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Rev. Proc. 2013-12
TABLE OF CONTENTS
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION
SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose.
.02 General principles underlying EPCRS
.03 Overview
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs
.02 Modifications to VCP submission procedures
.03 Modifications relating to 403(b) Plans
.04 Description of other modifications
.05 Future enhancements
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01 Effect of EPCRS on retirement plans
.02 Compliance statement
.03 Other taxes and penalties
.04 Reliance
SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs
.02 Effect of examination
.03 Favorable Letter requirement
.04 Established practices and procedures
.05 Correction by plan amendment
.06 Availability of correction for Employer Eligibility Failure
.07 Availability of correction for a terminated plan
.08 Availability of correction for an Orphan Plan
.09 Availability of correction for § 457 plans
.10 Submission for a determination letter
.11 Egregious failures
.12 Diversion or misuse of plan assets
.13 Abusive tax avoidance transactions
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PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL
APPLICABILITY
SECTION 5. DEFINITIONS
.01 Definitions for Qualified Plans
.02 Definitions for 403(b) Plans
.03 Definitions for Orphan Plans
.04 Earnings
.05 IRA
.06 References to Rev. Proc. 2007-44
.07 SEP
.08 SIMPLE IRA Plan
.09 Under Examination
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL
APPLICABILITY
.01 Correction principles; rules of general applicability
.02 Correction principles.
.03 Correction of an Employer Eligibility Failure.
.04 Correction of a failure to obtain spousal consent
.05 Submission of a determination letter application
.06 Special rules relating to Excess Amounts
.07 Rules relating to reporting plan loan failures
.08 Correction under statute or regulations
.09 Matters subject to excise or other taxes
.10 Correction for 403(b) Plans
.11 Correction for SEPs and SIMPLE IRA Plans
.12 Confidentiality and disclosure
.13 No effect on other law
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01 Requirements
.02 Factors
.03 Multiple failures
.04 Examples.
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements
.02 Correction period
.03 Correction by plan amendment
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.04 Substantial completion of correction
.05 Examples
PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements
.02 Identification of failures
.03 Effect of VCP submission on examination
.04 No concurrent examination activity
.05 Determination letter application for plan amendments related to a VCP
submission
.06 Determination letter applications not related to a VCP submission
.07 Processing of submission
.08 Compliance statement
.09 Effect of compliance statement on examination
.10 Special rules relating to Anonymous Submissions
.11 Special rules relating to Group Submissions
.12 Multiemployer and multiple employer plans
SECTION 11. SUBMISSION PROCEDURES FOR VCP
.01 General rules
.02 Use of Appendix C Part II Schedules
.03 Submission requirements.
.04 Required documents
.05 Date fee due generally
.06 Additional fee due for SEPs, SIMPLE IRA Plans and Group
Submissions
.07 Power of attorney requirements
.08 Penalty of perjury statement
.09 Procedural Requirements Checklist for Form
.10 Orphan Plan
.11 Acknowledgement letter.
.12 VCP mailing address.
.13 Maintenance of copies of submissions
.14 Assembling the submission
SECTION 12. VCP FEES
.01 VCP
.02 VCP fee for Qualified Plans and 403(b) Plans
.03 VCP fee for nonamender failures
.04 VCP fee for multiple failures
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.05 VCP fee for Group Submission
.06 VCP fee for SEPs and SIMPLE IRA Plans
.07 VCP fee for egregious or intentional failures
.08 Establishing the number of plan participants
.09 Insufficient VCP fee
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
.01 Audit CAP requirements.
.02 Payment of sanction
.03 Additional requirements
.04 Failure to reach resolution
.05 Effect of closing agreement
.06 Other procedural rules
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction
.02 Factors considered
.03 Transferred Assets
.04 Fee for nonamenders discovered during the determination letter application
process not related to a VCP submission
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK
REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
SECTION 16. EFFECTIVE DATE
SECTION 17. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
APPENDIX A: OPERATIONAL FAILURES AND CORRECTION METHODS
.01 General rule
.02 Failure to properly provide the minimum top-heavy benefit under § 416 to
non-key employees
.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth
in § 401(m)(2), or, for plan years beginning on or before December 31, 2001,
the multiple use test of § 401(m)(9)
.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in
contravention of § 401(a)(30))
.05 Exclusion of an eligible employee from all contributions or accruals under the
plan for one or more plan years
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.06 Failure to timely pay the minimum distribution required under § 401(a)(9)
.07 Failure to obtain participant or spousal consent for a distribution subject to
the participant and spousal consent rules under §§ 401(a)(11), 411(a)(11),
and 417
.08 Failure to satisfy the § 415 limits in a defined contribution plan
.09 Orphan Plans; orphan contracts and other assets
APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS
ADJUSTMENT METHODS AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION
REFERENCES
.01 Purpose
.02 Assumptions for Examples
.03 Designated Roth contributions
.04 Section references
SECTION 2. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures
.02 Exclusion of Otherwise Eligible Employees
.03 Vesting Failures
.04 § 415 Failures
.05 Correction of Other Overpayment Failures
.06 § 401(a)(17) Failures
.07 Correction by Amendment
SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings Adjustment Methods
.02 Examples
APPENDIX C: MODEL VCP SUBMISSION DOCUMENTS
Instructions
Part I- Model VCP Submission Compliance Statement
Part II- Appendix C Schedules
Schedule 1 - Interim and Certain Discretionary Nonamender Failures
Schedule 2 – Nonamender Failures (other than those to which Schedule 1
applies)
Schedule 3 - SEPs and SARSEPs
Schedule 4 - SIMPLE IRAs
Schedule 5 - Plan Loan Failures (Qualified Plans and 403(b) Plans)
Schedule 6 - Employer Eligibility Failure (§ 401(k) and 403(b) Plans only)
Schedule 7 - Failure to Distribute Elective Deferrals in Excess of the
§ 402(g) limit
Schedule 8 - Failure to Pay Required Minimum Distribution Timely under
§ 401(a)(9
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Schedule 9 - Correction by Plan Amendment (in accordance with
Appendix B)
APPENDIX D: ACKNOWLEDGEMENT LETTER
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION
SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose
. This revenue procedure updates the comprehensive system of
correction programs for sponsors of retirement plans that are intended to satisfy the
requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue
Code (the "Code"), but that have not met these requirements for a period of time. This
system, the Employee Plans Compliance Resolution System ("EPCRS"), permits Plan
Sponsors to correct these failures and thereby continue to provide their employees with
retirement benefits on a tax-favored basis. The components of EPCRS are the Self-
Correction Program ("SCP"), the Voluntary Correction Program ("VCP"), and the Audit
Closing Agreement Program ("Audit CAP").
.02 General 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 accordance with the applicable requirements of
the Code.
• Sponsors and other administrators of eligible plans should satisfy the
applicable plan document requirements of the Code.
• Sponsors and other administrators should make voluntary and timely
correction of any plan failures, whether involving discrimination in favor of
highly compensated employees, plan operations, the terms of the plan
document, or adoption of a plan by an ineligible employer. Timely and
efficient correction protects participating employees by providing them with
their expected retirement benefits, including favorable tax treatment.
• Voluntary compliance is promoted by providing for limited fees for voluntary
corrections approved by the Internal Revenue Service (“Service”), thereby
reducing employers' uncertainty regarding their potential tax liability and
participants' potential tax liability.
• Fees and sanctions should be graduated in a series of steps so that there is
always an incentive to correct promptly.
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• 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.
• Sponsors should be able to rely on the availability of EPCRS in taking
corrective actions to maintain the tax-favored status of their plans.
.03 Overview
. EPCRS includes the following basic elements:
• Self-correction (SCP)
. A Plan Sponsor that has established compliance
practices and procedures may, at any time without paying any fee or
sanction, correct insignificant Operational Failures under a Qualified Plan, a
403(b) Plan, a SEP, or a SIMPLE IRA Plan. For a SEP or SIMPLE IRA Plan,
however, SCP is available only if the SEP or SIMPLE IRA Plan is established
and maintained on a document approved by the Service. 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 if the correction is made within the time specified in section 9.02.
• Voluntary correction with Service approval (VCP)
. A Plan Sponsor, at any
time before audit, may pay a limited fee and receive the Service's approval for
correction of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan failure.
Under VCP, there are special procedures for Anonymous Submissions and
group submissions.
• Correction on audit (Audit CAP)
. If a 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 reasonable
relationship to the nature, extent, and severity of the failure, taking into
account the extent to which correction occurred before audit.
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs
. This revenue procedure modifies and supersedes Rev.
Proc. 2008-50, 2008-2 C.B. 464, the prior consolidated statement of the correction
programs under EPCRS.
.02 Modifications to VCP submission procedures
. All VCP submissions made on
or after April 1, 2013, are required to include a completed Form 8950, Application for
Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution
System (EPCRS), and a Form 8951, Compliance Fee for Application for Voluntary
Correction Program Submission Under the Employee Plans Compliance Resolution
System (EPCRS ). Section 11.12 provides new addresses that must be used when
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mailing VCP submissions to the Service. These procedures and addresses may be
used by VCP applicants prior to April 1, 2013, as permitted by section 16 of this revenue
procedure.
.03 Modifications relating to 403(b) Plans
. This revenue procedure generally
permits Plan Sponsors maintaining 403(b) Plans to correct a failure in the same manner
that the same failure could be corrected under a Qualified Plan. The revenue procedure
also updates EPCRS to coordinate with Notice 2009-3, 2009-2 I.R.B. 250, and the final
regulations under § 403(b) that were issued on July 26, 2007. The definitions for 403(b)
Plans (section 5.02) have been modified to add a definition of Plan Document Failure
and to revise the definitions of Operational Failure, Demographic Failure, and Employer
Eligibility Failure to coordinate with the new definition of Plan Document Failure. These
definitions are revised for failures that occurred on or after the effective date of the
regulations under § 403(b). These regulations are generally effective for taxable years
beginning on or after January 1, 2009. (See section 16 for rules applicable to 403(b)
failures that occurred in taxable years beginning before January 1, 2009.) With these
revisions, corrections applicable to failures for 403(b) Plans are substantially the same
as those available for Qualified Plans (see section 5.01). In addition, changes have
been made in Appendix A and Appendix B to extend these correction methods to 403(b)
failures. The correction principles for 403(b) Plans take into account the provisions of
Notice 2009-3. Notice 2009-3 provides that the Service will not treat a plan as failing to
satisfy the requirements of § 403(b) and the regulations during the 2009 calendar year if
(1) the plan sponsor adopts a written plan that is intended to satisfy the requirements of
§ 403(b) and the regulations, effective as of January 1, 2009, (2) during 2009 the plan
sponsor operates the plan in accordance with a reasonable interpretation of § 403(b)
taking into account the regulations, and (3) before the end of 2009, the plan sponsor
makes its best efforts to retroactively correct any operational failure to conform to the
terms of the written 403(b) Plan in a manner that is consistent with the correction
principles outlined in section 6 of this revenue procedure.
EPCRS is available to correct failures that occur in years prior to 2009 in violation
of § 403(b) with respect to a plan’s operation other than a failure to operate in
accordance with the plan document. There is no document requirement applicable to
403(b) Plans prior to this date. Announcement 2009-34, 2009-18 I.R.B. 916, and
Announcement 2009-89, 2009-52, I.R.B. 1009, provide guidance on written 403(b)
Plans, including a retroactive remedial amendment period for years after 2009 that will
permit employers to retroactively amend their plans for Plan Document Failures. To the
extent that a remedial amendment period applies under Announcement 2009-89, a
403(b) plan will not have a Plan Document Failure during the period beginning January
1, 2010, and ending on a date to be announced in future guidance, provided that the
Plan Document Failure is corrected through a retroactive plan amendment that is
adopted by the end of the remedial amendment period. See section 6.10(2) & (3) for
special correction principles that apply for 403(b) Plans in connection with Notice
2009-3.
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.04 Description of other modifications. The modifications to Rev. Proc. 2008-50
that are reflected in this revenue procedure include:
• Replacing references to VCP application procedures with VCP submission
procedures
• Updating section 4.04 to address established practices and procedures to
promote compliance with § 415(c)
• Updating section 4.09 regarding the availability of correction of § 457
plans
• Adding a definition of Earnings to section 5 that has a specified meaning
throughout this revenue procedure (and that generally includes losses, if
applicable)
• Adding to section 5.02 a definition of Overpayment and Favorable Letter
for 403(b) Plans
• Clarifying and revising section 6.02(4)(c) and Appendix A, section .03, to
provide that for purposes of correcting a failed ADP, ACP, or multiple use
test, any amounts used to fund QNECs must satisfy the definition of
QNEC in § 1.401(k)-6
• Revising section 6.02(4)(d) to clarify the actuarial equivalence factors that
should be used to determine a corrective distribution from a defined
benefit plan
• Adding section 6.02(4)(e) to provide for correction of a failure to satisfy
§ 436
• Revising section 6.02(5)(d) to reflect that the IRS Letter Forwarding
Program is no longer available as a method for locating lost plan
participants who are owed additional retirement benefits, to clarify the
actions that must be taken to locate those participants, and to provide for
a limited extension of the VCP 150-day correction period and the SCP
correction period set forth in sections 10.07(9) and 9.02(1) of this revenue
procedure, respectively, for Plan Sponsors taking action to locate lost
participants
• Revising section 6.03 to improve clarity
• Revising section 6.04(2)(c) to add a sentence that takes into account the
requirements of § 436 if a single employer defined benefit plan is under
restriction at the time of correction
• Revising sections 6.05(1), 6.05(2), 6.05(3)(a), and 6.05(3)(c) to clarify the
situations under which a determination letter application may not be
submitted under EPCRS
• Revising section 6.05(3)(a) to clarify what is meant by “good faith
amendments,” “interim amendments,” and “optional law changes” and
when the provisions of section 6.05(3)(a) are applicable, and adding a
new section 6.05(3)(b) to improve clarity
• Modifying section 6.05(3)(c) (formerly section 6.05(3)(b)) to specify that a
determination letter application is not required and may not be submitted
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to correct a Demographic Failure, and to clarify the scope of reliance on a
compliance statement or closing agreement
• Adding section 6.05(3)(d) to provide that a determination letter application
is not required and may not be submitted with a VCP submission to
correct a failure to adopt amendments required under the terms of a
favorable determination letter
• Adding section 6.05(5) to address corrective amendments to pre-approved
plans
• Revising section 6.06(3) to address the correction of Overpayments from
defined benefit plans
• Adding section 6.06(4) to address the correction of Overpayments from
defined contribution plans, including 403(b) Plans, and to clarify when an
employer contribution to correct an Overpayment is required
• Revising section 6.07 to clarify that the correction principles in that section
also apply to Audit CAP
• Adding section 6.10(3) to address the correction of a 403(b) Plan failure to
adopt a written plan document timely in accordance with the final
regulations under § 403(b) and Notice 2009-3
• Revising section 10.07(8) to improve clarity and to reference the new
model compliance statement in Appendix C Part I
• Revising section 10.08 by addressing the failure to adopt a written 403(b)
Plan timely, reorganizing the section to improve clarity, and clarifying the
scope of reliance on a compliance statement
• Revising section 10.10 and adding section 11.08(2) to clarify that if an
Anonymous Submission is made by an individual who represents the Plan
Sponsor, such individual must satisfy the power of attorney requirements
and provide a statement under penalty of perjury to that effect
• Revising sections 10.11(1) and 12.05 to clarify that in the case of either a
prototype or specimen plan, the number of plans (for the purpose of
determining the number of group submissions that may be required) is
based on the number of basic plan documents, not adoption agreements
• Revising section 10.12(2) to clarify that the VCP compliance fee or
sanction imposed with respect to multiemployer and multiple employer
plans is based on participants rather than assets
• Revising sections 10.07(1), 10.07(10), 11.01, and 11.02, and adding a
new section 11.04(1) to require that Forms 8950 and 8951 be included
with all VCP submissions, and to make conforming changes consistent
with this new requirement (including the consolidation of Appendices D
and F procedures into a new two-part Appendix C)
• Revising section 11.02 to discuss the use of the Appendix C Part II
Schedules
• Revising section 11.03 submission requirements to refer to the new two-
part Appendix C and to reflect the use of the Form 8950 in VCP
submission procedures
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• Revising section 11.04(3) (formerly section 11.04(2)) to provide that if a
restated plan document is being submitted as evidence of correction then
the plan sponsor must identify the corrective plan language in the restated
plan
• Revising section 11.05 to provide that a photocopy of the check for the
VCP compliance fee must be included with the submission
• Revising section 11.09 to eliminate the requirement to submit an Appendix
C Checklist and to refer to the Procedural Requirements Checklist on
Form 8950
• Revising section 11.12 (formerly 11.13) to provide new mailing addresses
for all VCP submissions and, if applicable, accompanying determination
letter applications effective for submissions made on or after April 1, 2013
• Revising section 11.14 (formerly 11.15) to require that Forms 8950 and
8951 be included when assembling the VCP submission, to remove
duplicative items captured by Form 8950, and to clarify that an applicant
must submit separate attachments and other necessary documents for
both a VCP submission and a related determination letter application
• Revising section 12.01 to add that a completed Form 8951 must
accompany all VCP submissions along with the initial compliance fee
• Adding section 12.01(2) to provide notice that VCP compliance fee checks
may be converted into an electronic fund transfer
• Adding section 12.02(5) to provide that the VCP compliance fee for a
failure to adopt a 403(b) Plan timely is temporarily reduced by 50% if
certain conditions are met
• Adding section 12.03(3) to provide that the VCP compliance fee is $500 if:
(a) the sole failure is the failure to adopt an amendment (upon which the
favorable determination letter is conditioned) within the applicable
remedial amendment period, and (b) the required amendment is adopted
within three months of the expiration of the remedial amendment period
for adopting the proposed amendment
• Adding section 12.04 to provide that if a VCP submission includes multiple
failures, each of which is subject to a reduced fee, then the fee for the
submission will be the lesser of the sum of the reduced fees or the fee
determined pursuant to the schedule under section 12.02(1)
• Revising section 12.08 to clarify how to determine the number of plan
participants if the Plan Sponsor is not required to file a Form 5500 series
return with regard to a Qualified Plan or 403(b) Plan eligible for VCP
• Revising section 14.04(1) and (2) to update the fee schedule for
nonamenders discovered during the determination letter application
process not related to a VCP submission and adding section 14.04(3) and
(4) to provide for reduced sanctions for certain nonamender failures
discovered during the determination letter application process that were
not related to a VCP submission
• Revising Appendix A, section .05, and related examples in Appendix B to
provide that, in some cases, a matching contribution owed to a participant
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may be made in the form of a corrective employer matching contribution,
instead of a QNEC, so that the corrective employer matching contribution
would be subject to the vesting schedule under the plan that applies to
employer matching contributions
• Clarifying and adding correction methods under Appendix A, section
.05(2)(d), for the improper exclusion of employees from safe harbor 401(k)
plans under §§ 401(k)(12) and 401(k)(13)
• Adding Appendix A, section .05(6) and (7), to provide for corrections for
improper exclusion of employees from making elective deferrals to 403(b)
and SIMPLE IRA Plans
• Clarifying that the correction under Appendix A, section .06, involving the
failure to timely pay a required minimum distribution in a defined benefit
plan that is subject to a restriction under § 436 at the time of correction
requires the Plan Sponsor to make a contribution to the plan
• Clarifying that the correction under Appendix A, section .07(2), involving
the payment of a lump sum to a spouse to correct the failure to obtain
spousal consent before making distributions to a participant for a plan that
is subject to a restriction on single-sum payments under § 436(d) at the
time of correction, is available only if the Plan Sponsor (or other person)
makes a contribution to the plan
• Clarifying that the correction by plan amendment under Appendix B,
section 2.07(3), for the early inclusion of an employee who did not satisfy
the plan’s age, service, or entry date requirement, must be consistent with
the rules relating to the limitations on plan amendments increasing liability
for benefits under § 436(c)
• Revising Appendix C to consist of two parts: (a) a Model VCP Submission
Compliance Statement and (b) various Schedules (formerly Appendix F
Schedules) that contain limited standardized failure descriptions and
correction methods that may assist applicants when preparing VCP
submissions
• Revising all of the former Appendix F Schedules and redesignating them
as Appendix C Part II Schedules that may be used with the Appendix C
Part I Model VCP Submission Compliance Statement (or simply as an aid
in VCP submissions that do not use the Appendix C Part I Model VCP
Submission Compliance Statement)
• Revising Appendix C Part II Schedule 1 (formerly Appendix F Schedule 1)
by changing the format and providing instructions on when Schedule 1
should be used
• Revising Appendix C Part II Schedule 2 (formerly Appendix F Schedule 2)
to include the failure to amend timely for the 2004, 2008, 2009, 2010,
2011 and 2012 Cumulative Lists, the failure to amend timely for an
amendment required as a condition to a favorable determination letter, the
failure to adopt a written 403(b) Plan timely, and the failure to adopt a pre-
approved defined benefit plan timely in accordance with Announcement
2010-20, I.R.B. 2010-15
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• Revising Appendix C Part II Schedules 3, 4, and 9 (formerly Appendix F
Schedules 3, 4, and 9) to reflect the revision regarding the method of
locating former participants on the Model VCP Submission Compliance
Statement associated with Appendix C Part I or any issued compliance
statements
.05 Future enhancements
.
(1) Future updates. It is expected that the EPCRS revenue procedure will
continue to be updated, in whole or in part, from time to time, including further
improvements to EPCRS based on comments received. Thus, the Service and Treasury
continue to invite further comments on how to improve EPCRS. Comments should be
sent to:
Internal Revenue Service
Attention: SE:T:EP:RA:VC
1111 Constitution Avenue NW
Washington, D.C. 20224
(2) Section 401(k) automatic enrollment, automatic escalation, and safe harbor
notices. Comments continue to be requested for certain specific issues under EPCRS.
First, comments are requested regarding methods to correct the failure to implement
automatic enrollment (including automatic escalation of the amount deferred) with
respect to elective deferrals in a § 401(k) plan or 403(b) Plan that has an automatic
enrollment or automatic escalation provision, including a plan with a qualified automatic
contribution arrangement within the meaning of § 401(k)(13) or 401(m)(12) under which
correct amounts were not timely withheld from the compensation of an employee who
did not make an affirmative election to have a specified contribution made on his or her
behalf under the plan (or who affirmatively elected to have automatic escalation apply).
For example, comments are requested on whether the correction in Appendix A, section
.05(2)(d)(ii), should also apply with respect to a § 401(k)(13) or 401(m)(12) safe harbor
plan that provides for automatic escalation in elective deferrals. Second, comments are
requested regarding methods to correct the failure to timely provide a safe harbor notice
under a plan designed to satisfy the requirements of § 401(k)(12), 401(k)(13),
401(m)(11), 401(m)(12), or 414(w).
(3) Designated Roth contributions
. Comments continue to be requested on
special issues relating to designated Roth contributions. For example, comments are
requested on whether, if a plan failed to implement a participant’s election to have a
designated Roth contribution made on his or her behalf, but instead a pre-tax elective
deferral was made for the participant with the participant’s compensation reduced
accordingly, it would be an appropriate correction of the failure for the employer to ask
the participant whether correction should be made by a transfer of the contribution
(adjusted for Earnings) to a Roth account under the plan and inclusion of the amount so
transferred in the participant’s compensation in the year of the transfer (instead of either
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(i) a similar transfer with a corrected W-2 for the year of the failure and the participant
having to complete an amended return for the year of the failure or (ii) a similar transfer
and inclusion of the amount so transferred in the participant’s compensation in the year
of the transfer, but with the employer to make a gross-up payment to the participant to
make the participant whole for any increase in the resulting income tax). Comments are
also requested regarding cases in which a plan fails to notify an employee of his or her
right to elect designated Roth contributions, such as whether a corrective contribution to
a Roth account (in an amount such as described in section .05(3) of Appendix A), with
the right to elect to have that amount included in gross income as described in the
preceding sentence, should be applied in this case or whether some additional
corrective contribution should be required to reflect the possibility that a participant’s
decision to make an elective deferral might be affected by the availability of designated
Roth contributions. See generally section .05(3) of Appendix A and Example 3 of
Appendix B, section 2.02(1)(b), for illustrations of corrections for exclusion of otherwise
eligible employees from having an effective opportunity to make elective deferrals,
which applies without regard to whether the plan only permits pre-tax elective deferrals
or whether the plan also permits designated Roth elective deferrals.
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01 Effect of EPCRS on retirement plans. For a Qualified Plan, a 403(b) Plan, a
SEP, or a SIMPLE IRA Plan, if the eligibility requirements of section 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 treat the plan as failing to meet the requirements of § 401(a), 403(b), 408(k), or
408(p), as applicable, because of the failure. Thus, for example, if the Plan Sponsor
corrects a failure in accordance with the requirements of this revenue procedure, the
plan will not thereby be treated as failing to satisfy § 401(a), 403(b), 408(k), or 408(p),
as applicable, for purposes of applying §§ 3121(a)(5) (FICA taxes) and 3306(b)(5)
(FUTA taxes).
.02 Compliance 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.
.03 Excise and other taxes
. See section 6.09 for rules relating to excise and other
taxes.
.04 Reliance
. Taxpayers may rely on this revenue procedure, including the relief
described in section 3.01.
15
SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs
. (1) SCP. SCP is available only for Operational Failures.
Qualified Plans and 403(b) Plans are eligible for SCP with respect to significant and
insignificant Operational Failures. SEPs and SIMPLE IRA Plans are eligible for SCP
only with respect to insignificant Operational Failures.
(2) VCP
. Qualified Plans, 403(b) Plans, SEPs, and SIMPLE IRA Plans are
eligible for VCP. VCP provides general procedures for correction of all Qualification
Failures: Operational, Plan Document, Demographic, and Employer Eligibility. VCP also
provides general procedures for the correction of participant loans that did not comply
with the requirements of § 72(p)(2).
(3) Audit CAP
. Unless otherwise provided, Audit CAP is available for Qualified
Plans, 403(b) Plans, SEPs, and SIMPLE IRA Plans for correction of all failures found on
examination that have not been corrected in accordance with SCP or VCP. Audit CAP
also provides general procedures for the correction of participant loans that did not
comply with the requirements of § 72(p)(2).
(4) Eligibility for other arrangements. The Service may extend EPCRS to other
arrangements.
(5) Appropriate use of programs
. In a particular case, the Service may decline to
make available one or more correction programs under EPCRS in the interest of sound
tax administration.
