underpayment 
rate defined in section 6621(a)(2) of the Code on the underpaid 
distributions. File amended Annual Report Forms 5500, as detailed 
below.
    (2) To correct the valuation defect, a Plan Official must determine 
the FMV of the improperly valued asset per Section 5(a), for each year 
in which the asset was valued improperly.
    (3) Once the FMV has been determined, the participant account 
balances for each year must be adjusted accordingly.
    (4) The annual report Forms 5500 must be amended and refiled for 
(i) the last three plan years or (ii) all plan years in which the value 
of the asset was reported improperly, whichever is less.
    (5) The Plan Official or plan administrator must determine who 
received distributions from the plan during the time the asset was 
valued improperly. For distributions that were too low, the amount of 
the underpayment is treated as a Principal Amount for each individual 
who received a distribution. The Principal Amount and Lost Earnings 
must be paid to the affected individuals. For distributions that were 
too high, the total of the overpayments constitutes the Principal 
Amount for the plan. The Principal Amount plus the Lost Earnings, as 
described in Section 5(b), must be restored to the plan or to the 
participants.
    (6) The principles of this paragraph (b) are illustrated in the 
following examples:

    Example 1. On December 31, 1995, a profit sharing plan purchased 
a 20-acre parcel of real property for $500,000, which represented a 
portion of the plan's assets. The plan has carried the property on 
its books at cost, rather than at FMV. One participant left the 
company on January 1, 1997, and received a distribution, which 
included her portion of the value of the property. The separated 
participant's account balance represented 2% of the plan's assets. 
As part of correction for the VFC Program, a qualified, independent 
appraiser has determined the FMV of the property for 1996, 1997, and 
1998. The FMV as of December 31, 1996, was $400,000. Therefore, this 
participant was overpaid by $2,000 (($500,000-$400,000) times 2%). 
The Plan Officials corrected the transaction by paying to the plan 
$2,500, consisting of $2,000 Principal Amount and $500 Lost 
Earnings. The Lost Earnings were based on a return of 25%, which 
represents the total return on the plan's investments from the date 
of the distribution to the participant until the date of correction.
    The plan administrator also filed an amended Form 5500 for plan 
years 1996 and 1997, to reflect the proper values. The plan 
administrator will include the correct asset valuation in the 1998 
Form 5500 when that form is filed.
    Example 2. Assume the same facts as in Example 1, except that 
the property had appreciated in value to $600,000 as of December 31, 
1996. The separated participant would have been underpaid by $2,000. 
The correction consists of locating the participant and distributing 
$2,500 to her ($2,000 Principal Amount and $500 Lost Earnings), as 
well as filing the amended Forms 5500 C/R.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) A copy of the qualified, independent appraiser's report for 
each plan year in which the asset was revalued;
    (2) A written statement confirming the date that amended Annual 
Report Forms 5500 with correct valuation data were filed;
    (3) If losses are restored to the plan, proof of payment to the 
plan and copies of the adjusted participant account balances;
    (4) if supplemental distributions are made, proof of payment to the 
individuals entitled to receive the supplemental distributions; and
    (5) a sample notice to participants.

E. Plan Expenses

1. Duplicative, Excessive, or Unnecessary Compensation Paid by a Plan
    (a) Description of Transaction. A plan paid excessive compensation, 
including commissions or fees, to a service provider (such as an 
attorney, accountant, actuary, financial advisor, or insurance agent); 
a plan paid two or more persons to provide the same services to the 
plan; or a plan paid a service provider for services that were not 
necessary for the operation of the plan.
    (b) Correction of Transaction. (1) Restore to the plan the 
Principal Amount, plus the greater of (i) Lost Earnings or (ii) 
Restoration of Profits resulting from the use of the Principal Amount, 
as described in Section 5(b).
    (2) The Principal Amount is the difference between (a) the amount 
actually paid by the plan to the service provider during the six years 
prior to the discontinuation of the payment of the excessive, 
duplicative, or unnecessary compensation and (b) the reasonable market 
value of the non-duplicative services.
    (3) The principles of this paragraph (b) are illustrated in the 
following example:

    Example. Excessive compensation. A plan hired an investment 
advisor who advised the plan's trustees about how to invest the 
plan's entire portfolio. In accordance with the plan document, the 
trustees instructed the advisor to limit the plan's investments to 
equities and bonds. In exchange for his services, the plan paid the 
investment advisor 3% of the value of the portfolio's assets. If the 
trustees had inquired they would have learned that comparable 
investment advisors charged 1% of the value of the assets for the 
type of portfolio that the plan maintained. To correct the 
transaction, the plan must be paid the Principal Amount of 2% of the 
value of the plan's assets, plus Lost Earnings, as described in 
Section 5(b).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) a written estimate of the reasonable market value of the 
services;
    (2) the estimator's qualifications; and
    (3) the cost of the services at issue during the period that such 
services were provided to the plan.
2. Payment of Dual Compensation to a Plan Fiduciary
    (a) Description of Transaction. A plan pays a fiduciary for 
services rendered to the plan when the fiduciary already receives full-
time pay from an employer or an association of employers, whose 
employees are participants in the plan, or from an employee 
organization whose members are participants in the plan. The plan's 
payments to the plan fiduciary are not mere reimbursements of expenses 
properly and actually incurred by the fiduciary.
    (b) Correction of Transaction. (1) Restore to the plan the 
Principal Amount, plus the greater of (i) Lost Earnings or (ii) 
Restoration of Profits

