The DOL’s Voluntary Fiduciary Correction Program: What Business Owners Need to Know

If your small business offers a 401(k) plan to employees, you know that staying compliant with federal regulations is critical. However, mistakes happen—perhaps you deposited employee contributions late or processed a loan incorrectly. The good news is that the U.S. Department of Labor (DOL) has a program to help employers correct these errors before they turn into major problems. It’s called the Voluntary Fiduciary Correction Program (VFCP), and understanding how it works can help you avoid penalties, legal risks, and protect your employees’ retirement savings.

In this post, we’ll break down what the VFCP is, who can use it, the most common errors corrected through the program, and changes that took effect in 2025 that make it even easier for you to stay compliant.

What Is the Voluntary Fiduciary Correction Program (VFCP)?

The VFCP allows small business owners to voluntarily correct certain violations of the Employee Retirement Income Security Act (ERISA) before they face legal or financial consequences.

Why Is the VFCP Important?

• • Encourage Compliance with ERISA: The program provides a structured way for employers and plan fiduciaries to identify and correct fiduciary breaches before they escalate into legal or financial consequences.

• • Protect Participants’ Retirement Benefits: Ensuring that plan participants are fully restored to the financial position they would have been in had the error not occurred.
  • Reduce Legal and Financial Risks for Employers: By voluntarily correcting errors, employers can avoid costly lawsuits, civil penalties, and government enforcement actions.
  • Provide Clear Guidelines for Corrections: The VFCP outlines specific correction procedures for various fiduciary violations, such as late participant contributions, improper plan expenses, and loan failures.

Common Errors Corrected Under the VFCP

The VFCP covers 19 categories of transactions that could involve fiduciary breaches. Some of the most common mistakes that small businesses correct through the VFCP include:

• • Late Deposits of Employee Contributions & Loan Repayments: ERISA requires employers to deposit employee contributions and loan repayments as soon as possible. Delays in deposits may be considered prohibited transactions and could result in penalties.
  • Improper Payment of Plan Expenses: Plan assets should only be used for plan-related expenses. If an employer inadvertently uses plan funds for non-plan expenses, correction may be required.
  • Prohibited Transactions Between the Plan and Interested Parties: ERISA restricts transactions between a plan and certain related parties (e.g., business owners, service providers). Unintentional prohibited transactions can often be corrected through the VFCP.
  • Failure to Follow Plan Terms for Participant Loans: Errors such as issuing loans beyond permissible limits or failing to enforce repayment terms can be corrected.
  • Errors in the Purchase, Sale, or Lease of Plan Assets: If plan assets are improperly bought, sold, or leased, the VFCP provides a way to rectify these errors.

Who Is Eligible to Use the VFCP?

To apply for VFCP relief, the following conditions must be met:

• • The plan must not be under investigation. If the DOL is already reviewing your plan, you cannot use the VFCP to sidestep enforcement.
  • The error must be fully corrected. The VFCP does not allow partial fixes—all violations must be completely remedied according to the program’s guidelines.
  • You must provide proper documentation. Employers must submit a detailed application proving that the correction has been made and that employees received full restoration of any lost funds.

How Errors are Corrected Through the VFCP

The VFCP correction process is designed to be straightforward. If your plan has a fiduciary violation, follow these four key steps:

1. 1. Identify the Problem: Determine the exact fiduciary violation and confirm that it is covered under the VFCP.
   2. Correct the Violation: Follow the DOL’s specific correction procedures for that type of error. This may involve replacing lost earnings, refunding improper payments, or amending plan records.
   3. Restore Losses & Profits to Participants: Calculate how much the plan lost due to the mistake and repay that amount—including interest or lost earnings. DOL provides an Online VFCP Calculator to make this step easier.
   4. File the Application with Documentation: Submit a VFCP application to the DOL regional office, including:

• • • Proof of correction
    • Financial records showing repayment
    • Plan documents and supporting evidence

Once submitted, the DOL will review the correction and, if everything is in order, issue a "no action" letter, meaning no penalties or enforcement will follow.

2025 Updates to the VFCP

On March 17, 2025, the DOL rolled out significant improvements to the VFCP to make it more efficient and user-friendly, especially for small businesses dealing with common, small-scale issues.

Here are the key changes from the 2025 update and how they can impact your business:

1. 1. New Self-Correction Option for Small Mistakes: The biggest change is a new self-correction component that allows employers to fix certain violations without having to file a full VFCP application or wait for a DOL sign-off​. This self-correction route is limited to specific types of issues:
      • Delinquent Participant Contributions and Loan Repayments (Small Amounts): If you withheld money from employees’ paychecks for the plan (contributions or loan repayments) but deposited it late, you can self-correct provided certain conditions are met.
        • • The lost earnings due to late deposits must be $1,000 or less, and the delinquent amounts must be remitted within 180 calendar days of being received or withheld.
          • The DOL’s Online Calculator is used to determine lost earnings.
          • A Self Correction Component (SCC) notice with required information is filed online with the Employee Benefits Security Administration (EBSA).
          • A completed SCC Retention Record Checklist (Appendix F of the VFCP), penalty of perjury statement, and supporting information is maintained with other plan records for documentation purposes.
      Note: Even if you self-correct, you still have to report the late deposit on your plan’s annual Form 5500.
      • Participant Loan Failures (Inadvertent and Eligible for IRS Fix): Under the new VFCP update, you can self-correct loans made from the plan to participants that don’t follow the plan’s rules (e.g., too large or too long), or defaulted loans where payments weren’t collected properly. Proper self-correction involves the following steps:
        • • Follow the correction procedures outlined in the EPCRS, which may include re-amortizing the loan, collecting missed payments, or reporting deemed distributions.
          • Submit a Self Correction Component (SCC) notice with required information online with the Employee Benefits Security Administration (EBSA).
          • For documentation purposes, maintain a completed penalty of perjury statement, detailed records of the failure, the correction process undertaken, and any communications with participants regarding the correction. The SCC Retention Record Checklist is not required.

1. 2. More Correction Methods: The VFCP now offers additional ways to correct certain prohibited transactions, like some loan transactions and purchase/sale transactions involving the plan, making it easier to tailor the correction to what went wrong.
   3. IRS Excise Tax Relief: The DOL’s class exemption (Prohibited Transaction Exemption 2002-51) now covers additional scenarios under VFCP and SCC, helping you avoid certain IRS penalty taxes. To rely on the class exemption, you must receive either a "no action" letter or SCC email acknowledgment from the DOL.

Key Takeaways for Small Businesses

Running a retirement plan comes with serious responsibilities, but programs like the VFCP are there to help when mistakes occur. For small business owners, the main points to remember are:

• • Don’t ignore plan errors. The DOL prefers voluntary correction over enforcement—use the VFCP before issues escalate.
  • Make sure your error is eligible and fix it completely. The VFCP only covers certain fiduciary breaches, and corrections must be fully completed.
  • Use the self-correction option for small mistakes. The 2025 SCC feature makes fixing minor late deposits or loan errors easier—take advantage of it!
  • Keep detailed records. Whether using VFCP or SCC, maintain proof of corrections, payments, and documentation in case of audits.

Stay Proactive & Protect Your Plan!

The VFCP is a valuable safety net for small businesses looking after employees’ retirement savings. With the 2025 updates, fixing common mistakes—such as late contributions or minor loan errors—is now simpler than ever. If you catch an error, act quickly: correct it, notify the DOL under the appropriate procedure, and maintain documentation.

Have additional questions? Consult your 401(k) provider. They should be able to help.