Internal Revenue Bulletin 2002-29 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2002–47, page 119.
LIFO; price indexes; department stores.The May 2002
Bureau of Labor Statistics price indexes are accepted for use
by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing inventories for tax years
ended on, or with reference to, May 31, 2002.
T.D. 9002, page 120.
Final regulations under section 1502 of the Code revise rules
concerning the common parent as agent for a consolidated
group, including the term and scope of the common parent’s
authority as agent, the designation of a substitute agent by a
terminating common parent, the existence of a default substi-
tute agent under certain conditions, the designation of a substi-
tute agent by the Commissioner under certain circumstances,
and the filing of a tentative carryback adjustment with respect
to a loss from a separate return year.
Notice 2002–51, page 131.
This notice solicits public comments on the application of sec-
tion 142(a)(6) of the Code, which permits tax-exempt bonds to
be issued to finance solid waste disposal facilities.
Rev. Proc. 2002–50, page 173.
This procedure states that if an individual exercises a statutory
or nonstatutory stock option and sells the stock on the same
day as the exercise, the sale constitutes an “excepted sale” for
Form 1099–B reporting under section 1.6045–1(c)(3)(ii) of the
regulations, provided certain conditions are satisfied.
Rev. Proc. 2002–51, page 175.
Specifications are set forth for the private printing of paper
substitutes for the December 2001 revisions of Form W–2c,
Corrected Wage and Tax Statement, and Form W–3c,
Transmittal of Corrected Wage and Tax Statements.Rev.
Proc. 95–18 superseded.
EMPLOYEE PLANS
Rev. Rul. 2002–45, page 116.
Restorative payments; nondiscrimination; deductions;
qualified defined contribution plan. This ruling describes
two situations in which certain payments, which are termed
“restorative payments” in the ruling, to a qualified defined con-
tribution plan are not treated as contributions for purposes of
various sections of the Code.
Rev. Rul. 2002–46, page 117.
Deductibility; timing. Contributions made during a grace
period to a section 401(k) plan or as matching contributions to
a qualified defined contribution plan are not deductible by the
employer for a taxable year if the contributions are attributable
to compensation earned by plan participants after the end of
that taxable year. Rev. Proc. 2002–9 modified and amplified.
Notice 2002–48, page 130.
Deductibility of contributions; timing. This notice provides
that the Service will not challenge the deductibility of certain
contributions actually made during the taxable year in anticipa-
tion of section 401(k) deferrals and section 401(m) matching
contributions.
(Continued on the next page)
Finding Lists begin on page ii.
Bulletin No. 2002–29
July 22, 2002

Notice 2002–49, page 130.
Weighted average interest rate update.The weighted aver-
age interest rate for July 2002 and the resulting permissible
range of interest rates used to calculate current liability for pur-
poses of the full funding limitation of section 412(c)(7) of the
Code are set forth.
Rev. Proc. 2002–47, page 133.
Administrative programs; closing agreements. This pro-
cedure updates and expands upon the Service’s correction pro-
grams for retirement plans within the jurisdiction of the Com-
missioner, Tax Exempt and Government Entities Division. Rev.
Proc. 2001–17 modified and superseded.
EXEMPT ORGANIZATIONS
Announcement 2002–66, page 183.
A list is provided of organizations now classified as private
foundations.
EMPLOYMENT TAX
Rev. Proc. 2002–51, page 175.
Specifications are set forth for the private printing of paper
substitutes for the December 2001 revisions of Form W–2c,
Corrected Wage and Tax Statement, and Form W–3c,
Transmittal of Corrected Wage and Tax Statements. Rev.
Proc. 95–18 superseded.
EXCISE TAX
Announcement 2002–65, page 182.
This document contains corrections to proposed regulations
(REG–209114–90, 2002–9 I.R.B. 576) under section 280G of
the Code that provide guidance about the denial of the deduc-
tion to a corporation for any excess golden parachute payment
to certain individuals.
ADMINISTRATIVE
T.D. 9001, page 128.
Final regulations under section 6103 of the Code permit IRS to
disclose an additional item of return information to the Depart-
ment of Agriculture for its use in structuring, preparing, and
conducting the Census of Agriculture. The additional item con-
sists of the taxpayer’s telephone number provided on Form
1040 (Schedule F).
Rev. Proc. 2002–49, page 172.
Stranded costs. This procedure provides that investor-owned
utilities will not realize gross income upon the securitization
and transfer of a statutorily created intangible property right to
collect charges from their customers to cover stranded costs
caused by restructuring of the electrical utility industry.
July 22, 20022002–29 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are consolidated semiannually into Cumulative Bulle-
tins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the rev-
enue ruling. In those based on positions taken in rulings to tax-
payers or technical advice to Service field offices, identifying
details and information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and
Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual
period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2002–29 I.R.B.July 22, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 103.—Interest on
State and Local Bonds
The Service solicits public comments on the
application of section 142(a)(6) to tax-exempt bonds
which finance solid waste recycling facilities. See
Notice 2002–51, page 131.
Section 142.—Exempt Facility
Bond
The Service solicits public comments on the
application of section 142(a)(6), which permits tax-
exempt bonds to be issued to finance solid waste
disposal facilities. See Notice 2002–51, page 131.
Section 401.—Qualified
Pension, Profit-Sharing, and
Stock Bonus Plans
Will the Service challenge the deductibility of
certain contributions actually made during the tax-
able year in anticipation of section 401(k) deferrals
and section 401(m) matching contributions? See
Notice 2002–48, page 130.
26 CFR 1.401–1: Qualified pension, profit-sharing,
and stock bonus plans.
(Also §§ 404, 415, 4972; 1.415–6.)
Rev. Rul. 2002–45
Restorative payments; nondiscrimi-
nation; deductions; qualified defined
contribution plan. This ruling describes
two situations in which certain payments,
which are termed “restorative payments”
in the ruling, to a qualified defined con-
tribution plan are not treated as contribu-
tions for various sections of the Code.
ISSUE
Under the facts described below, are
payments to the trust of a defined contri-
bution plan qualified under § 401(a) of
the Internal Revenue Code (the Code)
treated as contributions for purposes of
§ 401(a)(4), 401(k)(3), 401(m), 404,
415(c), or 4972?
FACTS
Situation 1. Employer M maintains
Plan X, a defined contribution plan, for
the benefit of M’s employees. The plan is
qualified under § 401(a). Employer M
caused an unreasonably large portion of
the assets of Plan X to be invested in
Entity G, a high-risk investment. It is
later determined that the investment has
become worthless.
A group of participants in Plan X files
a suit against Employer M alleging a
breach of fiduciary duty in connection
with the investment in Entity G. Follow-
ing the filing of the suit, the parties agree
to a settlement pursuant to which
Employer M does not admit that a breach
of fiduciary duty occurred but makes a
payment to Plan X equal to the amount of
the losses (including an appropriate
adjustment to reflect lost earnings) to
Plan X from the investment in Entity G.
The settlement also provides that the pay-
ment will be allocated among the indi-
vidual accounts of all of the participants
and beneficiaries in proportion to each
account’s investment in Entity G over the
appropriate period. The court approves
the settlement and enters a consent order.
Employer M makes the payment to Plan
X and the payment is allocated to the
appropriate accounts.
Situation 2. The facts are the same as
in Situation 1, except that no lawsuit is
filed against Employer M. However,
Employer M becomes aware that partici-
pants in Plan X are concerned about the
investment in Entity G and are consider-
ing taking legal action. Employer M also
learns that lawsuits alleging fiduciary
breach have been filed against other com-
panies by those companies’ employees
over losses to their qualified retirement
plans due to investment in Entity G.
Employer M decides to make the pay-
ment to Plan X before a lawsuit is filed,
after reasonably determining that it has a
reasonable risk of liability for breach of
fiduciary duty based on all of the relevant
facts and circumstances.
LAW AND ANALYSIS
The provisions of the Code that apply
to contributions to qualified defined con-
tribution plans include §§ 401(a)(4),
401(k)(3), 401(m), 404, 415 and 4972.
Section 401(a)(4) generally provides
that the contributions or benefits provided
under a qualified defined contribution
plan may not discriminate in favor of
highly compensated employees. Whether
contributions under a defined contribution
plan are discriminatory is generally deter-
mined by comparing the amount of con-
tributions allocated to the accounts of
highly compensated employees with the
amount of contributions allocated to the
accounts of nonhighly compensated
employees.
Section 401(k)(3) contains participa-
tion and nondiscrimination standards for
elective deferrals to qualified cash or
deferred arrangements. Section 401(m)
contains nondiscrimination tests for
matching contributions and employee
contributions. Both § 401(k)(3) and
§ 401(m) provide rules regarding quali-
fied matching contributions and qualified
nonelective contributions.
Section 404 generally provides that
contributions paid by an employer to or
under a plan, if they would otherwise be
deductible, are only deductible under
§ 404, subject to various limitations under
§ 404(a).
Section 415(c) generally limits the
amount of contributions and other addi-
tions under a qualified defined contribu-
tion plan with respect to a participant for
any year.
Section 4972(a) imposes a 10 percent
excise tax on the amount of the nonde-
ductible contributions made to any
“qualified employer plan,” including a
plan qualified under § 401(a) or 403(a).
A payment made to a qualified defined
contribution plan is not treated as a con-
tribution to the plan, and accordingly is
not subject to the Code provisions
described above, if the payment is made
to restore losses to the plan resulting from
actions by a fiduciary for which there is a
reasonable risk of liability for breach of a
fiduciary duty under Title I of the
Employee Retirement Income Security
Act of 1974 (ERISA) and plan partici-
pants who are similarly situated are
treated similarly with respect to the pay-
ment. For purposes of this revenue ruling,
these payments are referred to as “restor-
ative payments.”
The determination of whether a pay-
ment to a qualified defined contribution
plan is treated as a restorative payment,
2002–29 I.R.B.116July 22, 2002

rather than as a contribution, is based on
all of the relevant facts and circum-
stances. As a general rule, payments to a
defined contribution plan are restorative
payments for purposes of this revenue
ruling only if the payments are made in
order to restore some or all of the plan’s
losses due to an action (or a failure to act)
that creates a reasonable risk of liability
for breach of fiduciary duty. In contrast,
payments made to a plan to make up for
losses due to market fluctuations and that
are not attributable to a fiduciary breach
are generally treated as contributions and
not as restorative payments. In no case
will amounts paid in excess of the amount
lost (including appropriate adjustments to
reflect lost earnings) be considered restor-
ative payments. Furthermore, payments
that result in different treatment for simi-
larly situated plan participants are not
restorative payments. The failure to allo-
cate a share of the payment to the account
of a fiduciary responsible for the losses
does not result in different treatment for
similarly situated participants.
Payments to a plan made pursuant to a
Department of Labor (DOL) order or
court-approved settlement to restore
losses to a qualified defined contribution
plan on account of a breach of fiduciary
duty generally are treated as having been
made on account of a reasonable risk of
liability.
1
In no event are payments required
under a plan or necessary to comply with
a requirement of the Code considered
restorative payments, even if the pay-
ments are delayed or otherwise made in
circumstances under which there has been
a breach of fiduciary duty. Thus, for
example, while the payment of delinquent
elective deferrals or employee contribu-
tions is part of an acceptable correction
under the VFC Program, such payment is
not a restorative payment for purposes of
this revenue ruling. Similarly, payments
made under the Employee Plans Compli-
ance Resolution System (EPCRS), Rev.
Proc. 2002–47, on page 133, of this Bul-
letin, or otherwise, to correct qualification
failures are generally considered contri-
butions and do not constitute restorative
payments for purposes of this revenue
ruling. However, the payment of appro-
priate adjustments to reflect lost earnings
required under EPCRS is generally
treated in the same manner as a restor-
ative payment.
In Situation 1, the payment by
Employer M to restore losses to Plan X
on account of the investment in Entity G
is made pursuant to a court-approved
settlement of the suit filed against it by
plan participants and is not in excess of
the amount lost (including appropriate
adjustments to reflect lost earnings). In
Situation 2, the payment by Employer M
is made after it reasonably determines,
based on all of the relevant facts and cir-
cumstances, that it has a reasonable risk
of liability for breach of fiduciary duty
even though no suit has yet been filed. In
reaching this determination, the following
facts are taken into account: that Entity G
was a high-risk investment, that a large
portion of the plan assets had been
invested in Entity G, that participants
expressed concern about the investment,
and that several lawsuits had been filed
against other employers alleging fiduciary
breach in connection with the investment
of plan assets in Entity G.
In both Situation 1 and Situation 2,
therefore, the payment is made based on
a reasonable determination that there is a
reasonable risk of liability for breach of
fiduciary duty and to restore losses to the
plan. In addition, the payment is allocated
among the individual accounts of the par-
ticipants and beneficiaries in proportion
to each account’s investment in Entity G
so that similarly situated participants are
not treated differently.
In both Situation 1 and Situation 2, the
payment is a restorative payment (as
defined in this revenue ruling) and, as
such, is not a contribution to a qualified
plan. Accordingly, the payment is not
taken into account under§401(a)(4) or
415(c) or, if applicable to the plan,
§401(k)(3) or (m). In addition, the restor-
ative payments to Plan X are not subject
to the provisions of§404 or 4972.
HOLDING
The payments to the defined contribu-
tion plans qualified under§401(a) under
the facts described in Situation 1 and
Situation 2 above are not contributions
for purposes of§401(a)(4), 401(k)(3),
401(m), 404, 415(c), or 4972.
Drafting Information
The principal author of this revenue
ruling is Diane S. Bloom of the Employee
Plans, Tax Exempt and Government Enti-
ties Division. For further information
regarding this revenue ruling, please con-
tact the Employee Plans’taxpayer assis-
tance telephone service at 1–877–829–
5500 (a toll-free number), between the
hours of 8:00 a.m. and 6:30 p.m. Eastern
time, Monday through Friday. Ms. Bloom
may be reached at 1–202–283–9888 (not
a toll-free number).
Section 404.—Deduction for
Contributions of an Employer
to an Employees’Trust or
Annuity Plan and
Compensation Under a
Deferred-Payment Plan
Whether“restorative payments”to a qualified
defined contribution plan are deductible contribu-
tions. See Rev. Rul. 2002–45, page 116.
Will the Service challenge the deductibility of
certain contributions actually made during the tax-
able year in anticipation of section 401(k) deferrals
and section 401(m) matching contributions? See
Notice 2002–48, page 130.
1
Whether a payment is made under the Voluntary Fiduciary Correction (VFC) Program established by the DOL may be taken into account in determining whether there is a reasonable
risk of liability. Final rules describing the VFC Program were issued by the DOL on March 28, 2002 (67Fed. Reg.15062). The VFC Program is designed to encourage employers to
voluntarily comply with Title I of ERISA by correcting certain violations of the law. If an applicant meets the VFC Program criteria it will receive a noaction letter from the DOL, pur-
suant to which the DOL will neither initiate a civil investigation under ERISA regarding the applicant’s responsibility for any transaction described in the letter nor assess a civil penalty
under section 502(l) of ERISA on the correction amount paid to the plan or its participants.
July 22, 20021172002–29 I.R.B.

Deductibility; timing.Contributions
made during a grace period to a section
401(k) plan or as matching contributions
to a qualified defined contribution plan
are not deductible by the employer for a
taxable year if the contributions are attrib-
utable to compensation earned by plan
participants after the end of that taxable
year.
Rev. Rul. 2002–46
ISSUE
Whether contributions made during
the§404(a)(6) grace period to a qualified
cash or deferred arrangement within the
meaning of§401(k) or to a defined con-
tribution plan as matching contributions
within the meaning of§401(m) are
deductible by an employer for a taxable
year, if the contributions are designated as
satisfying a liability established before
the end of that taxable year but are attrib-
utable to compensation earned by plan
participants after the end of that taxable
year.
FACTS
Corporation M maintains Plan X,
which consists of a qualified cash or
deferred arrangement within the meaning
of§401(k) and which also provides for
matching contributions within the mean-
ing of§401(m). M’s taxable year is the
fiscal year ending June 30. Plan X has a
calendar plan year. Plan X was amended
to provide for M’s Board of Directors to
set a minimum contribution for a plan
year, to be allocated first toward elective
deferrals and matching contributions,
with any excess to be allocated to partici-
pants as of the end of the plan year in
proportion to compensation earned during
the plan year. Pursuant to this plan
amendment, M’s Board of Directors
adopted a resolution on June 15, 2001,
setting a minimum contribution of
$8,000,000 for the 2001 calendar plan
year. By December 31, 2001 (the last day
of Plan X’s 2001 calendar plan year), M
had contributed $8,000,000 to Plan X in
accordance with the terms of the plan.
These amounts consisted of (a)
$3,800,000 for elective deferrals and
matching contributions attributable to
compensation earned by plan participants
before the end of M’s taxable year ending
June 30, 2001 (Pre-Year End Service
Contributions), and (b) $4,200,000 for
elective deferrals and matching contribu-
tions attributable to compensation earned
by plan participants after the end of M’s
taxable year ending June 30, 2001 (Post-
Year End Service Contributions). M made
each contribution attributable to compen-
sation earned during each pay period con-
temporaneously with the issuance of
wage payments for the pay period.
M received an extension of time to
March 15, 2002, to file the income tax
return for its taxable year ending June 30,
2001 (2001 Taxable Year). On the income
tax return for its 2001 Taxable Year,
which was timely filed on March 1, 2002,
M claimed a deduction for the entire
$8,000,000 for elective deferrals and
matching contributions made to Plan X
during Plan X’s 2001 calendar plan year,
relating to both Pre-Year End Service
Contributions and Post-Year End Service
Contributions. The total amount contrib-
uted and claimed by M as a deduction did
not exceed 15 percent of the total com-
pensation otherwise paid or accrued dur-
ing M’s 2001 Taxable Year to participants
under Plan X (and thus did not exceed the
applicable percentage limitation for that
year under§404(a)(3)(A)(i)).
LAW AND ANALYSIS
Section 404(a) provides in relevant
part that if contributions are paid to a
profit-sharing or stock bonus plan and are
otherwise deductible under chapter 1 of
the Code, those contributions are deduct-
ible under§404 (subject to certain limi-
tations) in the taxable year of the
employer when paid, and are not deduct-
ible under any other section of chapter 1
of the Code.
Section 404(a)(6) provides in relevant
part that, for this purpose,“a taxpayer
shall be deemed to have made a payment
on the last day of the preceding taxable
year if the payment is on account of such
taxable year and is made not later than
the time prescribed by law for filing the
return for such taxable year (including
extensions thereof).”
Rev. Rul. 90–105, 1990–2 C.B. 69,
applies§404(a)(6), as interpreted by Rev.
Rul. 76–28, 1976–1 C.B. 106, to a situa-
tion involving a contribution to a 401(k)
plan made after the end of the plan year.
Rev. Rul. 90–105 holds that contributions
to a qualified cash or deferred arrange-
ment within the meaning of§401(k) or to
a defined contribution plan as matching
contributions within the meaning of
§401(m) are not deductible by the
employer for a taxable year, if the contri-
butions are attributable to compensation
earned by plan participants after the end
of that taxable year.See alsoRev. Rul.
76–28 (providing that a contribution
made after the close of an employer’s tax-
able year will be deemed to have been
made on account of the preceding taxable
year under§404(a)(6) if, among other
conditions, the payment is treated by the
plan in the same manner as the plan
would treat a payment actually received
on the last day of such preceding taxable
year of the employer) andLucky Stores,
Inc. v. Commissioner, 153 F.3d 964 (9th
Cir. 1998),cert. denied, 526 U.S.1111
(1999) (indicating, in the context of a
defined benefit plan, that the plain mean-
ing of§404(a)(6) precludes deduction in
the preceding taxable year of grace period
contributions that are required under col-
lective bargaining agreements for work
performed after the end of that preceding
taxable year).
The facts in this revenue ruling are the
same as the facts in Rev. Rul. 90–105,
except for the addition of the plan amend-
ment and the board resolution setting a
minimum contribution for the plan year.
These factual differences do not change
the result. The plan amendment and the
board resolution setting a minimum con-
tribution for the plan year establish a
liability, prior to the end of M’s taxable
year, to make that contribution. However,
M’s Post-Year End Service Contributions
still are attributable to compensation
earned by plan participants after the end
of the taxable year. Neither the plan
amendment nor the board resolution bear
on when that compensation is earned.
Thus, for example, the Post-Year End
Service Contributions in these circum-
stances are still on account of that subse-
quent taxable year rather than on account
of M’s 2001 Taxable Year, and so cannot
be deemed paid at the end of M’s 2001
Taxable Year under§404(a)(6). There-
fore, the holding of Rev. Rul. 90–105
2002–29 I.R.B.118July 22, 2002

applies to the facts of this revenue ruling,
and M’s Post-Year End Service Contribu-
tions are not deductible for M’s 2001
Taxable Year.
HOLDING
Grace period contributions to a quali-
fied cash or deferred arrangement within
the meaning of§401(k) or to a defined
contribution plan as matching contribu-
tions within the meaning of§401(m) are
not deductible by the employer for a tax-
able year, if the contributions are attribut-
able to compensation earned by plan par-
ticipants after the end of that taxable year.
This holding applies regardless of
whether the employer’s liability to make
a minimum contribution is fixed before
the close of that taxable year.
APPLICATION
A change in a taxpayer’s treatment of
contributions to a method consistent with
this revenue ruling is a change in method
of accounting to which§§446 and 481
apply. A taxpayer that wants to change its
treatment of contributions to a method
consistent with this revenue ruling must
follow the automatic change in method of
accounting provisions in Rev. Proc.
2002–9, 2002–3 I.R.B. 327 (as modified
by Rev. Proc. 2002–19, 2002–13 I.R.B.
696, and as modified and clarified by
Announcement 2002–17, 2002–8 I.R.B.
561), with the following modifications:
(1) The scope limitations in section
4.02 of Rev. Proc. 2002–9 do not apply,
provided the taxpayer’s method of
accounting for contributions addressed in
this revenue ruling is not an issue under
consideration for taxable years under
examination, within the meaning of sec-
tion 3.09(1) of Rev. Proc. 2002–9, at the
time the Form 3115 is filed with the
national office.
(2) To assist the Service in process-
ing changes in method of accounting
under this revenue ruling, and to ensure
proper handling, section 6.02(4)(a) of
Rev. Proc. 2002–9 is modified to require
that a Form 3115 filed under this revenue
ruling include the statement:“Automatic
Change Filed Under Rev. Rul. 2002–46.”
This statement should be legibly printed
or typed on the appropriate line on any
Form 3115 filed under this revenue rul-
ing.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include in the APPENDIX a
change to a method consistent with this
revenue ruling.
LISTED TRANSACTIONS
The transaction described in this rev-
enue ruling is substantially similar to the
transaction described in Rev. Rul.
90–105, 1990–2 C.B. 69. Under Notice
2000–15, 2000–1 C.B. 826, and Notice
2001–51, 2001–34 I.R.B. 190, transac-
tions that are the same as or substantially
similar to transactions described in that
notice (including transactions described
in Rev. Rul. 90–105) are tax avoidance
transactions and are identified as“listed
transactions”for purposes of§1.6011–
4T(b)(2) of the Temporary Income Tax
Regulations and§301.6111–2T(b)(2) of
the Temporary Procedure and Administra-
tion Regulations. Those provisions
impose certain requirements on taxpayers
that participate in listed transactions, and
on promoters of listed transactions.
ALTERNATIVE RATIONALE IN REV.
RUL. 90–105
An alternative rationale in Rev. Rul.
90–105 was based upon language in
§1.404(a)–1(b) of the Income Tax Regu-
lations requiring that contributions be
compensation for services actually ren-
dered. As indicated in Notice 2002–48,
elsewhere in this bulletin, the Service has
concluded upon further consideration that
this language is relevant only where the
reasonableness of an employee’s compen-
sation is in question, and thus is not an
appropriate basis upon which to deter-
mine the timing of deductions for the
contributions described in Notice 2002–
48, Rev. Rul. 90–105, or this revenue rul-
ing.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are James E. Holland, Jr., of the
Employee Plans, Tax Exempt and Gov-
ernment Entities Division and John
Richards of the Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For
further information regarding this revenue
ruling, contact the Employee Plans tax-
payer assistance telephone service at
1–877–829–5500 (a toll-free number)
between the hours of 8:00 a.m. and 4:00
p.m., Eastern Time, Monday through Fri-
day. Mr. Holland’s telephone number is
(202) 283–9699 (not a toll-free call). Mr.
Richards’s telephone number is (202)
622–6090 (not a toll-free call).
Section 415.—Limitations on
Benefits and Contributions
Under Qualified Plans
26 CFR 1.415–6: Limitation for defined contribu-
tion plans.
Whether“restorative payments”to a qualified
defined contribution plan are annual additions. See
Rev. Rul. 2002–45, page 116.
Section 472.—Last-in, First-
out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The May 2002 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out
inventory methods for valuing inventories
for tax years ended on, or with reference
to, May 31, 2002.
Rev. Rul. 2002–47
The following Department Store
Inventory Price Indexes for May 2002
were issued by the Bureau of Labor Sta-
tistics. The indexes are accepted by the
Internal Revenue Service, under§1.472–
1(k) of the Income Tax Regulations and
Rev. Proc. 86–46, 1986–2 C.B. 739, for
appropriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, May 31, 2002.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of
departments, (b) three special combina-
tions of the major groups—soft goods,
durable goods, and miscellaneous goods,
and (c) a store total, which covers all
departments, including some not listed
separately, except for the following:
candy, food, liquor, tobacco, and contract
departments.
July 22, 20021192002–29 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsMay
2001
May
2002
Percent Change
from May 2001
to May 2002
1
1.Piece Goods ------------------------------------------------------------491.2490.1-0.2
2.Domestics and Draperies --------------------------------------------598.8586.9-2.0
3.Women’s and Children’s Shoes ------------------------------------653.9647.5-1.0
4.Men’s Shoes -----------------------------------------------------------889.7924.63.9
5.Infants’Wear -----------------------------------------------------------625.4614.9-1.7
6.Women’s Underwear -------------------------------------------------570.4542.9-4.8
7.Women’s Hosiery -----------------------------------------------------352.0345.4-1.9
8.Women’s and Girls’Accessories -----------------------------------553.1558.00.9
9.Women’s Outerwear and Girls’Wear -----------------------------394.6386.7-2.0
10.Men’s Clothing --------------------------------------------------------595.5597.70.4
11.Men’s Furnishings ----------------------------------------------------619.2602.1-2.8
12.Boys’Clothing and Furnishings ------------------------------------497.1495.5-0.3
13.Jewelry ------------------------------------------------------------------934.7901.3-3.6
14.Notions ------------------------------------------------------------------776.3797.62.7
15.Toilet Articles and Drugs --------------------------------------------947.8975.02.9
16.Furniture and Bedding -----------------------------------------------641.8626.4-2.4
17.Floor Coverings -------------------------------------------------------623.7620.1-0.6
18.Housewares ------------------------------------------------------------767.1758.4-1.1
19.Major Appliances -----------------------------------------------------224.3220.7-1.6
20.Radio and Television -------------------------------------------------54.750.4-7.9
21.Recreation and Education
2
------------------------------------------90.286.9-3.7
22.Home Improvements
2
------------------------------------------------125.7125.4-0.2
23.Auto Accessories
2
-----------------------------------------------------108.9110.91.8
Groups 1–15: Soft Goods -------------------------------------------------594.0586.0-1.3
Groups 16–20: Durable Goods -------------------------------------------423.0413.1-2.3
Groups 21–23: Misc. Goods
2
---------------------------------------------98.696.8-1.8
Store Total
3
-------------------------------------------------------------530.8522.3-1.6
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food,
liquor, tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue ruling, contact Mr.
Burkom at (202) 622–7718 (not a toll-
free call).
Section 1502.—Regulations
26 CFR 1.1502–77: Agent for the group
T.D. 9002
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Agent for Consolidated Group
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations regarding the agent for
subsidiaries of an affiliated group that
files a consolidated return (agent for the
group). The regulations address certain
issues concerning the scope of the com-
mon parent’s authority, as well as ques-
tions concerning the agent for the group
when the common parent’s existence ter-
minates. These regulations affect all con-
solidated groups.
DATES:Effective Date: These regula-
tions are effective June 28, 2002.
2002–29 I.R.B.120July 22, 2002

Applicability Date: For dates of appli-
cability, see§§1.1502–77(h) and 1.1502–
78(f).
FOR FURTHER INFORMATION CON-
TACT: Gerald B. Fleming, (202) 622–
7770, or George R. Johnson, (202) 622–
7930 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1699. Responses to these
collections of information are required to
obtain a benefit (the approval by the IRS
of the common parent’s designation of a
substitute agent for the consolidated
group or recognition by the IRS of the
common parent’s successor as a default
substitute agent).
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
The estimated annual burden per
respondent is 2 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
ReportsClearanceOfficer,W:CAR:
MP:FP:S, Washington, DC 20224, and to
theOffice of Management and Budget,
Attn: Desk Officer for the Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On September 26, 2000, a notice of
proposed rulemaking (REG–103805–99,
2000–2 C.B. 376) relating to the agent for
the group was published in theFederal
Register(65 FR 57755). No public hear-
ing was requested or held. Written com-
ments responding to the notice of pro-
posed rulemaking were received. After
consideration of all the comments, the
proposed regulations are adopted as
amended by this Treasury decision.
Explanation and Summary of
Comments
These final regulations are substan-
tially the same as the proposed regula-
tions but reflect certain revisions based on
various formal and informal comments
that were received from the public and
from IRS personnel. Many of the revi-
sions are minor changes made to clarify
certain aspects of the proposed regula-
tions. Certain of the more significant revi-
sions are discussed below.
The final regulations reflect changes
that clarify the examples of matters for
which the common parent is the agent.
Specifically, the example on elections is
expanded to include other similar options
that are available to a member in deter-
mining its separate taxable income and
any changes in such options. The com-
mon parent should make any necessary
requests related to those options or
changes in such options (for example, to
request a change in a subsidiary’s method
or period of accounting). In addition, an
example is added to clarify that the com-
mon parent takes any action on behalf of
a member of the group with respect to a
foreign corporation. Finally, an example
is added to clarify that a final partnership
administrative adjustment (FPAA) under
section 6223 may be sent to the common
parent and that the mailing to the com-
mon parent will be considered a mailing
to each group member that is a partner
entitled to receive the FPAA.
In light of statutory changes not
reflected in the proposed regulations, the
final regulations modify the identification
of matters reserved to subsidiaries in
paragraph (a)(3) of the proposed regula-
tions. In particular, the reference to a
DISC’s change in annual accounting
period pursuant to§1.991–1(b)(3)(ii) has
been removed because such a change in
accounting period is generally automatic
and, in any event, is made by a DISC,
which is not an includible corporation
pursuant to section 1504(b)(7). In addi-
tion, the final regulations add as a spe-
cific matter reserved to subsidiaries any
action by a subsidiary acting as the tax
matters partner under the TEFRA partner-
ship provisions of sections 6221 through
6234 and the accompanying regulations.
The provisions requiring that a notice
of deficiency or notice and demand for
payment name each corporation that was
a member of the group for the consoli-
dated return year have been eliminated.
The IRS and Treasury have determined
that these provisions are inconsistent with
the general rule that the common parent is
agent for the group with respect to the
group’s consolidated tax liability.
The final regulations have added a
provision for a default substitute agent for
the group under certain circumstances. If
the common parent fails to designate a
substitute agent before its existence ter-
minates and it has a single successor that
is a domestic corporation, that successor
becomes the default substitute agent.
Although the Commissioner’s approval is
not required, any such default substitute
agent is advised to provide written notifi-
cation to the IRS in accordance with pro-
cedures established by the Commissioner.
Until notification is received, the Com-
missioner is not required to recognize the
successor’s status as default substitute
agent and may continue to send commu-
nications to the old common parent and
the Commissioner is not required to
respond to communications (including,
for example, a claim for refund) submit-
ted by the successor on behalf of the con-
solidated group.
Where the Commissioner designates a
substitute agent for the group, the pro-
posed regulations provide for the Com-
missioner and the designated agent to
give notice of the designation to all mem-
bers of the group. The final regulations
provide for the Commissioner to give
notice to the designated agent, which is
responsible for giving notice to the
remaining members of the group.
One comment suggested that there
should be a mechanism for taxpayers to
request that the final regulations apply to
taxable years beginning before the date of
issuance of the final regulations. Treasury
and the IRS recognize that some taxpay-
ers may wish to have the additional flex-
ibility afforded by paragraph (d)(1) of the
final regulations allowing the designation
July 22, 20021212002–29 I.R.B.

of a successor of a member (including a
successor of the common parent) as the
substitute agent for the group. Accord-
ingly, the final regulations permit a com-
mon parent to elect to apply paragraph
(d)(1) of the final regulations with respect
to designations for taxable years begin-
ning before the date of adoption. Once
such an election is made, the provisions
of paragraph (d)(1) of the final regula-
tions apply to any subsequent designation
of a substitute agent for the consolidated
return years subject to the election.
Effective Date
The final regulations under§1.1502–
77 apply to taxable years beginning on or
after June 28, 2002. The current rules of
§§1.1502–77 and 1.1502–77T, which are
collectively retained in§1.1502–77A,
continue to apply with respect to taxable
years beginning before June 28, 2002.
Thefinalregulationsunder
§1.1502–78 apply to taxable years to
which a loss or credit may be carried
back and for which the due date (without
extensions) of the original return is after
June 28, 2002.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based on the fact that these regula-
tions will primarily affect affiliated
groups of corporations that have elected
to file consolidated returns, which tend to
be larger businesses, and, moreover, that
any burden on taxpayers is minimal.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Drafting Information
The principal authors of these pro-
posed regulations are Gerald B. Fleming
and George R. Johnson, Office of the
Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing entries for
“1.1502–77(e)”and“1.1502–78(b)”and
adding entries in numerical order to read
in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.1502–77 also issued under
26 U.S.C. 1502 and 6402(j).
Section 1.1502–78 also issued under
26 U.S.C. 1502, 6402(j), and 6411(c).
***
Section 1.1502–77A also issued under
26 U.S.C. 1502 and 6402(j).***
Par. 2. Section 1.338–1 is amended by
adding a sentence at the end of paragraph
(b)(2)(vii) to read as follows:
§1.338–1 General principles; status of
old target and new target.
*****
(b)***
(2)***
(vii)***Seealso, for example,
§1.1502–77(e)(4), providing that an elec-
tion under section 338 does not result in
a deemed termination of target’s existence
for purposes of the rules applicable to the
agent for a consolidated group.
*****
Par.3.In§1.1502–6, paragraph (b) is
amended by removing the language“dis-
trict director”and adding“Commis-
sioner”in each place it appears.
Par. 4. Immediately following§1.
1502–41A, an undesignated center head-
ing is added to read as follows:
REGULATIONS APPLICABLE TO
TAXABLE YEARS BEGINNING
BEFORE JUNE 28, 2002
Par. 5. Section 1.1502–77 is redesig-
nated as§1.1502–77A, transferred
immediately after the undesignated center
heading“REGULATIONS APPLI-
CABLE TO TAXABLE YEARS BEGIN-
NING BEFORE JUNE 28, 2002”and
amended as follows:
1. The section heading is revised.
2. In the list below, for each paragraph
indicated in the left column, remove the
language in the middle column and add
the language in the right column:
ParagraphRemoveAdd
(a), last sentencedistrict directorCommissioner
(b), first sentence
district director with whom the
consolidated return is filed
Commissioner
(b), first sentencesuch district directorthe Commissioner
(b), second sentencesuch district directorthe Commissioner
(c)district directorCommissioner
(d), first sentence
district director with whom the
consolidated return is filed
Commissioner
(d), first sentencesuch district directorthe Commissioner
(d), second sentencedistrict directorCommissioner
(d), second sentence (each place it
appears)
such district directorthe Commissioner
(d), third sentence (each place it appears) such district directorthe Commissioner
2002–29 I.R.B.122July 22, 2002

3. Paragraph (e) is removed and
reserved.
4. Paragraphs (f) and (g) are added.
The revision and additions read as fol-
lows:
§1.1502–77A Common parent agent for
subsidiaries applicable for consolidated
return years beginning before June 28,
2002.
*****
(f)Cross-reference. For further rules
applicable to groups that include insol-
vent financial institutions, see§301.
6402–7 of this chapter.
(g)Effective date. This section applies
to taxable years beginning before June
28, 2002, except paragraph (e) of this sec-
tion applies to statutory notices and waiv-
ers of the statute of limitations for taxable
years for which the due date (without
extensions) of the consolidated return is
after September 7, 1988, and which begin
before June 28, 2002.
Par. 6. New§1.1502–77 is added to
read as follows:
§1.1502–77 Agent for the group.
(a)Scope of agency—(1)In general—
(i)Common parent. Except as provided in
paragraphs (a)(3) and (6) of this section,
the common parent (or a substitute agent
described in paragraph (a)(1)(ii) of this
section) for a consolidated return year is
the sole agent (agent for the group) that is
authorized to act in its own name with
respect to all matters relating to the tax
liability for that consolidated return year,
for—
(A) Each member in the group; and
(B) Any successor (see paragraph
(a)(1)(iii) of this section) of a member.
(ii)Substitute agents. For purposes of
this section, any corporation designated
as a substitute agent pursuant to para-
graph (d) of this section to replace the
common parent or a previously desig-
nated substitute agent acts as agent for the
group to the same extent and subject to
the same limitations as are applicable to
the common parent, and any reference in
this section to the common parent
includes any such substitute agent.
(iii)Successor. For purposes of this
section only, the termsuccessormeans an
individual or entity (including a disre-
garded entity) that is primarily liable, pur-
suant to applicable law (including, for
example, by operation of a state or Fed-
eral merger statute), for the tax liability of
a member of the group. Such determina-
tion is made without regard to§1.1502–
1(f)(4) or 1.1502–6(a). (For inclusion of a
successor in references to a subsidiary or
member, see paragraph (c)(2) of this sec-
tion.)
(iv)Disregarded entity. If a subsidiary
of a group becomes, or its successor is or
becomes, a disregarded entity for Federal
tax purposes, the common parent contin-
ues to serve as the agent with respect to
thatsubsidiary’staxliabilityunder
§1.1502–6 for consolidated return years
during which it was included in the
group, even though the entity generally is
not treated as a person separate from its
owner for Federal tax purposes.
(v)Transferee liability. For purposes
of assessing, paying and collecting trans-
feree liability, any exercise of or reliance
on the common parent’s agency authority
pursuant to this section is binding on a
transferee (or subsequent transferees) of a
member, regardless of whether the mem-
ber’s existence terminates prior to such
exercise or reliance.
(vi)Purported common parent.Ifany
corporation files a consolidated return
purporting to be the common parent of a
consolidated group but is subsequently
determined not to have been the common
parent of the claimed group, that corpora-
tion is treated, to the extent necessary to
avoid prejudice to the Commissioner, as
if it were the common parent.
(2)Examples of matters subject to
agency. With respect to any consolidated
return year for which it is the common
parent—
(i) The common parent makes any
election (or similar choice of a permis-
sible option) that is available to a subsid-
iary in the computation of its separate
taxable income, and any change in an
election (or similar choice of a permis-
sible option) previously made by or for a
subsidiary, including, for example, a
request to change a subsidiary’s method
or period of accounting;
(ii) All correspondence concerning the
income tax liability for the consolidated
return year is carried on directly with the
common parent;
(iii) The common parent files for all
extensions of time, including extensions
of time for payment of tax under section
6164, and any extension so filed is con-
sidered as having been filed by each
member;
(iv) The common parent gives waivers,
gives bonds, and executes closing agree-
ments, offers in compromise, and all
other documents, and any waiver or bond
so given, or agreement, offer in compro-
mise, or any other document so executed,
is considered as having also been given or
executed by each member;
(v) The common parent files claims
for refund, and any refund is made
directly to and in the name of the com-
mon parent and discharges any liability of
the Government to any member with
respect to such refund;
(vi) The common parent takes any
action on behalf of a member of the
group with respect to a foreign corpora-
tion, for example, elections by, and
changes to the method of accounting of, a
controlled foreign corporation in accor-
dance with§1.964–1(c)(3);
(vii) Notices of claim disallowance are
mailed only to the common parent, and
the mailing to the common parent is con-
sidered as a mailing to each member;
(viii) Notices of deficiencies are
mailed only to the common parent
(except as provided in paragraph (b) of
this section), and the mailing to the com-
mon parent is considered as a mailing to
each member;
(ix) Notices of final partnership
administrative adjustment under section
6223 with respect to any partnership in
which a member of the group is a partner
may be mailed to the common parent,
and, if so, the mailing to the common par-
ent is considered as a mailing to each
member that is a partner entitled to
receive such notice (for other rules
regarding partnership proceedings, see
paragraphs (a)(3)(v) and (a)(6)(iii) of this
section);
(x) The common parent files petitions
and conducts proceedings before the
United States Tax Court, and any such
petition is considered as also having been
filed by each member;
(xi) Any assessment of tax may be
made in the name of the common parent,
and an assessment naming the common
parent is considered as an assessment
with respect to each member; and
July 22, 20021232002–29 I.R.B.

