[Federal Register Volume 67, Number 60 (Thursday, March 28, 2002)]
[Notices]
[Pages 15062-15083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7516]



[[Page 15061]]

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Part V





Department of Labor





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Pension and Welfare Benefits Administration



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Adoption of Voluntary Fiduciary Correction Program; Notices

  Federal Register / Vol. 67, No. 60 / Thursday, March 28, 2002 / 
Notices  

[[Page 15062]]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

RIN 1210-AA76


Adoption of Voluntary Fiduciary Correction Program

AGENCY: Pension and Welfare Benefits Administration, Labor.

SUMMARY: The Department of Labor adopts the Voluntary Fiduciary 
Correction Program (VFC Program or 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 of 1974, as amended (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.

EFFECTIVE DATE: April 29, 2002.

ADDRESSES: Address questions regarding specific applications for relief 
under the VFC Program to the appropriate PWBA Regional Office listed in 
Appendix C.


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, Lead Investigator, Office of Enforcement, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, Washington, DC, 
(202) 693-8454, or Elizabeth A. Goodman, Pension Law Specialist, Office 
of Regulations and Interpretations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor, Washington, DC, (202) 693-
8510. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

Discussion of the Program and Comments

Background

    Title I of ERISA, 29 U.S.C. 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 public 
interest in such programs, PWBA decided to establish the VFC Program on 
an interim basis (Interim VFC Program). The Interim VFC Program was 
published in the Federal Register on March 15, 2000 (65 FR 14164), and 
has been administered out of each of PWBA's ten regional offices since 
April 14, 2000. 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. Based on its 
experience with administering the Program on an interim basis and the 
public comments received, PWBA has decided to implement the Program on 
a permanent basis. The Program will continue to be operated out of the 
ten regional PWBA offices.
    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 breach, and to 
restore to the 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) 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 section 502(l)(1)(B), this 
civil penalty also is 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 on a permanent basis. 
Under the Program, persons who are potentially liable for a breach are 
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 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 any amounts already restored to the plan by 
the applicant 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.

The March 15, 2000 Interim VFC Program

    The Interim VFC Program was set forth in seven sections and three 
appendices. It was 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 believed that the VFC Program would assist Plan Officials in 
understanding the requirements of Part 4 of Title I of ERISA and would 
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, made 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 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. Relief under the Interim VFC Program was limited to 
the transactions identified in the application and to the persons who 
corrected those transactions. In certain cases, such as where PWBA 
might become aware of possible criminal behavior, material 
misrepresentations or omissions in the VFC Program

[[Page 15063]]

application, or other abuse of the VFC Program, relief would not be 
available under the Interim VFC Program. In those cases, the Department 
reserved the right to initiate an investigation, which could lead to 
enforcement action. PWBA expected that such cases would be unusual. 
Full correction under the Interim VFC Program did not preclude any 
other governmental agency, including the Internal Revenue Service 
(IRS), from exercising any rights it might have had with respect to the 
transactions that were the subject of an application. PWBA sought 
comments on possible areas of coordination between PWBA and the IRS 
that would facilitate voluntary correction of breaches of Title I of 
ERISA. PWBA noted that based on its preliminary review of the VFC 
Program, the IRS had indicated that except in those instances where the 
fiduciary breach or its correction results in a tax abuse situation or 
a plan qualification failure, a correction under this Program generally 
would be acceptable under the Internal Revenue Code.
    The Interim VFC Program was 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, made 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 any 
breaching fiduciary, but also plan sponsors, parties in interest or 
other persons in a position to correct a breach. However, the 
definition of Under Investigation, along with the criteria set forth in 
Section 4, Program Eligibility, provided 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, could not 
take advantage of the VFC Program. Further, PWBA reserved the right to 
reject an application when warranted by the facts and circumstances of 
a particular case.
    The Interim VFC Program noted that 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 Interim VFC Program was 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, set forth 
issues that are likely to be present with regard to any transaction 
described in Section 7. For example, Section 5 described 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 made clear that the cost of correction must be borne by 
the applicant and not the plan. In addition, Section 5 stated 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, specified the requirements for 
the application, including documentation and the penalty of perjury 
statement that must be signed by a plan fiduciary with knowledge of the 
transaction and the applicant's authorized representative, if any. 
Section 6 was supplemented by Appendix B, the VFC Program Checklist 
that was designed to help the applicant determine whether he or she has 
met all of the application requirements, including all necessary 
documentation, prior to submission to PWBA.
    Section 7, Description of Eligible Transactions and Methods of 
Correction, set forth five types of transactions that may be corrected 
pursuant to the VFC Program. The first, ``Delinquent Participant 
Contributions to Pension Plans,'' was included in the Interim VFC 
Program based on PWBA's experience with the Pension Payback Program. 
Unlike the Pension Payback Program, the Interim VFC Program did 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 interim stage of the VFC 
Program, PWBA took a conservative approach and limited the eligible 
transactions to those where the nature of the transaction and the 
required correction could be described accurately without reference to 
specific circumstances, and thus could be corrected satisfactorily 
without consultation and negotiation with PWBA. PWBA sought comments on 
whether different correction methods or earnings calculation methods 
should be available in the Program.

Comments on the Interim VFC Program

In General

    In general, comments received on the VFC Program were favorable. 
Commenters expressed support for a formal program that encourages 
identification and correction of potential breaches of fiduciary duty. 
Among the advantages cited were increased fiduciary oversight of plans, 
reduction of litigation costs, and security of benefits.
    Some commenters represented generally, however, that the VFC 
Program contains disincentives to participation. Other commenters 
stated that Section 2(c)(6) (Other actions not precluded) will deter 
potential applicants. These comments noted that Section 2(c)(6) does 
not preclude PWBA from seeking injunctive relief against any person 
responsible for a transaction, referring information concerning the 
transaction to the IRS, or imposing civil penalties under section 
502(c)(2) of ERISA. Commenters also pointed out that other parties, 
including participants, could file suit against applicants. Several 
comments observed that PWBA reserves the right to reject an application 
if the facts and circumstances warrant, and that PWBA may initiate a 
civil or criminal investigation in certain cases. Commenters suggested 
these provisions might discourage potential applicants from 
participating in the Program.
    Several commenters expressed concern that the Department might 
target VFC Program applicants for investigation. Commenters believe 
that the lingering risk of enforcement action creates a disincentive 
for potentially liable parties to identify themselves to the 
Department. These comments suggested that the Department should offer 
public assurances that applicants will not be investigated. The 
commenters also questioned whether the Department would target an 
applicant plan for other potential violations for which VFC Program 
relief had not been requested. Commenters suggested the Department 
should offer VFC Program relief for violations of sections 403 and 
404(a) of ERISA if those violations relate to a transaction corrected 
under the Program.
    PWBA believes that the benefits of participating in the VFC Program 
should outweigh any concern about possible enforcement by the 
Department in response to an application. As noted in the preamble to 
the Interim VFC Program, the Department generally does not anticipate 
taking enforcement action in response to an application except in the 
unusual situation where PWBA becomes aware of possible criminal 
behavior, material misrepresentations or omissions in the VFC Program 
application, or other abuse of the Program. Moreover, although the VFC

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Program does not provide specifically for relief from violations of 
section 403 and 404 of ERISA, the Department anticipates that as a 
general matter applicants will have corrected violations of section 403 
and 404 that are integrally related to transactions corrected under the 
Program. PWBA continues to believe, however, that transactions 
violative of section 403 and 404 are not appropriate for the Program 
because unlike the transactions selected for the Program, the nature of 
the corrections required for violations of sections 403 and 404 will 
vary under the facts and circumstances of the particular transactions, 
and thus, proper correction is likely to require negotiations subject 
to the section 502(l) penalty. PWBA encourages plan officials who 
discover a transaction that is a breach of both section 404 and 406 to 
make full correction under the Program and to take any additional 
action necessary to correct the section 404 violations in conjunction 
with the appropriate regional office. PWBA emphasizes in this regard 
that only amounts actually negotiated as settlement in excess of those 
paid under the VFC Program, or otherwise paid to the plan by the 
correcting officials after discussion with PWBA, are potentially 
subject to section 502(l) penalties.