.02 Effect of examination
. If the plan or Plan Sponsor is Under Examination, VCP
is not available and SCP is only available as follows: while the plan or Plan Sponsor is
Under Examination, insignificant Operational Failures can be corrected under SCP; and,
if correction of significant operational failures has been completed or substantially
completed (as described in section 9.04) before the plan or Plan Sponsor is Under
Examination, correction of those failures can be completed under SCP.
.03 Favorable Letter requirement
. The provisions of SCP relating to significant
Operational Failures (see section 9) are available for Qualified Plans and 403(b) Plans
only if the plans are the subject of a Favorable Letter. (See section 6.10(2) for rules
treating a 403(b) Plan as having a Favorable Letter.) The provisions of SCP relating to
insignificant Operational Failures (see section 8) are available for a SEP only if the plan
document consists of either (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by
an employer in accordance with the instructions on the applicable form (see Rev. Proc.
2002-10, 2002-1 C.B. 401) or (ii) a prototype SEP that has a current favorable opinion
letter that has been amended in accordance with the procedures set forth in Rev. Proc.
2002-10. The provisions of SCP relating to insignificant Operational Failures (see
section 8) are available for a SIMPLE IRA Plan only if the plan document consists of
either (i) a valid Model Form 5305-SIMPLE or 5304-SIMPLE adopted by an employer in
16
accordance with the instructions on the applicable form (see Rev. Proc. 2002-10) or (ii)
a current favorable opinion letter for a Plan Sponsor that has adopted a prototype
SIMPLE IRA Plan that has been amended in accordance with the procedures set forth
in Rev. Proc. 2002-10.
.04 Established practices and procedures
. In order to be eligible for SCP, the
Plan Sponsor or administrator of a plan must have established practices and
procedures (formal or informal) reasonably designed to promote and facilitate overall
compliance with applicable Code requirements. For example, the plan administrator 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 document 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. SCP may also be used in
situations where the Operational Failure occurred because the procedures that were in
place, while reasonable, were not sufficient to prevent the occurrence of the failure. A
plan that provides for elective deferrals and nonelective employer contributions that are
not matching contributions is not treated as failing to have established practices and
procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under
which excess annual additions under § 415(c) are regularly corrected by return of
elective deferrals to the affected employee within two and one-half months after the end
of the plan’s limitation year. The correction, however, should not violate another
applicable Code requirement. 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 the sponsor of the transferor plan
or the prior Plan Sponsor of an assumed plan, the plan is considered to have
established practices and procedures for the Transferred Assets if such practices and
procedures are in effect for the Transferred Assets by the end of the first plan year that
begins after the corporate merger, acquisition, or other similar transaction. (See section
6.10(2) for special rules regarding established practices and procedures for 403(b)
Plans.)
.05 Correction by plan amendment
. (1) Availability of correction by plan
amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a
Qualified Plan or 403(b) Plan to correct Plan Document, Demographic, and Operational
Failures by a plan amendment, including correcting 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 applicable Code requirements, including, for a
Qualified Plan, § 401(a) (including the requirements of §§ 401(a)(4), 410(b), and
411(d)(6)). In addition, a Plan Sponsor may adopt a plan amendment to reflect the
corrective action. For example, if the plan failed to satisfy the actual 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
17
amended to provide for qualified nonelective contributions. Except as provided in
section 6.05, 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.
(2) Availability of correction by plan amendment in SCP
. A Plan Sponsor may
use SCP for a Qualified Plan or 403(b) Plan to correct an Operational Failure by a plan
amendment in order to conform the terms of the plan to the plan’s prior operations only
with respect to Operational Failures listed in section 2.07 of Appendix B. These failures
must be corrected in accordance with the correction methods set forth in section 2.07 of
Appendix B. Any plan amendment must comply with the requirements of § 401(a),
including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6), to the extent
applicable to the plan. If a Plan Sponsor corrects an Operational Failure in accordance
with the approved correction methods under Appendix B, it may amend the plan to
reflect the corrective action. For example, if the plan failed to satisfy the actual deferral
percentage (ADP) test required under § 401(k)(3) and the Plan Sponsor makes qualified
nonelective contributions not already provided for under the plan, the plan may be
amended to provide for qualified nonelective contributions. SCP is not otherwise
available for a Plan Sponsor to correct an Operational Failure by a plan amendment.
.06 Availability of correction for Employer Eligibility Failure
. SCP is not available
for a Plan Sponsor to correct an Employer Eligibility Failure.
.07 Availability of correction for a terminated plan
. Correction of Qualification
Failures and 403(b) Failures in a terminated plan may be made under VCP and Audit
CAP, whether or not the plan trust or contract is still in existence.
.08 Availability of correction for an Orphan Plan
. A failure in an Orphan Plan that
is terminating may only be corrected under VCP and Audit CAP, provided that the party
acting on behalf of the plan is an Eligible Party, as defined in section 5.03(2). See
section 6.02(2)(e)(ii). SCP is not available for correcting failures in Orphan Plans.
.09 Availability of correction for § 457 plans
. Submissions relating to § 457(b) will
be accepted by the Service on a provisional basis outside of EPCRS through standards
that are similar to EPCRS. The availability of correction is generally limited to plans that
are sponsored by governmental entities described in § 457(e)(1)(A). In the case of a
§ 457(b) plan that is an unfunded deferred compensation plan established for the
benefit of top hat employees of a tax-exempt entity described in § 457(e)(1)(B), the
Service generally will not enter into an agreement to address problems associated with
such a plan. However, the Service may consider a submission where, for example, the
plan was erroneously established to benefit the entity’s nonhighly compensated
employees and the plan has been operated in a manner that is similar to a Qualified
Plan.
.10 Submission for a determination letter
. In any case in which correction of a
Qualification Failure includes correction of a Plan Document Failure, Demographic
18
Failure, or Operational Failure by plan amendment, a determination letter application
may be required. See section 6.05.
.11 Egregious failures
. SCP is not available to correct Operational Failures that
are egregious. Egregious failures include: (a) a plan that has consistently and
improperly covered only highly compensated employees; (b) a plan that provides more
favorable benefits for an owner of the employer based on a purported collective
bargaining agreement where there has in fact been no good faith bargaining between
bona fide employee representatives and the employer (see Notice 2003-24, 2003-1
C.B. 853, with respect to welfare benefit funds); or (c) a defined contribution plan where
a contribution is made on behalf of a highly compensated employee that is several
times greater than the dollar limit set forth in § 415(c). VCP is available to correct
egregious failures. However, egregious failures are subject to the VCP fees described in
section 12.06 and, for purposes of section 12.06, an egregious failure would include any
case in which the IRS concludes that the parties controlling the plan recognized that the
action taken would constitute a failure and the failure either involves a substantial
number of participants or beneficiaries or involves participants who are predominantly
highly compensated employees. Audit CAP also is available to correct egregious
failures.
.12 Diversion or misuse of plan assets
. SCP, VCP, and Audit CAP are not
available to correct failures relating to the diversion or misuse of plan assets.
.13 Abusive tax avoidance transactions
. (1) Effect on Programs. (a) SCP. With
respect to SCP, in the event that the plan or the Plan Sponsor has been a party to an
abusive tax avoidance transaction (as defined in section 4.13(2)), SCP is not available
to correct any Operational Failure that is directly or indirectly related to the abusive tax
avoidance transaction.
(b) VCP
. With respect to VCP, if the Service determines that a plan or Plan
Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as
defined in section 4.13(2)), then the matter will be referred to the Internal Revenue
Service’s Employee Plans’ Tax Shelter Coordinator. Upon receiving a response from
the Tax Shelter Coordinator, the Service may determine that the plan or the Plan
Sponsor has been a party to an abusive tax avoidance transaction, and that the failures
addressed in the VCP submission are related to that transaction. In those situations, the
Service will conclude the review of the submission without issuing a compliance
statement and will refer the case for examination. However, if the Tax Shelter
Coordinator determines that the plan failures are unrelated to the abusive tax avoidance
transaction or that no abusive tax avoidance transaction occurred, then the Service will
continue to address the failures identified in the VCP submission, and may issue a
compliance statement with respect to those failures. In no event may a compliance
statement be relied on for the purpose of concluding that the plan or Plan Sponsor was
not a party to an abusive tax avoidance transaction. In addition, even if it is concluded
that the failures can be addressed pursuant to a VCP submission, the Service reserves
19
the right to make a referral of the abusive tax avoidance transaction matter for
examination.
(c) Audit CAP and SCP (for plans Under Examination)
. (1) For plans Under
Examination, if the Service determines that the plan or Plan Sponsor was, or may have
been, a party to an abusive tax avoidance transaction, the matter may be referred to the
Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. With respect to
plans Under Examination, an abusive tax avoidance transaction includes a transaction
described in section 4.13(2) and any other transaction that the Service determines was
designed to facilitate the impermissible avoidance of tax. Upon receiving a response
from the Tax Shelter Coordinator, (i) if the Service determines that a failure is related to
the abusive tax avoidance transaction, the Service reserves the right to conclude that
neither Audit CAP nor SCP is available for that failure or (ii) if the Service determines
that satisfactory corrective actions have not been taken with regard to the transaction,
the Service reserves the right to conclude that neither Audit CAP nor SCP is available to
the plan.
(2) Abusive tax avoidance transaction defined
. For purposes of section 4.13(1)
(except to the extent otherwise provided in section 4.13(1)(c)), an abusive tax
avoidance transaction means any listed transaction under § 1.6011-4(b)(2) and any
other transaction identified as an abusive transaction on the IRS web site entitled “EP
Abusive Tax Transactions.”
PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL
APPLICABILITY
SECTION 5. DEFINITIONS
The following definitions apply for purposes of this revenue procedure:
.01 Definitions 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 Qualification
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 remedial amendment period
20
under § 401(b) is a Plan Document Failure. Similarly, if a plan has not been timely and
properly amended during an applicable remedial amendment period for adopting good
faith or interim amendments with respect to disqualifying provisions, as described in
§1.401(b)-1(b)(1) of the Income Tax Regulations, the plan has 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 Eligibility Failure.
(b) Operational Failure
. The term "Operational Failure" means a Qualification
Failure (other than an Employer Eligibility 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 (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 retroactively to reflect the plan's operations (e.g., pursuant to § 401(b)).
In the situation where a Plan Sponsor timely adopted a good faith, interim, or
discretionary amendment (as provided in sections 2.07, 2.08, 2.09, and 5 of Rev. Proc.
2007-44) and the plan was not operated in accordance with the terms of such
amendment
, 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 correction of a Demographic Failure
generally requires a corrective amendment to the plan adding more benefits or
increasing existing benefits (see § 1.401(a)(4)-11(g)).
(d) Employer Eligibility Failure
. The term “Employer Eligibility Failure” means the
adoption of a plan intended to include a qualified cash or deferred arrangement under
§ 401(k) by an employer that fails to meet the employer eligibility requirements to
establish a § 401(k) plan. An Employer Eligibility Failure is not a Plan Document,
Operational, or Demographic Failure.
(3) Excess Amount; Excess Allocations; Overpayment
. (a) Excess Amount. The
term "Excess Amount" means a Qualification Failure due to a contribution, allocation, or
similar credit that is made on behalf of a participant or beneficiary to a plan in excess of
the maximum amount permitted to be contributed, allocated, or credited on behalf of the
participant or beneficiary under the terms of the plan or that exceeds a limitation on
contributions or allocations provided in the Code or regulations. Excess Amounts
include: (i) an elective deferral or after-tax employee contribution that is in excess of the
maximum contribution under the plan; (ii) an elective deferral or after-tax employee
contribution made in excess of the limitation under § 415; (iii) an elective deferral in
excess of the limitation of § 402(g); (iv) an excess contribution or excess aggregate
contribution under § 401(k) or (m); (v) an elective deferral or after-tax employee
contribution that is made with respect to compensation in excess of the limitation of
§ 401(a)(17); and (vi) any other employer contribution that exceeds a limitation under
§ 401(a)(17), 401(m) (but only with respect to the forfeiture of nonvested matching
21
contributions that are excess aggregate contributions), 411(a)(3)(G), or 415. However,
an Excess Amount does not include a contribution, allocation, or other credit that is
made pursuant to a correction method provided under this revenue procedure for a
different Qualification Failure. Excess Amounts are limited to contributions, allocations,
or annual additions under a defined contribution plan, after-tax employee contributions
to a defined benefit plan, and contributions or allocations that are to be made to a
separate account (with actual Earnings) under a defined benefit plan. See generally
section 6.06 for the treatment and correction of certain Excess Amounts.
(b) Excess Allocation
. The term "Excess Allocation" means an Excess Amount
for which the Code or regulations do not provide any corrective mechanism. Excess
Allocations include Excess Amounts as defined in section 5.01(3)(a) (i), (ii), (v), and (vi)
(except with respect to § 401(m) or 411(a)(3)(G) violations). Excess Allocations must be
corrected in accordance with section 6.06(2).
(c) Overpayment
. The term "Overpayment" means a Qualification Failure due to
a payment being made to a participant or beneficiary that exceeds the amount payable
to the participant or beneficiary under the terms of the plan or that exceeds a limitation
provided in the Code or regulations. Overpayments include both payments from a
defined benefit plan and payments from a defined contribution plan (either not made
from the participant's or beneficiary's account under the plan or not permitted to be paid
under the Code, the regulations, or the terms of the plan). However, an Overpayment
does not include a payment that is made pursuant to a correction method provided
under this revenue procedure for a different Qualification Failure. Overpayments must
be corrected in accordance with section 6.06(3).
(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 submitter plan that is not identical to an approved volume submitter
plan), a current favorable opinion letter for a Plan Sponsor that has adopted a master or
prototype plan (standardized or nonstandardized), or a current favorable advisory letter
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 letter,
opinion letter, or advisory letter if (a), (b), or (c) below is satisfied:
(a) The plan has a favorable determination letter, opinion letter, or advisory letter
that considers the law changes incorporated in the Plan Sponsor’s most recently
expired remedial amendment cycle determined under the provisions of Rev. Proc. 2007-
44.
( b) The plan is initially adopted or effective after December 31, 2001, and the
Plan Sponsor timely submits an application for a determination letter or adopts an
approved master or prototype plan or volume submitter plan within the plan’s remedial
amendment period under § 401(b).
(c) The plan is terminated prior to the expiration of the plan’s current remedial
amendment cycle determined under the provisions of Rev. Proc. 2007-44, and the plan
22
was amended to reflect the qualification requirements that applied as of the date of
termination.
(5) Maximum Payment Amount
. The term "Maximum Payment Amount" means a
monetary amount that is approximately 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) (and any interest or penalties applicable to the
trust return),
(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),
(c) additional income tax resulting from income inclusion for participants in the
plan (Form 1040), including the tax on plan distributions that have been rolled over to
other qualified trusts (as defined in § 402(c)(8)(A)) or eligible retirement plans (as
defined in § 402(c)(8)(B)) and any interest or penalties applicable to the participants’
returns, and
(d) any other tax that results from a Qualification Failure that would apply but for
correction under this revenue procedure.
(6) Plan Sponsor
. The term "Plan Sponsor" means the employer that establishes
or maintains a Qualified Plan for its employees.
(7) 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 consolidation of
plan assets) under § 414(l) from a plan sponsored by an employer that was not a
member of the same controlled group as the Plan Sponsor immediately 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.
.02 Definitions 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
. The term “403(b) Failure” means a failure that adversely affects the
exclusion from income provided by § 403(b). There are four types of 403(b) Failures: (a) Plan
Document Failures; (b) Operational Failures; (c) Demographic Failures; and (d) Employer Eligibility
Failures.
23
(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 § 403(b). Thus, for
example, the failure of a plan to be adopted in written form or to be amended to reflect a new
requirement within the plan's applicable remedial amendment period is a Plan Document Failure. If
a plan has not been timely or properly amended during an applicable remedial amendment period
with respect to provisions required to maintain the status of the plan under § 403(b), the plan has a
Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes
any 403(b) Failure that adversely affects the status of the plan under § 403(b) and that is not an
Operational Failure, Demographic Failure, or Employer Eligibility Failure.
(b) Operational Failure
. The term "Operational Failure" means a 403(b) Failure (other than an
Employer Eligibility 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 §§ 403(b)(12)(ii)
(relating to the availability of elective deferral contributions) and 401(m) (as applied to 403(b) Plans
pursuant to § 403(b)(12)(A)(i)) is an Operational Failure. A plan does not have an Operational
Failure to the extent the plan is permitted to be amended retroactively to reflect the plan's
operations.
(c) 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)) that is not an Operational Failure or an Employer Eligibility Failure. The
correction of a Demographic Failure generally requires a corrective amendment to the plan adding
more benefits or increasing existing benefits (see § 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 § 403(b) by a Plan Sponsor that is not a tax-exempt
organization described in § 501(c)(3) or a public educational organization described in
§ 170(b)(1)(A)(ii). An Employer Eligibility Failure is not a Plan Document, Operational, or
Demographic Failure.
(e) Effective date
. See section 16 for special rules for 403(b) failures that occurred prior to
January 1, 2009.
(3) Excess Amount
. The term "Excess Amount" means a contribution or other credit that is
made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted
to be contributed or credited on behalf of the participant or beneficiary under the terms of the plan or
that exceeds a limitation on contributions provided in the Code or regulations. The term "Excess
Amount" includes any amount in excess of the amount permitted under the requirements of §
402(g), 401(m), or 415. A contribution in excess of the limitation of § 415(c) is not an Excess
Amount (or a 403(b) Failure) if that excess is maintained in a separate account in accordance with
the rules in the regulations under §§ 403(b) and 415. Such separate account is considered to be a §
403(c) annuity contract (or, if applicable, an amount to which § 61, 83, or 402(b) applies). A
contribution in excess of the limitation of § 415(c) that is not maintained in a separate account in
accordance with the rules set forth in regulations under §§ 403(b) and 415 is an Excess Amount.
Thus, the correction principles in section 6.06 apply.
24
(4) Overpayment. The term “Overpayment” means a 403(b) Failure due to a payment being
made to a participant or beneficiary that exceeds the amount payable to the participant or
beneficiary under the terms of the plan or that exceeds a limitation provided in the Code or
regulations. Overpayments include both payments either made from the participant’s or
beneficiary’s 403(b) custodial account or annuity contract under the plan or not permitted to be paid
under the Code, the regulations, or the terms of the plan. However, an Overpayment does not
include a payment that is made pursuant to a correction method provided under this revenue
procedure for a different 403(b) Failure. Overpayments must be corrected in accordance with
section 6.06(4).
(5) Favorable Letter
. The term "Favorable Letter" means a Favorable Letter as
described in section 6.10(2).
(6) Maximum Payment Amount
. The term "Maximum Payment Amount” means a
monetary amount that is approximately equal to the tax the Service could collect as a
result of the 403(b) Failure and is the sum for the open taxable years of the:
(a) additional income tax resulting from income inclusion for employees or other
participants (Form 1040), including the tax on distributions that have been rolled over to
other qualified trusts (as defined in § 402(c)(8)(A)) or eligible retirement plans (as
defined in § 402(c)(8)(B)) and any interest or penalties applicable to the participants’
returns; and
(b) any other tax that results from a 403(b) Failure that would apply but for
correction under this revenue procedure.
(7) Plan Sponsor
. The term "Plan Sponsor” means the employer that offers a
403(b) Plan to its employees.
.03 Definitions for Orphan Plans
.
(1) Orphan Plan
. With respect to VCP and Audit CAP, the term “Orphan Plan”
means any Qualified Plan, 403(b) Plan, or other plan with respect to which an “Eligible
Party” (defined in section 5.03(2)) has determined that the Plan Sponsor (a) no longer
exists, (b) cannot be located, or (c) is unable to maintain the plan. However, the term
“Orphan Plan” does not include any plan subject to Title I of the Employee Retirement
Income Security Act of 1974 (“ERISA”) that is terminated pursuant to section 2578.1 of
the Department of Labor regulations governing the termination of abandoned individual
account plans.
(2) Eligible Party
. The term “Eligible Party” means:
(a) A court appointed representative with authority to terminate the plan and
dispose of the plan’s assets;
25
(b) In the case of an Orphan Plan under investigation by the Department of
Labor, a person or entity determined by the Department of Labor to have accepted
responsibility for terminating the plan and distributing the plan's assets; or
(c) In the case of a Qualified Plan to which Title I of ERISA has never applied, a
surviving spouse who is the sole beneficiary of a plan that provided benefits to a
participant who was (i) the sole owner of the business that sponsored the plan and (ii)
the only participant in the plan.
.04 Earnings
. The term “Earnings” refers to the adjustment of a principal amount
to reflect subsequent investment gains and losses, unless otherwise provided in a
specific section of this revenue procedure.
.05 IRA
. The term “IRA” means an individual retirement account (as defined in
§ 408(a)) or an individual retirement annuity (as defined in § 408(b)).
.06 References to Rev. Proc. 2007-44. References in sections 5.01, 6.05, 9.03,
10.05, 10.08, 11.02 and Appendix C, Section VIII of this revenue procedure to Rev.
Proc. 2007-44, 2007-2 C.B. 54, include any modifications published in the Cumulative
Bulletin, including any successor revenue procedure (and references to any section
thereof if such references refer to the successor section in any successor revenue
procedure). For example, see Rev. Proc. 2009-36, 2009-35 I.R.B. 304, which modifies
Rev. Proc. 2007-44 for the determination of the remedial amendment cycle for a
governmental plan within the meaning of § 414(d).
.07 SEP
. 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), if applicable.
.08 SIMPLE IRA Plan
. The term “SIMPLE IRA Plan” means a plan intended to
satisfy the requirements of § 408(p).
.09 Under Examination
. (1) The term "Under Examination" means: (a) a plan
that is under an Employee Plans examination (that is, an examination of a Form 5500
series or other Employee Plans examination); (b) a Plan Sponsor that is under an
Exempt Organizations examination (that is, an examination of a Form 990 series or
other Exempt Organizations examination); or (c) a plan that is under investigation by the
Criminal Investigation Division of the Service.
(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 examination, 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 in Appeals or in litigation for issues raised
26
in an Employee Plans examination. A plan is considered to be Under Examination if it is
aggregated for purposes of satisfying the nondiscrimination requirements of § 401(a)(4),
the minimum participation requirements of § 401(a)(26), the minimum coverage
requirements of § 410(b), or the requirements of § 403(b)(12)(A)(i), with any plan that is
Under Examination. In addition, a plan is considered 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 requirement (for example, § 401(a)(30), 415, or 416) and
that other plan is Under Examination. For example, assume Plan A has a § 415 failure,
Plan A is aggregated 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 aggregation 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 any Form 5300, 5307, or 5310 and the Employee Plans agent
notifies the Plan Sponsor, or a representative, of possible failures, whether or not the
Plan Sponsor is officially notified of an "examination." This would include a case where,
for example, a Plan Sponsor has applied for a determination letter on plan termination,
and an Employee Plans agent notifies the Plan Sponsor that there are partial
termination concerns. In addition, if, during the review process, the agent requests
additional information that indicates the existence of a failure not previously identified by
the Plan Sponsor, the plan is considered to be under an Employee Plans examination.
If, in such a case, the determination letter request under review is subsequently
withdrawn, the plan is nevertheless considered to be under an Employee Plans
examination for purposes of eligibility under SCP and VCP with respect to those issues
raised by the agent reviewing the determination letter application. The fact that a Plan
Sponsor voluntarily submits a determination letter application does not constitute a
voluntary identification of a failure to the Service. In order to be eligible for VCP, the
Plan Sponsor (or the authorized representative) must identify each failure, in writing, to
the reviewing agent before the agent recognizes the existence of the failure or
addresses the failure in communications with the Plan Sponsor (or the authorized
representative).
(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
examination 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.
27
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL
APPLICABILITY
.01 Correction principles; rules of general applicability
. The general correction
principles in section 6.02 and rules of general applicability in sections 6.03 through 6.13
apply for purposes of this revenue procedure.
.02 Correction principles
. Generally, a failure is not corrected unless full
correction is made with respect to all participants and beneficiaries, and for all taxable
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 redetermined because
of the correction. 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 correction 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 reasonable
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. For Qualified Plans
and 403(b) Plans, any correction method permitted under Appendix A or Appendix B is
deemed to be a reasonable and appropriate method of correcting the related failure.
Any correction method permitted under Appendix A or Appendix B applicable to a SEP,
or a SIMPLE IRA Plan is similarly deemed to be a reasonable and appropriate method
of correcting the related failure. If a plan has a different but analogous failure to one set
forth in Appendix A or B (such as the failure to provide a matching contribution by a
governmental plan that is not subject to § 401(m)), then the analogous correction
method under Appendix A or B is generally available to correct any failure. Whether any
other particular correction method is reasonable and appropriate is determined taking
into account the applicable facts and circumstances and the following principles:
(a) The correction method should, to the extent possible, resemble one already
provided for in the Code, regulations, or other guidance of general applicability. For
example, for Qualified Plans and 403(b) Plans, 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 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 participants or beneficiaries or return of assets to the
employer. 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 § 401(k)
28
plan), the excess should be reallocated to other participants or, depending on the facts
and circumstances, used to reduce future employer contributions.
(c) The correction method for failures relating to nondiscrimination should provide
benefits for nonhighly compensated employees. For example, for Qualified Plans, the
correction method set forth in § 1.401(a)(4)-11(g) (rather than methods making use of
the special testing provisions set forth in § 1.401(a)(4)-8 or 1.401(a)(4)-9) would be the
typical means of correcting a failure to satisfy nondiscrimination requirements. Similarly,
the correction of a failure to satisfy the requirements of § 401(k)(3) or 401(m)(2), or, for
plan years beginning on or before December 31, 2001, the multiple use test of
§ 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.
(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), 408(k) for SEPs, or 408(p) for SIMPLE IRA Plans, or a parallel requirement
in Part 2 of Subtitle B of Title I of ERISA (for plans that are subject to Part 2 of Subtitle B
of Title I of ERISA). If an additional failure is nevertheless created as a result of the use
of a correction method in this revenue procedure, then that failure also must be
corrected in conjunction with the use of that correction method and in accordance with
the requirements of this revenue procedure.
(e)
If a correction method is one that another government agency has authorized
with respect to a violation of legal requirements within its interpretive authority and that
correction relates to a violation for which there is a failure to which this revenue
procedure applies, then the Service may take the correction method of the other
governmental agency into account for purposes of this revenue procedure. For
example:
(i) If the plan is subject to ERISA, for a failure that results from the employer
having ceased to exist, the employer no longer maintaining the plan, or similar reasons,
the permitted correction is to terminate the plan and distribute plan assets to
participants and beneficiaries in accordance with standards and procedures
substantially similar to those set forth in section 2578.1 of the Department of Labor
regulations (relating to abandoned plans). This correction must satisfy four conditions.