(xii) Notice and demand for payment
of taxes is given only to the common par-
ent, and such notice and demand is con-
sidered as a notice and demand to each
member.
(3)Matters reserved to subsidiaries.
Except as provided in this paragraph
(a)(3) and paragraph (a)(6) of this section,
no subsidiary has authority to act for or to
represent itself in any matter related to
the tax liability for the consolidated return
year. The following matters, however, are
reserved exclusively to each subsidiary—
(i) The making of the consent required
by§1.1502–75(a)(1);
(ii) Any action with respect to the sub-
sidiary’s liability for a federal tax other
than the income tax imposed by chapter 1
of the Internal Revenue Code (including,
for example, employment taxes under
chapters 21 through 25 of the Internal
Revenue Code, and miscellaneous excise
taxes under chapters 31 through 47 of the
Internal Revenue Code);
(iii) The making of an election under
section 936(e);
(iv) The making of an election to be
treated as a DISC under§1.992–2; and
(v) Any actions by a subsidiary acting
as tax matters partner under sections 6221
through 6234 and the accompanying
regulations (but see paragraph (a)(2)(ix)
of this section regarding the mailing of a
final partnership administrative adjust-
ment to the common parent).
(4)Term of agency—(i)In general.
Except as provided in paragraph
(a)(4)(iii) of this section, the common
parent for the consolidated return year
remains the agent for the group with
respect to that year until the common par-
ent’s existence terminates, regardless of
whether one or more subsidiaries in that
year cease to be members of the group,
whether the group files a consolidated
return for any subsequent year, whether
the common parent ceases to be the com-
mon parent or a member of the group in
any subsequent year, or whether the
group continues pursuant to§1.1502–
75(d) with a new common parent in any
subsequent year.
(ii)Replacement of substitute agent
designated by Commissioner. If the Com-
missioner replaces a previously desig-
nated substitute agent pursuant to para-
graph (d)(3)(ii) of this section, the
replaced substitute agent ceases to be the
agent after the Commissioner designates
another substitute agent.
(iii)New common parent after a group
structure change. If the group continues
in existence with a new common parent
pursuant to§1.1502–75(d) during a con-
solidated return year, the common parent
at the beginning of the year is the agent
for the group through the date of the
§1.1502–75(d) transaction, and the new
common parent becomes the agent for the
group beginning the day after the transac-
tion, at which time it becomes the agent
for the group with respect to the entire
consolidated return year (including the
period through the date of the transaction)
and the former common parent is no
longer the agent for that year.
(5)Identifying members in notice of a
lien. Notwithstanding any other provi-
sions of this paragraph (a), any notice of
a lien, any levy or any other proceeding
to collect the amount of any assessment,
after the assessment has been made, must
name the entity from which such collec-
tion is to be made.
(6)Direct dealing with a member—(i)
Several liability. The Commissioner may,
upon issuing to the common parent writ-
ten notice that expressly invokes the
authority of this provision, deal directly
with any member of the group with
respect to its liability under§1.1502–6
for the consolidated tax of the group, in
which event such member has sole
authority to act for itself with respect to
that liability. However, if the Commis-
sioner believes or has reason to believe
that the existence of the common parent
has terminated, he may, if he deems it
advisable, deal directly with any member
with respect to that member’s liability
under§1.1502–6 without giving the
notice required by this provision.
(ii)Information requests. The Com-
missioner may, upon informing the com-
mon parent, request information relevant
to the consolidated tax liability from any
member of the group. However, if the
Commissioner believes or has reason to
believe that the existence of the common
parent has terminated, he may request
such information from any member of the
group without informing the common
parent.
(iii)Members as partners in partner-
ships. The Commissioner generally will
deal directly with any member in its
capacity as a partner of a partnership that
is subject to the provisions of sections
6221 through 6234 and the accompanying
regulations (but see paragraph (a)(2)(ix)
of this section regarding the mailing of a
final partnership administrative adjust-
ment to the common parent). However, if
requested to do so in accordance with the
provisions of§301.6223(c)–1(b) of this
chapter, the Commissioner may deal with
the common parent as agent for such
member on any matter related to the part-
nership, except in regards to a settlement
under section 6224(c) and except to the
extent the member acts as tax matters
partner of the partnership.
(b)Copy of notice of deficiency to
entity that has ceased to be a member of
the group. An entity that ceases to be a
member of the group during or after a
consolidated return year may file a writ-
ten notice of that fact with the Commis-
sioner and request a copy of any notice of
deficiency with respect to the tax for a
consolidated return year during which the
entity was a member, or a copy of any
notice and demand for payment of such
deficiency, or both. Such filing does not
limit the scope of the agency of the com-
mon parent provided for in paragraph (a)
of this section. Any failure by the Com-
missioner to comply with such request
does not limit an entity’s tax liability
under§1.1502–6. For purposes of this
paragraph (b), references to an entity
include a successor of such entity.
(c)References to member or subsid-
iary. For purposes of this section, all ref-
erences to a member or subsidiary for a
consolidated return year include—
(1) Each corporation that was a mem-
ber of the group during any part of such
year (except that any reference to a sub-
sidiary does not include the common par-
ent);
(2) Except as indicated otherwise, a
successor (as defined in paragraph
(a)(1)(iii) of this section) of any corpora-
tion described in paragraph (c)(1) of this
section; and
(3) Each corporation whose income
was included in the consolidated return
for such year, notwithstanding that the tax
liability of such corporation should have
been computed on the basis of a separate
return, or as a member of another consoli-
dated group, under the provisions of
§1.1502–75.
2002–29 I.R.B.124July 22, 2002

(d)Termination of common parent—
(1)Designation of substitute agent by
common parent. (i) If the common par-
ent’s existence terminates, it may desig-
nate a substitute agent for the group and
notify the Commissioner, as provided in
this paragraph (d)(1).
(A) Subject to the Commissioner’s
approval under paragraph (d)(1)(ii) of this
section, before the common parent’s
existence terminates, the common parent
may designate, for each consolidated
return year for which it is the common
parent and for which the period of limita-
tions either for assessment, for collection
after assessment, or for claiming a credit
or refund has not expired, one of the fol-
lowing to act as substitute agent in its
place—
(1) Any corporation that was a mem-
ber of the group during any part of the
consolidated return year and, except as
provided in paragraph (e)(3)(ii) of this
section, has not subsequently been disre-
garded as an entity separate from its
owner or reclassified as a partnership for
Federal tax purposes; or
(2) Any successor (as defined in para-
graph (a)(1)(iii) of this section) of such a
corporation or of the common parent that
is a domestic corporation (and, except as
provided in paragraph (e)(3)(ii) of this
section, is not disregarded as an entity
separate from its owner or classified as a
partnership for Federal tax purposes),
including a corporation that will become
a successor at the time that the common
parent’s existence terminates.
(B) The common parent must notify
the Commissioner in writing (under pro-
cedures prescribed by the Commissioner)
of the designation and provide the
following—
(1) An agreement executed by the des-
ignated corporation agreeing to serve as
the group’s substitute agent; and
(2) If the designated corporation was
not itself a member of the group during
the consolidated return year (because the
designated corporation is a successor of a
member of the group for the consolidated
return year), a statement by the desig-
nated corporation acknowledging that it is
or will be primarily liable for the consoli-
dated tax as a successor of a member.
(ii) A designation under paragraph
(d)(1)(i)(A) of this section does not apply
unless and until it is approved by the
Commissioner. The Commissioner’s
approval of such a designation is not
effective before the existence of the com-
mon parent terminates.
(2)Default substitute agent.Ifthe
common parent fails to designate a substi-
tute agent for the group before its exist-
ence terminates and if the common parent
has a single successor that is a domestic
corporation, such successor becomes the
substitute agent for the group upon termi-
nation of the common parent’s existence.
However, see paragraph (d)(4) of this sec-
tion regarding the consequences of the
successor’s failure to notify the Commis-
sioner of its status as default substitute
agent in accordance with procedures
established by the Commissioner.
(3)Designation by the Commissioner.
(i) In the event the common parent’s
existence terminates and no designation is
made and approved under paragraph
(d)(1) of this section and the Commis-
sioner believes or has reason to believe
that there is no successor of the common
parent that satisfies the requirements of
paragraph (d)(2) of this section (or the
Commissioner believes or has reason to
believe there is such a successor but has
no last known address on file for such
successor), the Commissioner may, at any
time, with or without a request from any
member of the group, designate a corpo-
ration described in paragraph (d)(1)(i)(A)
of this section to act as the substitute
agent. The Commissioner will notify the
designated substitute agent in writing of
its designation, and the designation is
effective upon receipt by the designated
substitute agent of such notice. The desig-
nated substitute agent must give notice of
the designation to each corporation that
was a member of the group during any
part of the consolidated return year, but a
failure by the designated substitute agent
to notify any such member of the group
does not invalidate the designation.
(ii) At the request of any member, the
Commissioner may, but is not required to,
replace a substitute agent previously des-
ignated under paragraph (d)(3)(i) of this
section with another corporation
described in paragraph (d)(1)(i)(A) of this
section.
(4)Absence of designation or notifica-
tion of default substitute agent. Until a
designation of a substitute agent for the
group under paragraph (d)(1) of this sec-
tion has become effective, the Commis-
sioner has received notification in accor-
dance with procedures established by the
Commissioner that a successor qualifying
under paragraph (d)(2) of this section has
become the substitute agent by default, or
the Commissioner has designated a sub-
stitute agent under paragraph (d)(3) of
this section—
(i) Any notice of deficiency or other
communication mailed to the common
parent, even if no longer in existence, is
considered as having been properly
mailed to the agent for the group; and
(ii) The Commissioner is not required
to act on any communication (including,
for example, a claim for refund) submit-
ted on behalf of the group by any person
other than the common parent (including
a successor of the common parent quali-
fying as a default substitute agent under
paragraph (d)(2) of this section).
(e)Termination of a corporation’s
existence—(1)In general. For purposes
of paragraphs (a)(1)(v), (a)(4)(i), and (d)
of this section, the existence of a corpora-
tion is deemed to terminate if—
(i) Its existence terminates under appli-
cable law; or
(ii) Except as provided in paragraph
(e)(3) of this section, it becomes, for Fed-
eral tax purposes, either—
(A) An entity that is disregarded as an
entity separate from its owner; or
(B) An entity that is reclassified as a
partnership.
(2)Purported agency. If the existence
of the agent for the group terminates
under circumstances described in para-
graph (e)(1)(ii) of this section, until the
Commissioner has approved the designa-
tion of a substitute agent for the group
pursuant to paragraph (d)(1) of this sec-
tion or the Commissioner designates a
substitute agent and notifies the desig-
nated substitute agent pursuant to para-
graph (d)(3) of this section, any post-
termination action by that purported agent
on behalf of the group has the same
effect, to the extent necessary to avoid
prejudice to the Commissioner, as if the
agent’s corporate existence had not termi-
nated.
(3)Exceptions where no eligible cor-
poration exists. (i) For purposes of the
common parent’s term as agent under
paragraph (a)(4)(i) of this section and the
July 22, 20021252002–29 I.R.B.

term as agent of the substitute agent des-
ignated under paragraph (d) of this sec-
tion, if a corporation either becomes dis-
regarded as an entity separate from its
owner or is reclassified as a partnership
for Federal tax purposes, its existence is
not deemed to terminate if the effect of
such termination would be that no corpo-
ration remains eligible to serve as the
substitute agent for the group’s consoli-
dated return year.
(ii) Similarly, for purposes of para-
graph (d) of this section, an entity that is
either disregarded as an entity separate
from its owner or reclassified as a part-
nership for Federal tax purposes is not
precluded from designation as a substitute
agent merely because of such classifica-
tion if the effect of the inability to make
such designation would be that no corpo-
ration remains eligible to serve as the
substitute agent for the group’s consoli-
dated return year.
(iii) Any entity described in paragraphs
(e)(3)(i) or (ii) of this section that remains
or becomes the agent for the group is
treated as a corporation for purposes of
this section.
(4)Exception for section 338 transac-
tions. Notwithstanding section 338(a)(2),
a target corporation for which an election
is made under section 338 is not deemed
to terminate for purposes of this section.
(f)Examples. The following examples
illustrate the principles of this section.
Unless otherwise indicated, each example
addresses the question of which corpora-
tion is the proper party to execute a con-
sent to waive the statute of limitations for
Years 1 and 2 or the more general ques-
tion of which corporation may be desig-
nated as a substitute agent for the group
for Years 1 and 2. In each example, as of
January 1 of Year 1, the P group consists
of P and its two subsidiaries, S and S–1.
P, as the common parent of the P group,
files consolidated returns for the P group
in Years 1 and 2. On January 1 of Year 1,
domestic corporations S–2, U, V, W,
W–1, X, Y, Z and Z–1 are not related to
P or the members of the P group. All cor-
porations are calendar year taxpayers. For
none of the tax years at issue does the
Commissioner exercise the authority
under paragraph (a)(6) of this section to
deal with any member separately. Any
surviving corporation in a merger is a
successor as described in paragraph
(a)(1)(iii) of this section. Any notification
to the Commissioner of the designation of
the P group’s substitute agent also con-
tains a statement signed on behalf of the
designated agent that it agrees to act as
the group’s substitute agent and, in the
case of a successor, that it is primarily
liable as a successor of a member. The
examples are as follows:
Example 1.Disposition of all group members.
On December 31 of Year 1, P sells all the stock of
S–1 to X. On December 31 of Year 2, P distributes
all the stock of S to P’s shareholders. P files a sepa-
rate return for Year 3. Although P is no longer a
common parent after Year 2, P remains the agent for
the P group for Years 1 and 2. For as long as P
remains in existence, only P may execute a waiver
of the period of limitations on assessment on behalf
of the group for Years 1 and 2.
Example 2.Acquisition of common parent by
another group. The facts are the same as inExample
1, except on January 1 of Year 3, all of the outstand-
ing stock of P is acquired by Y. P thereafter joins in
the Y group consolidated return as a member of Y
group. Although P is a member of Y group in Year
3, P remains the agent for the P group for Years 1
and 2. For as long as P remains in existence, only P
may execute a waiver of the period of limitations on
assessment on behalf of the P group for Years 1 and
2.
Example 3.Merger of common parent—
designation of remaining member as substitute
agent. On December 31 of Year 1, P sells all the
stock of S–1 to X. On July 1 of Year 2, P acquires
all the stock of S–2. On November 30 of Year 2, P
distributes all the stock of S to P’s shareholders. On
January 1 of Year 3, P merges into Y corporation.
Just before the merger, P notifies the Commissioner
in writing of the planned merger and of its designa-
tion of S as the substitute agent for the P group for
Years 1 and 2. S is the only member that P can des-
ignate as the substitute agent for both Years 1 and 2
because it is the only subsidiary that was a member
of the P group during part of both years. Although
S–2 is the only remaining subsidiary of the P group
when P merges into Y, S–2 was a member of the P
group only in Year 2. For that reason, S–2 cannot be
the substitute agent for the P group for Year 1. Alter-
natively, P could designate a different substitute
agent for each year, selecting S or S–1 as the substi-
tute agent for Year 1, and S or S–2 as the substitute
agent for Year 2. P could also designate its succes-
sor Y as the substitute agent for both Years 1 and 2.
Example 4.Forward triangular merger of com-
mon parent. On January 1 of Year 3, P merges with
and into Z–1, a subsidiary of Z, in a forward trian-
gular merger described in section 368(a)(1)(A) and
(a)(2)(D). The transaction constitutes a reverse
acquisition under§1.1502–75(d)(3)(i) because P’s
shareholders receive more than 50% of Z’s stock in
exchange for all of P’s stock. Just before the merger,
P notifies the Commissioner in writing of the
planned merger and its designation of Z–1, the cor-
poration that will survive the planned merger, as the
substitute agent of the P group for Years 1 and 2.
Because Z–1 will be P’s successor (within the mean-
ing of paragraph (a)(1) of this section) after the
planned merger, P may designate Z–1 as the substi-
tute agent for the P group for Years 1 and 2, pursu-
ant to paragraph (d)(1) of this section. Alternatively,
P could have designated S or S–1 as the substitute
agent for the P group for Years 1 and 2. Although Z
is the new common parent of the P group, which
continues pursuant to§1.1502–75(d)(3)(i), P may
not designate Z as the substitute agent for Years 1
and 2 because Z was not a member of the group
during any part of Years 1 or 2 and is not a succes-
sor of P or any other member of P group.
Example 5.Reverse triangular merger of com-
mon parent. On March 1 of Year 3, W–1, a subsid-
iary of W, merges into P, in a reverse triangular
merger described in section 368(a)(1)(A) and
(a)(2)(E). P survives the merger with W–1. The
transaction constitutes a reverse acquisition under
§1.1502–75(d)(3)(i) because P’s shareholders
receive more than 50% of W’s stock in exchange for
all of P’s stock. Under paragraph (a) of this section,
P remains the agent for the P group for Years 1 and
2, even though the P group continues with W as its
new common parent pursuant to§1.1502–
75(d)(3)(i). Because the transaction constitutes a
reverse acquisition, the P group is treated as remain-
ing in existence with W as its common parent.
Before March 2 of Year 3, P is the agent for the P
group for Year 3. Beginning on March 2 of Year 3,
W becomes the agent for the P group with respect to
all of Year 3 (including the period through March 1)
and subsequent consolidated return years. For as
long as P remains in existence, P remains the agent
of the P group under paragraph (a) of this section for
Years 1 and 2, and therefore only P may execute a
waiver of the period of limitations on assessment on
behalf of the P group for Years 1 and 2.
Example 6.Reverse triangular merger of com-
mon parent—subsequent spinoff of common parent.
The facts are the same as inExample 5, except that
on April 1 of Year 4, in a transaction unrelated to the
Year 3 reverse acquisition, P distributes the stock of
its subsidiaries S and S–1 to W, and W then distrib-
utes the stock of P to the W shareholders. Beginning
on March 2 of Year 3, W becomes the agent for the
P group with respect to Year 3 (including the period
through March 1) and subsequent consolidated
return years. Although P is no longer a member of
the P group after the Year 4 spinoff, P remains the
agent for the P group under paragraph (a) of this
section for Years 1 and 2. Thus, for as long as P
remains in existence, only P may execute a waiver
of the period of limitations on assessment on behalf
of the P group for Years 1 and 2.
Example 7.Qualified stock purchase and section
338 election. On March 31 of Year 2, V purchases
the stock of P in a qualified stock purchase (within
the meaning of section 338(d)(3)), and V makes a
timely election pursuant to section 338(g) with
respect to P. Although section 338(a)(2) provides
that P is treated as a new corporation as of the
beginning of the day after the acquisition date for
purposes of subtitle A, paragraph (e)(4) of this sec-
tion provides that P’s existence is not deemed to ter-
minate for purposes of this section notwithstanding
the general rule of section 338(a)(2). Therefore, the
election under section 338(g) does not result in a
termination of P under paragraph (e) of this section,
and new P remains the agent of the P group for Year
1 and the period ending March 31 of Year 2 (short
Year 2). For as long as new P remains in existence,
only new P may execute a waiver of the period of
2002–29 I.R.B.126July 22, 2002

limitations on assessment on behalf of the P group
for Year 1 and short Year 2.
Example 8.Fraudulent conveyance of assets.On
March 15 of Year 2, P files a consolidated return
that includes the income of S and S–1 for Year 1.
On December 1 of Year 2, S–1 transfers assets hav-
ing a fair market value of $100x to U in exchange
for $10x. This transfer of assets for less than fair
market value constitutes a fraudulent conveyance
under applicable state law. On March 1 of Year 5, P
executes a waiver extending to December 31 of Year
6 the period of limitations on assessment with
respect to the group’s Year 1 consolidated return. On
February 1 of Year 6, the Commissioner issues a
notice of deficiency to P asserting a deficiency of
$30x for the P group’s Year 1 consolidated tax
liability. P does not file a petition for redetermina-
tion in the Tax Court, and the Commissioner makes
a timely assessment against the P group. P, S and
S–1 are all insolvent and are unable to pay the defi-
ciency. On February 1 of Year 8, the Commissioner
sends a notice of transferee liability to U, which
does not file a petition in the Tax Court. On August
1 of Year 8, the Commissioner assesses the amount
of the P group’s deficiency against U. Under section
6901(c), the Commissioner may assess U’s trans-
feree liability within one year after the expiration of
the period of limitations against the transferor S–1.
By operation of section 6213(a) and 6503(a), the
issuance of the notice of deficiency to P and the
expiration of the 90-day period for filing a petition
in the Tax Court have the effect of further extending
by 150 days the P group’s limitations period on
assessment from the previously extended date of
December 31 of Year 6 to May 30 of Year 7. Pursu-
ant to paragraph (a)(1)(v) of this section, the waiver
executed by P on March 1 of Year 5 to extend the
period of limitations on assessment to December 31
of Year 6 and the further extension of the P group’s
limitations period to May 30 of Year 7 (by operation
of sections 6213(a) and 6503(a)) have the derivative
effect of extending the period of limitations on
assessment of U’s transferee liability to May 30 of
Year 8. By operation of section 6901(f), the issuance
of the notice of transferee liability to U and the
expiration of the 90-day period for filing a petition
in the Tax Court have the effect of further extending
the limitations period on assessment of U’s liability
as a transferee by 150 days, from May 30 of Year 8
to October 27 of Year 8. Accordingly, the Commis-
sioner may send a notice of transferee liability to U
at any time on or before May 30 of Year 8 and
assess the unpaid liability against U at any time on
or before October 27 of Year 8. The result would be
the same even if S–1 ceased to exist before March 1
of Year 5, the date P executed the waiver.
(g)Cross-reference. For further rules
applicable to groups that include insol-
ventfinancialinstitutions,see
§301.6402–7 of this chapter.
(h)Effective date—(1)Application—
(i)In general. This section applies with
respect to taxable years beginning on or
after June 28, 2002.
(ii)Election to apply for prior taxable
years. Notwithstanding paragraphs
(h)(1)(i) and (h)(2) of this section, the
common parent may elect to apply para-
graph (d)(1) of this section in lieu of
§1.1502–77A(d) in designating a substi-
tute agent for taxable years beginning
before June 28, 2002. The common par-
ent makes such an election by expressly
referring to the election under this para-
graph (h)(1)(ii) in notifying the Commis-
sioner of the designation of the substitute
agent. Once made, such election applies
to any subsequent designation of a substi-
tute agent for the consolidated return
year(s) subject to the election.
(2)Prior law. For taxable years begin-
ning before June 28, 2002, see§1.1502–
77A.
§ 1.1502–77T(a) [Redesignated as
§ 1.1502–77A(e) and Amended]
Par. 7. Section 1.1502–77T(a) is redes-
ignated as§1.1502–77A(e) and is
amended by removing the language“dis-
trict director”and adding“Commis-
sioner”in each place it appears.
§ 1.1502–77T [Removed]
Par. 8. Section 1.1502–77T is re-
moved.
Par. 9. Section 1.1502–78 is amended
as follows:
1. Paragraph (a) is revised.
2. Paragraph (b)(1) is amended by add-
ing the language“for the carryback year
(or agent designated under§1.1502–
77(d) for the carryback year)”at the end
of the first sentence.
3. Paragraph (b)(2) is amended by
removing the language“6213(b)(2)”and
adding“6213(b)(3)”in its place.
4. In paragraph (c), the last sentence of
Example (1)is amended by adding the
language“for the carryback year”after
“parent.”
5. In paragraph (c), the last sentence of
Example (2)is amended by removing the
language“S–1”and adding“P”in its
place.
6. In paragraph (c)Example (3), the
seventh sentence is amended by removing
the language“Z must”and adding“X
must”in its place.
7. In paragraph (c)Example (3), the
last sentence is amended by removing the
language“6213(b)(2)”and adding
“6213(b)(3)”in its place.
8. Paragraph (e)(2)(v) is removed.
9. Paragraph (f) is added.
The revision and addition read as fol-
lows:
§1.1502–78 Tentative carryback
adjustments.
(a)General rule. If a group has a con-
solidated net operating loss, a consoli-
dated net capital loss, or a consolidated
unused business credit for any taxable
year, then any application under section
6411 for a tentative carryback adjustment
of the taxes for a consolidated return year
or years preceding such year shall be
made by the common parent corporation
for the carryback year (or substitute agent
designated under§1.1502–77(d) for the
carryback year) to the extent such loss or
unused business credit is not apportioned
to a corporation for a separate return year
pursuant to§1.1502–21(b), 1.1502–
22(b), or 1.1502–79(c). In the case of the
portion of a consolidated net operating
loss or consolidated net capital loss or
consolidated unused business credit to
which the preceding sentence does not
apply and that is to be carried back to a
corporation that was not a member of a
consolidated group in the carryback year,
the corporation to which such loss or
credit is attributable shall make any appli-
cation under section 6411. In the case of
a net capital loss or net operating loss or
unused business credit arising in a sepa-
rate return year that may be carried back
to a consolidated return year, after taking
into account the application of§1.1502–
21(b)(3)(ii)(B) with respect to any net
operating loss arising in another consoli-
dated group, the common parent for the
carryback year (or substitute agent desig-
nated under§1.1502–77(d) for the carry-
back year) shall make any application
under section 6411.
*****
(f)Effective date—(1)In general. This
section applies to taxable years to which
a loss or credit may be carried back and
for which the due date (without exten-
sions) of the original return is after June
28, 2002, except that the provisions of
paragraph (e)(2) apply for applications by
new members of consolidated groups for
tentative carryback adjustments resulting
from net operating losses, net capital
losses, or unused business credits arising
July 22, 20021272002–29 I.R.B.

in separate return years of new members
that begin on or after January 1, 2001.
(2)Prior law. For taxable years to
which a loss or credit may be carried
back and for which the due date (without
extensions) of the original return is on or
before June 28, 2002, see§1.1502–78 in
effect prior to June 28, 2002, as contained
in 26 CFR part 1 revised April 1, 2002.
Par. 10. Immediately before§1.1502–
79A, an undesignated center heading is
added to read as follows:
REGULATIONS APPLICABLE TO
TAXABLE YEARS BEFORE
JANUARY 1, 1997
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12. Section 602.101, paragraph (b)
is amended by adding an entry in numeri-
cal order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1502–77 ................................................................................................................................................................. 1545–1699
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved May 20, 2002.
Pamela F. Olson,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on June
27, 2002, 8:45 a.m., and published in the issue of
the Federal Register for June 28, 2002, 67 F.R.
43538)
Section 4972.—Ta x o n
Nondeductible Contributions
to Qualified Employer Plans
Whether“restorative payments”to a qualified
defined contribution plan are contributions. See Rev.
Rul. 2002–45, page 116.
Section 6045.—Returns of
Brokers
26 CFR 1.6045–1(c)(3)(ii): Excepted sales.
Information Reporting on Form 1099–B.
Exception from reporting on Form 1099–B in con-
nection with certain stock option transactions, under
specified conditions. See Rev. Proc. 2002–50, page
173.
Section 6103.—Confidentiality
and Disclosure of Returns and
Return Information
26 CFR 301.6103(j)(5)–1: Disclosures of return
information to officers and employees of the Depart-
ment of Agriculture for certain statistical purposes
and related activities.
T.D. 9001
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Return
Information to Officers and
Employees of the Department
of Agriculture for Certain
Statistical Purposes and
Related Activities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This contains a final regula-
tion relating to return information to be
disclosed to the Department of Agricul-
ture (Department) for use in conducting
the Census of Agriculture. The regulation
provides for the disclosure of an addi-
tional item of return information to the
Department. The regulation provides
guidance to IRS personnel responsible for
disclosing the return information.
DATES:Effective Date: This final regula-
tion is effective June 19, 2002.
Applicability Date: For dates of appli-
cability of this final regulation, see
§301.6103(j)(5)–1(d).
FOR FURTHER INFORMATION CON-
TACT: Joseph Conley, 202–622–4580
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(5) of the Inter-
nal Revenue Code (Code), upon written
request from the Secretary of Agriculture,
the Secretary of the Treasury shall furnish
such returns or return information as pre-
scribed by Treasury regulation to officers
and employees of the Department whose
official duties require access to such
returns or return information for the pur-
pose of, but only to the extent necessary
in, structuring, preparing, and conducting
the Census of Agriculture pursuant to the
Census of Agriculture Act of 1997. Cur-
rently,§301.6103(j)(5)–1 provides an
itemized description of the return infor-
mation authorized to be disclosed for this
purpose. By letter dated May 8, 2001, the
Secretary of Agriculture requested that
the Treasury Regulations be amended to
authorize the disclosure of an additional
item of return information, the taxpayer’s
2002–29 I.R.B.128July 22, 2002

telephone number contained on Form
1040/Schedule F.
This document adopts a final regula-
tion that authorizes IRS personnel to dis-
close the additional item of return infor-
mation that has been requested by the
Secretary of Agriculture.
Explanation of Provisions
This final regulation will permit the
IRS to disclose to the Department, for its
use in structuring, preparing, and con-
ducting the Census of Agriculture, an
additional item of return information, the
taxpayer’s telephone number provided on
the Form 1040/Schedule F. According to
the Department, the disclosure of this
additional item of return information will
improve the efficiency of the Depart-
ment’s list-building operations by reduc-
ing the potential for duplication in the
Census of Agriculture. After receiving
information from the IRS, the Department
attempts to link such information to other
records held by or available to the
Department, doing so where possible on
the basis of names, social security num-
bers or employer identification numbers,
and addresses. The Department intends to
use taxpayer telephone numbers to match
records that cannot be matched otherwise
or to determine that questionable links
between records, such as those based
merely on name and address information,
constitute or do not constitute definite
matches. By means of the matching pro-
cess, the Department avoids duplicate
contacts and furthers its classification of
farms for Census of Agriculture purposes.
The IRS will provide taxpayer telephone
numbers to the Department under this
final regulation with the understanding
that the Department will only use them
for such purpose, and that it will not use
the information to telephone taxpayers.
Special Analyses
Section 553 of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) requires
that a notice of proposed rulemaking be
published in the Federal Register and,
after such notice, that the Federal agency
that issued the notice give interested per-
sons an opportunity to participate in the
rulemaking through submission of written
comments, with or without opportunity
for oral presentation. These requirements
are subject to certain exceptions, includ-
ing when the agency for good cause finds
that notice and public comment are
impracticable, unnecessary, or contrary to
the public interest. Because the final
regulation merely amends a preexisting
regulation (§301.6103(j)(5)–1) to add a
single item of information to a list of such
items, it is determined that the notice and
public-comment procedure required by 5
U.S.C. 553 is unnecessary in this case
pursuant to the exception in 5 U.S.C.
553(b)(3)(B). For the same reason, a
delayed effective date is not required pur-
suant to 5 U.S.C. 553(d)(3)
It has also been determined that this
Treasury decision is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. Because no
notice of proposed rulemaking is
required, the provisions of the Regulatory
Flexibility Act (5 U.S.C. 601et seq.)do
not apply. Pursuant to section 7805(f) of
the Code, this regulation was submitted to
the Chief Counsel of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of this temporary
regulation is Joseph Conley, Office of
Associate Chief Counsel (Procedure &
Administration), Disclosure and Privacy
Law Division.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 301.6103(j)(5)–1 also issued
under 26 U.S.C. 6103(j)(5);***
Par. 2. Section 301.6103(j)(5)–1is
amended by adding paragraph (b)(2)(xiv)
to read as follows:
§301.6103(j)(5)–1 Disclosures of return
information to officers and employees of
the Department of Agriculture for
certain statistical purposes and related
activities.
*****
(b)***
(2)***
(xiv) Taxpayer telephone number.
*****
(d)Effective dates. This section is
applicable on July 31, 2001, except para-
graph (b)(2)(xiv) which is applicable on
June 19, 2002.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved June 10, 2002.
Pamela F. Olson,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on June
18, 2002, 8:45 a.m., and published in the issue of
the Federal Register for June 19, 2002, 67 F.R.
41621)
July 22, 20021292002–29 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Deduction for Contributions of
an Employer to an Employees’
Trust or Annuity Plan and
Compensation Under a
Deferred-Payment Plan
Notice 2002–48
Questions have arisen about certain
variations on the fact pattern described in
Rev. Rul. 90–105, 1990–2 C.B. 69, and
their effect on the timing of an employ-
er’s deduction for contributions to a cash
or deferred arrangement within the mean-
ing of§401(k) or to a defined contribu-
tion plan as matching contributions
within the meaning of§401(m). Rev.
Rul. 2002–46, page 118 of this Bulletin,
addresses a fact pattern that is substan-
tially similar to the fact pattern in Rev.
Rul. 90–105. This notice addresses two
other variations on this fact pattern. The
facts in Rev. Rul. 90–105 involve contri-
butions that are attributable to compensa-
tion earned after the end of an employer’s
taxable year and are made after the end of
that year but during the§404(a)(6) grace
period. Rev. Rul. 90–105 holds that such
contributions are not deductible for the
taxable year.
In Rev. Rul. 2002–46, the plan is
amended to provide for a board resolution
setting a minimum contribution for a plan
year (to be allocated first toward elective
deferrals and matching contributions,
with any excess to be allocated to partici-
pants as of the end of the plan year in
proportion to compensation earned during
the plan year), and a board resolution is
adopted before the end of the taxable year
pursuant to that amendment. Rev. Rul.
2002–46 reaches the same result as Rev.
Rul. 90–105.
This notice addresses two other varia-
tions on the Rev. Rul. 90–105 fact pat-
tern, neither of which involves grace
period contributions. One variation
involves an actual payment to the plan
before the end of the taxable year, in
anticipation of§401(k) deferrals and
§401(m) matches to occur after the end
of the tax year (but before the end of the
overlapping plan year). The other varia-
tion involves such a prepayment, com-
bined with a guaranteed minimum contri-
bution as described in Rev. Rul. 2002–46.
Because these variations involve actual
payments before the end of the taxable
year,§404(a)(6) and Rev. Rul. 90–105,
1990–2 C.B. 69, do not affect the deduct-
ibility of the contributions.
Rev. Rul. 90–105 based its holding in
part upon§1.404(a)–1(b) of the Income
Tax Regulations. Specifically, Rev. Rul.
90–105 relied upon language in the regu-
lation requiring that contributions be
compensation for services actually ren-
dered. Upon further consideration, the
Service has concluded that this language
is relevant only where the reasonableness
of an employee’s compensation is in
question, and thus is not an appropriate
basis upon which to determine the timing
of deductions for the contributions
described in Rev. Rul. 90–105, Rev. Rul.
2002–46, and this notice.
The Service is reviewing other issues
that may be raised by the two factual pat-
terns addressed in this notice. Any addi-
tional guidance concerning the matters
addressed in this notice will be prospec-
tive in application. Pending such addi-
tional guidance, the Service will not chal-
lenge the deductibility of contributions
described in this notice, provided actual
payment is made during the taxable year
and the amount deducted does not exceed
the applicable limitation under§404(a)
(3)(A)(i).
The transactions described in this
notice are not“reportable transactions”
for purposes of§1.6011–4T(b)(1) of the
Temporary Income Tax Regulations and
are not“listed transactions”for purposes
of§301.6111–2T(b)(2) of the Temporary
Procedure and Administration Regula-
tions.
The principal author of this notice is
John Richards of the Office of the Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this
notice, contact Mr. Richards at (202)
622–6090 (not a toll-free call).
Weighted Average Interest
Rate Update
Notice 2002–49
Sections412(b)(5)(B)and
412(l)(7)(C)(i) of the Internal Revenue
Code provide that the interest rates used
to calculate current liability for purposes
of determining the full funding limitation
under§412(c)(7) and the required contri-
bution under§412(l) must be within a
permissible range around the weighted
average of the rates of interest on 30-year
Treasury securities during the four-year
period ending on the last day before the
beginning of the plan year.
Notice 88–73, 1988–2 C.B. 383, pro-
vides guidelines for determining the
weighted average interest rate and the
resulting permissible range of interest
rates used to calculate current liability for
the purpose of the full funding limitation
of§412(c)(7) of the Code.
Section 417(e)(3)(A)(ii)(II) of the
Code defines the applicable interest rate,
which must be used for purposes of deter-
mining the minimum present value of a
participant’s benefit under§417(e)(1)
and (2), as the annual rate of interest on
30-year Treasury securities for the month
before the date of distribution or such
other time as the Secretary may by regu-
lations prescribe. Section 1.417(e)–
1(d)(3) of the Income Tax Regulations
provides that the applicable interest rate
for a month is the annual interest rate on
30-year Treasury securities as specified
by the Commissioner for that month in
revenue rulings, notices or other guidance
published in the Internal Revenue Bulle-
tin.
The rate of interest on 30-year Trea-
sury Securities for June 2002 is 5.52 per-
cent. Pursuant to Notice 2002–26,
2002–15 I.R.B. 743, the Service has
determined this rate as the monthly aver-
age of the daily determination of yield on
the 30-year Treasury bond maturing in
February 2031.
Section 405 of the Job Creation and
Worker Assistance Act of 2002 amended
§412(l)(7)(C) of the Code to provide that
2002–29 I.R.B.130July 22, 2002

for plan years beginning in 2002 and
2003 the permissible range is extended to
120 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
MonthYear
Weighted
Average
90% to 110%
Permissible
Range
90% to 120%
Permissible
Range
July20025.675.10 to 6.235.10 to 6.80
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities
Division. For further information regard-
ing this notice, please contact the
Employee Plans’taxpayer assistance tele-
phone service at 1–877–829–5500 (a toll-
free number), between the hours of 8:00
a.m. and 6:30 p.m. Eastern time, Monday
through Friday. Mr. Newman may be
reached at 1–202–283–9888 (not a toll-
free number).
Bonds for Solid Waste
Disposal Facilities
Notice 2002–51
PURPOSE
The Treasury Department and the
Internal Revenue Service have received
inquiries regarding the application of sec-
tion 142(a)(6) of the Internal Revenue
Code to recycling facilities. As part of the
Priority Guidance Plan for the period July
1, 2002 through June 30, 2003, Treasury
and the IRS intend to undertake a guid-
ance project to address the application of
section 142(a)(6) to recycling facilities.
Accordingly, Treasury and the IRS are
soliciting public comment on the issue.
BACKGROUND
Generally, interest on a state or local
bond is excluded from gross income
under section 103. However, section
103(b) provides that the exclusion does
not apply to a private activity bond unless
the bond is a qualified bond. Section
141(e) defines“qualified bond”to
include an exempt facility bond that
meets certain requirements. Section
142(a) lists the categories of exempt facil-
ity bonds, which include bonds for solid
waste disposal facilities under section
142(a)(6).
Section 142(a)(6) was added to the
Code as part of the Tax Reform Act of
1986, P.L. 99–514; 100 Stat. 2606;
1986–3 C.B. (Vol. 1) 523. However,
exempt activity financing for solid waste
disposal facilities was not first introduced
in the 1986 Act. Rather, it was also per-
mitted under section 103(b)(4)(E) of the
Internal Revenue Code of 1954. Guidance
has been issued under section
103(b)(4)(E) that is applicable to section
142(a)(6). The Conference Report to the
1986 Act provides that“[t]he conference
agreement allows exempt-facility bonds
to be issued to finance solid waste dis-
posal facilities, defined generally as under
present law.”Conf. Rpt. 99–841 (Vol. II),
at II–704; 1986–3 C.B. (Vol. 4) 704.
Section 1.103–8(f)(2)(ii)(a) of the
regulations defines“solid waste disposal
facilities”as any property or portion
thereof used for the collection, storage,
treatment, utilization, processing, or final
disposal of solid waste. Section 1.103–
8(f)(2)(ii)(b) provides that the term“solid
waste”has the same meaning as in former
section 203(4) of the Solid Waste Dis-
posal Act (42 U.S.C.§3252(4)), as
quoted in the regulations, except that
material will not qualify as solid waste
unless, on the date of issue of the obliga-
tions issued to provide the facility to dis-
pose of the waste material, it is property
that is useless, unused, unwanted, or dis-
carded solid material which has no mar-
ket or other value at the place where it is
located. Thus, where any person is will-
ing to purchase the property, at any price,
the material is not waste. However, if any
person is willing to remove the property
at his own expense but is not willing to
purchase it at any price, the material is
waste.
Former section 203(4) of the Solid
WasteDisposal Act,asquotedin
§1.103–8(f)(2)(ii)(b), provides that,
The term“solid waste”means gar-
bage, refuse, and other discarded
solid materials, including solid-
waste materials resulting from
industrial, commercial, and agricul-
tural operations, and from commu-
nity activities, but does not include
solids or dissolved material in
domestic sewage or other signifi-
cant pollutants in water resources,
such as silt, dissolved or suspended
solids in industrial waste water
effluents, dissolved materials in irri-
gation return flows or other com-
mon water pollutants.
Section 1.103–8(f)(2)(ii)(c) states that
a facility that disposes of solid waste by
reconstituting, converting, or otherwise
recycling it into material that is not waste
shall also qualify as a solid waste disposal
facility if solid waste constitutes at least
65 percent, by weight or volume, of the
total materials introduced into the recy-
cling process. Such a recycling facility
shall not fail to qualify as a solid waste
disposal facility solely because it operates
at a profit.
Section 17.1(a) of the Temporary regu-
lations provides that, in the case of prop-
erty that has both a solid waste disposal
function and a function other than the dis-
posal of solid waste, only the portion of
the cost of the property allocable to the
function of solid waste disposal is taken
into account as an expenditure to provide
solid waste disposal facilities. However, a
facility that otherwise qualifies as a solid
waste disposal facility will not be treated
as having a function other than solid
July 22, 20021312002–29 I.R.B.

waste disposal merely because material or
heat which has utility or value is recov-
ered or results from the disposal process.
Where materials or heat are recovered,
the waste disposal function includes the
processing of those materials or heat that
occurs in order to put them into the form
in which the materials or heat are in fact
sold or used, but does not include further
processing which converts the materials
or heat into other products.
Section 17.1(c) of the Temporary regu-
lations contains an example in which
Company A proposed to build a recycling
facility that would process discarded
waste by separating out metals, glass, and
similar materials. As separated, some of
the items were commercially saleable.
However, A did not intend to sell the met-
als and glass until the metals were further
separated, sorted, sized and cleaned and
the glass was pulverized. The metals and
pulverized glass would then be sold to
commercial users. The example con-
cludes that the waste disposal function
includes such processing of the metals
and glass, but does not include further
processing.
The example further provides that the
remaining waste was burned and the heat
produced was used to make steam. Com-
pany B, which operated an adjacent gen-
erating facility, could use steam for
power. B needed steam with certain char-
acteristics and as a result, certain of A’s
equipment was more costly than it would
have been to produce steam for some
other uses. The example concludes that
the disposal function includes the equip-
ment actually used to put the heat into the
form in which it was sold. If A con-
structed pipes to carry the steam to B’s
facility, the pipes would not be included
in the solid waste disposal function. Simi-
larly, if A installed generating equipment
and used the steam to generate electricity,
the disposal function would not include
the generating equipment.
In Revenue Ruling 72–190, 1972–1
C.B. 29, bonds financed facilities leased
to a private corporation. The facilities
reconstituted discarded solid materials
from a manufacturing process so that the
materials could be reintroduced into a
manufacturing process. The corporation
had previously discarded the materials
resulting from its manufacturing process
because they could not be reintroduced
into its production process or sold for use
by someone else. Thus, at the time the
facilities were constructed, the discarded
materials were of no value to the corpora-
tion at the place where they were dis-
carded. The ruling concludes that the
facilities are solid waste disposal facili-
ties.
In Revenue Ruling 75–184, 1975–1
C.B. 41, bonds financed facilities leased
to a private person, P, that used the facili-
ties to recycle used corrugated containers
into corrugated paperboard. To provide
the raw material needed for the opera-
tions, P entered into a ten-year contract
with an unrelated corporation, M. M col-
lected and sorted discarded corrugated
containers from the refuse stream to meet
its obligations under the contract with P,
which included baling and loading for
transportation. The price P paid to M con-
sisted of a specified amount per ton for
processing plus an additional specified
amount per ton for the containers, F.O.B.,
at M’s location. The ruling concludes that
the containers were not solid waste
because they had value at M’s location
and P was willing to purchase them at a
stated price.
In Revenue Ruling 76–222, 1976–1
C.B. 26, bonds financed facilities leased
to a private person, X, that used the facili-
ties for collecting and processing garbage
into fuel for subsequent sale to Y, a pub-
lic utility. X received the garbage from
garbage collectors at collection stations.
X did not pay for the garbage; rather, it
received a fee from the garbage collectors
for the privilege of dumping their gar-
bage. The garbage was then packed into
containers for transportation by truck or
train to X’s processing station adjacent to
Y’s utility plant. At the processing sta-
tion, the garbage was reduced to a small,
uniform size and classified into noncom-
bustible and combustible fractions. Non-
combustible fractions were sold to scrap
dealers or placed in a landfill. The com-
bustible fraction was fed to a surge bin
from which it was blown into boilers at
Y’s utility plant. Y paid X a stipulated
amount per ton for the combustible frac-
tions based on their BTU value. The rul-
ing concludes that the facilities, other
than the equipment used to transport the
fuel from the surge bin to the boilers, are
solid waste disposal facilities.
In Revenue Ruling 80–197, 1980–2
C.B. 44, bonds financed facilities
acquired by the taxpayer, a private bever-
age manufacturer. The taxpayer used the
facilities to package beverages in reusable
containers. State law prohibited the sale
of beverages in non-returnable containers
and required beverage purchasers to pay a
deposit that was refunded on return of the
beverage containers. The taxpayer deter-
mined that it was less costly to use reus-
able containers than it was to use new
containers. The ruling notes that if a reus-
able container is not returned, but is dis-
carded, it could potentially become solid
waste. However, once the reusable con-
tainer is returned to the taxpayer and the
deposit is refunded to the retailer, the
reusable container is not useless,
unwanted, or discarded solid material.
The ruling concludes that even though a
market for used containers did not exist
by virtue of the mandatory deposit, reus-
able containers had value to the taxpayer
because reuse of these containers was less
costly than the purchase of new contain-
ers, and thus the containers were not solid
waste.
REQUEST FOR PUBLIC COMMENTS
Treasury and the IRS are soliciting
public comments regarding the applica-
tion of section 142(a)(6) to recycling
facilities. Treasury and the IRS also invite
comments on any other issues concerning
the application of that Code provision.
Taxpayers may submit comments in
writing to:
Internal Revenue Service
Attn: CC:CORP:R
(Notice 2002–51,
Room 5226)
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Alternatively, taxpayers may submit
comments electronically at:
http://www.irs.ustreas.gov/prod/
cover.html(the IRS Internet Site)
All comments should be received by
October 21, 2002. The comments submit-
ted will be available for public inspection
and copying.
2002–29 I.R.B.132July 22, 2002

DRAFTING INFORMATION
The principal authors of this notice are
Michael Brewer and Rebecca Harrigal of
the Office of the Assistant Chief Counsel
(CC:TEGE:EOEG). For further informa-
tion regarding this notice, contact Mr.
Brewer at (202) 622–3980 (not a toll-free
call).
26 CFR 601.202: Closing agreements.
Rev. Proc. 2002–47
TABLE OF CONTENTS
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01Purpose......................................................................................................................................................................p. 136
.02General principles underlying EPCRS.....................................................................................................................p. 136
.03Overview....................................................................................................................................................................p. 136
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01Effect on programs....................................................................................................................................................p. 137
.02Future enhancements.................................................................................................................................................p. 137
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01Effect of EPCRS on Qualified Plans........................................................................................................................p. 137
.02Effect of EPCRS on 403(b) Plans............................................................................................................................p. 137
.03Effect of EPCRS on SEPs.........................................................................................................................................p. 137
.04Compliance Statement...............................................................................................................................................p. 138
.05Other taxes and penalties.........................................................................................................................................p. 138
.06Reliance.....................................................................................................................................................................p. 138
SECTION 4. PROGRAM ELIGIBILITY
.01Programs for Qualified Plans and 403(b) Plans.....................................................................................................p. 138
.02Eligibility for other arrangements............................................................................................................................p. 138
.03Effect of examination................................................................................................................................................p. 138
.04Favorable Letter requirement...................................................................................................................................p. 138
.05Established practices and procedures......................................................................................................................p. 138
.06Correction by plan amendment.................................................................................................................................p. 138
.07Submission for a determination letter......................................................................................................................p. 138
.08Availability of correction of Employer Eligibility Failure.......................................................................................p. 138
.09Egregious failures......................................................................................................................................................p. 139
.10Diversion or misuse of plan assets...........................................................................................................................p. 139
PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY
SECTION 5. DEFINITIONS
.01Definitions for Qualified Plans...............................................................................................................................p. 139
.02Definitions for 403(b) Plans....................................................................................................................................p. 140
.03Under Examination..................................................................................................................................................p. 141
.04SEP............................................................................................................................................................................p. 141
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY
.01Correction principles; rules of general applicability..............................................................................................p. 141
.02Correction principles.................................................................................................................................................p. 141
.03Correction of an Employer Eligibility Failure (only available under VCP
general procedures, VCT, and VCSEP)....................................................................................................................p. 143
.04Correction by plan amendment.................................................................................................................................p. 143
July 22, 20021332002–29 I.R.B.