[[Page 14178]]

resulting from the fiduciary's use of the Principal Amount for the same 
period.
    (2) The Principal Amount is the difference between (a) the amount 
actually paid by the plan during the six years prior to the 
discontinuation of the payments to the fiduciary and (b) the amount 
that represents reimbursements of expenses properly and actually 
incurred by the fiduciary.
    (3) The principles of this paragraph (b) are illustrated in the 
following example:

    Example. A union sponsored a health plan funded through 
contributions by employers. The union president receives $50,000 per 
year from the union in compensation for his services as union 
president. He is appointed as a trustee of the health plan while 
retaining his position as union president. In exchange for acting as 
plan trustee, the union president is paid a salary of $200 per week 
by the plan while still receiving the $50,000 salary from the union. 
Since $50,000 is full-time pay, the plan's weekly salary payments 
are improper. To correct the transaction, the plan must be paid the 
Principal Amount, which is the $200 weekly salary amount for each 
week that the salary was paid, plus the higher of Lost Earnings or 
Restoration of Profits, as described in Section 5(b).

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) copies of the plan's accounting records which show the date and 
amount of compensation paid by the plan to the identified fiduciary; 
and
    (2) if any of the amounts paid by the plan to the fiduciary 
represent reimbursements of expenses properly and actually incurred by 
the fiduciary, include copies of the plan records which indicate the 
date, amount, and character of these payments.

    Signed at Washington, DC this 9th day of March, 2000.
Leslie Kramerich,
Acting Assistant Secretary for Pension and Welfare Benefits 
Administration, Department of Labor.

Appendix A--Sample VFC Program No Action Letter

Applicant (Plan Official)
Address
Dear Applicant (Plan Official):
Re: VFC Program Application No. xx-xxxxxx
    The Department of Labor, Pension and Welfare Benefits 
Administration (PWBA), has responsibility for administration and 
enforcement of Title I of the Employee Retirement Income Security Act 
of 1974, as amended (ERISA). PWBA has established a Voluntary Fiduciary 
Correction Program to encourage the correction of breaches of fiduciary 
responsibility and the restoration of losses to the plan participants 
and beneficiaries.
    In accordance with the requirements of the VFC Program, you have 
identified the following transactions as breaches, or potential 
breaches, of Part 4 of Title I of ERISA, and you have submitted 
documentation to PWBA that demonstrates that you have taken the 
corrective action indicated.
    [Briefly recap the violation and correction. Example: Failure to 
deposit participant contributions to the XYZ Corp. 401(k) plan within 
the time frames required by ERISA, from date to date. All participant 
contributions were deposited by date and lost earnings on the 
delinquent contributions were deposited and allocated to participants' 
plan accounts on date.]
    Because you have taken the above-described corrective action, which 
is consistent with the requirements of the VFC Program, PWBA will take 
no civil enforcement action against you with respect to this breach. 
Specifically, PWBA will not recommend that the Solicitor of Labor 
initiate legal action against you, and PWBA will not impose the penalty 
in section 502(l) of ERISA on the amount you have repaid to the plan.
    PWBA's decision to take no further action is conditioned on the 
completeness and accuracy of the representations made in your 
application. You should note that this decision will not preclude PWBA 
from conducting an investigation of any potential violations of 
criminal law in connection with the transaction identified in the 
application or investigating the transaction identified in the 
application with a view toward seeking appropriate relief from any 
other person. [If the transaction is a prohibited transaction, add the 
following language: Please also be advised that pursuant to section 
3003(c) of ERISA, 29 U.S.C. section 1203(c), the Secretary of Labor is 
required to transmit to the Secretary of the Treasury information 
indicating that a prohibited transaction has occurred. Accordingly, 
this matter will be referred to the Internal Revenue Service.]
    In addition, you are cautioned that PWBA's decision to take no 
further action is binding on PWBA only. Any other governmental agency, 
and participants and beneficiaries, remain free to take whatever action 
they deem necessary.
    If you have any questions about this letter, you may contact the 
Regional VFC Program Coordinator at applicable address and telephone 
number.

