[Federal Register Volume 70, Number 65 (Wednesday, April 6, 2005)]
[Notices]
[Pages 17516-17547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-6627]



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Part II





Department of Labor





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Employee Benefits Security Administration



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Voluntary Fiduciary Correction Program Under the Employee Retirement 
Income Security Act of 1974; Notice

  Federal Register / Vol. 70, No. 65 / Wednesday, April 6, 2005 / 
Notices  

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

RIN 1210-AB03


Voluntary Fiduciary Correction Program Under the Employee 
Retirement Income Security Act of 1974

AGENCY: Employee Benefits Security Administration, DOL.

ACTION: Adoption of amended and restated Voluntary Fiduciary Correction 
Program.

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SUMMARY: This Notice contains an update, which amends and restates the 
Employee Benefits Security Administration's Voluntary Fiduciary 
Correction Program (the VFC Program or Program). The VFC Program 
permits certain persons to avoid potential civil actions and civil 
penalties under the Employee Retirement Income Security Act (ERISA) by 
voluntarily taking steps to correct violations that would ordinarily 
give rise to such actions and penalties. Based on its experience since 
adoption of the VFC Program in March 2002, the Employee Benefits 
Security Administration (EBSA) has identified certain changes that will 
both simplify and expand the original VFC Program, thereby making the 
Program easier for, and more useful to, employers and others who wish 
to avail themselves of the relief provided by the Program. EBSA is 
inviting comments from interested persons on the revisions to the VFC 
Program described in this document. At the same time, EBSA is making 
the simplified and expanded Program available immediately to those who 
wish to rely on the revisions in seeking VFC Program relief.

DATES: This Notice is effective April 6, 2005.
    Written comments on the Notice should be received by EBSA on or 
before June 6, 2005.

ADDRESSES: Comments on the amendments to the VFC Program (preferably at 
least three copies) should be addressed to the Office of Regulations 
and Interpretations, Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-5669, 200 Constitution Avenue NW., 
Washington, DC 20210, Attn: Voluntary Fiduciary Correction Program. 
Comments also may be submitted electronically to [email protected] or to 
http://www.regulations.gov.
    All comments received will be available for public inspection at 
the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: For Questions Regarding the VFC 
Program Amendments: Contact Kristen L. Zarenko, Office of Regulations 
and Interpretations, Employee Benefits Security Administration, (202) 
693-8510.
    For General Questions Regarding the VFC Program: Contact Caroline 
Sullivan, Office of Enforcement, Employee Benefits Security 
Administration, (202) 693-8463. (These are not toll-free numbers.)
    For Questions Regarding Specific Applications Under the VFC 
Program: Contact the appropriate EBSA Regional Office listed in 
Appendix C.

SUPPLEMENTARY INFORMATION:

A. Background

    The Voluntary Fiduciary Correction Program was adopted by EBSA of 
the Department of Labor (Department) on a permanent basis in March 2002 
(the original VFC Program).\1\ The VFC Program is designed to encourage 
employers and plan fiduciaries to voluntarily comply with ERISA and 
allows those potentially liable for certain specified fiduciary 
violations under ERISA to voluntarily apply for relief from enforcement 
actions and certain penalties, provided they meet the VFC Program's 
criteria and follow the procedures outlined in the VFC Program. Many 
workers have also benefited from the VFC Program as a result of the 
restoration of plan assets and payment of promised benefits.
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    \1\ 67 FR 15062 (March 28, 2002). Prior to adoption in March 
2002, the VFC Program was made available on an interim basis during 
which the Department invited and considered public comments on the 
Program. (See 65 FR 14164, March 15, 2000).
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    The VFC Program describes: how to apply for relief; the specific 
transactions covered;\2\ acceptable methods for correcting violations; 
and examples of potential violations and corrective actions. Eligible 
applicants that satisfy the terms and conditions of the VFC Program 
receive a ``no-action letter'' from EBSA and are not subject to civil 
monetary penalties. In 2002, the original VFC Program was further 
expanded to include a class exemption (PTE 2002-51) providing excise 
tax relief for four specific VFC Program transactions.\3\
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    \2\ EBSA acknowledges, based on its experience, that certain 
transactions may fit within one or more of the listed categories of 
transactions, even if not specifically named in the category, for 
example certain transactions involving contributions in kind under 
Section 7.D.1. of the Program. EBSA encourages potential applicants 
to discuss eligibility and similar issues with the appropriate 
regional VFC Program coordinator.
    \3\ PTE 2002-51 published at 67 FR 70623 (Nov. 25, 2002).
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    While the original VFC Program has been very successful in 
encouraging and facilitating the correction of violations of ERISA's 
fiduciary responsibility and prohibited transaction rules, EBSA 
believes, based on its own experience to date, as well as comments from 
employee benefit plan practitioners, that changes to the Program are 
needed to further encourage utilization of the Program. These changes 
will improve administration of the Program by EBSA's Regional Offices 
by which the revised VFC Program will continue to be administered. To 
this end, EBSA is publishing in this Notice an updated and revised VFC 
Program containing several changes (the revised VFC Program), discussed 
below, on which EBSA is inviting public comment. As also discussed 
below, EBSA is making the revised VFC Program effective on publication 
of this Notice in order to enable employers, plan fiduciaries and 
others to avail themselves of the simplified processes and new covered 
transactions during the interim period until the adoption of final 
changes to the Program.
    EBSA also is proposing amendments to PTE 2002-51 to accommodate a 
new transaction contained in the revised VFC Program. These amendments 
also appear in the Notice section of today's Federal Register. It is 
important to note that the excise tax relief afforded by the amendments 
to PTE 2002-51 is not available until such amendments are adopted in 
final form and, therefore, the amendments cannot be relied upon for 
relief during the interim period of the revised Program.

B. Overview of VFC Program Changes

    Except as discussed below, the revised VFC Program, as set forth 
herein, is unchanged from the Program adopted in 2002. The Program is 
set forth in its entirety in this Notice to facilitate both utilization 
and review by interested persons. The following is an overview of 
changes applicable to the revised VFC Program.

1. Model Application Form

    To encourage use of the Program, EBSA is making available a model 
VFC Program application form. This model form is set forth in Appendix 
E of this Notice. EBSA also will be making the model form available to 
the public on its Web site.\4\ While use of the model form

[[Page 17517]]

is wholly voluntary, EBSA encourages applicants to consider using the 
form in order to avoid common application errors that frequently result 
in processing delays or rejections. Moreover, EBSA believes that use of 
the model form will enable the Regional Offices to provide a more 
expedient and consistent review of VFC Program applications.
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    \4\ The model form will be accessible to applicants on EBSA's 
Web site at http://www.dol.gov/ebsa.
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    In brief, the model form provides an outline for applicants of the 
information and supplemental documentation that must be included with 
the application to help ensure that the applications are correct and 
complete. The model form includes the Program's mandatory checklist, 
which is also separately set forth in Appendix B of this Notice. Use of 
the model form, however, is not a substitute for an applicant's careful 
review of Program conditions and requirements. For example, all 
applications must include a completed penalty of perjury statement.

2. Reduced Documentation

    As part of its effort to streamline and simplify the VFC Program, 
EBSA reviewed the supporting documents required to be filed as part of 
the application process. On the basis of this review, EBSA concluded 
that document requirements could be reduced in certain instances 
without compromising EBSA's review of applications. In particular, EBSA 
has made the following changes to the documentation requirements.
    Section 6 of the Program has been revised to eliminate the 
requirement that applicants provide certain information relating to the 
plan's fidelity bond.
    With regard to the correction of delinquent participant 
contributions or loan repayments under Section 7.A.1. of the Program, 
the Program is being revised to permit applicants correcting breaches 
that involve (i) amounts below $50,000, or (ii) amounts greater than 
$50,000 that were remitted within 180 calendar days after receipt by 
the employer to provide summary documentation. EBSA believes that 
introducing more simplified documentation requirements in certain cases 
rather than the detailed information and copies of accounting and 
payroll records required under the original VFC Program will streamline 
the application process, increase the efficiency of EBSA's reviewers, 
and be less burdensome for applicants making smaller corrections. Based 
on EBSA's experience to date, the majority of VFC Program applicants, 
under the revised Program, would be able to avail themselves of this 
reduced documentation requirement.