.05Special rules relating to Excess Amounts................................................................................................................p. 143
.06Correction under statute or regulations.................................................................................................................. p. 143
.07Matters subject to excise taxes.................................................................................................................................p. 143
.08Correction for SEPs..................................................................................................................................................p. 144
.09Confidentiality and disclosure..................................................................................................................................p. 144
.10No effect on other law............................................................................................................................................. p. 144
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01Requirements............................................................................................................................................................p. 144
.02Factors.......................................................................................................................................................................p. 144
.03Multiple failures....................................................................................................................................................... p. 145
.04Examples....................................................................................................................................................................p. 145
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01Requirements............................................................................................................................................................ p. 145
.02Correction period..................................................................................................................................................... p. 145
.03Correction by plan amendment............................................................................................................................... p. 145
.04Substantial completion of correction. .......................................................................................................................p. 145
.05Examples....................................................................................................................................................................p. 146
PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCP)
SECTION 10. VCP GENERAL PROCEDURES
.01VCP requirements. ................................................................................................................................................... p. 146
.02Identification of failures........................................................................................................................................... p. 146
.03Availability of correction of a terminated plan........................................................................................................p. 146
.04Effect of VCP submission on examination. ..............................................................................................................p. 146
.05No concurrent examination activity. ....................................................................................................................... p. 146
.06Submission of determination letter application for plan amendments. ................................................................. p. 146
.07Processing of submission......................................................................................................................................... p. 146
.08Compliance statement. ............................................................................................................................................. p. 147
.09Effect of compliance statement on examination.......................................................................................................p. 148
.10Processing of determination letter applications not submitted under VCP............................................................p. 148
.11Special rules relating to VCO...................................................................................................................................p. 148
.12Special rules relating to VCS. ..................................................................................................................................p. 148
.13Special rules relating to Anonymous (John Doe) Submission Procedure...............................................................p. 148
.14Special rules relating to VCT. ..................................................................................................................................p. 148
.15Special rules relating to VCGroup. ..........................................................................................................................p. 148
.16Special rules relating to VCSEP...............................................................................................................................p. 149
.17Multiemployer and multiple employer plans............................................................................................................p. 149
SECTION 11. APPLICATION PROCEDURES FOR VCP
.01General rules. ............................................................................................................................................................p. 149
.02Submission requirements. ..........................................................................................................................................p. 149
.03Submission requirements under special procedures.................................................................................................p. 150
.04Required documents. .................................................................................................................................................p. 150
.05Date VCP fee due generally. ....................................................................................................................................p. 150
.06Fee due earlier for VCO, VCS, Anonymous Submission, VCGroup, and VCSEP. ................................................p. 151
.07Signed submission. ....................................................................................................................................................p. 151
.08Power of attorney requirements................................................................................................................................p. 151
.09Penalty of perjury statement. ....................................................................................................................................p. 151
.10Checklist. ...................................................................................................................................................................p. 151
.11Designation. ...............................................................................................................................................................p. 151
.12VCP mailing address.................................................................................................................................................p. 151
.13Maintenance of copies of submissions. ....................................................................................................................p. 151
2002–29 I.R.B.134July 22, 2002

SECTION 12. VCP FEES
.01VCP general procedure compliance fee. ..................................................................................................................p. 151
.02VCO fee. ....................................................................................................................................................................p. 152
.03VCS fee. .....................................................................................................................................................................p. 152
.04Fee for Anonymous Submission................................................................................................................................p. 152
.05VCT fee. .....................................................................................................................................................................p. 152
.06VCGroup fees. ...........................................................................................................................................................p. 153
.07VCSEP fees................................................................................................................................................................p. 153
.08Establishing amount of assets and number of plan participants. ...........................................................................p. 153
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
.01Audit CAP requirements. .........................................................................................................................................p. 153
.02Payment of sanction................................................................................................................................................. p. 153
.03Additional requirements. .......................................................................................................................................... p. 153
.04Failure to reach resolution. ..................................................................................................................................... p. 153
.05Effect of closing agreement. .................................................................................................................................... p. 153
.06Other procedural rules. ........................................................................................................................................... p. 153
Section 14. AUDIT CAP SANCTION
.01Determination of sanction. ...................................................................................................................................... p. 153
.02Factors considered................................................................................................................................................... p. 153
.03Transferred Assets. ................................................................................................................................................... p. 154
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
.01Revenue procedure modified and superseded......................................................................................................... p. 154
SECTION 16. EFFECTIVE DATE
SECTION 17. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
APPENDIX A: OPERATIONAL FAILURES AND CORRECTIONS UNDER VCS
.01General rule. ............................................................................................................................................................ p. 154
.02Failure to properly provide the minimum top-heavy benefit under§416 of the Code to non-key employees.....p. 154
.03Failure to satisfy the ADP test set forth in§401(k)(3), the ACP test set forth in§401(m)(2), or the
multiple use test of§401(m)(9). ............................................................................................................................. p. 154
.04Failure to distribute elective deferrals in excess of the§402(g) limit (in contravention of§401(a)(30)). ....... p. 155
.05Exclusion of an eligible employee from all contributions or accruals under the plan for one or more
plan years. .................................................................................................................................................................p. 155
.06Failure to timely pay the minimum distribution required under§401(a)(9)........................................................ p. 155
.07Failure to obtain participant and/or spousal consent for a distribution subject to the participant and
spousal consent rules under§§401(a)(11), 411(a)(11), and 417.......................................................................... p. 155
.08Failure to satisfy the§415 limits in a defined contribution plan. .........................................................................p. 155
APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES
.01Purpose. .....................................................................................................................................................................p. 156
.02Assumptions for Examples. ...................................................................................................................................... p. 156
.03Section References. .................................................................................................................................................. p. 156
July 22, 20021352002–29 I.R.B.

SECTION 2. CORRECTION METHODS AND EXAMPLES
.01ADP/ACP Failures. ...................................................................................................................................................p. 156
.02Exclusion of Eligible Employees. .............................................................................................................................p. 157
.03Vesting Failures. ........................................................................................................................................................p. 161
.04§415 Failures. ..........................................................................................................................................................p. 161
.05Correction of Other Overpayment Failures. ............................................................................................................p. 164
.06§401(a)(17) Failures. ...............................................................................................................................................p. 164
.07Correction by Amendment Under VCP and SCP....................................................................................................p. 164
SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01Earnings Adjustment Methods. .................................................................................................................................p. 165
.02Examples....................................................................................................................................................................p. 167
APPENDIX C: VCP CHECKLIST ................................................................................................................................................p. 170
PART I. INTRODUCTION TO
EMPLOYEE PLANS COMPLIANCE
RESOLUTION SYSTEM
SECTION 1. PURPOSE AND
OVERVIEW
.01Purpose. This revenue procedure
updates the comprehensive system of cor-
rection programs for sponsors of retire-
ment plans that are intended to satisfy the
requirements of§401(a),§403(a),
§403(b), or§408(k) of the Internal Rev-
enue Code (the“Code”), but that have not
met these requirements for a period of
time. This system, the Employee Plans
ComplianceResolutionSystem
(“EPCRS”), permits plan sponsors to cor-
rect these failures and thereby continue to
provide their employees with retirement
benefits on a tax-favored basis. The com-
ponents of EPCRS are the Self-
Correction Program (“SCP”), the Volun-
tary Correction Program (“VCP”), and
the Audit Closing Agreement Program
(“Audit CAP”).
.02General principles underlying
EPCRS. EPCRS is based on the following
general principles:
•Sponsors and other administrators of
eligible plans should be encouraged
to establish administrative practices
and procedures that ensure that these
plans are operated properly in accor-
dance with the applicable require-
ments of the Code.
•Sponsors and other administrators of
eligible plans should satisfy the appli-
cable plan document requirements of
the Code.
•Plan sponsors and other administra-
tors should make voluntary and
timely correction of any plan failures,
whether involving discrimination in
favor of highly compensated employ-
ees, plan operations, the terms of the
plan document, or adoption of a plan
by an ineligible employer. Timely and
efficient correction protects partici-
pating employees by providing them
with their expected retirement ben-
efits, including favorable tax treat-
ment.
•Voluntary compliance is promoted by
providing for limited fees for volun-
tary corrections approved by the Ser-
vice, thereby reducing employers’
uncertainty regarding their potential
tax liability and participants’potential
tax liability.
•Fees and sanctions should be gradu-
ated in a series of steps so that there
is always an incentive to correct
promptly.
•Sanctions for plan failures identified
on audit should be reasonable in light
of the nature, extent, and severity of
the violation.
•Administration of EPCRS should be
consistent and uniform.
•Plan Sponsors should be able to rely
on the availability of EPCRS in tak-
ing corrective actions to maintain the
tax-favored status of their plans.
.03Overview. EPCRS includes the fol-
lowing basic elements:
•Self-correction (SCP). A plan sponsor
that has established compliance prac-
tices and procedures may, at any time,
correct insignificant Operational Fail-
ures without paying any fee or sanc-
tion. In addition, in the case of a
Qualified Plan that is the subject of a
favorable determination letter from
the Service or in the case of a 403(b)
Plan, the plan sponsor generally may
correct even significant Operational
Failures without payment of any fee
or sanction.
•Voluntary correction with Service
approval (VCP). A plan sponsor, at
any time before audit, may pay a lim-
ited fee and receive the Service’s
approval for correction. Under VCP,
there are special procedures for cer-
tain submissions involving only
Operational Failures (Voluntary Cor-
rection of Operational Failures
(“VCO”)), and for certain submis-
sions in which limited Operational
Failures are being corrected using
standardized corrections (Voluntary
Correction of Operational Failures
Standardized (“VCS”)). VCP also
includes a special procedure that
applies to 403(b) Plans (Voluntary
Correction of Tax-sheltered Annuity
Failures (“VCT”)), a special proce-
dure for anonymous submissions
(“Anonymous Submission Proce-
dure”), a special procedure for group
submissions (Voluntary Correction of
Group Failures (“VCGroup”)), and a
special procedure that applies to SEPs
(Voluntary Correction of SEP Failures
(“VCSEPs”)).
•Correction on audit (Audit CAP).Ifa
failure (other than a failure corrected
through SCP or VCP) is identified on
audit, the plan sponsor may correct
the failure and pay a sanction. The
sanction imposed will bear a reason-
able relationship to the nature, extent
and severity of the failure, taking into
account the extent to which correction
occurred before audit.
2002–29 I.R.B.136July 22, 2002

SECTION 2. EFFECT OF THIS
REVENUE PROCEDURE ON
PROGRAMS
.01Effect on programs. This revenue
procedure modifies and supersedes Rev.
Proc. 2001–17, 2001–1 C.B. 589, which
was the prior consolidated statement of
the correction programs under EPCRS.
The modifications to Rev. Proc. 2001–17
that are reflected in this revenue proce-
dure include:
•extending the duration of the self-
correction period under SCP for sig-
nificant operational compliance fail-
ures where the Plan Sponsor assumes
a plan in connection with a corporate
merger, acquisition, or other transac-
tion. (section 9.02(2))
•extending the Anonymous Submis-
sion Procedure indefinitely. (section
10.13(3))
•expanding the Anonymous Submis-
sion Procedure to permit the submis-
sion of failures listed in Appendix A
and Appendix B. (section 10.13(1))
•expanding the Anonymous Submis-
sion Procedure to VCGroup and
VCSEP submissions. (section
10.13(1))
•expanding the definition of Employer
Eligibility Failure to include the
adoption of a 401(k) plan by any
ineligible employer. (section
5.01(2)(d))
•broadening the VCGroup procedures
to permit eligible organizations to
submit operational and plan document
failures in a single submission. (sec-
tion 10.15(1))
•increasing thede minimisamount
relating to corrective distributions.
(section 6.02(5)(b))
•providing ade minimisrule for cor-
recting certain Overpayments. (sec-
tion 6.02(5)(c))
•clarifying the date by which correc-
tion of a failure related to Transferred
Assets must be completed. (section
12.08)
•clarifying that the correction of fail-
ures in a terminated plan may be
made under VCP. (section 10.03)
•clarifying what items may be
excluded from the initial submission
under the Anonymous Submission
Procedure. (section 10.13(1))
•updating the definition of Favorable
Letter. (section 5.01(4))
•modifying the correction procedure
relating to Excess Amounts under
VCT and overcontributions under
VCSEP. (sections 12.05(3) and
12.07(2))
•clarifying the factors considered
under Audit CAP for determining a
sanction amount. (section 14.02)
•revising the checklist in Appendix C
to include questions relating to Trans-
ferred Assets and the waiver of the
excise tax under§4974. (Appendix C
items 10 and 18)
In addition, the following sections
have been modified for purposes of clari-
fication: sections 4.05, 5.01(8), 5.02(3),
6.02(3), 6.02(5)(d), 6.05(1), 6.05(2)(a)
and (b), 9.05 Example 1, 10.06, 10.09,
10.13(2), 10.15(2), 10.15(3)(b), 11.01,
11.02(11), 11.03(4), 11.04(3), 11.04(4),
11.05, 11.12, 12.01(1), 12.01(3)(a), 12.02,
12.08, 13.02, 14.03, 15, 16, 17, Appendix
A .05, Appendix B 2.01(b)(i) and 2.07(3),
and Appendix C checklist item 26.
.02Future enhancements. (1) It is
expected that the EPCRS revenue proce-
dure will continue to be updated on a
periodic basis, including, as noted above,
further improvements to EPCRS based on
comments previously received. In addi-
tion, the Service and Treasury continue to
invite further comments on how to
improve EPCRS. Comments should be
sent to:
Internal Revenue Service
Attention: T:EP:RA:VC
1111Constitution Avenue, NW
Washington, D.C. 20224
(2) The Service and Treasury are
considering expanding the procedures
under EPCRS and are interested in
receiving comments regarding, among
other things, appropriate correction proce-
dures for failures arising under SIMPLE
IRAs (under§408(p)) and§457(b)
plans. Submissions related to SIMPLE
IRAs are currently being accepted by the
Service on a provisional basis outside of
EPCRS. Submissions relating to§457(b)
eligible governmental plans will be
accepted by the Service on a provisional
basis outside of EPCRS. Submissions
relating to other§457(b) eligible plans
may be accepted outside EPCRS as
Employee Plans develops experience in
the§457 area.
PART II. PROGRAM EFFECT AND
ELIGIBILITY
SECTION 3. EFFECT OF EPCRS;
RELIANCE
.01Effect of EPCRS on Qualified
Plans. For a Qualified Plan, if the eligi-
bility requirements of section 4 are satis-
fied and the Plan Sponsor corrects a
Qualification Failure in accordance with
the applicable requirements of SCP in
section 7, VCP in sections 10 and 11, or
Audit CAP in section 13, the Service will
not treat the Qualified Plan as failing to
meet§401(a). Thus, for example, if the
Plan Sponsor corrects the failures in
accordance with the requirements of this
revenue procedure, the plan will be
treated as a qualified plan for purposes of
applying§3121(a)(5) (FICA taxes) and
§3306(b)(5) (FUTA taxes).
.02Effect of EPCRS on 403(b) Plans.
(1)Income taxes. For a 403(b) Plan, if the
applicable eligibility requirements of sec-
tion 4 are satisfied and the Plan Sponsor
corrects a failure in accordance with the
applicable requirements of SCP in section
7, VCP in sections 10 and 11, or Audit
CAP in section 13, the Service will not
pursue income inclusion for affected par-
ticipants, or liability for income tax with-
holding, on account of the failure. How-
ever, the correction of a failure may result
in income tax consequences to partici-
pants and beneficiaries (for example, par-
ticipants may be required to include in
gross income distributions of Excess
Amounts in the year of distribution).
(2)Excise and employment taxes.
Excise taxes, FICA taxes, and FUTA
taxes (and corresponding withholding
obligations), if applicable, that result
from a failure are not waived merely
because the failure has been corrected.
.03Effect of EPCRS on SEPs. For a
SEP, if the eligibility requirements of sec-
tion 4 are satisfied and the Plan Sponsor
corrects a failure to satisfy the require-
ments of§408(k) in accordance with the
applicable requirements of SCP in section
7 (but only if the corresponding Qualifi-
cation Failure is an insignificant Opera-
tional Failure), VCP in sections 10 and
11, or Audit CAP in section 13, the Ser-
vice will not treat the SEP as failing to
July 22, 20021372002–29 I.R.B.

meet§408(k). Thus, for example, if the
Plan Sponsor corrects the failures in
accordance with the requirements of this
revenue procedure, the SEP will be
treated as satisfying§408(k) for purposes
of applying§3121(a)(5) (FICA taxes)
and§3306(b)(5) (FUTA taxes).
.04Compliance Statement. If a Plan
Sponsor or Eligible Organization receives
a compliance statement under VCP, the
compliance statement is binding upon the
Service and the Plan Sponsor or Eligible
Organization as provided in section
10.08.
.05Other taxes and penalties. See sec-
tion 6.07 for rules relating to other taxes
and penalties.
.06Reliance. Taxpayers may rely on
this revenue procedure, including the
relief described in sections 3.01, 3.02, and
3.03.
SECTION 4. PROGRAM ELIGIBILITY
.01Programs for Qualified Plans and
403(b) Plans. (1)SCP. Qualified Plans
and 403(b) Plans are eligible for SCP.
SCP is available only for Operational
Failures.
(2)VCP. Qualified Plans and
403(b) Plans are eligible for VCP. VCP
provides general procedures for correc-
tion of all Qualification Failures: Opera-
tional, Plan Document, Demographic, and
Employer Eligibility.
(3)Audit CAP. Audit CAP is avail-
able for correction of all failures found on
examination that have not been corrected
in accordance with SCP or VCP.
.02Eligibility for other arrangements.
(1) A SEP that is maintained under a Plan
Document is eligible for SCP with respect
to insignificant failures and is eligible for
VCP (under the special VCSEP proce-
dure). A SEP is also eligible for Audit
CAP. For purposes of EPCRS, a failure to
satisfy§408(k) is treated like the corre-
sponding Qualification Failure. A failure
to satisfy§408(k) includes a failure to
satisfy the 50%-eligible-employees elec-
tion requirement of§408(k)(6)(A)(ii) and
a failure to satisfy the 25-employee limit
of§408(k)(6)(B).
(2) The Service may extend EPCRS
to other arrangements.
.03Effect of examination. If the plan
or Plan Sponsor is Under Examination,
VCP is not available. However, while the
plan or Plan Sponsor is Under Examina-
tion, insignificant Operational Failures
can be corrected under SCP and, if cor-
rection has been substantially completed
before the plan or Plan Sponsor is Under
Examination, significant Operational
Failures can be corrected under SCP.
.04Favorable Letter requirement.
VCO and the provisions of SCP relating
to significant Operational Failures (see
section 9) are available for a Qualified
Plan only if the plan is the subject of a
Favorable Letter.
.05Established practices and proce-
dures. In order to be eligible for SCP, the
Plan Sponsor or administrator of a plan
must have established practices and pro-
cedures (formal or informal) reasonably
designed to promote and facilitate overall
compliance with applicable Code require-
ments. For example, the plan administra-
tor of a Qualified Plan that may be top-
heavy under§416 may include in its plan
operating manual a specific annual step to
determine whether the plan is top-heavy
and, if so, to ensure that the minimum
contribution requirements of the top-
heavy rules are satisfied. A plan docu-
ment alone does not constitute evidence
of established procedures. In order for a
Plan Sponsor or administrator to use SCP,
these established procedures must have
been in place and routinely followed, and
an Operational Failure must have
occurred through an oversight or mistake
in applying them or because of an inad-
equacy in the procedures. In the case of a
failure that relates to Transferred Assets
or to a plan assumed in connection with a
corporate merger, acquisition, or other
similar employer transaction between the
Plan Sponsor and sponsor of the transf-
eror plan or the prior plan sponsor of an
assumed plan, the plan is considered to
have established practices and procedures
if such practices and procedures are in
effect by the end of the first plan year that
begins after the corporate merger, acqui-
sition, or other similar transaction.
.06Correction by plan amendment. (1)
Availability of correction by plan amend-
ment in VCP general procedures. A Plan
Sponsor may use VCP for a Qualified
Plan to correct an Operational Failure by
a plan amendment to conform the terms
of the plan to the plan’s prior operations,
provided that the amendment complies
with the requirements of§401(a), includ-
ing the requirements of§§401(a)(4),
410(b), and 411(d)(6).
(2)Certain correction by plan
amendment permitted in SCP and VCO.
A Plan Sponsor may use SCP or VCO for
a Qualified Plan to correct an Operational
Failure by a plan amendment to conform
the terms of the plan to the plan’s prior
operations only to correct Operational
Failures listed in section 2.07 of Appen-
dix B. These failures must be corrected in
accordance with the correction methods
set forth in section 2.07 of Appendix B.
The amendment must comply with the
requirements of§401(a), including the
requirements of§§401(a)(4), 410(b), and
411(d)(6). SCP and VCO are not other-
wise available for a Plan Sponsor to cor-
rect an Operational Failure by a plan
amendment. Thus, if loans were made to
participants, but the plan document did
not permit loans to be made to partici-
pants, the failure cannot be corrected
under SCP or VCO by retroactively
amending the plan to provide for the
loans. However, if a Plan Sponsor cor-
rects an Operational Failure in accor-
dance with SCP or VCO, it may amend
the plan to the extent necessary to reflect
the corrective action. For example, if the
plan failed to satisfy the average deferral
percentage (“ADP”) test required under
§401(k)(3) and the Plan Sponsor must
make qualified nonelective contributions
not already provided for under the plan,
the plan may be amended to provide for
qualified nonelective contributions. The
issuance of a compliance statement does
not constitute a determination as to the
effect of any plan amendment on the
qualification of the plan.
.07Submission for a determination let-
ter. In a case in which correction of a
Qualification Failure includes correction
of a Plan Document Failure or correction
of an Operational Failure by plan amend-
ment, as permitted under section 4.06,
other than adoption of an amendment des-
ignated by the Service as a model amend-
ment or standardized prototype plan, the
amendment must be submitted to the Ser-
vice for approval using the appropriate
application form (i.e., the Form 5300
series or, if permitted, Form 6406) to
ensure that the amendment satisfies appli-
cable qualification requirements.
.08Availability of correction of
Employer Eligibility Failure. A Plan
2002–29 I.R.B.138July 22, 2002

Sponsor may use VCP general proce-
dures, VCT, or VCSEP to correct an
Employer Eligibility Failure. However,
under sections 4.01, 4.02, and 10, SCP,
VCO, and VCGroup are not available for
a Plan Sponsor to correct an Employer
Eligibility Failure.
.09Egregious failures. SCP, VCO,
VCGroup, and VCSEP are not available
to correct Operational Failures that are
egregious. For example, if an employer
has consistently and improperly covered
only highly compensated employees or if
a contribution to a defined contribution
plan for a highly compensated individual
is several times greater than the dollar
limit set forth in§415, the failure would
be considered egregious. VCP is available
to correct egregious failures; however,
these failures are subject to the fees
described in sections 12.01(4) and
12.05(6).
.10Diversion or misuse of plan assets.
SCP, VCP, and Audit CAP are not avail-
able to correct failures relating to the
diversion or misuse of plan assets.
PART III. DEFINITIONS,
CORRECTION PRINCIPLES, AND
RULES OF GENERAL
APPLICABILITY
SECTION 5. DEFINITIONS
The following definitions apply for
purposes of this revenue procedure:
.01Definitions for Qualified Plans.
The definitions in this section 5.01 apply
to Qualified Plans.
(1)Qualified Plan. The term
“Qualified Plan”means a plan intended to
satisfy the requirements of§401(a) or
§403(a).
(2)Qualification Failure. The term
“Qualification Failure”means any failure
that adversely affects the qualification of
a plan. There are four types of Qualifica-
tion Failures: (a) Plan Document Failures,
(b) Operational Failures, (c) Demographic
Failures, and (d) Employer Eligibility
Failures.
(a)Plan Document Failure. The
term“Plan Document Failure”means a
plan provision (or the absence of a plan
provision) that, on its face, violates the
requirements of§401(a) or§403(a).
Thus, for example, the failure of a plan to
be amended to reflect a new qualification
requirement within the plan’s applicable
remedialamendmentperiodunder
§401(b) is a Plan Document Failure. For
purposes of this revenue procedure, a
Plan Document Failure includes any
Qualification Failure that is a violation of
the requirements of§401(a) or§403(a)
and that is not an Operational Failure,
Demographic Failure, or Employer Eligi-
bility Failure.
(b)Operational Failure. The term
“Operational Failure”means a Qualifica-
tion Failure (other than an Employer Eli-
gibility Failure) that arises solely from the
failure to follow plan provisions. A failure
to follow the terms of the plan providing
for the satisfaction of the requirements of
§401(k) and§401(m) is considered to be
an Operational Failure. A plan does not
have an Operational Failure to the extent
the plan is permitted to be amended retro-
actively pursuant to§401(b) or another
statutory provision to reflect the plan’s
operations. However, if within an appli-
cable remedial amendment period under
§401(b), a plan has been properly
amended for statutory or regulatory
changes and, on or after the later of the
date the amendment is effective or is
adopted, the amended provisions are not
followed, then the plan is considered to
have an Operational Failure.
(c)Demographic Failure. The
term“Demographic Failure”means a
failure to satisfy the requirements of
§401(a)(4),§401(a)(26), or§410(b) that
is not an Operational Failure or an
Employer Eligibility Failure. The correc-
tion of a Demographic Failure generally
requires a corrective amendment to the
plan adding more benefits or increasing
existing benefits (cf.,§1.401(a)(4)–
11(g)).
(d)Employer Eligibility Failure.
The term“Employer Eligibility Failure”
means the adoption of a plan intended to
satisfy the requirements of§401(a) or
§408(k) by an employer that fails to meet
the employer eligibility requirements to
establish a§401(k) or§408(k) plan. An
Employer Eligibility Failure is not a Plan
Document, Operational, or Demographic
Failure.
(3)Excess Amount. The term
“Excess Amount”means (a) an Overpay-
ment, (b) an elective deferral or employee
after-tax contribution returned to satisfy
§415, (c) an elective deferral in excess of
the limitation of§402(g) that is distrib-
uted, (d) an excess contribution or excess
aggregate contribution that is distributed
to satisfy§401(k) or§401(m), (e) an
amount contributed on behalf of an
employee that is in excess of the employ-
ee’s benefit provided under a SEP, (f) an
excess contribution that is distributed to
satisfy§408(k)(6)(A)(iii), (g) an elective
deferral that is distributed to satisfy the
limitation of§401(a)(17), or (h) any
similar amount that is required to be dis-
tributed in order to maintain plan qualifi-
cation.
(4)Favorable Letter. The term
“Favorable Letter”means, in the case of
a Qualified Plan, a current favorable
determination letter for an individually
designed plan (including a volume sub-
mitter plan that is not identical to an
approved volume submitter plan), a cur-
rent favorable opinion letter for a Plan
Sponsor that has adopted a master or pro-
totype plan, (standardized or nonstandard-
ized), or a current favorable advisory let-
ter and certification that the Plan Sponsor
has adopted a plan that is identical to an
approved volume submitter plan. A plan
has a current favorable determination let-
ter, opinion letter, or advisory letter if (a),
(b), (c), (d), (e), (f), (g), or (h) below is
satisfied:
(a) The plan has a favorable deter-
mination letter, opinion letter, or advisory
letter/certification that considers GUST
(GUST is an acronym for the Uruguay
Round Agreements Act (GATT), the Uni-
formed Services Employment and Reem-
ployment Rights Act of 1994 (USERRA),
the Small Business Job Protection Act of
1996 (SBJPA), the Taxpayer Relief Act of
1997 (TRA’97), the Internal Revenue
Service Restructuring and Reform Act of
1998 (RRA’98), and the Community
Renewal Tax Relief Act of 2000 (CRA).)
(b) The plan (i) either has a favor-
able determination letter, opinion letter, or
notification letter for a regional prototype
plan that considers the Tax Reform Act of
1986 (“TRA’86”) or was initially
adopted or effective after December 7,
1994, and, (ii) the Plan Sponsor has by
the later of February 28, 2002, or the last
day of the first plan year beginning on or
after January 1, 2001, either submitted an
application for a determination letter on
GUST, or has adopted or certified that it
intends to adopt a master and prototype
July 22, 20021392002–29 I.R.B.

plan (includes former regional prototype
plans) or volume submitter plan, that has
been submitted for a GUST opinion letter
or advisory letter by December 31, 2000.
(c) The plan has a favorable deter-
mination letter that considers the Tax
Reform Act of 1986 (“TRA’86”)orwas
initially adopted or effective after Decem-
ber 7, 1994, and the plan is a plan directly
affected by the September 11, 2001, ter-
rorist attack on the United States, (see
Rev. Proc. 2001–55, 2001–49 I.R.B. 552)
and the Plan Sponsor has by June 30,
2002, submitted an application for a
determination letter request for GUST.
(d) The plan was timely amended
for TRA’86, the Unemployment Com-
pensation Act of 1992 (“UCA”), and the
Omnibus Budget and Reconciliation Act
of 1993 (“OBRA’93”) and the Plan
Sponsor has submitted an application for
a determination letter on GUST by Sep-
tember 3, 2002, in accordance with the
procedures set forth in Rev. Proc. 2002–
35, 2002–24 I.R.B. 1187.
(e) The plan is initially adopted or
effective after February 28, 2002, and the
Plan Sponsor timely submits an applica-
tion for a determination letter within the
plan’s remedial amendment period under
§401(b).
(f) The plan is a governmental
plan or non-electing church plan
described in Rev. Proc. 99–23, 1999–1
C.B. 920, and has a favorable determina-
tion, opinion, or notification letter that
considers the Tax Equity and Fiscal
Responsibility Act of 1982 (“TEFRA”),
the Deficit Reduction Act of 1984
(“DEFRA”), and the Retirement Equity
Act of 1984 (“REA”), and the§401(b)
remedial amendment period for TRA’86
has not yet expired.
(g) The plan is terminated prior to
the expiration of the applicable GUST
remedialamendmentperiodunder
§401(b) and the plan was amended to
reflect the provisions of GUST.
(h) In the case of a SEP, the term
“Favorable Letter”means (i) a valid
Model Form 5305–SEP or 5305A-SEP
adopted by an employer in accordance
with the instructions on the applicable
Form, (ii) a current favorable opinion let-
ter for a Plan Sponsor that has adopted a
prototype SEP which has been amended
in accordance with procedures set forth in
Rev. Proc. 94–13, 1994–1 C.B. 566, to
take into account any applicable changes
in the law since the issuance of the opin-
ion letter, or (iii) in the case of an indi-
vidually designed SEP, a private letter
ruling that has been issued for the SEP.
(5)Maximum Payment Amount.
The term“Maximum Payment Amount”
means a monetary amount that is approxi-
mately equal to the tax the Service could
collect upon plan disqualification and is
the sum for the open taxable years of the:
(a) tax on the trust (Form 1041),
(b) additional income tax resulting
from the loss of employer deductions for
plan contributions (and any interest or
penalties applicable to the Plan Sponsor’s
return), and
(c) additional income tax resulting
from income inclusion for participants in
the plan (Form 1040).
(6)Overpayment. The term“Over-
payment”means a distribution to an
employee or beneficiary that exceeds the
employee’s or beneficiary’s benefit under
the terms of the plan because of a failure
to comply with plan terms that implement
§401(a)(17),§401(m) (but only with
respect to the forfeiture of nonvested
matching contributions that are excess
aggregate contributions),§411(a)(3)(G),
or§415. An Overpayment does not
include a distribution of any Excess
Amount described in section 5.01(3)(b)
through (h).
(7)Plan Sponsor. The term“Plan
Sponsor”means the employer that estab-
lishes or maintains a qualified retirement
plan for its employees.
(8)Transferred Assets. The term
“Transferred Assets”means plan assets
that were received, in connection with a
corporate merger, acquisition or other
similar employer transaction, by the plan
in a transfer (including a merger or con-
solidation of plan assets) under§414(l)
from a plan sponsored by an employer
that was not a member of the same con-
trolled group as the Plan Sponsor prior to
the corporate merger, acquisition, or other
similar employer transaction. If a transfer
of plan assets related to the same
employer transaction is accomplished
through several transfers, then the date of
the transfer is the date of the first transfer.
.02Definitions for 403(b) Plans. The
definitions in this section 5.02 apply to
403(b) Plans.
(1)403(b) Plan. The term“403(b)
Plan”means a plan or program intended
to satisfy the requirements of§403(b).
(2)403(b) Failure. A 403(b) Failure
is any Operational, Demographic, or
Employer Eligibility Failure as defined
below.
(a)Operational Failure. The term
“Operational Failure”means any of the
following:
(i) A failure to satisfy the
requirements of§403(b)(12)(A)(ii)
(relating to the availability of salary
reduction contributions);
(ii) A failure to satisfy the
requirements of§401(m) (as applied to
403(b) Plans pursuant to§403(b)(12)
(A)(i));
(iii) A failure to satisfy the
requirements of§401(a)(17) (as applied
to 403(b) Plans pursuant to§403(b)(12)
(A)(i));
(iv) A failure to satisfy the dis-
tribution restrictions of§403(b)(7) or
§403(b)(11);
(v) A failure to satisfy the inci-
dental death benefit rules of§403(b)(10);
(vi) A failure to pay minimum
required distributions under§403(b)(10);
(vii) A failure to give employ-
ees the right to elect a direct rollover
under§403(b)(10), including the failure
to give meaningful notice of such right;
(viii) A failure of the annuity
contract or custodial agreement to pro-
vide participants with a right to elect a
direct rollover under§§403(b)(10) and
401(a)(31);
(ix) A failure to satisfy the limit
on elective deferrals under§403(b)
(1)(E);
(x) A failure of the annuity
contract or custodial agreement to pro-
vide the limit on elective deferrals under
§§403(b)(1)(E) and 401(a)(30);
(xi) A failure involving contri-
butions or allocations of Excess Amounts;
or
(xii) Any other failure to satisfy
applicable requirements under§403(b)
that (A) results in the loss of§403(b)
status for the plan or the loss of§403(b)
status for one or more custodial
account(s) or annuity contract(s) under
the plan and (B) is not a Demographic
Failure, an Employer Eligibility Failure,
or a failure related to the purchase of
2002–29 I.R.B.140July 22, 2002

annuity contracts, or contributions to cus-
todial accounts, on behalf of individuals
who are not employees of the employer.
(b)Demographic Failure. The
term“Demographic Failure”means a
failure to satisfy the requirements of
§401(a)(4),§401(a)(26), or§410(b) (as
applied to 403(b) Plans pursuant to
§403(b)(12)(A)(i)).
(c)Employer Eligibility Failure.
The term“Employer Eligibility Failure”
means any of the following:
(i) The adoption of a plan
intended to satisfy the requirements of
§403(b) by an employer that is not a tax-
exemptorganizationdescribedin
§501(c)(3) or a public educational orga-
nization described in§170(b)(1)(A)(ii);
(ii) A failure to satisfy the non-
transferability requirement of§401(g);
(iii) A failure to initially estab-
lish or maintain a custodial account as
required by§403(b)(7); or
(iv) A failure to purchase (ini-
tially or subsequently) either an annuity
contract from an insurance company
(unless grandfathered under Rev. Rul.
82–102, 1982–1 C.B. 62) or a custodial
account from a regulated investment
company utilizing a bank or an approved
non-bank trustee/custodian.
(3)Excess Amount. The term
“Excess Amount”means any contribu-
tions or allocations that are in excess of
the limits under§415 for the year (and
for years prior to 1/1/02, the§403(b)(2)
exclusion allowance limit for the year).
(4)Plan Sponsor. The term“Plan
Sponsor”means the employer that offers
a 403(b) Plan to its employees.
(5)Total Sanction Amount. The
term“Total Sanction Amount”means a
monetary amount that is approximately
equal to the income tax the Service could
collect as a result of the failure.
.03Under Examination. (1) The term
“Under Examination”means: (a) a plan
that is under an Employee Plans examina-
tion (that is, an examination of a Form
5500 series or other Employee Plans
examination), or (b) a Plan Sponsor that
is under an Exempt Organizations exami-
nation (that is, an examination of a Form
990 series or other Exempt Organizations
examination).
(2) A plan that is under an
Employee Plans examination includes
any plan for which the Plan Sponsor, or a
representative, has received verbal or
written notification from Employee Plans
of an impending Employee Plans exami-
nation, or of an impending referral for an
Employee Plans examination, and also
includes any plan that has been under an
Employee Plans examination and is now
in Appeals or in litigation for issues
raised in an Employee Plans examination.
A plan is considered to be Under Exami-
nation if it is aggregated for purposes of
satisfying the nondiscrimination require-
ments of§401(a)(4), the minimum par-
ticipation requirements of§401(a)(26),
the minimum coverage requirements of
§410(b),ortherequirementsof
§403(b)(12), with a plan(s) that is Under
Examination. In addition, a plan is con-
sidered to be Under Examination with
respect to a failure of a qualification
requirement (other than those described
in the preceding sentence) if the plan is
aggregated with another plan for purposes
of satisfying that qualification require-
ment (for example,§402(g),§415, or
§416) and that other plan is Under
Examination. For example, assume Plan
A has a§415 failure, Plan A is aggre-
gated with Plan B only for purposes of
§415, and Plan B is Under Examination.
In this case, Plan A is considered to be
Under Examination with respect to the
§415 failure. However, if Plan A has a
failure relating to the spousal consent
rules under§417 or the vesting rules of
§411, Plan A is not considered to be
Under Examination with respect to the
§417 or§411 failure. For purposes of
this revenue procedure, the term aggrega-
tion does not include consideration of
benefits provided by various plans for
purposes of the average benefits test set
forth in§410(b)(2).
(3) An Employee Plans examination
also includes a case in which a Plan
Sponsor has submitted a Form 5310 and
the Employee Plans agent notifies the
Plan Sponsor, or a representative, of pos-
sible Qualification Failures, whether or
not the Plan Sponsor is officially notified
of an“examination.”This would include
a case where, for example, a Plan Spon-
sor has applied for a determination letter
on plan termination, and an Employee
Plans agent notifies the Plan Sponsor that
there are partial termination concerns.
(4) A Plan Sponsor that is under an
Exempt Organizations examination
includes any Plan Sponsor that has
received (or whose representative has
received) verbal or written notification
from Exempt Organizations of an
impending Exempt Organizations exami-
nation or of an impending referral for an
Exempt Organizations examination and
also includes any Plan Sponsor that has
been under an Exempt Organizations
examination and is now in Appeals or in
litigation for issues raised in an Exempt
Organizations examination.
.04SEP. The term“SEP”means a plan
intended to satisfy the requirements of
§408(k). For purposes of this revenue
procedure, the term SEP also includes a
salary reduction SEP (“SARSEP”)
described in§408(k)(6), when appli-
cable.
SECTION 6. CORRECTION
PRINCIPLES AND RULES OF
GENERAL APPLICABILITY
.01Correction principles; rules of
general applicability. The general correc-
tion principles in section 6.02 and rules of
general applicability in sections 6.03
through 6.10 apply for purposes of this
revenue procedure.
.02Correction principles. Generally, a
failure is not corrected unless full correc-
tion is made with respect to all partici-
pants and beneficiaries, and for all tax-
able years (whether or not the taxable
year is closed). Even if correction is made
for a closed taxable year, the tax liability
associated with that year will not be rede-
termined because of the correction. In the
case of a Qualified Plan with an Opera-
tional Failure, correction is determined
taking into account the terms of the plan
at the time of the failure. Correction
should be accomplished taking into
account the following principles:
(1)Restoration of benefits. The cor-
rection method should restore the plan to
the position it would have been in had the
failure not occurred, including restoration
of current and former participants and
beneficiaries to the benefits and rights
they would have had if the failure had not
occurred.
(2)Reasonable and appropriate
correction. The correction should be rea-
sonable and appropriate for the failure.
Depending on the nature of the failure,
there may be more than one reasonable
and appropriate correction for the failure.
July 22, 20021412002–29 I.R.B.