Appendix B--VFC Program Checklist

    Use this checklist to ensure that you are submitting a complete 
application. The applicant must sign and date the checklist and include 
it with the application. Indicate ``Yes'', ``No'' or ``N/A'' next to 
each item. A ``No'' answer or the failure to include a completed 
checklist will delay review of the application until all required items 
are received.
______1. Have you reviewed the eligibility, definitions, transaction 
and correction, and documentation sections of the VFC Program?
______2. Have you included the name, address and telephone number of a 
contact person familiar with the contents of the application?
______3. Have you provided the EIN # and address of the plan sponsor 
and plan administrator?
______ 4. Have you provided the date that the most recent Form 5500 was 
filed by the plan?
______5. Have you enclosed a signed and dated certification under 
penalty of perjury?
______6. Have you enclosed a copy of the plan document, and any other 
pertinent documents (such as the adoption agreement, trust agreement, 
or insurance contract) with the relevant sections identified?
______7. Have you enclosed a copy of the current fidelity bond for the 
plan?
______8. Where applicable, have you enclosed a copy of an appraiser's 
report?
______9. Have you enclosed other documents as specified by the 
individual transactions and corrections?
______a. a detailed narrative of the Breach, including the date it 
occurred;
______b. documentation that supports the narrative description of the 
transaction;
______c. an explanation of how the Breach was corrected, by whom and 
when, with supporting documentation;
______d. a list of all persons materially involved in the Breach and 
its correction (e.g., fiduciaries, service providers, borrowers);
______e. documentation establishing the return on the plan's other 
investments during the time period the plan engaged in the transaction 
described in the VFC Program application;
______f. specific calculations demonstrating how Principal Amount and 
Lost Earnings or Restoration of Profits were computed; and
______g. proof of payment of Principal Amount and Lost Earnings or 
Restoration of Profits.
______10. Have you made proper arrangements to provide notice to the 
plan participants?

[[Page 14179]]

______11. Where applicable, have you enclosed a description of how the 
plan has used its best efforts to locate and pay former employees who 
have received lump sum distributions or rollovers but are due an 
additional distribution as a result of the correction of the 
transaction?
______12. Has the plan implemented measures to ensure that the 
transactions specified in the application do not recur? (Do not include 
this with the application. The Department will not opine on the 
adequacy of these measures.)
Signature of Applicant and Date Signed
Name of Applicant (Typed):
Title/Relationship to the Plan (Typed):
Name of Plan, EIN and Plan Number (Typed):

Appendix C--List of PWBA Regional Offices

    Atlanta Regional Office, 61 Forsyth Street, SW, Suite 7B54, 
Atlanta, GA 30303, telephone (404) 562-2156, fax (404) 562-2168; 
jurisdiction: Alabama, Florida, Georgia, Mississippi, North Carolina, 
South Carolina, Tennessee, Puerto Rico.
    Boston Regional Office, J.F.K. Building, Room 575, Boston, MA 
02203, telephone: (617) 565-9600, fax: (617) 565-9666; jurisdiction: 
Connecticut, Maine, Massachusetts, New Hampshire, central and western 
New York, Rhode Island, Vermont.
    Chicago Regional Office, 200 West Adams Street, Suite 1600, 
Chicago, IL 60606, telephone (312) 353-0900, fax (312) 353-1023; 
jurisdiction: northern Illinois, northern Indiana, Wisconsin.
    Cincinnati Regional Office, 1885 Dixie Highway, Suite 210, Ft. 
Wright, KY 41011-2664, telephone (606) 578-4680, fax (606) 578-4688; 
jurisdiction: southern Indiana, Kentucky, Michigan, Ohio.
    Dallas Regional Office, 525 Griffin Street, Rm. 707, Dallas, TX 
75202-5025, telephone (214) 767-6831, fax (214) 767-1055; jurisdiction: 
Arkansas, Louisiana, New Mexico, Oklahoma, Texas.
    Kansas City Regional Office, 1100 Main Street, Suite 1200, Kansas 
City, MO 64105-2112, telephone (816) 426-5131, fax (816) 426-5511; 
jurisdiction: Colorado, southern Illinois, Iowa, Kansas, Minnesota, 
Missouri, Montana, Nebraska, North Dakota, South Dakota, Wyoming.
    Los Angeles Regional Office, 790 E. Colorado Boulevard, Suite 514, 
Pasadena, CA 91101, telephone (626) 583-7862, fax (626) 583-7845; 
jurisdiction: 10 southern counties of California, Arizona, Hawaii, 
American Samoa, Guam, Wake Island.
    New York Regional Office, 6 World Trade Center, Room 625, New York, 
NY 10048, telephone (212) 637-0600, fax (212) 637-0512; jurisdiction: 
southeastern New York, northern New Jersey.
    Philadelphia Regional Office, 3535 Market St., Room 12400, 
Philadelphia, PA 19104, telephone (215) 596-1134, fax (215) 596-4475; 
jurisdiction: Delaware, Maryland, southern New Jersey, Pennsylvania, 
Virginia, Washington, D.C., West Virginia.
    San Francisco Regional Office, 71 Stevenson St., Suite 915, San 
Francisco, CA 94105, telephone (415) 975-4600, fax (415) 975-4589; 
jurisdiction: Alaska, 48 northern counties of California, Idaho, 
Nevada, Oregon, Utah, Washington.

[FR Doc. 00-6256 Filed 3-14-00; 8:45 am]
BILLING CODE 4510-29-P