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§ Introductions n U.S. Department of Labor (DOL) n Employee Benefits Security Administration
(EBSA) n Voluntary Fiduciary Correction Program (VFCP)
o Investigator Audrey Chan
Welcome to the U.S. Department of Labor Presentation: Voluntary Fiduciary Correction
Program and Application Process
The views expressed are those of the speakers; do not necessarily represent the official position of the Department of Labor
April 18, 2013 SF WP&BC Chapter Meeting
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EBSA MISSION n Assist employees in getting the information they need to protect
their benefit rights
n Assist plan officials to understand the law in order to meet their legal responsibilities
n Develop policies and laws that encourage the growth of employment-based benefits
n Deter and correct violations of the relevant statutes
April 18, 2013 SF WP&BC Chapter Meeting
EBSA Field Offices
Regional Offices District Offices
EBSA Contact Information
§ Hot Line Number
1-866-444-EBSA (3272) § Visit the EBSA website: www.dol.gov/ebsa
§ San Francisco Regional Office (415) 625-2481
§ Seattle District Office (206) 553-4244
§ E-mail at [email protected]
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o Correction Program that allows “Plan Officials” to correct certain violations before DOL investigates
o And if done properly, those “Plan Officials” will receive a “No-Action” letter from the Department.
What is the Voluntary Fiduciary Correction Program (VFCP)?
DOL NO ACTION DOL “You fixed it”
April 18, 2013 SF WP&BC Chapter Meeting
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Basic Fiduciary Duties
§ Acting solely in the interests of the participants and their beneficiaries
§ Being prudent § Paying only reasonable and necessary
expenses of the plan § Following the terms of the plan § Avoiding non-exempt Transactions
Ø Actions between Plans and Parties In Interest
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Who are the Fiduciaries?
o Fiduciaries are people with decision making power over the plan’s administration or over the plan’s assets.
o Named (such as the Plan Administrator) o Functional (exercises discretionary control)
o Parties In Interest (PII) o Fiduciaries, Service Providers, Employer, etc. o Certain Relatives
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What if a fiduciary fails to fulfill his or her obligations?
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What are the risks?
Restore Plan Losses Fiduciary Breach?
Disgorge Any Profits
DOL Investigation IRS Audit
DOL’s 502(l) Civil Penalty IRS Excise Tax
Litigation Removal or Barring a Fiduciary
Make the News!
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§ Compliance with ERISA via DOL guidance
n How to Correct P n How to Calculate Losses P
§ Increased benefits for some and enhanced benefit security for all
§ More accurate valuations & reporting § DOL agrees to forego an Investigation § Applicants avoid Civil Penalties § Applicant avoid Potential Ligitation § No cost to apply
VFCP - Advantages
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§ Not all fiduciary violations are included § Must be 1 of 19 described transactions § Eligibility is conditioned upon not being “under investigation” and upon the
application not containing any evidence of criminal violations. § Correction must be made prior to submitting an application to the VFCP
Coordinator in the EBSA Regional Office. § All losses must be restored to the plan. § All prohibited transactions (PT’s) must be corrected. § All valuations must be based on generally recognized markets or written
valuation reports by qualified independent appraisers § Supplemental distributions may need to be made § No correction costs paid by the plan § Form 5500’s may need to be amended
VFCP General Principles
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§ Fiduciaries § Plan sponsors § PIIs § Others in a position to correct § May utilize “Representative”
n Must include copy of signed authorization
VFCP – Applicants (Plan Official)
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§ Neither plan nor applicant “Under Investigation” § No evidence of criminal violations disclosed in the submission § Prior EBSA contact concerns transaction in application and correction
hasn’t been made § Does not include reviews made by the Office of Chief Accountant
(OCA) o Any criminal investigation of plan or transaction involving the plan o IRS or PBGC conducting examination of the plan o State attorney general or state insurance commissioner auditing the plan
Eligibility Requirements
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§ “Correction amount” varies based upon transaction type (details in Program)
§ “Correction amount” usually includes n “Principal Amount”
§ Amount that would have been available for investment or distribution but for the breach
§ Original transaction costs n Plus greater of “Lost Earnings” or “Restoration of
Profits”
VFCP General Correction
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VFCP Correction
Lost Earnings: Ø Amount that would have been earned at IRC §6621(a)(2)
underpayment rate. Ø If Lost Earnings > $100,000, must recalculate using IRC
§6621(c)(1) underpayment rate Restoration of Profits: Ø Amount that fiduciary or PII profited from the
transaction. Ø Must include interest from date profit realized to date of
payment to plan Ø Interest calculated same way as Lost Earnings on the
Principal Amount
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19 Transactions – 6 Categories 1. Delinquent Remittance of Participant Funds
(pension and welfare deferrals) 2. Loans (Non-Participant/PII or Non PII) 3. Participant Loans (Failed/Defaulted) 4. Purchases, Sales & Exchanges (PII or Non
PII/Illiquid Assets) 5. Benefits (Participant Payments) 6. Plan Expenses (Duplicative, Excessive or
Unnecessary Payments to Service Providers)
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§ Delinquent participant contributions to: n Pension plans
§ May include Participant Loan repayments n Welfare plans (insured and trust)
§ No lapse in coverage § No denied claims
n Potential relief from IRS Excise Tax. § Contributed within 180 day from payroll date § VFCP not used in last three years.