For Qualified Plans, any correction
method permitted under Appendix A or
Appendix B is deemed to be a reasonable
and appropriate method of correcting the
related Qualification Failure. Any correc-
tion method permitted under Appendix A
applicable to a 403(b) Plan is deemed to
be a reasonable and appropriate method
of correcting the related 403(b) Failure.
Whether any other particular correction
method is reasonable and appropriate is
determined taking into account the appli-
cable facts and circumstances and the fol-
lowing principles:
(a) The correction method should,
to the extent possible, resemble one
already provided for in the Code, regula-
tions thereunder, or other guidance of
general applicability. For example, for
Qualified Plans, the defined contribution
plan correction methods set forth in
§1.415–6(b)(6) would be the typical
means of correcting a failure under§415.
Likewise, the correction method set forth
in§1.402(g)–1(e)(2) would be the typical
means of correcting a failure under
§402(g).
(b) The correction method for fail-
ures relating to nondiscrimination should
provide benefits for nonhighly compen-
sated employees. For example, for Quali-
fied Plans, the correction method set forth
in§1.401(a)(4)–11(g) (rather than meth-
ods making use of the special testing pro-
visions set forth in§1.401(a)(4)–8or
§1.401(a)(4)–9) would be the typical
means of correcting a failure to satisfy
nondiscrimination requirements. Simi-
larly, the correction of a failure to satisfy
therequirementsof§401(k)(3),
§401(m)(2), or§401(m)(9) (relating to
nondiscrimination), solely by distributing
excess amounts to highly compensated
employees would not be the typical
means of correcting such a failure.
(c) The correction method should
keep plan assets in the plan, except to the
extent the Code, regulations, or other
guidance of general applicability provide
for correction by distribution to partici-
pants or beneficiaries or return of assets
to the employer or Plan Sponsor. For
example, if an excess allocation (not in
excess of the§415 limits) made under a
Qualified Plan was made for a participant
under a plan (other than a cash or
deferred arrangement), the excess should
be reallocated to other participants or,
depending on the facts and circumstances,
used to reduce future employer contribu-
tions.
(d) The correction method should
not violate another applicable specific
requirement of§401(a) or§403(b) (for
example,§401(a)(4),§411(d)(6), or
§403(b)(12), as applicable), or§408(k)
for SEPs. If an additional failure is cre-
ated as a result of the use of a correction
method in this revenue procedure, then
that failure also must be corrected in con-
junction with the use of that correction
method and in accordance with the
requirements of this revenue procedure.
(3)Consistency Requirement. Gen-
erally, where more than one correction
method is available to correct a type of
Operational Failure for a plan year (or
where there are alternative ways to apply
a correction method), the correction
method (or one of the alternative ways to
apply the correction method) should be
applied consistently in correcting all
Operational Failures of that type for that
plan year. Similarly, earnings adjustment
methods generally should be applied con-
sistently with respect to corrective contri-
butions or allocations for a particular type
of Operational Failure for a plan year. In
the case of a VCGroup submission, the
consistency requirement applies on a plan
by plan basis.
(4)Principles regarding corrective
allocations and corrective distributions.
The following principles apply where an
appropriate correction method includes
the use of corrective allocations or correc-
tive distributions:
(a) Corrective allocations under a
defined contribution plan should be based
upon the terms of the plan and other
applicable information at the time of the
failure (including the compensation that
would have been used under the plan for
the period with respect to which a correc-
tive allocation is being made) and should
be adjusted for earnings (including
losses) and forfeitures that would have
been allocated to the participant’s account
if the failure had not occurred. The cor-
rective allocation need not be adjusted for
losses. See section 3 of Appendix B for
additional information on calculation of
earnings for corrective allocations.
(b) A corrective allocation to a
participant’s account because of a failure
to make a required allocation in a prior
limitation year will not be considered an
annual addition with respect to the par-
ticipant for the limitation year in which
the correction is made, but will be consid-
ered an annual addition for the limitation
year to which the corrective allocation
relates. However, the normal rules of
§404, regarding deductions, apply.
(c) Corrective allocations should
come only from employer contributions
(including forfeitures if the plan permits
their use to reduce employer contribu-
tions).
(d) In the case of a defined benefit
plan, a corrective distribution for an indi-
vidual should be increased to take into
account the delayed payment, consistent
with the plan’s actuarial adjustments.
(5)Special exceptions to full cor-
rection. In general, a failure must be fully
corrected. Although the mere fact that
correction is inconvenient or burdensome
is not enough to relieve a Plan Sponsor of
the need to make full correction, full cor-
rection may not be required in certain
situations because it is unreasonable or
not feasible. Even in these situations, the
correction method adopted must be one
that does not have significant adverse
effects on participants and beneficiaries
or the plan, and that does not discriminate
significantly in favor of highly compen-
sated employees. The exceptions
described below specify those situations
in which full correction is not required.
(a)Reasonable estimates.Ifitis
not possible to make a precise calcula-
tion, or the probable difference between
the approximate and the precise restora-
tion of a participant’s benefits is insignifi-
cant and the administrative cost of deter-
mining precise restoration would
significantly exceed the probable differ-
ence, reasonable estimates may be used in
calculating appropriate correction.
(b)Delivery of small benefits.If
the total corrective distribution due a par-
ticipant or beneficiary is $50 or less, the
Plan Sponsor is not required to make the
corrective distribution if the reasonable
direct costs of processing and delivering
the distribution to the participant or ben-
eficiary would exceed the amount of the
distribution.
(c)Recovery of small Overpay-
ments. Generally, for a submission under
VCP, if the total amount of an Overpay-
ment made to a participant or beneficiary
2002–29 I.R.B.142July 22, 2002

is $100 or less, the Plan Sponsor is not
required to seek the return of the Over-
payment from the participant or benefi-
ciary.
(d)Locating lost participants.
Reasonable actions must be taken to find
all current and former participants and
beneficiaries to whom additional benefits
are due, but who have not been located
after a mailing to the last known address.
In general, such actions include use of the
Internal Revenue Service Letter Forward-
ing Program (see Rev. Proc. 94–22,
1994–1 C.B. 608) or the Social Security
Administration Employer Reporting Ser-
vice. A plan will not be considered to
have failed to correct a failure due to the
inability to locate an individual if either
of these programs is used; provided that,
if the individual is later located, the addi-
tional benefits must be provided to the
individual at that time.
(6)Reporting. Any distributions
from the plan should be properly
reported.
.03Correction of an Employer Eligi-
bility Failure (only available under VCP
general procedures, VCT, and VCSEP).
(1) The permitted correction of an
Employer Eligibility Failure is the cessa-
tion of all contributions (including salary
reduction and after-tax contributions)
beginning no later than the date the appli-
cation under VCP is filed. Pursuant to
VCP correction, the assets in such a plan
are to remain in the trust, annuity con-
tract, or custodial account and are to be
distributed no earlier than the occurrence
of one of the applicable distribution
events,e.g., for 403(b) Plans, the events
described in§403(b)(7) (to the extent the
assets are held in custodial accounts) or
§403(b)(11) (for those assets invested in
annuity contracts that would be subject to
§403(b)(11) restrictions if the employer
were eligible). A Plan that is corrected
through VCP will be treated as subject to
all of the requirements and provisions of
§401(a) for a Qualified Plan,§403(b) for
a 403(b) Plan, and§408(k) for a SEP
(including Code provisions relating to
rollovers).
(2) Cessation of contributions is not
required if continuation of contributions
would not be an Employer Eligibility
Failure (for example, a tax-exempt
employer may maintain a§401(k) plan
after 1996).
(3) Because a plan with an
Employer Eligibility Failure will be
treated as subject to all of the applicable
Code qualification requirements, the Plan
Sponsor must also correct all other fail-
ures in accordance with this revenue pro-
cedure.
.04Correction by plan amendment.In
any case in which correction of a Quali-
fied Plan failure includes correction of a
Plan Document Failure or correction of
an Operational Failure by plan amend-
ment as permitted under section 4.06,
other than adoption of a model amend-
ment or a standardized prototype plan, the
amendment must be submitted to the Ser-
vice for approval under the appropriate
application form (i.e., Form 5300 series
or Form 6406) to ensure that the amend-
ment satisfies applicable qualification
requirements.
.05Special rules relating to Excess
Amounts. (1)Treatment of Excess
Amounts under Qualified Plans. A distri-
bution of an Excess Amount is not eli-
gible for the favorable tax treatment
accorded to distributions from Qualified
Plans (such as eligibility for rollover
under§402(c)). To the extent that a cur-
rent or prior distribution was a distribu-
tion of an Excess Amount, distribution of
that Excess Amount is not an eligible roll-
over distribution. Thus, for example, if
such a distribution was contributed to an
individual retirement arrangement
(“IRA”), the contribution is not a valid
rollover contribution for purposes of
determining the amount of excess contri-
butions (within the meaning of§4973) to
the individual’s IRA. A distribution of an
Excess Amount is generally treated in the
manner described in section 3 of Rev.
Proc. 92–93, 1992–2 C.B. 505, relating to
the corrective disbursement of elective
deferrals. The distribution must be
reported on Forms 1099–R for the year of
distribution with respect to each partici-
pant or beneficiary receiving such a dis-
tribution. Where an Excess Amount has
been or is being distributed, the Plan
Sponsor must notify the recipient that (a)
an Excess Amount has been or will be
distributed and (b) an Excess Amount is
not eligible for favorable tax treatment
accorded to distributions from Qualified
Plans (and, specifically, is not eligible for
tax-free rollover).
(2)Treatment of Excess Amounts
under 403(b) Plans. (a)Distribution of
Excess Amounts. Excess Amounts for a
year, adjusted for earnings through the
date of distribution, must be distributed to
affected participants and beneficiaries and
are includible in their gross income in the
year of distribution. The distribution of
Excess Amounts is not an eligible roll-
over distribution within the meaning of
§403(b)(8). A distribution of Excess
Amounts is generally treated in the man-
ner described in section 3 of Rev. Proc.
92–93 relating to the corrective disburse-
ment of elective deferrals. The distribu-
tion must be reported on Forms 1099–R
for the year of distribution with respect to
each participant or beneficiary receiving
such a distribution. In addition, the Plan
Sponsor must inform affected participants
and beneficiaries that the distribution of
Excess Amounts is not eligible for roll-
over.
(b)Retention of Excess Amounts.
Under VCT and Audit CAP, Excess
Amounts will be treated as corrected
(even though the Excess Amounts are
retained in the 403(b) Plan) if the follow-
ing requirements are satisfied. Excess
Amounts arising from a§415 failure,
adjusted for earnings through the date of
correction, must reduce affected partici-
pants’applicable§415 limit for the year
following the year of correction (or for
the year of correction if the Plan Sponsor
so chooses), and subsequent years, until
the excess is eliminated.
.06Correction under statute or regula-
tions. Generally, none of the correction
programs are available to correct failures
that can be corrected under the Code and
related regulations. For example, as a
general rule, a Plan Document Failure
that is a disqualifying provision for which
the remedial amendment period under
§401(b) has not expired can be corrected
by operation of the Code through retroac-
tive remedial amendment.
.07Matters subject to excise taxes. (1)
Except as provided in paragraph (3) of
this subsection, excise taxes and addi-
tional taxes, to the extent applicable, are
not waived merely because the underly-
ing failure has been corrected or because
the taxes result from the correction. Thus,
for example, the excise tax on certain
excess contributions under§4979 is not
waived under these correction programs.
July 22, 20021432002–29 I.R.B.

(2) Except as provided in paragraph
(3) of this section, the correction pro-
grams are not available for events for
which the Code provides tax conse-
quences other than plan disqualification
(such as the imposition of an excise tax or
additional income tax). For example,
funding deficiencies (failures to make the
required contributions to a plan subject to
§412), prohibited transactions, and fail-
ures to file the Form 5500 cannot be cor-
rected under the correction programs.
However, if the event is also an Opera-
tional Failure (for example, if the terms
of the plan document relating to plan
loans to participants were not followed
and loans made under the plan did not
satisfy§72(p)(2)), the correction pro-
grams will be available to correct the
Operational Failure, even though the
excise or income taxes generally still will
apply.
(3) As part of VCP, if the failure
involves the failure to satisfy the mini-
mum required distribution requirements
of§401(a)(9), in appropriate cases, the
Service will waive the excise tax under
§4974 applicable to plan participants.
The waiver will be included in the com-
pliance statement. The Plan Sponsor, as
part of the submission, must request the
waiver and in cases where the participant
subject to the excise tax is an owner-
employee, as defined in§401(c)(3), or a
10 percent owner of a corporation, the
Plan Sponsor must also provide an expla-
nation supporting the request.
.08Correction for SEPs. (1)Correc-
tion for SEPs generally. Generally, the
correction for a SEP is expected to be
similar to the correction required for a
Qualified Plan with a similar Qualifica-
tion Failure.
(2)Special correction for SEPs.
Under VCSEP, in any case in which cor-
rection under section 6.08(1) is not fea-
sible for a SEP or in any other case deter-
mined by the Service in its discretion
(including failures relating to§§402(g),
415, and 401(a)(17), failures relating to
deferral percentages, discontinuance of
contributions to a SARSEP, and retention
of overcontributions for cases in which
there has been no violation of a statutory
limitation), the Service may provide for a
different correction. See section 12.07 for
a special fee that may apply in such a
case.
(3)Correction of failure to satisfy
deferral percentage test. If the failure
involves a violation of the deferral per-
centage test under§408(k)(6)(A)(iii)
applicable to a SARSEP, there are several
methods to correct the failure, similar to
the methods used in VCS and VCO. This
failure may be corrected in one of the fol-
lowing ways:
(a) The Plan Sponsor may make
contributions that are 100% vested to all
eligible nonhighly compensated employ-
ees (to the extent permitted by§415)
necessary to raise the deferral percentage
needed to pass the test. This amount may
be calculated as either the same percent-
age of compensation or the same flat dol-
lar amount (regardless of the terms of the
SEP).
(b) The Plan Sponsor may effect
distribution of excess contributions,
adjusted for earnings through the date of
correction, to highly compensated
employees to correct the failure. The Plan
Sponsor must also contribute to the SEP
an amount equal to the total amount dis-
tributed. This amount must be allocated
to (i) current employees who were non-
highly compensated employees in the
year of the failure, (ii) current nonhighly
compensated employees who were non-
highly compensated employees in the
year of the failure, or (iii) employees
(both current and former) who were non-
highly compensated employees in the
year of the failure.
(4)Treatment of undercontributions
to a SEP. (a)Make-up contributions;
earnings. The Plan Sponsor should cor-
rect undercontributions to a SEP by con-
tributing make-up amounts that are fully
vested, adjusted for earnings credited
from the date of the failure to the date of
correction.
(b)Earnings adjustment methods.
(i) The earnings rate generally is based on
the investment results that would have
applied to the corrective contribution if
the failure had not occurred.
(ii) Insofar as SEP assets are
held in IRAs, there is no earnings rate
under the SEP as a whole. If the Plan
Sponsor is unable to determine what the
actual investment results would have
been, a reasonable interest rate may be
used.
.09Confidentiality and disclosure.
Because each correction program relates
directly to the enforcement of the Code
qualification requirements, the informa-
tion received or generated by the Service
under the program is subject to the confi-
dentiality requirements of§6103 and is
not a written determination within the
meaning of§6110.
.10No effect on other law. Correction
under these programs has no effect on the
rights of any party under any other law,
including Title I of the Employee Retire-
ment Income Security Act of 1974
(“ERISA”).
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
The requirements of this section 7 are
satisfied with respect to an Operational
Failure if the Plan Sponsor of a Qualified
Plan, a 403(b) Plan, or a SEP satisfies the
requirements of section 8 (relating to
insignificant Operational Failures) or, in
the case of a Qualified Plan or a 403(b)
Plan, section 9 (relating to significant
Operational Failures).
SECTION 8. SELF-CORRECTION OF
INSIGNIFICANT OPERATIONAL
FAILURES
.01Requirements. The requirements of
this section 8 are satisfied with respect to
an Operational Failure if the Operational
Failure is corrected and, given all the
facts and circumstances, the Operational
Failure is insignificant. This section 8 is
available for correcting an insignificant
Operational Failure even if the plan or
Plan Sponsor is Under Examination and
even if the Operational Failure is discov-
ered by an agent on examination.
.02Factors. The factors to be consid-
ered in determining whether or not an
Operational Failure under a plan is insig-
nificant include, but are not limited to: (1)
whether other failures occurred during the
period being examined (for this purpose,
a failure is not considered to have
occurred more than once merely because
more than one participant is affected by
the failure); (2) the percentage of plan
assets and contributions involved in the
failure; (3) the number of years the failure
occurred; (4) the number of participants
affected relative to the total number of
participants in the plan; (5) the number of
2002–29 I.R.B.144July 22, 2002

participants affected as a result of the fail-
ure relative to the number of participants
who could have been affected by the fail-
ure; (6) whether correction was made
within a reasonable time after discovery
of the failure; and (7) the reason for the
failure (for example, data errors such as
errors in the transcription of data, the
transposition of numbers, or minor arith-
metic errors). No single factor is determi-
native. Additionally, factors (2), (4), and
(5) should not be interpreted to exclude
small businesses.
.03Multiple failures. In the case of a
plan with more than one Operational Fail-
ure in a single year, or Operational Fail-
ures that occur in more than one year, the
Operational Failures are eligible for cor-
rection under this section 8 only if all of
the Operational Failures are insignificant
in the aggregate. Operational Failures that
have been corrected under SCP in section
9 and VCP in sections 10 and 11 are not
taken into account for purposes of deter-
mining if Operational Failures are insig-
nificant in the aggregate.
.04Examples. The following examples
illustrate the application of this section 8.
It is assumed, in each example, that the
eligibility requirements of section 4 relat-
ing to SCP have been satisfied and that no
Operational Failures occurred other than
the Operational Failures identified below.
Example 1: In 1984, Employer X established
Plan A, a profit-sharing plan that satisfies the
requirements of§401(a) in form. In 1999, the ben-
efits of 50 of the 250 participants in Plan A were
limited by§415(c). However, when the Service
examined Plan A in 2002, it discovered that, during
the 1999 limitation year, the annual additions allo-
cated to the accounts of 3 of these employees
exceeded the maximum limitations under§415(c).
Employer X contributed $3,500,000 to the plan for
the plan year. The amount of the excesses totaled
$4,550. Under these facts, because the number of
participants affected by the failure relative to the
total number of participants who could have been
affected by the failure, and the monetary amount of
the failure relative to the total employer contribution
to the plan for the 1999 plan year, are insignificant,
the§415(c) failure in Plan A that occurred in 1999
would be eligible for correction under this section 8.
Example 2: The facts are the same as inExample
1, except that the failure to satisfy§415 occurred
during each of the 1998, 1999, and 2000 limitation
years. In addition, the three participants affected by
the§415 failure were not identical each year. The
fact that the§415 failures occurred during more
than one limitation year did not cause the failures to
be significant; accordingly, the failures are still eli-
gible for correction under this section 8.
Example 3: The facts are the same as inExample
1, except that the annual additions of 18 of the 50
employees whose benefits were limited by§415(c)
nevertheless exceeded the maximum limitations
under§415(c) during the 1999 limitation year, and
the amount of the excesses ranged from $1,000 to
$9,000, and totaled $150,000. Under these facts,
taking into account the number of participants
affected by the failure relative to the total number of
participants who could have been affected by the
failure for the 1999 limitation year (and the mon-
etary amount of the failure relative to the total
employer contribution), the failure is significant.
Accordingly, the§415(c) failure in Plan A that
occurred in 1999 is ineligible for correction under
this section 8 as an insignificant failure.
Example 4: Employer J maintains Plan C, a
money purchase pension plan established in 1992.
The plan document satisfies the requirements of
§401(a) of the Code. The formula under the plan
provides for an employer contribution equal to 10%
of compensation, as defined in the plan. During its
examination of the plan for the 1999 plan year, the
Service discovered that the employee responsible
for entering data into the employer’s computer made
minor arithmetic errors in transcribing the compen-
sation data with respect to 6 of the plan’s 40 partici-
pants, resulting in excess allocations to those 6 par-
ticipants’accounts. Under these facts, the number of
participants affected by the failure relative to the
number of participants that could have been affected
is insignificant, and the failure is due to minor data
errors. Thus, the failure occurring in 1999 would be
insignificant and therefore eligible for correction
under this section 8.
Example 5: Public School maintains for its 200
employees a salary reduction 403(b) Plan (the
“Plan”) that satisfies the requirements of§403(b).
The business manager has primary responsibility for
administering the Plan, in addition to other adminis-
trative functions within Public School. During the
1998 plan year, a former employee should have
received an additional minimum required distribu-
tion of $278 under§403(b)(10). Another participant
received an impermissible hardship withdrawal of
$2,500. Another participant made elective deferrals
of $11,000, $1,000 of which was in excess of the
§402(g) limit. Under these facts, even though mul-
tiple failures occurred in a single plan year, the fail-
ures will be eligible for correction under this section
8 because in the aggregate the failures are insignifi-
cant.
SECTION 9. SELF-CORRECTION OF
SIGNIFICANT OPERATIONAL
FAILURES
.01Requirements. The requirements of
this section 9 are satisfied with respect to
an Operational Failure (even if signifi-
cant) if the Operational Failure is cor-
rected and the correction is either com-
pleted or substantially completed (in
accordance with section 9.04) by the last
day of the correction period described in
section 9.02.
.02Correction period. (1)End of cor-
rection period. The last day of the correc-
tion period for an Operational Failure is
the last day of the second plan year fol-
lowing the plan year for which the failure
occurred. However, in the case of a fail-
uretosatisfytherequirementsof
§401(k)(3), 401(m)(2), or 401(m)(9), the
correction period does not end until the
last day of the second plan year following
the plan year that includes the last day of
the additional period for correction per-
mitted under§401(k)(8) or 401(m)(6). If
a 403(b) Plan does not have a plan year,
the plan year is deemed to be the calendar
year for purposes of this subsection.
(2)Extension of correction period
for Transferred Assets. In the case of an
Operational Failure that relates only to
Transferred Assets, or to a plan assumed
in connection with a corporate merger,
acquisition or other similar employer
transaction, the correction period does not
end until the last day of the first plan year
that begins after the corporate merger,
acquisition, or other similar employer
transaction between the Plan Sponsor and
the sponsor of the transferor plan or the
prior sponsor of an assumed plan.
(3)Effect of examination. The cor-
rection period for an Operational Failure
that occurs for any plan year ends, in any
event, on the first date the plan or Plan
Sponsor is Under Examination for that
plan year (determined without regard to
the second sentence of section 9.02). (But
see section 9.04 for special rules permit-
ting completion of correction after the
end of the correction period.)
.03Correction by plan amendment.In
order to complete correction by plan
amendment (as permitted under section
4.06) during the correction period, the
appropriate application (i.e., the Form
5300 series or Form 6406) must be sub-
mitted before the end of the correction
period.
.04Substantial completion of correc-
tion. Correction of an Operational Failure
is substantially completed by the last day
of the correction period only if the
requirements of either paragraph (1) or
(2) are satisfied.
(1) The requirements of this para-
graph (1) are satisfied if:
(a) during the correction period,
the Plan Sponsor is reasonably prompt in
identifying the Operational Failure, for-
mulating a correction method, and initiat-
ing correction in a manner that demon-
strates a commitment to completing
July 22, 20021452002–29 I.R.B.

correction of the Operational Failure as
expeditiously as practicable, and
(b) within 90 days after the last
day of the correction period, the Plan
Sponsor completes correction of the
Operational Failure.
(2) The requirements of this para-
graph (2) are satisfied if:
(a) during the correction period,
correction is completed with respect to 85
percent of all participants affected by the
Operational Failure, and
(b) thereafter, the Plan Sponsor
completes correction of the Operational
Failure with respect to the remaining
affected participants in a diligent manner.
.05Examples. The following examples
illustrate the application of this section 9.
Assume that the eligibility requirements
of section 4 relating to SCP have been
met.
Example 1: Employer Z established a qualified
defined contribution plan in 1986 and received a
favorable determination letter for TRA’86. During
1999, while doing a self-audit of the operation of
the plan for the 1998 plan year, the plan administra-
tor discovered that, despite the practices and proce-
dures established by Employer Z with respect to the
plan, several employees eligible to participate in the
plan were excluded from participation. The admin-
istrator also found that for 1998 Operational Fail-
ures occurred because the elective deferrals of addi-
tional employees exceeded the§402(g) limit and
Employer Z failed to make the required top-heavy
minimum contribution. During the 1999 plan year,
the Plan Sponsor made corrective contributions on
behalf of the excluded employees, distributed the
excess deferrals to the affected participants, and
made a top-heavy minimum contribution to all par-
ticipants entitled to that contribution for the 1998
plan year. Each corrective contribution and distribu-
tion was credited with earnings at a rate appropriate
for the plan from the date the corrective contribution
or distribution should have been made to the date of
correction. Under these facts, the Plan Sponsor has
corrected the Operational Failures for the 1998 plan
year within the correction period and thus satisfied
the requirements of this section 9.
Example 2: Employer A established a qualified
defined contribution plan, Plan A, in 1990 and
received a favorable determination letter for TRA
’86. In April 2002, Employer A purchased all of the
stock of Employer B, a wholly-owned subsidiary of
Employer C. Employees of Employer B participated
in a qualified defined contribution plan sponsored
by Employer C, Plan C. Following Employer A’s
review of Plan C, Employer A and Employer C
agreed that Plan A would accept a transfer of plan
assets attributable to the account balances of the
employees of Employer B who had participated in
Plan C. As part of this agreement, Employer C rep-
resented to Employer A that Plan C is tax qualified.
Employers A and C also agreed that such transfer
would be in accordance with§414(l) and
§1.414(l)–1 and addressed issues related to costs
associated with the transfer. Following the transac-
tion, the employees of Employer B began participa-
tion in Plan A. Effective July 1, 2002, Plan A
accepted the transfer of plan assets from Plan C.
After the transfer, Employer A determined that all
the participants in one division of Employer B had
been incorrectly excluded from allocation of the
profit sharing contributions for the 1998 and 1999
plan years. During 2003, Employer A made correc-
tive contributions on behalf of the affected partici-
pants. The corrective contributions were credited
with earnings at a rate appropriate for the plan from
the date the corrective contribution should have
been made to the date of correction and Employer A
otherwise complied with the requirements of SCP.
Under these facts, Employer A has, within the cor-
rection period, corrected the Operational Failures for
the 1998 and 1999 plan years with respect to the
assets transferred to Plan A, and thus satisfied the
requirements of this section 9.
PART V. VOLUNTARY CORRECTION
PROGRAM WITH SERVICE
APPROVAL (VCP)
SECTION 10. VCP GENERAL
PROCEDURES
.01VCP requirements. The require-
ments of this section 10 are satisfied with
respect to failures submitted in accor-
dance with the requirements of this sec-
tion 10 if the Plan Sponsor pays the com-
pliance fee required under section 12 and
implements the corrective actions and sat-
isfies any other conditions in the compli-
ance statement described in section 10.07.
.02Identification of failures. VCP is
not based upon an examination of the
plan by the Service. Only the failures
raised by the Plan Sponsor or failures
identified by the Service in processing the
application will be addressed under the
program, and only those failures will be
covered by the program. The Service will
not make any investigation or finding
under VCP concerning whether there are
failures.
.03Availability of correction of a ter-
minated plan. Correction of Qualification
Failures in a terminated plan may be
made under VCP.
.04Effect of VCP submission on
examination. Because VCP does not arise
out of an examination, consideration
under VCP does not preclude or impede
(under§7605(b) or any administrative
provisions adopted by the Service) a sub-
sequent examination of the Plan Sponsor
or the plan by the Service with respect to
the taxable year (or years) involved with
respect to matters that are outside the
compliance statement. However, a Plan
Sponsor’s statements describing failures
are made only for purposes of VCP and
will not be regarded by the Service as an
admission of a failure for purposes of any
subsequent examination.
.05No concurrent examination activ-
ity. Except in unusual circumstances, a
plan that has been properly submitted
under VCP will not be examined while
the submission is pending. This practice
regarding concurrent examinations does
not extend to other plans of the Plan
Sponsor. Thus, any plan of the Plan Spon-
sor that is not pending under VCP could
be subject to examination.
.06Submission of determination letter
application for plan amendments.Inany
case in which correction of a Qualified
Plan failure includes correction of a Plan
Document Failure or correction of an
Operational Failure by plan amendment
as permitted under section 4.06, other
than adoption of an amendment desig-
nated by the Service as a model amend-
ment or a standardized prototype plan, the
Plan Sponsor should submit a copy of the
amendment, the appropriate application
form (i.e., Form 5300 series or Form
6406), and the appropriate user fee con-
currently and to the same address as the
VCP submission. The user fee for the
determination letter application and the
fee for a VCP submission which requires
an up-front fee, for example, a VCO or
VCS submission, must be submitted on
separate certified or cashier’s checks
made payable to the U.S. Treasury.
.07Processing of submission. (1)
Screening of submission. Upon receipt of
a submission under VCP, the Service will
review whether the eligibility require-
ments of section 4 and the submission
requirements of section 11 are satisfied. If
the Service determines that a VCP sub-
mission is seriously deficient, the Service
reserves the right to return the submis-
sion, including any compliance fee, with-
out contacting the Plan Sponsor.
(2)Review of submission. Once the
Service determines that the submission is
complete under VCP, the Service will
consult with the Plan Sponsor or the Plan
Sponsor’s representative to discuss the
proposed corrections and the plan’s
administrative procedures.
(3)Additional information required.
If additional information is required, a
2002–29 I.R.B.146July 22, 2002

Service representative will generally con-
tact the Plan Sponsor or the Plan Spon-
sor’s representative and explain what is
needed to complete the submission. The
Plan Sponsor will have 21 calendar days
from the date of this contact to provide
the requested information. If the informa-
tion is not received within 21 days, the
matter will be closed, the compliance fee
will not be returned, and the case may be
referred to Employee Plans Examinations.
Any request for an extension of the
21-day time period must be made in writ-
ing within the 21-day time period and
must be approved by the Service (by the
applicable group manager).
(4)Additional failures discovered
after initial submission. (a) A Plan Spon-
sor that discovers additional, unrelated
Qualification or 403(b) Failures after its
initial submission may request that such
failures be added to its submission. How-
ever, the Service retains the discretion to
reject the inclusion of such failures if the
request is not timely, for example, if the
Plan Sponsor makes its request when pro-
cessing of the submission is substantially
complete.
(b) If the Service discovers an
unrelated Qualification or 403(b) Failure
while the request is pending, the failure
generally will be added to the failures
under consideration. However, the Ser-
vice retains the discretion to determine
that a failure is outside the scope of the
voluntary request for consideration
because it was not voluntarily brought
forward by the Plan Sponsor. In this case,
if the additional failure is significant, all
aspects of the plan may be examined and
the rules pertaining to Audit CAP will
apply. (See sections 13 and 14.)
(5)Conference right. If the Service
initially determines that it cannot issue a
compliance statement because the parties
cannot agree upon correction or a change
in administrative procedures, the Plan
Sponsor (generally through the Plan
Sponsor’s representative) will be con-
tacted by the Service representative and
offered a conference with the Service.
The conference can be held either in per-
son or by telephone and must be held
within 21 calendar days of the date of
contact. The Plan Sponsor will have 21
calendar days after the date of the confer-
ence to submit additional information in
support of the submission. Any request
for an extension of the 21-day time period
must be made in writing within the
21-day time period and must be approved
by the Service (by the applicable group
manager). Additional conferences may be
held at the discretion of the Service.
(6)Failure to reach resolution.If
the Service and the Plan Sponsor cannot
reach agreement with respect to the sub-
mission, all aspects of the plan may be
examined, and the Service may refer the
submission to Employee Plans Examina-
tions.
(7)Issuance of compliance state-
ment. If agreement is reached, the Service
will send to the Plan Sponsor an unsigned
compliance statement specifying the cor-
rective action required. Within 30 calen-
dar days of the date the compliance state-
ment is sent, a Plan Sponsor must sign the
compliance statement and return it and
any compliance fee required to be paid at
the time that the compliance statement is
signed (see sections 11.05 and 11.06
regarding timing of payment of compli-
ance fee). The Service will then issue a
signed copy of the compliance statement
to the Plan Sponsor. If the Plan Sponsor
does not send the Service the signed com-
pliance statement (with the compliance
fee) within 30 calendar days, the plan
may be referred to Employee Plans
Examinations for examination consider-
ation.
(8)Timing of correction. The Plan
Sponsor must implement the specific cor-
rections and administrative changes set
forth in the compliance statement within
150 days of the date of the compliance
statement. Any request for an extension
of this time period must be made in
advance and in writing and must be
approved by the Service.
(9)Modification of compliance
statement. Once the compliance statement
has been issued (based on the information
provided), the Plan Sponsor cannot
request a modification of the compliance
terms except by a new request for a com-
pliance statement. However, if the
requested modification is minor and is
postmarked no later than 30 days after the
compliance statement is issued, the com-
pliance fee for the modification will be
the lesser of the original compliance fee
or $1,250.
(10)Verification. Once the compli-
ance statement has been issued, the Ser-
vice may require verification that the cor-
rections have been made and that any
plan administrative procedures required
by the statement have been implemented.
This verification does not constitute an
examination of the books and records of
the employer or the plan (within the
meaning of§7605(b)). If the Service
determines that the Plan Sponsor did not
implement the corrections and procedures
within the stated time period, the plan
may be referred to Employee Plans
Examinations for examination consider-
ation.
.08Compliance statement. (1)Gen-
eral description of compliance statement.
The compliance statement issued for a
VCP submission addresses the failures
identified, the terms of correction, includ-
ing any revision of administrative proce-
dures, and the time period within which
proposed corrections must be imple-
mented, including any changes in admin-
istrative procedures. The compliance
statement also provides that the Service
will not treat the plan as failing to satisfy
the applicable requirements of the Code
on account of the failures described in the
compliance statement if the conditions of
the compliance statement are satisfied.
Where current procedures are inadequate
for operating the plan in conformance
with the applicable requirements of the
Code, the compliance statement will be
conditioned upon the implementation of
stated administrative procedures. The Ser-
vice may prescribe appropriate adminis-
trative procedures in the compliance
statement.
(2)Compliance statement condi-
tioned upon timely correction. The com-
pliance statement is conditioned on (i)
there being no misstatement or omission
of material facts in connection with the
submission and (ii) the implementation of
the specific corrections and satisfaction of
any other conditions in the compliance
statement.
(3)Authority delegated. Compli-
ance statements (including any waiver of
the excise tax under§4974) are autho-
rized to be signed by Area Managers
reporting to the Director, Employee Plans
Examinations, and managers within
Employee Plans Rulings and Agreements,
under the Tax Exempt and Government
Entities Operating Division of the Ser-
vice.
July 22, 20021472002–29 I.R.B.

.09Effect of compliance statement on
examination. The compliance statement is
binding upon both the Service and the
Plan Sponsor or Eligible Organization (as
defined in section 10.15(2)) with respect
to the specific tax matters identified
therein for the periods specified, but does
not preclude or impede an examination of
the plan by the Service relating to matters
outside the compliance statement, even
with respect to the same taxable year or
years to which the compliance statement
relates.
.10Processing of determination letter
applications not submitted under VCP.
(1) The Service may process a determina-
tion letter application submitted under the
determination letter program (including
an application requested on Form 5310)
concurrently with a VCP submission for
the same plan. However, issuance of the
determination letter in response to an
application made on a Form 5310 will be
suspended pending the closure of the
VCP submission.
(2) A submission of a plan under
the determination letter program does not
constitute a submission under VCP. Thus,
a Plan Sponsor that discovers a Qualifica-
tion Failure in its plan must make a sepa-
rate application under VCP. If the failure
is discovered by the Service in connection
with a determination letter application,
the agent may issue a closing agreement
with respect to the failures identified or, if
appropriate, refer the case to Employee
Plans Examinations. In either case, the
fee structure in section 12, applicable to
VCP, will not apply. Instead, the fee
structure in section 14 relating to Audit
CAP will apply. (See sections 13 and 14.)
.11Special rules relating to VCO. (1)
Under VCP, Operational Failures in a
Qualified Plan may be corrected under
the VCO rules in this subsection. VCO is
available only if the plan’s identified fail-
ures are all Operational Failures and only
if the plan has a Favorable Letter.
(2) If the plan is not the subject of
a Favorable Letter, or if the submission
either includes a failure other than an
Operational Failure or includes an egre-
gious failure described in section 4.09,
the submission will be converted from a
submission under VCO to a submission
under the VCP general procedures. The
compliance fee will be retained and will
be applied to the compliance fee required
under the VCP general procedures. The
Service retains the discretion to determine
whether a submission is outside the scope
of the special VCO rules even if the iden-
tified failures are Operational Failures
and the plan has a Favorable Letter. The
discretion will be applied only in rare and
unusual circumstances.
.12Special rules relating to VCS. (1)
Under VCO, certain Operational Failures
in a Qualified Plan may be corrected
under the VCS rules in this subsection.
VCS is available only if the plan’s only
identified Operational Failures are fail-
ures addressed in Appendix A or Appen-
dix B of this revenue procedure and the
failures are corrected in accordance with
an applicable correction method set forth
in Appendix A or Appendix B. Appropri-
ate correction must be made for any
Qualification Failure that results from the
application of a VCS correction.
(2) The correction methods set forth
in Appendix A and Appendix B are
strictly construed and are the only accept-
able correction methods for failures cor-
rected under VCS. If the Plan Sponsor
wishes to modify a correction method
provided in Appendix A or Appendix B or
to propose another method, the Plan
Sponsor may not use VCS, but may
request a compliance statement under the
VCO procedure.
(3) VCS is not available if the Plan
Sponsor has identified more than two fail-
ures in a single VCS request. If there are
one or two failures that can be corrected
under VCS and there are other failures
that cannot be corrected under VCS, VCS
is not available. The Service reserves the
right to shift requests for consideration
under VCS into VCO if the Plan Sponsor
submits a second VCS request with
respect to the same plan while the first
VCS request is being considered or dur-
ing the 12 months after the first VCS
compliance statement is issued. Both
VCS requests may be shifted into VCO if
the first VCS request is still being consid-
ered.
(4) The Service will review a VCS
request within 120 days of the date the
submission is received and determined to
be complete. If the Service determines
that the request is acceptable, the Service
will issue a compliance statement on the
Plan Sponsor’s proposed correction.
.13Special rules relating to Anony-
mous (John Doe) Submission Procedure.
(1) The Anonymous Submission Proce-
dure permits submission of a Qualified or
403(b) Plan under VCP without initially
identifying the applicable plan(s), the
Plan Sponsor(s), or the Eligible Organiza-
tion. The requirements of this revenue
procedure relating to VCP, including sec-
tions 10, 11, and 12, apply to these sub-
missions. However, information identify-
ing the plan or the Plan Sponsor may be
redacted (and the power of attorney state-
ment and the penalty of perjury statement
need not be included with the initial sub-
mission). For purposes of processing the
submission, the State of the Plan Sponsor
must be identified in the initial submis-
sion. Once the Service and the plan rep-
resentative reach agreement with respect
to the submission, the Service will con-
tact the plan representative in writing
indicating the terms of the agreement.
The Plan Sponsor will have 21 calendar
days from the date of the letter of agree-
ment to identify the plan and Plan Spon-
sor. If the Plan Sponsor does not submit
the identifying material (including the
power of attorney statement and the pen-
alty of perjury statement) within 21 calen-
dar days of the letter of agreement, the
matter will be closed and the compliance
fee will not be returned.
(2) Notwithstanding section 10.05,
until the plan(s) and Plan Sponsor(s) are
identified to the Service, a submission
under this subsection does not preclude or
impede an examination of the Plan Spon-
sor or its plan(s). Thus, a plan submitted
under the Anonymous Submission Proce-
dure that comes Under Examination prior
to the date the plan(s) and Plan Spon-
sor(s) identifying materials are received
by the Service will no longer be eligible
for either the Anonymous Submission
Procedure or VCP.
(3) The Anonymous Submission
Procedure is extended indefinitely.
.14Special rules relating to VCT.A
VCP submission for a 403(b) Plan is
required to be made under the VCT pro-
cedure. A VCT submission is subject to
the procedures of sections 10 and 11. A
403(b) Plan is not eligible for VCO or
VCS.
.15Special rules relating to VCGroup.
(1)General rules. An Eligible Organiza-
tion may submit a VCP request for a
2002–29 I.R.B.148July 22, 2002

Qualified Plan or a 403(b) Plan under the
VCGroup procedure for Operational and
Plan Document Failures under this sub-
section and may not submit an application
under VCO, VCS, or VCT.
(2)Eligible Organizations. For pur-
poses of VCGroup, the term“Eligible
Organization”means either (a) a Sponsor
(as that term is defined in section 4.09 of
Rev. Proc. 2000–20, 2000–1 C.B. 553) of
a master or prototype plan, (b) an insur-
ance company or other entity that has
issued annuity contracts or provides ser-
vices with respect to assets for 403(b)
Plans, or (c) an entity that provides its
clients with administrative services with
respect to Qualified Plans or 403(b)
Plans. An Eligible Organization is not eli-
gible for VCGroup unless the submission
includes a failure resulting from a sys-
temic error involving the Eligible Organi-
zation that affects at least 20 plans and
that results in at least 20 plans imple-
menting correction. If, at any time before
the Service provides an unsigned compli-
ance statement, the number of plans falls
below 20, the Eligible Organization must
notify the Service that it is no longer eli-
gible for VCGroup (and the compliance
fee will be retained).
(3)Special VCGroup procedures.
(a) A VCGroup submission is subject to
the same procedures as any VCP submis-
sion in accordance with sections 10 and
11, except that the Eligible Organization
is responsible for performing the proce-
dural obligations imposed on the Plan
Sponsor under sections 10 and 11.
(b) When an Eligible Organization
under VCGroup receives an unsigned
compliance statement on the proposed
correction and agrees to the terms of the
compliance statement, the Eligible Orga-
nization must return to the Service within
120 calendar days not only the signed
compliance statement and any additional
compliance fee under section 12.06, but
also a list containing (i) the employers’
tax identification numbers for the Plan
Sponsors of the plans to whom the com-
pliance statement may be applicable and
(ii) the plans by name, plan number, type
of plan, number of plan participants, and
trust’s tax identification numbers, if
applicable, along with (iii) a power of
attorney (which may be a limited power
of attorney) from each of the Plan Spon-
sors authorizing the Eligible Organization
or its representative to act on the Plan
Sponsor’s behalf with respect to the items
in the compliance statement and (iv) a
certification that each Plan Sponsor
timely filed the Form 5500 return for
each plan. Only those plans for which
correction is actually made within 240
calendar days of the date of the signed
compliance statement (or within such
longer period as may be agreed to by the
Service at the request of the Eligible
Organization) will be covered by that
statement.
(c) Notwithstanding section 10.04,
until the Eligible Organization provides
the Service with the information of sec-
tion 10.14(3)(b)(i) through (iv) with
respect to a Plan Sponsor and its plan(s),
a VCGroup submission does not preclude
or impede an examination of the Plan
Sponsor or its plan(s).
(4)VCGroup implementation. The
VCGroup procedure is being imple-
mented on a provisional basis, and the
Service and Treasury invite comments on
the operation of the VCGroup procedure.
.16Special rules relating to VCSEP.A
VCP submission for a SEP is required to
be made under the VCSEP procedure. A
VCSEP submission is subject to the pro-
cedures of sections 10 and 11. A SEP Plan
is not eligible for VCO or VCS.
.17Multiemployer and multiple
employer plans. (1) In the case of a mul-
tiemployer or multiple employer plan, the
plan administrator (rather than any con-
tributing or adopting employer) must
request consideration of the plan under
the programs. The request must be with
respect to the plan, rather than a portion
of the plan affecting any particular
employer.
(2) If a VCP submission for a multi-
employer or multiple employer plan has
failures that apply to fewer than all of the
employers under the plan, the plan
administrator may choose to have the
compliance fee (in section 12) or sanction
(in section 14) calculated separately for
each employer based on the assets attrib-
utable to that employer, rather than being
attributable to the assets of the entire
plan. Thus, the plan administrator may
choose to apply the provisions of this
paragraph where the failure is attributable
in whole or in part to data, information,
actions, or inactions that are within the
control of the employers rather than the
multiemployer or multiple employer plan
(such as attribution in whole or in part to
the failure of an employer to provide the
plan administrator with full and complete
information).
SECTION 11. APPLICATION
PROCEDURES FOR VCP
.01General rules. The requirements of
this section 11 are satisfied if the request
for a compliance statement from the Ser-
vice under VCP satisfies the informa-
tional and other requirements of this sec-
tion 11. In general, a request under VCP
consists of a letter from the Plan Sponsor
(which may be a letter from the Plan
Sponsor’s representative) or Eligible
Organization (or representative) to the
Service that contains a description of the
failures, a description of the proposed
methods of correction, and other proce-
dural items, and includes supporting
information and documentation as
described below.
.02Submission requirements. The let-
ter from the Plan Sponsor or the Plan
Sponsor’s representative must contain the
following:
(1) A complete description of the
failures and the years in which the fail-
ures occurred, including closed years
(that is, years for which the statutory
period has expired).
(2) A description of the administra-
tive procedures in effect at the time the
failures occurred.
(3) An explanation of how and why
the failures arose.
(4) A detailed description of the
method for correcting the failures that the
Plan Sponsor has implemented or pro-
poses to implement. Each step of the cor-
rection method must be described in nar-
rative form. The description must include
the specific information needed to sup-
port the suggested correction method.
This information includes, for example,
the number of employees affected and the
expected cost of correction (both of
which may be approximated if the exact
number cannot be determined at the time
of the request), the years involved, and
calculations or assumptions the Plan
Sponsor used to determine the amounts
needed for correction. See section 10.11
for special procedures regarding VCS.
(5) A description of the methodol-
ogy that will be used to calculate earnings
July 22, 20021492002–29 I.R.B.