First, the correction must comply with standards and procedures substantially similar to
those set forth in section 2578.1 of the Department of Labor regulations (relating to
abandoned plans). Second, the qualified termination administrator, based on plan
records located and updated in accordance with the Department of Labor regulations,
must have reasonably determined whether, and to what extent, the survivor annuity
requirements of §§ 401(a)(11) and 417 apply to any benefit payable under the plan and
must take reasonable steps to comply with those requirements (if applicable). Third,
each participant and beneficiary must have been provided a nonforfeitable right to his or
her accrued benefits as of the date of deemed termination under the Department of
Labor regulations, subject to Earnings between that date and the date of distribution.
29
Fourth, participants and beneficiaries must receive notification of their rights under
§ 402(f). In addition, notwithstanding correction under this revenue procedure, the
Service reserves the right to pursue appropriate remedies under the Code against any
party who is responsible for the plan, such as the Plan Sponsor, plan administrator, or
owner of the business, even in its capacity as a participant or beneficiary under the
plan. See also section .09(1) of Appendix A for parallel rules for plans that are not
subject to ERISA.
(ii) In the case of a violation of the fiduciary standards imposed by Part 4 of
Subtitle B of Title I of ERISA, correction under the Voluntary Fiduciary Correction
Program established by the Department of Labor (at 71 FR 20262) for a fiduciary
violation for which there is a similar failure under this revenue procedure would
generally be taken into account as correction under this revenue procedure. (See also
section 7.3(b) of the Department of Labor’s Voluntary Fiduciary Correction Program
under which correction of a defaulted participant loan that provides for repayment in
accordance with § 72(p)(2) requires only submission of the correction under VCP and
inclusion of the VCP compliance statement (with proof of any required corrective
payment).)
(3) Consistency requirement
. Generally, 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 consistently with respect to corrective
contributions or allocations for a particular type of Operational Failure for a plan year. In
the case of a Group 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 corrective 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 corrective allocation is being made) and should be adjusted for
Earnings and forfeitures that would have been allocated to the participant's account if
the failure had not occurred. However, a corrective allocation is not required to be
adjusted for losses. Accordingly, corrective allocations must include gains and may be
adjusted for losses. For additional information, see Appendix B section 3 Earnings
Adjustment Methods And Examples.
(b) A corrective allocation to a participant's account because of a failure to make
a required allocation in a prior limitation year is not considered an annual addition with
30
respect to the participant for the limitation year in which the correction is made, but is
considered 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 nonelective
contributions, including forfeitures if the plan permits their use to reduce employer
contributions). For purpose of correcting a failed ADP, ACP, or multiple use test, any
amounts used to fund QNECs must satisfy the definition of QNEC in §1.401(k)-6.
(d) In the case of a defined benefit plan, a corrective distribution for an individual
should be increased to take into account the delayed payment, in accordance with the
plan’s provisions for actuarial equivalence (after considering the applicable
requirements of §§ 417(e)(3) and 415(b) or any other applicable provision) that were in
effect on the date that the distribution should have been made. A corrective distribution
is not subject to the requirements of § 417(e)(3) if it is made to make up for missed
payments with respect to a benefit that is not subject to the requirements of § 417(e)(3).
(e)(i) In the case of a single employer defined benefit plan, a payment of benefits
that fails to satisfy the requirements of § 436(b), (c), or (e) can be corrected by the Plan
Sponsor (including another person acting on behalf of the Plan Sponsor) making a
contribution to the plan equal to the following amount (with interest up to the date of the
contribution): (A) in the case of a failure to satisfy § 436(b) with respect to an
unpredictable contingent event benefit, the amount described in § 436(b)(2) with respect
to that benefit; (B) in the case of a failure to satisfy § 436(c) with respect to an
amendment, the amount described in § 436(c)(2) with respect to that amendment; and
(C) in the case of a failure to satisfy § 436(e), the amount described in § 436(e)(2) with
respect to that failure. See also section 6.06(3) for correction of an Overpayment
(including a payment of benefits that exceeds the limitations imposed by § 436(d) or
436(b), (c), or (e)).
(ii) A corrective distribution or a corrective amendment (where a correction is
accomplished through a plan amendment) is not subject to the requirements of § 436,
but, if the plan is subject to a restriction pursuant to § 436 at the time of the correction,
generally the Plan Sponsor must make a contribution to the plan at the time of the
correction in the following amount: (A) if a corrective distribution is made in a single-sum
payment or other prohibited payment (as defined in § 436(d)(5)) at a time when the plan
is subject to a restriction pursuant to § 436(d), the Plan Sponsor must generally
contribute to the plan the amount of that corrective distribution (but only half of the
corrective distribution must be contributed if the payment is made at a time when the
plan is subject to a restriction pursuant to § 436(d)(3)); and (B) if a corrective
amendment is made at a time when the plan is subject to a restriction pursuant to
§ 436(c), the Plan Sponsor must generally contribute to the plan an amount equal to the
increase in the funding target of the plan (as defined in § 430) attributable to that
amendment. No contribution is required to be made under this paragraph (e)(ii) if the
corrective distribution is made in a form that is not a prohibited payment (for example, if
31
the correction is made by actuarially increasing future payments that are made in a form
that is not a prohibited payment).
(iii) Any contribution made by the Plan Sponsor pursuant to this paragraph (e) is
treated in the same manner as a “section 436 contribution” (as defined in § 1.436-1(j)
(7)). Thus, the contribution is treated as separate from a minimum required contribution
under § 430 and is disregarded in determining the amount added to a prefunding
balance under § 430(f)(6). See § 1.436-1(f)(2) generally for rules relating to § 436
contributions.
(f) In the case of a defined contribution plan, a corrective contribution or
distribution should be adjusted for Earnings from the date of the failure (determined
without regard to any Code provision which permits a corrective contribution or
distribution to be made at a later date).
(5) Special exceptions to full correction
. 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 correction may
not be required in certain situations if 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 compensated employees. The exceptions
described below specify those situations in which full correction is not required.
(a) Reasonable estimates
. If either (i) it is possible to make a precise calculation
but the probable difference between the approximate and the precise restoration of a
participant's benefits is insignificant and the administrative cost of determining precise
restoration would significantly exceed the probable difference or (ii) it is not possible to
make a precise calculation (for example, where it is impossible to provide plan data),
reasonable estimates may be used in calculating appropriate correction. If it is not
feasible to make a reasonable estimate of what the actual investment results would
have been, a reasonable interest rate may be used. For this purpose, the interest rate
used by the Department of Labor’s Voluntary Fiduciary Correction Program Online
Calculator (“VFCP Online Calculator”) is deemed to be a reasonable interest rate. The
VFCP Online Calculator can be found on the internet at
http://www.dol.gov/ebsa/calculator.
(b) Delivery of small benefits
. If the total corrective distribution due a participant
or beneficiary is $75 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 beneficiary would exceed the amount of the distribution. This section
6.02(5)(b) does not apply to corrective contributions. Corrective contributions are
required to be made with respect to a participant with an account under the plan.
32
(c) Recovery of small Overpayments. Generally, if the total amount of an
Overpayment to a participant or beneficiary is $100 or less, the Plan Sponsor is not
required to seek the return of the Overpayment from the participant or beneficiary. The
Plan Sponsor is not required to notify the participant or beneficiary that the
Overpayment is not eligible for favorable tax treatment accorded to distributions from
the plan (and, specifically, is not eligible for tax-free rollover).
(d) Locating lost participants
. (i) 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, but are not limited to, a mailing to the individual’s last known
address using certified mail, and, if that is unsuccessful, an additional search method,
such as the use of the Social Security letter forwarding program, a commercial locator
service, a credit reporting agency, or Internet search tools. Depending on the facts and
circumstances, the use of more than one of these additional search methods may be
appropriate. A plan will not be considered to have failed to correct a failure due to the
inability to locate an individual if reasonable actions to locate the individual have been
undertaken in accordance with this paragraph; provided that, if the individual is later
located, the additional benefits are provided to the individual at that time.
(ii) The IRS Letter Forwarding Program is no longer available as a means to
search for participants and beneficiaries to whom additional benefits under the plan are
due. Any request for locater services received by the Service on or after August 31,
2012 will not be processed. See Rev. Proc. 2012-35, 2012-37 I.R.B. 341.
(iii) A Plan Sponsor described in (A) or (B) of this section 6.02(5)(d)(iii)) that is
correcting failures that require payment of additional benefits to participants and
beneficiaries will have until the earlier of: a) May 30, 2013, or b) if a request under the
IRS Letter Forwarding Program has been submitted on or after August 31, 2012, 150
days after the date of notification by the Service that the request to locate missing
participants and beneficiaries will not be processed, to take other reasonable actions in
accordance with section 6.02(5)(d)(i) to locate participants and beneficiaries to whom
additional benefits are due. A Plan Sponsor is described in this section 6.02(5)(d)(iii) if
it:
(A) received a VCP compliance statement for which the 150-day correction
period set forth in section 10.07(9) of this revenue procedure has not
expired, or
(B) is correcting failures under SCP and is within 150 days of the
expiration of the correction period set forth in section 9.02(1) of this
revenue procedure.
(e) Small Excess Amounts
. Generally, if the total amount of an Excess Amount
with respect to the benefit of a participant or beneficiary is $100 or less, the Plan
Sponsor is not required to distribute or forfeit such Excess Amount. However, if the
33
Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified
that the Excess Amount, including any investment gains, is not eligible for favorable tax
treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-
free rollover). See section 6.06(1) for such notice requirements.
(f) Orphan Plans
. The Service retains the discretion to determine under VCP and
Audit CAP whether full correction will be required with respect to a terminating Orphan
Plan.
(6) Correction principle for loan failures
. In the case of a loan failure corrected in
accordance with section 6.07(2)(b) or (c) and section 6.07(3), the participant is generally
responsible for paying the corrective payment. However, with respect to the failure listed
in section 6.07(3), the employer should pay a portion of the correction payment on
behalf of the participant equal to the interest that accumulates as a result of such failure
-- generally determined at a rate equal to the greater of the plan loan interest rate or the
rate of return under the plan.
(7) Correction for exclusion of employees with respect to elective deferrals or
after-tax employee contributions. If a Qualified Plan or 403(b) Plan has an Operational
Failure that consists of excluding an employee that should have been eligible to make
an elective deferral or an after-tax employee contribution, the employer should
contribute to the plan on behalf of the excluded employee an amount that makes up for
the value of the lost opportunity for the employee to have a portion of his or her
compensation contributed to the plan accumulated with earnings tax deferred in the
future. This correction principle applies solely to this limited circumstance. It does not,
for example, extend to the correction of a failure to satisfy a nondiscrimination test, e.g.,
the ADP test pursuant to § 401(k)(3) and the ACP test pursuant to § 401(m)(2). Specific
methods and examples to correct this failure are provided in Appendix A, section .05,
and Appendix B, section 2.02. Similarly, the methods and examples provided for
correcting this failure do not extend to other failures. Thus, the correction methods and
the examples in Appendix A, section .05, and Appendix B, section 2.02, cannot, for
example, be used to correct ADP/ACP failures.
(8) Correction by plan amendment in VCP, Audit CAP, and SCP
. For the
availability of correction by plan amendment, see section 4.05.
(9) Reporting
. Any corrective distributions from the plan should be properly
reported.
.03 Correction of an Employer Eligibility Failure
. (1) The permitted correction of
an Employer Eligibility Failure is the cessation of all contributions (including elective
deferrals and after-tax employee contributions). For VCP submissions, the cessation
must occur no later than the date the submission under VCP is filed. The assets in such
a plan are to remain in the trust, annuity contract, or custodial account and are to be
distributed no earlier than the occurrence of one of the applicable distribution events,
34
e.g., for 403(b) Plans, an event 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).
(2) Cessation of contributions is not required if continuation of contributions
would not be an Employer Eligibility Failure (for example, with respect to a tax-exempt
employer that may maintain a § 401(k) plan after 1996). In the case of a 403(b) Failure
which is an Employer Eligibility Failure, correction may include treating contributions as
not being excluded under § 403(b) (and thus the contributions would be treated as
having been contributed, for example, to an annuity contract to which § 403(c) applies).
(3) A plan that is corrected through VCP or Audit CAP is treated as subject to all
of the requirements and provisions of §§ 401(a) for a Qualified Plan, 403(b) for a 403(b)
Plan, 408(k) for a SEP, and 408(p) for a SIMPLE IRA Plan (including Code provisions
relating to rollovers). Therefore, the Plan Sponsor must also correct all other failures in
accordance with this revenue procedure.
(4) If correction is accomplished under VCP or Audit CAP in accordance with the
requirements of this section 6.03, then any rollovers made from the plan pursuant to a
distributable event are deemed to have been made from an eligible retirement plan
under § 402(c)(8)(B) for the purpose of determining whether the amounts qualify as an
eligible rollover distribution under § 402(c) or 403(b)(8) (including the determination of
excess contributions that are subject to the § 4973 excise tax).
.04 Correction of a failure to obtain spousal consent
. (1) Normally, the correction
method under VCP for a failure to obtain spousal consent for a distribution that is
subject to the spousal consent rules under §§ 401(a)(11) and 417 is similar to the
correction method described in Appendix A, section .07. The Plan Sponsor must notify
the affected participant and spouse (to whom the participant was married at the time of
the distribution), so that the spouse can provide spousal consent to the distribution
actually made or the participant may repay the distribution and receive a qualified joint
and survivor annuity.
(2)(a) As alternatives to the correction method in section 6.04(1), correction for a
failure to obtain spousal consent may be made under either section 6.04(2)(b) or
section 6.04(2)(c).
(b) In the event that spousal consent to the prior distribution is not obtained (e.g.,
because the spouse chooses not to consent, the spouse does not respond to the notice,
or the spouse cannot be located), the spouse is entitled to a benefit under the plan
equal to the portion of the qualified joint and survivor annuity that would have been
payable to the spouse upon the death of the participant had a qualified joint and
survivor annuity been provided to the participant under the plan at the annuity starting
35
date for the prior distribution. Such spousal benefit must be provided if a claim is made
by the spouse.
(c) In the event that spousal consent to the prior distribution is not obtained, the
plan may offer the spouse the choice between (i) the survivor annuity benefit described
in section 6.04(2)(b) or (ii) a single-sum payment equal to the actuarial present value of
that survivor annuity benefit (calculated using the applicable interest rate and mortality
table under § 417(e)(3)). Any such single-sum payment is treated in the same manner
as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or
other eligible retirement plan. In the event that the plan is subject to a restriction on the
payment of single sums pursuant to § 436(d) at the time the plan offers this choice to
the spouse and the spouse elects to receive a single-sum payment, the plan sponsor
must contribute to the plan the applicable amount under section 6.02(4)(e)(ii)(A).
.05 Submission of a determination letter application
. (1) In general. This section
6.05 sets forth the situations in which a determination letter application is required to be
submitted as part of the correction of a Qualification Failure if the correction includes a
plan amendment. If a determination letter application is required under this section 6.05,
then, unless otherwise specified in this revenue procedure, the provisions of Rev. Proc.
2007-44 will apply. Thus, for example, in the case of an ongoing individually designed
plan, a determination letter application will be reviewed with respect to all items included
in the Cumulative List (as defined in Rev. Proc. 2007-44) that would apply to the
remedial amendment cycle during which the determination letter is filed.
Notwithstanding any other part of this section 6.05, a determination letter application is
not required and may not be submitted with the VCP submission if (a) the correction by
plan amendment is achieved through (i) the adoption of an amendment that is
designated as a model amendment by the Service or (ii) the adoption of a prototype or
volume submitter plan with an opinion or advisory letter as provided in Rev. Proc. 2012-
6, 2012-1 I.R.B. 197, on which the Plan Sponsor has reliance (or is treated as having
reliance pursuant to section 6.05(5) below), or (b) the failure corrected is a
Demographic Failure.
(2) Determination letter application required
. (a) VCP and Audit CAP. (i)
Operational failure corrected by plan amendment during on-cycle year.
Except as
provided in section 6.05(1), to correct an Operational Failure that includes a plan
amendment (in a case where the Plan Sponsor submits the failure under VCP or
corrects the failure under Audit CAP during an on-cycle year or in connection with a
plan termination), a determination letter application is required. An “on-cycle year”
means the last 12 months of the plan’s remedial amendment cycle set forth in Rev.
Proc. 2007-44.
(ii) Nonamender failure
. Except as provided in section 6.05(1) and (3)(a), a
determination letter application is required in order to correct a nonamender failure
under VCP or Audit CAP, whether or not the plan is submitted under VCP or corrected
under Audit CAP during an on-cycle year. For this purpose, the term “nonamender
36
failure” means a failure to amend the plan to correct a disqualifying provision described
in § 1.401(b)-1(b) within the applicable remedial amendment period. In general, a
disqualifying provision includes a provision in the plan document that violates a
qualification requirement of the Code or the absence of a provision that causes the plan
to fail to satisfy a qualification requirement of the Code. A disqualifying provision also
includes any provision designated by the Commissioner as a disqualifying provision
under § 1.401(b)-1(b)(3).
(b) SCP
. Except as provided in section 6.05(1), in the case of any correction of
an Operational Failure through plan amendment under SCP that is permitted under
section 4.05(2) of this revenue procedure, a Plan Sponsor must submit a determination
letter application for the plan, including the corrective plan amendment, during the plan’s
next on-cycle year, or if earlier, in connection with the plan’s termination. The
determination letter application should be mailed to the address provided in the
instructions for the applicable Form 5300, 5307, or 5310. As part of the determination
letter submission, the cover letter must identify the amendment as a corrective
amendment under SCP. In addition, the Plan Sponsor must include in the cover letter to
the application: (1) a statement that neither the plan nor the Plan Sponsor has been a
party to an abusive tax avoidance transaction (as defined in section 4.13(2) of this
revenue procedure); or (2) a brief identification of any abusive tax avoidance transaction
to which the plan or the Plan Sponsor has been a party.
(3) Determination Letter application not required or permitted
. (a) Failure to
adopt timely good faith amendments, interim amendments, or amendments required to
implement optional law changes before the expiration of the plan’s remedial amendment
period as determined under Rev. Proc. 2007-44. (i) In general. The provisions of this
section 6.05(3)(a) are applicable with respect to a failure to adopt timely good faith,
interim, or optional law change amendments that is corrected (i.e., corrective
amendments are adopted by the employer) prior to the plan’s first on-cycle year
following the date by which any such amendment should have been adopted pursuant
to section 5.05 of Rev. Proc. 2007-44. If a Plan Sponsor submits a failure under VCP or
corrects a failure under Audit CAP to adopt timely good faith amendments, interim
amendments, or timely amendments to the plan to implement optional law changes,
then a determination letter application is not required and may not be submitted with the
VCP submission or as part of the correction of the failure under Audit CAP.
(ii) Definitions
. For purposes of this revenue procedure:
(1)
“Good faith amendments” include the EGTRRA good faith amendments
described in Notice 2001-42, 2001-2 C.B. 70, the amendment required for the plan to
comply with the final regulations under § 401(a)(9) of the Code (see Rev. Proc. 2002-
29, 2002-1 C.B. 1176, as modified by Rev. Proc. 2003-10, 2003-1 C.B. 259), the
amendment updating the mortality table to reflect the guidance in Rev. Rul. 2001-62,
2001-2 C.B. 632, and the amendment updating the definition of compensation, for
37
purposes of § 415(c)(3), to include “deemed § 125 compensation” pursuant to Rev. Rul.
2002-27, 2002-1 C.B. 925,
(2)
“Interim amendments” are interim amendments within the meaning of section
5.01 of Rev. Proc. 2007-44, and
(3)
“Optional law changes” refer to changes in statutes, regulations, or other
published guidance that are not required to preserve the plan’s qualified status, but are
implemented at the Plan Sponsor’s discretion, other than amendments that are integral
to plan provisions that are disqualifying provisions under section 5.01(1) of Rev. Proc.
2007-44.
(iii) Example
. An example of an optional law change is the expansion of
permitted safe harbor hardship events as provided in section 826 of the Pension
Protection Act, 2006, P.L. 109-280 (“PPA ’06”) and Notice 2007-7 to permit a plan to
treat a participant’s beneficiary under the plan the same as the participant’s spouse or
dependent in determining whether the participant has incurred a hardship or
unforeseeable financial emergency. The Plan Sponsor may amend the plan to permit
hardship distributions pursuant to any or all of the events provided for in the previous
sentence. However, the plan amendment is not required to preserve the plan’s qualified
status.
(b) Issuance of a compliance statement
. The issuance of a compliance
statement (under VCP) or closing agreement (under Audit CAP) with respect to failures
described in paragraph 6.05(3)(a) results in the corrective amendments being treated as
if they had been adopted timely for the purpose of determining the availability of the
extended remedial amendment period described in section 5.03 of Rev. Proc. 2007-44.
However, the issuance of such a compliance statement or closing agreement does not
constitute a determination as to whether the form of the plan amendment complies with
the change in qualification requirement.
(c) Operational Failures corrected through plan amendment under VCP and Audit
CAP during an off-cycle year. If, during an off-cycle year, a Plan Sponsor submits an
Operational Failure under VCP or corrects such a failure under Audit CAP, then a
determination letter application is not required and may not be submitted with the VCP
submission or as part of the correction of the failure under Audit CAP. If the plan
amendment is accepted as a proper correction for an Operational Failure, the
compliance statement under VCP or closing agreement issued under Audit CAP
constitutes a determination on the effect of the plan amendment on the qualification of
the plan. The reliance provided by a compliance statement or closing agreement is
limited to the specific failures and years specified and does not provide reliance for any
other failure or year. Except as provided in section 6.05(1), with respect to correction of
an Operational Failure through plan amendment, the compliance statement issued
under VCP or closing agreement issued under Audit CAP is subject to the condition that
the amendment be submitted as part of a determination letter submission during the
38
plan’s next on-cycle year, or, if earlier, in connection with the plan’s termination, and
that a favorable determination letter be issued with respect to the plan. The
determination letter application should be mailed to the address listed in the instructions
of the applicable Form 5300, 5307 or 5310 and should include a copy of the related
compliance statement or closing agreement. A Plan Sponsor that corrects an
Operational Failure through a plan amendment under Audit CAP during an off-cycle
year should also include a copy of the closing agreement when submitting a
determination letter application during the plan’s next on-cycle year, or if earlier, in
connection with the plan’s termination.
(d) Failure to adopt amendments required under the terms of a favorable
determination letter. If a Plan Sponsor failed to adopt an amendment (upon which the
favorable letter was conditioned) within the applicable remedial amendment period
specified in the determination letter and the Plan Sponsor submits such failure under
VCP, then a determination letter application is not required and should not be submitted
with the VCP submission.
(4) Determination letter applications optional under EPCRS
. A Plan Sponsor may
submit a determination letter application with respect to a correction through plan
amendment prior to the plan’s on-cycle year if the plan would be given the same priority
as an on-cycle filing pursuant to sections 14.02 and 14.03 of Rev. Proc. 2007-44,
(relating to certain new plans, terminating plans, and off-cycle applications submitted in
accordance with published guidance issued by the Service specifying such submission,
and in the case of urgent business need). Determination letter requests submitted
pursuant to this section 6.05(4) must contain a written justification as to the eligibility of
the plan under section 14.02 or 14.03 of Rev. Proc. 2007-44 and this section 6.05(4). In
the case of urgent business need, the Service will consider such requests based on the
facts and circumstances.
(5) Corrective amendments to pre-approved plans
. (a) VCP and Audit CAP.
Generally, under VCP or Audit CAP, a Plan Sponsor that is a pre-approved plan
adopter is able to amend its plan to correct a Qualification Failure (provided the
amendment satisfies the requirements of the Code). In some cases, the corrective
amendment is not provided for among plan provision options that were pre-approved
when the opinion or advisory letter was issued with respect to the plan. As a result,
adopting such a corrective amendment would cause the Plan Sponsor to lose reliance
on the plan’s opinion or advisory letter, except in the limited circumstances provided in
this section 6.05(5).
(b) Pre-approved plans
. In the case of a pre-approved plan (that is, a master and
prototype or volume submitter plan), the adoption of a plan provision not provided for in
the adoption agreement which is required to correct a failure under VCP or Audit CAP
will not cause the Plan Sponsor to lose its reliance on the plan’s opinion or advisory
letter, provided that: (i) the corrective amendment would otherwise be permitted under
the rules for pre-approved plans and (ii) no other modification has been made to the
39
plan that would cause the plan to lose its reliance on the opinion or advisory letter. If
these conditions are satisfied, the Plan Sponsor will be allowed to continue to rely on
the plan’s opinion or advisory letter. In addition, the adoption of the corrective
amendment will not cause the plan to lose its eligibility to remain within the six-year
remedial amendment cycle provided for in Rev. Proc. 2007-44 on a continuing basis
until the expiration of the next six-year remedial amendment cycle described in section
18.01 of Rev. Proc. 2007-44.
(6) Internal Revenue Service discretion
. Notwithstanding any other provision of
section 6.05 of this revenue procedure, the Service reserves the right to require the
submission of a determination letter application with respect to any amendment
proposed or adopted to correct any Qualification Failure under VCP or Audit CAP.
.06 Special rules relating to Excess Amounts
. (1) Treatment of Excess Amounts.
Except as otherwise provided in section 6.02(5)(c) with respect to recovery of small
Overpayments, a distribution of an Excess Amount is not eligible for the favorable tax
treatment accorded to distributions from Qualified Plans or 403(b) Plans (such as
eligibility for tax-free rollover). Thus, for example, if such a distribution was contributed
to an IRA, the contribution is not a valid rollover contribution for purposes of determining
the amount of excess contributions (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 Form 1099-R for the year of
distribution with respect to each participant or beneficiary receiving such a distribution.
Except as otherwise provided in section 6.02(5)(c), 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 an eligible retirement plan under
§ 402(c)(8)(B) (and, specifically, is not eligible for rollover).
(2) Correction of Excess Allocations
. In general, an Excess Allocation is
corrected in accordance with the Reduction of Account Balance Correction Method set
forth in this paragraph. Under this method, the account balance of an employee who
received an Excess Allocation is reduced by the Excess Allocation (adjusted for
Earnings). If the Excess Allocation would have been allocated to other employees in the
year of the failure had the failure not occurred, then that amount (adjusted for Earnings)
is reallocated to those employees in accordance with the plan's allocation 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 a separate account that is
not allocated on behalf of any participant or beneficiary (an unallocated account)
established for the purpose of holding Excess Allocations, adjusted for Earnings, to be
used to reduce employer contributions (other than elective deferrals) in the current year
or succeeding year. While such amounts remain in the unallocated account, the
employer is not permitted to make contributions to the plan other than elective deferrals.
