Employers that do not timely deposit participant deferrals and loan contributions to their employer sponsored retirement plans can be subject to Department of Labor (DOL) penalties for breaching their fiduciary duties. We discussed in our prior blog post the DOL’s amendments to its Voluntary Fiduciary Compliance (VFC) Program, which now includes a self-correction component. In addition to DOL penalties, late deferral errors also result in a prohibited transaction, and employers are subject to an excise tax under section 4975 of the Code. Excise tax relief is obtainable, but requires plan sponsors to take action.
In tandem with the amendments to the VFC Program, guidance was issued to update Prohibited Transaction Exemption 2002-51, (PTE) the related class exemption that allows relief from excise taxes imposed by the Code for certain eligible transactions corrected pursuant to the VFC Program. The PTE was updated to allow relief for the newly established self-corrections under the VFC Program. In addition, the three-year limitation (plans were historically only available to utilize the PTE relief once in a 3-year period) was eliminated.
Plan sponsors that correct late deferral errors through the traditional VFC Program will receive excise tax relief if a notice is prepared and sent to interested persons via mail or email informing them of the prohibited transaction. A new model notice can be found in the amended PTE. In lieu of providing notice to plan participants, plan sponsors, that would otherwise owe excise tax in an amount that does not exceed $100, can instead make a contribution to the Plan equal to the amount of the excise tax and provide a copy of the excise tax calculation and proof of payment with its VFC Program application. Similarly, Plan sponsors that correct through the new self-correction component of the VFC Program will not provide a notice, but must make a contribution to the Plan equal to the amount of the excise tax and retain a copy of the excise tax calculations and proof of payment. This excise tax relief is not available for delinquent contributions that were not transmitted to the Plan within 180 calendar days of the date they would otherwise have been timely.
Late deferrals errors can be a real pain for plan sponsors, but correction options are available. If you have any questions on the VFC Program or new self-correction component, please feel free to contact any of the members of our employee benefits team.