or actuarial adjustments on any corrective
contributions or distributions (indicating
the computation periods and the basis for
determining earnings or actuarial adjust-
ments, in accordance with section
6.02(4)).
(6) Specific calculations for each
affected employee or a representative
sample of affected employees. The
sample calculations must be sufficient to
demonstrate each aspect of the correction
method proposed. For example, if a Plan
Sponsor requests a compliance statement
with respect to a failure to satisfy the con-
tribution limits of§415(c) and proposes
a correction method that involves elective
contributions (whether matched or
unmatched) and matching contributions,
the Plan Sponsor must submit calcula-
tions illustrating the correction method
proposed with respect to each type of
contribution. As another example, with
respect to a failure to satisfy the ADP test
in§401(k)(3), the Plan Sponsor must
submit the ADP test results both before
the correction and after the correction.
(7) The method that will be used to
locate and notify former employees and
beneficiaries, or an affirmative statement
that no former employees or beneficiaries
were affected by the failures or will be
affected by the correction.
(8) A description of the measures
that have been or will be implemented to
ensure that the same failures will not
recur.
(9) A statement that, to the best of
the Plan Sponsor’s knowledge, neither the
plan nor the Plan Sponsor is Under
Examination.
(10) If a submission includes a fail-
ure that refers to Transferred Assets and
occurred prior to the transfer, a descrip-
tion of the transaction (including the dates
of the employer change and the plan
transfer).
(11) A statement (if applicable) that
the plan is currently being considered in a
determination letter application. If the
request for a determination letter is made
while a request for consideration under
VCP is pending, the Plan Sponsor must
update the VCP request to add this infor-
mation.
.03Submission requirements under
special procedures. The letter from the
Plan Sponsor or the Plan Sponsor’s repre-
sentative must also contain the following:
(1)VCS. In the case of a VCS sub-
mission, a statement that it is a VCS
request, a description of the applicable
correction in accordance with Appendix
A or Appendix B, and a statement that the
Plan Sponsor proposes to implement (or
has implemented) the correction(s).
(2)VCT. In the case of a VCT sub-
mission, a statement that the Plan Spon-
sor has contacted all other entities
involved with the plan and has been
assured of cooperation in implementing
the applicable correction, to the extent
necessary. For example, if the plan’s fail-
ure is the failure to satisfy the require-
ments of§403(b)(1)(E) on elective defer-
rals, the Plan Sponsor must, prior to
making the VCT application, contact the
insurance company or custodian with
control over the plan’s assets to assure
cooperation in effecting a distribution of
the excess deferrals and the earnings
thereon. An application under VCT must
also contain a statement as to the type of
employer (e.g., a tax-exempt organization
described in§501(c)(3)) submitting the
VCT application.
(3)VCGroup. A VCGroup submis-
sion must be signed by the Eligible Orga-
nization or the Eligible Organization’s
authorized representative and accompa-
nied by a copy of the relevant portions of
the plan document(s).
(4)VCSEP. In the case of a VCSEP
submission, a statement that it is a
VCSEP request.
.04Required documents. A VCP sub-
mission must be accompanied by the fol-
lowing documents:
(1)Form 5500 or similar informa-
tion. (a)VCP. In the case of the general
procedures under VCP, a copy of the most
recently filed Form 5500 series return.
(b)VCO and VCS. In the case of
a VCO or VCS submission, a copy of the
first page and a copy of the page contain-
ing employee census information (cur-
rently, line 7f of the 1999 Form 5500) and
a copy of the page containing the total
amount of plan assets (currently, line 31f
of the 1999 Form 5500) or the most
recently filed Form 5500 series return.
(c)Anonymous submission.Inthe
case of a submission under the Anony-
mous Submission Procedure, the
employee census and plan asset informa-
tion may be redacted and replaced by
numbers that are rounded up.
(d)VCT. In the case of a VCT
submission, if Form 5500 is inapplicable,
the information generally included on the
first two pages of Form 5500, including
the name and number of the plan, and the
employer’s Employer Identification Num-
ber.
(e)VCSEP. In the case of a
VCSEP submission, if Form 5500 is inap-
plicable, the information generally
included on the first two pages of Form
5500, including the name and number of
the plan, and the employer’s Employer
Identification Number.
(2)Plan document. A copy of the
relevant portions of the plan document.
For example, in a case involving
improper exclusion of eligible employees
from a profit-sharing plan with a cash or
deferred arrangement, relevant portions of
the plan document include the eligibility,
allocation, and cash or deferred arrange-
ment provisions of the basic plan docu-
ment (and the adoption agreement, if
applicable), along with applicable defini-
tions in the plan. If the plan is a 403(b)
Plan and a plan document is not avail-
able, written descriptions of the plan, and
sample salary reduction agreements if rel-
evant. In the case of a SEP, submit the
entire plan document.
(3)Determination letter applica-
tion. In any case in which correction of a
Qualified Plan failure includes correction
of a Plan Document Failure or correction
of an Operational Failure by plan amend-
ment as permitted under section 4.06,
other than adoption of an amendment des-
ignated by the Service as a model amend-
ment or a standardized or prototype plan,
the Plan Sponsor must submit the amend-
ment, the appropriate application form
(i.e., Form 5300 series or Form 6406),
and the appropriate user fee. The user fee
for the determination letter application
and the fee for a VCP submission which
requires an up-front fee, for example, a
VCO or VCS submission, must be sub-
mitted on separate certified or cashier’s
checks made payable to the U.S. Trea-
sury.
(4)Copy of Favorable Letter for
VCO, VCS, or VCSEP. In the case of
VCO, VCS, or VCSEP, a copy of a
Favorable Letter.
.05Date VCP fee due generally.
Except as provided in section 11.06, the
VCP fee under section 12 is due at the
2002–29 I.R.B.150July 22, 2002

time the compliance statement is signed
by the Plan Sponsor and returned to the
Service. All fees must be submitted by
certified or cashier’s check made payable
to the U.S. Treasury.
.06Fee due earlier for VCO, VCS,
Anonymous Submission, VCGroup, and
VCSEP. In the case of a VCO or VCS
submission, the appropriate fee described
in section 12.02 or 12.03 must be
included with the submission. In the case
of a submission made under the Anony-
mous Submission Procedure, VCGroup,
or VCSEP, the initial fee described in sec-
tion 12.04(1), 12.06, or 12.07(1), respec-
tively, must be included with the submis-
sion (and any additional fee is due at the
time provided in section 11.05).
.07Signed submission. The submission
must be signed by the Plan Sponsor or the
sponsor’s authorized representative.
.08Power of attorney requirements.To
sign the submission or to appear before
the Service in connection with the sub-
mission, the Plan Sponsor’s representa-
tive must comply with the requirements
of section 9.02(11) and (12) of Rev. Proc.
2002–4, 2002–1 I.R.B. 127.
.09Penalty of perjury statement. The
following declaration must accompany a
request and any factual information or
change in the submission at a later time:
“Under penalties of perjury, I declare
that I have examined this submission,
including accompanying documents,
and, to the best of my knowledge and
belief, the facts presented in support of
this submission are true, correct, and
complete.”The declaration must be
signed by the Plan Sponsor, not the Plan
Sponsor’s representative.
.10Checklist. The Service will be able
to respond more quickly to a VCP request
if the request is carefully prepared and
complete. The checklist in Appendix C is
designed to assist Plan Sponsors and their
representatives in preparing a submission
that contains the information and docu-
ments required under this revenue proce-
dure. The checklist in Appendix C must
be completed, signed, and dated by the
Plan Sponsor or the Plan Sponsor’s repre-
sentative, and should be placed on top of
the submission. A photocopy of this
checklist may be used.
.11Designation. The letter to the Ser-
vice should be designated“VCP”,
“VCO”,“VCS”,“VCT”,“VCSEP”,or
“VCGroup”, as appropriate, in the upper
right hand corner of the letter. In addition,
if the submission is an Anonymous Sub-
mission, the letter should also be desig-
nated“Anonymous Submission Proce-
dure”.
.12VCP mailing address. All VCP
submissions should be mailed to:
Internal Revenue Service
Attention: T:EP:RA:VC
P.O. Box 27063
McPherson Station
Washington, D.C. 20038
.13Maintenance of copies of submis-
sions. Plan Sponsors and their representa-
tives should maintain copies of all corre-
spondence submitted to the Service with
respect to their VCP requests.
SECTION 12. VCP FEES
.01VCP general procedure compli-
ance fee. (1)Compliance fee chart.
Except as otherwise provided in this sec-
tion 12, the compliance fee for an appli-
cation under VCP is determined in accor-
dance with the chart below. All fees must
be submitted by certified or cashier’s
check made payable to the U.S. Treasury.
The chart contains a graduated range of
fees based on the size of the plan and the
number of participants. Each range
includes a minimum amount, a maximum
amount, and a presumptive amount. In
each case, the minimum amount is the
applicable VCO fee in section 12.02. It is
expected that in most instances the com-
pliance fee imposed will be at or near the
presumptive amount in each range; how-
ever, the fee may be a higher or lower
amount within the range, depending on
the factors in paragraph (2) below.
VCP GENERAL PROCEDURES COMPLIANCE FEES
# of participantsFee rangePresumptive Amount
10 or fewerVCO fee* to $4,000$2,000
11 to 50VCO fee* to $8,000$4,000
51 to 100VCO fee* to $12,000$6,000
101 to 300VCO fee* to $16,000$8,000
301 to 1,000VCO fee* to $30,000$15,000
Over 1,000VCO fee* to $70,000$35,000
* Items marked by asterisk refer to the VCO compliance fee that would apply under section 12.02 if the plan had been submitted
under VCO.
(2)Factors considered. Except as
provided in section 12.01(3) with respect
to nonamenders and section 12.01(4)
relating to egregious failures, consider-
ation of whether the compliance fee
should be equal to, greater than, or less
than the presumptive amount will depend
on factors relating to the nature, extent,
and severity of the failure. These factors
include: (a) whether the failure is a failure
to satisfy the requirements of§401(a)(4),
§401(a)(26), or§410(b), (b) whether the
plan has both Operational and Plan Docu-
ment Failures, (c) the period over which
the violation occurred (for example, the
time that has elapsed since the end of the
applicable remedial amendment period
under§401(b) for a Plan Document Fail-
ure), (d) the extent to which the plan has
accepted Transferred Assets, and the
extent to which the failures relate to the
Transferred Assets and occurred before
the transfer, and (e) whether the plan has
a Favorable Letter.
July 22, 20021512002–29 I.R.B.

(3)VCP fee for nonamenders. The
VCP compliance fee for a submission that
includes only a Plan Document Failure
that is solely a failure to amend the plan
timely to comply with required tax law
changes is determined in accordance with
section 12.01(1), as follows:
(a) GUST (for plans filed after
September 3, 2002), UCA or OBRA’93
model amendments only—the fee is the
halfway point between the minimum
amount and the presumptive amount of
the applicable fee range.
(b) TRA’86—the fee is the pre-
sumptive amount of the applicable fee
range, and clause (a) does not apply.
(c) TEFRA, DEFRA, or REA—
the fee is the halfway point between the
presumptive amount and the maximum
amount of the applicable fee range, and
clauses (a) and (b) do not apply.
(d) ERISA—the fee is the maxi-
mum amount of the applicable fee range,
and clauses (a), (b), and (c) do not apply.
(4)Egregious failures. In cases
involving failures that are egregious (as
described in section 4.09), (a) the maxi-
mum compliance fee applicable to the
plan under the chart in 12.01(1) is
increased to 40 percent of the Maximum
Payment Amount and (b) no presumptive
amount applies.
.02VCO fee. Unless VCS is appli-
cable, the VCO compliance fee depends
on the assets of the plan and the number
of plan participants.
(1) The fee for a plan with assets of
less than $500,000 and no more than
1,000 plan participants is $500.
(2) The fee for a plan with assets of
at least $500,000 and no more than 1,000
plan participants is $1,250.
(3) The fee for a plan with more
than 1,000 plan participants but fewer
than 10,000 plan participants is $5,000.
(4) The fee for a plan with 10,000
or more plan participants is $10,000.
.03VCS fee. The VCS compliance fee
is $350.
.04Fee for Anonymous Submission.
The compliance fee for the Anonymous
Submission Procedure is the fee appli-
cable under other provisions of this sec-
tion 12 (i.e., the fee under section 12.01
for VCP general procedures, the fee under
section 12.02 for VCO, or the fee under
section 12.05 for VCT).
(1) The initial portion of the fee is
the amount determined under section
12.02 (for the VCP general procedures or
VCO) or 12.05(2) (for VCT).
(2) The additional fee, if any, is the
fee determined under section 12.01 or
12.05, if applicable, reduced by the fee in
section 12.04(1).
.05VCT Fee. (1)VCT compliance fee.
The applicable VCT compliance fee
depends on the type of failure and, gener-
ally, the number of employees of the
employer.
(2)Fee for Operational Failures.
Subject to section 12.05(3), the compli-
ance fee for submissions that include only
Operational Failures is as follows:
(a) The fee for an employer with
fewer than 25 employees is $500.
(b) The fee for an employer with
at least 25 and no more than 1,000
employees is $1,250.
(c) The fee for an employer with
more than 1,000 employees but less than
10,000 is $5,000.
(d) The fee for an employer with
10,000 or more employees is $10,000.
(3)Fee for certain Excess Amounts.
Subject to section 12.05(6), the compli-
ance fee for Excess Amounts that are cor-
rected pursuant to section 6.05(2)(b) is
equal to the sum of (a) the applicable fee
described in section 12.05(2), plus (b) ten
percent of the Excess Amounts, adjusted
for earnings through the date of the VCT
application, contributed or allocated in
the calendar year of the VCT application
and in the three calendar years prior
thereto. If there is a failure to satisfy both
the§403(b)(2) and§415 limits with
respect to a single employee for a year,
the fee will take into account only the
larger Excess Amount.
(4)Fee for Demographic and Eligi-
bility Failures. (a) Subject to section
12.05(6), the compliance fee for a 403(b)
Plan with failures that include any Demo-
graphic or Employer Eligibility Failure is
determined in accordance with the VCP
fee table in section 12.01(1), except that
(i) the reference to VCO fees is changed
to refer to the VCT compliance fee for
Operational Failures in section 12.05(2)
above and (ii) the fee is determined with
reference to the number of employees
rather than participants.
(b) In addition to the types of fac-
tors listed in section 12.01(2), factors
considered in determining the compliance
fee for failures that include any Demo-
graphic or Employer Eligibility Failure
under VCT include: (i) whether the fail-
ures include a Demographic Failure, (ii)
whether the 403(b) Plan has a combina-
tion of two or more types of failures
(Operational, Demographic, and
Employer Eligibility); and (iii) the period
of time over which the failure occurred.
(5)Fee for multiple failures. If cor-
rection is requested for multiple failures,
the compliance fee is determined in
accordance with the table below.
Multiple Operational FailuresFee described in section 12.05(2)
Multiple Demographic or Eligibility FailuresFee described in section 12.05(4)
Combination of Operational and Demographic or
Eligibility FailuresFee described in section 12.05(4)
Operational Failure(s) with section 6.05(2)(b)
correction of Excess AmountsFee described in section 12.05(3)
Demographic or Eligibility Failures and Operational Failures
including section 6.05(2)(b) correction of Excess Amounts
Fee described in section 12.05(3), substituting section
12.05(4) fee for section 12.05(2) fee
2002–29 I.R.B.152July 22, 2002

(6)Fee for egregious failures.In
cases involving failures that are egre-
gious, the maximum VCT compliance fee
applicable to the plan is increased to 40
percent of the Total Sanction Amount and
no presumptive amount applies.
.06VCGroup fees. The compliance fee
for a VCGroup submission is based on
the number of plans to which the compli-
ance statement is applicable. The initial
fee is $10,000. In the case of a submis-
sion with only corrections under Appen-
dix A or B, an additional fee is due equal
to the product of the number of plans in
excess of 20 times $125, up to a maxi-
mum of $40,000; in any other case, the
additional fee is equal to the product of
the number of plans in excess of 20 times
$250, up to a maximum of $90,000.
.07VCSEP fees. The applicable
VCSEP compliance fee is the same as the
fee for VCP in section 12.01, subject to
the following:
(1) In the case of a SEP with Opera-
tional Failures only, the compliance fee is
determined in accordance with the VCO
fee schedule in section 12.02, except that
the fee is determined solely on the basis
of the number of plan participants.
(2) In any case in which a SEP cor-
rection is not similar to a correction for a
similar Qualification Failure (as provided
under section 6.08(1)), the Service may
impose an additional fee. If the failure
involves an overcontribution to a SEP
that is not the result of a failure to satisfy
a statutory limit on contributions to a SEP
and the Plan Sponsor retains the overcon-
tribution in the SEP, a fee equal to at least
ten percent of the overcontribution
excluding earnings will be imposed. This
is in addition to the VCSEP compliance
fee.
.08Establishing amount of assets and
number of plan participants. Compliance
fees under this section 12 are calculated
by the Plan Sponsor using the numbers
from the most recently filed Form 5500
series to establish the fee. Thus, with
respect to the 1999 Form 5500, the Plan
Sponsor would use the number shown on
line 7(f) (or the equivalent line on the
Form 5500 C/R or EZ) to establish the
number of plan participants and would
use line 31(f) (or the equivalent line on
the Form 5500 C/R or EZ) to establish
the amount of plan assets. If the submis-
sion involves a plan with Transferred
Assets and no new incidents of the failure
occurred after the end of the second plan
year that begins after the corporate
merger, acquisition, or other similar
employer transaction, the Plan Sponsor
may calculate the amount of plan assets
and number of plan participants based on
the Form 5500 information that would
have been filed by the Plan Sponsor for
the plan year that includes the employer
transaction if the Transferred Assets were
maintained as a separate plan. In the case
of a SEP not required to file a Form 5500,
the Plan Sponsor may use other reason-
able information to determine the amount
of plan assets and the number of partici-
pants.
PART VI. CORRECTION ON AUDIT
(AUDIT CAP)
SECTION 13. DESCRIPTION OF
AUDIT CAP
.01Audit CAP requirements.Ifthe
Service identifies a Qualification or
403(b) Failure (other than a failure that
has been corrected in accordance with
SCP or VCP) upon an Employee Plans or
Exempt Organizations examination of a
Qualified Plan, 403(b) Plan, or SEP, the
requirements of this section 13 are satis-
fied with respect to the failure if the Plan
Sponsor corrects the failure, pays a sanc-
tion in accordance with section 14, satis-
fies any additional requirements of sec-
tion 13.03, and enters into a closing
agreement with the Service.
.02Payment of sanction. Payment of
the sanction under section 14 generally is
required at the time the closing agreement
is signed. All sanction amounts should be
submitted by certified or cashier’s check
made payable to the U.S. Treasury.
.03Additional requirements. Depend-
ing on the nature of the failure, the Ser-
vice will discuss the appropriateness of
the plan’s existing administrative proce-
dures with the Plan Sponsor. If existing
administrative procedures are inadequate
for operating the plan in conformance
with the applicable requirements of the
Code, the closing agreement may be con-
ditioned upon the implementation of
stated procedures. In addition, for Quali-
fied Plans, the Plan Sponsor may be
required to obtain a Favorable Letter
before the closing agreement is signed
unless the Service determines that it is
unnecessary based on the facts and cir-
cumstances (for example, because the
plan already has a Favorable Letter and
no significant amendments are adopted).
If a Favorable Letter is required, the Plan
Sponsor is required to pay the applicable
user fee for obtaining the letter.
.04Failure to reach resolution.Ifthe
Service and the Plan Sponsor cannot
reach an agreement with respect to the
correction of the failure(s) or the amount
of the sanction, the plan will be disquali-
fied or, in the case of a 403(b) Plan or
SEP, will not have reliance on this rev-
enue procedure.
.05Effect of closing agreement. A clos-
ing agreement constitutes an agreement
between the Service and the Plan Sponsor
that is binding with respect to the tax
matters identified therein for the periods
specified.
.06Other procedural rules. The proce-
dural rules for Audit CAP are set forth in
Internal Revenue Manual (“IRM“) 7.2.2,
EPCRS.
SECTION 14. AUDIT CAP SANCTION
.01Determination of sanction.The
sanction under Audit CAP is a negotiated
percentage of the Maximum Payment
Amount. For 403(b) Plans and SEPs, the
sanction is a negotiated percentage of the
Total Sanction Amount. Sanctions will
not be excessive and will bear a reason-
able relationship to the nature, extent, and
severity of the failures, based on the fac-
tors below.
.02Factors considered. Factors
include: (1) the steps taken by the Plan
Sponsor to ensure that the plan had no
failures, (2) the steps taken to identify
failures that may have occurred, (3) the
extent to which correction had progressed
before the examination was initiated,
including full correction, (4) the amount
of the fee the Plan Sponsor would have
paid under section 12 for correcting the
failures, (5) the number and type of
employees affected by the failure, (6) the
number of nonhighly compensated
employees who would be adversely
affected if the plan were not treated as
qualified or as satisfying the requirements
of§403(b) or§408(k), (7) whether the
failure is a failure to satisfy the require-
ments of§401(a)(4),§401(a)(26), or
§410(b),eitherdirectlyorthrough
§403(b)(12), (8) the period over which
July 22, 20021532002–29 I.R.B.

the failure occurred (for example, the
time that has elapsed since the end of the
applicable remedial amendment period
under§401(b) for a Plan Document Fail-
ure), and (9) the reason for the failure (for
example, data errors such as errors in
transcription of data, the transposition of
numbers, or minor arithmetic errors).
Factors relating only to Qualified Plans
also include: (1) whether the plan is the
subject of a Favorable Letter, (2) whether
the plan has both Operational and other
failures, and (3) the extent to which the
plan has accepted Transferred Assets, and
the extent to which failures relate to
Transferred Assets and occurred before
the transfer. Additional factors relating
only to 403(b) Plans include: (1) whether
the plan has a combination of Opera-
tional, Demographic, or Employer Eligi-
bility Failures, (2) the extent to which the
failure relates to Excess Amounts, and (3)
whether the failure is solely an Employer
Eligibility Failure.
.03Transferred Assets. If the examina-
tion involves a plan with Transferred
Assets and the Service determines that no
new incidents of the failures that relate to
the Transferred Assets occur after the end
of the second plan year that begins after
the corporate merger, acquisition, or other
similar employer transaction, the sanction
under Audit CAP will not exceed the
sanction that would apply if the Trans-
ferred Assets were maintained as a sepa-
rate plan.
PART VII. EFFECT ON OTHER
DOCUMENTS; EFFECTIVE DATE;
PAPERWORK REDUCTION ACT
SECTION 15. EFFECT ON OTHER
DOCUMENTS
.01Revenue procedure 2001–17 modi-
fied and superseded. Rev. Proc. 2001–17
is modified and superseded by this rev-
enue procedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is effective
July 22, 2002.
SECTION 17. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1673.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The collection of information in this
revenue procedure is in sections 4.06,
6.02(5)(c), 6.05, 10.01, 10.02, 10.05–
10.07, 11.02–11.04, 11.07–11.13, 13.01,
section 2.01–2.07 of Appendix B, and
Appendix C. This information is required
to enable the Commissioner, Tax Exempt
and Government Entities Division of the
Internal Revenue Service to make deter-
minations regarding the issuance of vari-
ous types of closing agreements and com-
pliance statements. This information will
be used to issue closing agreements and
compliance statements to allow individual
plans to continue to maintain their tax
qualified and tax-deferred status. As a
result, favorable tax treatment of the ben-
efits of the eligible employees is retained.
The likely respondents are individuals,
state or local governments, business or
other for-profit institutions, nonprofit
institutions, and small businesses or orga-
nizations.
The estimated total annual reporting
and/or recordkeeping burden is 56,272
hours.
The estimated annual burden per
respondent/recordkeeper varies from .5 to
42.5 hours, depending on individual cir-
cumstances, with an estimated average of
13.11 hours. The estimated number of
respondents and/or recordkeepers is
4,292.
The estimated frequency of responses
is occasional.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C.§6103.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Maxine Terry and Carlton
Watkins of the Tax Exempt and Govern-
ment Entities Division. For further infor-
mation concerning this revenue proce-
dure, please contact the Employee Plans’
taxpayer assistance telephone service at
1–877–829–5500 between 8:30 a.m. and
6:30 p.m., Eastern Time, Monday through
Friday (a toll-free number). Ms. Terry and
Mr. Watkins may be reached at (202)
283–9888 (not a toll-free number).
APPENDIX A
OPERATIONAL FAILURES AND
CORRECTIONS UNDER VCS
.01General rule. This appendix sets
forth Operational Failures relating to
Qualified Plans and corrections under
VCS in accordance with section 10.11. In
each case, the method described corrects
the Operational Failure identified in the
headings below. Corrective allocations
and distributions should reflect earnings
and actuarial adjustments in accordance
with section 6.02(4). The correction
methods in this appendix are acceptable
under SCP and VCP (including VCS).
Additionally, the correction methods and
the earnings adjustment methods in
Appendix B are acceptable under SCP
and VCP (including VCS but not VCT).
.02Failure to properly provide the
minimum top-heavy benefit under§416
of the Code to non-key employees.Ina
defined contribution plan, the permitted
correction method is to properly contrib-
ute and allocate the required top-heavy
minimums to the plan in the manner pro-
vided for in the plan on behalf of the non-
key employees (and any other employees
required to receive top-heavy allocations
under the plan). In a defined benefit plan,
the minimum required benefit must be
accrued in the manner provided in the
plan.
.03Failure to satisfy the ADP test set
forth in§401(k)(3), the ACP test set forth
in§401(m)(2), or the multiple use test of
§401(m)(9). The permitted correction
method is to make qualified nonelective
contributions (QNCs) (as defined in
§1.401(k)–1(g)(13)(ii)) on behalf of the
nonhighly compensated employees to the
extent necessary to raise the actual defer-
ral percentage or actual contribution per-
centage of the nonhighly compensated
employees to the percentage needed to
pass the test or tests. The contributions
must be made on behalf of all eligible
nonhighly compensated employees (to the
2002–29 I.R.B.154July 22, 2002

extent permitted under§415) and must
either be the same flat dollar amount or
the same percentage of compensation.
QNCs contributed to satisfy the ADP test
need not be matched. Employees who
would have been eligible for a matching
contribution had they made elective con-
tributions must be counted as eligible
employees for the ACP test, and the plan
must satisfy the ACP test. Under this
VCS correction method, a plan may not
be treated as two separate plans, one cov-
ering otherwise excludable employees
and the other covering all other employ-
ees (as permitted in§1.410(b)–6(b)(3))
in order to reduce the number of employ-
ees eligible to receive QNCs. Likewise,
under this VCS correction method, the
plan may not be restructured into compo-
nent plans (as permitted in§1.401(k)–
1(h)(3)(iii) for plan years before January
1, 1992) in order to reduce the number of
employees eligible to receive QNCs.
.04Failure to distribute elective defer-
rals in excess of the§402(g) limit (in
contravention of§401(a)(30)). The per-
mitted correction method is to distribute
the excess deferral to the employee and to
report the amount as taxable in the year
of deferral and in the year distributed. In
accordance with§1.402(g)–1(e)(1)(ii), a
distribution to a highly compensated
employee is included in the ADP test; a
distribution to a nonhighly compensated
employee is not included in the ADP test.
.05Exclusion of an eligible employee
from all contributions or accruals under
the plan for one or more plan years. The
permitted correction method is to make a
contribution to the plan on behalf of the
employees excluded from a defined con-
tribution plan or to provide benefit accru-
als for the employees excluded from a
defined benefit plan. If the employee
should have been eligible to make an
elective contribution under a cash or
deferred arrangement, the employer must
make a QNC (as defined in§1.401(k)–
1(g)(13)(ii)) to the plan on behalf of the
employee that is equal to the actual defer-
ral percentage for the employee’s group
(either highly compensated or nonhighly
compensated). If the employee should
have been eligible to make employee con-
tributions or for matching contributions
(on either elective contributions or
employee contributions), the employer
must make a QNC to the plan on behalf
of the employee that is equal to the actual
contribution percentage for the employ-
ee’s group (either highly compensated or
nonhighly compensated). Contributing
the actual deferral or contribution per-
centage for such employees eliminates
the need to rerun the ADP or ACP test to
account for the previously excluded
employees. Under this VCS correction
method, a plan may not be treated as two
separate plans, one covering otherwise
excludable employees and the other cov-
ering all other employees (as permitted in
§1.410(b)–6(b)(3)) in order to reduce the
amount of QNCs. Likewise, restructuring
the plan into component plans under
§1.401(k)–1(h)(3)(iii) is not permitted in
order to reduce the amount of QNCs.
.06Failure to timely pay the minimum
distribution required under§401(a)(9).
In a defined contribution plan, the permit-
ted correction method is to distribute the
required minimum distributions. The
amount to be distributed for each year in
which the failure occurred should be
determined by dividing the adjusted
account balance on the applicable valua-
tion date by the applicable distribution
period. For this purpose, adjusted account
balance means the actual account balance,
determined in accordance with§1.401(a)
(9)–5 Q&A F–3 of the regulations,
reduced by the amount of the total missed
minimum distributions for prior years. In
a defined benefit plan, the permitted cor-
rection method is to distribute the
required minimum distributions, plus an
interest payment representing the loss of
use of such amounts.
.07Failure to obtain participant
and/or spousal consent for a distribution
subject to the participant and spousal
consent rules under§§401(a)(11),
411(a)(11) and 417. The permitted correc-
tion method is to give each affected par-
ticipant a choice between providing
informed consent for the distribution
actually made or receiving a qualified
joint and survivor annuity. In order to use
this VCS correction method, the Plan
Sponsor must have contacted each
affected participant and spouse (to whom
the participant was married at the annuity
starting date) and received responses
from each such individual before request-
ing consideration under VCS. In the event
that participant and/or spousal consent is
required but cannot be obtained, the par-
ticipant must receive a qualified joint and
survivor annuity based on the monthly
amount that would have been provided
under the plan at his or her retirement
date. This annuity may be actuarially
reduced to take into account distributions
already received by the participant. How-
ever, the portion of the qualified joint and
survivor annuity payable to the spouse
upon the death of the participant may not
be actuarially reduced to take into
account prior distributions to the partici-
pant. Thus, for example, if in accordance
with the automatic qualified joint and sur-
vivor annuity option under a plan, a mar-
ried participant who retired would have
received a qualified joint and survivor
annuity of $600 per month payable for
life with $300 per month payable to the
spouse upon the participant’s death but
instead received a single-sum distribution
equal to the actuarial present value of the
participant’s accrued benefit under the
plan, then the $600 monthly annuity pay-
able during the participant’s lifetime may
be actuarially reduced to take the single-
sum distribution into account. However,
the spouse must be entitled to receive an
annuity of $300 per month payable for
life beginning at the participant’s death.
.08Failure to satisfy the§415 limits
in a defined contribution plan. The per-
mitted correction for failure to limit
annual additions (other than elective
deferrals and employee contributions)
allocated to participants in a defined con-
tribution plan as required in§415 (even
if the excess did not result from the allo-
cation of forfeitures or from a reasonable
error in estimating compensation) is to
place the excess annual additions into an
unallocated account, similar to the sus-
pense account described in§1.415–
6(b)(6)(iii), to be used as an employer
contribution in the succeeding year(s).
While such amounts remain in the unallo-
cated account, the employer is not permit-
ted to make additional contributions to
the plan. The permitted VCS correction
for failure to limit annual additions that
are elective deferrals or employee contri-
butions (even if the excess did not result
from a reasonable error in determining
the amount of elective deferrals or
employee contributions that could be
made with respect to an individual under
the§415 limits) is to distribute the elec-
tive deferrals or employee contributions
July 22, 20021552002–29 I.R.B.

using a method similar to that described
under§1.415–6(b)(6)(iv). Elective defer-
rals and employee contributions that are
matched may be returned, provided that
the matching contributions relating to
such contributions are forfeited (which
will also reduce excess annual additions
for the affected individuals). The forfeited
matching contributions are to be placed
into an unallocated account to be used as
an employer contribution in succeeding
periods.
APPENDIX B
CORRECTION METHODS AND
EXAMPLES; EARNINGS
ADJUSTMENT METHODS
AND EXAMPLES
SECTION 1. PURPOSE,
ASSUMPTIONS FOR EXAMPLES
AND SECTION REFERENCES
.01Purpose. (1) This appendix sets
forth correction methods relating to
Operational Failures under Qualified
Plans. This appendix also sets forth earn-
ings adjustment methods. The correction
methods and earnings adjustment meth-
ods described in this appendix are accept-
able under SCP and VCP (including VCS,
but not VCT).
(2) This appendix does not apply to
403(b) Plans or SEPs. Accordingly, spon-
sors of 403(b) Plans or SEPs cannot rely
on the correction methods and the earn-
ings adjustment methods under this
appendix.
.02Assumptions for Examples. Unless
otherwise specified, for ease of presenta-
tion, the examples assume that:
(1) the plan year and the§415 limi-
tation year are the calendar year;
(2) the employer maintains a single
plan intended to satisfy§401(a) and has
never maintained any other plan;
(3) in a defined contribution plan,
the plan provides that forfeitures are used
to reduce future employer contributions;
(4) the Qualification Failures are
Operational Failures and the eligibility
and other requirements for SCP, VCP or
Audit CAP, whichever applies, are satis-
fied; and
(5) there are no Qualification Fail-
ures other than the described Operational
Failures, and if a corrective action would
result in any additional Qualification Fail-
ure, appropriate corrective action is taken
for that additional Qualification Failure in
accordance with EPCRS.
.03Section References. References to
section 2 and section 3 are references to
the section 2 and 3 in this appendix.
SECTION 2. CORRECTION
METHODS AND EXAMPLES
.01ADP/ACP Failures.
(1)Correction Methods. (a) VCS
Correction Method. Appendix A, section
.03 sets forth the VCS correction method
for a failure to satisfy the actual deferral
percentage (“ADP”), actual contribution
percentage (“ACP”), or multiple use test
set forth in§§401(k)(3), 401(m)(2), and
401(m)(9), respectively.
(b) One-to-One Correction
Method. (i) General. In addition to the
VCS correction method, a failure to sat-
isfy the ADP, ACP, or multiple use test
may be corrected using the one-to-one
correction method set forth in this section
2.01(1)(b). Under the one-to-one correc-
tion method, an excess contribution
amount is determined and assigned to
highly compensated employees as pro-
vided in paragraph (1)(b)(ii) below. That
excess contribution amount (adjusted for
earnings) is either distributed to the
highly compensated employees or for-
feited from the highly compensated
employees’accounts as provided in para-
graph (1)(b)(iii) below. That same dollar
amount (i.e., the excess contribution
amount, adjusted for earnings) is contrib-
uted to the plan and allocated to non-
highly compensated employees as pro-
vided in paragraph (1)(b)(iv) below.
Under this correction method, a plan may
not be treated as two separate plans, one
covering otherwise excludable employees
and the other covering all other employ-
ees (as permitted in§1.410(b)–6(b)(3)).
Likewise, restructuring the plan into com-
ponent plans under§1.401(k)–1(h)(3)(iii)
is not permitted.
(ii) Determination of the
Excess Contribution Amount. The excess
contribution amount for the year is equal
to the excess of (A) the sum of the excess
contributions (as defined in§401(k)
(8)(B)), the excess aggregate contribu-
tions (as defined in§401(m)(6)(B)), and
the amount treated as excess contribu-
tions or excess aggregate contributions
under the multiple use test pursuant to
§401(m)(9) and§1.401(m)–2(c) for the
year, as assigned to each highly compen-
sated employee in accordance with
§401(k)(8)(C) and (m)(6)(C), over (B)
previous corrections that complied with
§401(k)(8), (m)(6), and (m)(9). See
Notice 97–2, 1997–1 C.B. 348.
(iii) Distributions and Forfei-
tures of the Excess Contribution Amount.
(A) The portion of the excess contribution
amount assigned to a particular highly
compensated employee under paragraph
(1)(b)(ii) is adjusted for earnings through
the date of correction. The amount
assigned to a particular highly compen-
sated employee, as adjusted, is distributed
or, to the extent the amount was forfeit-
able as of the close of the plan year of the
failure, is forfeited. If the amount is for-
feited, it is used in accordance with the
plan provisions relating to forfeitures that
were in effect for the year of the failure.
If the amount so assigned to a particular
highly compensated employee has been
previously distributed; the amount is an
Excess Amount within the meaning of
section 5.01(3) of this revenue procedure.
Thus, pursuant to section 6.05 of this rev-
enue procedure, the employer must notify
the employee that the Excess Amount was
not eligible for favorable tax treatment
accorded to distributions from qualified
plans (and, specifically, was not eligible
for tax-free rollover).
(B) If any matching contributions
(adjusted for earnings) are forfeited in
accordance with§411(a)(3)(G), the for-
feited amount is used in accordance with
the plan provisions relating to forfeitures
that were in effect for the year of the fail-
ure.
(C) If a payment was made to an
employee and that payment is a forfeit-
able match described in either paragraph
(1)(b)(iii)(A) or (B), then it is an Over-
payment defined in section 5.01(6) of this
revenue procedure that must be corrected
(see sections 2.04 and 2.05 below).
(iv) Contribution and Alloca-
tion of Equivalent Amount. (A) The
employer makes a contribution to the plan
that is equal to the aggregate amounts dis-
tributed and forfeited under paragraph
(1)(b)(iii)(A) (i.e., the excess contribution
amount adjusted for earnings, as provided
in paragraph (1)(b)(iii)(A), which does
not include any matching contributions
forfeited in accordance with§411(a)
2002–29 I.R.B.156July 22, 2002

(3)(G) as provided in paragraph
(1)(b)(iii)(B)). The contribution must sat-
isfy the vesting requirements and distri-
bution limitations of§401(k)(2)(B) and
(C).
(B)(1) This paragraph (1)(b)(iv)
(B)(1) applies to a plan that uses the cur-
rent year testing method described in
Notice 98–1, 1998–1 C.B. 327. The con-
tribution made under paragraph
(1)(b)(iv)(A) is allocated to the account
balances of those individuals who were
either (I) the eligible employees for the
year of the failure who were not highly
compensated employees for that year or
(II) the eligible employees for the year of
the failure who were not highly compen-
sated employees for that year and who
also are not highly compensated employ-
ees for the year of correction. Alterna-
tively, the contribution is allocated to
account balances of eligible employees
described in (I) or (II) of the preceding
sentence, except that the allocation is
made only to the account balances of
those employees who are employees on a
date during the year of the correction that
is no later than the date of correction.
Regardless of which of these four options
(described in the two preceding sen-
tences) the employer selects, the contribu-
tion is allocated to each such employee
either as the same percentage of the
employee’s compensation for the year of
the failure or as the same dollar amount
for each employee. (See Examples 1, 2
and 3.) Under the one-to-one correction
method, the amount allocated to the
account balance of an employee (i.e, the
employee’s share of the total amount con-
tributed under paragraph (1)(b)(iv)(A)) is
not further adjusted for earnings and is
treated as an annual addition under§415
for the year of the failure for the
employee for whom it is allocated.
(2) This paragraph (1)(b)(iv)
(B)(2) applies to a plan that uses the prior
year testing method described in Notice
98–1. Paragraph (1)(b)(iv)(B)(1)is
applied by substituting“the year prior to
the year of the failure”for“the year of
the failure”.
(2)Examples.
Example 1:
Employer A maintains a profit-sharing plan with
a cash or deferred arrangement that is intended
to satisfy§401(k) (“401(k) plan”) using the cur-
rent year testing method described in Notice
98–1. The plan does not provide for matching
contributions or employee after-tax contribu-
tions. In 1999, it was discovered that the ADP
test for 1997 was not performed correctly. When
the ADP test was performed correctly, the test
was not satisfied for 1997. For 1997, the ADP
for highly compensated employees was 9% and
the ADP for nonhighly compensated employees
was 4%. Accordingly, the ADP for highly com-
pensated employees exceeded the ADP for non-
highly compensated employees by more than
twopercentagepoints(inviolationof
§401(k)(3)). (The ADP for nonhighly compen-
sated employees for 1996 also was 4%, so the
ADP test for 1997 would not have been satisfied
even if the plan had used the prior year testing
method described in Notice 98–1.) There were
two highly compensated employees eligible
under the 401(k) plan during 1997, Employee P
and Employee Q. Employee P made elective
deferrals of $8,000, which is equal to 10% of
Employee P’s compensation of $80,000 for
1997. Employee Q made elective deferrals of
$9,500, which is equal to 8% of Employee Q’s
compensation of $118,750 for 1997.
Correction:
On June 30, 1999, Employer A uses the one-to-
one correction method to correct the failure to
satisfy the ADP test for 1997. Accordingly,
Employer A calculates the dollar amount of the
excess contributions for the two highly compen-
sated employees in the manner described in
§401(k)(8)(B). The amount of the excess contri-
bution for Employee P is $3,200 (4% of
$80,000) and the amount of the excess contribu-
tion for Employee Q is $2,375 (2% of
$118,750), or a total of $5,575. In accordance
with§401(k)(8)(C), $5,575, the excess contri-
bution amount, is assigned $2,037.50 to
Employee P and $3,537.50 to Employee Q. It is
determined that the earnings on the assigned
amounts through June 30, 1999, are $407 and
$707 for Employees P and Q, respectively. The
assigned amounts and the earnings are distrib-
uted to Employees P and Q. Therefore,
Employee P receives $2,444.50 ($2,037.50 +
$407) and Employee Q receives $4,244.50
($3,537.50 + $707). In addition, on the same
date, a corrective contribution is made to the
401(k) plan equal to $6,689 (the sum of the
$2,444.50 distributed to Employee P and the
$4,244.50 distributed to Employee Q). The cor-
rective contribution is allocated to the account
balances of eligible nonhighly compensated
employees for 1997,pro ratabased on their
compensation for 1997 (subject to§415 for
1997).
Example 2:
The facts are the same as in Example 1.
Correction:
The correction is the same as in Example 1,
except that the corrective contribution of $6,689
is allocated in an equal dollar amount to the
account balances of eligible nonhighly compen-
sated employees for 1997 who are employees on
June 30, 1999, and who are nonhighly compen-
sated employees for 1999 (subject to§415 for
1997).
Example 3:
The facts are the same as in Example 1, except
that for 1997 the plan also provides (1) for
employee after-tax contributions and (2) for
matching contributions equal to 50% of the sum
of an employee’s elective deferrals and
employee after-tax contributions that do not
exceed 10% of the employee’s compensation.
The plan provides that matching contributions
are subject to the plan’s 5-year graded vesting
schedule and that matching contributions are
forfeited and used to reduce employer contribu-
tions if associated elective deferrals or employee
after-tax contributions are distributed to correct
an ADP, ACP or multiple use test failure. For
1997, nonhighly compensated employees made
employee after-tax contributions and no highly
compensated employee made any employee
after-tax contributions. Employee P received a
matching contribution of $4,000 (50% of
$8,000) and Employee Q received a matching
contribution of $4,750 (50% of $9,500).
Employees P and Q were 100% vested in 1997.
It is determined that, for 1997, the ACP for
highly compensated employees was not more
than 125% of the ACP for nonhighly compen-
sated employees, so that the ACP and multiple
use tests would have been satisfied for 1997
without any corrective action.
Correction:
The same corrective actions are taken as in
Example 1. In addition, in accordance with the
plan’s terms, corrective action is taken to forfeit
Employee P’s and Employee Q’s matching con-
tributions associated with their distributed
excess contributions. Employee P’s distributed
excess contributions and associated matching
contributions are $2,037.50 and $1,018.75,
respectively. Employee Q’s distributed excess
contributions and associated matching contribu-
tions are $3,537.50 and $1,768.75, respectively.
Thus, $1,018.75 is forfeited from Employee P’s
account and $1,768.75 is forfeited from
Employee Q’s account. In addition, the earnings
on the forfeited amounts are also forfeited. It is
determined that the respective earnings on the
forfeited amount for Employee P is $150 and for
Employee Q is $204. The total amount of the
forfeitures of $3,141.50 (Employee P’s
$1,018.75 + $150 and Employee Q’s $1,768.75
+ $204) is used to reduce contributions for 1999
and subsequent years.
.02Exclusion of Eligible Employees.
(1) Exclusion of Eligible Employ-
ees in a 401(k) or (m) Plan. (a) Correction
Method. (i) VCS Correction Method for
Full Year Exclusion. Appendix A, section
.05 sets forth the VCS correction method
for the exclusion of an eligible employee
from all contributions under a 401(k) or
(m) plan for one or more full plan years.
(See Example 4.) In section 2.02(1)(a)(ii)
July 22, 20021572002–29 I.R.B.