Excess Allocations that are attributable to elective deferrals or after-tax employee
40
contributions (adjusted for Earnings) must be distributed to the participant. For
qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph
is disregarded for purposes of §§ 402(g) and 415, the actual deferral percentage test of
§ 401(k)(3), and the actual contribution percentage test of § 401(m)(2). If an Excess
Allocation resulting from a violation of § 415 consists of annual additions attributable to
both employer contributions and elective deferrals or after-tax employee contributions,
then the correction of the Excess Allocation is completed by first distributing the
unmatched employee’s after-tax contributions (adjusted for Earnings) and then the
unmatched employee’s elective deferrals (adjusted for Earnings). If any excess
remains, and is attributable to either elective deferrals or after-tax employee
contributions that are matched, the excess is apportioned first to after-tax employee
contributions with the associated matching employer contributions and then to elective
deferrals with the associated matching employer contributions. Any matching
contribution or nonelective employer contribution (adjusted for Earnings) which
constitutes an Excess Allocation is then forfeited and placed in an unallocated account
established for the purpose of holding Excess Allocations to be used to reduce
employer contributions in the current year and succeeding year. Such unallocated
account is adjusted for Earnings. While such amounts remain in the unallocated
account, the employer is not permitted to make contributions (other than elective
deferrals) to the plan.
(3) Correction of Overpayment (defined benefit plans)
. An Overpayment from a
defined benefit plan is corrected in accordance with rules similar to the Return of
Overpayment and Adjustment of Future Payments correction methods described in
section 2.04(1) of Appendix B.
(4) Correction of Overpayment (defined contribution plans and 403(b) Plans)
. (a)
In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected
in accordance with the Return of Overpayment method set forth in this paragraph.
Under this method, the employer takes reasonable steps to have the Overpayment,
adjusted for Earnings at the plan’s earnings rate from the date of the distribution to the
date of the repayment, returned by the participant or beneficiary to the plan.
(b) Make-whole contribution
. To the extent the amount of an Overpayment
adjusted for Earnings at the plan’s earnings rate is not repaid to the plan, the employer
or another person must contribute the difference to the plan. The preceding sentence
does not apply when the failure arose solely because a payment was made from the
plan to a participant or beneficiary in the absence of a distributable event (but was
otherwise determined in accordance with the terms of the plan (e.g. an impermissible in-
service distribution)).
(c) Unallocated account
. Except as provided in section 6.06(4)(d), a corrected
Overpayment, adjusted for Earnings at the plan's earnings rate to the date of the
repayment, is to be placed in an unallocated account, as described in section 6.06(2), to
be used to reduce employer contributions (other than elective deferrals) in the current
41
year and succeeding 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 accordance
with the plan's allocation formula).
(d) Repayment by the participant or beneficiary
. To the extent an Overpayment
was solely considered a premature distribution but was otherwise determined in
accordance with the terms of the plan, any amount returned to the plan by the
participant or beneficiary is to be allocated to his or her account.
(e) Notification of employee
. Except as provided in section 6.02(5)(c) with
respect to the recovery of small overpayments, the employer must notify the employee
that the Overpayment was not eligible for favorable tax treatment accorded to
distributions from an eligible retirement plan under § 402(c)(8)(B) (and, specifically, was
not eligible for tax-free rollover).
.07 Rules relating to reporting plan loan failures
. (1) General rules for loans.
Unless correction is made in accordance with this section 6.07(2) or (3), a deemed
distribution under § 72(p)(1) in connection with a failure relating to a loan to a participant
made from a plan must be reported on Form 1099-R with respect to the affected
participant and any applicable income tax withholding amount that was required to be
paid in connection with the failure (see § 1.72(p)-1, Q&A-15) must be paid by the
employer. As part of VCP and Audit CAP, the deemed distribution may be reported on
Form 1099-R with respect to the affected participant for the year of correction (instead
of the year of the failure). The relief of reporting the participant’s loan as a deemed
distribution on Form 1099-R in the year of correction, as described in the preceding
sentence, applies only if the Plan Sponsor specifically requests such relief.
(2) Special rules for loans
. (a) In general. The correction methods set forth in
section 6.07(2)(b) and (c) and section 6.07(3) are available for plan loans that do not
comply with one or more requirements of § 72(p)(2) and are corrected through VCP or
Audit CAP. The correction methods described in section 6.07(2)(b) and (c) and section
6.07(3) are not available if the maximum period for repayment of the loan pursuant to
§ 72(p)(2)(B) has expired. The Service reserves the right to limit the use of the
correction methods listed in section 6.07(2)(b) and (c) and section 6.07(3) to situations
that it considers appropriate; for example, where the loan failure is caused by employer
action. A deemed distribution corrected under section 6.07(2)(b) or (c) or under section
6.07(3) is not required to be reported on Form 1099-R and repayments made by
correction under sections 6.07(2) and 6.07(3) do not result in the affected participant
having additional basis in the plan for purposes of determining the tax treatment of
subsequent distributions from the plan to the affected participant. The relief from
reporting the participant’s loan as a deemed distribution on Form 1099-R, as described
in the preceding sentence, applies only if the Plan Sponsor specifically requests such
relief and provides an explanation supporting the request.
42
(b) Loans in excess of § 72(p)(2)(A). A failure to comply with plan provisions
requiring that loans comply with § 72(p)(2)(A) may be corrected by a corrective
repayment to the plan based on the excess of the loan amount over the maximum loan
amount under § 72(p)(2)(A). In the event that loan repayments were made in
accordance with the amortization schedule for the loan before correction, such prior
repayments may be applied (i) solely to reduce the portion of the loan that did not
exceed the maximum loan amount under § 72(p)(2)(A) (so that the corrective
repayment would equal the original loan excess plus interest thereon), (ii) to reduce the
loan excess to the extent of the interest thereon, with the remainder of the repayments
applied to reduce the portion of the loan that did not exceed the maximum loan amount
under § 72(p)(2)(A) (so that the corrective repayment would equal the original loan
excess), or (iii) pro rata against the loan excess and the maximum loan amount under
§ 72(p)(2)(A) (so that the corrective repayment would equal the outstanding balance
remaining on the original loan excess on the date that corrective repayment is made).
After the corrective payment is made, the loan may be reformed to amortize the
remaining principal balance as of the date of repayment over the remaining period of
the original loan. This is permissible as long as the recalculated payments over the
remaining period would not cause the loan to violate the maximum duration permitted
under § 72(p)(2)(B). The maximum duration is determined from the date the original
loan was made. In addition, the amortization payments determined for the remaining
period must comply with the level amortization requirements of § 72(p)(2)(C).
(c) Loan terms that do not satisfy § 72(p)(2)(B) or (C)
. For a failure of loan
repayment terms to provide for a repayment schedule that complies with § 72(p)(2)(B)
or (C), the failure may be corrected by a reamortization of the loan balance in
accordance with § 72(p)(2)(C) over the remaining period that is the maximum period
that complies with § 72(p)(2)(B) measured from the original date of the loan.
(d) No requirement for plan provisions
. This section 6.07 applies even if the plan
does not require loans to satisfy the requirements of § 72(p)(2). However, to correct the
ERISA fiduciary violations associated with the failures described in section 6.07(2)(b)
and (c) and section 6.07(3) under the Department of Labor’s Voluntary Fiduciary
Correction Program, the plan must contain plan provisions requiring that loans comply
with § 72(p)(2)(A), (B), and (C).
(3) Defaulted loans
. A failure to repay the loan in accordance with the loan terms
where the terms satisfy § 72(p)(2) may be corrected by (i) a single-sum repayment
equal to the additional repayments that the affected participant would have made to the
plan if there had been no failure to repay the plan, plus interest accrued on the missed
repayments, (ii) reamortizing the outstanding balance of the loan, including accrued
interest, over the remaining payment schedule of the original term of the loan or the
period remaining had the loan been amortized over the maximum period that complies
with § 72(p)(2)(B), measured from the original date of the loan, or (iii) any combination
of (i) or (ii).
43
.08 Correction under statute or regulations. 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 under provisions of the Code through retroactive remedial
amendment.
.09 Matters subject to excise or other taxes
. (1) General rule. Except as provided
in this revenue procedure, the correction programs are not available for events for which
the Code provides tax consequences 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 failures to file the Form 5500 series cannot be corrected under this
revenue procedure.
(2) Section 4974
. As part of VCP and Audit CAP, if a failure involves the failure
to satisfy the minimum required distribution requirements of § 401(a)(9), in appropriate
cases, the Service will waive the excise tax under § 4974 applicable to plan participants
or beneficiaries. The waiver will be included in the compliance statement or in the
closing agreement in the case of Audit CAP. Under VCP, the Plan Sponsor, as part of
the submission, must request the waiver and, in cases where the participant subject to
the excise tax is either an owner-employee as defined in § 401(c)(3) or a 10% owner of
a corporation, the Plan Sponsor must also provide an explanation supporting the
request. See section 12.02(2) relating to the applicable compliance fee for certain
§ 401(a)(9) failures. Under Audit CAP, the Plan Sponsor must make a specific request
for waiver of the excise tax under § 4974. The Plan Sponsor should also provide an
explanation supporting the request for a waiver. Upon reviewing the request, the
reasons for the failure, and other facts or circumstances of the case under examination,
the Service will determine whether it is appropriate to approve the waiver of the excise
tax as part of the closing agreement negotiated under Audit CAP.
(3) Section 4972
. As part of VCP, if the failure involves a correction that requires
the Plan Sponsor to make a plan contribution that is not deductible, in appropriate
cases, the Service will not pursue the excise tax under § 4972 on such nondeductible
contributions. The Plan Sponsor, as part of the submission must request the relief and
provide an explanation supporting the request.
(4) Section 4979
. As part of VCP, if a failure results in excess contributions as
defined in § 4979(c) or excess aggregate contributions as defined in § 4979(d) under a
plan, in appropriate cases, the Service will not pursue the excise tax under § 4979, e.g.,
where correction is made for any case in which the ADP test was timely performed but,
due to reliance on inaccurate data, resulted in an insufficient amount of excess elective
deferrals having been distributed to HCEs. The Plan Sponsor, as part of the
submission, must request the relief and provide an explanation supporting the request.
44
(5) Section 4973. Subject to section 6.03(4), as part of VCP, in appropriate
cases, the Service will not pursue the excise tax under § 4973 relating to excess
contributions made to a 403(b) Plan or IRA under any of the following circumstances:
(a) As part of the proposed correction for Overpayments, the participant or
beneficiary (“recipient”) removes the Overpayment (adjusted for Earnings) from the
recipient’s 403(b) Plan or IRA and returns that amount to the plan.
(b) As part of the proposed correction for Excess Amounts, the recipient removes
the Excess Amount (adjusted for Earnings) from the recipient’s 403(b) Plan or IRA and
reports that amount (reduced by any applicable after-tax employee contribution) as a
taxable distribution for the year in which the Excess Amount (adjusted for Earnings) is
removed from the recipient’s IRA. The amount removed is generally taxed in a manner
that is similar to the manner in which the corrective disbursement of elective deferrals is
taxed, as described in section 3 of Rev. Proc. 92-93.
(c) The Plan Sponsor, as part of the submission, must request relief from the §
4973 excise tax and provide an explanation supporting the request.
(6) Section 72(t)
. As part of VCP, in appropriate cases, the Service will not
pursue the 10% additional income tax under § 72(t) (or will pursue only a portion
thereof) if, as part of the proposed correction of an Overpayment that occurred solely
because an employee received a distribution from his or her vested account balance
that was not a distributable event, the participant or beneficiary (“recipient”) returns the
improperly distributed amount, adjusted for Earnings, to the plan. If the improperly
distributed amount was rolled over to the recipient’s IRA, then correction will include
removing the amount improperly distributed and rolled over (adjusted for Earnings)
from the recipient’s IRA and returning that amount to the plan. In appropriate cases, as
a condition for not pursuing all or a portion of the additional tax, the Service may require
the Plan Sponsor to pay an additional fee under VCP not in excess of the 10%
additional income tax under § 72(t). The Plan Sponsor, as part of the submission, must
request the relief and provide an explanation supporting the request.
.10 Correction for 403(b) Plans
. (1) Correction for 403(b) Plans generally.
Except as provided in sections 6.03(2) and 6.10(2), the correction for a 403(b) Plan is
expected to be the same as the correction required for a Qualified Plan with the same
Failure (i.e., Plan Document Failure, Operational Failure, Demographic Failure, and
Employer Eligibility Failure).
(2) Special correction principles
. In general, a 403(b) Failure can be corrected
by treating a contract as a § 403(c) annuity contract (or, if applicable, as an amount to
which § 61, 83, or 402(b) applies), such as for purposes of correcting an Employer
Eligibility Failure, a failure to provide for full vesting (including a failure to maintain a
separate account), or an exchange made to a vendor which is not part of the plan (and
for which there is no information sharing agreement). In addition, for purposes of this
45
revenue procedure, pending additional guidance, a 403(b) Plan generally will be treated
as having a Favorable Letter if either (a) the employer is an eligible employer and, on or
before December 31, 2009 (or the date a 403(b) Plan is established, if later), the
employer has adopted a written 403(b) Plan that is intended to satisfy § 403(b)
(including the regulations thereunder) effective as of January 1, 2009 (or the first day of
the plan year in which a 403(b) Plan is established, if later), or (b) the employer has
failed to adopt a written 403(b) Plan timely and corrects the failure in accordance with
section 6.10(3) below. In addition, for purposes of section 4.04 (requiring that the Plan
Sponsor or administrator of the plan have established practices and procedures
reasonably designed to promote and facilitate overall compliance with applicable Code
requirements in order to be eligible for SCP to be available to correct Operational
Failures), the requirement to have established practices and procedures only applies for
failures during periods after December 31, 2009.
(3) Correction for failure to adopt a written 403(b) Plan timely
. A failure to adopt
a written 403(b) Plan timely in accordance with the final regulations under § 403(b) and
Notice 2009-3 may be corrected under VCP and Audit CAP. The issuance of a
compliance statement or closing agreement for the failure to adopt a written 403(b) Plan
timely will result in the written 403(b) Plan being treated as if it had been adopted timely
for the purpose of making available the extended remedial amendment period set forth
in Announcement 2009-89. However, the issuance of a compliance statement or closing
agreement does not constitute a determination as to whether the written plan, as
drafted, complies with the applicable requirements of § 403(b) of the Code and the final
403(b) regulations.
.11 Correction for SEPs and SIMPLE IRA Plans
. (1) Correction for SEPs and
SIMPLE IRA Plans generally. Generally, the correction for a SEP or a SIMPLE IRA Plan
is expected to be similar to the correction required for a Qualified Plan with a similar
Qualification Failure (i.e., Plan Document Failure, Operational Failure, Demographic
Failure, and Employer Eligibility Failure).
(2) Special correction for SEPs and SIMPLE IRA Plans
. In any case in which
correction under section 6.11(1) is not feasible for a SEP or SIMPLE IRA Plan or in any
other case determined by the Service in its discretion (including failures relating to
§ 402(g), 415, or 401(a)(17), failures relating to deferral percentages, discontinuance of
contributions to a SARSEP or SIMPLE IRA Plan, and retention of Excess Amounts for
cases in which there has been no violation of a statutory limitation with respect to a SEP
or SIMPLE IRA Plan), the Service may provide for a different correction. See section
12.06(2) 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 percentage test under § 408(k)(6)(A)(iii) applicable to a
SARSEP, the failure may be corrected in either of the following ways:
46
(a) The Plan Sponsor may make contributions that are 100% vested to all eligible
nonhighly compensated employees (to the extent permitted by § 415) necessary to
raise the deferral percentage to an amount sufficient to pass the test. This amount may
be calculated as the same percentage of compensation (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 distributed. This amount must be allocated to (i) current employees who
were nonhighly compensated employees in the year of the failure, (ii) current nonhighly
compensated employees who were nonhighly compensated employees in the year of
the failure, or (iii) employees (both current and former) who were nonhighly
compensated employees in the year of the failure.
(4) Treatment of undercontributions to a SEP or a SIMPLE IRA Plan
. (a) Make-
up contributions; Earnings. The Plan Sponsor should correct undercontributions to a
SEP or a SIMPLE IRA Plan by contributing make-up amounts that are fully vested,
adjusted for Earnings from the date of the failure to the date of correction.
(b) Earnings adjustment methods. Insofar as SEP and SIMPLE IRA Plan assets
are held in IRAs, there is no earnings rate under the SEP or SIMPLE IRA Plan as a
whole. If it is not feasible to make a reasonable estimate of what the actual investment
results would have been, a reasonable interest rate may be used.
(5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan
. (a)
Distribution of Excess Amounts
. For purposes of this section 6.11, an Excess Amount is
an amount contributed on behalf of an employee that is in excess of an employee’s
benefit under the plan, or an elective deferral in excess of the limitations of § 402(g) or
408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan
Sponsor may effect distribution of the Excess Amount, adjusted for Earnings through
the date of correction, to the affected participant. The amount distributed to the affected
participant is includible in gross income in the year of distribution. The distribution is
reported on Form 1099-R for the year of distribution with respect to each participant
receiving the distribution. In addition, the Plan Sponsor must inform affected participants
that the distribution of an Excess Amount is not eligible for favorable tax treatment
accorded to distributions from a SEP or a SIMPLE IRA Plan (and, specifically, is not
eligible for tax-free rollover). If the Excess Amount is attributable to employer
contributions, the Plan Sponsor may effect distribution of the employer Excess Amount,
adjusted for Earnings through the date of correction, to the Plan Sponsor. The amount
distributed to the Plan Sponsor is not includible in the gross income of the affected
participant. The Plan Sponsor is not entitled to a deduction for such employer Excess
Amount. The distribution is reported on Form 1099-R issued to the participant indicating
the taxable amount as zero.
47
(b) Retention of Excess Amounts. If an Excess Amount is retained in the SEP or
SIMPLE IRA Plan under this section 6.11(5), a special fee, in addition to the VCP
submission fee, will apply. See section 12.06(2) for the special fee. The Plan Sponsor is
not entitled to a deduction for an Excess Amount retained in the SEP or SIMPLE IRA
Plan. In the case of an Excess Amount retained in a SEP that is attributable to a § 415
failure, the Excess Amount, adjusted for Earnings through the date of correction, must
reduce an affected participant’s 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.
(c) De minimis Excess Amounts
. If the total Excess Amount in a SEP or SIMPLE
IRA Plan, whether attributable to elective deferrals or employer contributions, is $100 or
less, the Plan Sponsor is not required to distribute the Excess Amount and the special
fee described in section 12.06(2) does not apply.
.12 Confidentiality and disclosure
. Because each correction program relates
directly to the enforcement of Code requirements, the information received or generated
by the Service under the program is subject to the confidentiality requirements of § 6103
and is not a written determination within the meaning of § 6110.
.13 No 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 ERISA. The Department of
Labor maintains a Voluntary Fiduciary Correction Program under which certain ERISA
fiduciary violations may be corrected. The Department of Labor also maintains a
Delinquent Filer Voluntary Compliance Program under which certain failures to comply
with the annual reporting requirements (Form 5500 series) under ERISA may be
corrected.
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, a SEP, or a SIMPLE IRA
Plan 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
.01 Requirements
. 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 discovered on examination.
48
.02 Factors. The factors to be considered in determining whether an Operational
Failure under a plan is insignificant 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
participants affected as a result of the failure relative to the number of participants who
could have been affected by the failure; (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 arithmetic errors). No single factor is determinative. Additionally,
factors (2), (4), and (5) should not be interpreted to exclude small businesses.
.03 Multiple failures
. In the case of a plan with more than one Operational Failure
in a single year, or Operational Failures that occur in more than one year, the
Operational Failures are eligible for correction 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 determining if Operational Failures are insignificant in the
aggregate.
.04 Examples
. The following examples illustrate the application of this section 8.
It is assumed, in each example, that the eligibility requirements of section 4 relating to
SCP (for example, the requirements of section 4.04 relating to established practices and
procedures) have been satisfied and that no Operational Failures occurred other than
the Operational Failures identified below.
Example 1: In 1991, Employer X established Plan A, a profit-sharing plan that satisfies the
requirements of § 401(a) in form. In 2005, the benefits of 50 of the 250 participants in Plan A were limited
by § 415(c). However, when the Service examined Plan A in 2008, it discovered that, during the 2005
limitation year, the annual additions allocated 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 2005 plan year, are insignificant, the § 415(c) failure in Plan A that occurred in 2005 would be eligible
for correction under this section 8.
Example 2: The facts are the same as in Example 1, except that the failure to satisfy § 415
occurred during each of the 2005 and 2007 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 does not cause the failures to be significant; accordingly, the failures are still eligible
for correction under this section 8.
49
Example 3: The facts are the same as in Example 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 2005 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 2005 limitation year (and the monetary 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 2005 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). 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 2005 plan year, the Service discovered that the employee responsible for entering data into
the employer's computer made minor arithmetic errors in transcribing the compensation data with respect
to 6 of the plan's 40 participants, resulting in excess allocations to those 6 participants' 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 2005 is 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 ("Plan
B") that is intended to satisfy the requirements of § 403(b). The business manager has primary
responsibility for administering Plan B, in addition to other administrative functions within Public School.
During the 2005 plan year, a former employee should have received an additional minimum required
distribution of $278 under § 403(b)(10). Another participant received an impermissible hardship
withdrawal of $2,500. Another participant made elective deferrals of which $1,000 was in excess of the
§ 402(g) limit. Under these facts, even though multiple failures occurred in a single plan year, the failures
are eligible for correction under this section 8 because in the aggregate the failures are insignificant.
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements
. The requirements of this section 9 are satisfied with respect to
an Operational Failure (even if significant) if the Operational Failure is corrected and the
correction is either completed or substantially completed (in accordance with section
9.04) by the last day of the correction period described in section 9.02.
.02 Correction period
. (1) End of correction period. The last day of the correction
period for an Operational Failure is the last day of the second plan year following the
plan year for which the failure occurred. However, in the case of a failure to satisfy the
requirements of § 401(k)(3), 401(m)(2), or, for plan years beginning on or before
December 31, 2001, the multiple use test of § 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 permitted under § 401(k)(8) or 401(m)(6).
If a 403(b) Plan does not have a designated plan year, the plan year is deemed to be
the calendar year for purposes of this section 9.02. See section 6.02(5)(d)(ii) of this
revenue procedure for a limited extension of the correction period set forth in this
paragraph for Plan Sponsors taking action to locate lost participants.
50
(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 correction 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 permitting completion
of correction after the end of the correction period.)
.03 Correction by plan amendment
. In order to complete correction by plan
amendment (as permitted under section 4.05), the amendment should be identified as
an amendment that was adopted pursuant to SCP and submitted as a part of the next
determination letter application. The appropriate determination letter application must be
submitted during the plan’s next on-cycle year (as determined under Rev. Proc. 2007-
44), or, if earlier, in connection with the plan’s termination. The application must
conclude with the issuance of a favorable determination letter for the plan.
.04 Substantial completion of correction
. 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 paragraph (1) are satisfied if:
(a) during the correction period, the Plan Sponsor is reasonably prompt in
identifying the Operational Failure, formulating a correction method, and initiating
correction in a manner that demonstrates a commitment to completing correction of the
Operational Failure as expeditiously as practicable; and
(b) within 120 days after the last day of the correction period, the Plan Sponsor
completes correction of the Operational Failure.
(2) The requirements of this paragraph (2) are satisfied if:
(a) during the correction period, correction is completed with respect to 65% 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.
51
.05 Examples. The following examples illustrate the application of this section 9.
It is assumed, in each example, that the eligibility requirements of section 4 relating to
SCP have been met.
Example 1: Employer Z established a qualified defined contribution plan in 2003 and received a
favorable determination letter. During 2007, while doing a self-audit of the operation of the plan for the
2006 plan year, the plan administrator discovered that, despite the practices and procedures established
by Employer Z with respect to the plan, several employees eligible to participate in the plan were
excluded from participation. The administrator also found that for 2006 Operational Failures occurred
because the elective deferrals of additional employees exceeded the § 402(g) limit and Employer Z failed
to make the required top-heavy minimum contribution. In addition, during the review of the administration
for the 2006 year, it was found that the plan administrator intended to implement correction for the failure
to satisfy the ADP test (as described in § 401(k)(3)) for the 2005 plan year. During the 2008 plan year, the
Plan Sponsor made QNECs on behalf of the excluded employees, distributed the excess deferrals to the
affected participants, and made a top-heavy minimum contribution to all participants entitled to that
contribution for the 2006 plan year. Each corrective contribution and distribution 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. The failed ADP test for 2005 was corrected by making
corrective contributions, adjusted for Earnings, on behalf of nonhighly compensated employees using the
method described in Appendix A, section .03 of this revenue procedure. Under these facts, the Plan
Sponsor has corrected the ADP test failure for the 2005 plan year and the Operational Failures for the
2006 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 1993 and has
received a favorable determination letter for the applicable law changes. In April 2007, Employer A
purchased all of the stock of Employer B, a wholly-owned subsidiary of Employer C. Employees of
Employer B participated in Plan C, a qualified defined contribution plan sponsored by Employer 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 from Plan C attributable to the account balances of the employees of Employer B
who had participated in Plan C. As part of this agreement, Employer C represented to Employer A that
Plan C was 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
transaction, the employees of Employer B began participation in Plan A. Effective July 1, 2007, 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 2002 and 2003 plan years. During 2008, Employer A made corrective
contributions on behalf of the affected participants. The corrective contributions were credited with
Earnings at a rate appropriate for the plan from the date the corrective contributions 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 correction period, corrected the Operational Failures for the 2002
and 2003 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 PROCEDURES
.01 VCP requirements
. The requirements of this section 10 are satisfied with
respect to failures submitted in accordance with the requirements of this section 10 if
the Plan Sponsor pays the compliance fee required under section 12 and implements
the corrective actions and satisfies any other conditions in the compliance statement
described in section 10.08.
52
.02 Identification 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 submission are addressed under VCP, and only those failures
are covered by a VCP compliance statement. The Service will not make any
investigation or finding under VCP concerning whether there are failures.