Specific Comments

Excise Tax Relief

    Several commenters requested that the VFC Program be amended to 
provide for relief from excise taxes in addition to the Program's 
relief from ERISA section 502(l) penalties. Commenters noted that the 
Department granted relief from excise taxes in its Pension Payback 
Program. Commenters stated that they believed that the possibility of 
referral by the Secretary of Labor to the Internal Revenue Service as 
mandated by section 3003 of ERISA and the absence of any relief under 
the VFC Program from the Code's requirement that excise taxes be paid 
in full for the transactions at issue would provide significant 
disincentives for participating in the Program.
    As discussed in more detail in the preamble to the Notice of 
Proposed Class Exemption, published in this issue of the Federal 
Register simultaneously with the adoption of the VFC Program (Class 
Exemption),\1\ PWBA has determined that limited excise tax relief is 
appropriate for the correction of certain transactions under the 
Program.
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    \1\ All references to the Class Exemption hereafter include the 
Proposed Class Exemption until finalized.
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    PWBA also notes that applicants who would not otherwise be liable 
for excise taxes under section 4975(a) of the Code, but who are in a 
position to correct a breach, are not made liable for excise taxes 
solely by virtue of their participation in the Program.

Notice to Participants

    The majority of commenters requested that PWBA eliminate or reduce 
the notice requirements in Section 5, General Rules for Acceptable 
Corrections. Commenters noted that the Department generally does not 
require notice of correction to participants when the Department 
resolves investigations through voluntary compliance or lawsuits. 
Commenters stated that the notice requirement might invite participant 
litigation concerning the transaction described in a VFC Program 
application. Other commenters maintained that notice of the correction 
might erode employee morale, and that participants would receive 
sufficient notice simply by observing any increase in their account 
balance. One commenter explicitly supported the notice requirement in 
the Interim VFC Program.
    PWBA believes that informed participants promote the goals of sound 
plan administration and protection of benefits. PWBA agrees, however, 
that the original notice requirements could discourage correction 
through participation in the VFC Program, and therefore eliminate 
opportunities to protect and restore plan benefits. Accordingly, in the 
permanent VFC Program, PWBA has omitted those notice requirements 
specified in section 5(e) of the Interim VFC Program. To the extent 
that the applicant avails him or herself of excise tax relief under the 
Class Exemption, however, the notice requirements described therein 
must be followed. PWBA also expects that if correction under the 
Program involves an adjustment of account balances or supplemental 
distributions, the plan will explain to the affected participants and 
beneficiaries the basis for such adjustment or distribution.

Protection of Participant Privacy Data

    Commenters objected to the fact that requiring production on 
request to participants of the entire application and supporting 
documents, which was part of the original notice requirement in section 
5(e) of the Interim VFC Program, if read literally, could be 
interpreted to require the production of protected privacy data. 
Although the notice requirement, which included a notice of the right 
to obtain a copy of the application, has been eliminated from the 
Program, PWBA believes that participants have a right to obtain copies 
of the application and supporting documentation. PWBA believes that it 
would be required to produce portions of the application under the 
Freedom of Information Act. Therefore, such information will be made 
available by PWBA to any participant or beneficiary who formally seeks 
such information, but no privacy data that would be protected under law 
will be disclosed. PWBA encourages plan officials to give copies of 
applications directly to participants, but recognizes that privacy data 
need not be disclosed.

Voluntary Self-Correction

    A number of commenters suggested that PWBA expand the VFC Program 
to include voluntary self-correction similar to that in IRS Rev. Proc. 
2001-16 (now Rev. Proc. 2001-17).\2\ These commenters suggested that 
the VFC Program provide that if a plan official were to correct a 
transaction in accordance with the Program without making an 
application, that PWBA would not take action against potentially liable 
parties if the transaction in question were discovered on audit. 
Commenters suggested that adding a self-correction option would 
encourage correction of minor technical breaches by plan officials and 
would obviate the need for PWBA to process applications for such types 
of transactions.
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    \2\ The Interim VFC Program referred to IRS Rev. Proc. 2000-16. 
IRS Rev. Proc. 2001-17 superceded IRS Rev. Proc. 2000-16. For 
convenience, all references to the IRS correction programs and 
procedures are to IRS Rev. Proc. 2001-17 and include reference to 
any subsequent versions in future years.
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    PWBA has decided not to include a formal self-correction option in 
the VFC Program. PWBA believes that an important result under the VFC 
Program is certainty that applicants have complied with the terms of 
the Program and have revealed the details of the transaction and the 
correction under penalty of perjury. PWBA does not believe that it is 
possible to offer relief under the VFC Program without the opportunity 
to scrutinize details of the transaction and correction as would be 
provided in a formal application. Nonetheless, PWBA notes that an ERISA 
section 502(l) penalty is assessed only on amounts obtained pursuant to 
a settlement agreement with the Secretary or ordered by a court to be 
paid in a judicial proceeding instituted by the Secretary under 
subsection 502(a)(2) or (5). Accordingly, if a potentially liable party 
were to have corrected a transaction as specified by the Program and 
the transaction with the correction were later to be discovered on 
audit, any

[[Page 15065]]

penalty to be assessed on an applicable recovery amount within the 
meaning of section 502(l) would be limited to any additional amount 
that might be required by PWBA to be paid following the audit.\3\
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    \3\ PWBA notes that if it discovered on audit a prohibited 
transaction that is subject to section 4975 of the IRC, it would 
have an obligation under section 3003 of ERISA to make a referral to 
the IRS. When plan officials desire to correct a prohibited 
transaction, plan officials should make sure they satisfy the 
requirements of both the Department of Labor and the IRS.
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Expansion of the VFC Program To Include Additional Transactions

    PWBA sought input from the public on whether the VFC Program should 
be expanded to include additional transactions. Some commenters 
believed that the VFC Program should not be limited to specific 
transactions, but rather should include all types of fiduciary 
breaches. Other commenters suggested that certain specific transactions 
be added to the VFC Program. These transactions included plan contracts 
that result in excessive surrender charges, losses due to a failure to 
monitor investments, failure to diversify plan investments and problems 
with Summary Plan Descriptions (SPDs), Form 5500s and qualified 
domestic relations order (QDRO) administration. PWBA believes that 
these transactions are not appropriate for the VFC Program because the 
adequacy of the correction depends on facts and circumstances and 
therefore is not sufficiently uniform to be described in the Program in 
a manner that would obviate the need for any negotiation to ensure full 
correction. In addition, a separate voluntary compliance program (the 
Delinquent Filer Voluntary Compliance Program) is maintained for 
resolution of annual reporting (Form 5500 series) compliance issues. 
After considering the comments, PWBA has decided to maintain the basic 
structure of the Interim VFC Program and limit relief to the 
transactions specified. PWBA believes that the transactions currently 
included in the Program represent those with respect to which plans 
will maximize recoveries by voluntary correction without requiring 
negotiation between applicants and the Department. The Program has been 
expanded to add correction of delinquent employee contributions to both 
insured and funded welfare plans. PWBA will continue to review the 
scope of the VFC Program as it gains more experience with administering 
the Program. In this regard, PWBA invites members of the public to 
submit additional comments on viable transactions and reasonable 
methods of correction through the VFC Program for those suggested 
transactions.