3. Simplification of Correction Amount

    In the course of EBSA's administration of the VFC Program, a number 
of applicants expressed concern about the complexities attendant to 
calculating amounts required for transaction corrections under the 
Program. In an effort to address applicant concerns and facilitate 
corrections for purposes of the revised Program, EBSA is simplifying 
the definitions of both Lost Earnings and Restoration of Profits set 
forth in Section 5(b) of the Program.\5\ Additionally, EBSA is also 
providing a new Internet tool on its Web site, the Online Calculator, 
to automatically perform Program calculations. Use of the Online 
Calculator is discussed in detail below.
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    \5\ The Department notes that the Program's correction criteria 
represent EBSA enforcement policy with respect to applications under 
the Program and are provided for informational purposes to the 
public, but are not intended to confer enforceable rights on any 
person correcting a violation.
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    The Program has always required that Plan Officials determine the 
correction amount to be restored to the plan based on either the losses 
to the plan resulting from a breach or the profits gained from improper 
use of plan assets, as required by section 409 of ERISA. The correction 
amount generally consists of two components: (1) Principal Amount and 
(2) Lost Earnings or Restoration of Profits. In broad terms, the 
Principal Amount is the amount of plan assets that would have been 
available to the plan if the breach had not occurred. Plan Officials 
must always restore the Principal Amount to the plan.
(a) Lost Earnings Component
    Under the original VFC Program, Plan Officials generally calculated 
Lost Earnings by comparing two hypothetical amounts that a plan might 
have earned on the Principal Amount between the date of the breach (the 
Loss Date) and the date the Principal Amount is restored to the plan 
(the Recovery Date), as well as any interest on such earnings because 
of payment of Lost Earnings after the Recovery Date. The first earnings 
amount assumed that the Principal Amount had been appropriately 
invested under ERISA, while the second assumed that the Principal 
Amount had earned interest at a rate defined in section 6621 of the 
Internal Revenue Code (Code). Utilizing this approach, Plan Officials 
were then required to restore the higher of these two hypothetical 
amounts to the plan.
    In an effort to simplify this component of the correction amount, 
EBSA is revising the method of calculating Lost Earnings and interest, 
if any, to use factors provided under IRS Revenue Procedure 95-17.\6\ 
These factors, which are displayed on EBSA's Web site in a tabular 
format, incorporate daily compounding of an interest rate over a set 
period of time.
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    \6\ Rev. Proc. 95-17, 1995-1 C.B. 556 (Feb. 8, 1995).
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    First, applicants must determine the applicable corporate 
underpayment rate(s) established under section 6621(a)(2) of the Code 
for each quarter (or portion thereof) for the period beginning with the 
Loss Date and ending with the Recovery Date. These rates are displayed 
on EBSA's Web site and will be updated when necessary. Second, 
applicants must select the applicable factor(s) under IRS Revenue 
Procedure 95-17 for such quarterly underpayment rate(s) for each 
quarter (or portion thereof) of the period beginning with the Loss Date 
and ending with the Recovery Date. Third, applicants multiply the 
Principal Amount by the first applicable factor to determine the amount 
of earnings for the first quarter (or portion thereof). If the Loss 
Date and Recovery Date are within the same quarter, this initial 
calculation is complete. However, if the Recovery Date is not in the 
same quarter as the Loss Date, the applicable factor for each 
subsequent quarter (or portion thereof) must be applied to the sum of 
the Principal Amount and all earnings as of the end of the immediately 
preceding quarter (or portion thereof), until Lost Earnings have been 
calculated for the entire period, ending with the Recovery Date.
    In situations when the Lost Earnings amount is paid to the plan 
after the Recovery Date, applicants must calculate an amount of 
interest that the Lost Earnings would have earned during the time 
period between the Recovery Date and such payment date. This 
calculation also has been simplified to use the factors provided under 
IRS Revenue Procedure 95-17. Applicants must use the same method as in 
calculating Lost Earnings, but referencing the period beginning on the 
Recovery Date and ending with the payment date and applying the first 
applicable factor to Lost Earnings instead of the Principal Amount. 
Under the original Program, the Plan Official would have had to 
calculate and compare two assumed amounts of interest that would have 
been earned if the Lost Earnings amount had been restored to the plan 
on the Recovery

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Date and then pay the greater of these two amounts.
    If the sum of Lost Earnings and any interest on Lost Earnings 
exceeds $100,000, applicants must then re-determine the amount of Lost 
Earnings and any interest on Lost Earnings using the same method 
discussed above, but substituting the applicable underpayment rates 
under section 6621(c)(1) of the Code for the rates previously used 
under section 6621(a)(2). These rates also are displayed on EBSA's Web 
site and will be updated when necessary.
    Applicants either may use the Online Calculator to facilitate the 
calculation of these Lost Earnings amounts, as explained below, or 
perform the calculation manually. In either case, information 
sufficient to verify the correctness of the amounts to be paid to the 
plan must be included as part of the VFC Program application.
(b) Restoration of Profits Component
    In a limited set of circumstances, Plan Officials are required to 
determine Restoration of Profits as a correction amount component. 
Under the original VFC Program, Plan Officials generally calculated 
Restoration of Profits when a breach involved the use of the Principal 
Amount by a fiduciary, plan sponsor or other Plan Official for a 
specific purpose resulting in an actual profit that could be 
determined. Plan Officials were required to compare this actual profit 
to a second amount that assumed that the Principal Amount had earned 
interest at a rate defined in section 6621 of the Code. The higher of 
these two amounts was defined as Restoration of Profits. Plan Officials 
were then required to compare this Restoration of Profits amount to the 
Lost Earnings amount and restore the higher amount to the plan.
    In an effort to simplify this component of the correction amount, 
EBSA is revising the Program to require the calculation of a 
Restoration of Profits amount only when the Principal Amount was used 
by a fiduciary, plan sponsor or other Plan Official for a specific 
purpose such that a profit resulting from the breach is determinable. 
EBSA's experience suggests that more commonly, the Principal Amount is 
commingled with other funds of the plan sponsor or a fiduciary, so that 
a profit from the use of the Principal Amount cannot definitively be 
determined. As a consequence, EBSA anticipates that applicants under 
the revised Program will be using the simplified Lost Earnings 
calculation more frequently than Restoration of Profits.
    Under the revised Program, Restoration of Profits is defined to 
incorporate two amounts: (i) The amount of profit made on the use of 
the Principal Amount, and (ii) if the profit is restored to the plan on 
a date later than the date on which the profit was realized (i.e., 
received or determined), the amount of interest earned on such profit 
from the date the profit was realized to the date on which the profit 
is restored to the plan. Under the original Program, Plan Officials 
would have had to calculate and compare two assumed amounts of interest 
and then include the greater of these two amounts in Restoration of 
Profits.
    EBSA is simplifying the determination of Restoration of Profits 
under the revised Program to use factors provided under IRS Revenue 
Procedure 95-17 in calculating the interest amount. First, applicants 
must determine the applicable corporate underpayment rate(s) 
established under section 6621(a)(2) of the Code for each quarter (or 
portion thereof) for the period beginning with the date the profit was 
realized (i.e. received or determined) and ending with the date on 
which the profit is paid to the plan. Second, applicants must select 
the applicable factor(s) under IRS Revenue Procedure 95-17 for such 
quarterly underpayment rate(s) for each quarter (or portion thereof) of 
the period beginning with the date the profit was realized and ending 
with the date on which the profit is paid to the plan. Third, 
applicants multiply the profit on the Principal Amount, referred to 
above, by the first applicable factor to determine the amount of 
interest for the first quarter (or portion thereof). If the date the 
profit was realized and the date the profit is paid to the plan are 
within the same quarter, the initial calculation is complete. However, 
if the date the profit was realized is not in the same quarter as the 
date the profit was paid to the plan, the applicable factor for each 
subsequent quarter (or portion thereof) must be applied to the sum of 
the profit on the Principal Amount, and all interest as of the end of 
the immediately preceding quarter (or portion thereof), until interest 
has been calculated for the entire period, ending with the date the 
profit amount is paid to the plan.
    If the Restoration of Profits amount exceeds $100,000, applicants 
must then recalculate the interest amount for Restoration of Profits 
using the same method discussed above, but substituting the applicable 
underpayment rates under section 6621(c)(1) of the Code for the rates 
previously used under section 6621(a)(2).
    To more easily perform these interest amount calculations, 
applicants may use the Online Calculator. Applicants also may perform 
these calculations manually. In either case, information sufficient to 
verify the correctness of the amounts to be paid to the plan must be 
included as part of the VFC Program application.
    In situations when the Restoration of Profits amount can be 
determined, the revised VFC Program requires the Plan Official to 
restore Restoration of Profits to the plan as a component of the 
correction amount only if Restoration of Profits exceeds the Lost 
Earnings amount plus interest, if any.

4. Online Calculator

    To facilitate use of the Program, EBSA is providing an Online 
Calculator on its Web site, which is an Internet based compliance 
assistance tool that may be used by applicants to automatically 
calculate Lost Earnings and interest, if any, and the interest amount 
for Restoration of Profits. Use of the Online Calculator will provide 
accuracy, ensure consistency and expedite review of applications by 
EBSA. While EBSA anticipates that most applicants will use the Online 
Calculator under the revised Program, applicants also may perform a 
manual calculation, as explained above, using the applicable factors 
under IRS Revenue Procedure 95-17.
    In using the Online Calculator to determine Lost Earnings and 
interest, if any, applicants input four data elements: the (1) 
Principal Amount, (2) Loss Date, and (3) Recovery Date, and if the 
final payment will occur after the Recovery Date, (4) the date of such 
final payment. The Online Calculator selects the applicable factors 
under Revenue Procedure 95-17 after referencing the underpayment rates 
over the relevant time period. The Online Calculator then automatically 
applies the factors to provide applicants with the amount of Lost 
Earnings and interest, if any, that must be paid to the plan.
    In using the Online Calculator to determine the interest amount for 
Restoration of Profits, applicants input three data elements: (1) The 
amount of profit, (2) the date the amount of profit was realized (i.e. 
received or determined), and (3) the date of payment of the Restoration 
of Profits amount. The Online Calculator selects the applicable factors 
under Revenue Procedure 95-17 after referencing the underpayment rates 
over the relevant time period. The Online Calculator then automatically 
applies the factors to provide applicants with the interest

[[Page 17519]]

amount on the profit that must be paid to the plan.