.03 Effect 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 subsequent
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. See section 5.09 for the definition of
Under Examination.
.04 No concurrent examination activity
. Except in unusual circumstances, a plan
that has been properly submitted under VCP will not be examined while the submission
is pending. Notwithstanding the above, a plan that is eligible for a Group Submission
under section 10.11 may be examined while the Group Submission is pending with
respect to issues not identified in the Group Submission at the time such plan comes
Under Examination. In addition, if it is determined that either the plan or the Plan
Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as
defined under section 4.13(2)), the Service may authorize the examination of the plan,
even if a submission pursuant to VCP is pending. This practice regarding concurrent
examinations does not extend to other plans of the Plan Sponsor. Thus, any plan of the
Plan Sponsor that is not pending under VCP could be subject to examination.
.05 Determination letter application for plan amendments related to a VCP
submission. In any case in which a determination letter application is submitted
pursuant to section 6.05, the Plan Sponsor must submit concurrently a copy of the
amendment or restated plan document, the appropriate determination letter application
form (i.e., Form 5300, 5307, or 5310), and the appropriate user fee to the same address
as the VCP submission. If a restated plan document is submitted as evidence of
correction, the Plan Sponsor must identify the page, the section, and the specific plan
language that resolves each specified Qualification Failure in the VCP submission.
Pursuant to section 12.03 of Rev. Proc. 2007-44, in the case of individually designed
plans, a restated plan generally will be required. The user fee for the determination
letter application and the compliance fee for the VCP submission must be paid by
separate checks made payable to the United States Treasury.
.06 Determination letter applications not related to a VCP submission
. (1) The
Service may process a determination letter application submitted under the
determination letter program (including an application requested on Form 5310)
53
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. If the Plan Sponsor discovers a failure, the failure
may not be corrected as part of the determination letter process. The Plan Sponsor may
use SCP and VCP instead, as applicable. If the Service, in connection with a
determination letter application, discovers failures, the Service may issue a closing
agreement with respect to the failures identified or, if appropriate, refer the case to
Employee Plans Examinations. In such a case, the fee structure in section 12 relating to
VCP does not apply. Except as provided in section 10.06(3), the sanction in section
14.01 relating to Audit CAP applies. See section 5.08(3) for a description of when a plan
submitted for a determination letter is considered to be Under Examination for purposes
of EPCRS.
(3) If the Service in connection with a determination letter application discovers
the plan has not been amended timely for tax legislation changes, the fee structure in
section 14.04 applies.
.07 Processing of submission
.
(1) Screening of submission
. Upon receipt of a VCP submission, the Service will
review whether the eligibility requirements of section 4 and the submission requirements
of section 11 are satisfied, including whether completed Forms 8950 and 8951 have
been included with the VCP submission.
(2) Eligibility of submission
. If, at any stage of the review process the Service
determines that a VCP submission is seriously deficient or that the application of VCP
would be inappropriate or impracticable, the Service reserves the right to return the
submission without contacting the Plan Sponsor. A VCP submission that does not
include a Form 8950 or Form 8951 will be considered to be seriously deficient. If no
substantive processing of the case has occurred, the Service will refund the compliance
fee submitted with the request.
(3) Review of submission
. Once the Service determines that the submission is
complete under VCP, the Service will contact the Plan Sponsor or the Plan Sponsor's
representative to discuss the proposed corrections and the plan's administrative
procedures.
(4) Additional information required
. If additional information is required, a Service
representative will generally contact the Plan Sponsor or the Plan Sponsor'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 information is not received within 21 days, the matter will
54
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 writing within the 21-day time period and must be approved by the
Service (by the applicable group manager).
(5) Additional failures discovered after initial submission
. (a) A Plan Sponsor that
discovers additional unrelated failures after its initial submission may request that such
failures be added to its submission. However, 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 processing of the submission is substantially
complete) or the application of VCP would be inappropriate or impracticable.
(b) If the Service discovers an unrelated failure while the request is pending, the
failure generally will be added to the failures under consideration. However, the Service
retains the discretion to determine that a failure is outside the scope of the voluntary
request for consideration because the Plan Sponsor did not voluntarily bring this failure
forward. 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.
(6) 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 contacted by the Service representative and offered a conference
with the Service. The conference can be held either in person 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 conference 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.
(7) Failure to reach resolution
. If the Service and the Plan Sponsor cannot reach
agreement with respect to the submission, the matter will be closed, the compliance fee
will not be returned, and the case may be referred to Employee Plans Examinations. In
the case of an Anonymous Submission that fails to reach resolution under this revenue
procedure, the Service will refund 50% of the applicable VCP fee. See section 12 for the
VCP fee.
(8) Issuance of compliance statement
. (a) In general. If agreement has been
reached and all applicable compliance fees have been paid, the Service will send to the
Plan Sponsor a compliance statement signed by the Service specifying the corrective
action required. However, the Service reserves the right to require the Plan Sponsor to
sign the compliance statement. In such a case, the Service will send to the Plan
Sponsor an unsigned compliance statement. Within 30 calendar days of the date the
compliance statement is sent, the Plan Sponsor must sign and return the compliance
55
statement along with any outstanding compliance fee that may be required. The Service
will then issue a signed copy of the compliance statement to the Plan Sponsor. If the
Plan Sponsor does not return the compliance statement (along with any outstanding
compliance fee) within 30 calendar days, the VCP submission will be closed, and no
further action will be taken with respect to the submission. In appropriate circumstances,
the plan may be referred to Employee Plans Examinations.
(b) Model VCP Submission Compliance Statement
. If the Plan Sponsor included
the Appendix C Part I Model VCP Submission Compliance Statement (“Model
Compliance Statement”) with its VCP submission, then the Service will sign and send to
the Plan Sponsor the compliance statement specifying the corrective action required.
The Service reserves the right to issue an individually drafted compliance statement in
appropriate circumstances. The format and content of the Model Compliance Statement
may not be modified or changed in any way.
(c) Modifications to VCP Submission.
If a Plan Sponsor materially modifies a
VCP submission that was previously filed with the Service, then, unless the Plan
Sponsor has submitted a penalty of perjury statement (see section 11.08(1)) with
respect to such subsequent modifications, the Plan Sponsor will be required to sign and
return the compliance statement under the general procedures described in section
10.07(8)(a).
(9) Timing of correction
. The Plan Sponsor must implement the specific
corrections 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 prior to the expiration of the correction period in writing and must
be approved by the Service. Correction of the failure to adopt timely good faith
amendments, interim amendments, or amendments relating to the implementation of
optional law changes, as described in section 6.05(3)(a), must be made by the date of
the submission. That is, the submission should include the executed amendments that
would correct this failure. See section 6.02(5)(d)(ii) of this revenue procedure for a
limited extension of the 150-day correction period set forth in this paragraph for Plan
Sponsors taking action to locate lost participants.
(10) 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 compliance
statement. However, if the requested modification is minor and is postmarked within the
correction period provided for in the compliance statement, the compliance fee will be
equal to the lesser of one-half of the original compliance fee or $1,500. The request
should be sent to the VCP mailing address provided for in section 11.12. The request
should include a letter explaining the modification, a copy of the original compliance
statement and related VCP submission, any other correspondence relating to the
issuance of the original compliance statement, and a check for the VCP compliance fee
payable to the United States Treasury, along with completed Forms 8950 and 8951.
56
(11) Verification. Once the compliance statement has been issued, the Service
may require verification that the correction methods have been complied with and that
any plan administrative procedures required by the compliance 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.
.08 Compliance statement
. (1) General description of compliance statement.
The compliance statement issued for a VCP submission only addresses the failures
identified in the submission, the terms of correction (including any revision of
administrative procedures), and the time period within which proposed corrections must
be implemented (including any changes in administrative 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. The
reliance provided by a compliance statement is limited to the specific failures and years
specified and does not provide reliance for any other failure or year.
(2) Failure to adopt timely amendments
. (a) Failure to amend plan timely. With
respect to a failure to amend a plan timely for good faith amendments, interim
amendments, or optional law changes, as described in section 6.05(3)(a) of this
revenue procedure, the issuance of a compliance statement will result in the corrective
amendments being treated as if they had been adopted timely for the purpose of
determining the availability of the remedial amendment period in Rev. Proc. 2007-44.
However, the issuance of such a compliance statement does not constitute a
determination as to whether the good faith amendment, interim amendment, or other
corrective amendment to reflect the implementation of optional law changes, as drafted,
complies with the change in qualification requirement. The compliance statement does
not constitute a determination as to whether the corrective amendment conforms the
terms of the plan to the plan’s prior operations, and whether the amendment complies
with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b),
and 411(d)(6).
(b) Failure to adopt 403(b) Plan timely
. A failure to adopt a 403(b) Plan in
accordance with the final regulations under § 403(b) and Notice 2009-3 may be
corrected under VCP. The issuance of a compliance statement will result in the 403(b)
Plan being treated as if it had been adopted timely for the purpose of making available
the extended remedial amendment period set forth in Announcement 2009-89.
However, the issuance of a compliance statement does not constitute a determination
as to whether the written plan, as drafted, complies with the applicable requirements of
§ 403(b) and the final § 403(b) regulations.
57
(3) Administrative procedures required. 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 Service may prescribe appropriate administrative
procedures in the compliance statement.
(4) Compliance statement conditioned upon timely correction
. The compliance
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.
(5) Authority delegated
. Compliance statements (including relief from any excise
tax or other penalty as provided under section 6.09) are authorized to be signed by
managers within Employee Plans Rulings and Agreements, under the Tax Exempt and
Government Entities Operating Division of the Service.
.09 Effect 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 10.11(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.
.10 Special rules relating to Anonymous Submissions
. (1) The Anonymous
Submission procedure in this section 10.10 permits submission of a Qualified Plan,
403(b) Plan, SEP, and SIMPLE IRA Plan under VCP without initially identifying the
applicable plan, the Plan Sponsor, or the Eligible Organization. The requirements of this
revenue procedure relating to VCP, including sections 10, 11, and 12, apply to these
submissions. Information identifying the plan or the Plan Sponsor may be redacted (and
the power of attorney statement and the penalty of perjury statement need not be
included with the initial submission). In addition, if a determination letter application will
be requested as part of the submission, the determination letter application should not
be submitted until the time all identifying information is provided to the Service. For
purposes of processing the submission, the state of the Plan Sponsor must be identified
in the initial submission. All Anonymous Submissions must be numbered or labeled on
the first page of the VCP submission by the Plan Sponsor or its representative to
facilitate identification and tracking of the submission. The identification number must be
unique to the submission and should not be used with respect to any other Anonymous
Submission of the Plan Sponsor or representative. If the submission is made by an
individual who represents the Plan Sponsor, such individual must satisfy the power of
attorney requirements described in section 11.07. As part of the submission, the
representative must, under penalty of perjury, assert that the representative complies
with the power of attorney requirements described in section 11.07 and that the
representative will submit an executed copy of a Form 2848 upon the disclosure of the
identity of the Plan Sponsor to the Service. Once the Service and the plan
58
representative reach agreement with respect to the submission, the Service will contact
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 agreement to identify
the plan and Plan Sponsor. If the Plan Sponsor does not submit the identifying material
(including the power of attorney statement and the penalty of perjury statement) within
21 calendar days from the date of the letter of agreement, the matter will be closed and
the compliance fee will not be returned.
(2) Notwithstanding section 10.04, until each plan and Plan Sponsor is identified
to the Service, a submission under this subsection does not preclude or impede an
examination of the Plan Sponsor or its plan. Thus, a plan submitted under the
Anonymous Submission procedure that comes Under Examination prior to the date the
identifying materials of each plan and Plan Sponsor are received by the Service will no
longer be eligible under VCP.
.11 Special rules relating to Group Submissions
. (1) General rules. An Eligible
Organization may submit a VCP request for a Qualified Plan, a 403(b) Plan, a SEP, or a
SIMPLE IRA Plan under a Group Submission for Plan Document, Operational, and
Employer Eligibility Failures. If a sponsor of a master or prototype plan submits failures
with respect to more than one master or prototype plan, each plan will be treated as a
separate submission and a separate fee must be submitted for each prototype plan.
Similarly, if a Volume Submitter practitioner submits failures with respect to more than
one Volume Submitter Specimen plan, each plan will be treated as a separate
submission and a separate fee must be submitted for each specimen plan. For this
purpose, in the case of either the prototype plan or specimen plan, the number of plans
is determined with reference to the number of basic plan documents, not adoption
agreements. See section 12.05.
(2) Eligible Organizations
. For purposes of a Group Submission, the term
“Eligible Organization” means either (a) a Sponsor (as that term is defined in section
4.07 of Rev. Proc. 2005-16, 2005-10 I.R.B. 674, or Rev. Proc. 2011-49, 2011-44 I.R.B.
608) of a master or prototype plan, (b) a Volume Submitter practitioner, as that term is
defined in section 13.04 of Rev. Proc. 2005-16 or section 13.05 of Rev. Proc. 2011-49,
2011-44 I.R.B. 608, (c) an insurance company or other entity that has issued annuity
contracts or provides services with respect to assets for 403(b) Plans, or (d) an entity
that provides its clients with administrative services with respect to Qualified Plans,
403(b) Plans, SEPs, or SIMPLE IRA Plans. An Eligible Organization is not eligible to
make a Group Submission unless the failures in the submission result from a systemic
error involving the Eligible Organization that affects at least 20 plans and results in at
least 20 plans implementing correction. If, at any time before the Service issues the
compliance statement, the number of plans falls below 20, the Eligible Organization
must notify the Service that it is no longer eligible to make a Group Submission. Under
these circumstances the compliance fee may be retained by the Service.
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(3) Special Group Submission procedures. (a) In general, a Group Submission is
subject to the same procedures as any VCP submission in accordance with sections 10
and 11, except that the Eligible Organization is responsible for performing the
procedural obligations imposed on the Plan Sponsor under sections 10 and 11. See
section 11.03(12) for a special submission requirement with respect to Group
Submissions.
(b) The Eligible Organization must provide notice to all Plan Sponsors of the
plans included in the Group Submission. The notice must be provided at least 90 days
before the Eligible Organization provides the Service with the information required in
section 10.11(3)(c). The purpose of the notice is to provide each Plan Sponsor with
information relating to the Group Submission request. The notice should explain the
reason for the Group Submission and inform the Plan Sponsor that the Plan Sponsor’s
plan will be included in the Group Submission unless the Plan Sponsor responds within
the 90-day period requesting that the Plan Sponsor’s plan be excluded from the Group
Submission.
(c) When an Eligible Organization receives an unsigned compliance statement
on the proposed correction and agrees to the terms of the compliance statement, the
Eligible Organization must return to the Service within 120 calendar days not only the
signed compliance statement and any additional compliance fee under section 12.05,
but also a list containing (i) the employer tax identification numbers for the Plan
Sponsors of the plans to which the compliance statement may be applicable, (ii) the
plans by name, plan number, type of plan, and number of plan participants, (iii) a
certification that each Plan Sponsor received notice of the Group Submission, and (iv) a
certification that each Plan Sponsor timely filed the Form 5500 series return for the most
recent plan year for which the Form 5500 series return was required to have been filed.
This list can be submitted at any stage of the submission process provided that the
requirements of section 10.11(3)(b) have been satisfied. Applicants are encouraged to
submit the list on a computer disk in Microsoft Word. 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 the compliance statement.
(d) Notwithstanding section 4.02, if a Plan Sponsor of a plan that is eligible to be
included in the Group Submission and has not requested to be excluded from the Group
Submission pursuant to section 10.11(3)(b) is notified of an impending Employee Plans
examination after the Eligible Organization filed the Group Submission with the Service,
the Plan Sponsor’s plan will be included in the Group Submission. However, with
respect to such plan, the Group Submission will not preclude or impede an examination
of the plan with respect to any failures not identified in the Group Submission at the time
the plan comes Under Examination.
.12 Multiemployer and multiple employer plans
. (1) In the case of a
multiemployer or multiple employer plan, the plan administrator (rather than any
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contributing or adopting employer) must request consideration of the plan under VCP.
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 multiemployer 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 participants
attributable to that employer, rather than having the compliance fee calculated based on
the participants of the entire plan. For example, the plan administrator may choose to
apply the provisions of this paragraph when 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 a failure attributable in
whole or in part to the failure of an employer to provide the plan administrator with full
and complete information).
SECTION 11. SUBMISSION PROCEDURES FOR VCP
.01 General rules
. (1) A VCP submission must satisfy the requirements of this
section 11.
(2) A VCP submission must include completed Forms 8950 and 8951.
(3) A VCP submission must include a description of the failures, a description of
the proposed methods of correction, and other procedural items set forth in this section
11. Appendix C of this revenue procedure is provided to assist applicants in satisfying
these requirements. Applicants are encouraged to use the Model Compliance
Statement format set forth in Part I of Appendix C and, where appropriate, one or more
of Schedules 1 through 9 contained in Part II of Appendix C (“Schedules”), without
modifying the text and format of the Appendix C documents.
.02 Use of Schedules
. (1) Schedules 1 through 9 provide descriptions of
common qualification failures and standardized correction methods which may be
submitted in lieu of individually drafted descriptions. For applicants that do not choose to
use the Model Compliance Statement, the Schedules can be used to satisfy certain
requirements of this revenue procedure.
(2) Multiple Schedules may be included in a single VCP submission.
(3) A Schedule may be used only if its printed content applies without
modification to the applicant’s situation.
(4) The following failures are described in the Schedules:
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(a) Interim and Certain Discretionary Nonamender Failures (Schedule 1): If the
Plan Sponsor failed to adopt timely good faith amendments, interim amendments, or
amendments required to reflect the changed operation of the plan on account of the
Plan Sponsor’s decision to implement optional law changes (see section 6.05(3)(a) of
this revenue procedure for a description of each of these amendments), the Plan
Sponsor may submit Schedule 1. Schedule 1 may be used only if the corrective
amendment was adopted before the expiration of the plan’s extended remedial
amendment period (as determined under Rev. Proc. 2007-44) for that amendment.
(b) Nonamender Failures and Failure to Adopt a 403(b) Plan Timely (Schedule
2): If the Plan Sponsor failed to adopt timely amendments to comply with required
legislative or regulatory changes (other than as described in section 11.02(4)(a)) or
failed to adopt a 403(b) Plan timely in accordance with the final regulations under
§ 403(b) and Notice 2009-3,
the Plan Sponsor may submit Schedule 2.
(c) SEPs and SARSEPs (Schedule 3)
: If the Plan is a SEP or a SARSEP and
experienced one or more of the failures shown on Schedule 3, and the Plan Sponsor
proposes to correct such failure(s) by using the method(s) provided on such schedule,
the Plan Sponsor may submit Schedule 3.
(d) SIMPLE IRAs (Schedule 4)
: If the Plan is a SIMPLE IRA and experienced one
or more of the failures shown on Schedule 4, and the Plan Sponsor proposes to correct
such failure(s) by using the method(s) provided on such schedule, the Plan Sponsor
may submit Schedule 4.
(e) Plan Loan Failures (Schedule 5)
: If the Plan Sponsor failed to administer
loans in accordance with the provisions of § 72(p)(2), the failure solely relates to
employees who are neither key employees (as defined in § 416(i)(1)) nor self-employed
individuals (as defined in § 401(c)(1)(B)), and proposes to correct such failure(s) by
using the method(s) provided on such schedule, the Plan Sponsor may submit
Schedule 5.
(f) Employer Eligibility Failure (Schedule 6)
: If the Plan Sponsor failed to satisfy
the criteria for an employer to sponsor either a 403(b) Plan or a § 401(k) plan, and
proposes to correct such failure by using the method provided on such schedule, the
Plan Sponsor may submit Schedule 6.
(g) Failure to Distribute Elective Deferrals in Excess of the § 402(g) Limit
(Schedule 7)
: If the plan failed to distribute elective deferrals made in excess of the
§ 402(g) limit and the Plan Sponsor proposes to correct such failure using the method
described in Appendix A, section .04, the Plan Sponsor may submit Schedule 7.
(h) Failure to Pay Required Minimum Distributions Timely under § 401(a)(9)
(Schedule 8)
: If the plan failed to make required minimum distributions pursuant to
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§ 401(a)(9) and proposes to correct such failure using the method described in
Appendix A, section .06, then the Plan Sponsor may submit Schedule 8.
(i) Correction by Plan Amendment (in accordance with Appendix B) (Schedule 9)
:
The Plan Sponsor may submit Schedule 9 if one or more of the following applies:
1. Section 401(a)(17) failure being corrected using the method described in
Appendix B, section 2.07(1)(a);
2. Hardship distribution failure being corrected using the method
described in Appendix B, section 2.07(2)(a);
3. Loans permitted in operation but not permitted by Plan document
being corrected using the method described in Appendix B, section
2.07(2)(a); or
4. Early inclusion of otherwise eligible employee(s) being corrected
using the method described in Appendix B, section 2.07(3)(a).
.03 Submission requirements
. A VCP submission must include the following
information:
(1) Identification of failures
. A complete description of the failures, the years in
which the failures occurred, including closed years (that is, years for which the statutory
period has expired), and the number of employees affected by each failure.
(2) Explanation
. An explanation of how and why the failures arose, including a
description of the administrative procedures applicable to the failures in effect at the
time the failures occurred.
.
(3) Proposed method of correction
. A detailed description of the method for
correcting the failures that the Plan Sponsor has implemented or proposes to
implement. Each step of the correction method must be described in narrative form. The
description must include the specific information needed to support 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.
(4) Earnings or actuarial adjustments
. A description of the methodology that will
be used to calculate Earnings or actuarial adjustments on any corrective contributions
or distributions (indicating the computation periods and the basis for determining
Earnings or actuarial adjustments, in accordance with section 6.02(4)).
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(5) Computations. 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 contribution limits of § 415(c) and proposes a correction method that involves
elective deferrals (whether matched or unmatched) and matching contributions, the
Plan Sponsor must submit calculations 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.
(6) Former employees or beneficiaries
. The method(s) 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.
(7) Change in administrative procedures
. A description of the measures that have
been or will be implemented to ensure that the same failures will not recur.
(8) Request for excise tax relief (§ 4972, 4973, 4974, or 4979) or additional tax
relief under §72(t). If excise tax or additional tax relief is sought, a specific request for
relief should be included in the submission, along with explanations, where applicable,
supporting such request.
(9) Loan failures and income tax reporting relief
. A specific request for relief
needs to be made if the applicant either wants relief from reporting a corrected
participant loan as a deemed distribution or wants to report the loan as a deemed
distribution in the year of correction instead of the year in which the deemed distribution
occurred.
(10) Transferred Assets
. If a submission includes a failure that relates to
Transferred Assets and the failure occurred prior to the transfer, a description of the
transaction (including the dates of the employer change and the plan transfer).
(11) 403(b) Plans
. In the case of a 403(b) Plan submission, a statement that the
Plan Sponsor 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 failure is the failure to satisfy the requirements of
§ 403(b)(1)(E) regarding elective deferrals, the Plan Sponsor must, prior to making the
VCP submission, contact the insurance company or custodian with control over the
plan’s assets to assure cooperation in effecting a distribution of the excess deferrals
adjusted for Earnings thereon. A submission under VCP must also contain a statement
as to the type of employer (e.g., a tax-exempt organization described in § 501(c)(3)) that
is making the VCP submission.
64
(12) Group Submissions. A Group Submission must be signed by the Eligible
Organization or the Eligible Organization's authorized representative and accompanied
by a copy of the relevant portions of the plan document(s).
(13) Orphan Plans
. If the plan is an Orphan Plan, the applicant should indicate
whether relief from correction or from the VCP compliance fee is being requested and
the support for such relief. See sections 6.02(5)(f) and 12.02(4).
.04 Required documents
. A VCP submission must be accompanied by the
following documents:
(1) Forms 8950 and 8951.
Forms 8950 and 8951 must be included with a VCP
submission.
(2) Plan document.
A copy of the entire plan document or the relevant portions of
the plan document. For example, in a case involving an 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
arrangement provisions of the basic plan document (and the adoption agreement, if
applicable), along with applicable definitions in the plan. In the case of a SEP and a
SIMPLE IRA Plan, the entire plan document should be submitted.
(3) Determination letter application
. In any case in which correction of a
Qualification Failure is made by plan amendment, as permitted under section 4.05, and
the Plan Sponsor is submitting a determination letter request as required under section
6.05, the Plan Sponsor must submit, concurrently and to the same address as the VCP
submission, a copy of the amendment or restated plan document, the appropriate
application form (i.e., Form 5300, 5307, or 5310), the appropriate user fee, and the most
recent version of the Form 8717, User Fee for Employee Plan Determination, Opinion
and Advisory Letter Request. The user fee for the determination letter application and
the compliance fee for the VCP submission must be paid by separate checks made
payable to the United States Treasury. Include a photocopy of each check with the
submission. If the appropriate fees are not included in the submission, the submission
may be returned. If a restated plan document is being submitted as evidence of
correction, the Plan Sponsor must indentify the page and section of the document, and
the specific plan language that resolves the Qualification Failure.
.05 Date fee due generally
. Except as provided in sections 11.06 and 12.02(4),
the VCP fee under section 12 and, if applicable, the determination letter user fee must
be included with the submission. The VCP fee and the determination letter user fee
must be paid by separate checks made payable to the United States Treasury. Include
a photocopy of each check with the submission. If the appropriate fees are not included
in the submission, the submission may be returned.
65
.06 Additional fee due for SEPs, SIMPLE IRA Plans, and Group Submissions. In
the case of a SEP, a SIMPLE IRA Plan, or a Group Submission, the initial fee described
in section 12.02, 12.04, or 12.05 must be included in the submission and any additional
fee is due at the time the compliance statement is signed by the Plan Sponsor and
returned to the Service, or when agreement has been reached between the Service and
the Plan Sponsor regarding correction of the failure(s).
.07 Power of attorney requirements
. To appear before the Service in connection
with the submission, the Plan Sponsor's representative must comply with the
requirements of section 9.02(11) and (12) of Rev. Proc. 2012-4, 2012-1 I.R.B. 125, and
submit Form 2848, Power of Attorney and Declaration of Representative. A Form 2848
that designates a representative not qualified to sign Part II of the Form 2848, e.g., an
unenrolled return preparer, will not be accepted. However, a Plan Sponsor may
authorize an individual, such as an unenrolled return preparer, to inspect or receive
confidential information using Form 8821 Tax Information Authorization. (See Form
8821 and Instructions) See section 10.10 for special rules relating to Anonymous
Submissions.