Use of Alternative Correction Methods

    PWBA requested input from the public on additional or different 
correction methods. Commenters generally favored having more 
flexibility in choosing correction options. After evaluating the 
comments, however, PWBA continues to believe that giving applicants 
complete flexibility in choosing correction methods will necessitate a 
level of review and negotiation by PWBA that would result in a 
settlement agreement within the meaning of ERISA section 502(l). 
Accordingly, PWBA will not make any changes to the VFC Program to 
permit alternative correction methods.

Use of New Prohibited Transactions as an Alternative Correction Method

    One commenter suggested, with respect to proposed alternative 
correction methods, that the VFC Program permit engaging in a new 
prohibited transaction to correct the breach where the new prohibited 
transaction is the most viable way to correct the transaction that is 
the subject of the application. The Interim VFC Program contains 
correction methods that do not involve engaging in a new prohibited 
transaction because a new prohibited transaction would require 
exemptive relief or be subject to excise taxes.
    Parties who believe that it is not feasible to correct a 
transaction through the VFC Program because the only viable correction, 
in the applicant's opinion, involves a new prohibited transaction may 
seek voluntary compliance with the Department outside of the VFC 
Program or may apply for individual relief from the prohibited 
transaction provisions for the new transaction from the Office of 
Exemption Determinations. In such circumstances, the corrected 
transaction would be subject to any applicable excise taxes and ERISA 
section 502(l) penalties, but the new transaction would not require the 
payment of excise taxes. PWBA notes in this regard that Prohibited 
Transaction Exemption 94-71 exempts from excise taxes new prohibited 
transactions that are used to correct a past transaction where the 
Department in a written settlement agreement approves the new 
prohibited transaction. However, PTE 94-71 does not relieve liable 
parties from excise taxes for the corrected transaction.

Proof of Payment to Missing Individuals Who Are Entitled to 
Distributions Under the VFC Program

    The correction procedures under the Interim VFC Program required 
applicants to provide evidence that all participants and beneficiaries 
entitled to an additional distribution have been paid. One commenter 
noted that it can take a significant amount of time to locate former 
employees who are not in current pay status with the plan, their 
beneficiaries, and alternate payees, and suggested that the Program be 
amended to provide, similar to the IRS correction programs in Rev. 
Proc. 2001-17, that the applicant be required only to demonstrate that 
it has segregated funds for missing individuals and is taking 
appropriate steps to locate and pay those individuals. PWBA agrees that 
requiring proof of payment to all entitled individuals could 
significantly delay an applicant's ability to obtain relief under the 
Program. PWBA therefore has amended Section 5(d) of the VFC Program to 
require proof of payment only to participants and beneficiaries whose 
current location is known to the plan and/or applicant. For missing 
individuals who need to be located, applicants need only demonstrate 
that they have segregated adequate funds to pay the missing individuals 
and demonstrate that they have commenced the process of locating those 
individuals using either the IRS and Social Security Administration 
locator services, or other comparable means.

Comments Suggesting Changes Where Correction Includes Distribution to 
Participants

    One commenter suggested that because the cost of making the 
distribution may sometimes exceed the amount of the distribution, PWBA 
should use a ``reasonableness standard'' with some flexibility where 
either the costs of full correction exceed the actual benefit to the 
plan or it is impossible to make full correction. The Interim VFC 
Program did not have a de minimus exception for making required 
distributions. Another commenter suggested that the VFC Program be 
modified to take into account situations where the costs of correction 
exceed the benefit to the plan. The IRS Rev. Proc. 2001-17 has an 
exception for making required distributions where the amount of the 
distribution is less than $20 and the cost of the distribution exceeds 
the distribution.
    PWBA has decided to amend the VFC Program by adding Section 5(e), 
De Minimus Exception, to parallel the IRS

[[Page 15066]]

correction programs with respect to former employees, their 
beneficiaries and alternate payees who have neither account balances 
with, nor a right to future benefits, from the plan. Under the new 
section 5(e), where correction under the Program requires distributions 
to such individuals in amounts of less than $20 per individual, and the 
applicant demonstrates in its submission that the cost of making the 
distribution exceeds the cost of correction, the applicant need not 
make distributions to those individuals who have separated from the 
plan and who would receive less than $20 as part of the correction. 
Instead, the applicant need only make payment to the plan in the 
required amount and the payments will be treated as any other payments 
or credits to the plan that are not allocated to individual accounts.
    Another commenter noted that in situations where assets of the plan 
are overvalued, such as those situations described in section 7(d) of 
the Interim VFC Program, correction requires the applicant to make good 
the losses to the plan, without regard to whether assets are recovered 
from any participants or beneficiaries who might have received an 
overpayment. That commenter suggested that the VFC Program should be 
revised to allow plan fiduciaries first to attempt to collect any 
overpayment from a participant or beneficiary before the applicant is 
required to restore the amount overpaid to the plan. PWBA has 
determined not to amend the VFC Program in this regard. PWBA is 
concerned that encouraging applicants to pursue participants and 
beneficiaries for excess benefit payments will unduly delay making the 
plan whole.

Use of Alternative Earnings Calculations

    PWBA also requested comments from the public on whether different 
earnings calculations might be appropriate to correct some or all of 
the transactions in the Program. Generally, commenters believed that 
alternative methods should be permitted so long as they provide 
adequate recovery. Some commenters believed that the methods described 
in the Program were too rigid. Others believed that certain of the 
methods provided more relief than could be obtained by the Department 
in litigation. Evaluation of alternative earnings calculations, 
however, would require discussions and negotiations between PWBA and 
the applicant. Thus, PWBA continues to believe that applicants must use 
the earnings calculation methods described in the VFC Program in order 
to obtain relief under the Program and has not amended the Program in 
this regard.
    PWBA also received comments on certain specific aspects of the 
earnings calculations for the Program. PWBA notes that the correction 
methods, including earnings calculations in the Program, are fairly 
closely patterned on those in the IRS correction methods for prohibited 
transactions (see 26 CFR 53.4941(e)-1(c)) and in the IRS correction 
programs (Rev. Proc. 2001-17).
    One commenter suggested that using the Internal Revenue Code 
section 6621 rate as a ``floor'' provided an inappropriate windfall to 
the plan. According to the commenter, profits made on the use of the 
plan funds rather than the loss to the plan should only be required 
where there is proof of a causal connection between the use of the 
funds and the profits gained by the breaching party. PWBA has 
determined not to amend the Program in this regard. Section 409 of 
ERISA provides that any person who is a fiduciary with respect to a 
plan who breaches any of the responsibilities, obligations, or duties 
imposed upon fiduciaries by this title 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 of such fiduciary which 
have been made through the use of assets of the plan by the fiduciary. 
The VFC Program is structured to make the plan whole without the need 
for investigation and suit and the costs attendant thereto in exchange 
for relief from penalties under section 502(l).
    Another commenter suggested that for an ERISA section 404(c)-type 
plan, it would be more appropriate to use a blended rate, as opposed to 
the highest rate of return, if, for administrative convenience as was 
permitted under the Interim VFC Program, the applicant was not using 
the actual return an individual participant would have earned based on 
his or her investment allocations. PWBA notes that IRS Rev. Proc. 2001-
17, Appendix B, permits IRS program applicants to use the highest rate 
of return for administrative convenience when adding funds to a plan 
participant's account as part of a correction. Rev. Proc. 2001-17 
provides, however, that the employer correcting the violations may use 
the blended overall return for the plan only if a plan participant has 
not made any investment allocations and funds are being added to his or 
her account as part of the correction. PWBA has decided to amend 
Section 5(b)(5) of the VFC Program to track more closely the IRS 
correction programs. The VFC Program is modified to permit the use of a 
blended rate for affected participants who have not made any investment 
allocations. Where participants have made elections, the applicant must 
still either calculate the actual rate of return or use the investment 
with the highest rate of return among the designated broad range of 
investment alternatives available to the participants.
    Certain commenters, as well as applicants who have participated in 
the Interim VFC Program, identified ambiguities in the earnings 
calculation methods for lost earnings with respect to delinquent 
participant contributions to pension plans. PWBA recognizes that 
calculating lost earnings, particularly for delinquent contributions to 
401(k) plans, may be complicated, depending on the length of the 
delinquency, the number of investment options and the performance of 
those options. PWBA has elected not to change the VFC Program with 
respect to the earnings calculations; it believes that only a general 
formula will address the myriad situations that may arise. PWBA has 
however, slightly modified the examples to eliminate some references to 
annualized yields for short correction periods to lessen any possible 
confusion in applying the principles set forth in the examples. 
Nonetheless, PWBA recognizes that there may be situations, depending on 
the duration of the delinquency and the information available to the 
correcting officials regarding investment performance, where use of a 
fraction of an annualized yield may be appropriate.