5. New Covered Transactions

(a) Illiquid Assets
    On the basis of EBSA's review of the VFC Program, EBSA believes it 
is appropriate to revise the Program to include a correction of a 
transaction that permits the plan to divest, rather than continuing to 
hold in its portfolio, a previously purchased asset that is currently 
classified as illiquid. This new transaction is described in Section 
7.D.6. of the revised Program.
    Specifically, the new transaction covers circumstances where a plan 
is holding an illiquid asset and a plan fiduciary has determined that 
continued holding of such asset is not in the best interest of the plan 
or the plan's participants and beneficiaries, and following reasonable 
efforts to dispose of the asset, the only available purchaser is a 
party in interest. The revised Program describes three scenarios for 
the plan's acquisition of the illiquid asset, each of which results in 
the plan's holding of the illiquid asset, for which the correction is 
determined to be necessary. In the first scenario, the plan purchases 
an asset at a price not greater than fair market value at that time, 
but because the acquisition was from a related party, it was 
nonetheless a prohibited transaction. In the second scenario, the plan 
purchases an asset from an unrelated third party in an acquisition that 
was not a prohibited transaction under ERISA, but the plan fiduciary 
failed to appropriately discharge his or her fiduciary duties with 
respect to the purchase. For example, the fiduciary's purchase of a 
limited partnership interest from an unrelated third party was 
imprudent and inconsistent with the objectives contained in the plan's 
investment guidelines. In the third scenario, the plan purchases an 
asset from an unrelated third party in an acquisition that was not a 
prohibited transaction under ERISA, and the plan fiduciary 
appropriately discharged his or her fiduciary duties with respect to 
the purchase.
    Subsequent to an acquisition pursuant to one of the foregoing 
scenarios, the plan fiduciary concludes that the continued holding of 
the asset is not in the interest of the plan. To correct the 
transaction, the revised VFC Program requires the fiduciary to classify 
the asset as illiquid by making the following determinations: (1) That 
the asset has failed to appreciate, failed to provide a reasonable rate 
of return or has caused a loss to the plan; (2) that the sale of the 
asset is in the best interest of the plan; and (3) following reasonable 
efforts to sell the asset to a non-party in interest, that the asset 
cannot immediately be sold for its original purchase price, or its 
current fair market value, if greater. Illiquid assets, among other 
things, could include restricted and thinly traded stock, limited 
partnership interests, real estate and collectibles.
    The required correction permits the sale of the illiquid asset to a 
party in interest, provided the plan is returned to a financial 
position that is no worse than if the acquisition had never taken 
place. Accordingly, a plan must receive the higher of the fair market 
value of the asset on the date of the correction or its original 
purchase price, plus incidental costs. For purposes of the Class 
Exemption, corrective relief would, upon adoption of the amendments, 
extend to both the acquisition of the asset by the plan, if that 
acquisition would otherwise have been a prohibited transaction, and the 
disposition of the illiquid asset by sale to a party in interest, which 
would itself be a prohibited transaction but for the exemption.
(b) Participant Loans
    Often plans incorporate in their terms with respect to participant 
loan programs a provision that a participant loan will not exceed the 
limitations set by section 72(p) of the Code.\7\ The statutory 
exemption from the prohibited transaction provisions for participant 
loans provided by section 408(b)(1) of ERISA contains a requirement 
that a participant loan be made in accordance with plan terms regarding 
such loans. A violation of the prohibited transaction provisions of 
ERISA, therefore, would occur when the section 72(p) loan limitations 
are exceeded. According to practitioners, these loan violations 
commonly occur and lack an approved correction method for the fiduciary 
breach involved. EBSA recognizes that plan loans to participants can 
result in prohibited transactions through no fault of the borrowers. 
For example, a data processing system or record-keeping error could 
result in a loan that fails to comply with the plan's written loan 
provisions, and the borrower agrees to the loan terms unaware of the 
error. To facilitate correction of such transactions, EBSA is expanding 
the Program with the addition of two new categories of transactions 
involving plan loans to participants. These transactions are being 
added in Section 7.C.1. and 2. of the revised Program.
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    \7\ See Code section 72(p)(2)(A) and (B).
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    The new transactions describe situations when a plan extends a loan 
(i) to a participant who is a party in interest with respect to the 
plan based solely on his or her status as an employee, and (ii) either 
the amount or duration of the loan exceeds that permitted under the 
applicable plan provisions incorporating the limitations of section 
72(p) of the Code. These loans are prohibited transactions that fail to 
qualify for the statutory exemption in section 408(b)(1) of ERISA 
because the loans were not made in accordance with the specific plan 
loan provisions.
    To correct a loan that exceeded the amount limitation, the Program 
requires the participant to pay back to the plan the excess amount of 
the loan. For example, if on the date the loan was made, a participant 
should have received a loan no greater than $5,000, but the participant 
erroneously received a loan for $7,000, then the participant must pay 
$2,000 back to the plan on the date of correction. Then, Plan Officials 
must reform the loan to amortize the remaining principal balance as of 
the date of correction over the remaining duration of the original 
loan, making any required adjustments to the monthly repayment amount. 
Plan Officials otherwise must continue to enforce all other terms of 
the original loan agreement.
    To correct a loan that exceeded the duration limitation, the 
Program requires that Plan Officials reform the duration of the loan to 
complete repayment within the maximum term permitted under the plan 
loan provisions. For example, if a loan should have been for a term of 
five years, but the participant erroneously received a loan with 
scheduled repayments over ten years, Plan Officials must reform the 
loan. The reformed loan must be paid back within five years from the 
date of loan origination, and Plan Officials must make any necessary 
changes to the monthly repayment amount. If more than five years has 
passed since the date of loan origination, then this correction is not 
available. Plan Officials otherwise must continue to enforce all other 
terms of the original loan agreement.
    EBSA is aware that these plan loan transactions also have tax 
consequences; they require income tax reporting as a deemed 
distribution by the plan fiduciaries, which triggers income tax 
liabilities for participants. Informal discussion between EBSA and the 
staffs of the Internal Revenue Service (IRS) and Treasury Department 
have confirmed their intent to develop a coordinating Employee Plans

[[Page 17520]]

Compliance Resolution System \8\ (EPCRS) correction for these plan loan 
transactions under which certain tax consequences may be alleviated.
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    \8\ Rev. Proc. 2003-44, 2003-1 C.B. 1051.
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(c) Delinquent Participant Loan Repayments
    Subsequent to the publication of the original VFC Program, EBSA 
issued Advisory Opinion 2002-02A (May 17, 2002) relating to the time 
frames for repayment of participants' loans to pension plans. The 
Department then issued guidance in a question and answer format under 
the VFC Program stating that applicants could correct the failure to 
forward participant loan repayments to a plan in a timely fashion under 
the Program in the manner set forth in this Advisory Opinion. In 
conjunction with this guidance, the Department included, in its final 
class exemption providing relief for certain transactions described in 
the Program,\9\ explicit language to cover the failure to transmit 
participant loan repayments to a pension plan within a reasonable time 
after withholding or receipt by the employer. Consistent with the 
Department's prior guidance,\10\ EBSA is expanding the Program to 
explicitly include delinquent participant loan repayments as an 
eligible transaction in Section 7.A.1. of the Program.
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    \9\ See infra 1.
    \10\ See also Preamble to the final participant contribution 
regulation, 29 CFR 2510.3-102, published at 61 FR 41220, 41226 (Aug. 
7, 1996).
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6. Other Changes

    In addition to the revisions described above, EBSA is making the 
following changes in an effort to further refine the scope of the 
Program and facilitate its administration of the Program via the 
Regional Offices.
(a) Scope of the Term ``Under Investigation''
    Eligibility to participate in the revised Program pursuant to 
Section 4 (VFC Program Eligibility), paragraph (a), is conditioned on 
neither the plan nor the applicant being ``Under Investigation.'' For 
purposes of the revised VFC Program, EBSA has changed the definition of 
``Under Investigation'' in Section 3(b)(3). Upon review of the prior 
definition, EBSA concluded that in some respects the definition was too 
broad and in other respects too narrow. For example, the original VFC 
Program provided that a person would be considered ``Under 
Investigation'' only if he or she were subject to an investigation 
under either section 504 of ERISA by EBSA or any criminal statute 
involving a transaction affecting the plan. EBSA believes that if 
another Federal agency (e.g., IRS, SEC) is conducting an investigation 
involving the plan, applicant or plan fiduciary in connection with an 
act or transaction involving the plan, the acts or transaction at issue 
should be subject to closer scrutiny than might otherwise be the case 
in connection with the VFC Program, which is designed to deal with 
routine correction issues. Accordingly, the definition of ``Under 
Investigation'' includes investigations or examinations by other 
Federal agencies whether of a criminal or civil nature.
    EBSA further modified the ``Under Investigation'' definition to 
include notice of a Federal agency's intent to conduct an 
investigation, recognizing that the parties to the transaction may 
actually be on notice of an agency's intent to conduct an investigation 
well in advance of the beginning of the actual investigation. Again, 
EBSA believes that, while mere contact by an agency official generally 
is insufficient, communications notifying the parties of a Federal 
agency's intent to conduct an investigation or examination should, for 
purposes of eligibility for the VFC Program, be the same as if the 
investigation had started. It should be noted, however, that the plan, 
the applicant or plan sponsor will be considered ``Under 
Investigation'' only if the investigation or examination at issue is in 
connection with an act or transaction involving the plan. For example, 
if a plan sponsor is notified by a Federal agency of an investigation 
of the company regarding a Federal contract, such notification would 
not affect the plan's eligibility to participate in the VFC Program 
because the investigation does not involve the plan or an act or 
transaction involving the plan.
(b) Modification of Penalty of Perjury Statement
    For purposes of the revised VFC Program, EBSA also has modified the 
Penalty of Perjury Statement required by Section 6(g) of the Program. 
This amendment significantly simplifies the statement and more closely 
conforms the required representations to the revised Program's 
eligibility criteria. Under the revised Program, the statement will 
continue to require a declaration that the application and all 
supporting documents, based on knowledge and belief, are true, correct, 
and complete.
(c) Requests for Additional Documentation
    For purposes of the revised VFC Program, EBSA has added a provision 
to the Application Procedures set forth in Section 6(j) of the Program, 
Submission of Additional Documentation. This provision is intended to 
make clear that EBSA retains the right to make written requests for any 
supplemental documentation necessary for a complete examination and 
review of the application under the Program. If an applicant fails to 
respond with the requested documentation within the specified time 
period, EBSA may suspend further review of the application and consider 
what, if any, other action may be appropriate with respect to the 
identified violations. EBSA believes that this new provision will 
improve the efficiency of the Program and encourage timely 
communications among Program applicants and EBSA reviewers.

7. Miscellaneous Issues

(a) 502(l) Penalty If Application Is Rejected Or Closed As Incomplete
    If a person files an application under the VFC Program, but the 
corrective action falls short of a complete and acceptable correction, 
EBSA may reject the application and consider appropriate action, 
including assessment of a section 502(l) penalty. However, no section 
502(l) penalty would be imposed on the basis of any amounts restored to 
the plan prior to filing a 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.
(b) Actions By Parties Other Than the Department
    Full correction under the VFC Program does not preclude any other 
person or governmental agency, including the IRS, from exercising any 
rights it may have with respect to the transactions that are the 
subject of the application. The IRS has indicated to the Department 
that the federal tax treatment of a breach and correction under the VFC 
Program (including the federal income and employment tax consequences 
to participants, beneficiaries, and plan sponsors) are determined under 
the Code and that, based on its review of the revised Program, except 
in those instances where the fiduciary breach or its correction involve 
a tax abuse, a correction under the VFC Program for a breach that 
constitutes a prohibited transaction under section 4975 of the Code 
generally will constitute correction for purposes of section 4975 and a 
correction under the VFC Program

[[Page 17521]]

for a breach that also constitutes an operational plan qualification 
failure generally will constitute correction for purposes of the IRS's 
EPCRS program.