.08 Penalty of perjury statement
. (1) The Plan Sponsor must sign the penalty of
perjury statement on the Form 8950 as part of a VCP submission. In addition, the
following declaration must accompany any new factual information or change in the
VCP submission made 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.
(2) If the VCP submission is an Anonymous Submission made pursuant to
section 10.10, and the submission is made by an individual authorized to represent the
Plan Sponsor, the individual must submit the following statement: “Under penalties of
perjury, I declare that I am an authorized representative of the Plan Sponsor who
complies with the Power of Attorney requirements described in section 11.07 of
Revenue Procedure 2013-12. I will submit an executed Form 2848 upon the
disclosure of the identity of the Plan Sponsor to the Service.”
.09 Procedural Requirements Checklist
. The Service will be able to respond
more quickly to a VCP submission if the submission is carefully prepared and complete.
The checklist provided on Form 8950 and the instructions to Forms 8950 and 8951 are
designed to assist Plan Sponsors and their representatives in preparing the information
and documents required under this revenue procedure.
.10 Orphan Plan
. The VCP submission should indicate if, appropriate, that it
concerns an Orphan Plan and should include information that establishes that the
applicant is an Eligible Person as defined in section 5.03(2).
66
.11 Acknowledgement letter. The Service will acknowledge receipt of a VCP
submission if the Plan Sponsor or the Plan Sponsor’s representative completes the
Acknowledgement Form in Appendix D and includes it in the submission. A separate
Acknowledgement Form should be included for each plan submitted. A photocopy of
Appendix D may be used.
.12 VCP mailing addresses
. Use the following addresses for VCP submissions
and any accompanying determination letter applications:
First class mail
:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
Express mail or private delivery service
:
Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011
.13 Maintenance of copies of submissions. Plan Sponsors and their
representatives should maintain copies of all correspondence submitted to the Service
with respect to their VCP submissions.
.14 Assembling the submission
. (1) The documents comprising a VCP
submission, including any required determination letter application, must be mailed to
the Service in a single package. As the Service will process the VCP submission and
accompanying determination letter application separately, any documents required to
be filed for both the VCP submission and the accompanying determination letter
application must be provided in duplicate. All information required for the VCP
submission and any accompanying determination letter application must be assembled
separately behind the appropriate form (e.g. Form 8951 and Form 5300). For example,
if the VCP submission and determination letter application require the inclusion of a plan
amendment, then two copies of the amendments will be needed -- one for the VCP
submission and one for the determination letter application. If a determination letter
application is included with a VCP submission, any acknowledgement letter issued by
the Service with regard to the application will be mailed under separate cover, and will
not be issued concurrently with any voluntarily submitted Appendix D VCP
Acknowledgement Letter.
(2) The Service will be able to process a VCP submission more quickly if it is
assembled in the following order:
67
1. Form 8951, with the check for the VCP fee attached to the front of the form.
Include a photocopy of the check.
2. Signed Form 8950.
3. Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821)
attached to Form 8950.
4. The following narrative information:
• Description of the failures (if the failures relate to Transferred Assets,
include a description of the related employer transaction).
• An explanation of how and why the failures occurred.
• Description of the method for correcting failures, including earnings
methodology (if applicable) and supporting computations (if
applicable).
• Description of the method(s) used to locate or notify former employees
or beneficiaries affected by the failures or corrections. If no former
employees or beneficiaries are affected by the failures or corrections,
then affirmatively state that position when addressing this issue.
• Description of the administrative procedures that have been or will be
implemented to ensure that the failures do not recur.
• Whether a request is being made in order for participant loans
corrected under this revenue procedure to not be treated as deemed
distributions under §72(p) and the supporting rationale for such
request. Alternatively, whether a request is being made for participant
loans corrected under this revenue procedure to be treated as deemed
distributions under §72(p) in the year of correction.
• Whether relief is being requested from imposition of the excise taxes
under § 4972, 4973, 4974, or 4979, or the 10% additional income tax
under § 72(t), and the supporting rationale for such relief.
• If the plan is an Orphan Plan, whether relief from the VCP compliance
fee is being requested on Form 8951, and the supporting rationale for
such relief.
5. If the VCP submission includes either the Model Compliance Statement or
any Schedule, as provided in Appendix C, include any required information
and enclosures, and any related schedules.
6. Appendix D Acknowledgement Letter.
7. Copy of opinion, advisory or determination letter (if applicable).
8. Relevant plan document language or plan document (if applicable). If you are
including a determination letter application, a second copy of the relevant plan
68
document or plan amendment may be necessary. See section 11.14(1).
9. Any other items that may be relevant to the VCP submission.
10. If appropriate, the determination letter application, including all required
documentation.
SECTION 12. VCP FEES
.01 VCP fees
. (1) The compliance fees for all submissions under VCP are
determined under this section 12. All fees must be paid upon filing the VCP submission
(except for any special fees described in sections 12.05 and 12.06(2)). The check made
payable to the United States Treasury must be attached to the front of Form 8951.
(2) The check may be converted to an electronic fund transfer. “Electronic fund
transfer” is the term used to refer to the process by which the Service electronically
instructs the financial institution holding the funds to transfer funds from the account
named on the check to the U.S. Treasury account, rather than processing the check.
By sending a completed, signed check to the Service, the Service is authorized to copy
the check and to use the account information from the check to make an electronic fund
transfer from the account for the same amount as the check. If the electronic fund
transfer cannot be processed for technical reasons, the Service is authorized to process
the copy of the check. The electronic fund transfer from an account will usually occur
within 24 hours, which is faster than a check is normally processed. Therefore, it is
necessary to ensure there are sufficient funds available in the checking account when
the check is sent to the Service. The check will not be returned from the financial
institution.
.02 VCP fee for Qualified Plans and 403(b) Plans
. (1) Except as otherwise
provided in this section 12, the compliance fee for a submission under VCP for Qualified
Plans and 403(b) Plans (including Anonymous Submissions) is determined in
accordance with the following chart.
Number of Participants Fee
20 or fewer $ 750
21 to 50 $ 1,000
51 to 100 $ 2,500
101 to 500 $ 5,000
501 to 1,000 $ 8,000
1,001 to 5,000 $ 15,000
5,001 to 10,000 $ 20,000
Over 10,000 $ 25,000
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(2) If (a) a VCP submission involves the failure to satisfy the minimum distribution
requirements of § 401(a)(9) for 50 or fewer participants, (b) such failure is the only
failure described in the submission, and (c) the failure would result in the imposition of
the excise tax under § 4974, the compliance fee is $500.
(3) If (a) a VCP submission involves a loan failure that is corrected in accordance
with section 6.07, (b) the failure does not affect more than 25% of the Plan Sponsor’s
participants in any of the year(s) in which the failure occurred, and (c) the failure is the
only failure described in the submission, the compliance fee for a VCP submission
determined under the provisions of section 12.02(1) is reduced by 50%.
(4) At the discretion of the Service, the compliance fee may be waived in the
case of a terminating Orphan Plan. In such a case, the submission must include a
request for a waiver of the VCP fee.
(5) If (a) a VCP submission involves a failure to adopt a written 403(b) Plan
timely in accordance with the final regulations under § 403(b) and Notice 2009-3, (b) the
failure is the only failure included in the submission, and (c) the VCP submission is
made within the one-year period beginning with the date of publication of this revenue
procedure, the applicable compliance fee under section 12.02(1) is reduced by 50%.
The VCP submission must be sent to the Service no later than December 31, 2013, in
order to be eligible for the reduced fee.
.03 VCP fee for nonamender failures
. (1) In general, the compliance fee for
plans with a nonamender failure, as described in section 6.05, is determined in
accordance with the chart in section 12.02(1). The applicable fee for a VCP submission
that contains only nonamender failures is reduced by 50% if it is submitted within a one-
year period following the expiration of the plan’s remedial amendment period for
complying with such changes.
(2) Notwithstanding section 12.03(1), the compliance fee for a submission that
contains only a failure to adopt timely good faith amendments, interim amendments, or
amendments required to implement optional law changes, as described in section
6.05(3)(a), is $375.
(3) Notwithstanding section 12.03(1), the compliance fee for a submission that
contains only a failure to adopt an amendment (upon which a favorable determination
letter is conditioned) within the applicable remedial amendment period as described in
section 6.05(3)(d) is $500, provided the required amendment is adopted within three
months of the expiration of the remedial amendment period for adopting the amendment
as provided in the plan’s most recent determination letter.
.04 VCP fee for multiple failures
. Generally, the VCP fee is determined under
section 12.02(1). However, if the submission consists of failures, each of which is
subject to reduced fees under section 12.02(2), 12.02(3), 12.02(5), 12.03(1), 12.03(2),
70
or 12.03(3), and if the sum of the reduced fees is less than the fee under section 12.02
(1), then the reduced fee applies. See section 11.02(4).
.05 VCP fee for Group Submission
. The compliance fee for a Group Submission
is based on the number of plans affected by the failure as described in the compliance
statement. The initial fee for the first 20 plans is $10,000. An additional fee is due equal
to the product of the number of plans in excess of 20 multiplied by $250. The maximum
compliance fee for a Group Submission is $50,000. If additional plans are added
following the Group Submission, the additional fee is paid subject to the $50,000
maximum compliance fee. With respect to pre-approved plans, the compliance fee is
determined based on the number of basic plan documents submitted and the number of
employers who have adopted each basic plan by using an adoption agreement
associated with that basic plan. For example, a pre-approved defined contribution
basic plan has three associated adoption agreements: a profit sharing adoption
agreement, a § 401(k) adoption agreement, and a money purchase adoption
agreement. The compliance fee would be based on the number of employers that
adopted the basic plan by using any of the three associated adoption agreements. See
section 10.11(1).
.06 VCP fee for SEPs and SIMPLE IRA Plans
. (1) In general, the compliance fee
for a SEP or a SIMPLE IRA Plan submission (including an Anonymous Submission) is
$250. Notwithstanding the preceding sentence, the Service reserves the right to impose
the fee schedule under section 12.02 (or section 12.07) in appropriate circumstances.
(2) In any case in which a SEP or SIMPLE IRA Plan correction is not similar to a
correction for a similar Qualification Failure (as provided under section 6.10(1)), the
Service may impose an additional fee. If the failure involves an Excess Amount under a
SEP or a SIMPLE IRA Plan and the Plan Sponsor retains the Excess Amount in the
SEP or SIMPLE IRA Plan, a fee equal to at least 10% of the Excess Amount with no
adjustment for Earnings will be imposed. This is in addition to the SEP or SIMPLE IRA
Plan compliance fee set forth in section 12.06(1).
.07 VCP fee for egregious or intentional failures
. Notwithstanding the preceding
provisions of this section 12, in cases involving failures that are egregious (as described
in section 4.11) or where the failure is not inadvertent (i.e., is not a result of an oversight
or mistake), the compliance fee for Qualified Plans, 403(b) Plans, SEPs, and SIMPLE
IRA Plans is the greater of (1) the fee that would be determined under the preceding
provisions of this section 12 or (2) an amount equal to a negotiated percentage of the
Maximum Payment Amount, with such percentage not to exceed 40%.
.08 Establishing the number of plan participants
. Compliance fees under this
section 12 are determined based on the total number of plan participants. For a
description of a participant, see the Instructions for Form 5500.
For new plans and
ongoing plans, the number of plan participants is determined from the most recently
filed Form 5500 series. Thus, with respect to the applicable 2010 or 2011 Form 5500,
71
the Plan Sponsor would use the number shown in item 6f (or the equivalent item on the
Form 5500-SF or EZ) to establish the total number of plan participants. In the case of a
terminated plan, the Form 5500 used to determine the number of plan participants must
be the one filed for the plan year prior to the plan year for which the Final Form 5500
return was filed. If the submission 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 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. If the Plan Sponsor is not required to file a Form 5500 series return with
regard to any Qualified Plan or 403(b) Plan eligible for VCP, the number of plan
participants for compliance fee purposes will generally be the number of plan
participants as of the last day of the most recently completed plan year preceding the
date of the VCP submission. However, if this information has not been compiled by the
time the Plan Sponsor is ready to make a VCP submission to the Service, the Plan
Sponsor may use the number of plan participants associated with the most recently
completed prior plan year for which information on the number of plan participants is
available. This exception would not apply if the VCP submission is mailed to the Service
more than seven months after the close of the most recently completed plan year
preceding the date of the VCP submission.
.09 Insufficient VCP fee
. If the compliance fee included with the VCP submission
is less than the compliance fee required under this section 12, the submission may be
returned.
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
.01 Audit CAP requirements
. If the 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, SEP, or SIMPLE IRA Plan, the requirements of this section 13 are satisfied
with respect to the failure if the Plan Sponsor corrects the failure, pays a sanction in
accordance with section 14, satisfies any additional requirements of section 13.03, and
enters into a closing agreement with the Service. This section 13 also applies if the
Service identifies a participant loan that did not comply with the requirements of §
72(p)(2) (other than a loan failure that is corrected in accordance with SCP or VCP)
upon an Employee Plans or Exempt Organizations examination of a Qualified Plan or
403(b) Plan.
.02 Payment 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
72
submitted by certified check or cashier’s check made payable to the United States
Treasury.
.03 Additional requirements
. Depending on the nature of the failure, the Service
will discuss the appropriateness of the plan's existing administrative procedures 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 conditioned upon the implementation of stated procedures. In
addition, pursuant to section 6.05, the Plan Sponsor may be required to obtain a
Favorable Letter before the closing agreement is signed. If a Favorable Letter is
required, the Plan Sponsor is required to pay the applicable user fee for obtaining the
letter.
.04 Failure to reach resolution
. If the Service and the Plan Sponsor cannot reach
an agreement with respect to the correction of the failure(s) or the amount of the
sanction then the plan will be disqualified, the plan or contract will be treated as if it did
not comply with § 403(b), the SEP will be treated as if it did not comply with § 408(k), or
the SIMPLE IRA Plan will be treated as if it did not comply with § 408(p), as applicable.
.05 Effect of closing agreement. A closing agreement constitutes an agreement
between the Service and the Plan Sponsor that is binding with respect to the tax
matters identified in the agreement for the periods specified.
.06 Other procedural rules
. The procedural rules for Audit CAP are set forth in
Internal Revenue Manual ("IRM") 7.2.2. EPCRS.
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction
. Except as otherwise provided in section 14.04, the
sanction under Audit CAP is a negotiated percentage of the Maximum Payment
Amount. Sanctions will not be excessive and will bear a reasonable relationship to the
nature, extent, and severity of the failures, based on the factors below. In the case of
any participant loan that did not comply with the requirements of § 72(p)(2), the
Maximum Payment Amount will include the tax the Service could collect as a result of
the loan not being excluded from gross income under § 72(p)(2).
.02 Factors 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 number and type of
employees affected by the failure; (5) 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), 408(k), or 408(p); (6) whether the failure is a failure to
satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b), either directly or through
§ 403(b)(12); (7) whether the failure is solely an Employer Eligibility Failure; (8) the
73
period over which the failure(s) occurred (for example, the time that has elapsed since
the end of the applicable remedial amendment period under § 401(b) for a Plan
Document Failure); and (9) the reason for the failure(s) (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; and (2) whether the failure(s) were discovered during the
determination letter process. If one of the failures discovered during an Employee Plans
examination includes the failure to amend the plan timely for relevant legislation, it is
expected that the sanction will be greater than the applicable fee described in section
14.04. An additional factor taken into account with respect to a participant loan that did
not comply with the requirements of § 72(p)(2) is the extent to which the failure is a
result solely of action (or inaction) of the employer or its agents (or the extent to which
the failure is a result of the employee’s or beneficiary’s actions or inaction).
.03 Transferred Assets
. If the examination 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 Transferred Assets were
maintained as a separate plan.
.04 Fee for nonamenders discovered during the determination letter application
process not related to a VCP submission. (1) Except as provided in section 14.04(3)
and (4), the compliance fee for nonamenders (as defined in section 6.05(2)(a)(ii)) not
voluntarily identified by the Plan Sponsor, but instead discovered by the Service in
connection with the determination letter application process as described in section
5.03(3) is determined in accordance with the chart below. This fee schedule applies if
the only failure discovered during the application process is the nonamender failure.
Number of
Participants
Employer’s
2
nd 5 or 6 year
Remedial
Amendment
Cycle
Employer’s
1
st 5 or 6 year
Remedial
Amendment
Cycle
GUST/
401(a)(9)
Regs
UCA/
OBRA
‘93
TRA
‘86
T/D/R
ERISA
20 or fewer
$ 2,500 $ 3,000 $ 3,500 $ 4,000$ 4,500 $ 5,000 $ 5,500
21-50
$ 5,000 $ 6,000 $ 7,000 $ 8,000$ 9,000 $10,000 $11,000
51-100
$ 7,500 $ 9,000 $10,500 $12,000$13,500 $15,000 $16,500
101-500
$12,500 $15,000 $17,500 $20,000$22,500 $25,000 $27,500
501-1,000
$17,500 $21,000 $24,500 $28,000$31,500 $35,000 $38,500
1,001-5,000
$25,000 $30,000 $35,000 $40,000$45,000 $50,000 $55,000
5,001-
10,000
$32,500 $39,000 $45,500 $52,000$58,500 $65,000 $71,500
Over 10,000
$40,000 $48,000 $56,000 $64,000$72,000 $80,000 $88,000
(2) The acronyms listed in the chart in section 14.04(1) refer to the following
laws:
(a) Employee Retirement Income Security Act of 1974 (ERISA),
(b) Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA); Deficit Reduction
Act of 1984 (DEFRA); and Retirement Equity Act of 1984 (REA) together (T/D/R),
(c) Tax Reform Act of 1986 (TRA ’86),
(d) Unemployment Compensation Act of 1992 (UCA); Omnibus Budget and
Reconciliation Act of 1993 (OBRA ’93),
(e) The Uruguay Round Agreements Act; the Uniformed Services Employment
and Reemployment Rights Act of 1994; the Small Business Job Protection Act of 1996;
the Taxpayer Relief Act of 1997; the Internal Revenue Service Restructuring and
Reform Act of 1998; and the Community Renewal Tax Relief Act of 2000 (collectively
known as “GUST”),
(f) Final and temporary regulations under § 401(a)(9), 74 FR 18987, published on
April 17, 2002 (“401(a)(9) Regs”), and
(g) The Employer’s 1
st
5 or 6 year Remedial Amendment Cycle (RAC), includes
the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the
2004 through the 2009 Cumulative List.
(h) The Employer’s 2
nd
5 or 6 year Remedial Amendment Cycle, includes the
2010 through the 2014 Cumulative List.
74
75
(3) If the sole failure consists of the failure to adopt good faith amendments,
interim amendments, or amendments required to reflect the changed operation of the
plan on account of the Plan Sponsor’s decision to implement optional law changes (as
described in section 6.05(3)(a)) by their applicable deadlines, but before the expiration
of the plan’s extended remedial amendment period, then the fee is 40% of the
applicable fee under “Employer’s 2
nd
Remedial Amendment Cycle” on the chart in
section 14.04(1).
(4) If the sole failure consists of a failure to timely adopt an amendment (upon
which a favorable determination letter was conditioned) within the applicable remedial
amendment period, the fee is $1,000 regardless of the number of plan participants,
provided the required amendment is adopted within three months of the expiration of
the remedial amendment period for adopting the amendment.
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK
REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2008-50 is modified and superseded by this revenue procedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is generally effective April 1, 2013. However, Plan
Sponsors are permitted, at their option, to apply the provisions of this revenue
procedure on or after December 31, 2012. Plan Sponsors that choose this option must
include Forms 8950 and 8951 with their VCP submissions made to the new mailing
addresses set forth in section 11.12. For 403(b) Plans, the definitions under Rev. Proc.
2008-50 apply to failures that occurred in taxable years beginning before January 1,
2009.
SECTION 17. PAPERWORK REDUCTION ACT
The collection of information contained 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 sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.
The collection of information in this revenue procedure is in sections 4.05,
6.02(5)(d), 6.05, 6.09(5), 6.09(6), 10.01, 10.02, 10.05-.07, 10.10-10.12, 11.02-11.05,
11.07-11.14, 13.01, sections 2.01-2.07 of Appendix B, Appendix C, and Appendix D.
This information is required to enable the Commissioner, Tax Exempt and Government
76
Entities Division of the Internal Revenue Service to consider the issuance of various
types of closing agreements and compliance statements. This information will be used
to issue closing agreements and compliance statements to allow individual plans to
continue to maintain their tax favored status. As a result, favorable tax treatment of the
benefits of the eligible employees is retained. The likely respondents are individuals,
state or local governments, businesses or other for-profit institutions, nonprofit
institutions, and small businesses or organizations.
The estimated total annual reporting or recordkeeping burden is 86,148 hours.
The estimated annual burden per respondent/recordkeeper varies from .5 to 45.5
hours, depending on individual circumstances, with an estimated average of 20.4 hours.
The estimated number of respondents or recordkeepers is 4,300.
The estimated frequency of responses is occasional.
Books or records relating to a collection of information must be retained as long
as their contents may become material 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 author of this revenue procedure is Paul C. Hogan of the Employee
Plans, Tax Exempt and Government Entities Division. For further information regarding
this revenue procedure, please contact the Employee Plans’ taxpayer assistance
telephone service at 877-829-5500 (a toll-free number) between the hours of 8:30 a.m.
and 4:30 p.m. Eastern Time, Monday through Friday. Alternatively, you can direct your
questions to Mr. Hogan by sending a question via electronic mail to
RetirementPlanQuestions@irs.gov
.
77
APPENDIX A
OPERATIONAL FAILURES AND CORRECTION METHODS
.01 General rule
. (i) This appendix sets forth Operational Failures and Correction
Methods relating to Qualified Plans. 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) of this revenue procedure. The correction methods in this appendix are
acceptable to correct Qualification Failures under VCP, and to correct Qualification
Failures under SCP that occurred notwithstanding that the plan has established
practices and procedures reasonably designed to promote and facilitate overall
compliance with the Code, as provided in section 4.04 of this revenue procedure. To the
extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a
SIMPLE IRA Plan, the correction method listed for such failure may similarly be used to
correct the failure.
(ii) Correction methods permitted in Appendix A and Appendix B are deemed to be
reasonable and appropriate methods of correcting a failure. As provided in section
6.02(2), there may be more than one reasonable and appropriate correction of a failure.
Any correction method used that is not described in Appendix A or Appendix B would
need to satisfy the correction principles of section 6.02. For example, the sponsor of a
403(b) Plan that failed to satisfy the universal availability requirement of
§ 403(b)(12)(A)(ii) might propose to determine the missed deferral for an excluded
employee using a percentage based on the average deferrals for all employees in the
plan instead of using the rule for calculating missed deferrals set out in .05(6)(b). In
doing so, the proposed correction method would fall outside Appendix A, and the Plan
Sponsor would need to satisfy the general correction principles of section 6.02 and
other applicable rules in this revenue procedure.
.02 Failure to properly provide the minimum top-heavy benefit under § 416 to
non-key employees. In a defined contribution plan, the permitted correction method is to
properly contribute and allocate the required top-heavy minimums to the plan in the
manner provided 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.
.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth
in § 401(m)(2), or, for plan years beginning on or before December 31, 2001, the
multiple use test of § 401(m)(9). The permitted correction method is to make qualified
nonelective contributions (QNECs) (as defined in §1.401(k)-6) on behalf of the
nonhighly compensated employees to the extent necessary to raise the actual deferral
percentage or actual contribution percentage of the nonhighly compensated employees
78
to the percentage needed to pass the test or tests. For purposes of correcting a failed
ADP, ACP, or multiple use test, any amounts used to fund QNECs must satisfy the
definition of QNEC in § 1.401(k)-6). The contributions must be made on behalf of all
eligible nonhighly compensated employees (to the extent permitted under § 415) and
must be the same percentage of compensation. QNECs contributed to satisfy the ADP
test need not be taken into account for determining additional contributions (e.g., a
matching contribution), if any. For purposes of this section .03, employees who would
have received a matching contribution had they made elective deferrals must be
counted as eligible employees for the ACP test, and the plan must satisfy the ACP test.
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 employees
(as permitted in § 1.410(b)-6(b)(3)), in order to reduce the number of employees eligible
to receive QNECs. Likewise, under this correction method, the plan may not be
restructured into component plans in order to reduce the number of employees eligible
to receive QNECs.
.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in
contravention of § 401(a)(30)). The permitted 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. The inclusion of the deferral and the distribution in
gross income applies whether or not any portion of the excess deferral is attributable to
a designated Roth contribution (see § 402A(d)(3)). In accordance with § 1.402(g)-
1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test
and a distribution to a nonhighly compensated employee is not included in the ADP test.
.05 Exclusion of an eligible employee from all contributions or accruals under the
plan for one or more plan years. (1) Improperly excluded employees: employer provided
contributions or benefits. For plans with employer provided contributions or benefits
(which are neither elective deferrals under a qualified cash or deferred arrangement
under § 401(k) nor matching or after-tax employee contributions that are subject to
§ 401(m)), the permitted correction method is to make a contribution to the plan on
behalf of the employees excluded from a defined contribution plan or to provide benefit
accruals for the employees excluded from a defined benefit plan.
(2) Improperly excluded employees: contributions subject to § 401(k) or 401(m)
.
(a) For plans providing benefits subject to § 401(k) or 401(m), the corrective contribution
for an improperly excluded employee is described in the following paragraphs of this
section .05(2). (See Examples 3 through 12 of Appendix B.)
(b) If the employee was not provided the opportunity to elect and make elective
deferrals (other than designated Roth contributions) to a § 401(k) plan that does not
satisfy § 401(k)(3) by applying the safe harbor contribution requirements of § 401(k)(12)
or 401(k)(13), the employer must make a QNEC to the plan on behalf of the employee
that replaces the “missed deferral opportunity.” The missed deferral opportunity is equal
79
to 50% of the employee’s “missed deferral.” The missed deferral is determined by
multiplying the actual deferral percentage for the year of exclusion (whether or not the
plan is using current or prior year testing) for the employee's group in the plan (either
highly compensated or nonhighly compensated) by the employee’s compensation for
that year. The employee’s missed deferral amount is reduced further to the extent
necessary to ensure that the missed deferral does not exceed applicable plan limits,
including the annual deferral limit under § 402(g) for the calendar year in which the
failure occurred. 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 employees (as permitted in § 1.410(b)-6(b)(3)) in order to reduce the applicable
ADP, the corresponding missed deferral, and the required QNEC. Likewise,
restructuring the plan into component plans is not permitted in order to reduce the
applicable ADP, the corresponding missed deferral, and the required QNEC. The QNEC
required for the employee for the missed deferral opportunity for the year of exclusion is
adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected
employee.