Form 5500 Filings Associated With VFC Program

    PWBA received several comments with respect to Form 5500 filings 
associated with the VFC Program. Commenters generally were concerned 
that they not be subject to penalties for improper filings if they 
filed an amended return in connection with the VFC Program. One 
commenter suggested that the Delinquent Filer Voluntary Compliance 
Program be consolidated with the VFC Program. Another commenter 
suggested that there be no penalties associated with any filings 
required by the VFC Program. One commenter suggested that PWBA 
eliminate any requirement for filing amended returns to reflect the 
transactions corrected by the VFC Program.
    PWBA has decided to keep the filing requirements associated with 
the VFC Program as published in the Interim VFC Program. PWBA believes 
that where a plan has engaged in a prohibited transaction or plan 
assets have been valued improperly, Forms 5500 must be amended to 
reflect these

[[Page 15067]]

important reporting items. PWBA notes that filing an amended return for 
these purposes will not trigger a penalty, and accordingly, there is no 
need to provide special relief under section 502(c)(2). Penalties 
attach under section 502(c)(2) for delinquent and non-filers. If a plan 
has filed a return that is inadequate, PWBA can reject the return. If 
the filer does not correct the return within 45 days of rejection by 
the Office of the Chief Accountant, PWBA may then assess a penalty. 
PWBA does not anticipate that amended Forms 5500 filed to reflect 
transactions or valuations corrected in accordance with the terms of 
the VFC Program will be subject to rejection for those amendments 
alone.
    The Delinquent Filer Voluntary Compliance Program, as currently 
operated, applies only to delinquent and non-filers. PWBA anticipates 
that applicants under the VFC Program will need only to amend their 
previously filed Forms 5500 to the extent the prohibited transactions 
or improper valuations were not reported adequately. Accordingly, there 
is no need to merge the two programs. Nonetheless, if a plan has filing 
problems and transactions that could be corrected through the VFC 
Program, all of which need to be corrected, plan officials may wish to 
consider applying to both programs simultaneously.

Anonymous Presubmissions

    Commenters suggested that the public would benefit from the ability 
of potentially liable parties to presubmit applications anonymously to 
PWBA prior to filing a formal application for relief under the Program. 
Certain commenters suggested that if the determination as to the type 
of transaction to be included in an application and the correction 
method to be used were negotiated on an anonymous basis, PWBA could 
negotiate the precise relief necessary without engaging in a settlement 
agreement within the meaning of section 502(l). PWBA does not believe 
that it is either practical or appropriate to amend the VFC Program to 
provide for a formal anonymous presubmission process. A formal process 
would result in duplicative effort and could be cumbersome to 
administer. In addition, PWBA believes that negotiation of the type of 
transaction and the appropriate correction could lead to a settlement 
within the meaning of section 502(l) even if the negotiations took 
place on an anonymous basis. PWBA notes that each regional PWBA office 
has a VFC Program Coordinator. Members of the public are free to 
contact the VFC Program Coordinator and discuss on an informal, 
hypothetical basis general issues regarding the scope of the Program, 
including the types of transactions appropriate for an application and 
the types of correction that would satisfy the Program.

Ability To Amend Application To Avoid Final Rejection

    One commenter requested that the VFC Program expressly provide for 
amendment of applications. The commenter suggested that Plan Officials 
be given the opportunity to conduct their own compliance reviews after 
submitting a preliminary application outlining suspected but 
uncorrected breaches. The comment stated that such a procedure would 
enable fiduciaries to resolve known and undiscovered breaches during 
the compliance review. The commenter suggested that the Department 
defer any enforcement action pending its receipt of the final 
application. The commenter also suggested that the VFC Program provide 
that if the Department intended to reject an application, it provide 
notice to the applicant, the basis for rejection, and a deadline for 
correcting deficiencies. The Department believes a formal procedure for 
amendment of applications as proposed by the commenter is not 
necessary. The Department emphasizes that the VFC Program includes no 
limitations on amendment of applications provided such change does not 
result from negotiation with PWBA. Accordingly, PWBA does not believe 
it is necessary to amend the VFC Program to provide for a formal 
procedure. In its administration of the VFC Program, PWBA anticipates 
providing applicants sufficient opportunity, as the circumstances 
warrant, to correct defects.

Tolling Agreements

    One commenter suggested that certain applicants might desire to 
enter into tolling agreements with PWBA. This commenter requested that 
tolling agreements be made part of the VFC Program. PWBA believes that 
only in rare situations would it be necessary to use tolling agreements 
in connection with the VFC Program. PWBA believes that in most 
situations, the transaction that is the subject of the application will 
be fully corrected in accordance with the VFC Program and there will be 
no extenuating circumstances that would warrant a tolling agreement 
with respect to the transaction or related transactions. However, in 
situations where an applicant believes that it will need additional 
time to complete an application or to file additional applications for 
related transactions, PWBA will consider entering into tolling 
agreements with the applicant. The mere fact that an applicant has 
entered into a tolling agreement with respect to a transaction or 
transactions ultimately corrected pursuant to a formal application 
under the VFC Program will not itself take the application out of the 
VFC Program and subject the applicant to the possibility of the 
imposition of section 502(l) penalties. PWBA does not believe, however, 
that it is necessary to amend the VFC Program formally to permit or 
require tolling agreements.

Whether Persons Other Than the Applicant Should Be Entitled to Relief 
Under the VFC Program

    Various commenters expressed concern that the relief under the VFC 
Program was limited to the Program applicant and was not extended to 
all persons who might have participated in the breach. PWBA does not 
believe that it is appropriate to extend relief to persons who have not 
participated in the application process. The application process 
requires persons in a position to correct the breach to evaluate the 
transaction and correction and to attest under penalty of perjury as to 
the accuracy of the application, including whether the correction has 
been made in accordance with the VFC Program. PWBA notes that more than 
one party can submit an application. Thus, for example, if a plan 
sponsor, as the named fiduciary, decides to correct a transaction, and 
all the plan fiduciaries involved in the transaction join in the 
submission of the application, including executing the penalty of 
perjury statement, the relief provided under the VFC Program would 
extend to all the fiduciaries participating in the application. The 
Program has been amended to make clear that any number of Plan 
Officials may be applicants who sign the penalty of perjury statement.