Delinquent Remittance of Participant Funds - Category 1
April 18, 2013 SF WP&BC Chapter Meeting
Participant Contributions – the rule
Amounts withheld from employees’ wages must be transmitted to plan as soon as they can be reasonably segregated from the company’s general assets but in no event later than the 15th business day of the month following month of withholding. This is not a safe harbor!
Delinquent Participant Contributions make up over 90% of San Francisco’s Applications
ü Review your payroll system and work with service providers to ensure that participant contributions are forwarded to the plan on the earliest possible date in compliance with the law.
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Final Regulations Contribution Deposit Safe Harbor
o Proposed Regulations issued Feb. 29, 2008 o Final Regulations issued Jan. 14, 2010 o (DOL Reg. 2510.3-102)
o Modify definition of “plan assets” to provide a safe harbor for deposit of participant contributions for small plans: 7 business days after withholding date
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§ Loans n Fair market rate to PII
o Potential relief from IRS Excise Tax.
n Below market rate to PII n Below market rate to non-PII n Below market rate because of delay in
perfecting interest
Loan Transactions – Category 2
Required Correction(s)
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Required Corrections n Fair Market Rate to PII
o Pay off loan in full + any prepayment penalties. o Requires Independent Commercial Lender to confirm
loan interest rate. n Below Market Rate to PII
o Pay off loan in full + any penalties. o Requires Independent Commercial Lender to confirm
loan interest rate (actual vs. required = principal). o Pay to Plan greater of Principal + Lost Earnings or
Restoration of Profits. n Below Market Rate to Non-PII or Below Market
Rate because of delay in perfecting interest § Pay Principal amount + Lost Earnings
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Participant Loans – Category 3
Applicants must receive approval from the IRS’s Employee Plans Compliance Resolution System (EPCRS) prior to submitting application to EBSA!
§ Participant loan violates 72(p) of the Code n Amount of Loan n Duration of Loan n Level Amortization
§ Default Loans n Due to administrative errors, loan repayments weren’t withheld
from participant’s pay
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§ Purchase by a Plan from PII* § Sale by a Plan to PII *
§ Potential relief from IRS Excise Tax (FMV). § Sale and leaseback to employer
n Consider amount of rent payments § Purchase by plan from non-PII @ more than
FMV § Sale by plan to non-PII @ less than FMV
Purchases, Sales & Exchanges – Category 4
Required Correction(s) April 18, 2013 SF WP&BC Chapter Meeting
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Required Correction § Purchase by a Plan from PII
n Sell back to PII or Non-PII n Must receive higher of FMV or Principal + Lost Earnings/Restoration of
Profits. § Alternative may retain asset provided Ind. Fiduciary Determines in Plan’s
best interest. § Sale by a Plan to PII
n Plan may repurchase at lower of original price or FMV at time of repurchase. § Plan may receive Principal Amount plus greater of Lost Earnings or
Restoration of Profits. Requires determination by Ind. Fiduciary § Sale by Employer to Plan and Leaseback by Employer
n Sell Property back to PII or Non-PII n Pay Plan higher of FMV at time of sale or Principal Amount + Lost
Earnings/Restoration of Profits
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§ Acquired from n PII with a statutory or administrative exemption n PII without such exemption n Non-PII in an imprudent transaction n Non-PII with no fiduciary breach
§ Might include § Restricted or Thinly Traded Stock § Limited Partnership Interests § Real Property § Collectibles, etc.
n Potential relief from IRS Excise Tax.