(c) If the employee should have been eligible for but did not receive an allocation
of employer matching contributions under a non-safe harbor plan because he or she
was not given the opportunity to make elective deferrals, the employer must make a
corrective employer nonelective contribution on behalf of the affected employee. The
corrective employer nonelective contribution is equal to the matching contribution the
employee would have received had the employee made a deferral equal to the missed
deferral determined under section .05(2)(b). The corrective employer nonelective
contribution must be adjusted for Earnings to the date the corrective contribution is
made on behalf of the affected employee.
(d)(i) If the employee was not provided the opportunity to elect and make elective
deferrals (other than designated Roth contributions) to a safe harbor § 401(k) plan that
uses a rate of matching contributions to satisfy the safe harbor requirements of §
401(k)(12), then the missed deferral is deemed equal to the greater of 3% of
compensation or the maximum deferral percentage for which the employer provides a
matching contribution rate that is at least as favorable as 100% of the elective deferral
made by the employee. If the employee was not provided the opportunity to elect and
make elective deferrals (other than Roth contributions) to a safe harbor § 401(k) plan
that uses nonelective contributions to satisfy the safe harbor requirements of §
401(k)(12), then the missed deferral is deemed equal to 3% of compensation. In either
event, this estimate of the missed deferral replaces the estimate based on the ADP test
in a traditional § 401(k) plan. The required QNEC on behalf of the excluded employee is
equal to (i) 50% of the missed deferral, plus (ii) either (A) an amount equal to the
contribution that would have been required as a matching contribution based on the
missed deferral in the case of a safe harbor § 401(k) plan that uses a rate of matching
contributions to satisfy the safe harbor requirements of § 401(k)(12) or (B) the
nonelective contribution that would have been made on behalf of the employee in the
80
case of a safe harbor § 401(k) plan that uses nonelective contributions to satisfy the
safe harbor requirements of § 401(k)(12). The QNEC required to replace the
employee’s missed deferral opportunity and the corresponding matching or nonelective
contribution is adjusted for Earnings to the date the corrective QNEC is made on behalf
of the employee.
(ii) If the employee was not provided the opportunity to make an affirmative
election with respect to elective deferrals (other than designated Roth contributions) to a
safe harbor § 401(k) plan that uses an automatic contribution arrangement to satisfy the
safe harbor requirements of § 401(k)(13) and the failure occurs for a period that does
not extend past the last day of the first plan year which begins after the date on which
the first deferral would have been made (but for the failure), then the missed deferral is
deemed to equal 3% of the employee’s compensation under the plan. If the failure
occurs for a plan year or plan years subsequent to the period described in the prior
sentence, then the missed deferral for each subsequent plan year is equal to the
qualified percentage specified in the plan document to comply with § 401(k)(13)(C)(iii).
The missed deferral determined in accordance with this section .05(2)(d)(ii) replaces the
estimate based on the ADP test in a traditional § 401(k) plan. The required corrective
employer contribution on behalf of the excluded employee is equal to (i) the missed
deferral opportunity, which is an amount equal to 50% of the missed deferral, plus (ii) an
amount equal to either the matching contribution that would apply under § 401(k)(13)
based on the missed deferral or the nonelective contribution that would have been
made on behalf of the employee under § 401(k)(13), whichever applies under the plan.
The employer contribution for the missed deferral opportunity must be a QNEC. The
corrective employer contribution consisting of the QNEC required to replace the
employee’s missed deferral opportunity and the corresponding matching or nonelective
contribution is adjusted for Earnings to the date the corrective employer contribution is
made on behalf of the employee.
(iii) In the case of a failure to make the required nonelective contribution for a
plan year under a safe harbor § 401(k) plan that uses the nonelective contribution under
§ 401(k)(12)(C) to satisfy the safe harbor requirements of § 401(k)(12) or that uses the
nonelective contribution under § 401(k)(13)(D)(i)(I) to satisfy the safe harbor
requirements of § 401(k)(13), the nonelective contribution (which must be a QNEC in
the case of a plan that uses § 401(k)(12) to satisfy ADP) required to be made on behalf
of the employee is equal to 3% of the employee’s compensation during the period of the
failure. For this purpose, the period of the failure for any plan year ends at the end of
the plan year or, if earlier, the later of June 18, 2009 or the date 30 days after notice
was provided to employees as required under applicable Treasury Regulations (see
§ 1.401(k)-3(g)(ii) of the proposed regulations, at 74 FR 23134).
(e) If the employee should have been eligible to elect and make after-tax
employee contributions (other than designated Roth contributions), the employer must
make a QNEC to the plan on behalf of the employee that is equal to the “missed
81
opportunity for making after-tax employee contributions.” The missed opportunity for
making after-tax employee contributions is equal to 40% of the employee’s “missed
after-tax contributions.” The employee’s missed after-tax contributions are equal to the
actual contribution percentage (ACP) for the employee’s group (either highly
compensated or nonhighly compensated) times the employee’s compensation, but with
the resulting amount not to exceed applicable plan limits. If the ACP consists of both
matching and after-tax employee contributions, then, in lieu of basing the employee’s
missed after-tax employee contributions on the ACP for the employee’s group, the
employer is permitted to determine separately the portion of the ACP that is attributable
to after-tax employee contributions for the employee’s group (either highly compensated
or nonhighly compensated), multiplied by the employee’s compensation for the year of
exclusion. The QNEC must be adjusted for Earnings to the date the corrective QNEC is
made on behalf of the affected employee.
(f) If the employee was improperly excluded from an allocation of employer
matching contributions because he or she was not given the opportunity to make after-
tax employee contributions (other than designated Roth contributions), the employer
must make a corrective employer nonelective contribution on behalf of the affected
employee. The corrective employer nonelective contribution is equal to the matching
contribution the employee would have received had the employee made an after-tax
employee contribution equal to the missed after-tax employee contribution determined
under section .05(2)(e). The corrective employer nonelective contribution must be
adjusted for Earnings to the date the corrective contribution is made on behalf of the
affected employee.
(g) The methods for correcting the failures described in this section .05(2) do not
apply until after the correction of other qualification failures. Thus, for example, if, in
addition to the failure of excluding an eligible employee, the plan also failed the ADP or
ACP test, the correction methods described in section .05(2)(b) through (f) cannot be
used until after correction of the ADP or ACP test failures. For purposes of this section
.05(2), in order to determine whether the plan passed the ADP or ACP test, the plan
may rely on a test performed with respect to those eligible employees who were
provided with the opportunity to make elective deferrals or after-tax employee
contributions and receive an allocation of employer matching contributions, in
accordance with the terms of the plan, and may disregard the employees who were
improperly excluded.
(3) Improperly excluded employees: designated Roth contributions
. For
employees who were improperly excluded from plans that (i) are subject to § 401(k) (as
described in section .05(2)) and (ii) provide for the optional treatment of elective
deferrals as designated Roth contributions, the correction is the same as described
under section .05(2). Thus, for example, the corrective employer contribution required to
replace the missed deferral opportunity is made in accordance with the method
described in section .05(2)(b) in the case of a § 401(k) plan that is not a safe harbor
82
§ 401(k) plan or .05(2)(d) in the case of a safe harbor § 401(k) plan. However, none of
the corrective contributions made by the employer may be treated as designated Roth
contributions (and may not be included in an employee’s gross income) and thus may
not be contributed or allocated to a Roth account (as described in § 402A(b)(2)). The
corrective employer contribution must be allocated to an account established for
receiving a QNEC or any other employer contribution in which the employee is fully
vested and subject to the withdrawal restrictions that apply to elective deferrals.
(4) Improperly excluded employees: catch-up contributions only
. (a) Correction
for missed catch-up contributions. If an eligible employee was not provided the
opportunity to elect and make catch-up contributions to a § 401(k) plan, the employer
must make a QNEC to the plan on behalf of the employee that replaces the “missed
deferral opportunity” attributable to the failure to permit an eligible employee to make a
catch-up contribution pursuant to § 414(v). The missed deferral opportunity for catch-up
contributions is equal to 50% of the employee’s missed deferral attributable to catch-up
contributions. For this purpose, the missed deferral attributable to catch-up contributions
is one half of the applicable catch-up contribution limit for the year in which the
employee was improperly excluded. Thus, for example if an eligible employee was
improperly precluded from electing and making catch-up contributions in 2006, the
missed deferral attributable to catch-up contributions is $2,500, which is one half of
$5,000, the 2006 catch-up contribution limit for a § 401(k) plan. The eligible employee’s
missed deferral opportunity is $1,250 (i.e., 50% of the missed deferral attributable to
catch-up contributions of $2,500). The QNEC required to replace the missed deferral
opportunity for the year of exclusion is adjusted for Earnings to the date the corrective
QNEC is made on behalf of the affected employee. For purposes of this correction, an
eligible employee, pursuant to § 414(v)(5), refers to any participant who (i) would have
attained age 50 by the end of the plan’s taxable year and (ii) in the absence of the
plan’s catch-up provision, could not make additional elective deferrals on account of the
plan or statutory limitations described in § 414(v)(3) and § 1.414(v)-1(b)(1).
(b) Correction for missed matching contributions on catch-up contributions
. If an
employee was precluded from making catch-up contributions under this section .05(4),
the Plan Sponsor should ascertain whether the affected employee would have been
entitled to an additional matching contribution on account of the missed deferral. If the
employee would have been entitled to an additional matching contribution, then the
employer must make a corrective employer nonelective contribution for the matching
contribution on behalf of the affected employee. The corrective employer nonelective
contribution is equal to the additional matching contribution the employee would have
received had the employee made a deferral equal to the missed deferral determined
under paragraph (a) of this section .05(4). The corrective employer nonelective
contribution must be adjusted for Earnings to the date the corrective contribution is
made on behalf of the affected employee. If in addition to the failure to provide matching
contributions under this section .05(4)(b), the plan also failed the ACP test, the
correction methods described in this section cannot be used until after correction of the
83
ACP test failure. For purposes of this section, in order to determine whether the plan
passed the ACP test the plan may rely on a test performed with respect to those eligible
employees who were provided with the opportunity to make elective deferrals or after-
tax employee contributions and receive an allocation of employer matching
contributions, in accordance with the terms of the plan, and may disregard any
employer matching contribution that was not made on account of the plan’s failure to
provide an eligible employee with the opportunity to make a catch-up contribution.
(5) Failure to implement an employee election
. (a) Missed opportunity for elective
deferrals. For eligible employees who filed elections to make elective deferrals under
the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan
Sponsor must make a QNEC to the plan on behalf of the employee to replace the
“missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the
employee’s “missed deferral.” The missed deferral is determined by multiplying the
employee’s elected deferral percentage by the employee’s compensation. If the
employee elected a dollar amount for an elective deferral, the missed deferral would be
the specified dollar amount. The employee’s missed deferral amount is reduced further
to the extent necessary to ensure that the missed deferral does not exceed applicable
plan limits, including the annual deferral limit under § 402(g) for the calendar year in
which the failure occurred. The QNEC must be adjusted for Earnings to the date the
corrective QNEC is made on behalf of the affected employee.
(b) Missed opportunity for after-tax employee contributions
. For eligible
employees who filed elections to make after-tax employee contributions under the Plan
which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must
make a QNEC to the plan on behalf of the employee to replace the employee’s missed
opportunity for after-tax employee contributions. The missed opportunity for making
after-tax employee contributions is equal to 40% of the employee’s “missed after-tax
contributions.” The missed after-tax employee contribution is determined by multiplying
the employee’s elected after-tax employee contribution percentage by the employee’s
compensation. The QNEC must be adjusted for Earnings to the date the corrective
QNEC is made on behalf of the affected employee.
(c) Missed opportunity affecting matching contributions
. In the event of failure
described in paragraph (a) or (b) of this section .05(5), if the employee would have been
entitled to an additional matching contribution had either the missed deferral or after-tax
employee contribution been made, then the Plan Sponsor must make a corrective
employer nonelective contribution for the matching contribution on behalf of the affected
employee, or a corrective QNEC in the case of a safe harbor plan under § 401(k)(12).
The corrective employer nonelective contribution or QNEC is equal to the matching
contribution the employee would have received had the employee made a deferral
equal to the missed deferral determined under this paragraph. The corrective employer
nonelective contribution or QNEC must be adjusted for Earnings to the date the
corrective contribution or QNEC is made on behalf of the affected employee.
84
(d) Coordination with correction of other Qualification Failures
. The method for
correcting the failures described in this section .05(5) does not apply until after the
correction of other qualification failures. Thus, for example, if in addition to the failure to
implement an employee’s election, the plan also failed the ADP test or ACP test, the
correction methods described in section .05(5)(a), (b), or (c) cannot be used until after
correction of the ADP or ACP test failures. For purposes of this section .05(5), in order
to determine whether the plan passed the ADP or ACP test the plan may rely on a test
performed with respect to those eligible employees who were not impacted by the Plan
Sponsor’s failure to implement employee elections and received allocations of employer
matching contributions, in accordance with the terms of the plan, and may disregard
employees whose elections were not properly implemented.
(6) Failure of a 403(b) Plan to satisfy the universal availability requirement of
§ 403(b)(12)(A)(ii). (a) Subject to the specific rules in this section .05(6), the correction
methods set forth in this section .05 (and section 2.02 of Appendix B) for a Qualified
Plan also apply to a 403(b) Plan that has a similar failure.
(b) If the employee was not provided the opportunity to elect and make elective
deferrals to a 403(b) Plan, then, in lieu of determining the missed deferral based on the
actual deferral percentage as described in section .05(2)(b), the missed deferral is
deemed equal to the greater of 3% of compensation or the maximum deferral
percentage for which the Plan Sponsor provides a matching contribution rate that is at
least as favorable as 100% of the elective deferral made by the employee.
(7) Improper exclusion of an eligible employee from a SIMPLE IRA plan subject
to the requirements of § 408(p). (a) Subject to the specific rules in this section .05(7),
the correction methods set forth in this section .05 for a Qualified Plan also apply to a
SIMPLE IRA plan that has a similar failure.
(b) If the employee was not provided the opportunity to elect and make elective
deferrals to a SIMPLE IRA plan, then, in lieu of determining the missed deferral based
on the actual deferral percentage as described in section .05(2)(b), the missed deferral
is deemed to be 3% of compensation.
.06 Failure to timely pay the minimum distribution required under § 401(a)(9)
. In a
defined contribution plan, the permitted correction method is to distribute the required
minimum distributions (with Earnings from the date of the failure to the date of the
distribution). The amount required to be distributed for each year in which the initial
failure occurred should be determined by dividing the adjusted account balance on the
applicable valuation 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-3, reduced by the amount of the total missed minimum
distributions for prior years. In a defined benefit plan, the permitted correction method is
85
to distribute the required minimum distributions, plus an interest payment based on the
plan’s actuarial equivalence factors in effect on the date that the distribution should
have been made. See section 6.02(4)(d) of this revenue procedure. If this correction is
made at the time the plan is subject to a restriction on single-sum payments pursuant to
§ 436(d), the Plan Sponsor must contribute to the plan the applicable amount under
section 6.02(4)(e)(ii)(A) as part of the correction.
.07 Failure to obtain participant or spousal consent for a distribution subject to
the participant and spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417. (1)
The permitted correction method is to give each affected participant a choice between
providing informed consent for the distribution actually made or receiving a qualified
joint and survivor annuity. In the event that participant or spousal consent is required but
cannot be obtained, the participant 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. However, 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 participant.
Thus, for example, if, in accordance with the automatic qualified joint and survivor
annuity option under a plan, a married 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 for the spouse’s life beginning 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
payable 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.
(2) An alternative permitted correction method is to give each affected participant
a choice between (i) providing informed consent for the distribution actually made, (ii)
receiving a qualified joint and survivor annuity (both (i) and (ii) of this section .07(2) are
described in section .07(1) of this Appendix A), or (iii) a single-sum payment to the
participant’s spouse equal to the actuarial present value of that survivor annuity benefit
(calculated using the applicable interest rate and mortality table under § 417(e)(3)). For
example, assuming the actuarial present value of a $300 per month annuity payable to
the spouse for the spouse’s life beginning upon the participant’s death was $7,837
(calculated using the applicable interest rate and applicable mortality table under §
417(e)(3)), the single-sum payment to the spouse under clause (iii) of this section .07(2)
is equal to $7,837. If the single-sum payment is made to the spouse, then the payment
is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling
over the payment to an IRA or other eligible retirement plan. If correction is made at the
time the plan is subject to a restriction on single-sum payments pursuant to § 436(d),
then the alternative permitted correction in this section .07(2) is available only if the Plan
86
Sponsor (or other person) contributes to the plan the applicable amount under section
6.02(4)(e)(ii)(A) as part of the correction.
.08 Failure to satisfy the § 415 limits in a defined contribution plan
. For limitation
years beginning before January 1, 2009, the permitted correction for failure to limit
annual additions (other than elective deferrals and after-tax employee contributions)
allocated to participants in a defined contribution plan as required in § 415 (even if the
excess did not result from the allocation of forfeitures or from a reasonable error in
estimating compensation) is to place the excess annual additions into an unallocated
account, similar to the suspense account described in § 1.415-6(b)(6)(iii) (as it appeared
in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final
regulations under § 415, to be used as an employer contribution, other than elective
deferrals, in the succeeding year(s). While such amounts remain in the unallocated
account, the Plan Sponsor is not permitted to make additional contributions to the plan.
The permitted correction for failure to limit annual additions that are elective deferrals or
after-tax employee contributions (even if the excess did not result from a reasonable
error in determining compensation, the amount of elective deferrals or after-tax
employee contributions that could be made with respect to an individual under the § 415
limits) is to distribute the elective deferrals or after-tax employee contributions using a
method similar to that described under § 1.415-6(b)(6)(iv) (as it appeared in the April 1,
2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under
§ 415. Elective deferrals and after-tax employee contributions that are matched may be
returned to the employee, 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, other than elective
deferrals, in succeeding periods. For limitation years beginning on or after January 1,
2009, the failure to limit annual additions allocated to participants in a defined
contribution plan as required in § 415 is corrected in accordance with section 6.06(2)
and (3).
.09 Orphan Plans; orphan contracts and other assets
. (1) Orphan Plans. If (a) a
plan has one or more failures (whether a Qualification Failure or a 403(b) Failure) that
result from the Plan Sponsor having ceased to exist, the Plan Sponsor no longer
maintaining the plan, or similar reasons and (b) the plan is an Orphan Plan, as defined
in section 5.03 (i.e., is not a plan to which ERISA applies), the permitted correction is to
terminate the plan and distribute plan assets to participants and beneficiaries. This
correction must satisfy four conditions. First, the correction must comply with conditions,
standards, and procedures substantially similar to those set forth in section 2578.1 of
the Department of Labor regulations (relating to abandoned plans). Second, the
qualified termination administrator, as defined in 2578.1(g) of the Department of Labor
regulations, based on plan records located and updated in accordance with the
Department of Labor regulations, must have reasonably determined whether, and to
what extent, the survivor annuity requirements of §§ 401(a)(11) and 417 apply to any
87
benefit payable under the plan and take reasonable steps to comply with those
requirements (if applicable). Third, each participant and beneficiary must have been
provided a nonforfeitable right to his or her accrued benefits as of the date of deemed
termination under the Department of Labor regulations, subject to income, expenses,
gains, and losses between that date and the date of distribution. Fourth, participants
and beneficiaries must receive notification of their rights under § 402(f). In addition,
notwithstanding correction under this revenue procedure, the Service reserves the right
to pursue appropriate remedies under the Code against any party who is responsible for
the plan, such as the Plan Sponsor, plan administrator, or owner of the business, even
in its capacity as a participant or beneficiary under the plan. However, with respect to
the first through third conditions above, notice need not be furnished to the Department
of Labor, and notices furnished to the Plan Sponsor, participants, or beneficiaries need
not indicate that the procedures followed or notices furnished actually comply with, or
are required under, Department of Labor regulations.
(2) 403(b) Failures for orphan contracts or other assets
. (a) Former employees
or beneficiaries. In any case in which a 403(b) Failure results from the Plan Sponsor
having ceased involvement with respect to specific assets (including an insurance
annuity contract) held under a defined contribution plan on behalf of a participant who is
a former employee or on behalf of a beneficiary, a permitted correction is to distribute
those plan assets to the participant or beneficiary. Compliance with the distribution rules
of section 2578.1(d)(2)(vii) of the Department of Labor regulations satisfies this
paragraph .09(2))
(b) Failures Relating to Information Sharing Agreements
. In any case in which a
403(b) Failure results from a contract issued in an exchange not being part of a 403(b)
Plan due to the failure to have an information sharing agreement pursuant to § 1.403(b)-
10(b)(2)(i)(C), a permitted correction is for the assets held under the contract to be
transferred to another vendor to which contributions are being made under the plan in
order to become a contract which is held under the plan without regard to the special
rules in § 1.403(b)-10(b).
88
APPENDIX B
CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS
AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION
REFERENCES
.01 Purpose
. (1) This appendix sets forth correction methods relating to
Operational Failures under Qualified Plans. This appendix also sets forth Earnings
adjustment methods. 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) of this
revenue procedure. The correction methods in this appendix are acceptable to correct
Qualification Failures under VCP, and to correct Qualification Failures under SCP that
occurred notwithstanding that the plan has established practices and procedures
reasonably designed to promote and facilitate overall compliance with the Code, as
provided in section 4.04 of this revenue procedure.
(2) To the extent a failure listed in this appendix could occur under a 403(b) Plan,
SEP, or SIMPLE IRA Plan, the correction method listed for such failure may similarly be
used to correct the failure.
.02 Assumptions for Examples
. Unless otherwise specified, for ease of
presentation, the examples assume that:
(1) the plan year and the § 415 limitation year are the calendar year;
(2) the Plan Sponsor 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 satisfied; and
(5) there are no Qualification Failures other than the described Operational
Failures, and if a corrective action would result in any additional Qualification Failure,
appropriate corrective action is taken for that additional Qualification Failure in
accordance with EPCRS.
89
.03 Designated Roth contributions. The examples in this Appendix B generally do
not identify whether the plan offers designated Roth contributions. The results in the
examples, including corrective contributions, would be the same whether or not the plan
offered designated Roth contributions.
.04 Section references
. References to section 2 and section 3 are references to
section 2 and 3 in this appendix.
SECTION 2. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures
. (1) Correction Methods. (a) Appendix A Correction
Method. Appendix A.03 sets forth a correction method for a failure to satisfy the actual
deferral percentage ("ADP"), actual contribution percentage ("ACP"), or, for plan years
beginning on or before December 31, 2001, 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 correction
method in Appendix A, a failure to satisfy the ADP test or ACP test may be corrected by
using the one-to-one correction method set forth in this section 2.01(1)(b). Under the
one-to-one correction method, an excess contribution amount is determined and
assigned to highly compensated employees as provided in paragraph (1)(b)(ii) below.
That excess contribution amount (adjusted for Earnings) is either distributed to the
highly compensated employees or forfeited from the highly compensated employees'
accounts as provided in paragraph (1)(b)(iii) below. That same dollar amount (i.e., the
excess contribution amount, adjusted for Earnings) is contributed to the plan and
allocated to nonhighly compensated employees as provided 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
employees (as permitted in § 1.410(b)- 6(b)(3)). Likewise, restructuring the plan into
component plans is not permitted. This correction method may also be used to correct a
failure to satisfy the multiple use test for plan years beginning on or before December
31, 2001.
(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 contributions (as defined in
§ 401(m)(6)(B)), and for plan years beginning on or before December 31, 2001 the
amount treated as excess contributions or excess aggregate contributions under the
multiple use test for the year, as assigned to each highly compensated employee in
accordance with §
§ 401(k)(8)(C) and 401(m)(6)(C), over (B) previous corrections that
complied with §
§ 401(k)(8) and 401(m)(6), and, for plan years beginning on or before
December 31, 2001, the multiple use test.
90
(iii) Distributions and Forfeitures 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 from the end of the plan
year of the year of the failure through the date of correction. The amount assigned to a
particular highly compensated employee, as adjusted, is distributed or, to the extent the
amount was forfeitable as of the close of the plan year of the failure, is forfeited. If the
amount is forfeited, 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 6.06 of this revenue procedure, the Plan Sponsor must notify
the employee that the Excess Amount is not eligible for favorable tax treatment
accorded to distributions from qualified plans (and, specifically, is not eligible for tax-free
rollover).
(B) If any matching contributions (adjusted for Earnings) are forfeited in
accordance with § 411(a)(3)(G), the forfeited amount is used in accordance with the
plan provisions relating to forfeitures that were in effect for the year of the failure.
(C) If a payment was made to an employee and that payment is a forfeitable
match described in either paragraph (1)(b)(iii)(A) or (B), then it is an Overpayment
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 Allocation of Equivalent Amount
. (A) The Plan Sponsor
makes a contribution to the plan that is equal to the aggregate amounts distributed 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)(3)(G) as provided in paragraph
(1)(b)(iii)(B)). The contribution must be a QNEC as defined in § 1.401(k)-6.
(B)(1)
This paragraph (1)(b)(iv)(B)(1) applies to a plan that uses the current year
testing method described in §
§ 1.401(k)-2(a)(2), 1.401(m)-2(a)(2), and, for periods prior
to the effective date of those regulations, Notice 98-1, 1998-1 C.B. 327. The contribution
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 nonhighly compensated employees for that year or (II) the eligible employees for
the year of the failure who were nonhighly compensated employees for that year and
who also are nonhighly compensated employees for the year of correction.
Alternatively, 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 sentences) the Plan Sponsor selects,
91
eligible employees must receive a uniform allocation (as a percentage of compensation)
of the contribution. (See Examples 1 and 2.) 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 contributed 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 §§ 1.401(k)-2(a)(2) and 1.401(m)-2(a)(2) and, for periods
prior to the effective date of those regulations, 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) using the current year testing method. The plan does not provide for matching
contributions or after-tax employee contributions. In 2007, it was discovered that the ADP test for 2005
was not performed correctly. When the ADP test was performed correctly, the test was not satisfied for
2005. For 2005, the ADP for highly compensated employees was 9% and the ADP for nonhighly
compensated employees was 4%. Accordingly, the ADP for highly compensated employees exceeded
the ADP for nonhighly compensated employees by more than two percentage points (in violation of
§ 401(k)(3)). There were two highly compensated employees eligible under the
§ 401(k) plan during
2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which is equal to
10% of Employee P's compensation of $100,000 for 2005. Employee Q made elective deferrals of
$9,500, which is equal to 8% of Employee Q's compensation of $118,750 for 2005.