below, the VCS correction method for the
exclusion of an eligible employee from
all contributions under a 401(k) or (m)
plan for a full year is expanded to include
correction for the exclusion of an eligible
employee from all contributions under a
401(k) or (m) plan for a partial plan year.
This correction for a partial year exclu-
sion may be used in conjunction with the
correction for a full year exclusion.
(ii) Expansion of VCS Correc-
tion Method to Partial Year Exclusion.
(A) In General. The correction method in
Appendix A, section .05 is expanded to
cover an employee who was improperly
excluded from making elective deferrals
or employee after-tax contributions for a
portion of a plan year or from receiving
matching contributions (on either elective
deferrals or employee after-tax contribu-
tions) for a portion of a plan year. In such
case, a permitted correction method for
the failure is for the employer to satisfy
this section 2.02(1)(a)(ii). The employer
makes a corrective contribution on behalf
of the excluded employee that satisfies
the vesting requirements and distribution
limitations of§401(k)(2)(B) and (C).
(B) Elective Deferral Failures.
The appropriate corrective contribution
for the failure to allow employees to
make elective deferrals for a portion of
the plan year is equal to the ADP of the
employee’s group (either highly or non-
highly compensated), determined prior to
correctionunderthissection
2.02(1)(a)(ii), multiplied by the employ-
ee’s plan compensation for the portion of
the year during which the employee was
improperly excluded. The corrective con-
tribution for the portion of the plan year
during which the employee was improp-
erly excluded from being eligible to make
elective deferrals is reduced to the extent
that (1) the sum of that contribution and
any elective deferrals actually made by
the employee for that year would exceed
(2) the maximum elective deferrals per-
mitted under the plan for the employee
for that plan year (including the§402(g)
limit). The corrective contribution is
adjusted for earnings. (See Examples 5
and 6.)
(C) Employee After-tax and
Matching Contribution Failures. The
appropriate corrective contribution for the
failure to allow employees to make
employee after-tax contributions or to
receive matching contributions because
the employee was precluded from making
employee after-tax contributions or elec-
tive deferrals for a portion of the plan
year is equal to the ACP of the employ-
ee’s group (either highly or nonhighly
compensated), determined prior to correc-
tion under this section 2.02(1)(a)(ii), mul-
tiplied by the employee’s plan compensa-
tion for the portion of the year during
which the employee was improperly
excluded. The corrective contribution is
reduced to the extent that (1) the sum of
that contribution and the actual total
employee after-tax and matching contri-
butions made by and for the employee for
the plan year would exceed (2) the sum of
the maximum employee after-tax contri-
butions permitted under the plan for the
employee for the plan year and the
matching contributions that would have
been made if the employee had made the
maximum matchable contributions per-
mitted under the plan for the employee
for that plan year. The corrective contri-
bution is adjusted for earnings.
(D) Use of Prorated Compensa-
tion. For purposes of this paragraph
(1)(a)(ii), for administrative convenience,
in lieu of using the employee’s actual
plan compensation for the portion of the
year during which the employee was
improperly excluded, apro rataportion
of the employee’s plan compensation that
would have been taken into account for
the plan year, if the employee had not
been improperly excluded, may be used.
(E) Special Rule for Brief Exclusion
from Elective Deferrals. An employer is
not required to make a corrective contri-
bution with respect to elective deferrals,
as provided in section 2.02(1)(a)(ii)(B),
(but is required to make a corrective con-
tribution with respect to any employee
after-tax and matching contributions, as
provided in section 2.02(1)(a)(ii)(C)) for
an employee for a plan year if the
employee has been provided the opportu-
nity to make elective deferrals under the
plan for a period of at least the last 9
months in that plan year and during that
period the employee had the opportunity
to make elective deferrals in an amount
not less than the maximum amount that
would have been permitted if no failure
had occurred. (See Example 7.)
(b) Examples.
Example 4:
Employer B maintains a 401(k) plan. The plan
provides for matching contributions for eligible
employees equal to 100% of elective deferrals
that do not exceed 3% of an employee’s com-
pensation. The plan provides that employees
who complete one year of service are eligible to
participate in the plan on the next January 1 or
July 1 entry date. Twelve employees (8 non-
highly compensated employees and 4 highly
compensated employees) who had met the one
year eligibility requirement after July 1, 1995,
and before January 1, 1996, were inadvertently
excluded from participating in the plan begin-
ning on January 1, 1996. These employees were
offered the opportunity to begin participating in
the plan on January 1, 1997. For 1996, the ADP
for the highly compensated employees was 8%
and the ADP for the nonhighly compensated
employees was 6% . In addition, for 1996, the
ACP for the highly compensated employees was
2.5% and the ACP for the nonhighly compen-
sated employees was 2% . The failure to include
the 12 employees was discovered during 1998.
Correction:
Employer B uses the VCS correction method for
full year exclusions to correct the failure to
include the 12 eligible employees in the plan for
the full plan year beginning January 1, 1996.
Thus, Employer B makes a corrective contribu-
tion (that satisfies the vesting requirements and
distribution limitations of§401(k)(2)(B) and
(C)) for each of the excluded employees. The
contribution for each of the improperly excluded
highly compensated employees is 10.5% (the
highly compensated employees’ADP of 8% plus
ACP of 2.5% ) of the employee’s plan compen-
sation for the 1996 plan year (adjusted for earn-
ings). The contribution for each of the improp-
erly excluded nonhighly compensated
employees is 8% (the nonhighly compensated
employees’ADP of 6% plus ACP of 2% ) of the
employee’s plan compensation for the 1996 plan
year (adjusted for earnings).
Example 5:
Employer C maintains a 401(k) plan. The plan
provides for matching contributions for each
payroll period that are equal to 100% of an
employee’s elective deferrals that do not exceed
2% of the eligible employee’s plan compensa-
tion during the payroll period. The plan does not
provide for employee after-tax contributions.
The plan provides that employees who complete
one year of service are eligible to participate in
the plan on the next January 1 or July 1 entry
date. A nonhighly compensated employee who
met the eligibility requirements and should have
entered the plan on January 1, 1996, was not
offered the opportunity to participate in the plan.
In August of 1996, the error was discovered and
Employer C offered the employee an election
opportunity as of September 1, 1996. The
employee made elective deferrals equal to 4% of
the employee’s plan compensation for each pay-
roll period from September 1, 1996, through
2002–29 I.R.B.158July 22, 2002

December 31, 1996 (resulting in elective defer-
rals of $500). The employee’s plan compensa-
tion for 1996 was $36,000 ($23,500 for the first
eight months and $12,500 for the last four
months). Employer C made matching contribu-
tions equal to $250 for the excluded employee,
which is 2% of the employee’s plan compensa-
tion for each payroll period from September 1,
1996, through December 31, 1996 ($12,500).
The ADP for nonhighly compensated employees
for 1996 was 3% and the ACP for nonhighly
compensated employees for 1996 was 1.8% .
Correction:
Employer C uses the VCS correction method for
partial year exclusions to correct the failure to
include the eligible employee in the plan. Thus,
Employer C makes a corrective contribution
(that satisfies the vesting requirements and dis-
tribution limitations of§401(k)(2)(B) and (C))
for the excluded employee. In determining the
amount of corrective contributions (both for the
elective deferral and for the matching contribu-
tion), for administrative convenience, in lieu of
using actual plan compensation of $23,500 for
the period the employee was excluded, the
employee’s annual plan compensation is pro
rated for the eight-month period that the
employee was excluded from participating in the
plan. The failure to provide the excluded
employee the right to make elective deferrals is
corrected by the employer making a corrective
contribution on behalf of the employee that is
equal to $720 (the 3% ADP percentage for non-
highly compensated employees multiplied by
$24,000, which is 8/12ths of the employee’s
1996 plan compensation of $36,000), adjusted
for earnings. In addition, to correct for the fail-
ure to receive the plan’s matching contribution,
a corrective contribution is made on behalf of
the employee that is equal to $432 (the 1.8%
ACP for the nonhighly compensated group mul-
tiplied by $24,000, which is 8/12ths of the
employee’s 1996 plan compensation of
$36,000), adjusted for earnings. Employer C
determines that $682, the sum of the actual
matching contribution received by the employee
for the plan year ($250) and the corrective con-
tribution to correct the matching contribution
failure ($432), does not exceed $720, the maxi-
mum matching contribution available to the
employee under the plan (2% of $36,000) deter-
mined as if the employee had made the maxi-
mum matchable contributions. In addition to
correcting the failure to include the eligible
employee in the plan, Employer C reruns the
ADP and ACP tests for 1996 (taking into
account the corrective contribution and plan
compensation for 1996 for the excluded
employee) and determines that the tests were
satisfied.
Example 6:
The facts are the same as in Example 5, except
that the plan provides for matching contributions
that are equal to 100% of an eligible employee’s
elective deferrals that do not exceed 2% of the
employee’s plan compensation for the plan year.
Accordingly, the actual matching contribution
made by Employer C for the excluded employee
for the last four months of 1996 is $500 (which
is equal to 100% of the $500 of elective defer-
rals made by the employee for the last four
months of 1996).
Correction:
The correction is the same as in Example 5,
except that the corrective contribution made for
the first 8 months of 1996 to correct the failure
to make matching contributions is equal to $220
(adjusted for earnings), instead of the $432
(adjusted for earnings) in Example 5, because
the corrective contribution is limited to the
maximum matching contributions available
under the plan for the employee for the plan
year, $720 (2% of $36,000), reduced by the
actual matching contributions made for the
employee for the plan year, $500.
Example 7:
The facts are the same as in Example 5, except
that the error is discovered in March of 1996 and
the employee was given the opportunity to make
elective deferrals beginning on April 1, 1996.
The amount of elective deferrals that the
employee was given the opportunity to make
during 1996 was not less than the maximum
elective deferrals that the employee could have
made if the employee had been given the oppor-
tunity to make elective deferrals beginning on
January 1, 1996. The employee made elective
deferrals equal to 4% of the employee’s plan
compensation for each payroll period from April
1, 1996, through December 31, 1996, of $28,000
(resulting in elective deferrals of $1,120).
Employer C made a matching contribution equal
to $560, which is 2% of the employee’s plan
compensation for each payroll period from April
1, 1996, through December 31, 1996 ($28,000).
The employee’s plan compensation for 1996
was $36,000 ($8,000 for the first three months
and $28,000 for the last nine months).
Correction:
Employer C uses the VCS correction method for
partial year exclusions to correct the failure to
include an eligible employee in the plan.
Because the employee was given an opportunity
to make elective deferrals to the plan for at least
the last 9 months of the plan year (and the
amount of the elective deferrals that the
employee had the opportunity to make was not
less than the maximum elective deferrals that the
employee could have made if the employee had
been given the opportunity to make elective
deferrals beginning on January 1, 1996), under
the special rule set forth in section
2.02(1)(a)(ii)(E), Employer C is not required to
make a corrective contribution for the failure to
allow the employee to make elective deferrals.
In determining the amount of corrective contri-
bution with respect to the failure to allow the
employee to receive matching contributions, in
lieu of using actual plan compensation of $8,000
for the period the employee was excluded, the
employee’s annual plan compensation is pro
rated for the three-month period that the
employee was excluded from participating in the
plan. Accordingly, a corrective contribution is
made on behalf of the employee that is equal to
$160, which is the lesser of (i) $162 (a matching
contribution of 1.8% of $9,000, which is 3/12ths
of the employee’s 1996 plan compensation of
$36,000), and (ii) $160 (the excess of the maxi-
mum matching contribution for the entire plan
year, which is equal to 2% of $36,000, or $720,
over the matching contributions made after
March 31, 1996, $560). The contribution is
adjusted for earnings.
(2) Exclusion of Eligible Employ-
ees In a Profit-Sharing Plan.
(a) Correction Methods. (i) VCS
Correction Method. Appendix A, section
.05 sets forth the VCS correction method
for correcting the exclusion of an eligible
employee. In the case of a defined contri-
bution plan, the VCS correction method
is to make a contribution on behalf of the
excluded employee. Section 2.02(2)(a)(ii)
below clarifies the VCS correction
method in the case of a profit-sharing or
stock bonus plan that provides for non-
elective contributions (within the mean-
ing of§1.401(k)–1(g)(10)).
(ii) Clarification of VCS Cor-
rection Method for Profit-Sharing Plans.
To correct for the exclusion of an eligible
employee from nonelective contributions
in a profit-sharing or stock bonus plan
under the VCS correction method, an
allocation amount is determined for each
excluded employee on the same basis as
the allocation amounts were determined
for the other employees under the plan’s
allocation formula (e.g., the same ratio of
allocation to compensation), taking into
account all of the employee’s relevant
factors (e.g., compensation) under that
formula for that year. The employer
makes a corrective contribution on behalf
of the excluded employee that is equal to
the allocation amount for the excluded
employee. The corrective contribution is
adjusted for earnings. If, as a result of
excluding an employee, an amount was
improperly allocated to the account bal-
ance of an eligible employee who shared
in the original allocation of the nonelec-
tive contribution, no reduction is made to
the account balance of the employee who
shared in the original allocation on
account of the improper allocation. (See
Example 8.)
(iii) Reallocation Correction
Method. (A) In General. Subject to the
limitations set forth in section
2.02(2)(a)(iii)(F) below, in addition to the
VCS correction method, the exclusion of
an eligible employee for a plan year from
July 22, 20021592002–29 I.R.B.

a profit-sharing or stock bonus plan that
provides for nonelective contributions
may be corrected using the reallocation
correction method set forth in this section
2.02(2)(a)(iii). Under the reallocation cor-
rection method, the account balance of
the excluded employee is increased as
provided in paragraph (2)(a)(iii)(B)
below, the account balances of other
employees are reduced as provided in
paragraph (2)(a)(iii)(C) below, and the
increases and reductions are reconciled,
as necessary, as provided in paragraph
(2)(a)(iii)(D) below. (See Examples 9 and
10.)
(B) Increase in Account Balance
of Excluded Employee. The account bal-
ance of the excluded employee is
increased by an amount that is equal to
the allocation the employee would have
received had the employee shared in the
allocation of the nonelective contribution.
The amount is adjusted for earnings.
(C) Reduction in Account Bal-
ances of Other Employees. (1) The
account balance of each employee who
was an eligible employee who shared in
the original allocation of the nonelective
contribution is reduced by the excess, if
any, of (I) the employee’s allocation of
that contribution over (II) the amount that
would have been allocated to that
employee had the failure not occurred.
This amount is adjusted for earnings tak-
ing into account the rules set forth in sec-
tion 2.02(2)(a)(iii)(C)(2) and (3) below.
The amount after adjustment for earnings
is limited in accordance with section
2.02(2)(a)(iii)(C)(4) below.
(2) This paragraph (2)(a)(iii)(C)(2)
applies if most of the employees with
account balances that are being reduced
are nonhighly compensated employees. If
there has been an overall gain for the
period from the date of the original allo-
cation of the contribution through the date
of correction, no adjustment for earnings
is required to the amount determined
under section 2.02(2)(a)(iii)(C)(1) for the
employee. If the amount for the employee
is being adjusted for earnings and the
plan permits investment of account bal-
ances in more than one investment fund,
for administrative convenience, the reduc-
tion to the employee’s account balance
may be adjusted by the lowest earnings
rate of any fund for the period from the
date of the original allocation of the con-
tribution through the date of correction.
(3) If an employee’s account bal-
ance is reduced and the original allocation
was made to more than one investment
fund or there was a subsequent distribu-
tion or transfer from the fund receiving
the original allocation, then reasonable,
consistent assumptions are used to deter-
mine the earnings adjustment.
(4) The amount determined in sec-
tion 2.02(2)(a)(iii)(C)(1) for an employee
aftertheapplicationofsection
2.02(2)(a)(iii)(C)(2) and (3) may not
exceed the account balance of the
employee on the date of correction, and
the employee is permitted to retain any
distribution made prior to the date of cor-
rection.
(D) Reconciliation of Increases
and Reductions. If the aggregate amount
of the increases under section
2.02(2)(a)(iii)(B) exceeds the aggregate
amount of the reductions under section
2.02(2)(a)(iii)(C), the employer makes a
corrective contribution to the plan for the
amount of the excess. If the aggregate
amount of the reductions under section
2.02(2)(a)(iii)(C) exceeds the aggregate
amount of the increases under section
2.02(2)(a)(iii)(B), then the amount by
which each employee’s account balance
is reduced under section 2.02(2)(a)(iii)(C)
is decreased on apro ratabasis.
(E) Reductions Among Multiple
Investment Funds. If an employee’s
account balance is reduced and the
employee’s account balance is invested in
more than one investment fund, then the
reduction may be made from the invest-
ment funds selected in any reasonable
manner.
(F) Limitations on Use of Reallo-
cation Correction Method. If any
employee would be permitted to retain
any distribution pursuant to section
2.02(2)(a)(iii)(C)(4), then the reallocation
correction method may not be used unless
most of the employees who would be per-
mitted to retain a distribution are non-
highly compensated employees.
(b) Examples.
Example 8:
Employer D maintains a profit-sharing plan that
provides for discretionary nonelective employer
contributions. The plan provides that the
employer’s contributions are allocated to
account balances in the ratio that each eligible
employee’s compensation for the plan year bears
to the compensation of all eligible employees for
the plan year and, therefore, the only relevant
factor for determining an allocation is the
employee’s compensation. The plan provides for
self-directed investments among four investment
funds and daily valuations of account balances.
For the 1997 plan year, Employer D made a
contribution to the plan of a fixed dollar amount.
However, five employees who met the eligibility
requirements were inadvertently excluded from
participating in the plan. The contribution
resulted in an allocation on behalf of each of the
eligible employees, other than the excluded
employees, equal to 10% of compensation. Most
of the employees who received allocations under
the plan for the year of the failure were non-
highly compensated employees. No distributions
have been made from the plan since 1997. If the
five excluded employees had shared in the origi-
nal allocation, the allocation made on behalf of
each employee would have equaled 9% of com-
pensation. The excluded employees began par-
ticipating in the plan in the 1998 plan year.
Correction:
Employer D uses the VCS correction method to
correct the failure to include the five eligible
employees. Thus, Employer D makes a correc-
tive contribution to the plan. The amount of the
corrective contribution on behalf of the five
excluded employees for the 1997 plan year is
equal to 10% of compensation of each excluded
employee, the same allocation that was made for
other eligible employees, adjusted for earnings.
The excluded employees receive an allocation
equal to 10% of compensation (adjusted for
earnings) even though, had the excluded
employees originally shared in the allocation for
the 1997 contribution, their account balances, as
well as those of the other eligible employees,
would have received an allocation equal to only
9% of compensation.
Example 9:
The facts are the same as in Example 8.
Correction:
Employer D uses the reallocation correction
method to correct the failure to include the five
eligible employees. Thus, the account balances
are adjusted to reflect what would have resulted
from the correct allocation of the employer con-
tribution for the 1997 plan year among all eli-
gible employees, including the five excluded
employees. The inclusion of the excluded
employees in the allocation of that contribution
would have resulted in each eligible employee,
including each excluded employee, receiving an
allocation equal to 9% of compensation. Accord-
ingly, the account balance of each excluded
employee is increased by 9% of the employee’s
1997 compensation, adjusted for earnings. The
account balance of each of the eligible employ-
ees other than the excluded employees is
reduced by 1% of the employee’s 1997 compen-
sation, adjusted for earnings. Employer D deter-
mines the adjustment for earnings using the
earnings rate of each eligible employee’s excess
2002–29 I.R.B.160July 22, 2002

allocation (using reasonable, consistent assump-
tions). Accordingly, for an employee who shared
in the original allocation and directed the invest-
ment of the allocation into more than one invest-
ment fund or who subsequently transferred a
portion of a fund that had been credited with a
portion of the 1997 allocation to another fund,
reasonable, consistent assumptions are followed
to determine the adjustment for earnings. It is
determined that the total of the initially deter-
mined reductions in account balances exceeds
the total of the required increases in account bal-
ances. Accordingly, these initially determined
reductions are decreasedpro rataso that the
total of the actual reductions in account balances
equals the total of the increases in the account
balances, and Employer D does not make any
corrective contribution. The reductions from the
account balances are made on apro ratabasis
among all of the funds in which each employ-
ee’s account balance is invested.
Example 10:
The facts are the same as in Example 8.
Correction:
The correction is the same as in Example 9,
except that, because most of the employees
whose account balances are being reduced are
nonhighly compensated employees, for adminis-
trative convenience, Employer D uses the earn-
ings rate of the fund with the lowest earnings
rate for the period of the failure to adjust the
reduction to each account balance. It is deter-
mined that the aggregate amount (adjusted for
earnings) by which the account balances of the
excluded employees is increased exceeds the
aggregate amount (adjusted for earnings) by
which the other employees’account balances are
reduced. Accordingly, Employer D makes a con-
tribution to the plan in an amount equal to the
excess. The reduction from account balances is
made on apro ratabasis among all of the funds
in which each employee’s account balance is
invested.
.03Vesting Failures.
(1) Correction Methods. (a) Contri-
bution Correction Method. A failure in a
defined contribution plan to apply the
proper vesting percentage to an employ-
ee’s account balance that results in forfei-
ture of too large a portion of the employ-
ee’s account balance may be corrected
using the contribution correction method
set forth in this paragraph. The employer
makes a corrective contribution on behalf
of the employee whose account balance
was improperly forfeited in an amount
equal to the improper forfeiture. The cor-
rective contribution is adjusted for earn-
ings. If, as a result of the improper forfei-
ture, an amount was improperly allocated
to the account balance of another
employee, no reduction is made to the
account balance of that employee. (See
Example 11.)
(b) Reallocation Correction
Method. In addition to the contribution
correction method, in a defined contribu-
tion plan under which forfeitures of
account balances are reallocated among
the account balances of the other eligible
employees in the plan, a failure to apply
the proper vesting percentage to an
employee’s account balance which results
in forfeiture of too large a portion of the
employee’s account balance may be cor-
rected under the reallocation correction
method set forth in this paragraph. A cor-
rective reallocation is made in accordance
with the reallocation correction method
set forth in section 2.02(2)(a)(iii), subject
to the limitations set forth in section
2.02(2)(a)(iii)(F). In applying section
2.02(2)(a)(iii)(B), the account balance of
the employee who incurred the improper
forfeiture is increased by an amount equal
to the amount of the improper forfeiture
and the amount is adjusted for earnings.
In applying section 2.02(2)(a)(iii)(C)(1),
the account balance of each employee
who shared in the allocation of the
improper forfeiture is reduced by the
amount of the improper forfeiture that
was allocated to that employee’s account.
The earnings adjustments for the account
balances that are being reduced are deter-
minedinaccordancewithsections
2.02(2)(a)(iii)(C)(2) and (3) and the
reductions after adjustments for earnings
are limited in accordance with section
2.02(2)(a)(iii)(C)(4). In accordance with
section 2.02(2)(a)(iii)(D), if the aggregate
amount of the increases exceeds the
aggregate amount of the reductions, the
employer makes a corrective contribution
to the plan for the amount of the excess.
Inaccordancewithsection2.02(2)
(a)(iii)(D), if the aggregate amount of the
reductions exceeds the aggregate amount
of the increases, then the amount by
which each employee’s account balance
is reduced is decreased on apro rata
basis. (See Example 12.)
(2) Examples.
Example 11:
Employer E maintains a profit-sharing plan that
provides for nonelective contributions. The plan
provides for self-directed investments among
four investment funds and daily valuation of
account balances. The plan provides that forfei-
tures of account balances are reallocated among
the account balances of other eligible employees
on the basis of compensation. During the 1997
plan year, Employee R terminated employment
with Employer E and elected and received a
single-sum distribution of the vested portion of
his account balance. No other distributions have
been made since 1997. However, an incorrect
determination of Employee R’s vested percent-
age was made resulting in Employee R receiving
a distribution of less than the amount to which
he was entitled under the plan. The remaining
portion of Employee R’s account balance was
forfeited and reallocated (and these reallocations
were not affected by the limitations of§415).
Most of the employees who received allocations
of the improper forfeiture were nonhighly com-
pensated employees.
Correction:
Employer E uses the contribution correction
method to correct the improper forfeiture. Thus,
Employer E makes a contribution on behalf of
Employee R equal to the incorrectly forfeited
amount (adjusted for earnings) and Employee
R’s account balance is increased accordingly. No
reduction is made from the account balances of
the employees who received an allocation of the
improper forfeiture.
Example 12:
The facts are the same as in Example 11.
Correction:
Employer E uses the reallocation correction
method to correct the improper forfeiture. Thus,
Employee R’s account balance is increased by
the amount that was improperly forfeited
(adjusted for earnings). The account of each
employee who shared in the allocation of the
improper forfeiture is reduced by the amount of
the improper forfeiture that was allocated to that
employee’s account (adjusted for earnings).
Because most of the employees whose account
balances are being reduced are nonhighly com-
pensated employees, for administrative conve-
nience, Employer E uses the earnings rate of the
fund with the lowest earnings rate for the period
of the failure to adjust the reduction to each
account balance. It is determined that the
amount (adjusted for earnings) by which the
account balance of Employee R is increased
exceeds the aggregate amount (adjusted for
earnings) by which the other employees’
account balances are reduced. Accordingly,
Employer E makes a contribution to the plan in
an amount equal to the excess. The reduction
from the account balances is made on apro rata
basis among all of the funds in which each
employee’s account balance is invested.
.04§415 Failures.
(1) Failures Relating to a§415(b)
Excess.
(a) Correction Methods. (i) Return
of Overpayment Correction Method.
Overpayments as a result of amounts
being paid in excess of the limits of
July 22, 20021612002–29 I.R.B.

§415(b) may be corrected using the
return of Overpayment correction method
set forth in this paragraph (1)(a)(i). The
employer takes reasonable steps to have
the Overpayment (with appropriate inter-
est) returned by the recipient to the plan
and reduces future benefit payments (if
any) due to the employee to reflect
§415(b). To the extent the amount
returned by the recipient is less than the
Overpayment, adjusted for earnings at the
plan’s earnings rate, then the employer or
another person contributes the difference
to the plan. In addition, in accordance
with section 6.05 of this revenue proce-
dure, the employer must notify the recipi-
ent that the Overpayment was not eligible
for favorable tax treatment accorded to
distributions from qualified plans (and,
specifically, was not eligible for tax-free
rollover). (See Examples 15 and 16.)
(ii) Adjustment of Future Pay-
ments Correction Method. (A) In Gen-
eral. In addition to the return of overpay-
ment correction method, in the case of
plan benefits that are being distributed in
the form of periodic payments, Overpay-
ments as a result of amounts being paid in
excess of the limits in§415(b) may be
corrected by using the adjustment of
future payments correction method set
forth in this paragraph (1)(a)(ii). Future
payments to the recipient are reduced so
that they do not exceed the§415(b)
maximum limit and an additional reduc-
tion is made to recoup the Overpayment
(over a period not longer than the remain-
ing payment period) so that the actuarial
present value of the additional reduction
is equal to the Overpayment plus interest
at the interest rate used by the plan to
determine actuarial equivalence. (See
Examples 13 and 14.)
(B) Joint and Survivor Annuity
Payments. If the employee is receiving
payments in the form of a joint and survi-
vor annuity, with the employee’s spouse
to receive a life annuity upon the employ-
ee’s death equal to a percentage (e.g.,
75% ) of the amount being paid to the
employee, the reduction of future annuity
payments to reflect§415(b) reduces the
amount of benefits payable during the
lives of both the employee and spouse,
but any reduction to recoup Overpay-
ments made to the employee does not
reduce the amount of the spouse’s survi-
vor benefit. Thus, the spouse’s benefit
will be based on the previous specified
percentage (e.g., 75% ) of the maximum
permitted under§415(b), instead of the
reduced annual periodic amount payable
to the employee.
(C) Overpayment Not Treated as
an Excess Amount. An Overpayment cor-
rected under this adjustment of future
payment correction method is not treated
as an Excess Amount as defined in sec-
tion 5.01(3) of this revenue procedure.
(b) Examples.
Example 13:
Employer F maintains a defined benefit plan
funded solely through employer contributions.
The plan provides that the benefits of employees
are limited to the maximum amount permitted
under§415(b), disregarding cost-of-living
adjustments under§415(d) after benefit pay-
ments have commenced. At the beginning of the
1998 plan year, Employee S retired and started
receiving an annual straight life annuity of
$140,000 from the plan. Due to an administra-
tive error, the annual amount received by
Employee S for 1998 included an Overpayment
of $10,000 (because the§415(b)(1)(A) limit for
1998 was $130,000). This error was discovered
at the beginning of 1999.
Correction:
Employer F uses the adjustment of future pay-
ments correction method to correct the failure to
satisfy the limit in§415(b). Future annuity ben-
efit payments to Employee S are reduced so that
they do not exceed the§415(b) maximum limit,
and, in addition, Employee S’s future benefit
payments from the plan are actuarially reduced
to recoup the Overpayment. Accordingly,
Employee S’s future benefit payments from the
plan are reduced to $130,000 and further
reduced by $1,000 annually for life, beginning
in 1999. The annual benefit amount is reduced
by $1,000 annually for life because, for
Employee S, the actuarial present value of a
benefit of $1,000 annually for life commencing
in 1999 is equal to the sum of $10,000 and inter-
est at the rate used by the plan to determine
actuarial equivalence beginning with the date of
the first Overpayment and ending with the date
the reduced annuity payment begins. Thus,
Employee S’s remaining benefit payments are
reduced so that Employee S receives $129,000
for 1999, and for each year thereafter.
Example 14:
The facts are the same as in Example 13.
Correction:
Employer F uses the adjustments of future pay-
ments correction method to correct the§415(b)
failure, by recouping the entire excess payment
made in 1998 from Employee S’s remaining
benefit payments for 1999. Thus, Employee S’s
annual annuity benefit for 1999 is reduced to
$119,400 to reflect the excess benefit amounts
(increased by interest) that were paid from the
plan to Employee S during the 1998 plan year.
Beginning in 2000, Employee S begins to
receive annual benefit payments of $130,000.
Example 15:
The facts are the same as in Example 13, except
that the benefit was paid to Employee S in the
form of a single-sum distribution in 1998, which
exceeded the maximum§415(b) limits by
$110,000.
Correction:
Employer F uses the return of overpayment cor-
rection method to correct the§415(b) failure.
Thus, Employer F notifies Employee S of the
$110,000 Overpayment and that the Overpay-
ment was not eligible for favorable tax treatment
accorded to distributions from qualified plans
(and, specifically, was not eligible for tax-free
rollover). The notice also informs Employee S
that the Overpayment (with interest at the rate
used by the plan to calculate the single-sum pay-
ment) is owed to the plan. Employer F takes
reasonable steps to have the Overpayment (with
interest at the rate used by the plan to calculate
the single-sum payment) paid to the plan.
Employee S pays the $110,000 (plus the
requested interest) to the plan. It is determined
that the plan’s earnings rate for the relevant
period was 2 percentage points more than the
rate used by the plan to calculate the single-sum
payment. Accordingly, Employer F contributes
the difference to the plan.
Example 16:
The facts are the same as in Example 15.
Correction:
Employer F uses the return of overpayment cor-
rection method to correct the§415(b) failure.
Thus, Employer F notifies Employee S of the
$110,000 Overpayment and that the Overpay-
ment was not eligible for favorable tax treatment
accorded to distributions from qualified plans
(and, specifically, was not eligible for tax-free
rollover). The notice also informs Employee S
that the Overpayment (with interest at the rate
used by the plan to calculate the single-sum pay-
ment) is owed to the plan. Employer F takes
reasonable steps to have the Overpayment (with
interest at the rate used by the plan to calculate
the single-sum payment) paid to the plan. As a
result of Employer F’s recovery efforts, some,
but not all, of the Overpayment (with interest) is
recovered from Employee S. It is determined
that the amount returned by Employee S to the
plan is less than the Overpayment adjusted for
earnings at the plan’s earnings rate. Accordingly,
Employer F contributes the difference to the
plan.
(2) Failures Relating to a§415(c)
Excess.
(a) Correction Methods. (i) VCS
Correction Method. Appendix A, section
.08 sets forth the VCS correction method
for correcting the failure to satisfy the
§415(c) limits on annual additions.
2002–29 I.R.B.162July 22, 2002

(ii) Forfeiture Correction
Method. In addition to the VCS correc-
tion method, the failure to satisfy
§415(c) with respect to a nonhighly com-
pensated employee (A) who in the limita-
tion year of the failure had annual addi-
tions consisting of both (I) either elective
deferrals or employee after-tax contribu-
tions or both and (II) either matching or
nonelective contributions or both, (B) for
whom the matching and nonelective con-
tributions equal or exceed the portion of
the employee’s annual addition that
exceeds the limits under§415(c)
(“§415(c) excess”) for the limitation
year, and (C) who has terminated with no
vested interest in the matching and non-
elective contributions (and has not been
reemployed at the time of the correction),
may be corrected by using the forfeiture
correction method set forth in this para-
graph. The§415(c) excess is deemed to
consist solely of the matching and non-
elective contributions. If the employee’s
§415(c) excess (adjusted for earnings)
haspreviouslybeenforfeited,the
§415(c) failure is deemed to be cor-
rected. If the§415(c) excess (adjusted
for earnings) has not been forfeited, that
amount is placed in an unallocated
account, similar to the suspense account
described in§1.415–6(b)(6)(iii), to be
used to reduce employer contributions in
succeeding year(s) (or if the amount
would have been allocated to other
employees who were in the plan for the
year of the failure if the failure had not
occurred, then that amount is reallocated
to the other employees in accordance with
the plan’s allocation formula). Note that
while this correction method will permit
more favorable tax treatment of elective
deferrals for the employee than the VCS
correction method, this correction method
could be less favorable to the employee in
certain cases, for example, if the
employee is subsequently reemployed
and becomes vested. (See Examples 17
and 18.)
(iii) Return of Overpayment
Correction Method. A failure to satisfy
§415(c) that includes a distribution of the
§415(c) excess attributable to nonelec-
tive contributions and matching contribu-
tions may be corrected using the return of
overpayment correction method set forth
in this paragraph. The employer takes
reasonable steps to have the Overpayment
(i.e., the distribution of the§415(c)
excess adjusted for earnings to the date of
the distribution), plus appropriate interest
from the date of the distribution to the
date of the repayment, returned by the
employee to the plan. To the extent the
amount returned by the employee is less
than the Overpayment adjusted for earn-
ings at the plan’s earnings rate, then the
employer or another person contributes
the difference to the plan. The Overpay-
ment, adjusted for earnings at the plan’s
earnings rate to the date of the repayment,
is to be placed in an unallocated account,
similar to the suspense account described
in§1.415–6(b)(6)(iii), to be used to
reduce employer contributions in suc-
ceeding year(s) (or if the amount would
have been allocated to other eligible
employees who were in the plan for the
year of the failure if the failure had not
occurred, then that amount is reallocated
to the other eligible employees in accor-
dance with the plan’s allocation formula).
In addition, the employer must notify the
employee that the Overpayment was not
eligible for favorable tax treatment
accorded to distributions from qualified
plans (and, specifically, was not eligible
for tax-free rollover).
(b) Examples.
Example 17:
Employer G maintains a 401(k) plan. The plan
provides for nonelective employer contributions,
elective deferrals, and employee after-tax contri-
butions. The plan provides that the nonelective
contributions vest under a 5-year cliff vesting
schedule. The plan provides that when an
employee terminates employment, the employ-
ee’s nonvested account balance is forfeited five
years after a distribution of the employee’s
vested account balance and that forfeitures are
used to reduce employer contributions. For the
1998 limitation year, the annual additions made
on behalf of two nonhighly compensated
employees in the plan, Employees T and U,
exceeded the limit in§415(c). For the 1998
limitation year, Employee T had§415 compen-
sationof$60,000,and,accordingly,a
§415(c)(1)(B) limit of $15,000. Employee T
made elective deferrals and employee after-tax
contributions. For the 1998 limitation year,
Employee U had§415 compensation of
$40,000, and, accordingly, a§415(c)(1)(B) limit
of $10,000. Employee U made elective deferrals.
Also, on January 1, 1999, Employee U, who had
three years of service with Employer G, termi-
nated his employment and received his entire
vested account balance (which consisted of his
elective deferrals). The annual additions for
Employees T and U consisted of:
TU
Nonelective
Contributions$7,500$4,500
Elective
Deferrals10,0005,800
After-tax
Contributions5000
Total Contributions$18,000$10,300
§415(c) Limit$15,000$10,000
§415(c) Excess$3,000$300
Correction:
Employer G uses the VCS correction method to
correct the§415(c) excess with respect to
Employee T (i.e., $3,000). Thus, a distribution
of plan assets (and corresponding reduction of
the account balance) consisting of $500
(adjusted for earnings) of employee after-tax
contributions and $2,500 (adjusted for earnings)
of elective deferrals is made to Employee T.
Employer G uses the forfeiture correction
method to correct the§415(c) excess with
July 22, 20021632002–29 I.R.B.

respect to Employee U. Thus, the§415(c)
excess is deemed to consist solely of the non-
elective contributions. Accordingly, Employee
U’s nonvested account balance is reduced by
$300 (adjusted for earnings) which is placed in
an unallocated account, similar to the suspense
account described in§1.415–6(b)(6)(iii), to be
used to reduce employer contributions in suc-
ceeding year(s). After correction, it is deter-
mined that the ADP and ACP tests for 1998 were
satisfied.
Example 18:
Employer H maintains a 401(k) plan. The plan
provides for nonelective employer contributions,
matching contributions and elective deferrals.
The plan provides for matching contributions
that are equal to 100% of an employee’s elective
deferrals that do not exceed 8% of the employ-
ee’s plan compensation for the plan year. For the
1998 limitation year, Employee V had§415
compensation of $50,000, and, accordingly, a
§415(c)(1)(B) limit of $12,500. During that
limitation year, the annual additions for
Employee V totaled $15,000, consisting of
$5,000 in elective deferrals, a $4,000 matching
contribution (8% of $50,000), and a $6,000 non-
elective employer contribution. Thus, the annual
additions for Employee V exceeded the§415(c)
limit by $2,500.
Correction:
Employer H uses the VCS correction method to
correct the§415(c) excess with respect to
Employee V (i.e., $2,500). Accordingly, $1,000
of the unmatched elective deferrals (adjusted for
earnings) are distributed to Employee V. The
remaining $1,500 excess is apportioned equally
between the elective deferrals and the associated
matching employer contributions, so Employee
V’s account balance is further reduced by dis-
tributing to Employee V $750 (adjusted for earn-
ings) of the elective deferrals and forfeiting
$750 (adjusted for earnings) of the associated
employer matching contributions. The forfeited
matching contributions are placed in an unallo-
cated account; similar to the suspense account
described in§1.415–6(b)(6)(iii), to be used to
reduce employer contributions in succeeding
year(s). After correction, it is determined that the
ADP and ACP tests for 1998 were satisfied.
.05Correction of Other Overpayment
Failures.
An Overpayment, other than one
described in section 2.04(1) (relating to a
§415(b) excess) or section 2.04(2) (relat-
ing to a§415(c) excess), may be cor-
rected in accordance with this section
2.05. An Overpayment from a defined
benefit plan is corrected in accordance
with the rules in section 2.04(1). An
Overpayment from a defined contribution
plan is corrected in accordance with the
rules in section 2.04(2)(a)(iii).
.06§401(a)(17) Failures.
(1) Reduction of Account Balance
Correction Method. The allocation of
contributions or forfeitures under a
defined contribution plan for a plan year
on the basis of compensation in excess of
the limit under§401(a)(17) for the plan
year may be corrected using the reduction
of account balance correction method set
forth in this paragraph. The account bal-
ance of an employee who received an
allocation on the basis of compensation in
excess of the§401(a)(17) limit is
reduced by this improperly allocated
amount (adjusted for earnings). If the
improperly allocated amount would have
been allocated to other employees in the
year of the failure if the failure had not
occurred, then that amount (adjusted for
earnings) is reallocated to those employ-
ees in accordance with the plan’s alloca-
tion formula. If the improperly allocated
amount would not have been allocated to
other employees absent the failure, that
amount (adjusted for earnings) is placed
in an unallocated account, similar to the
suspense account described in§1.415–
6(b)(6)(iii), to be used to reduce employer
contributions in succeeding year(s). For
example, if a plan provides for a fixed
level of employer contributions for each
eligible employee, and the plan provides
that forfeitures are used to reduce future
employer contributions, the improperly
allocated amount (adjusted for earnings)
would be used to reduce future employer
contributions. (See Example 19.) If a pay-
ment was made to an employee and that
payment was attributable to an improp-
erly allocated amount, then it is an Over-
payment defined in section 5.01(6) of this
revenue procedure that must be corrected
(see sections 2.04 and 2.05).
(2) Example.
Example 19:
Employer J maintains a money purchase pension
plan. Under the plan, an eligible employee is
entitled to an employer contribution of 8% of
theemployee’scompensationuptothe
§401(a)(17) limit ($160,000 for 1998). During
the 1998 plan year, an eligible employee,
Employee W, inadvertently was credited with a
contribution based on compensation above the
§401(a)(17) limit. Employee W’s compensation
for 1998 was $220,000. Employee W received a
contribution of $17,600 for 1998 (8% of
$220,000), rather than the contribution of
$12,800 (8% of $160,000) provided by the plan
for that year, resulting in an improper allocation
of $4,800.
Correction:
The§401(a)(17) failure is corrected using the
reduction of account balance method by reduc-
ing Employee W’s account balance by $4,800
(adjusted for earnings) and crediting that amount
to an unallocated account, similar to the sus-
pense account described in§1.415–6(b)(6)(iii),
to be used to reduce employer contributions in
succeeding year(s).
.07Correction by Amendment Under
VCP and SCP.
(1)§401(a)(17) Failures. (a) Con-
tribution Correction Method. In addition
to the reduction of account balance cor-
rection method under section 2.06 of this
Appendix B, an employer may correct a
§401(a)(17) failure for a plan year under
a defined contribution plan under VCP
and SCP (in accordance with the require-
ments of sections 8, 10, and 11) by using
the contribution correction method set
forth in this paragraph. The employer
contributes an additional amount on
behalf of each of the other employees
(excluding each employee for whom
there was a§401(a)(17) failure) who
received an allocation for the year of the
failure, amending the plan (as necessary)
to provide for the additional allocation.
The amount contributed for an employee
is equal to the employee’s plan compen-
sation for the year of the failure multi-
plied by a fraction, the numerator of
which is the improperly allocated amount
made on behalf of the employee with the
largest improperly allocated amount, and
the denominator of which is the limit
under§401(a)(17) applicable to the year
of the failure. The resulting additional
amount for each of the other employees is
adjusted for earnings. (See Example 20.)
(b) Examples.
Example 20:
The facts are the same as in Example 19.
Correction:
Employer J corrects the failure under VCP using
the contribution correction method by (1)
amending the plan to increase the contribution
percentage for all eligible employees (other than
Employee W) for the 1998 plan year and (2)
contributing an additional amount (adjusted for
earnings) for those employees for that plan year.
To determine the increase in the plan’s contribu-
tion percentage (and the additional amount con-
tributed on behalf of each eligible employee),
the improperly allocated amount ($4,800) is
divided by the§401(a)(17) limit for 1998
($160,000). Accordingly, the plan is amended to
increase the contribution percentage by 3 per-
centage points ($4,800/$160,000) from 8% to
2002–29 I.R.B.164July 22, 2002