Penalty of Perjury Statement

    PWBA received numerous comments that the penalty of perjury 
statement (Section 6(g)) needed clarification. Several comments noted 
that the penalty of perjury statement appears to be broader than the 
eligibility standards (Section 4, VFC Program Eligibility). One 
commenter questioned why both a plan fiduciary with knowledge of the 
transaction and the applicant's authorized representative (if any) must 
sign and date the statement. The commenter represented that the 
transaction at issue would typically be beyond the personal knowledge 
of the representative. PWBA has decided to retain the language of the 
original

[[Page 15068]]

penalty of perjury statement. The penalty of perjury statement, 
eligibility provisions, and PWBA's reservation of the right to reject 
an application when warranted by facts and circumstances are all 
intended to help the potential applicant evaluate whether participation 
in the VFC Program is appropriate. PWBA believes these provisions are 
necessary to limit its review to the application only and to avoid 
follow-up investigations that could render the Program less efficient 
and focused. PWBA believes the review and signature of the authorized 
representative is a necessary safeguard that presents an insignificant 
burden.

Scope of the Term ``Under Investigation''

    PWBA received several comments requesting clarification of Section 
3(b)(3) (Under Investigation) of the VFC Program. In response to the 
comments, PWBA is amending the definition of Under Investigation to 
clarify that the definition does not include work paper reviews 
initiated by PWBA's Office of Chief Accountant under authority of 
section 504(a) of ERISA. Although PWBA is not making any further 
amendments to the definition, PWBA also notes, by way of clarification, 
that a party is Under Investigation if it has received oral or written 
notification from PWBA of a PWBA investigation of the plan concerning 
any issue. However, a plan is not Under Investigation if PWBA staff 
have contacted a Plan Official or representative in connection with a 
participant complaint that does not relate to a transaction described 
in the VFC Program application.

Required Documentation Under the VFC Program

    Commenters suggested that various types of documentation required 
by the VFC Program are unnecessary or overly burdensome. One commenter 
suggested that there is no reason to require the provision of a 
fidelity bond. Another commenter questioned the need to provide a copy 
of the entire plan document as part of the application and suggested 
that providing the relevant portion of the plan should be adequate. 
PWBA has determined to retain generally all of the documentation 
requirements of the VFC Program. The documentation is necessary for 
PWBA to evaluate fully the application and the transaction at issue. 
However, PWBA believes that streamlining the documentation requirements 
may encourage additional participation in the VFC Program. Accordingly, 
PWBA is eliminating the requirement in Section 6(e)(i) of the Interim 
VFC Program that applicants produce a copy of the fidelity bond. 
Instead, Section 6(e)(i) of the VFC Program now provides that 
applicants need only identify in their application the current fidelity 
bond that meets the requirements of section 412 of ERISA. In addition, 
the Program is amended to require only production of relevant portions 
of the plan with the initial application. There may be situations where 
PWBA will want to examine additional provisions of the plan when 
reviewing the application. Accordingly, the VFC Program now provides 
that as part of the application process, applicants may be required to 
produce the entire plan document on request.

Departmental Approval of Preventive Measures Taken by Applicants

    Section 2(c)(2) (Effect of the VFC Program--No implied approval of 
other matters) states that a no action letter does not imply approval 
of steps that fiduciaries take to prevent recurrence of the breach 
described in an application and to ensure future compliance with Title 
I of ERISA. Appendix B (VFC Program Checklist) at item 12 asks whether 
the plan has implemented measures to ensure that the transactions 
specified in the application do not recur. Appendix B states that PWBA 
will not opine on the adequacy of these measures. One commenter 
requested that Plan Officials be given the opportunity to request and 
obtain PWBA's approval of preventive measures. PWBA believes such a 
procedure is beyond the scope of the VFC Program. A VFC Program 
application is an insufficient record upon which this type of opinion 
could be rendered, and PWBA designed the Program to avoid conducting 
additional inquiries.

Required Use of Independent and Expert Evaluations and Written 
Appraisals

    Each of the Loan and Purchase, Sale, and Exchange corrections 
described in Section 7(b) and (c) of the Interim VFC Program requires 
that an independent party provide a specific determination or report. 
Additionally, the correction of Benefits and Plan Expenses transactions 
described in Sections 7(d) and (e) requires action by an independent 
appraiser and an estimator, respectively. Commenters generally 
represented that these requirements were unnecessary and impractical. 
One commenter suggested that PWBA clarify that ERISA does not mandate 
independent written appraisals prior to the sale of an asset that is 
not publicly traded. Another comment suggested that certification by 
the applicant or other alternative evidence of a fair market interest 
rate should suffice. The VFC Program's principle of independence 
derives in part from PWBA's prohibited transaction exemption program. 
PWBA believes the requirement for a neutral, qualified independent 
party is an established and proper safeguard. The unilateral nature of 
PWBA's application review also compels the requirement of an 
independent judgment. An objective of the Program is that PWBA need not 
audit the circumstances of the transaction and its correction. The VFC 
Program is designed to provide a record free of any appearance of self-
dealing or imprudence in the correction of transactions. Accordingly, 
PWBA has decided not to amend the requirements for the use of 
independent and expert evaluations and appraisals.

The Revised VFC Program

    The VFC Program as adopted here retains the same basic structure as 
the Interim VFC Program, while adding two new transactions. The effect 
of the VFC Program, the eligibility requirements, and the application 
procedures are unchanged. As discussed in more detail above in the 
responses to specific public comments, the major changes to the Program 
are the proposal to provide relief from some excise taxes associated 
with transactions that can be corrected under the Program and the 
elimination of the requirement of notice to participants, as described 
in Section 5(e) of the Interim VFC Program. As stated previously, where 
the applicant is eligible for and elects to take advantage of the 
excise tax relief available under the Class Exemption, the separate 
notice requirements of the Class Exemption must be met. The 
documentation requirements have been simplified to permit applicants to 
provide a statement that they have a fidelity bond, rather than provide 
a copy of the bond itself. Additionally, applicants need only submit 
relevant portions of the applicable plan documents with the 
application, rather than the entire plan document.

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

[[Page 15069]]