C. Notice and Request for Comments

    Although the Department is not required to seek public comments on 
an enforcement policy, the Department solicits comments from the public 
on the revisions to the VFC Program discussed in this Notice, including 
whether there are different ways in which the new transactions included 
in the Program could be corrected in accordance with the goals of the 
Program.
    At the same time, the Department has determined that the relief 
afforded by the revised VFC Program should be made available upon 
publication of the revised Program in the Federal Register in order to 
ensure that interested parties may avail themselves of the Program 
changes on the earliest possible date. EBSA does not believe that a 
delay in the implementation of the changes discussed herein would serve 
any useful purpose and is unnecessary, depriving potential applicants 
of the ability to take advantage of the clarified procedures and 
additional transactions included in the revised Program. As with the 
original VFC Program, implementation of the revised Program does not 
foreclose resolution of fiduciary breaches by other means, including 
entering into settlement agreements with the Department. The Department 
expects that the availability of the revised Program will encourage 
fiduciaries, which otherwise might not do so, to correct violations and 
reimburse plan losses. Alternatively, VFC Program applicants may pursue 
relief under the original VFC Program until such time as final changes 
are adopted by the Department.

D. Impact of Program Amendments

Executive Order 12866 Statement

    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) of the Executive 
Order, a ``significant regulatory action'' is an action that is likely 
to result in a rule (1) having an annual effect on the economy of $100 
million or more, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. OMB has 
determined that this action is not a ``significant regulatory action'' 
under Executive Order 12866, section 3(f). Accordingly, an assessment 
of the potential costs and benefits under section 6(a)(3) of that order 
is not required. In order to better inform the public, however, the 
Department has included below a brief analysis of the costs and 
benefits attributable to the updated and revised Program.
    The Department continues to believe that the benefits of the VFC 
Program substantially outweigh its costs, because participation is 
voluntary, the administrative cost of correcting a potential fiduciary 
breach through voluntary participation in the VFC Program is lower than 
the administrative cost of a correction in connection with a civil 
action and civil penalties, and the value and security of the assets of 
the plans participating in the VFC Program are preserved or increased. 
The VFC Program imposes no costs unless Plan Officials choose to avail 
themselves of the opportunity to correct a potential fiduciary breach 
under the terms of the VFC Program. Costs to Plan Officials in applying 
under the VFC Program include the expenses related to making a 
correction in accordance with Program conditions, and completing the 
application to be submitted to the Department. Benefits for Plan 
Officials include the reduction of risk and savings of penalties that 
would otherwise be payable on the amount of assets recovered following 
a civil action, in addition to the savings of resources that might have 
been devoted to such a civil action.
    An additional benefit of the VFC Program accrues to participants 
and beneficiaries through the correction of violations and restoration 
of losses or profits that arise from the reversal of impermissible 
transactions, resulting in greater security of plan assets and future 
benefits.
    The Department expects that the revised VFC Program will be easier 
and more useful for potential applicants. The greater efficiency and 
accessibility that will result from the availability of a model 
application form, the reduced documentation requirements, 
simplification of the correction amount calculation, including the 
introduction of the Online Calculator and the factors provided under 
IRS Revenue Procedure 95-17, addition of new transaction categories, 
and other clarifying modifications are expected to make the Program 
easier to use, to lessen the cost of participation in many instances, 
and to increase efficiency for both applicants and reviewers.
    The VFC Program has been very successful to date in encouraging and 
facilitating the correction of violations. The Department anticipates 
that the revised VFC Program will encourage Plan Officials, who 
otherwise might not do so, to correct violations and reimburse plan 
losses.
    The Department is unable to predict with certainty either the 
reduction in application costs that will arise from simplification of 
application and procedural requirements, or the potential increase in 
participation that will be associated with these revisions. However, 
based on the Department's experience to date, and comments from 
employee benefit plan practitioners, the availability of the model 
application form, streamlining of documentation requirements, and 
simplification of the correction amount calculation would make the 
Program substantially easier to use. The voluntary model form should 
offer an easily accessible outline for applicants to use in ensuring 
that their applications are complete, which will reduce or eliminate 
common application errors that result in processing delays and 
potential rejections.
    The reduction in the extent of documentation required for 
corrections involving delinquent contributions, in particular, should 
decrease the cost of participation for many Plan Officials because the 
vast majority of applications based on the delinquent remittance of 
participant funds have entailed breaches that involve amounts below 
$50,000, or amounts greater than $50,000 that were repaid within 180 
days. The delinquent remittance of participant contributions is also 
the most common type of violation corrected to date under the VFC 
Program. Where it applies, this reduction is substantial in that it 
permits the submission of summary information rather than the detailed 
accounting records previously required.
    Similarly, the modification of the method of calculating Lost 
Earnings or Restoration of Profits will simplify the correction in two 
significant ways. First, the revision in most cases eliminates the need 
for multiple calculations and a comparison of the two hypothetical 
amounts representing losses based on

[[Page 17522]]

actual rates and losses based on Code section 6621 rates. Second, the 
calculation of correction amounts will be facilitated considerably by 
the availability of the Online Calculator and the factors provided 
under IRS Revenue Procedure 95-17. As explained in detail above, the 
Online Calculator and IRS factors will be simpler, easier to use, and 
lessen the opportunity for errors. As noted, the Online Calculator and 
IRS factors will also facilitate calculations in connection with 
differences in Code section 6621 rates over time applicable to Lost 
Earnings, interest on Lost Earnings and interest for the Restoration of 
Profits. Further, the Online Calculator and IRS factors will facilitate 
these calculations for transactions causing large losses or resulting 
in large restorations where the Code section 6621(c)(1) large corporate 
underpayment rate must be used.
    Again, the Department anticipates that this simplification will 
have a sizeable aggregate effect. This is because the Online Calculator 
is expected to be particularly useful in the correction of violations 
involving the delinquent remittance of participant contributions. Not 
only is this the most common type of violation corrected to date, it is 
also a violation likely to involve multiple Loss Dates, further 
complicating the computation of correction amounts. The revised Program 
does retain flexibility for applicants by permitting manual 
calculations using the IRS factors.
    The Department previously estimated the average administrative cost 
of participation at about $3,000, consisting of about 39 hours of 
purchased professional services and Plan Official time for the 
correction and application. The actual cost is expected to be highly 
variable. However, if the model form, streamlined documentation, and 
simplification of correction amount calculation together served to 
reduce the average application time by eight to ten hours, spread over 
purchased professional services and Plan Officials, the average cost 
per applicant would be reduced to between $2,500 and $2,300. For the 
700 plans estimated to participate in the VFC Program annually, this 
would amount to an aggregate savings of about $400,000 to $500,000 per 
year. This cost contrasts with fiscal year 2004 corrections in 474 
cases restoring over $260 million.
    The Department is unable to estimate the increase in participation 
in the Program that may result from these revisions, largely because 
participation has continued to increase substantially. Participation 
roughly doubled between fiscal years 2003 and 2004. Many factors may 
contribute to this steady increase, such that it is not possible to 
observe a relationship between the administrative cost of participation 
in the Program and the decision to participate. Although the degree to 
which perceived complexities in the Program have discouraged 
participation is unknown, information provided by practitioners 
suggests that these changes will encourage greater participation.
    The inclusion in the Program of new covered transactions, involving 
certain loans to participants, the delinquent remittance of participant 
loan repayments, and the purchases and sales, of illiquid assets as 
determined under the VFC Program, along with the proposed prohibited 
transaction class exemption also published today that relates to the 
purchase and sale of illiquid assets, is also expected to make the 
relief available under the Program accessible to more Plan Officials 
and further increase participation. This assumption is based on both 
feedback from potential applicants, and on the experience of the 
Department in administering the Program. The Department has not 
ascertained a basis for estimating the volume of increased 
participation that might result from these new covered transactions and 
related prohibited transaction class exemption.
    The Department actively monitors the use of the Program, and will 
continue at this time to project annual Program utilization by about 
700 plans until the rate of participation has become more consistent.
    Beyond these administrative impacts, the Department has also 
considered the potential economic impacts of eliminating the 
requirement for the comparison of two hypothetical correction amounts 
for the calculation of correction amounts. Plan Officials were 
previously required to restore the higher of earnings as though the 
principal had been invested appropriately under ERISA, and earnings as 
though the principal had accrued interest at the rates specified in 
Code section 6621. The Department acknowledges that the correction 
amount under the revised Program may in some instances be lower than 
the higher of the former two hypothetical amounts.
    In eliminating dual calculation methods and offering the Online 
Calculator and IRS factors, the Department has attempted to strike a 
reasonable balance between the advantages of simplicity, which may 
include lower administrative costs and a greater likelihood of a timely 
correction, and the potentially greater precision of applying multiple 
rates of return based on the investment alternatives involved. The 
Department welcomes comments on the possible economic consequences of 
the revised provisions relating to the correction amount.

Paperwork Reduction Act

    The Information Collection Request (ICR) included in the 2002 
Program and PTE 2002-51 is currently approved by the Office of 
Management and Budget under control number 1210-0118. This approval is 
scheduled to expire on December 31, 2006. The amendments to the 
original VFC Program described earlier in this preamble may be expected 
to modify burden to some degree. However, with the exception of the 
change in the documentation requirements for the delinquent remittance 
of participant funds, these amendments do not in the Department's view 
constitute a substantive or material modification of the existing ICR. 
Accordingly, the Department has not addressed changes other than those 
made to Section 7.A.1.c. in a submission for the approval of a revision 
to the ICR in connection with these amendments, or with the proposed 
amendments to PTE 2002-51, published separately in this issue of the 
Federal Register.
    As noted, to facilitate applicants' use of the Program, the 
Department has developed an optional model application form (Appendix 
E). Potential applicants and practitioners have strongly encouraged 
EBSA to develop such a form to assist applicants to readily identify 
the Program requirements, and to verify that they have provided all of 
the information and supplementary documentation necessary for a valid 
application. Use of the form may help applicants avoid common errors 
that frequently result in processing delays or rejections.
    Although the model form may reduce burden, it follows the 
requirements set forth in the Program, and would not collect 
information not already required to be provided by an applicant under 
the existing Program. As such, the model application form will provide 
ready access to Program requirements previously set out in the text of 
the Program, and increase certainty about compliance with the 
application requirements, without altering the existing ICR.
    Completion and submission of the checklist (Appendix B) was 
required in the original program, and is revised in only its more user-
friendly format. Elements of the checklist now appear on a separate 
Appendix. It should be noted that the required checklist appears twice 
within the Appendices to the Program.