11% . In addition, each eligible employee for the
1998 plan year (other than Employee W)
receives an additional contribution of 3% multi-
plied by that employee’s plan compensation for
1998. This additional contribution is adjusted for
earnings.
(2) Hardship Distribution Failures.
(a) Plan Amendment Correction Method.
The Operational Failure of making hard-
ship distributions to employees under a
plan that does not provide for hardship
distributions may be corrected under VCP
and SCP using the plan amendment cor-
rection method set forth in this paragraph.
The plan is amended retroactively to pro-
vide for the hardship distributions that
were made available. This paragraph does
not apply unless (i) the amendment satis-
fies§401(a), and (ii) the plan as amended
would have satisfied the qualification
requirements of§401(a) (including the
requirements applicable to hardship dis-
tributions under§401(k), if applicable)
had the amendment been adopted when
hardship distributions were first made
available. (See Example 21.)
(b) Example.
Example 21:
Employer K, a for-profit corporation, maintains
a 401(k) plan. Although plan provisions in 1998
did not provide for hardship distributions, begin-
ning in 1998 hardship distributions of amounts
allowed to be distributed under§401(k) were
made currently and effectively available to all
employees (within the meaning of§l.401(a)(4)–
4). The standard used to determine hardship sat-
isfied the deemed hardship distribution standards
in§1.401(k)–1(d)(2). Hardship distributions
were made to a number of employees during the
1998 and 1999 plan years, creating an Opera-
tional Failure. The failure was discovered in
2000.
Correction:
Employer K corrects the failure under VCP by
adopting a plan amendment, effective January 1,
1998, to provide a hardship distribution option
that satisfies the rules applicable to hardship dis-
tributions in§1.401(k)–1(d)(2). The amendment
provides that the hardship distribution option is
available to all employees. Thus, the amendment
satisfies§401(a), and the plan as amended in
2000 would have satisfied§401(a) (including
§1.401(a)(4)–4 and the requirements applicable
to hardship distributions under§401(k)) if the
amendment had been adopted in 1998.
(3) Inclusion of Ineligible
Employee Failure. (a) Plan Amendment
Correction Method. The Operational Fail-
ure of including an ineligible employee in
the plan who has not completed the plan’s
minimum age or service requirements
may be corrected under VCP and SCP by
using the plan amendment correction
method set forth in this paragraph. The
plan is amended retroactively to change
the eligibility provisions to provide for
the inclusion of the ineligible employee to
reflect the plan’s actual operations. The
amendment may change the eligibility
provisions with respect to only those
ineligible employees that were wrongly
included, and only to those ineligible
employees, provided (i) the amendment
satisfies§401(a) at the time it is adopted,
(ii) the amendment would have satisfied
§401(a) had the amendment been
adopted at the earlier time when it is
effective, and (iii) the employees affected
by the amendment are predominantly
nonhighly compensated employees.
(b) Example
Example 22:
Employer L maintains a 401(k) plan applicable
to all of its employees who have at least six
months of service. The plan is a calendar year
plan. The plan provides that Employer L will
make matching contributions based upon an
employee’s salary reduction contributions. In
2001, it is discovered that all four employees
who were hired by Employer L in 2000 were
permitted to make salary reduction contributions
to the plan effective with the first weekly pay-
check after they were employed. Three of the
four employees are nonhighly compensated.
Employer L matched these employees’salary
reduction contributions in accordance with the
plan’s matching contribution formula. Employer
L calculates the ADP and ACP tests for 2000
(taking into account the salary reduction and
matching contributions that were made for these
employees) and determines that the tests were
satisfied.
Correction:
Employer L corrects the failure under SCP by
adopting a plan amendment, effective for
employees hired on or after January 1, 2000, to
provide that there is no service eligibility
requirement under the plan and submitting the
amendment to the Service for a determination
letter.
SECTION 3. EARNINGS
ADJUSTMENT METHODS AND
EXAMPLES
.01Earnings Adjustment Methods. (1)
In general. (a) Under section 6.02(4)(a) of
this revenue procedure, whenever the
appropriate correction method for an
Operational Failure in a defined contribu-
tion plan includes a corrective contribu-
tion or allocation that increases one or
more employees’account balances (now
or in the future), the contribution or allo-
cation is adjusted for earnings and forfei-
tures. This section 3 provides earnings
adjustment methods (but not forfeiture
adjustment methods) that may be used by
an employer to adjust a corrective contri-
bution or allocation for earnings in a
defined contribution plan. Consequently,
these earnings adjustment methods may
be used to determine the earnings adjust-
ments for corrective contributions or allo-
cations made under the correction meth-
ods in section 2 and under the VCS
correction methods in Appendix A. If an
earnings adjustment method in this sec-
tion 3 is used to adjust a corrective con-
tribution or allocation, that adjustment is
treated as satisfying the earnings adjust-
ment requirement of section 6.02(4)(a) of
this revenue procedure. Other earnings
adjustment methods, different from those
illustrated in this section 3, may also be
appropriate for adjusting corrective con-
tributions or allocations to reflect earn-
ings.
(b) Under the earnings adjustment
methods of this section 3, a corrective
contribution or allocation that increases
an employee’s account balance is
adjusted to reflect an“earnings amount”
that is based on the earnings rate(s)
(determined under section 3.01(3)) for the
period of the failure (determined under
section 3.01(2)). The earnings amount is
allocated in accordance with section
3.01(4).
(c) The rule in section 6.02(5)(a)
of this revenue procedure permitting rea-
sonable estimates in certain circum-
stances applies for purposes of this sec-
tion 3. For this purpose, a determination
of earnings made in accordance with the
rules of administrative convenience set
forth in this section 3 is treated as a pre-
cise determination of earnings. Thus, if
the probable difference between an
approximate determination of earnings
and a determination of earnings under this
section 3 is insignificant and the adminis-
trative cost of a precise determination
would significantly exceed the probable
difference, reasonable estimates may be
used in calculating the appropriate earn-
ings.
(d) This section 3 does not apply
to corrective distributions or corrective
reductions in account balances. Thus, for
example, while this section 3 applies in
July 22, 20021652002–29 I.R.B.

increasing the account balance of an
improperly excluded employee to correct
the exclusion of the employee under the
reallocation correction method described
in section 2.02(2)(a)(iii)(B), this section 3
does not apply in reducing the account
balances of other employees under the
reallocation correction method. (See sec-
tion 2.02(2)(a)(iii)(C) for rules that apply
to the earnings adjustments for such
reductions.) In addition, this section 3
does not apply in determining earnings
adjustments under the one-to-one correc-
tion method described in section
2.01(1)(b)(iii).
(2) Period of the Failure. (a) Gen-
eral Rule. For purposes of this section 3,
the“period of the failure”is the period
from the date that the failure began
through the date of correction. For
example, in the case of an improper for-
feiture of an employee’s account balance,
the beginning of the period of the failure
is the date as of which the account bal-
ance was improperly reduced.
(b) Rules for Beginning Date for
Exclusion of Eligible Employees from
Plan. (i) General Rule. In the case of an
exclusion of an eligible employee from a
plan contribution, the beginning of the
period of the failure is the date on which
contributions of the same type (e.g., elec-
tive deferrals, matching contributions, or
discretionary nonelective employer con-
tributions) were made for other employ-
ees for the year of the failure. In the case
of an exclusion of an eligible employee
from an allocation of a forfeiture, the
beginning of the period of the failure is
the date on which forfeitures were allo-
cated to other employees for the year of
the failure.
(ii) Exclusion from a 401(k) or
(m) Plan. For administrative convenience,
for purposes of calculating the earnings
rate for corrective contributions for a plan
year (or the portion of the plan year) dur-
ing which an employee was improperly
excluded from making periodic elective
deferrals or employee after-tax contribu-
tions, or from receiving periodic match-
ing contributions, the employer may treat
the date on which the contributions would
have been made as the midpoint of the
plan year (or the midpoint of the portion
of the plan year) for which the failure
occurred. Alternatively, in this case, the
employer may treat the date on which the
contributions would have been made as
the first date of the plan year (or the por-
tion of the plan year) during which an
employee was excluded, provided that the
earnings rate used is one half of the earn-
ings rate applicable under section 3.01(3)
for the plan year (or the portion of the
plan year) for which the failure occurred.
(3) Earnings Rate. (a) General Rule.
For purposes of this section 3, the earn-
ings rate generally is based on the invest-
ment results that would have applied to
the corrective contribution or allocation if
the failure had not occurred.
(b) Multiple Investment Funds. If
a plan permits employees to direct the
investment of account balances into more
than one investment fund, the earnings
rate is based on the rate applicable to the
employee’s investment choices for the
period of the failure. For administrative
convenience, if most of the employees for
whom the corrective contribution or allo-
cation is made are nonhighly compen-
sated employees, the rate of return of the
fund with the highest earnings rate under
the plan for the period of the failure may
be used to determine the earnings rate for
all corrective contributions or allocations.
If the employee had not made any appli-
cable investment choices, the earnings
rate may be based on the earnings rate
under the plan as a whole (i.e., the aver-
age of the rates earned by all of the funds
in the valuation periods during the period
of the failure weighted by the portion of
the plan assets invested in the various
funds during the period of the failure).
(c) Other Simplifying Assump-
tions. For administrative convenience, the
earnings rate applicable to the corrective
contribution or allocation for a valuation
period with respect to any investment
fund may be assumed to be the actual
earnings rate for the plan’s investments in
that fund during that valuation period. For
example, the earnings rate may be deter-
mined without regard to any special
investment provisions that vary according
to the size of the fund. Further, the earn-
ings rate applicable to the corrective con-
tribution or allocation for a portion of a
valuation period may be apro ratapor-
tion of the earnings rate for the entire
valuation period, unless the application of
this rule would result in either a signifi-
cant understatement or overstatement of
the actual earnings during that portion of
the valuation period.
(4) Allocation Methods. (a) In Gen-
eral. For purposes of this section 3, the
earnings amount generally may be allo-
cated in accordance with any of the meth-
ods set forth in this paragraph (4). The
methods under paragraph (4)(c), (d), and
(e) are intended to be particularly helpful
where corrective contributions are made
at dates between the plan’s valuation
dates.
(b) Plan Allocation Method.
Under the plan allocation method, the
earnings amount is allocated to account
balances under the plan in accordance
with the plan’s method for allocating
earnings as if the failure had not
occurred. (See Example 23.)
(c) Specific Employee Allocation
Method. Under the specific employee
allocation method, the entire earnings
amount is allocated solely to the account
balance of the employee on whose behalf
the corrective contribution or allocation is
made (regardless of whether the plan’s
allocation method would have allocated
the earnings solely to that employee). In
determining the allocation of plan earn-
ings for the valuation period during which
the corrective contribution or allocation is
made, the corrective contribution or allo-
cation (including the earnings amount) is
treated in the same manner as any other
contribution under the plan on behalf of
the employee during that valuation
period. Alternatively, where the plan’s
allocation method does not allocate plan
earnings for a valuation period to a con-
tribution made during that valuation
period, plan earnings for the valuation
period during which the corrective contri-
bution or allocation is made may be allo-
cated as if that employee’s account bal-
ance had been increased as of the last day
of the prior valuation period by the cor-
rective contribution or allocation, includ-
ing only that portion of the earnings
amount attributable to earnings through
the last day of the prior valuation period.
The employee’s account balance is then
further increased as of the last day of the
valuation period during which the correc-
tive contribution or allocation is made by
that portion of the earnings amount attrib-
utable to earnings after the last day of the
prior valuation period. (See Example 24.)
2002–29 I.R.B.166July 22, 2002

(d) Bifurcated Allocation Method.
Under the bifurcated allocation method,
the entire earnings amount for the valua-
tion periods ending before the date the
corrective contribution or allocation is
made is allocated solely to the account
balance of the employee on whose behalf
the corrective contribution or allocation is
made. The earnings amount for the valu-
ation period during which the corrective
contribution or allocation is made is allo-
cated in accordance with the plan’s
method for allocating other earnings for
that valuation period in accordance with
section 3.01(4)(b). (See Example 25.)
(e) Current Period Allocation
Method. Under the current period alloca-
tion method, the portion of the earnings
amount attributable to the valuation
period during which the period of the fail-
ure begins (“first partial valuation
period”) is allocated in the same manner
as earnings for the valuation period dur-
ing which the corrective contribution or
allocation is made in accordance section
3.01(4)(b). The earnings for the subse-
quent full valuation periods ending before
the beginning of the valuation period dur-
ing which the corrective contribution or
allocation is made are allocated solely to
the employee for whom the required con-
tribution should have been made. The
earnings amount for the valuation period
during which the corrective contribution
or allocation is made (“second partial
valuation period”) is allocated in accor-
dance with the plan’s method for allocat-
ing other earnings for that valuation
period in accordance with section
3.01(4)(b). (See Example 26.)
.02 Examples.
Example 23:
Employer L maintains a profit-sharing plan that
provides only for nonelective contributions. The
plan has a single investment fund. Under the
plan, assets are valued annually (the last day of
the plan year) and earnings for the year are allo-
cated in proportion to account balances as of the
last day of the prior year, after reduction for dis-
tributions during the current year but without
regard to contributions received during the cur-
rent year (the“prior year account balance”).
Plan contributions for 1997 were made on
March 31, 1998. On April 20, 2000, Employer L
determines that an operational failure occurred
for 1997 because Employee X was improperly
excluded from the plan. Employer L decides to
correct the failure by using the VCS correction
method for the exclusion of an eligible
employee from nonelective contributions in a
profit-sharing plan. Under this method,
Employer L determines that this failure is cor-
rected by making a contribution on behalf of
Employee X of $5,000 (adjusted for earnings).
The earnings rate under the plan for 1998 was
+20% . The earnings rate under the plan for
1999 was +10% . On May 15, 2000, when
Employer L determines that a contribution to
correct for the failure will be made on June 1,
2000, a reasonable estimate of the earnings rate
under the plan from January 1, 2000, to June 1,
2000 is +12%.
Earnings Adjustment on the Corrective Contri-
bution:
The $5,000 corrective contribution on behalf of
Employee X is adjusted to reflect an earnings
amount based on the earnings rates for the
period of the failure (March 31, 1998, through
June 1, 2000) and the earnings amount is allo-
cated using the plan allocation method.
Employer L determines that apro ratasimplify-
ing assumption may be used to determine the
earnings rate for the period from March 31,
1998, to December 31, 1998, because that rate
does not significantly understate or overstate the
actual earnings for that period. Accordingly,
Employer L determines that the earnings rate for
that period is 15% (9/12 of the plan’s 20% earn-
ings rate for the year). Thus, applicable earnings
rates under the plan during the period of the
failure are:
Time PeriodsEarnings Rate
3/31/98—12/31/98 (First Partial Valuation Period)+15%
1/1/99—12/31/99+10%
1/1/00—6/1/00 (Second Partial Valuation Period)+12%
If the $5,000 corrective contribution
had been contributed for Employee X on
March 31, 1998, (1) earnings for 1998
would have been increased by the amount
of the earnings on the additional $5,000
contribution from March 31, 1998,
through December 31, 1998, and would
have been allocated as 1998 earnings in
proportion to the prior year (December
31, 1997) account balances, (2) Employee
X’s account balance as of December 31,
1998, would have been increased by the
additional $5,000 contribution, (3) earn-
ings for 1999 would have been increased
by the 1999 earnings on the additional
$5,000 contribution (including 1998 earn-
ings thereon) allocated in proportion to
the prior year (December 31, 1998)
account balances along with other 1999
earnings, and (4) earnings for 2000 would
have been increased by the earnings on
the additional $5,000 (including 1998 and
1999 earnings thereon) from January 1 to
June 1, 2000, and would be allocated in
proportion to the prior year (December
31, 1999) account balances along with
other 2000 earnings. Accordingly, the
$5,000 corrective contribution is adjusted
to reflect an earnings amount of $2,084
($5,000[(1.15)(1.10)(1.12)–1]) and the
earnings amount is allocated to the
account balances under the plan alloca-
tion method as follows:
(a) Each account balance that shared in
the allocation of earnings for 1998 is
increased, as of December 31, 1998, by
its appropriate share of the earnings
amount for 1998, $750 ($5,000(.15)).
(b) Employee X’s account balance is
increased, as of December 31, 1998, by
$5,000.
(c) The resulting December 31, 1998,
account balances will share in the 1999
earnings, including the $575 for 1999
earnings included in the corrective contri-
bution ($5,750(.10)), to determine the
account balances as of December 31,
1999. However, each account balance
other than Employee X’s account balance
has already shared in the 1999 earnings,
excluding the $575. Accordingly,
Employee X’s account balance as of
December 31, 1999, will include $500 of
the 1999 portion of the earnings amount
based on the $5,000 corrective contribu-
tion allocated to Employee X’s account
balance as of December 31, 1998
($5,000(.10)). Then each account balance
that originally shared in the allocation of
earnings for 1999 (i.e., excluding the
$5,500 additions to Employee X’s
account balance) is increased by its
appropriate share of the remaining 1999
portion of the earnings amount, $75.
(d) The resulting December 31, 1999,
account balances (including the $5,500
additions to Employee X’s account bal-
ance) will share in the 2000 portion of the
earnings amount based on the estimated
July 22, 20021672002–29 I.R.B.

January 1, 2000, to June 1, 2000, earnings
included in the corrective contribution
equal to $759 ($6,325 (.12)). (See Table
1.)
TABLE 1
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective Contribution$5,000Employee X
First Partial Valuation Period
Earnings
15%750
1
All 12/31/1997, Account
Balances
4
1999 Earnings10%575
2
Employee X ($500)/
All 12/31/1998, Account
Balances ($75)
4
Second Partial Valuation Period
Earnings
12%759
3
All 12/31/1999, Account
Balances (including Employee
X’s $5,500)
4
Total Amount Contributed$7,084
1
$5,000 x 15%
2
$5,750 ($5,000 +750) x 10%
3
$6,325 ($5,000 +750 +575) x 12%
4
After reduction for distributions during the year for which earning are being determined but without regard to contributions received during the year for which
earnings are being determined.
Example 24:
The facts are the same as in Example 23.
Earnings Adjustment on the Corrective Contribu-
tion:
The earnings amount on the corrective contribu-
tion is the same as in Example 23, but the earn-
ings amount is allocated using the specific
employee allocation method. Thus, the entire
earnings amount for all periods through June 1,
2000 (i.e., $750 for March 31, 1998, to Decem-
ber 31, 1998, $575 for 1999, and $759 for Janu-
ary 1, 2000, to June 1, 2000) is allocated to
Employee X. Accordingly, Employer L makes a
contribution on June 1, 2000, to the plan of
$7,084 ($5,000(1.15)(1.10)(1.12)). Employee
X’s account balance as of December 31, 2000, is
increased by $7,084. Alternatively, Employee
X’s account balance as of December 31, 1999, is
increased by $6,325 ($5,000(1.15)(1.10)), which
shares in the allocation of earnings for 2000, and
Employee X’s account balance as of December
31, 2000, is increased by the remaining $759.
(See Table 2.)
TABLE 2
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective Contribution$5,000Employee X
First Partial Valuation Period
Earnings
15%750
1
Employee X
1999 Earnings10%575
2
Employee X
Second Partial Valuation Period
Earnings
12%759
3
Employee X
Total Amount Contributed$7,084
1
$5,000 x 15%
2
$5,750 ($5,000 +750) x 10%
3
$6,325 ($5,000 +750 +575) x 12%
2002–29 I.R.B.168July 22, 2002

Example 25:
The facts are the same as in Example 23.
Earnings Adjustment on the Corrective Contribu-
tion:
The earnings amount on the corrective contribu-
tion is the same as in Example 23, but the earn-
ings amount is allocated using the bifurcated
allocation method. Thus, the earnings for the
first partial valuation period (March 31, 1998, to
December 31, 1998) and the earnings for 1999
are allocated to Employee X. Accordingly,
Employer L makes a contribution on June 1,
2000,totheplanof$7,084
($5,000(1.15)(1.10)(1.12)). Employee X’s
account balance as of December 31, 1999, is
increased by $6,325 ($5,000(1.15)(1.10)); and
the December 31, 1999, account balances of
employees (including Employee X’s increased
account balance) will share in estimated January
1, 2000, to June 1, 2000, earnings on the correc-
tive contribution equal to $759 ($6,325(.12)).
(See Table 3.)
TABLE 3
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective Contribution$5,000Employee X
First Partial Valuation Period
Earnings
15%750
1
Employee X
1999 Earnings10%575
2
Employee X
Second Partial Valuation Period
Earnings
12%759
3
12/31/99, Account Balances
(including Employee X’s
$6,325)
4
Total Amount Contributed$7,084
1
$5,000 x 15%
2
$5,750 ($5,000 +750) x 10%
3
$6,325 ($5,000 +750 +575) x 12%
4
After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year.
Example 26:
The facts are the same as in Example 23.
Earnings Adjustment on the Corrective Contribu-
tion:
The earnings amount on the corrective contribu-
tion is the same as in Example 23, but the earn-
ings amount is allocated using the current period
allocation method. Thus, the earnings for the
first partial valuation period (March 31, 1998, to
December 31, 1998) are allocated as 2000 earn-
ings. Accordingly, Employer L makes a contri-
bution on June 1, 2000, to the plan of $7,084
($5,000 (1.15)(1.10)(1.12)). Employee X’s
account balance as of December 31, 1999, is
increased by the sum of $5,500 ($5,000(1.10))
and the remaining 1999 earnings on the correc-
tive contribution equal to $75 ($5,000(.15)(.10)).
Further, both (1) the estimated March 31, 1998,
to December 31, 1998, earnings on the correc-
tive contribution equal to $750 ($5,000(.15)) and
(2) the estimated January 1, 2000, to June 1,
2000, earnings on the corrective contribution
equal to $759 ($6,325(.12)) are treated in the
same manner as 2000 earnings by allocating
these amounts to the December 31, 2000,
account balances of employees in proportion to
account balances as of December 31, 1999
(including Employee X’s increased account bal-
ance). (See Table 4.) Thus, Employee X is allo-
cated the earnings for the full valuation period
during the period of the failure.
TABLE 4
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective Contribution$5,000Employee X
First Partial Valuation Period
Earnings
15%750
1
12/31/99, Account Balances
(including Employee X’s $5,575)
4
1999 Earnings10%575
2
Employee X
Second Partial Valuation Period
Earnings
12%759
3
12/31/99, Account Balances
(including Employee X’s $5,575)
4
Total Amount Contributed$7,084
1
$5,000 x 15%
2
$5,750 ($5,000 +750) x 10%
3
$6,325 ($5,000 +750 +575) x 12%
4
After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year for which
earnings are being determined.
July 22, 20021692002–29 I.R.B.

APPENDIX C
VCP CHECKLIST
IS YOUR SUBMISSION COMPLETE?
INSTRUCTIONS
The Service will be able to respond more quickly to your VCP request if it is carefully prepared and complete. To ensure that your
request is in order, use this checklist. Answer each question in the checklist by inserting yes, no, or N/A, as appropriate, in the
blank next to the item.Sign and date the checklist(as taxpayer or authorized representative) and place it on top of your request.
You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your
request, substantive consideration of your submission will be deferred until a completed checklist is received.
TAXPAYER’S NAME
TAXPAYER’S I.D. NO.
PLAN NAME & NO.
ATTORNEY/P.O.A.
The following items relate to all submissions:
1. Have you included a complete description of the failure(s) and the years in which the failure(s) occurred (including
the years for which the statutory period has expired)? (See section 11.02(1) of Rev. Proc. 2002–47.) (Hereafter, all sec-
tion references are to Rev. Proc. 2002–47.)
2. Have you included an explanation of how and why the failure(s) arose, including a description of the administrative
procedures for the plan in effect at the time the failure(s) occurred? (See section 11.02(2) and (3).)
3. Have you included a detailed description of the method for correcting the failure(s) identified in your submission?
This description must include, for example, the number of employees affected and the expected cost of correction (both
of which may be approximated if the exact number cannot be determined at the time of the request), the years involved,
and calculations or assumptions the Plan Sponsor used to determine the amounts needed for correction. In lieu of pro-
viding correction calculations with respect to each employee affected by a failure, you may submit calculations with
respect to a representative sample of affected employees. However, the representative sample calculations must be suf-
ficient to demonstrate each aspect of the correction method proposed. Note that each step of the correction method must
be described in narrative form. (See section 11.02(4).)
4. Have you described the earnings or interest methodology (indicating computation period and basis for determining
earnings or interest rates) that will be used to calculate earnings or interest on any corrective contributions or distribu-
tions? (As a general rule, the interest rate (or rates) earned by the plan during the applicable period(s) should be used
in determining the earnings for corrective contributions or distributions.) (See section 11.02(5).)
If you inserted“N/A”for item 4, enter explanation:
5. Have you submitted specific calculations for each affected employee or a representative sample of affected employ-
ees? (See section 11.02(6).)
6. Have you described the method that will be used to locate and notify former employees or, if there are no former
employees affected by the failure(s) or the correction(s), provided an affirmative statement to that effect? (See section
11.02(7).)
7. Have you provided a description of the administrative measures that have been or will be implemented to ensure that
the same failure(s) do not recur? (See section 11.02(8).)
8. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the plan is not currently under an
Employee Plans examination? (See section 11.02(9).)
2002–29 I.R.B.170July 22, 2002

9. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the Plan Sponsor is not under an
Exempt Organizations examination? (See section 11.02(9).)
10. If the submission includes a failure related to Transferred Assets, have you included a description of the related
employer transaction, including the date of the employer transaction and the date the assets were transferred to the plan?
11. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable) relevant to
the failure(s) and method(s) of correction? (See section 11.04(2).)
12. Have you included a copy of the plan’s most recent Favorable Letter and/or the required applicable document(s)?
(See section 11.04(4).)
13. Have you included the appropriate voluntary compliance fee due with the submission? (See section 11.06.)
14. Have you included the original signature of the sponsor or the sponsor’s authorized representative? (See section
11.07.)
15. Have you included a Power of Attorney (Form 2848)? Note: representation under VCP is limited to attorneys, cer-
tified public accountants, enrolled agents, and enrolled actuaries; unenrolled return preparers are not eligible to act as
representatives under VCP. (See section 11.08.)
16. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the Plan Sponsor?
(See section 11.09.)
17. Have you designated your submission as a VCP, VCO, VCS, VCT, VCSEP, VCGroup, or Anonymous Submission
Procedure, as appropriate? (See section 11.11.)
18. If you are requesting a waiver of the excise tax under§4974 of the Code, have you included the request, and, if
applicable, an explanation supporting the request for any affected owner-employee or 10 percent owner? (See section
6.07(3).)
19. Have you submitted an application for a determination letter? (See section 10.06.)
20. If the plan is currently being considered in a determination letter application, have you included a statement to that
effect? (See section 11.03(1).)
The following items relate only to submissions under VCO (including VCS):
21. Have you included a copy of the first page, the page containing employee census information (currently line 7f of
the 1998 Form 5500), and the information relating to plan assets (currently line 31f of the 1998 Form 5500) of the most
recently filed Form 5500 series return? Note: If a Form 5500 is not applicable, insert N/A and furnish the name of the
plan, and the census information required of Form 5500 series filers. (See section 11.04(1)(b).)
22. Have you proposed a time period of correction that is limited to 150 days (240 days for VCGroup) from the date
the compliance statement is issued? (See sections 10.06(8) and 10.14(3)(b).)
The following items relate only to submissions under VCS:
23. Are each of the failures you have identified eligible for correction under VCS? (See Appendix A and Appendix B.)
24. Have you identified no more than two VCS failures? (If more than two failures were identified, VCS is not avail-
able, but you may make a submission under VCO.) (See section 10.11(3).)
25. Have you proposed to correct the failure(s) identified in your request using the permitted correction method(s) set
forth in Appendix A or Appendix B? (See Appendix A and Appendix B.)
The following item relates only to submissions under VCGroup:
26. Have you submitted a certified or cashier’s check for the initial fee of ten thousand dollars ($10,000) made payable
to the U.S. Treasury?
July 22, 20021712002–29 I.R.B.

The following item relates only to submissions under the general procedures of VCP:
27. Have you included a copy of the most recently filed Form 5500? (See section 11.04(1)(b).)
SignatureDate
Title or Authority
Typed or printed name of person signing checklist
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I,§§61, 451, 1001)
Rev. Proc. 2002–49
SECTION 1. PURPOSE
This revenue procedure sets forth a
manner in which an electric utility com-
pany may treat a transaction in which the
utility is issued a financing order by a
State agency authorizing the recovery of
certain costs incurred by the utility.
SECTION 2. BACKGROUND
In general, State public utility commis-
sions set rates for public utility companies
that are calculated to allow for the recov-
ery of prudently incurred costs. In the
case of capital expenditures, rates are set
to allow recovery of costs over an
extended period of time. With the advent
of restructuring and a competitive mar-
ketplace, these rates are no longer guaran-
teed. Thus, the recovery of previously
incurred costs associated with generation
facilities that have market values below
their book value, as well as costs associ-
ated with contracts to purchase electricity
at above-market prices, have become
uncertain. Some States have enacted leg-
islation to allow the recovery of these
costs through a non-bypassable surcharge
to customers upon their consumption of
electricity within the utility’s historic ser-
vice area. These statutes, which also
authorize securitization of the surcharge,
are unique to the regulated utility indus-
try. Accordingly, the law and analysis
applied to these transactions is peculiar to
this situation.
SECTION 3. SCOPE
This revenue procedure applies to
investor-owned public utility companies
that, pursuant to transition legislation,
receive an irrevocable financing order
from an appropriate State agency deter-
mining the amount of transition costs the
utility will be permitted to recover
through qualifying securitization of an
intangible property right created under
the transition legislation.
SECTION 4. DEFINITIONS
.01 PUBLIC UTILITY COMPANY
For purposes of this revenue proce-
dure, the terms“public utility”or“utility”
refer to a utility company that is subject
to the regulatory authority of the State
public utility commission or other appro-
priate State agency.
.02 TRANSITION LEGISLATION
For purposes of this revenue proce-
dure, transition legislation is legislation
that:
(1) is enacted by a State to facilitate
the conversion from a wholly regulated
public utility regime to a competitive
environment caused by restructuring of
the public utility industry within the
State;
(2) authorizes the utility to apply
for, and authorizes the public utility com-
mission or other appropriate State agency
to issue, a financing order determining
the amount of transition costs the utility
will be allowed to recover;
(3) provides that pursuant to the
financing order, the utility acquires an
intangible property right to charge, col-
lect, and receive charges in a fixed
amount necessary to provide for the full
recovery of the transition costs deter-
mined to be recoverable, and assures that
the charges are non-bypassable and will
be paid by customers within the utility’s
traditional service territory who receive
electricity through the utility’s transmis-
sion and distribution system, even if those
customers elect to purchase electricity
from a third-party generator;
(4) guarantees that neither the State
nor any agency thereof has the authority
to rescind or amend the financing order,
to revise the amount of transition costs, or
in any way to reduce or impair the value
of the intangible property right, except as
may be contemplated by periodic adjust-
ments authorized by the transition legisla-
tion;
(5) provides procedures assuring
that the sale, assignment or other transfer
of the intangible property right from the
utility to a financing entity will be per-
fected under State law as an absolute
transfer of the utility’s right, title and
interest in the property; and
(6) authorizes the securitization of
the intangible property right to recover
2002–29 I.R.B.172July 22, 2002

the fixed amount of transition costs
through the issuance of bonds, notes, cer-
tificates of participation or beneficial
interest or other evidences of indebted-
ness issued pursuant to an indenture, con-
tract or other agreement of an electric
utility or a financing entity.
.03 TRANSITION COSTS
For purposes of this revenue proce-
dure, transition costs are the utility’s non-
economic costs caused by restructuring
and the introduction of a competitive
marketplace for electric services, and
such other related costs that the State leg-
islature may deem appropriate.
.04 QUALIFYING SECURITIZA-
TION
For purposes of this revenue proce-
dure, qualifying securitization is an issu-
ance of any bonds, notes, certificates of
participation or beneficial interests or
other evidences of indebtedness—
(1) secured by the intangible prop-
erty right to collect charges for the recov-
ery of transition costs and such other
assets, if any, of the financing entity;
(2) initially capitalized by the utility
with at least 0.5 percent of the total prin-
cipal amount of each series of evidences
of indebtedness issued; and
(3) providing for self-amortizing
level payments of interest and principal
on a quarterly or semiannual basis.
SECTION 5. APPLICATION
.01 The utility will be treated as not
recognizing gross income upon:
(1) the receipt of a financing order
that creates an intangible property right in
the amount of transition costs that may be
recovered through securitization;
(2) the receipt of cash or other valu-
able consideration in exchange for the
transfer of that property right to a financ-
ing entity; or
(3) the receipt of cash or other valu-
able consideration in exchange for securi-
tized evidences of indebtedness issued by
the financing entity.
.02 The securitized evidences of
indebtedness described in Section 4.04
will be treated as obligations of the utility.
.03 The non-bypassable charges are
gross income to the utility recognized
under the utility’s usual method of
accounting.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective
July 22, 2002.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Thomas Preston of the
Office of the Associate Chief Counsel
(Financial Institutions and Products). For
further information regarding this revenue
procedure, contact Mr. Preston at (202)
622–3940 (not a toll-free call).
Rev. Proc. 2002–50
26 CFR 1.6045–1: Returns of Information of bro-
kers and barter exchanges.
(Also Part III,§§83, 421, 422, 423, 1001, 1011,
3121, 3306, 3401, 3402, 6041, 6051.)
SECTION 1. PURPOSE
This revenue procedure provides an
exception from reporting on Form
1099–B,“Proceeds From Broker and
Barter Exchange Transactions”, for trans-
actions involving an employee, former
employee, or other service provider (a
“service provider”) who has obtained a
stock option in connection with the per-
formance of services. Where the service
provider purchases stock through the
exercise of the stock option and sells that
stock on the same day through a broker,
the broker executing such a sale is not
required to report the sale on Form
1099–B, provided certain conditions are
met.
SECTION 2. BACKGROUND
.01Tax treatment of stock options.
Section 83 of the Internal Revenue Code
governs the tax treatment of nonstatutory
stock options granted in connection with
the performance of services. Sections 421
through 424 govern the tax treatment of
statutory stock options,i.e., incentive
stock options described in§422(b) and
options granted under an employee stock
purchase plan described in§423(b). A
stock option is not taxable when granted,
provided the option either lacks“a readily
ascertainable fair market value”as
defined in§1.83–7(b) of the Income Tax
Regulations or meets the requirements of
§422 or§423.
For nonstatutory stock options that
lack a readily ascertainable fair market
value, the service provider generally rec-
ognizes income at the time of the exercise
of the options, in an amount generally
equal to the fair market value of the stock
received (disregarding lapse restrictions)
minus the amount paid for that stock. See
§83(a) and§1.83–7. The time for recog-
nizing this income and for determining
the fair market value of the stock is the
first day that the transferee’s rights in the
stock are“substantially vested”,i.e.,
transferable or not subject to a substantial
risk of forfeiture. Where the individual
exercising such options is an employee,
the taxable compensation income gener-
ated by§83(a) constitutes wages for pur-
poses of§§3121, 3306, and 3401.
For statutory stock options, if the indi-
vidual receiving the statutory stock option
satisfies the employment requirements of
§422(a) or§423(a), the exercise of the
stock option produces taxable income
only when the stock acquired pursuant to
the exercise of the option is sold or dis-
posed of. If that stock is sold in a dis-
qualifying disposition (i.e., prior to the
later of the date that is one year after the
exercise of the option and two years after
the grant of the option), certain amounts
will be taxable compensation income
under§83(a). In addition, pursuant to
§423(c), where the holding periods are
satisfied, and where the stock options
under an employee stock purchase plan
are offered at an exercise price below the
fair market value of the stock at the date
of grant, certain amounts may be included
as compensation income at the time of
disposition of the stock acquired at exer-
cise of the option.
Notice 2002–47, 2002–28 I.R.B. 97,
provides, in part, that until the Treasury
Department and the Internal Revenue Ser-
vice issue further guidance, in the case of
a statutory stock option, the Service will
not assess the Federal Insurance Contri-
butions Act (FICA) tax or Federal Unem-
ployment Tax Act (FUTA) tax, or apply
federal income tax withholding obliga-
tions, upon either the exercise of the
option or the disposition of the stock
acquired by an employee pursuant to the
exercise of the option.
July 22, 20021732002–29 I.R.B.