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 would create a novel method for 
accomplishing compliance while reducing regulatory burdens and making 
effective use of federal resources. As such, this notice is consistent 
with the principles of the Executive Order. Therefore, 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 Program is 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 Program 
will be increased.
    No costs are 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. Because the decision 
to participate in the VFC Program is made by the relevant Plan 
Officials, participation is expected to occur only when the projected 
benefit outweighs the anticipated cost for the plan. The costs of 
electing to correct potential breaches of fiduciary responsibility 
under the terms of the VFC Program are expected to arise from the 
requirement for those participating in the VFC Program to obtain fair 
market value determinations, computations of losses or profits on the 
use of plan assets, the administrative costs of supplemental 
distributions, recomputations of account balances, 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 viewed 
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 this VFC Program to 
participants and beneficiaries.
    The principal benefit of this VFC Program accrues 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 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 further legal action in response to 
a completed application under the VFC Program, the fiduciary is 
relieved of potential demands on its resources that might be imposed by 
a civil investigation and any subsequent litigation.
    The VFC Program also allows 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 is 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.
    Under the Interim VFC Program, 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. The Department originally estimated the cost 
of the Interim VFC Program for the Plan Officials who chose to 
participate at $1.9 million. Because the Department has amended the VFC 
Program by streamlining documentation requirements, the overall 
benefits and costs of the Program as adopted vary from those proposed 
in the Interim VFC Program only to the extent that the estimated cost 
for applying to the Program for 700 Plan Officials has been reduced to 
$1.8 million as a result of the modification in the documentation 
requirements. Under the Interim VFC Program, initial estimates of costs 
and benefits were based on the upper bound of the number of Plan 
Officials that might avail themselves of the Program based on the 
transactions eligible for correction. Because the actual number of Plan 
Officials that have taken advantage of the program, averaged over a 
nine-month period, has not contradicted the original estimates, the 
Department continues to believe that 700 Plan Officials remains a 
reasonable estimate of the number of applicants that will avail 
themselves of the VFC Program. The number of Program participants 
during the initial months of the Program has been lower than originally 
projected. However, the addition of a transaction to the permanent 
Program, the availability of the related exemption, and the elimination 
of the notice requirement except for that in the related exemption, is 
expected to increase participation.
    Finally, 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 are not 
readily quantifiable. Because this VFC Program is voluntary, the 
Department assumes that Plan Officials will in no event make use of the 
VFC Program unless the projected benefit outweighs the estimated cost 
of participation.
    A discussion of the elements of the costs and benefits of this VFC 
Program and estimates of their magnitude where they can be specifically 
quantified follows. Based on the Department's previous experience with 
the Pension Payback Program, in which approximately 0.1 percent of 
plans that permitted employee contributions elected to participate 
during the six-month period when the Pension Payback Program was in 
effect, the Department projects that Plan Officials of approximately 
700 plans will apply for and use the VFC Program. The Department 
expects a similar rate of participation among the approximately 200,000 
plans that currently permit employee contributions. However, it assumes 
the participation by Plan Officials of 200 plans will occur over an

[[Page 15070]]

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 per cent 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 issues involved in a given 
transaction, and the degree of similarity between a specific 
transaction representing a breach of fiduciary responsibility 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 $80 million, 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 per cent 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 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. Relief from section 4975 excise 
taxes under the Code is available to Plan Officials under the newly 
proposed Class Exemption to Permit Certain Transactions identified in 
the Voluntary Fiduciary Correction Program, also published 
simultaneously in this issue of the Federal Register (Application No. 
D-10933).
    The costs for Plan Officials to participate in the VFC Program 
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 39 hours to complete, including 8 hours of the Plan 
Official's time, and 31 hours of a professional's time.
    At the assumed rate of participation, the total cost of these 
activities is estimated to amount to $1.8 million (or an average of 
$2,600 per Plan Official), at an average cost of $57 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

    At the time of publication of the Interim VFC Program in the 
Federal Register (65 FR 14164, Mar. 15, 2000), the Department submitted 
to OMB the information collection request (ICR) included in the Interim 
VFC Program using emergency procedures for review and clearance in 
accordance with the Paperwork Reduction Act of 1995 (PRA 95) (44 U.S.C. 
Chapter 35). Although the Department requested emergency review of the 
ICR by April 14, 2000, and OMB granted approval of the ICR through 
September 30, 2000, the Department continued to receive comments until 
May 15, 2000. The OMB number assigned to the ICR is 1210-0118. The 
Department subsequently applied for and was granted approval by OMB for 
an extension of the information collection request. The current OMB 
approval for this ICR will expire on November 30, 2003. Based on 
comments received from the public after the Notice in the Federal 
Register and additional consideration by the Department, modifications 
in the documentation and notification requirements were made to the 
Interim VFC Program. No comments were received in response to the 
Department's solicitation of comments concerning the ICR included in 
the Interim VFC Program. The changes in the hour and cost burdens 
reflected below are therefore the result of changes made by the 
Department to the VFC Program as adopted.
    The VFC Program permits Plan Officials voluntarily to correct 
certain potential violations of Part 4 of Title I of ERISA, resulting 
in the receipt of a ``no action'' letter from the Department signifying 
that the applicant had been relieved of the possibility of civil 
investigation for that breach and/or civil action by the Secretary with 
respect to that breach, as well as the imposition of civil penalties 
under section 502(l) of ERISA. Comments received, however, requested 
that the Department also consider granting relief from the excise taxes 
imposed on prohibited transactions under section 4975 of the Code 
because the taxes were considered by Plan Officials to be a 
disincentive for participation in the VFC Program. In response, the 
Department is publishing simultaneously the proposed Class Exemption.
    Under the Interim VFC Program, notification to interested persons 
of the application and correction of the eligible transaction was 
considered a condition for obtaining a ``no action'' letter. A number 
of commenters, however, observed that a notice of correction was not 
generally required by the Department in other circumstances where 
corrections have occurred and that notification was therefore 
unnecessary and burdensome. While the Department agreed to remove the 
notice requirement from the VFC Program, the Department also determined 
that where a Plan Official intended to seek relief from section 4975 of 
the Code, interested persons should be made aware of the material facts 
of the eligible transaction and the resulting correction.

[[Page 15071]]

Therefore, under the VFC Program as adopted, the notice requirement has 
been eliminated as a part of the application process; however, a notice 
requirement has been included among the conditions for relief under the 
Class Exemption. For purposes of the PRA, the ICR previously described 
under the Interim VFC Program has been revised to indicate that 
notification is now a requirement under the Class Exemption rather than 
under the VFC Program as implemented on a permanent basis. Because the 
Class Exemption is only used in connection with the VFC Program, the 
Class Exemption also published simultaneously herewith is treated for 
purposes of the PRA as a modification of the information collection 
requirements of the VFC Program.
    Based on additional observations received from commenters, the 
Department has also reduced the documentation required to be included 
with an application. Proof of bonding, formerly indicated by including 
a copy of the bond with the application, has been simplified by 
permitting a Plan Official to simply state in the application that the 
plan has a current fidelity bond that meets the requirements of section 
412 of ERISA. Finally, the Program has been amended to require only 
production of relevant portions of the employee benefit plan, instead 
of a copy of the entire plan, with the initial application.
    The ICR included in the VFC Program as adopted requires a Plan 
Official to describe the correction of the potential breach of 
fiduciary duty and to 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 this VFC 
Program in as specific a manner as 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, a statement under penalty of perjury, and 
signature. Under certain circumstances, for instance if the correction 
under the Program involves an adjustment of account balances or 
supplemental distributions for participants or beneficiaries, the plan 
is expected to explain the basis for the adjustment or distribution. 
Because plans regularly report to participants or beneficiaries on 
changes in their account balance, the Department has not attributed an 
additional cost for disseminating this information. The information 
submitted to the Department will permit the Department 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. The Department estimates that 
approximately 8 hours of a Plan Official's time will be required to 
assemble documents and complete and sign the application to participate 
in the VFC Program. For 700 Plan Officials, the total hour burden is 
5,600 hours. At a cost of $57 per hour for a financial manager's time, 
the administrator most likely to compile the necessary documents, the 
cost of the hour burden is $319,200.
    It is further assumed that evaluation, correction, and 
documentation of transactions under the VFC Program will require 
approximately 31 hours, and that Plan Officials will generally elect to 
hire service providers to complete this work. The Department originally 
allotted six hours of a service provider's time for the completion of 
work attributed to the information collection. This included preparing 
descriptions and documentation, copying relevant supporting statements, 
and completing the application. Based on comments received on the 
Interim VFC Program, the Department has reduced the amount of 
supporting documentation required for the application process (i.e., 
requiring that only relevant parts of plan documents be submitted and 
acknowledging that a statement fidelity bonding is sufficient to 
replace a copy of the bond) and removed the notice requirement from the 
VFC Program as adopted and included it with the proposed exemption. 
Because of the changes in document production and notification, the 
Department has reduced by one hour the number of hours expected to be 
associated with information collection by service providers under the 
Program as adopted. Based on the reduction from six to five hours for 
purchased services, and at an assumed hourly rate of $70 per hour, the 
total estimated cost to 700 Plan Officials is $246,400. This includes 
an allowance of $2 per application for materials and mailing costs.
    Agency: Pension and Welfare Benefits Administration, Department of 
Labor.
    Title: Voluntary Fiduciary Correction Program.
    OMB Number: 1210-0118.
    Affected Public: 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 for existing ICR.
    Estimated Annual Costs (Operating and Maintenance): $246,400.
    Persons are not required to respond to the collection of 
information unless it displays a currently valid OMB control number.