[[Page 17523]]

While it is required to be submitted only once, it is included as the 
separate Appendix B for applicants who do not choose to use the model 
application in Appendix E, and as the final item in the model 
application for ease of use for those who do choose to use the model 
application.
    The Department has also modified the VFC Program's application 
requirements by clarifying certain terms and representations to be made 
in the application, by describing the process by which the Department 
when necessary may request additional documentation, and eliminating 
previously required information related to the plan's fidelity bond. 
These modifications are also made with intention of making the Program 
easier and more efficient to use, but do not substantively or 
materially alter the existing ICR.
    In the Department's view, the amendments to Section 7.A.1.c. do 
constitute a substantive and material change to the existing ICR 
because they will substantially reduce burden. The revision of the 
currently approved ICR pertains to documentation requirements for 
Delinquent Participant Contributions and Delinquent Participant Loan 
Repayments to Pension Plans. Revised provision 7.A.1.c. eliminates 
under specific circumstances the requirement for the applicant to 
provide accounting and payroll records to document the date and amount 
of each contribution at issue. The Plan Official is relieved from 
providing the more detailed documentation if restored participant 
contributions and/or repayments (exclusive of Lost Earnings) total 
$50,000 or less, or exceed $50,000 and were remitted to the plan within 
180 days from the date such amounts were received by the employer or 
otherwise payable to the participant in cash. This program change is 
intended to reduce the burden of participation in the Program.
    This revision is expected to impact the burden of the currently 
approved information collection because the vast majority of violations 
corrected under the Program involve delinquent participant 
contributions that totaled $50,000 or less, or were remitted within 180 
days. Thus a burden reduction is expected for more than 90% of 
applicants.
    The information collection burden of the VFC Program and related 
PTE 2002-51 is estimated as follows. The estimates include updated 
assumptions for compensation rates and mailing costs, and an increase 
in the number of respondents over the number currently in OMB 
inventory. For each of 700 plans, 8 hours of time of Plan Officials at 
$68 per hour, and 5 hours of service provider time at $83 per hour will 
be required to meet information collection requirements. These 
components account for 5,600 burden hours and $290,500 in burden cost. 
Total burden cost includes $2 in mailing costs, for a total of 
$291,900.
    Assuming as many as one-half of applicants also make use of the 
class exemption when using the Program and that all work is performed 
by service providers, an additional cost burden of $29,000 arises from 
developing required notices to interested persons at $83 per hour, and 
mailing at first class rates for 10% of those notices and the notices 
to the Department, assuming an average of 136 participants per plan. It 
is assumed that the remaining notices are delivered electronically. 
Total cost burden for the information collection provisions of the 
exemption is $30,900. The total cost of the information collection 
provisions of the VFC Program and exemption before this revision is 
$322,800.
    The revision in Section 7.A.1.c is estimated to reduce the hours 
and costs required to comply with the Program's information collection 
request by about one-half. The burden associated with the exemption is 
unchanged.
    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data 
can be provided in the desired format, reporting burden (time and 
financial resources) is minimized, collection instruments are clearly 
understood, and the impact of collection requirements on respondents 
can be properly assessed.
    Currently, EBSA is soliciting comments concerning the revision of 
the currently approved information collection request (ICR) included in 
this Amended and Restated Voluntary Fiduciary Correction Program. A 
copy of the ICR may be obtained by contacting the PRA addressee shown 
below.
    The Department has submitted a copy of the revised ICR to OMB in 
accordance with 44 U.S.C. 3507(d) for review of its information 
collections. The Department and OMB are particularly interested in 
comments that:
     Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. Although comments may be 
submitted through June 6, 2005, OMB requests that comments be received 
within 30 days of publication of the Notice of Adoption of Amended and 
Restated Voluntary Fiduciary Correction Program.
    PRA Addressee: Address requests for copies of the ICR to Gerald B. 
Lindrew, Office of Policy and Research, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue, 
NW., Room N-5647, Washington, DC 20210. Telephone (202) 693-8410; Fax: 
(202) 219-5333. These are not toll-free numbers.
    Type of Review: Revision of currently approved collection of 
information.
    Agency: Department of Labor, Employee Benefits Security 
Administration.
    Title: Voluntary Fiduciary Correction Program.
    OMB Number: 1210-0118.
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
    Respondents: 700.
    Frequency of Response: On occasion.
    Responses: 5,810.
    Estimated Total Burden Hours: 1,200 for existing ICR; 3,500 for 
revised ICR.
    Total Annual Cost (Operating and Maintenance): $66,000 for existing 
ICR; $177,600 for revised ICR.
    Comments submitted in response to this notice will be summarized 
and/or included in the request for OMB approval of the information 
collection request; they will also become a matter of public record.

[[Page 17524]]

Regulatory Flexibility Act

    This document describes 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 and the Department is not required to either certify 
that the rule will not have a significant economic impact on a 
substantial number of small entities, or conduct a regulatory 
flexibility analysis. However, EBSA considered the potential costs and 
benefits of this action for small plans and the Plan Officials in 
developing the revised Program, and believes that its greater 
simplicity and accessibility will make the Program more useful to small 
employers who wish to avail themselves of the relief offered.

Congressional Review Act

    The VFC Program is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and will be transmitted to the Congress and 
the Comptroller 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 
United States-based enterprises to compete with foreign-based 
enterprises in domestic or export markets.

Unfunded Mandates Reform Act

    Pursuant to provisions of the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), this regulatory action does not include any Federal 
mandate that may result in annual expenditures by State, local, or 
tribal governments, or the private sector, of $100 million or more.

E. Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires the adherence to specific 
criteria by Federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This Program would not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated that are not pertinent here, that 
the provisions of Titles I and IV of ERISA supersede any and all laws 
of the States as they relate to any employee benefit plan covered under 
ERISA. The requirements implemented in this Program do not alter the 
fundamental provisions of the statute with respect to employee benefit 
plans, and as such would have no implications for the States or the 
relationship or distribution of power between the national government 
and the States.

    Authority: Secretary of Labor's Order 1-2003, 68 FR 5374 (Feb 3, 
2003). ERISA Sec. 502(a)(2) and (a)(5) also issued under 29 U.S.C. 
1132(a)(2) and (a)(5), ERISA Sec. 506(b) also issued under 29 U.S.C. 
1136(b).

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
Section 6. Application Procedures
Section 7. Description of Eligible Transactions and Corrections 
Under the VFC Program
A. Delinquent Remittance of Participant Funds
    1. Delinquent Participant Contributions and Participant Loan 
Repayments 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. Participant Loans
    1. Loan Amount in Excess of Plan Limitations
    2. Loan Duration in Excess of Plan Limitations
D. 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
    6. Holding of an Illiquid Asset Previously Purchased by a Plan
E. Benefits
    1. Payment of Benefits Without Properly Valuing Plan Assets on 
Which Payment is Based
F. 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 (Required)
Appendix C. List of EBSA Regional Offices
Appendix D. Lost Earnings Example
Appendix E. Model Application Form (Optional)

Section 1. Purpose and Overview of the VFC Program

    The purpose of the Voluntary Fiduciary Correction Program (VFC 
Program or Program) is to protect the financial security of workers by 
encouraging identification and correction of transactions that violate 
Part 4 of Title I of the Employee Retirement Income Security Act of 
1974, as amended (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, the 
Employee Benefits Security Administration (EBSA) is providing guidance 
on what constitutes adequate

[[Page 17525]]

correction under Title I of ERISA for the breaches described in this 
Program.

Section 2. Effect of the VFC Program

    (a) In general. EBSA generally will issue to the applicant a no 
action letter \11\ 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, EBSA 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.
---------------------------------------------------------------------------

    \11\ See Appendix A.
---------------------------------------------------------------------------

    (b) Verification. EBSA 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. If a transaction 
gave rise to violations not specifically described in the Program, 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 EBSA, 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 EBSA, EBSA 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. Participation in the VFC 
Program will not preclude:
    (i) EBSA or any other governmental agency from conducting a 
criminal investigation of the transaction identified in the 
application;
    (ii) EBSA's assistance to such other agency; or
    (iii) EBSA making the appropriate referrals of criminal violations 
as required by section 506(b) of ERISA.\12\
---------------------------------------------------------------------------

    \12\ 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.
---------------------------------------------------------------------------

    (6) Other actions not precluded. Compliance with the terms of the 
VFC Program will not preclude EBSA 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 
Internal Revenue Service (IRS) as required by section 3003(c) of 
ERISA;\13\ or
---------------------------------------------------------------------------

    \13\ 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 EBSA enforcement policy with respect to applications under 
the Program 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 Internal Revenue Code 
(Code).\14\ Correction may not be achieved under the Program by 
engaging in a prohibited transaction that is not subject to a 
prohibited transaction administrative exemption.
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    \14\ See section 4975(f)(5) of the Code; section 141.4975-13 of 
the temporary Treasury Regulations and section 53.4941(e)-1(c) of 
the Treasury Regulations. The IRS has indicated that the federal tax 
treatment of a breach and correction under the VFC Program 
(including the federal income and employment tax consequences to 
participants, beneficiaries, and plan sponsors) are determined under 
the Code and that, based on its review of the Program, except in 
those instances where the fiduciary breach or its correction involve 
a tax abuse, a correction under the VFC Program for a breach that 
constitutes a prohibited transaction under section 4975 of the Code 
generally will constitute correction for purposes of section 4975 
and a correction under the VFC Program for a breach that also 
constitutes an operational plan qualification failure generally will 
constitute correction for purposes of the IRS's Employee Plans 
Compliance Resolution Program (EPCRS).
---------------------------------------------------------------------------

    (e) EBSA's authority to investigate. EBSA 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. 
EBSA 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.