Section 1001 dictates the tax conse-
quences when substantially vested stock
obtained through the exercise of an option
is sold. Pursuant to§1001(a), the gain
from sale of the stock is the amount real-
ized minus the adjusted basis provided in
§1011, and the loss is the adjusted basis
provided in§1011 minus the amount
realized. For this purpose, the adjusted
basis of the stock includes the amount
included in gross income under§83(a)
upon exercise of an option that did not
have a readily ascertainable fair market
value at grant.
.02Information reporting—Form
W–2 and Form 1099. Section 6051 pro-
vides generally that an employer must
annually report to each of its employees
the total wages paid to the employee.
Compensation income constitutes
“wages”for purposes of this reporting
obligation. Form W–2 is used to report
the information required by§6051.
Section 6041 provides that where a
person engaged in a trade or business
makes payments in the course of the trade
or business to another person of compen-
sation of $600 or more in a taxable year,
the person must render a return, in accor-
dance with such regulations as the Secre-
tary may prescribe, that sets forth the
amount of the income, and the name and
address of the recipient of the payment.
Forms in the 1099 series are generally
used to report the information required by
§6041 where the compensation income
does not constitute wages, such as where
the service provider does not provide the
services as an employee of the service
recipient.
.03Information reporting—Form
1099–B. Section 6045(a) provides that
brokers, when required to do so by the
Secretary, must make a return in accor-
dance with such regulations as the Secre-
tary may prescribe regarding transactions
they carry out for customers.
Section 1.6045–1(c)(2) of the regula-
tions states, in general, that each broker
must make a return of information with
respect to each sale by a customer
effected by the broker.
Section 1.6045–1(d)(2) provides, in
part, that a broker must report the gross
proceeds of a stock sale.
Section 1.6045–1(d)(5) provides that
the broker may, but is not required to,
take commissions and option premiums
into account in determining gross pro-
ceeds provided the treatment chosen is
consistent with the books of the broker.
Form 1099–B is used to report the infor-
mation required by§6045 and the regu-
lations thereunder.
Section 1.6045–1(c)(3)(ii) states that
no return of information is required with
respect to a sale effected by a broker for
a customer if the sale is an excepted sale.
This regulation defines an“excepted
sale”as one so designated by the Internal
Revenue Service in a revenue ruling or
revenue procedure published in the Inter-
nal Revenue Bulletin.
SECTION 3. SCOPE
.01Applicability. The exception pro-
vided by this revenue procedure applies
to a sale of stock acquired by a service
provider through the exercise of an option
if:
(1) the sale is executed for the ser-
vice provider on the same day
that the stock being sold is
acquired through the exercise of
an option;
(2) the option was granted in con-
nection with the performance of
services, such that the federal
tax consequences of the transac-
tions are governed by section 83
of the Code (e.g., an exercise of
a nonstatutory stock option
granted in exchange for services
or an exercise of a statutory
stock option followed by a dis-
qualifying disposition of the
stock acquired pursuant to the
exercise);
(3) the service recipient certifies in
writing to the broker that the
service recipient will report any
compensation income generated
by the exercise of the option, or
disposition of the stock acquired
pursuant to the exercise of the
option, in accordance with sec-
tion 6041 (Form 1099) or sec-
tion 6051 (Form W–2), as appli-
cable; and
(4) the broker either:
(a) does not charge a commission
or other fee on the transaction;
or
(b) does charge a commission or
other fee on the transaction
and furnishes to the service
provider the written statement
described in section 4.03 of
this revenue procedure.
.02Inapplicability. The exception pro-
vided by this revenue procedure does not
apply if the service recipient uses an
amount other than the sale price of the
shares to calculate the compensation
income generated to the service provider
by the option exercise. This revenue pro-
cedure also does not apply to the exercise
of a stock option if, at the date of grant,
the stock option had a readily ascertain-
able fair market value as defined in
§1.83–7(b).
SECTION 4. PROCEDURE
.01General. A broker may treat a sale
as an“excepted sale”for purposes of
§1.6045–1(c)(3)(ii) if an employee,
former employee or other service pro-
vider obtains substantially vested shares
of stock from the exercise of an option
and on the same day sells the shares
through a broker.
.02Statement to broker. To determine
whether the service provider exercised
the option and sold the underlying shares
on the same day, the broker may rely on
a receipt or written statement provided by
the service recipient or the service pro-
vider showing the date of exercise. To
determine whether the service recipient
uses the sale price of the shares to calcu-
late the compensation income generated
to service providers by the option exer-
cise, the broker may rely upon a written
statement from the service recipient certi-
fying that it follows that practice.
.03Statement to customer. Under the
circumstances described in section
3.01(4)(b) of this revenue procedure, the
broker must furnish the service provider
with a statement containing the following
information:
(1) the gross sales price with
respect to the shares sold through the bro-
ker;
(2) the commissions or other fees
charged by the broker on the sale; and
(3) a description of how gain or loss
with respect to shares obtained through
the option exercise is calculated and the
manner in which such gain or loss should
be reported on a federal income tax
return. The description need not be an
2002–29 I.R.B.174July 22, 2002

independent document, but may be incor-
porated in a document such as a settle-
ment sheet provided to the broker’s cus-
tomer in connection with the sale.
SECTION 5. EXAMPLES
.01Example 1. An employee holds an option for
100 shares of Company A stock at an exercise price
of $20 per share. When granted, the option had no
readily ascertainable fair market value. The
employee exercises the option on January 15, 2003,
receives substantially vested shares and immediately
sells the shares for the fair market value of $30 per
share. The sale is executed by a broker rendering its
services to Company A employees through a con-
tractual arrangement with Company A. The broker
charges no commissions or other fees to the
employee in connection with the sale of the shares.
Company A uses the sale price of the shares to cal-
culate the compensation income of the employee
reported as wages on Form W–2.
Under these facts, the employee has compensa-
tion income of $10 per share under§83(a) ($30 fair
market value minus $20 exercise price). Company A
certifies in writing to the broker that it will report
$1,000 as wages of the employee, and includes that
amount on the employee’s Form W–2. The employ-
ee’s basis is $30 per share ($20 cost of exercising
the option plus $10 taxable income recognized).
Because the employee’s amount realized on the sale
of the stock ($30 per share) equals his basis, the
employee has no capital gain or loss on the sale. The
broker is not required to report the proceeds of the
sale on Form 1099–B.
.02Example 2. Assume the same facts as
Example 1, except that the employee pays a com-
mission of $.05 per share to the broker. The employ-
ee’s compensation income is $10 per share ($30 fair
market value of stock received minus $20 exercise
price). Company A reports $1,000 as wages on the
employee’s Form W–2 (as inExample 1), since
commission expense does not reduce the income
generated by the exercise. The employee has a loss
of $5.00 ($.05 per share times 100 shares). Because
the employee realizes a loss,“excepted sale”treat-
ment will apply only if the broker provides the state-
ment required by section 4.03 to the employee.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for
sales of stock occurring after December
31, 2001.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Nathan Rosen of the Office
of the Associate Chief Counsel (Proce-
dure & Administration), Administrative
Provisions and Judicial Practice Division.
For further information regarding this
revenue procedure, contact Mr. Rosen at
(202) 622–4910 (not a toll free call).
Note: This revenue procedure will be reprinted as the next revision of IRS Publication 1223,General Rules and Specifications
for Substitute Forms W–2c and W–3c.
Rev. Proc. 2002–51
TABLE OF CONTENTS
Section 1—Purpose
Section 2—Nature of Changes
Section 3—Filing Forms W–2c and W–3c on Magnetic Media or Electronically
Section 4—General Requirements for Substitute Paper Copies of Forms W–2c (Copy A) and W–3c That Payers Submit to SSA
Section 5—Requirements for Substitute Privately-Printed Forms W–2c (Copies B, C, and 2) Furnished to Employees
Section 6—Instructions for Employers
Section 7—OMB Requirements for Substitute Forms
Section 8—Reproducible Copies of Forms
Section 9—Effect on Other Revenue Procedures
Section 10—Exhibits
Section 1—Purpose.
.01The purpose of this revenue procedure is to state the requirements of the Internal Revenue Service (IRS) and the Social
Security Administration (SSA) relating to substitutes forForm W–2c,Corrected Wage and Tax Statement, andForm W–3c,
Transmittal of Corrected Wage and Tax Statements, for:
•Preparing acceptable substitutes of the official IRS forms to file information returns with the IRS and SSA, and
July 22, 20021752002–29 I.R.B.

•Using official or acceptable substitute forms to furnish information to recipients.
.02The official IRS Form W–2c is a six-part form and the official IRS Form W–3c is a one-part form.Paper substitutes con-
forming to the specifications contained in this document may be privately-printed without the prior approval of the IRS or
the SSA.
Note:Both paper substitute forms filed with the SSA and those furnished to employees that do not conform totally to these
specifications are not acceptable. Forms W–2c (Copy A) and Forms W–3c that do not conform may be returned. In addition, pen-
alties may be assessed.
.03 Forms should not be submitted to either the IRS or the SSA for specific approval. If you are uncertain of any specifi-
cation and want it clarified, you may submit a letter citing the specification, state your understanding and interpretation of the
specification, and enclose an example of the form (if appropriate) to:
Internal Revenue Service
Attn: Substitute Forms Program
W:CAR:MP:FP:S:SP
1111Constitution Ave., NW
Room 6411 IR
Washington, DC 20224
You may also contact the Substitute Forms Program Unit via e-mail at *taxforms@irs.gov. Please enter“Substitute Forms”on
the Subject Line.
Note:Allow at least 45 days for the IRS to respond.
Section 2—Nature of Changes.
.01The following changes have been made since the last revision (March 1995) of Publication 1223:
•The text and exhibits have been extensively updated throughout the publication.
•A new checkbox,“Third-party sick pay,”has been added to box 13 of Form W–2c and box c,“Kind of Payer,”on Form W–3c.
•A Form W–3c is required to be included whenever you file a Form W–2c with the Social Security Administration (SSA), even
if you are only filing Form W–2c to correct an employee’s name and/or social security number (SSN).
•Copy A of Form W–2c and Form W–3c must be printed on 8.5–inch by 11 inch paper using the revised formats and nonre-
flective black ink. Form identification numbers“44444”and“55555”, respectively, were added to the top of Forms W–2c and
W–3c.
•Filers are instructed to use 12-point Courier font (SSA-preferred) for data entries in order to facilitate processing.
Section 3—Filing Forms W–2c and W–3c on Magnetic Media or Electronically
.01Employers with less than 250 Forms W–2 to be corrected are encouraged to file electronically or use magnetic media for
filing Forms W–2c (Copy A) with the SSA. Employersmustuse magnetic or electronic media for filing with the SSA if they file
250 or more Forms W–2c (Copy A) during a calendar year.
.02To submit Forms W–2c on magnetic media or electronically, contact the Employer Service Liaison Officer (ESLO) for your
state. Call 1–800–772–6270 for your ESLO’s phone number. Specifications for filing Form W–2c on magnetic media or electroni-
cally are contained in SSA’sMMREF–2,Magnetic Media Reporting and Electronic Filing of W–2c Information. As noted above,
employers filing less than 250 Forms W–2c are not required to file on magnetic media or electronically. However, doing so will
enhance the timeliness and accuracy of forms processing.
.03You can also get information from the SSA’s Business Services Online (BSO). You can access BSO by visiting the SSA
Website atwww.ssa.gov/employeror by calling 410–966–4105 (not a toll-free number). Call the SSA at 1–888–772–2970 if you
experience problems using BSO. Information available includes Forms W–2c magnetic media filing instructions, information on
electronic filing, selected IRS and SSA forms and publications, and general topics about information reporting. BSO can also be
used to ask questions about those same items.
Section 4—General Requirements for Substitute Paper Copies of Forms W–2c (Copy A) and W–3c That Payers Submit
to SSA
.01Include the OMB Number on Forms W–2c (Copy A) and Form W–3c in the same location as on the official form.
.02The words“For Privacy Act and Paperwork Reduction Act Notice, see separate instructions.”mustbe printed on all Forms
W–2c (Copy A) and Form W–3c.
.03The Government Printing Office (GPO) symbol mustnotbe printed on substitute Forms W–2c (Copy A) and Form W–3c.
.04The Catalog Number (Cat. No.) shown on the forms is used for IRS distribution purposes and should not be printed on any
substitute forms.
2002–29 I.R.B.176July 22, 2002

.05The SSA addresses must be printed on the front of Form W–3c below the body of the form (see Exhibit B). They are:
If you use theU.S. Postal Service:
Social Security Administration
Wilkes-Barre Data Operations
Center
P.O. Box 3333
Wilkes-Barre, PA 18767–3333.
If you use acarrier other than the U.S. Postal Service:
Social Security Administration
Wilkes-Barre Data Operations
Center
Attn: W–2c Process
1150 E. Mountain Drive
Wilkes-Barre, PA 18702–7997.
.06The sequence for assembling the copies of Form W–2c is:
Copy A—For Social Security Administration
Copy 1—For State, City, or Local Tax Department
Copy B—To Be Filed With Employee’s FEDERAL Tax Return
Copy C—For EMPLOYEE’S RECORDS
Copy 2—To Be Filed With Employee’s State, City, or Local Income Tax Return
Copy D—For Employer
.07Substitute form printers arerequiredto include their Employer Identification Numbers (EINs) to the left of“Department of
the Treasury”in the lower right of Forms W–2c and W–3c in place of“Cat. No.”
.08Employers may file privately-printed Forms W–2c (Copy A) and Form W–3c with the SSA. The substitute form must be an
exactreplica of the IRS-printed form with respect to layout and content.
.09The back of substitute Forms W–2c (Copy A) and Form W–3c must be free of all printing.
.10In addition:
•Hot wax and cold carbon spots are not permitted on any of the internal form plies.
•Color and paper quality for Copy A (cut sheets and continuous pinfeed forms) as specified by JCP Code 0–25, dated Novem-
ber 29, 1978, must be white 100% bleached chemical wood, optical character recognition (OCR) bond.
Note:Reclaimed fiber in any percentage is permitted provided the requirements of this standard are met.
•Chemical transfer paper is permitted for Copy A only if:
(a) chemically-backed;
(b) you do not use carbon-coated forms; and
(c) chemically-transferred images are black.
•All copies must beclearly legible.Interleaved carbonshould be black and must be of good quality to assure legibility on
all copies and to avoid smudging. Fading must be minimized to assure legibility.
•All copies should be legible and able to be photocopied.
•The contractor must initiate or have a quality control program to assure OCR ink density. The forms must be printed in non-
reflective black ink.
.11Type must be substantially identical in size and shape to the official form. All rules are either 1/2-point or 3/4-point. Rules
must be identical to those on the official IRS form.
Note:The form identifying number must be nonreflective carbon-based black ink in OCR A font.
.12Two official Forms W–2c or one W–3c are contained on a single page that is 8.5 inches wide (exclusive of any snap stubs)
by 11 inches deep. The width of a substitute form must be 7.5 inches. See Exhibits A and B.
.13Forms W–2c (Copy A) of privately-printed, continuous substitute forms must be perforated at each 11”page depth. No per-
forations are allowed between the forms on a single page of Copies A.
Note:Perforations are required between all the other individual copies (Copies 1, B, C, 2, and D).
Section 5—Requirements for Substitute Privately-Printed Forms W–2c (Copies B, C, and 2) Furnished to Employees
.01 Allemployers (including those who file on magnetic media or electronically) must furnish employees with at least two cop-
ies of Form W–2c (three or more for employees required to file a state, city, or local income tax return).
.02The paper for all copiesmustbe white and printed in black ink. The substitute Copy B (or its equal), which employees are
instructed to attach to their federal income tax returns, must be at least 12-pound paper (basis 17 x 22-500). Other copies furnished
to the employee must be at least 9-pound paper (basis 17 x 22-500).
.03Interleaved carbon and chemical transfer paper for employee copiesmustbe clearly legible, have the capability to be pho-
tocopied, and not fade to such a degree as to preclude legibility and the ability to photocopy.
July 22, 20021772002–29 I.R.B.

.04Type must be substantially identical in size and shape to that on the official form.
.05Substitute forms for employees need to contain only the payment boxes and captions that are applicable. These boxes, box
numbers, and box titlesmust, when applicable, match the IRS-printed form. In all cases, the employee name, address, and SSN
must be present.
.06The dimensions of these copies (Copies B, C, and 2), but not Copy A, may be expanded from the dimensions of the official
form to allow space for conveying additional information. Also, on these copies (Copies B, C, and 2), the size of the boxes may
be adjusted. This may permit the employer to eliminate other statements or notices that would otherwise be furnished to employ-
ees.
.07Themaximumallowable dimensions for employee copies of Form W–2c are no more than 6.5 inches deep by 8.5 inches
wide. Theminimumallowable dimensions for employee copies of Form W–2c are 2.67 inches deep by 4.25 inches wide.
Note:These maximum and minimum size specifications are subject to future change.
.08Either horizontal or vertical format is permitted for substitute employee copies of Forms W–2c. That is, the width of the
form may be either greater or less than the depth of the form.
.09All copies of Form W–2cmustclearly show the form number and the form title prominently displayed together in one area
of the form. It is recommended (but not required) that this be located on the bottom left of Form W–2c. The reference to the
“Department of the Treasury—Internal Revenue Service”mustbe on all copies of Form W–2c. It is recommended (but not
required) that this be located on the bottom right of Form W–2c.
.10If the substitute Forms W–2c arenot labeledas to the disposition of the copies, then written notificationmustbe provided
to each employee as specified below:
•The first copy of Form W–2c (Copy B) is filed with the employee’s federal tax return.
•The second copy of Form W–2c (Copy C) is for the employee’s records.
•If applicable, the third copy (Copy 2) of Form W–2c is filed with the employee’s state, city, or local income tax return.
If the substitute Forms W–2c arelabeled, the formsmustcontain the applicable description as stated on the official form.
.11Instructions similar to those on the back of Form W–2c (Copy C) of the official form must be provided to each employee.
Section 6—Instructions for Employers
.01Privately-printed substitute Forms W–2c are not required to contain a copy to be retained by employers (Copy D). However,
employersmustbe prepared to verify or duplicate this information if the IRS or the SSA requests it. Paper filers who do not keep
Copy D of Form W–2c should be able to generate a facsimile of Form W–2c (Copy A) in case of loss.
.02If Copy D is provided for the employer, instructions contained on the back of Copy D of the official form must appear on
the back of the substitute form. If Copy D is not provided, these instructions must be furnished to the employer on a separate state-
ment.
.03Only originals or compliant substitute copies of Forms W–2c and Forms W–3c may be filed with the SSA. CARBON COP-
IES AND PHOTOCOPIES ARE NOT ACCEPTABLE.
.04Employers should type or machine print entries on non-laser generated forms whenever possible and provide good quality
data entries by using a high quality type face, inserting data in the middle of blocks that are well separated from other printing and
guidelines, and taking any other measures that will guarantee clear, sharp images.
.05Because employers must file a machine-scannable Form W–2c, be aware of the following requirements. Use 12-point Cou-
rier (SSA-preferred) font for data entries. Proportional-spaced fonts are unacceptable. You must refrain from printing any data in
the top margin of the forms
.06The employer must also furnish payee copies of Forms W–2c (Copies B, C, and 2) that are legible and capable of being
photocopied (by the employee).
.07When Forms W–2c or W–3c are typed, black inkmustbe used with no script type, inverted font, italics or dual-case alpha
characters.
.08The filer’s Employer Identification Number (EIN)mustbe entered in box e of Form W–3c and is a preferred entry in
box e of Form W–2c.
.09The employer’s name, address, EIN, and state ID number may be preprinted.
Section 7—OMB Requirements for Substitute Forms
.01The Paperwork Reduction Act (the Act) of 1995 (Public Law 104–13) requires that:
•The OMB approves all IRS tax forms that are subject to the Act.
•Each IRS form contains (in or near the upper right corner) the OMB approval number, if any. (The official OMB numbers may
be found on the official IRS printed forms and are also shown in the exhibits.)
•Each IRS form (or its instructions) states:
1. Why the IRS needs the information,
2. How it will be used, and
3. Whether or not the information is required to be furnished to the IRS.
2002–29 I.R.B.178July 22, 2002

.02This information must be provided to any users of official or substitute IRS forms or instructions.
.03The OMB requirements forsubstituteIRS forms are:
•Any substitute form or substitute statement to a recipient must show the OMB number as it appears on the official IRS form.
•For Form W–3c and Copy A of Form W–2c, the OMB number must appear exactly as shown on the official IRS form.
•For any copy other than Copy A, the OMB number must use one of the following formats.
1. OMB No. XXXX-XXXX (preferred) or
2. OMB # XXXX-XXXX (acceptable).
.04All substitute Forms W–3c and Copy A of Form W–2c must state,“For Privacy Act and Paperwork Reduction Act Notice,
see separate instructions.”If no instructions are provided to users of your forms, you must furnish them the exact text of the Pri-
vacy Act and Paperwork Reduction Act Notice.
Section 8—Reproducible Copies of Forms
.01You can order official IRS forms and information copies of federal tax materials by calling the IRS Distribution Center at
1–800–829–3676. Other ways to get federal tax material include:
•The Internet.
•CD-ROM.
•GPO Superintendent of Documents Bookstores.
Note:Several IRS forms are provided electronically on the IRS Website and on the federal tax forms CD-ROM, but Form W–3c
and Copy A of Form W–2c downloaded from these sources cannot be used for filing because fileable forms must comply with
specifications contained in this publication. These forms contain special scannable requirements.
.02You can access the IRS Website on the Internet via:
•File Transfer Protocol (FTP) usingftp.irs.govor
•World Wide Web by usingwww.irs.gov
.03The IRS also offers an alternative to downloading electronic files and provides current and prior-year access to tax forms
and instructions through its federal tax forms CD-ROM. OrderPub. 1796,IRS Federal Tax Products CD-ROM, by using the IRS’
Internet Website atwww.irs.gov/cdordersor by calling 1–877–CDFORMS (1–877–233–6767).
Section 9—Effect on Other Revenue Procedures
.01Revenue Procedure 95–18, 1995–1 C.B. 657 (reprinted as Publication 1223, Rev 3–95), is superseded.
Section 10—Exhibits
July 22, 20021792002–29 I.R.B.

2002–29 I.R.B.180July 22, 2002

July 22, 20021812002–29 I.R.B.

Part IV. Items of General Interest
Golden Parachute Payments;
Correction
Announcement 2002–65
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking and notice of public
hearing.
SUMMARY: This document contains
corrections to a notice of proposed rule-
making and notice of public hearing
(REG–109114–90, 2002–9 I.R.B. 576)
that was published in theFederal Regis-
teron Wednesday, February 20, 2002 (67
FR 7630) that will clarify the application
of section 280G of the Internal Revenue
Code to deny a deduction to a corporation
for any excess parachute.
FOR FURTHER INFORMATION CON-
TACT: Erinn Madden at (202) 622–6060
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking
and notice of public hearing that is the
subject of these corrections are under sec-
tion 280G of the Internal Revenue Code.
Need for Correction
As published, the notice of proposed
rulemaking and notice of public hearing
(REG–209114–90, 2002–9 I.R.B. 576)
contains errors that may prove to be mis-
leading and are in need of clarification.
Correction of Publication
Accordingly, the publication of the
notice of proposed rulemaking and notice
of public hearing (REG–209114–90),
which is the subject of FR Doc. 02–3819,
is corrected as follows:
1. On page 7630, column 1, in the pre-
amble under the caption“SUMMARY:”,
fourth line from the bottom of the para-
graph, the language“may rely on the
1989 regulations for any”is corrected to
read“may rely on the 1989 proposed
regulations for any”.
2. On page 7630, column 2, in the pre-
amble under the caption“FOR FUR-
THER INFORMATION CONTACT:”,
line 2, the language“Madden at (202)
622–6030 (not a toll”is corrected to read
“Madden at (202) 622–6060 (not at toll-”.
3. On page 7630, column 2, in the pre-
amble under the paragraph heading
“Background”, second paragraph, line 9,
the language“section 312(v)(2)(A),
which relates to”is corrected to read
“section 3121(v)(2)(A), which relates to
the.”
4. On page 7630, column 2, in the pre-
amble under the paragraph heading
“Background”, second paragraph, line 14,
the language“FR 19390 on May 5, 1989
(the 1989”is corrected to read“FR 19390
on May 5, 1989 and corrected in 54 FR
25879 (June 20, 1989) (the 1989”.
5. On page 7631, column 1, in the pre-
amble under the paragraph heading“Dis-
qualified Individuals”, second paragraph,
line 7, the language“1989 regulations
provides ade minimis”is corrected to
read“1989 proposed regulations provides
ade minimis”.
6. On page 7634, column 2, in the pre-
amble under the paragraph heading“Rea-
sonable Compensation”, first full para-
graph from the top of the column, line 2
from end of paragraph, the language
“show to be reasonable compensation”is
corrected to read“shown to be reasonable
compensation”.
7. On page 7635, column 3, in the pre-
amble under the paragraph heading“Tim-
ing of the Payment of Tax under Section
4999”, paragraph 1, line 2, the language
“section 312(v) and§1.3121(v)–1(e)(4)”
is corrected to read“section 3121(v) and
§31.3121(v)(2)–1(e)(4)”.
8. On page 7635, column 3, in the pre-
amble under the paragraph heading“Pro-
posed Effective Date”, line 4, the lan-
guage“control occurring on or after
January 1,”is corrected to read“control
that occurs on or after January 1,”.
§1.280G–1 [Corrected]
9.Onpage7638,column2,
§1.280G–1, paragraph (g) of A–6:,
Example 4., line 10, the language“appli-
cation of the excemption described in”is
corrected to read“application of the
exemption described in”.
10.Onpage7638,column2,
§1.280G–1, paragraph (g) of A–6:,
Example 5., line 9, the language“pays or
accrues a payment that would”is cor-
rected to read“that would”.
11.Onpage7638,column3,
§1.280G–1, paragraph (b)(1) of A–7:,
line 9, the language“A–7, the vote can be
no less than the”is corrected to read
“A–7, the vote can be on less than the”.
12.Onpage7640,column1,
§1.280G–1, paragraph (e) of A–7:,
Example 7., line 16, the language“the
payments of $400,000 to X; $600,000 to”
is corrected to read“and describing the
payments of $400,000 to X; $600,000
to”.
13.Onpage7640,column1,
§1.280G–1, paragraph (e) of A–7:,
Example 8., line 8, the language“the
nature of the payments to X, Y, and Z
are”is corrected to read“the nature and
amount of the payments to X, Y, and Z
are”.
14.Onpage7641,column1,
§1.280G–1, paragraph (c) of A–11:, lines
18 and 19 from the top of the column, the
language“under section 3121(v) and
§1.312(v)–1(c)(4) or payment related to
health”is corrected to read“under section
3121(v) and§31.3121(v)(2)–1(e)(4) of
this chapter, or a payment related to
health”.
15.Onpage7641,column2,
§1.280G–1, paragraph (a) of A–13:, lines
13 and 14, the language“value of an
option with an ascertainable fair market
value at the time the option”is corrected
to read“value of an option at the time the
option”.
16.Onpage7642,column1,
§1.280G–1, Q–17:, line 3, the language
“purposes of paragraph (a)(1) of Q/A–15”
is corrected to read“purposes of para-
graph (a)(1) and (b) of Q/A–15”.
17.Onpage7642,column3,
§1.280G–1, paragraph (c) of A–18:, line
16, the language“defined in Q/A–20 of
this section). If the”is corrected to read
“defined in Q/A–20 of this section). The
number of employees is determined with
regard to the rules in Q/A–19 (c). If the”.
18.Onpage7642,column3,
§1.280G–1, paragraph (a) of A–19:, line
13, the language“A–21 of this section)
2002–29 I.R.B.182July 22, 2002

paid during the”is corrected to read
“A–21 of this section) earned during the”.
20.Onpage7644,column1,
§1.280G–1, paragraph (c) of A–22:, line
7, the language“that is closely associated
and materially”is corrected to read“that
is closely associated with and materially”.
21.Onpage7646,column3,
§1.280G–1, paragraph (f) of A–24:,
Example 4., line 3 from the bottom of the
column, the language“would been on
January 15, 2011. The”is corrected to
read“would have been on January 15,
2011. The”.
22.Onpage7648,column1,
§1.280G–1, paragraph (c) of A–26:, line
13, the language“of section 129); or a
no-additional-cost”is corrected to read
“of section 129); a no-additional-cost”.
23.Onpage7648,column1,
§1.280G–1, paragraph (c) of A–26:, line
15, the language“132(b)) or qualified
employee discount”is corrected to read
“132(b)) qualified employee discount”.
24.Onpage7648,column1,
§1.280G–1, line 16, the language
“(within the meaning of section 132(c));”
is corrected to read“(within the meaning
of section 132(c)) qualified retirement
planning services under section 132(m);”.
25.Onpage7649,column1,
§1.280G–1, paragraph (d) of A–27:,
Example 4., lines 11 through 22, the lan-
guage“Corporation P shareholders also
owned Corporation O stock (overlapping
shareholders) with a fair market value of
5 percent of the value of Corporation O
stock. The overlapping shareholders con-
sist of Mutual Company A Growth Fund,
which prior to the transaction owns 3 per-
cent of the value of Corporation O stock,
Mutual Company A Income Fund, which
prior to the transaction owns 1 percent of
the value of Corporation O stock, and B,
an individual who prior to the transaction
owns 1 percent”is corrected to read
“Corporation O shareholders also owned
Corporation P stock (overlapping share-
holders) exchanged for O stock with a
fair market value of 5 percent of the value
of Corporation O stock. The overlapping
shareholders consist of Mutual Company
A Growth Fund, which prior to the trans-
action owns P stock that is exchanged for
3 percent of the value of Corporation O
stock, Mutual Company A Income Fund,
which prior to the transaction owns P
stock that is exchanged for 1 percent of
the value of Corporation O stock, and B
an individual who prior to the transaction
owns P stock that is exchanged for 1 per-
cent”
26.Onpage7651,column1,
§1.280G–1, A–32:, line 12, the language
“24 and 35 of this section. However, for”
is corrected to read“24 and 31 of this
section. However, for”.
27.Onpage7655,column1,
§1.280G–1, paragraph (c) of A–42:,
Example 3., line 4, the language“services
to Corporation N, when and if,”is cor-
rected to read“services to Corporation N,
when and if”.
28.Onpage7656,column2,
§1.280G–1, A–48: is corrected to read as
follows:
§1.280G–1 Golden parachute payments.
*****
A–48: This section applies to any pay-
ments that are contingent on a change in
ownership or control that occurs on or
after January 1, 2004. Taxpayers can rely
on these rules after February 20, 2002, for
the treatment of any parachute payment.
*****
Cynthia E. Grigsby,
Chief, Regulations Unit,
Associate Chief Counsel
(Income Tax and Accounting).
(Filed by the Office of the Federal Register on June
20, 2002, 8:45 a.m., and published in the issue of
the Federal Register for June 21, 2002, 67 F.R.
42210)
Foundations Status of Certain
Organizations
Announcement 2002–66
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of
notices under section 508(b) of the Code.
This listing doesnotindicate that the
organizations have lost their status as
organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The follow-
ing organizations (which have been
treated as organizations that are not pri-
vate foundations described in section
509(a) of the Code) are now classified as
private foundations:
7-12 Model Aviation Youth Academy,
Long Beach, CA
A-Home, Inc., New Orleans, LA
Acadian Memorial Foundation, Inc.,
St. Martinville, LA
Adventures in Art, Inc., Ft. Worth, TX
African-American Community
Entrustment, San Francisco, CA
African American Portrait Collection,
Inc., Sacramento, CA
Aha Mele’OHo’Omau, Honolulu, HI
Alberta Street Apartments Preservation,
Inc., Wilsonville, OR
Alianza Deministerios Evangelicos
Nacionales, Costa Mesa, CA
Aloha Park Preservation, Inc.,
Wilsonville, OR
Alpha Community Housing
Development, Inc., New Orleans, LA
Alpha Reading & Tutorial Services,
Royal Palm Beach, FL
Alumni Basketball Camp, Inc.,
Norman, OK
Angels Anonymous of Horizon Hospice,
Inc., Meridian, ID
Animal Welfare Council,
Weatherford, TX
Arc Marion New Hope Foundation, Inc.,
Ocala, FL
Aromas San Juan Bautista Community
Schools Foundation,
San Juan Bautista, CA
Ascension Theatre, Inc., New York, NY
Autumn Glow Alzheimers Care Home,
Inc., San Francisco, CA
Axumite Community Development
Corporation, Stockton, CA
B. J. Hill and Associates, Inc.,
Fayetteville, NC
Babes and Tots Child Care, Inc.,
Mountain Home, AR
Backdoor Institute of Disability Enabling
Resources & Services, Inc.,
Sacramento, CA
Baltimore County Health Council,
Towson, MD
Barbour County Family Resource
Network, Inc., Phillippi, WV
Barcap of Florida, Inc., Sarasota, FL
July 22, 20021832002–29 I.R.B.

Beaufort County Cities in Schools, Inc.,
Hilton Head, SC
Behavioral Impact Counseling Services,
Inc., Mission Hills, CA
Benedictus, El Cajon, CA
Bethel High School Band Boosters Club,
Spanaway, WA
Bethlehem Partners in Prevention,
Spartanburg, SC
Big Brothers Big Sisters of the Tulorosa
Basin, Inc., Alamogordo, NM
Boston Islamic School, Inc., Boston, MA
Bound for Freedom, Inc., Charlotte, NC
Boys and Girls Club of Fauquier, Inc.,
Warrenton, VA
Boys & Girls Club of Lake County,
Clearlake, CA
Brazos Valley Youth Corporation,
College Station, TX
Brendas Full House, Columbia, MO
Brookhollow Tenant Association,
Incorporation, Kerrville, TX
Business for Progress Economic
Development Corporation,
Hawaiian Gardens, CA
Butte Libraries Foundation, Chico, CA
Calabash Hawaii, Honolulu, HI
California Institute for Biodiversity,
Walnut Creek, CA
Canine Service Corps, Wimberley, TX
Cantilever Network, Incorporated,
Chicago, IL
Canyon Creek Narrow Guage Railway,
Georgetown, CA
Caregivers Solutions, Inc.,
Oklahoma City, OK
Casper Storm AAU Basketball Club,
Inc., Evansville, WY
Catholic Christian Community for
Justice, Inc., Vallejo, CA
Center for Christian-Jewish Dialogue,
Colorado Springs, CO
Center for Multicultural Wellness and
Prevention, Inc., Winter Park, FL
Central California Arts Foundation,
Tulare, CA
Central Coast Theater Works, Inc.,
Santa Cruz, CA
Central High Choral Booster Bunch,
Inc., Phoenix, AZ
Central Valley Youth Services, Inc.,
Stockton, CA
Charles Apartments Housing
Corporation, Gilroy, CA
Charleston Rotary Fund, Charleston, SC
Chesapeake Bay Educators, Weems, VA
Child Safety Net of Southern California,
Los Angeles, CA
Children and Family Network, Inc.,
Silt, CO
Chillicothe Quarterback Club,
Chillicothe, OH
Chinese Cultural Foundation of Diablo
Valley, Danville, CA
Cleveland County Friends of the
Fairgrounds, Inc., Norman, OK
Clover Hill Area Teen Center, Inc.,
Midlothian, VA
Coastal Health & Fitness, Inc.,
Camarillo, CA
Coleville High School PTSO,
Coleville, CA
Collective Theatre Company,
Winston Salem, NC
Colorado Inhalant Abuse Program, Inc.,
Denver, CO
Colquitt County Senior Consortium, Inc.,
Moultrie, GA
Columbus Metabolic Foundation, Inc.,
Columbus, GA
Communities in Schools of Asheville,
Asheville, NC
Communities in Schools of the Valley of
the Sun, Inc., Phoenix, AZ
Community Health Center of Glendale,
Sylmar, CA
Community in Action, Inc.,
Gulfport, MS
Community Learning and Information
Network of the Tri-State, Inc.,
Huntington, WV
Community Supporters of the Atlanta
Symphony Orchestra, Atlanta, GA
Conejo Oaks Symphony, Inc.,
Thousand Oaks, CA
Connecticut Valley Soccer Club, Inc.,
Claremont, NH
Consortium for Learning & Research in
Aging, Sacramento, CA
Contact Point Productions, Inc.,
Shelbyville, KY
Contemporary Asian Theatre Scene,
San Jose, CA
Covenant Word Ministries, Inc.,
Dallas, TX
Coyote Trail PTF, Tucson, AZ
Crawford Center, Inc., Miami, FL
Crime Prevention Boosters,
Nashville, TN
Crossroads Riding Center, Inc.,
Alexandria, LA
Cuarto Centennial Project Corporation,
Albuquerque, NM
Cuban Cultural Group, Inc., Miami, FL
Cultural Movement, Inc., Goldsboro, NC
Cumberland Regional Improvement
Corporation, Fayetteville, NC
Cypress and Senior Care Homes, Inc.,
Antioch, CA
Cypress Gardens Housing Corporation,
Gilroy, CA
DARE Georgia, Inc., Decatur, GA
De Mano A Mano Spanish Language
Hotline, Santa Barbara, CA
Decro Kappa Corporation,
Anaheim Hills, CA
Deming Soccer League, Deming, NM
Desert Legacy Employment Solutions,
Inc., Phoenix, AZ
Desoto County Domestic Violence
Council, Arcadia, FL
Dwight R. Means Foundation,
Dallas, TX
E. E. Brownell Academy of Humanities
and Fine Arts Parents Club,
Gilroy, CA
East Lincoln Middle School Parents-
Teachers Organization,
Iron Station, NC
Eden Economic Development
Corporation, Eden, TX
Educational Concepts, Sacramento, CA
El Paisano Educational Resource Center,
Inc., Albuquerque, NM
Ellenton Lions Foundation, Inc.,
Palmetto, FL
Ensemble Theatre, Scottsdale, AZ
Environmental Resourcing Association,
Olympia, WA
Evansville Fc-Soccer League,
Evansville, IN
F Q Story Block Watch Association,
Phoenix, AZ
Fairmont Private Schools Parent
Association, Anaheim, CA
Families for Children of Oregon,
Portland, OR
Families for Inclusive Education,
Jefferson, LA
Fannie Bush Teacher Organization of
Winchester Kentucky, Winchester, KY
Fannin County High School Tip-Off
Club, Inc., Mineral Bluff, GA
Few-Fund for Education Research and
Training, Washington, DC
First Night Phoenix, Inc., Tempe, AZ
Five Forks Commemorative Committee,
Prince George, VA
Florence County Association of
Educational Office Professionals,
Lake City, SC
Focus on Children, Inc., Durham, NC
2002–29 I.R.B.184July 22, 2002

Folsom St. Interchange,
San Francisco, CA
For the Children, Mountain View, MO
Foundation for Students Education,
Easton, MA
Fourth of July Celebration at Hansen
Dam, Sun Valley, CA
Friends of Mallory Square, Inc.,
Key West, FL
Friends of Santa Clara Soccer Park,
Santa Clara, CA
Friends of the Civic Arts Plaza,
Thousand Oaks, CA
Friends of the Fairfax City Library,
Fairfax, VA
Friends of the Ma Rainey Museum of
the Blues, Inc., Columbus, GA
Friends of the National Kidney
Association, San Francisco, CA
FSUS Sigma Chi Educational
Foundation, Inc., Tallahassee, FL
Gardngs Favrp, Inc., Ft. Lauderdale, FL
Gate Parents Group of the San Mateo
Union High School District,
San Mateo, CA
Gateway Apprenticeship Program,
Boulder, CO
Geneseo High School Soccer Boosters,
Geneseo, IL
Georgia Community-Based
Development, Inc., Atlanta, GA
Georgia Mountains Private Industry
Council, Inc., Gainesville, GA
Get Well Soon Day Care Program,
Aloha, OR
Glenoak Golden Eagel Kick Off Club,
Inc., Canton, OH
Gods Kitchen, Inc., Boynton Beach, FL
Golden Starfish Buddy Program,
Medina, WA
Golden Triangle Deacon & Deaconess
Council, Beaumont, TX
Great American Museum of History,
Carson City, NV
Group Opportunity, Inc., Richmond, CA
Gulf Shore Literary Society, Inc.,
Naples, FL
H & L Charities, Nashville, TN
Harbison West Elementary Parent
Teacher Organization, Columbia, SC
Hawaii Power Builders, Inc.,
Honolulu, HI
Haywood County Agricultural &
Activities Center Association,
Waynesville, NC
Help-Out, Texas City, TX
Helper Intermountain Theatre,
Helper, UT
High Peaks Educational Group, Inc.,
Boulder, CO
Highland Park Community Development
Corporation, Pasadena, CA
Hilo Medical Center Foundation,
Hilo, HI
Historic Entertainment and Repertory
Organizational Society,
Morrisville, NC
Hmong International Culture Reunion,
Inc., Fresno, CA
Homebound Remembered, Inc.,
Lubbock, TX
Hope Connection, Mission Hills, CA
Housing Effort, Inc., Louisville, KY
Houston Enhanced Enterprise
Community Governance Board,
Houston, TX
Hub City Community Hospice,
Compton, CA
Hui Kauhale, Inc., Honolulu, HI
Imani House, Winston Salem, NC
Inner City Youth, San Francisco, CA
Institute for Behavior and Research, Inc.,
Daphne, AL
Integrity Youth Enterprises, Inc.,
Santa Maria, CA
International Baccalaureate Foundation
of Choctawhatchee H.S.,
Fort Walton, FL
Irby Adult Resources Center, Inc.,
Pascagoula, MS
Irene Cardenas Memorial Scholarship
Fund, Del Rio, TX
J. W. Williams Neighborhood Center,
Memphis, TN
Jeffco First Steps for Children With
Special Needs, Golden, CO
JLWP Adult Day Care Center, Inc.,
Humphrey, AR
Juvenile Drug Diversion Program,
Capitola, CA
Kami Educational Corporation,
Fairbanks, AK
Keep the Kids Busy Foundation,
Jackson, MS
Kent High Schools PTSA, Tacoma, WA
Kolours Dance, Inc., Atlanta, GA
Korean Artist Association of Southern
California, Los Angeles, CA
La Cheim Psychological Treatment
Services, Inc., Oakland, CA
La Joya Middle School PTC,
Visalia, CA
Labor Museum & Learning Center of
Michigan, Flint, MI
Lakers Premier Soccer Club, Inc.,
Mandeville, LA
Las Vegas Vecindario De Esperanza
Resident Council, Las Vegas, NM
Latino American Economic Development
Institute, Hollywood, CA
Latinos Unidos for Alcohol and Drug
Services of Monterey County,
Castroville, CA
Leland College Development
Corporation, Baton Rouge, LA
Liberty Bells Group, Hopewell, VA
Life Care Institute, Inc., Boseman, MT
Life Net Ministries, Richmond, VA
Lincoln County Housing Coalition, Inc.,
Davenport, WA
Literacy Initiatives & Family Endeavors,
San Antonio, TX
Living Classrooms of Florida, Inc.,
Riviera, FL
Los Molinos Educational Endowment
Foundation, Los Molinos, CA
Louisiana Lacrosse Association,
Shreveport, LA
Love Memorial Parent Teacher
Organization, Lincolnton, NC
Lovell Wyoming Educational
Foundation, Inc., Lovell, WY
Lower Umpqua Volunteers Luv, Inc.,
Reedsport, OR
Lyons Elementary Parent Teacher
Organization, Lyons, CO
Marc Carr Evangelistic Association, Inc.,
Sarasota, FL
Marin People Care, San Rafael, CA
Maryland Parent Teacher Organization,
Phoenix, AZ
Maui Tongan Association, Kahului, HI
McKendree Vilage Home Health, Inc.,
Hermitage, TN
MDC Today Foundation,
Oklahoma City, OK
Mead High PTSA, Tacoma, WA
Men of Moral Consciousness,
Wilson, NC
Merchants Development, Inc.,
Birmingham, AL
Mid-Ohio Community Information
Network, Newark, OH
Mid-South Interventions & Solutions
Institute, Inc., Natchitiches, LA
Middletown Educational Foundation,
Middletown, CA
Miracles Recovery Center, Inc.,
Houston, TX
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
July 22, 20021852002–29 I.R.B.

determination letter with the revised clas-
sification as to foundation status. Grant-
ors and contributors may thereafter rely
upon such ruling or determination letter
as provided in section 1.509(a)–7ofthe
Income Tax Regulations. It is not the
practice of the Service to announce such
revised classification of foundation status
in the Internal Revenue Bulletin.
2002–29 I.R.B.186July 22, 2002

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Intemal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
July 22, 2002i2002–29 I.R.B.

Numerical Finding List
1
Bulletin 2002–26 through 2002–28
Announcements:
2002–59, 2002–26 I.R.B.28
2002–60, 2002–26 I.R.B.28
2002–61, 2002–27 I.R.B.72
2002–62, 2002–27 I.R.B.72
2002–63, 2002–27 I.R.B.72
2002–64, 2002–27 I.R.B.72
Notices:
2002–42, 2002–27 I.R.B.36
2002–43, 2002–27 I.R.B.38
2002–44, 2002–27 I.R.B.39
2002–45, 2002–28, I.R.B.93
2002–46, 2002–28 I.R.B.96
2002–47, 2002–28 I.R.B.97
2002–50, 2002–28 I.R.B.98
Proposed Regulations:
REG–248110–96, 2002–26 I.R.B.19
REG–110311–98, 2002–28 I.R.B.109
REG–103823–99, 2002–27 I.R.B.44
REG–103829–99, 2002–27 I.R.B.59
REG–103735–00, 2002–28 I.R.B.109
REG–106457–00, 2002–26 I.R.B.23
REG–107524–00, 2002–28 I.R.B.110
REG–115285–01, 2002–27 I.R.B.62
REG–126024–01, 2002–27 I.R.B.64
REG–122564–02, 2002–26 I.R.B.25
REG–123305–02, 2002–26 I.R.B.26
Revenue Procedures:
2002–43, 2002–28 I.R.B.99
2002–44, 2002–26 I.R.B.10
2002–45, 2002–27 I.R.B.40
2002–46, 2002–28 I.R.B.105
Revenue Rulings:
2002–38, 2002–26 I.R.B.4
2002–39, 2002–27 I.R.B.33
2002–40, 2002–27 I.R.B.30
2002–41, 2002–28 I.R.B.75
2002–42, 2002–28 I.R.B.76
2002–43, 2002–28 I.R.B.85
2002–44, 2002–28 I.R.B.84
Treasury Decisions:
8997, 2002–26 I.R.B.6
8998, 2002–26 I.R.B.1
8999, 2002–28 I.R.B.78
9000, 2002–28 I.R.B.87
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
2002–29 I.R.B.iiJuly 22, 2002

Finding List of Current Actions
on Previously Published Items
1
Bulletin 2002–26 through 2002–28
Announcements:
98–99
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B.10
2000–4
Modified by
Ann. 2002–60, 2002–26 I.R.B.28
2001–9
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B.10
Revenue Procedures:
2002–9
Modified and amplified by
Rev. Proc. 2002–46, 2002–28 I.R.B.105
2002–13
Modified by
Rev. Proc. 2002–45, 2002–27 I.R.B.40
Revenue Rulings:
94–76
Amplified by
Rev. Rul. 2002–42, 2002–28 I.R.B.76
1
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
July 22, 2002iii2002–29 I.R.B.