401(k) DOL’s Voluntary Fiduciary Correction Program (VFCP)

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Certain transactions between a retirement plan, such as a 401(k) plan, and a “party-in-interest” or “disqualified person” are considered to be prohibited transactions under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“Code”). Under the Code, a fiduciary involved in prohibited transaction may be subject to tax penalties. Generally stated, the initial tax on a prohibited transaction is fifteen percent (15%) of the amount involved for each year (or part of a year) during the taxable period in which the transaction occurred. If the transaction is not corrected within the taxable period, then an additional tax of one hundred percent (100%) of the amount involved is imposed.

In addition, ERISA requires a full, prompt correction of prohibited transactions. This means that the plan must be made whole, and the party or parties involved must disgorge any profits resulting from the transaction. Being “made whole” generally means that the parties will, in the end, be in the exact position they would have been in, had the prohibited transaction never occurred.

In certain limited circumstances, however, full correction of a prohibited transaction by means of the U.S. Department of Labor (“DOL”)’s Voluntary Fiduciary Correction Program (“VFCP”) effectively eliminates the prohibited transaction problem under the Code by means of a specific DOL class exemption to the overall prohibited transaction rules.

VFCP is designed to encourage employers to voluntarily comply with the ERISA by self-correcting certain violations of the prohibited transaction rules. Pursuant to this special class exemption, prohibited transactions that are corrected via VFCP are granted relief from the otherwise applicable prohibited transaction provisions of the Code. This means that the penalty tax can sometimes be minimized or avoided altogether by means of taking advantage of the VFCP program. However, ERISA still requires full restitution and restoration to the plan and plan participants.


The VFCP program, which was introduced in April 2006, currently covers 21 categories of events that constitute prohibited transactions. VFPC also outlines the acceptable method of correction for each of these transactions. The complete list of prohibited transactions that currently may be corrected by using VFPC is as follows (several of the 21 categories, such as delinquent participant contributions to welfare benefit plans, do not apply to 401(k) plans):


From the plan sponsor’s perspective, the goal of taking advantage of VFCP is to correct the event that would otherwise constitute a prohibited transaction, thereby avoiding penalty taxes. From the DOL’s perspective, the goal of the program is to place the parties into the exact position they would have been in, had the prohibited transaction never occurred.

Toward these ends, VFCP incorporates a number of authorized methods for making acceptable corrections concerning the events described in the list above. For all prohibited transactions, plan sponsors must adhere to four general principles:

The DOL’s VFCP website includes an online calculator available here to assist applicants by automatically calculating correction amounts that must be paid to the plan or plan participants.


Plans must file, where necessary, amended tax returns for the affected years to reflect each of the corrected transactions and/or valuations.


To apply for VFCP, plan sponsors must submit a formal application to the appropriate regional office of the Employee Benefit Security Administration (“EBSA”), a division of the DOL. Applicants must carefully follow the procedures outlined in the guidance available here. Furthermore, EBSA has a VFCP Model Application Form available that employers are encouraged to use.

The completed application should show that any prohibited transactions have been fully and correctly resolved by including the following information:

Under the program, 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.


The ultimate goal of the plan sponsor, other than the granting of the relief itself, is a “no-action letter.” A no-action letter is a document stating that EBSA will not initiate a civil investigation under ERISA concerning the applicant’s liability for any transaction described in the no action letter, nor will it assess penalty taxes under the Code on the correction amount paid to the plan or its participants.

EBSA generally will issue a no action letter with respect to a transaction identified in the application, assuming all of the VFCP requirements have been met. This also assumes, of course, that a the plan actually corrects the transaction in accordance with the requirements of VFCP.

Any no action letter issued under the VFPC program is limited to the specific transaction(s) and the particular applicant named in the letter. Further, the method of calculating the correction amount is only intended to correct the specific transaction described in the application, and should not be taken as a “safe harbor” correction method to be applied generally.


Prohibited transactions that are fully and appropriately corrected via VFCP are not treated as prohibited transactions under the Code, and are therefore not subject to the Code’s penalty taxes.

If a prohibited transaction is not covered by VFCP – or if the steps of VFCP are not followed entirely – the transaction would still constitute a prohibited transaction, subject to Code penalties.

Moreover, if the applicant does not submit a VFCP application, or it does not ultimately receive a no action letter with respect to the transaction, then the transaction is not corrected and remains a prohibited transaction, subject to the Code penalty taxes.


Importantly – and perhaps counterintuitively – no relief is provided from the prohibited transaction provisions of ERISA simply because such relief is provided under the VFCP. Therefore, ERISA sanctions applicable to prohibited transactions will apply to all transactions prohibited under ERISA, even if they are corrected via VFCP.

This makes sense, considering that, since ERISA requires that the plan and participants be placed into the same position that they had been in prior to the prohibited transaction, to relieve a plan sponsor of this responsibility would be counterproductive.

A complete copy of the official DOL-issued VFCP guidance is available here.