ILLIQUID
Holding Illiquid Asset – Category 4
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§ Asset n Failed to appreciate n Failed to provide a reasonable rate of return n Caused a loss to the plan
§ Reasonable Efforts to Sell Asset to Non-PII Failed n At original price n Or current FMV, if higher
§ Independent Fiduciary Determines Plan’s Best Interest to Sell
Determining Illiquidity
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§ Payment of Benefits without Properly Valuing Plan Assets on Which Payment is Based n Need to determine FMV for year in which asset
was improperly valued
Required Correction(s) n Need to adjust account balances / restore losses n Amend and file 5500s
Benefit Payments – Category 5
April 18, 2013 SF WP&BC Chapter Meeting
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§ Duplicative, Excessive, Unnecessary Compensation paid to a service provider
§ Expenses Improperly Paid by Plan n In violation of plan provision n Settlor fees
§ Or Dual Compensation to a Plan Fiduciary
Plan Expenses – Category 6
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§ Relief only afforded to applicants § EBSA reserves the right to:
n Investigate truthfulness, completeness of application
n Confirm that correction actually occurred n Refer any criminal information to appropriate
agency n Take other actions under special circumstances
VFCP - Limits
April 18, 2013 SF WP&BC Chapter Meeting
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“No Action” letter n Limited to specific transaction(s) being corrected n Conditioned on application’s
§ Truthfulness § Completeness § Accuracy
n Does not limit rights of other parties
VFCP - Relief
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§ Amended Form 5500 Filings n For previously unreported PTs n For re-valued asset situations
§ Filing amended Form 5500 n Does not trigger ERISA §502(c)(2) penalties
Annual Report Filings
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§ Payments for “missing” individuals § Don’t wait until former participants are found to file
application § Submit application with statement telling us steps are
being taken to make distributions
§ De Minimis Distributions § If distribution < $20 and cost to the Applicant >
amounts a Participant will receive, then re-allocate amounts to other Ps & Bs
VFCP – Correction Payments
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§ Prohibited Transaction Exemption 2002-51 n Amended effective May 19, 2006
§ Applicable only to the VFCP n Limited to 6 transaction types
§ Full compliance with VFCP required n Must receive “No Action” letter
§ Relief from IRC §4975 (a) and (b) excise tax § Ineligible if used VFCP and received PTE within the last 3
years of the current application for similar transaction
VFCP Class Exemption - Prohibited Transaction Exemption (PTE)
April 18, 2013 SF WP&BC Chapter Meeting
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Type 1 Delinquent Employee Contributions and/or
Participant Loan Payments
§ Contributions to Pension Plans n Delinquency cannot be >180 days
§ Welfare Plans not subject to IRC §4975
PTE 2002-51 (Limits)
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§ Loans to PIIs (Type 2) § Purchases/Sales w/ PIIs (Type 3) § Sale/Leaseback to Employer Sponsor
(Type 4) General Requirements:
n All at “Fair Market Value” as described in VFCP n Cannot > 10% of plan assets @ time of transaction n “Arm’s length” terms
PTE 2002-51 (Limits)
April 18, 2013 SF WP&BC Chapter Meeting
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§ Illiquid Assets (Type 5) n Covers both:
§ Original purchase at FMV, if from a PII and not subject to an exemption
§ Sale of the asset to a PII for correction n Cannot > 10% of plan assets at time of
transaction n “Arm’s length” terms n No brokerage fees or commissions
PTE 2002-51 (Added 2006)
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§ Settlor fees paid to PII (Type 6) n Decisions relating to the formation, design and
termination of plans (AO 2001-01A) § Unless expressly prohibited in Plan § “Arm’s length” terms § Amount did not exceed lesser of
n $10,000 n 5% of FMV of plan assets
PTE 2002-51 (Added 2006)
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n Written notice to interested persons (participants) n Notice is not paid by the plan. n Regular U.S. mail, E-mail, workroom posting, etc methods are OK n Be provided within 60 days of application to
§ Each interested person and § A copy to EBSA Regional Office (RO)
n Notice must contain the following language: § Applicant is seeking relief under the VFCP and PTE. § Objectively describe transaction and correction § Provide participants a 30-day comment period from the date of the Notice
to contact the EBSA RO. § Provide participants the EBSA RO mailing address and telephone number
PTE 2002-51 – Notice Requirement
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n If applicant is correcting Delinquent employee contributions/loan repayments, and
n Calculated excise tax amount ≤ $100 n Calculated excise tax amount, which would
otherwise be payable to IRS, is paid to plan n Distributed to participants as earnings would be n Do not have to file IRS Form 5330
§ IRS Revenue Ruling 2006-38
PTE 2002-51 – Notice Exception
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§ Determine Eligibility n Eligible transaction? n Eligible Applicant? n Under investigation? n Signs of criminal activity? n Correct field office?