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 considered the potential costs and 
benefits of this action for small plans and their Plan Officials in 
developing the VFC Program.
    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 are 
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

[[Page 15072]]

quantified, and the saving 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 $2,600 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 a plan as a result 
of participation in the VFC Program ($114,300 per plan) may be viewed 
as an expense by Plan Officials, the Department believes that this 
expense arises from a previously occurring 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, Plan Officials of small plans electing to correct 
previously occurring 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 of exposure 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.

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.

Federalism

    The Department has reviewed this rule in accordance with Executive 
Order 13132 regarding Federalism. The order requires that agencies, to 
the extent possible, refrain from limiting state policy options, 
consult with states prior to taking any action, which would restrict 
state policy options or impose substantial direct compliance costs on 
state and local governments, and take such action only when there is 
clear constitutional authority and the presence of a problem of 
national significance. Since this rule does not limit state policy 
options or impose costs on state and local governments, it does not 
have federalism implications, and thus Executive Order 13132 does not 
require a certification that the VFC Program complies with the order.

Congressional Review Act

    The VFC Program is subject to the provisions of the Congressional 
Review Act (5 U.S.C. 801 et seq.) and will be transmitted to Congress 
and the Controller General for review. The program is not a ``major 
rule'' as that term is defined in 5 U.S.C. 804 because it is not likely 
to result in (1) an annual effect on the economy of $100 million or 
more; (2) a major increase in costs or prices for consumers, individual 
industries, or federal, State, or local government agencies, or 
geographic regions; or (3) significant adverse effects on competition, 
employment, investment, productivity, innovation, or on the ability of 
the United States-based enterprises to compete with foreign-based 
enterprises in domestic or export markets.

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) De Minimus Exception
    (f) Confidentiality
Section 6. Application Procedures
Section 7. Description of Eligible Transactions and Methods of 
Correction
    (a) Delinquent Participant Contributions
    1. Delinquent Participant Contributions to Pension Plans
    2. Delinquent Participant Contributions to Insured Welfare Plans
    3. Delinquent Participant Contributions to Welfare Plan Trusts
    (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 be 
liable, under certain circumstances, 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 \4\

[[Page 15073]]

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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    \4\ See Appendix A.
---------------------------------------------------------------------------

    (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 
applicants 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. Methods of 
calculating losses other than, or in addition to, those set forth in 
the Program may be more appropriate, depending on the facts and 
circumstances, if the transaction violates provisions of ERISA other 
than those that can be corrected under the Program. In this regard, the 
Program assumes, for example, 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.\5\
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    \5\ 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; \6\ or
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    \6\ 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.
    (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.\7\ Correction may not be achieved under the Program by 
engaging in a new prohibited transaction.
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    \7\ 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 U.S.C. section 1002, unless 
separately defined herein.

[[Page 15074]]

    (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 involving a transaction which affects an 
employee benefit plan. A plan that is Under Investigation by PWBA 
includes any plan for which a Plan Official, or a plan representative, 
has received oral or written notification from PWBA of a PWBA 
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 participant complaint, 
unless the participant complaint concerns the transaction described in 
the application. A plan also is not considered to be Under 
Investigation where it is undergoing a work paper review by PWBA's 
Office of the Chief Accountant under the authority of ERISA section 
504(a).

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. The Principal Amount 
shall also include, where appropriate, any transaction costs, such as 
closing costs, associated with entering into the transaction that 
constitutes the Breach.
    (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 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. For participants who have not made any 
participant directions, plan officials may use the plan's average of 
the rates of return earned by all the designated investment 
alternatives weighted by the portion of plan assets invested in these 
alternatives.
    (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

[[Page 15075]]

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'') could have reasonably paid participant 
contributions into the plan's trust account within two business days 
of each pay day. For this employer, the second business day after 
pay day was therefore the date on which the participant 
contributions become plan assets, because it is the earliest date on 
which this employer reasonably could have segregated the participant 
contributions from the employer's general assets.\8\ However, for 
the pay period ending January 31, a Monday, participant 
contributions totaling $10,000 were not deposited until March 2.
---------------------------------------------------------------------------

    \8\ 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 representing 
a broad range of investment alternatives. During the month of 
February, one of the plan's mutual funds had a one percent return, 
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 
multiplied by one percent).
    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% (annualized yield for the relevant 
quarter), the Restoration of Profits amount is $75 ($10,000 
multiplied by 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. The plan's 
annual yield for the highest earning fund was 12 percent. The 
employer elects to use the highest yielding fund for administrative 
convenience. Accordingly, an additional $12 ($100 multiplied by 12 
percent--the 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.\9\ The Principal Amount is 
$5,000 (1,000 shares multiplied by 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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    \9\ 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 multiplied by 9% annual yield for 
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 multiplied by 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 investment earnings totaled five percent, including all 
reinvestment earnings. The Lost Earnings amount is $300 ($6,000 
multiplied by five percent).
    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 
published section 6621 rate was 8% per annum for the duration of the 
period April 20 to October 20, 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 Official, not the plan, shall pay the costs of correction.
    (2) The costs of correction include, where appropriate, such 
expenses as closing costs, prepayment penalties, or sale or purchase 
costs associated with correcting the transaction.
    (3) 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. 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 proof of payment to 
participants and beneficiaries whose current location is known to the 
plan

[[Page 15076]]

and/or applicant. For individuals whose location is unknown, applicants 
must demonstrate that they have segregated adequate funds to pay the 
missing individuals and that the applicant has commenced the process of 
locating the missing individuals using either the IRS and Social 
Security Administration locator services, or other comparable means. 
The costs of such efforts are part of the Costs of Correction.
    (e) De Minimus Exception. Where correction under the Program 
requires distributions in amounts less than $20 to former employees, 
their beneficiaries and alternate payees, who neither have account 
balances with, nor have a right to future benefits from the plan, and 
the applicant demonstrates in its submission that the cost of making 
the distribution to each such individual exceeds the amount of the 
payment to which such individual is entitled in connection with the 
correction of the transaction that is the subject of the application, 
the applicant need not make distributions to such individuals who would 
receive less than $20 each as part of the correction. However, the 
applicant must pay to the plan as a whole the total of such de minimus 
amounts not distributed to such individuals.

    Example. Employer X sponsors Plan Y. Employer X submits an 
application under the VFC Program to correct a failure to forward 
timely participant contributions to the Plan Y. Employer X had paid 
the delinquent contributions six months late, but had not paid lost 
earnings on the delinquency. The correction under the VFC Program, 
therefore, required only payment of Lost Earnings for the six-month 
delinquency. During the six-month period 25 employees separated from 
service and rolled over their plan accounts to individual retirement 
accounts. The amount of lost earnings due to 20 of those former 
employees is less than $20, and Employer X demonstrates that the 
cost of making the distribution to those former employees is $27 per 
individual. Employer X need not make distributions to those 20 
former employees. However, the total amount of distributions that 
would have been due to those former employees must be paid to Plan 
Y. The payment to Plan Y may be used for any purpose that payments 
or credits to Plan Y that are not allocated directly to participant 
accounts are used. Employer X must make distributions to the five 
former employees who are entitled to receive distributions of more 
than $20.