[[Page 17526]]

    (f) Confidentiality. EBSA 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, EBSA 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.
    (b) The following definitions apply for purposes of the VFC 
Program:
    (1) Breach. The term ``Breach'' means any transaction that 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. For purposes of section 4(a), a plan or an 
applicant shall be considered to be ``Under Investigation'' if EBSA or 
any other Federal agency is conducting an investigation or examination 
of the plan, the applicant, or the plan sponsor in connection with an 
act or transaction involving the plan, or if a written or oral notice 
of an intent to conduct such an investigation or examination has been 
received by the plan, a Plan Official, or other plan representative. 
For purposes of section 4(a), a plan shall not be considered to be 
``Under Investigation'' merely because EBSA staff has contacted the 
plan, the applicant, or the plan sponsor 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'' if the accountant of the plan is 
undergoing a work paper review by EBSA's Office of the Chief Accountant 
under the authority of ERISA section 504(a).

    Example 1. On March 1 the plan sponsor of a profit sharing plan 
received written notification from an agent of the IRS that the plan 
has been scheduled for examination. As of March 1, the plan is 
ineligible for participation in the VFC Program because the plan 
sponsor has received a notice from the IRS concerning the IRS's 
intent to examine the plan.
    Example 2. Assume the same facts as in Example 1, except that 
the plan sponsor received written notification from a Federal agency 
of an investigation of the company regarding an alleged workplace 
safety violation. The plan's eligibility to participate in the VFC 
Program would not be affected because the investigation does not 
involve the plan or an act or transaction involving the plan.

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 EBSA.

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. For purposes of the VFC 
Program, the correction amount is the amount that must be paid to the 
plan as a result of the Breach in order to make the plan whole. In most 
instances, the correction amount will be a combination of the Principal 
Amount involved in the transaction (see subparagraph (2)), the Lost 
Earnings amount, which is earnings that would have been earned on the 
Principal Amount for the period of the transaction (see subparagraph 
(5)), and any interest on Lost Earnings. However, in circumstances when 
the Restoration of Profits amount (see subparagraph (6)) exceeds the 
Lost Earnings amount and any interest on Lost Earnings, the correction 
amount will be a combination of the Principal Amount and the 
Restoration of Profits amount.
    (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. The Principal Amount, 
when applicable, must be determined for each transaction by reference 
to Section 7 of the VFC Program. Generally, the Principal Amount is the 
base amount on which Lost Earnings and, if applicable, Restoration of 
Profits is calculated. The Principal Amount shall also include, where 
appropriate, any transaction 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. (A) General. ``Lost Earnings'' is intended to 
approximate the amount that would have been earned by the plan on the 
Principal Amount, but for the Breach. For purposes of this Program, 
Lost Earnings shall be calculated in accordance with this paragraph.
    (B) Initial Calculation. Lost earnings shall be calculated by: (i) 
Determining the applicable corporate underpayment rate(s) established 
under section 6621(a)(2) of the Code \15\ for each quarter (or portion 
thereof) for the period beginning with the Loss Date and ending with 
the Recovery Date; (ii) determining, by reference to IRS Revenue 
Procedure 95-17,\16\ the applicable factor(s) for such quarterly 
underpayment rate(s) for each quarter

[[Page 17527]]

(or portion thereof) of the period beginning with the Loss Date and 
ending with the Recovery Date; and (iii) multiplying the Principal 
Amount by the first applicable factor to determine the amount of 
earnings for the first quarter (or portion thereof). If the Loss Date 
and Recovery Date are within the same quarter, the initial calculation 
is complete. If the Recovery Date is not in the same quarter as the 
Loss Date, the applicable factor for each subsequent quarter (or 
portion thereof) must be applied to the sum of the Principal Amount and 
all earnings as of the end of the immediately preceding quarter (or 
portion thereof), until Lost Earnings have been calculated for the 
entire period, ending with the Recovery Date.
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    \15\ These underpayment rates are displayed on EBSA's Web site 
and will be updated when necessary.
    \16\ Rev. Proc. 95-17, 1995-1 C.B. 556 (Feb. 8, 1995). These 
factors, which are displayed on EBSA's Web site in a tabular format, 
incorporate daily compounding of an interest rate over a set period 
of time.
---------------------------------------------------------------------------

    (C) Payment of Lost Earnings after Recovery Date. If Lost Earnings 
are not paid to the plan on the Recovery Date along with the Principal 
Amount, payment of Lost Earnings shall include interest on the amount 
of Lost Earnings determined in accordance with subparagraph (5)(B), 
above. Such interest shall be calculated in the same manner as Lost 
Earnings described in subparagraph (5)(B) above, for the period 
beginning on the Recovery Date and ending on the date the Lost Earnings 
are paid to the plan.
    (D) Special Rule for Transactions Causing Large Losses. If the 
amount of Lost Earnings (determined in accordance with subparagraph 
(5)(B)) and any interest added to such Lost Earnings (determined in 
accordance with subparagraph (5)(C)) above, exceed $100,000, the amount 
of Lost Earnings and interest, if any, to be paid to the plan shall be 
determined in accordance with subparagraphs (5)(B) and (C), above, 
substituting the applicable underpayment rates under section 6621(c)(1) 
of the Code \17\ in lieu of the rates under section 6621(a)(2).
---------------------------------------------------------------------------

    \17\ These underpayment rates are displayed on EBSA's Web site 
and will be updated when necessary.
---------------------------------------------------------------------------

    (E) Method of Calculation. For purposes of calculating Lost 
Earnings and interest, if any, a Plan Official may either (i) use the 
Online Calculator described in Section 5(b)(7), below, or (ii) perform 
a manual calculation in accordance with subparagraphs (B) through (D) 
of this paragraph (5). A Plan Official using the Online Calculator or 
performing a manual calculation shall include as part of the VFC 
Program application sufficient information to verify the correctness of 
the amounts to be paid to the plan.
    (6) Restoration of Profits. (A) General. If the Principal Amount 
was used for a specific purpose such that a profit on the use of the 
Principal Amount is determinable, the Plan Official must calculate the 
Restoration of Profits amount and compare it to the Lost Earnings 
amount to determine the correction amount (see paragraph (b)(1)). 
``Restoration of Profits'' is a combination of two amounts: (i) The 
amount of profit made on the use of the Principal Amount by the 
fiduciary or party in interest who engaged in the Breach, or by a 
person who knowingly participated in the Breach, and (ii) if the profit 
is returned to the plan on a date later than the date on which the 
profit was realized (i.e., received or determined), the amount of 
interest earned on such profit from the date the profit was realized to 
the date on which the profit is paid to the plan. The amount of such 
interest shall be determined in accordance with subparagraph (B), 
below.
    If the Restoration of Profits amount exceeds Lost Earnings and 
interest, if any, the Restoration of Profits amount must be paid to the 
plan instead of Lost Earnings.
    (B) Calculation of Interest. Interest shall be calculated by: (i) 
Determining the applicable corporate underpayment rate(s) established 
under section 6621(a)(2) of the Code for each quarter (or portion 
thereof) for the period beginning with the date the profit was realized 
(i.e. received or determined) and ending with the date on which the 
profit is paid to the plan; (ii) determining, by reference to IRS 
Revenue Procedure 95-17, the applicable factor(s) for such quarterly 
underpayment rate(s) for each quarter (or portion thereof) of the 
period beginning with the date the profit was realized and ending with 
the date on which the profit is paid to the plan; and (iii) multiplying 
the first applicable factor by the profit on the Principal Amount, 
referred to in paragraph (A)(i), above, to determine the amount of 
interest for the first quarter (or portion thereof). If the date the 
profit was realized and the date the profit is paid to the plan are 
within the same quarter, the initial calculation is complete. If the 
date the profit was realized is not in the same quarter as the date the 
profit was paid to the plan, the applicable factor for each subsequent 
quarter (or portion thereof) must be applied to the sum of the profit 
on the Principal Amount, referred to in paragraph (A)(i), above, and 
all interest as of the end of the immediately preceding quarter (or 
portion thereof), until interest has been calculated for the entire 
period, ending with the date the profit is paid to the plan.
    (C) Special Rule for Transactions Resulting in Large Restorations. 
If the amount of Restoration of Profits (determined in accordance with 
subparagraph (6)(A)) above exceeds $100,000, the amount of any interest 
on the Restoration of Profits to be paid to the plan shall be 
determined in accordance with subparagraph (6)(B), above, substituting 
the applicable underpayment rates under section 6621(c)(1) of the Code 
in lieu of the rates under section 6621(a)(2).
    (D) Method of Calculation. For purposes of calculating the interest 
amount for Restoration of Profits, pursuant to subparagraphs (6)(B) and 
(C) above, a Plan Official may either (i) use the Online Calculator 
described in Section 5(b)(7), below, or (ii) perform a manual 
calculation in accordance with subparagraphs (B) and (C) of this 
paragraph (6). A Plan Official using the Online Calculator or 
performing a manual calculation shall include as part of the VFC 
Program application sufficient information to verify the correctness of 
the amounts to be paid to the plan.
    (7) Online Calculator. ``Online Calculator'' is an Internet based 
compliance assistance tool provided on EBSA's Web site that permits 
applicants to calculate the amount of Lost Earnings, any interest on 
Lost Earnings, and the interest amount for Restoration of Profits, if 
applicable, for certain transactions. The Online Calculator will be 
updated as necessary.
    (A) Lost Earnings and Interest. To calculate Lost Earnings, 
applicants must input the (1) Principal Amount, (2) Loss Date, and (3) 
Recovery Date, and if the final payment will occur after the Recovery 
Date, (4) the date of such final payment. The Online Calculator selects 
the applicable factors under Revenue Procedure 95-17 after referencing 
the underpayment rates over the relevant time period. The Online 
Calculator then automatically applies the factors to provide applicants 
with the amount of Lost Earnings and interest, if any, that must be 
paid to the plan.
    (B) Interest Amount for Restoration of Profits. To calculate the 
interest amount on the profit, applicants must input (1) the amount of 
profit, (2) the date the amount of profit was realized (i.e. received 
or determined), and (3) the date of payment of the Restoration of 
Profits amount. The Online Calculator selects the applicable factors 
under Revenue Procedure 95-17 after referencing the underpayment rates 
over the relevant time period. The Online Calculator then automatically 
applies the factors to provide applicants with

[[Page 17528]]

the interest amount on the profit that must be paid to the plan.
    (8) The principles of this paragraph (b) are illustrated by example 
in Appendix D.
    (c) Costs of Correction. (1) The fiduciary, plan sponsor or other 
Plan Official, shall pay the costs of correction, which may not be paid 
from plan assets.
    (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 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 timely 
forward participant contributions to 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. Any fees paid to such representative for 
services relating to the preparation and submission of the application 
may not be paid from plan assets.
    (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 EBSA.
    (d) Detailed narrative. The applicant must provide to EBSA 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 employer identification number (EIN), plan 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;
    (vi) specific calculations demonstrating how Principal Amount and 
Lost Earnings or, if applicable, 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) copies of the relevant portions of the plan document and any 
other pertinent documents (such as the adoption agreement, trust 
agreement, or insurance contract); \18\
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    \18\ Applicants must supply complete copies of the plan 
documents and other pertinent documents if requested by EBSA during 
its review of the application.
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    (ii) documentation that supports the narrative description of the 
transaction and its correction;
    (iii) documentation establishing the Lost Earnings amount;
    (iv) documentation establishing the amount of Restoration of 
Profits, if applicable;
    (v) all documents described in Section 7 with respect to the 
transaction involved; and
    (vi) proof of payment of Principal Amount and Lost Earnings or 
Restoration of Profits.
    (f) 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.