Applications - Processing
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§ Lack of signed authorization § Failure to include payroll documents § No proof of payment
§ Principal § Lost Earnings
§ Lack of narrative concerning timing of employee contributions
§ No response to EBSA
Common Application Problems
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o VFCP Checklist (required) o VFCP Penalty of Perjury Statement (required) o VFCP Model Application Form (Recommended) o Narratives and Supplemental Information o Relevant portions of the Plan Document(s) § Supporting Documentation:
§ Identification of the Principal Amounts (payroll registers) § Calculations of the Lost Earnings Amounts (VFCP Online Calculator) § Proof of payment of both of Principal and Lost Earnings Amounts § Class Exemption (PTE)
Application - Delinquent Contributions
April 18, 2013 SF WP&BC Chapter Meeting
Identify the Applicant(s) to receive the No Action Letter(s) Identify the Eligible Transaction(s) from the 19 listed
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Identify the total amount of Principal involved and the date Principal was paid to the Plan Identify the total amount of corrective payment made to the Plan and the date payment was made to the Plan Questions (1) through (3) asks for your description of the breach you are correcting Question (4) asks for your description of how you determined the earliest date that you can segregate participant contributions from employee pay and the number of days you determined is the earliest
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Question (5) asks for your description of the changes, if any, that you made to the way you remit participant contributions to the Plan Question (6) asks you to identify the way you calculated the corrective amount to pay the Plan Supplemental Information asks you to identify the Plan and the related parties Identify the Authorized Representative, if any, that you hired to process this Application Identify the individual we may contact to discuss the Application Identify the most recent filing of the Form 5500 Annual Report
April 18, 2013 SF WP&BC Chapter Meeting
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Identify your intention to perform the necessary steps to receive excise tax relief under the PTE Identify the documents you are submitting as Proofs of Payment for both the Principal amount involved and the corrective amount Disclose whether you are under investigation by another governmental agency Identify how you learned of the VFCP Plan Official signs ”Authorization of Preparer” section only if an Authorized Representative was hired to process this Application Plan Official must sign Penalty of Perjury Statement
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Plan Official must sign the Penalty of Perjury Statement If an Authorized Representative was hired to process this Application, then the Authorized Representative must also sign the Penalty of Perjury Statement
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§ Enter the Principal Amount § Enter the Loss Date § Enter the Recovery Date § Enter the Final Payment Date, if different
than the Recovery Date § Click on the “Calculate” button § Repeat as needed (e.g., for each pay period)
VFCP Online Calculator - Basics
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DOL EBSA Website: www.dol.gov/ebsa
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DOL EBSA Website: www.dol.gov/ebsa
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VFCP Website
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VFCP Online Calculator
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VFCP Online Calculator – Final Results
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§ Submit all documents to your EBSA Regional Office
§ DOL reviews application and if complete, issues a “No-Action” letter.
Application (cont.)
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Questions?
o Overview VFCP o VFCP Class Exemption o Application Form o Online Calculator
April 18, 2013 SF WP&BC Chapter Meeting