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) a statement that the plan has a current fidelity bond that 
meets the requirements of section 412 of ERISA and the name of the 
company providing the bond and the policy number;
    (ii) copies of the relevant portions of the plan document and any 
other pertinent documents (such as the adoption agreement, trust 
agreement, or insurance contract);\10\
---------------------------------------------------------------------------

    \10\ Applicants must supply complete copies of the plan 
documents and other pertinent documents if requested by PWBA during 
its review of the application.
---------------------------------------------------------------------------

    (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; and
    (vii) proof of payment of Principal Amount and Lost Earnings or 
Restoration of Profits.
    (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 of the 
applicant, if any. In addition, all Plan Officials applying under the 
VFC Program must execute the Penalty of Perjury statement in order to 
be covered by the No Action Letter. The statement must accompany the 
application and any subsequent additions to the 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;\11\
---------------------------------------------------------------------------

    \11\ 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 offense against the United 
States.

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[[Page 15077]]

    (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, or 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 Section 5 and 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. Pay to the 
plan the Principal Amount plus the greater of (i) Lost Earnings on the 
Principal Amount 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 and the Loss Date for each contribution is the earliest 
date on which the contributions reasonably could 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 29 CFR 
2510.3-102.
    (2) Late Contributions. If participant contributions were remitted 
to the plan outside of the time period provided 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 reasonably 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 decrease 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% (annual yield for all quarters) 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% (annual yield). 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 
multiplied by 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; and
    (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.
2. Delinquent Participant Contributions to an Insured Welfare Plan
    (a) Description of Transaction. Benefits are provided exclusively 
through insurance contracts issued by an insurance company or similar 
organization qualified to do business in any state or through a health 
maintenance organization (HMO) defined in section 1310(d) of the Public 
Heath Service Act, 42 U.S.C. 3000e-9(d). An employer receives directly 
from participants or withholds from employees' paychecks certain 
amounts that the employer forwards to an insurance provider for the 
purpose of providing group health or other welfare benefits. The 
employer fails to forward such amounts in accordance with the terms of 
the plan (including the provisions of any insurance contract) or the 
requirements of the Department's regulation at 29 CFR 2510.3-102. There 
are no instances in which claims have been denied under the plan, nor 
has there been any lapse in coverage, due to the failure to transmit 
participant contributions on a timely basis.
    (b) Correction of Transaction. Pay to the insurance provider or HMO 
the Principal Amount, as well as any penalties, late fees or other 
charges necessary to prevent a lapse in coverage due to such failure. 
Any penalties, late fees or other such charges shall be paid

[[Page 15078]]

by the employer and not from participant contributions.
    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) For participant contributions received directly 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;
    (4) Copies of the insurance contract or contracts for the group 
health or other welfare benefits for the plan;
    (5) A statement from a Plan Official attesting that there are no 
instances in which claims have been denied under the plan for 
nonpayment, nor has there been any lapse in coverage; and
    (6) A statement from a Plan Official attesting that any penalties, 
late fees or other such charges have been paid by the employer and not 
from participant contributions.
3. Delinquent Participant Contributions to a Welfare Plan Trust
    (a) Description of Transaction. An employer receives directly from 
participants or withholds from employees' paychecks certain amounts 
that the employer forwards to a trust maintained to provide, through 
insurance or otherwise, group health or other welfare benefits. The 
employer fails to forward such amounts in accordance with the terms of 
the plan or the requirements of the Department's regulation at 29 CFR 
2510.3-102. There are no instances in which claims have been denied 
under the plan, nor has there been any lapse in coverage, due to the 
failure to transmit participant contributions on a timely basis.
    (b) Correction of Transaction. (1) Unpaid Contributions. Pay to the 
trust (1) the Principal Amount, and, where applicable, pay any 
penalties, late fees or other charges necessary to prevent a lapse in 
coverage due to the failure to make timely payments, and (2) pay to the 
trust the greater of (i) Lost Earnings on the Principal Amount 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 delinquent participant contributions. The Loss Date for 
such contributions is the date on which each contribution would become 
plan assets under 29 CFR 2510.3-102. Any penalties, late fees or other 
charges shall be paid by the employer and not from participant 
contributions.
    (2) Late Contributions. If participant contributions were remitted 
to the trust outside of the time period required by the regulation, the 
only correction required is to pay to the trust 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). Any 
penalties, late fees or other such charges shall be paid by the 
employer and not from participant contributions.
    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) For participant contributions received directly 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 statement from a Plan Official attesting that there are no 
instances in which claims have been denied under the plan for 
nonpayment, nor has there been any lapse in coverage.

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.

    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

[[Page 15079]]

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 independent fiduciary's dated, written approval 
of the fair market interest rate determination(s).
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 described 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; and
    (2) A copy of the independent commercial lender's fair market 
interest rate determination(s).
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 became 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 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; and
    (2) A copy of the independent commercial lender's fair market 
interest rate determination(s).

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 asset 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

[[Page 15080]]

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 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 asset, the plan may repurchase the asset 
from the party in interest \12\ 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 to the plan 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.
---------------------------------------------------------------------------

    \12\ 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 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.\13\ 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).
---------------------------------------------------------------------------

    \13\ 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;

[[Page 15081]]

    (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.

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 any 
participants who received distributions that were too low.
    (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) multiplied 
by 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

[[Page 15082]]

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) 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; and
    (4) If supplemental distributions are made, proof of payment to the 
individuals entitled to receive the supplemental distributions.

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 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 25th day of March, 2002.
Ann L. Combs,
Assistant Secretary for Pension and Welfare Benefits Administration, 
U.S. 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 
that 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 for which no 
exemptive relief is available, add the following language: Please 
also be

[[Page 15083]]

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 for each applicant and the applicant's 
representative, if any?
______ 6. Have you enclosed relevant portions 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 statement identifying 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, 
lenders);
______ 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. If you are an eligible applicant and wish to avail 
yourself of excise tax relief under the Proposed Class Exemption, 
have you made proper arrangements to provide within 60 calendar days 
following the date of this application a copy of the Class 
Exemption's required notice to all interested persons and to the 
PWBA regional office to which the application is filed?
______ 11. Where applicable, have you enclosed a description 
demonstrating proof of payment to participants and beneficiaries 
whose current location is known to the plan and/or applicant, and 
for participants who need to be located, have you described how 
adequate funds have been segregated to pay missing participants and 
commenced the process of locating the missing participants using 
either the IRS and Social Security Administration locator services, 
or other comparable means?
______ 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 (859) 578-4680, fax (859) 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, temporarily located at 201 Varick Street, 
New York, NY 10014, telephone (212) 337-2228, fax (212) 337-2112; 
jurisdiction: southeastern New York, northern New Jersey.
Philadelphia Regional Office, The Curtis Center, 170 S. Independence 
Mall West, Suite 870 West, Philadelphia, PA 19106-3317, telephone 
215-861-5300, fax 215-861-5347; 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.

**Please verify current telephone numbers and addresses on PWBA's 
website.

[FR Doc. 02-7516 Filed 3-27-02; 8:45 am]
BILLING CODE 4510-29-P