[[Page 17529]]

    (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 include the 
following statement: ``Under penalties of perjury I certify that I am 
not Under Investigation (as defined in Section 3(b)(3)) and that I have 
reviewed this application, including all supporting documentation, and 
to the best of my knowledge and belief the contents are true, correct, 
and complete.'' The statement must 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, each Plan Official applying under the VFC Program must 
sign and date the Penalty of Perjury statement. The statement must 
accompany the application and any subsequent additions to the 
application. Use of the Penalty of Perjury Statement included with the 
Model Application Form in Appendix E will satisfy the requirements of 
this Section 6(g).
    (h) Checklist. The checklist in Appendix B must be completed, 
signed, and submitted with the application. Use of the checklist 
included with the Model Application Form in Appendix E also will 
satisfy the requirements of this Section 6(h).
    (i) Where to apply. The application shall be mailed to the 
appropriate regional EBSA office listed in Appendix C.
    (j) Submission of Additional Documentation. If EBSA determines that 
required information is missing from the application or that additional 
documentation is needed to complete EBSA's review, EBSA will request 
such documentation in writing from the applicant or authorized 
representative. If EBSA does not receive the requested documentation 
within a time period specified in writing by the EBSA reviewer, EBSA 
may suspend its review of the application and consider appropriate 
action. EBSA will notify the applicant or authorized representative in 
writing regarding such suspension.
    (k) Record keeping. The applicant must maintain copies of the 
application and any subsequent correspondence with EBSA for the period 
required by section 107 of ERISA.

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

    EBSA 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. EBSA 
will not accept applications concerning correction of breaches not 
described in this Section.

A. Delinquent Remittance of Participant Funds

1. Delinquent Participant Contributions and Participant Loan Repayments 
to Pension Plans
    (a) Description of Transaction. An employer receives directly from 
participants, or withholds from employees' paychecks, certain amounts 
for either contribution to a pension plan or for repayment of 
participants' plan loans. Instead of forwarding participant 
contributions for investment in accordance with the provisions of the 
plan and by reference to the principles of the Department's regulation 
at 29 CFR 2510.3-102, the employer retains such contributions for a 
longer period of time. Similarly, in the case of participant loan 
repayments, instead of applying such repayments to outstanding loan 
balances within a reasonable period of time determined by reference to 
the guiding principles of 29 CFR 2510.3-102 and in accordance with the 
provisions of the plan, the employer retains such repayments for a 
longer period of time.
    (b) Correction of Transaction. (1) Unpaid Contributions or 
Participant Loan Repayments. 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 Loss Date for such 
contributions is the date on which each contribution reasonably could 
have been segregated from the employer's general assets. In no event 
shall the Loss Date for such contributions be later than the applicable 
maximum time period described in 29 CFR 2510.3-102. The Loss Date for 
such repayments is the date on which each repayment reasonably could 
have been segregated from the employer's general assets consistent with 
the guiding principles of 29 CFR 2510.3-102.\19\ Any penalties, late 
fees or other charges shall be paid by the employer and not from 
participant loan repayments.
---------------------------------------------------------------------------

    \19\ Although the maximum time periods described in 29 CFR 
2510.3-102 are not directly applicable to participant loan 
repayments, retaining repayments beyond such periods raises a 
question as to whether the employer forwarded repayments to the plan 
as soon as they could reasonably be segregated from the employer's 
general assets. See Advisory Opinion 2002-02A (May 17, 2002).
---------------------------------------------------------------------------

    (2) Late Contributions or Participant Loan Repayments. If 
participant contributions or loan repayments were remitted to the plan 
outside of the time periods described above, 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). Any penalties, late fees 
or other charges shall be paid by the employer and not from participant 
loan repayments.
    (3) For this transaction, the Principal Amount is the amount of 
delinquent participant contributions or loan repayments retained by the 
employer.
    (4) Example. The principles of this paragraph (b) are illustrated 
by example in Appendix D.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) A statement from a Plan Official identifying the earliest date 
on which the participant contributions and/or repayments 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) If restored participant contributions and/or repayments 
(exclusive of Lost Earnings) (A) total $50,000 or less; or (B) exceed 
$50,000 and were remitted to the plan within 180 calendar days from the 
date such amounts were received by the employer, or the date such 
amounts otherwise would have been payable to the participants in cash 
(regarding amounts withheld by an employer from employees' paychecks), 
submit:
    (i) A narrative describing the applicant's contribution and/or 
repayment remittance practices before and after the period of unpaid or 
late contributions and/or repayments; and
    (ii) Summary documents demonstrating the amount of unpaid or late 
contributions and/or repayments; and
    (3) If restored participant contributions and/or repayments 
(exclusive of Lost Earnings) exceed $50,000 and were remitted more than

[[Page 17530]]

180 calendar days after the date such amounts were received by the 
employer, or the date such amounts otherwise would have been payable to 
the participants in cash (regarding amounts withheld by an employer 
from employees' paychecks), submit:
    (i) A narrative describing the applicant's contribution and/or 
repayment remittance practices before and after the period of unpaid or 
late contributions and/or repayments;
    (ii) For participant contributions and/or repayments received from 
participants, a copy of the accounting records which identify the date 
and amount of each contribution received; and
    (iii) For participant contributions and/or repayments withheld from 
employees' paychecks, a copy of the payroll documents showing the date 
and amount of each withholding.
2. Delinquent Participant Contributions to Insured Welfare Plans
    (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(c) of the Public 
Health Service Act, 42 U.S.C. 300e-9(c). 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. (1) 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 by the 
employer and not from participant contributions.
    (2) For this transaction, the Principal Amount is the amount of 
delinquent participant contributions retained by the employer.
    (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 Welfare Plan Trusts
    (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, any penalties, 
late fees or other charges necessary to prevent a lapse in coverage due 
to the failure to make timely payments, and (2) 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 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.
    (3) For this transaction, the Principal Amount is the amount of 
delinquent participant contributions retained by the employer.
    (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,

[[Page 17531]]

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, each loan payment has a 
Principal Amount equal to the excess of the loan payment 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 the loan payment actually received under the loan terms during 
such period. Under 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 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) For purposes of this transaction, each loan payment has a 
Principal Amount equal to the excess of the loan payment 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 the loan payment actually received under the loan terms during 
such period. Under the VFC Program, 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) For purposes of this transaction, each loan payment has a 
Principal Amount equal to the excess of the loan payment that would 
have been received if the loan had been made at the fair market 
interest rate for an unsecured loan (from the beginning of the loan 
until the Recovery Date) over the loan payment actually received under 
the loan terms during such period. Under the VFC Program, 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

[[Page 17532]]

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. Participant Loans

1. Loan Amount in Excess of Plan Limitations
    (a) Description of Transaction. A plan extended a loan to a plan 
participant who is a party in interest with respect to the plan based 
solely on his or her status as an employee of any employer whose 
employees are covered by the plan, as defined in section 3(14)(H) of 
ERISA. The amount of the loan exceeded the amount permitted under 
applicable plan provisions incorporating the requirements of section 
72(p) of the Code. The loan was a prohibited transaction that failed to 
qualify for ERISA's statutory exemption for plan loan programs because 
the loan amount exceeded the amount permitted under applicable plan 
provisions.
    (b) Correction of Transaction. (1) The participant must pay the 
Principal Amount to the plan. Plan Officials must reform the 
outstanding loan amount that was not in excess of the applicable plan 
loan limit at origination (the date of Breach) into an ongoing plan 
loan. In reformulating the loan, Plan Officials must make the necessary 
adjustments to the monthly repayment amount so that the remaining 
outstanding principal balance is amortized over the remaining duration 
of the original loan and also enforce all other terms of the original 
loan agreement. The Principal Amount is the loan amount in excess of 
the applicable plan loan limit on the Loss Date. The Loss Date is the 
date of loan origination.
    (2) The principles of this paragraph (b) are illustrated in the 
following example:

    Example. On January 1, 2004, Participant A receives a $15,000 
loan pursuant to the loan provisions of Plan X, which incorporate 
the requirements of section 72(p) of the Code. Participant A is an 
employee of Company Y, the plan sponsor. Participant A is not a 
party in interest with respect to Plan X for any reason other than 
his employment with Company Y. The terms of the loan include a five-
year repayment in equal monthly installments of principal and 
interest at a then current market interest rate of 4.625%. Amortized 
monthly payments for Participant A are determined to be $280. 
However, in accordance with Plan X limitations on the amount of 
participant loans and Participant A's account balance as of January 
1, 2004, Participant A should not have received a loan in excess of 
$10,000. The loan otherwise complies with Plan X's loan provisions.
    In late 2004, a Plan Official discovers that the amount of 
Participant A's loan exceeded applicable plan limitations. On 
January 1, 2005, the Recovery Date, Participant A's outstanding loan 
balance is $12,270. Participant A repays $5,000 to Plan X, the 
amount by which his loan exceeded applicable plan limitations on 
January 1, 2004. Plan Officials reform Participant A's loan on 
January 1, 2005 based on the outstanding principal balance of 
$7,270, to be paid back in equal monthly installments of principal 
and interest at the original loan rate of 4.625%. Appropriate 
adjustments are made to the monthly repayment amount, which will be 
$166 over the 4-year period remaining on the loan's original 5-year 
term. The reformed loan otherwise will comply with the terms of the 
original loan.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) For each plan loan originated in violation of applicable plan 
limits, the date, amount, duration, interest rate and repayment 
schedule applicable to each plan loan and the amount of each 
participant's nonforfeitable accrued benefit on such date;
    (2) Date and amount of excess loan repaid by each participant prior 
to reformulation;
    (3) Date, amount and repayment schedule of each reformulated plan 
loan being maintained as an ongoing plan loan;
    (4) Date and amount of payments made by the participant with 
respect to the original plan loan;
    (5) A copy of the plan's loan provisions; and
    (6) An explanation of any administrative practices or procedures 
with respect to plan loans and any changes to such practices or 
procedures designed to prevent this type of Breach from recurring.
2. Loan Duration in Excess of Plan Limitations
    (a) Description of Transaction. A plan extended a loan to a plan 
participant who is a party in interest with respect to the plan based 
solely on his or her status as an employee of any employer whose 
employees are covered by the plan, as defined in section 3(14)(H) of 
ERISA. The duration of the loan exceeded the maximum repayment term 
permitted under applicable plan provisions incorporating the 
requirements of section 72(p) of the Code. The loan was a prohibited 
transaction that failed to qualify for ERISA's statutory exemption for 
plan loan programs because the duration of the loan exceeded the 
maximum repayment term permitted under applicable plan provisions.
    (b) Correction of Transaction. (1) Plan Officials must reform the 
duration of the loan term so that repayment of the outstanding loan 
will be completed by the date that complies with the maximum repayment 
term permitted under applicable plan provisions. The duration of the 
reformulated loan must be no longer than the maximum permissible term 
under applicable plan provisions, measured from the date of loan 
origination to the date of correction. In reformulating the loan, Plan 
Officials must make the necessary adjustments to the monthly repayment 
amount so that the remaining outstanding principal balance is amortized 
over such duration and also enforce all other terms of the original 
loan agreement. If the period of time elapsed between the date of loan 
origination and the date Plan Officials discover the error equals or 
exceeds the maximum permissible term permitted under applicable plan 
provisions, then this correction is unavailable.
    (2) The principles of this paragraph (b) are illustrated in the 
following example:

    Example. On January 1, 2004, Participant A receives a general 
purpose $10,000 loan pursuant to the loan provisions of Plan X, 
which incorporate the requirements of section 72(p) of the Code. 
Participant A is an employee of Company Y, the plan sponsor. 
Participant A is not a party in interest with respect to Plan X for 
any reason other than his employment with Company Y. The terms of 
the loan include a ten-year repayment in equal monthly installments 
of principal and interest at a then current market interest rate of 
4.75%. Amortized monthly payments for Participant A are determined 
to be $105. However, in accordance with Plan X limitations on the 
repayment term for general purpose participant loans, Participant A 
should not have received a loan with a duration longer than five 
years. The loan

[[Page 17533]]

otherwise complies with Plan X's loan provisions.
    In late 2004, a Plan Official discovers that the duration of 
Participant A's loan exceeded applicable plan limitations. Plan 
Officials reform Participant A's loan on January 1, 2005, the date 
of correction, based on the outstanding principal balance of $9,200, 
to be paid back in equal monthly installments of principal and 
interest at the original loan rate of 4.75%. Appropriate adjustments 
are made to the monthly repayment amount, which will be $211 over 
the remaining four-year repayment term that begins on the date of 
correction. The reformed loan otherwise will comply with the terms 
of the original loan.

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) For each plan loan originated with a duration exceeding 
applicable plan limits, the date, amount, duration, interest rate, and 
repayment schedule applicable to each plan loan;
    (2) Date, amount, duration, interest rate, and repayment schedule 
of each reformulated plan loan being maintained as an ongoing plan loan 
from the date of correction;
    (3) Date and amount of payments made by the participant with 
respect to the original plan loan;
    (4) A copy of the plan's loan provisions; and
    (5) An explanation of any administrative practices or procedures 
with respect to plan loans and any changes to such practices or 
procedures designed to prevent this type of Breach from recurring.

D. 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 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 \20\ 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.
---------------------------------------------------------------------------

    \20\ 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 VALUE 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.

[[Page 17534]]

    (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.\21\ 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).
---------------------------------------------------------------------------

    \21\ 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) For purposes of this transaction, the Principal Amount is the 
plan's original purchase price.
    (3) 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.
    (4) 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).
    (5) The principles of this paragraph (b) are illustrated in the 
following example:

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

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

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

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

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

    (c) Documentation. In addition to the documentation required by 
Section 6, submit the following documents:
    (1) Documentation of the plan's original sale of the asset, 
including the date of the sale, the sale price, and the identity of the 
buyer;
    (2) A narrative describing the relationship of the buyer to the 
plan; and
    (3) A copy of the qualified, independent appraiser's report 
addressing the FMV at the time of the plan's sale.
6. Holding of an Illiquid Asset Previously Purchased by a Plan
    (a) Description of Transaction. A plan is holding an asset 
previously purchased from (i) a party in interest with respect to the 
plan at no greater than fair market value at that time in an 
acquisition to which no prohibited transaction exemption applied, (ii) 
a person who was not a party in interest with respect to the plan in an 
acquisition in which a plan fiduciary failed to appropriately discharge 
his or her fiduciary duties, or (iii) a person who was not a party in 
interest with respect to the plan in an acquisition in which a plan 
fiduciary appropriately discharged his or her fiduciary duties. 
Currently, a plan fiduciary determines that such asset is an illiquid 
asset because: (1) the asset failed to appreciate, failed to provide a 
reasonable rate of return, or caused a loss to the plan; (2) the sale 
of the asset

[[Page 17535]]

is in the best interest of the plan; and (3) following reasonable 
efforts to sell the asset to a person who is not a party in interest 
with respect to the plan, the asset cannot immediately be sold for its 
original purchase price, or its current FMV, if greater. Examples of 
assets that may meet this definition include, but are not limited to, 
restricted and thinly traded stock, limited partnership interests, real 
estate and collectibles.
    (b) Correction of Transaction. (1) The transaction may be corrected 
by the sale of the asset to a party in interest, provided the plan 
receives 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 Lost Earnings as described in Section 5(b). 
The Plan Official may cause the plan to sell the asset to a party in 
interest. This correction provides relief for both the original 
purchase of the asset, if required, and the sale of the illiquid asset 
by the plan to a party in interest, provided the Plan Official also 
satisfies the applicable conditions of the VFC Program class exemption.
    (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 examples:

    Example 1. A plan purchases undeveloped real property from a 
party in interest with respect to the plan for $60,000 in June 1999. 
In April 2004, Plan Officials determine that the property is an 
illiquid asset. A qualified independent, appraiser appraises the 
property at a current FMV of $20,000. The plan sponsor pays the plan 
the Principal Amount of $60,000 plus Lost Earnings as described in 
Section 5(b), and Plan Officials transfer the property from the plan 
to the plan sponsor. The Plan Officials also comply with the 
applicable terms of the related exemption.
    Example 2. A plan purchases a limited partnership interest for 
$60,000 in June 1999 from an unrelated party after plan fiduciaries 
properly fulfill their fiduciary duties with respect to the 
purchase. In April 2004, Plan Officials determine that the interest 
is an illiquid asset because the interest has failed to generate a 
reasonable rate of return. A qualified, independent appraiser 
appraises the interest at a current FMV of $80,000. The plan sponsor 
pays the plan the FMV of $80,000 without a reduction for the costs 
of the sale, which is greater than the Principal Amount plus Lost 
Earnings, and Plan Officials transfer the interest from the plan to 
the plan sponsor. The Plan Officials also comply with the applicable 
terms of the related exemption.

    (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 plan's purchase price, the 
identity of the original seller, and a description of the relationship, 
if any, between the original seller and the plan;
    (2) The qualified, independent appraiser's report addressing the 
FMV of the asset purchased by the plan at the recovery date;
    (3) A narrative describing the plan's efforts to sell the asset to 
persons who are not parties in interest with respect to the plan and 
any documentation of such efforts to sell the asset;
    (4) A statement from a Plan Official attesting that: (i) The asset 
failed to appreciate, failed to provide a reasonable rate of return, or 
caused a loss to the plan; (ii) the sale of the asset is in the best 
interest of the plan; (iii) the asset is an illiquid asset; and (iv) 
the plan made reasonable efforts to sell the asset to persons who are 
not parties in interest with respect to the plan without success; and
    (5) In the case of an illiquid asset that is a parcel of real 
estate, a statement from a Plan Official attesting that no party in 
interest owns real estate that is contiguous to the plan's parcel of 
real estate on the Recovery Date.

E. 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 Lost Earnings as described in Section 5(b) 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 the $2,000 Principal Amount plus Lost Earnings as described 
in Section 5(b).
    The plan administrator also filed an amended Form 5500 for plan 
years 1996 and 1997, to reflect the proper values. The plan 
administrator will include the correct asset valuation in the 1998 
Form 5500 when that form is filed.
    Example 2. Assume the same facts as in Example 1, except that 
the property had appreciated in value to $600,000 as of December 31, 
1996. The separated participant would have been underpaid by $2,000. 
The correction consists of locating the participant and distributing 
to her the $2,000 Principal Amount plus Lost Earnings as described 
in Section 5(b), as well as filing the amended Forms 5500.


[[Page 17536]]


    (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.

F. 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 that indicate the 
date, amount, and character of these payments.

    Signed at Washington, DC, this 30th day of March, 2005.
Ann L. Combs,
Assistant Secretary for Employee Benefits Security Administration, U.S. 
Department of Labor.

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[FR Doc. 05-6627 Filed 4-5-05; 8:45 am]
BILLING CODE 4150-29-P