Correction
:
On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to
satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess
contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The
amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the
excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with
§ 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and
$2,937.50 to Employee Q. It is determined that the Earnings on the assigned amounts through June 30,
2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the Earnings
are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687)
and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A
makes a corrective contribution to the §
401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed
to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to
the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their
compensation for 2005 (subject to § 415 for 2005).
92
Example 2:
The facts are the same as in Example 1, except that for 2005 the plan also provides for (1) after-
tax employee contributions and (2) matching contributions equal to 50% of the sum of an employee's
elective deferrals and after-tax employee contributions that do not exceed 10% of the employee's
compensation. The plan provides that matching contributions are subject to the plan's 20% per year of
service vesting schedule and that matching contributions are forfeited and used to reduce employer
contributions if associated elective deferrals or after-tax employee contributions are distributed to correct
an ADP or ACP test failure. For 2005, nonhighly compensated employees made after-tax employee
contributions and no highly compensated employee made any after-tax employee contributions.
Employee P received a matching contribution of $5,000 (50% of $10,000) and Employee Q received a
matching contribution of $4,750 (50% of $9,500). Employees P and Q were 100% vested in 2005. It was
determined that the plan satisfied the requirements of the ACP test for 2005.
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 contributions
associated with their distributed excess contributions. Employee P's distributed excess contributions and
associated matching contributions are $3,437.50 and $1,718.75, respectively. Employee Q's distributed
excess contributions and associated matching contributions are $2,937.50 and $1,468.75, respectively.
Thus, $1,718.75 is forfeited from Employee P's account and $1,468.75 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 $250 and for Employee Q is $220. The
total amount of the forfeitures of $3,657.50 (Employee P's $1,718.75 + $250 and Employee Q's $1,468.75
+ $220) is used to reduce contributions for 2007 and subsequent years.
.02 Exclusion of Otherwise Eligible Employees. (1) Exclusion of Eligible
Employees in a § 401(k) or (m) Plan. (a) Correction Method. (i) Appendix A Correction
Method for Full Year Exclusion. Appendix A, section .05(2) sets forth the correction
method for the exclusion of an eligible employee from electing and making elective
deferrals (other than designated Roth contributions) and after-tax employee
contributions to a plan that provides benefits that are subject to the requirements of
§ 401(k) or 401(m) for one or more full plan years. (See Example 3.) Appendix A,
section .05(2) also specifies the method for determining missed elective deferrals and
the corrective contributions for employees who were improperly excluded from electing
and making elective deferrals to a safe harbor § 401(k) plan for one or more full plan
years. (See Examples 8, 9, and 10.) Appendix A, section .05(3) sets forth the correction
method for the exclusion of an eligible employee from electing and making elective
deferrals in a plan that (i) is subject to § 401(k) and (ii) provides employees with the
opportunity to make designated Roth contributions. Appendix A, section .05(4) sets forth
the correction method for the situation where an eligible employee was permitted to
make an elective deferral, but was not provided with the opportunity to make catch-up
contributions under the terms of the plan and § 414(v), and correction is being made by
making a QNEC on behalf of the excluded employee. (See Example 11.) Appendix A,
section .05(5) sets forth the correction method for the failure by a plan to implement an
employee’s election with respect to elective deferrals (including designated Roth
contributions) or after-tax employee contributions. (See Example 12.) In section
2.02(1)(a)(ii) below, the correction methods for (I) the exclusion of an eligible employee
93
from all contributions (including designated Roth contributions) under a § 401(k) or (m)
plan for a full year, as described in Appendix A, sections .05(2) and .05(3), (II) the
exclusion of an eligible employee who was permitted to make elective deferrals, but was
not permitted to make catch-up contributions for a full plan year as described in
Appendix A, section .05(4), and (III) the exclusion of an eligible employee on account of
the failure to implement an employee’s election to make elective deferrals or after-tax
employee contributions to the plan as described in Appendix A, section .05(5) are
expanded to include correction for the exclusion from these contributions (including
designated Roth contributions) under a § 401(k) or (m) plan for a partial plan year. This
correction for a partial year exclusion may be used in conjunction with the correction for
a full year exclusion.
(ii) Expansion of Correction 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 electing and making elective deferrals (including
designated Roth contributions) or after-tax employee contributions for a portion of a plan
year or from receiving matching contributions (on either elective deferrals or after-tax
employee contributions) for a portion of a plan year. In such a case, a permitted
correction method for the failure is for the Plan Sponsor to satisfy this section
2.02(1)(a)(ii). The Plan Sponsor makes a QNEC on behalf of the excluded employee.
The method and examples described to correct the failure to include otherwise eligible
employees do not apply until after correction of other qualification failures. Thus, for
example, in the case of a § 401(k) plan that does not apply the safe harbor contribution
requirements of § 401(k)(12) or 401(k)(13) the correction for improperly excluding an
employee from making elective deferrals, as described in the narrative and the
examples in this section cannot be used until after correction of the ADP test failure.
(See Appendix A, section .05(2)(g).)
(B) Elective Deferral Failures
. (1) The appropriate QNEC for the failure to allow
an employee to elect and make elective deferrals (including designated Roth
contributions) for a portion of the plan year is equal to the missed deferral opportunity
which is an amount equal to 50% of the employee’s missed deferral. The employee’s
missed deferral is determined by multiplying the ADP of the employee's group (either
highly or nonhighly compensated), determined prior to correction under this section
2.02(1)(a)(ii), by the employee's plan compensation for the portion of the year during
which the employee was improperly excluded. In a safe harbor § 401(k) plan, the
employee’s missed deferral is determined by multiplying 3% (or, if greater, whatever
percentage of the participant’s compensation which, if contributed as an elective
deferral, would have been matched at a rate of 100% or more) by the employee’s plan
compensation for the portion of the year during which the employee was improperly
excluded. The missed deferral for the portion of the plan year during which the
employee was improperly excluded from being eligible to make elective deferrals is
reduced to the extent that (i) the sum of the missed deferral (as determined in the
preceding two sentences of this paragraph) and any elective deferrals actually made by
94
the employee for that year would exceed (ii) the maximum elective deferrals permitted
under the plan for the employee for that plan year (including the § 402(g) limit). The
corrective contribution is adjusted for Earnings. For purposes of correcting other failures
under this revenue procedure (including determination of any required matching
contribution) after correction has occurred under this section 2.02(1)(a)(ii)(B), the
employee is treated as having made pre-tax elective deferrals equal to the employee’s
missed deferral for the portion of the year during which the employee was improperly
excluded. (See Examples 4 and 5.)
(2)
The appropriate corrective contribution for the plan’s failure to implement an
employee’s election with respect to elective deferrals is equal to the missed deferral
opportunity which is an amount equal to 50% of the employee’s missed deferral.
Corrective contributions are adjusted for Earnings. The missed deferral is determined by
multiplying the employee’s deferral percentage by the employee's plan compensation
for the portion of the year during which the employee was improperly excluded. If the
employee elected a fixed dollar amount that can be attributed to the period of exclusion,
then the flat dollar amount for the period of exclusion may be used for this purpose. If
the employee elected a fixed dollar amount to be deferred for the entire plan year, then
that dollar amount is multiplied by a fraction. The fraction is equal to the number of
months, including partial months where applicable, during which the eligible employee
was excluded from making elective deferral contributions divided by 12. The missed
deferral for the portion of the plan year during which the eligible employee was
improperly excluded from making elective deferrals is reduced to the extent that (i) the
sum of the missed deferral (as determined in the preceding three sentences) and any
elective deferrals actually made by the employee for that year would exceed (ii) the
maximum elective deferrals permitted under the plan for the employee for that plan year
(including the § 402(g) limit). The corrective contribution is adjusted for Earnings. The
requirements relating to the passage of the ADP test before this correction method can
be used, as described in Appendix A, section .05(5)(d), still apply.
(C) After-Tax Employee Contribution Failures
. (1) The appropriate corrective
contribution for the failure to allow employees to elect and make after-tax employee
contributions for a portion of the plan year is equal to the missed after-tax employee
contributions opportunity, which is an amount equal to 40% of the employee’s missed
after-tax employee contributions. The employee’s missed after-tax employee
contributions are determined by multiplying the ACP of the employee's group (either
highly or nonhighly compensated), determined prior to correction under this section
2.02(1)(a)(ii)(C), by the employee's plan compensation for the portion of the year during
which the employee was improperly excluded. If the ACP consists of both matching and
after-tax employee contributions, then, for purposes of the preceding sentence, in lieu of
basing the missed after-tax employee contributions on the ACP for the employee's
group (either highly compensated or nonhighly compensated), the Plan Sponsor is
permitted to determine separately the portions of the ACP that are attributable to
matching contributions and after-tax employee contributions and base the missed after-
95
tax employee contributions on the portion of the ACP that is attributable to after-tax
employee contributions. The missed after-tax employee contribution is reduced to the
extent that (i) the sum of that contribution and the actual total after-tax employee
contributions made by the employee for the plan year would exceed (ii) the sum of the
maximum after-tax employee contributions permitted under the plan for the employee
for the plan year. The corrective contribution is adjusted for Earnings. The requirements
relating to the passage of the ACP test before this correction method can be used, as
described in Appendix A, section .05(2)(g), still apply.
(2)
The appropriate corrective contribution for the plan’s failure to implement an
employee’s election with respect to after-tax employee contributions for a portion of the
plan year is equal to the missed after-tax employee contributions opportunity, which is
an amount equal to 40% of the employee’s missed after-tax employee contributions.
Corrective contributions are adjusted for Earnings. The missed after-tax employee
contribution is determined by multiplying the employee’s elected after-tax employee
contribution percentage by the employee's plan compensation for the portion of the year
during which the employee was improperly excluded. If the employee elected a flat
dollar amount that can be attributed to the period of exclusion, then the flat dollar
amount for the period of exclusion may be used for this purpose. If the employee
elected a flat dollar amount to be contributed for the entire plan year, then that dollar
amount is multiplied by a fraction. The fraction is equal to the number of months,
including partial months where applicable, during which the eligible employee was
excluded from making after-tax employee contributions divided by 12. The missed after-
tax employee contribution is reduced to the extent that (i) the sum of that contribution
and the actual total after-tax employee contributions made by the employee for the plan
year would exceed (ii) the sum of the maximum after-tax employee contributions
permitted under the plan for the employee for the plan year. The requirements relating
to the passage of the ACP test before this correction method can be used, as described
in Appendix A, section .05(5)(d), still apply.
(D) Matching Contribution Failures
. (1) The appropriate corrective contribution for
the failure to make matching contributions for an employee because the employee was
precluded from making elective deferrals (including designated Roth contributions) or
after-tax employee contributions for a portion of the plan year is equal to the matching
contribution that would have been made for the employee if (1) the employee’s elective
deferrals for that portion of the plan year had equaled the employee’s missed deferrals
(determined under section 2.02(1)(a)(i)(B)) or (2) the employee’s after-tax contribution
for that portion of the plan year had equaled the employee’s missed after-tax employee
contribution (determined under section 2.02(1)(a)(ii)(C)). This matching contribution is
reduced to the extent that (i) the sum of this contribution and other matching
contributions actually made on behalf of the employee for the plan year would exceed
(ii) the maximum matching contribution permitted if the employee had made the
maximum matchable contributions permitted under the plan for the plan year. The
corrective contribution is adjusted for Earnings. The requirements relating to the
96
passage of the ACP test before this correction method can be used, as described in
Appendix A, section .05(2)(g), still apply.
(2)
The appropriate corrective contribution for the failure to make matching
contributions for an employee because of the failure by the plan to implement an
employee’s election with respect to elective deferrals (including designated Roth
contributions) or, where applicable, after-tax employee contributions for a portion of the
plan year is equal to the matching contribution that would have been made for the
employee if the employee made the elective deferral as determined under section
2.02(1)(a)(ii)(B)(2), or where applicable, the after-tax employee contribution determined
under section 2.02(1)(a)(ii)(C)(2). This matching contribution is reduced to the extent
that (i) the sum of this contribution and other matching contributions actually made on
behalf of the employee for the plan year would exceed (ii) the maximum matching
contribution permitted if the employee had made the maximum matchable contributions
permitted under the plan for the plan year. The corrective contribution is adjusted for
Earnings. The requirements relating to the passage of the ACP test before this
correction method can be used, as described in Appendix A, section .05(5)(d), still
apply.
(E) Use of Prorated Compensation
. 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, a pro
rata portion 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.
(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax
Employee Contributions. An Plan Sponsor is not required to make a corrective
contribution with respect to elective deferrals (including designated Roth contributions)
or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and (C), but
is required to make a corrective contribution with respect to any matching contributions,
as provided in section 2.02(1)(a)(ii)(D), for an employee for a plan year if the employee
has been provided the opportunity to make elective deferrals or after-tax employee
contributions 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 or
after-tax employee contributions in an amount not less than the maximum amount that
would have been permitted if no failure had occurred. (See Examples 6 and 7.)
97
(b) Examples.
Example 3
:
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 compensation.
The plan allows employees to make after-tax employee contributions up to a maximum of the lesser of
2% of compensation or $1,000. The after-tax employee contributions are not matched. The plan provides
that employees who complete one year of service are eligible to participate in the plan on the next
designated entry date. The entry dates are January 1, and July 1. In 2007, it is discovered that Employee
V, an NHCE with compensation of $30,000, was excluded from the plan for the 2006 plan year even
though she satisfied the plan’s eligibility requirements as of January 1, 2006.
For the 2006 plan year, the relevant employee and contribution information is as follows:
Compensation Elective deferral Match After-Tax Employee
Contribution
Highly Compensated Employees (HCEs):
R $200,000 $ 6,000 $6,000 $0
S $150,000 $12,000 $4,500 $1,000
Nonhighly Compensated Employees (NHCEs):
T $80,000 $12,000 $2,400 $1,000
U $50,000 $ 500 $ 500 $0
HCEs
:
ADP - 5.5%
ACP - 3.33%
ACP attributable to matching contributions - 3%
ACP attributable to after-tax employee contributions - 0.33%
NHCEs
:
ADP - 8%
ACP -2.63%
ACP attributable to matching contributions - 2%
ACP attributable to after-tax employee contributions - 0.63%
Correction
:
Employer B uses the correction method for a full year exclusion, described in Appendix A, section
.05(2), to correct the failure to include Employee V in the plan for the full plan year beginning January 1,
2006. Employer B calculates the corrective QNEC to be made on behalf of Employee V as follows:
Elective deferrals: Employee V was eligible to, but was not provided with the opportunity to, elect
and make elective deferrals in 2006. Thus, Employer B must make a QNEC to the plan on behalf of
Employee V equal to the missed deferral opportunity for Employee V, which is 50% of Employee V’s
missed deferral. The QNEC is adjusted for Earnings. The missed deferral for Employee V is determined
by using the ADP for NHCEs for 2006 and multiplying that percentage by Employee V’s compensation for
98
2006. Accordingly, the missed deferral for Employee V on account of the employee’s improper exclusion
from the plan is $2,400 (8% x $30,000). The missed deferral opportunity is $1,200 (i.e., 50% x $2,400).
Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to
make elective deferrals to the plan is $1,200 (plus Earnings). The corrective contribution is made to a pre-
tax QNEC account for Employee V (not to a designated Roth contributions account even if the plan offers
designated Roth contributions, as provided in section .05(3) of Appendix A).
Matching contributions: Employee V should have been eligible for, but did not receive, an
allocation of employer matching contributions because Employee V was not provided the opportunity to
make elective deferrals in 2006. Thus, Employer B must make a corrective employer nonelective
contribution to the plan on behalf of Employee V that is equal to the matching contribution Employee V
would have received had the missed deferral been made. The corrective employer nonelective
contribution is adjusted for Earnings. Under the terms of the plan, if Employee V had made an elective
deferral of $2,400 or 8% of compensation ($30,000), the employee would have been entitled to a
matching contribution equal to 100% of the first 3% of Employee V’s compensation ($30,000) or $900.
Accordingly, the contribution required to replace the missed employer matching contribution is $900 (plus
Earnings).
After-tax employee contributions: Employee V was eligible to, but was not provided with the
opportunity to, elect and make after-tax employee contributions in 2006. Employer B must make a QNEC
to the plan equal to the missed opportunity for making after-tax employee contributions for Employee V,
which is 40% of Employee V’s missed after-tax employee contribution. The QNEC is adjusted for
Earnings. The missed after-tax employee contribution for Employee V is estimated by using the ACP for
NHCEs (to the extent that the ACP is attributable to after-tax employee contributions) for 2006 and
multiplying that percentage by Employee V’s compensation for 2006. Accordingly, the missed after-tax
employee contribution for Employee V, on account of the employee’s improper exclusion from the plan is
$189 (0.63% x $30,000). The missed opportunity to make after-tax employee contributions to the plan is
$76 (40% x $189). Thus, the required corrective contribution for the failure to provide Employee V with
the opportunity to make the $189 after-tax employee contribution to the plan is $76 (plus Earnings).
The total required corrective contribution, before adjustments for Earnings, on behalf of Employee
V is $2,176 ($1,200 for the missed deferral opportunity plus $900 for the missed matching contribution
plus $76 for the missed opportunity to make after-tax employee contributions). The required corrective
contribution is further adjusted for Earnings. The corrective contribution for the missed deferral
opportunity ($1,200), the missed opportunity for after-tax employee contributions ($76), and related
Earnings must be made in the form of a QNEC.
Example 4
:
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 compensation during the payroll period. The plan provides for after-tax employee
contributions. The after-tax employee contribution cannot exceed $1,000 for the plan year. 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. Employee X, a nonhighly compensated employee, who met the
eligibility requirements and should have entered the plan on January 1, 2006, was not offered the
opportunity to elect to have elective contributions made on his behalf to the plan. In August of 2006, the
error was discovered and Employer C offered Employee X the opportunity to make elective deferrals and
after-tax employee contributions as of September 1, 2006. Employee X made elective deferrals equal to
4% of the employee's plan compensation for each payroll period from September 1, 2006 through
December 31, 2006 (resulting in elective deferrals of $400). Employee X’s plan compensation for 2006
was $36,000 ($26,000 for the first eight months and $10,000 for the last four months). Employer C made
matching contributions equal to $200 on behalf of Employee X, which is 2% of Employee X’s plan
99
compensation for each payroll period from September 1, 2006 through December 31, 2006 ($10,000).
After being allowed to participate in the plan, Employee X made $250 of after-tax employee contributions
for the 2006 plan year. The ADP for nonhighly compensated employees for 2006 was 3% and the ACP
for nonhighly compensated employees for 2006 was 2.3%. The ACP attributable to matching
contributions for nonhighly compensated employees for 2006 was 1.8%. The ACP attributable to
employee contributions for nonhighly compensated employees for 2006 was 0.5%.
Correction
:
In accordance with section 2.02(1)(a)(ii), Employer C uses the correction method described in
Appendix A, section .05, to correct for the failure to provide Employee X the opportunity to elect and make
elective deferrals and after-tax employee contributions, and, as a result, the failure of Employee X to
receive matching contributions for a portion of the plan year (January 1, 2006 through August 31, 2006).
Thus, Employer C makes a corrective contribution on behalf of Employee X that satisfies the
requirements of section 2.02(1)(a)(ii). Employer C elects to utilize the provisions of section
2.02(1)(a)(ii)(E) to determine Employee X’s compensation for the portion of the year in which Employee X
was not provided the opportunity to make elective deferrals and after-tax employee contributions. Thus,
for administrative convenience, in lieu of using actual plan compensation of $26,000 for the period
Employee X was excluded, Employee X’s annual plan compensation is prorated for the 8-month period
that the employee was excluded from participating in the plan. The corrective contribution is determined
as follows:
(1) Corrective contribution for missed deferral
: Employee X was eligible to, but was not provided
with the opportunity to, elect and make elective deferrals from January 1 through August 31 of 2006.
Employer C must make a QNEC to the plan on behalf of Employee X equal to Employee X’s missed
deferral opportunity for that period, which is 50% of Employee X’s missed deferral. The corrective
contribution is adjusted for Earnings. Employee X’s missed deferral is determined by multiplying the 3%
ADP for nonhighly compensated employees by $24,000 (8/12ths of the employee’s 2006 compensation
of $36,000). Accordingly, the missed deferral is $720. The missed deferral is not reduced because when
this amount is added to the amount already deferred, no plan limit (including § 402(g)) was exceeded.
Accordingly, the required QNEC is $360 (i.e. 50% multiplied by the missed deferral amount of $720). The
required QNEC is adjusted for Earnings.
(2) Corrective contribution for missed matching contribution
: Under the terms of the plan, if
Employee X had made an elective deferral of $720 or 3% of compensation for the period of exclusion
($24,000), the employee would have been entitled to a matching contribution equal to 2% of $24,000 or
$480. The missed matching contribution is not reduced because no plan limit is exceeded when this
amount is added to the matching contribution already contributed for the 2006 plan year. Accordingly, the
required corrective employer contribution is $480. The required corrective employer contribution is
adjusted for Earnings.
(3) Corrective contribution for missed after-tax employee contribution
: Employee X was
eligible to, but was not provided with the opportunity to elect and make after-tax employee contributions
from January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of
Employee X equal to the missed opportunity to make after-tax employee contributions. The missed
opportunity to make after-tax employee contributions is equal to 40% of Employee X’s missed after-tax
employee contributions. The QNEC is adjusted for Earnings. The missed after-tax employee contribution
amount is equal to the 0.5% ACP attributable to employee contributions for nonhighly compensated
employees multiplied by $24,000 (8/12ths of the employee’s 2006 plan compensation of $36,000).
Accordingly, the missed after-tax employee contribution amount is $120. The missed after-tax employee
contribution is not reduced because the sum of $120 and the previously made after-tax employee
contribution of $250 is less than the overall plan limit of $1,000. Therefore, the required QNEC is $48 (i.e.,
100
40% multiplied by the missed after-tax employee contribution of $120). The QNEC is adjusted for
Earnings.
The total required corrective contribution, before adjustments for Earnings, on behalf of Employee
X is $888 ($360 for the missed deferral opportunity plus $480 for the missed matching contribution plus
$48 for the missed opportunity to make after-tax employee contributions). The corrective contribution for
the missed deferral opportunity ($360), the missed opportunity for after-tax employee contributions ($48),
and related Earnings must be made in the form of a QNEC.
Example 5
:
The facts (including the ADP and ACP results) are the same as in Example 4, except that it is
now determined that Employee X, after being included in the plan in 2006, made after-tax employee
contributions of $950.
Correction:
The correction is the same as in Example 4, except that the QNEC required to replace the missed
after-tax employee contribution is re-calculated to take into account applicable plan limits in accordance
with the provisions of section 2.02(1)(a)(ii)(C). The QNEC is determined as follows:
The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to after-tax
employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the
employee’s 2006 plan compensation of $36,000). The missed after-tax employee contribution amount,
based on this calculation, is $120. However, the sum of this amount ($120) and the previously made
after-tax employee contribution ($950) is $1,070. Because the plan limit for after-tax employee
contributions is $1,000, the missed after-tax employee contribution needs to be reduced by $70, to
ensure that the total after-tax employee contributions comply with the plan limit. Accordingly, the missed
after-tax employee contribution is $50 ($120 minus $70) and the required QNEC is $20 (i.e. 40%
multiplied by the missed after-tax employee contribution of $50). The QNEC is adjusted for Earnings.
Example 6
:
Employer D sponsors a §
401(k) plan. The plan has a one year of service eligibility requirement
and provides for January 1 and July 1 entry dates. Employee Y, who should have been provided the
opportunity to elect and make elective deferrals for the plan year beginning on January 1, 2006, was not
provided the opportunity to elect and make elective deferrals until July 1, 2006. Employee Y made $5,000
in elective deferrals to the plan in 2006. Employee Y was a highly compensated employee with
compensation for 2006 of $200,000. Employee Y’s compensation from January 1 through June 30, 2006
was $130,000. The ADP for highly compensated employees for 2006 was 10%. The ADP for nonhighly
compensated employees for 2006 was 8%. The § 402(g) limit for deferrals made in 2006 was $15,000.
Correction:
QNEC for missed deferral: Employee Y’s missed deferral is equal to the 10% ADP for highly
compensated employees multiplied by $130,000 (compensation earned for the portion of the year in
which Employee Y was erroneously excluded, i.e., January 1, 2006 through June 30, 2006). The missed
deferral amount, based on this calculation is $13,000. However, the sum of this amount ($13,000) and the
previously made elective contribution ($5,000) is $18,000. The 2006 § 402(g) limit for elective deferrals is
$15,000. In accordance with the provisions of section 2.02(1)(a)(ii)(B), the missed deferral needs to be
reduced by $3,000 to ensure that the total elective contribution complies with the applicable § 402(g) limit.
Accordingly, the missed deferral is $10,000 ($13,000 minus $3,000) and the required QNEC is $5,000
(i.e., 50% multiplied by the missed deferral of $10,000). The QNEC is adjusted for Earnings.
101
Example 7
:
Employer E 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 compensation during the payroll period. The plan also provides that the annual
limit on matching contributions is $750. The plan provides for after-tax employee contributions. The after-
tax employee contribution cannot exceed $1,000 during a plan year. 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. Employee Z, a nonhighly compensated employee who met the eligibility requirements and
should have entered the plan on January 1, 2006, was not offered the opportunity to elect to have elective
contributions made on his behalf to the plan. In March of 2006, the error was discovered and Employer E
offered the employee an election opportunity as of April 1, 2006. Employee Z had the opportunity to make
the maximum elective deferrals and/or after-tax employee contributions that could have been made under
the terms of the plan for the entire 2006 plan year. The employee made elective deferrals equal to 3% of
the employee's plan compensation for each payroll period from April 1, 2006 through December 31, 2006
(resulting in elective deferrals of $960). The employee's plan compensation for 2006 was $40,000 ($8,000
for the first three months and $32,000 for the last nine months). Employer E made matching contributions
equal to $640 for the excluded employee, which is 2% of the employee's plan compensation for each
payroll period from April 1, 2006 through December 31, 2006 ($32,000). After being allowed to participate
in the plan, the employee made $500 in after-tax employee contributions. The ADP for nonhighly
compensated employees for 2006 was 3% and the ACP for nonhighly compensated employees for 2006
was 2.3%. The portion of the ACP attributable to matching contributions for nonhighly compensated
employees for 2006 was 1.8%. The portion of the ACP attributable to after-tax employee contributions for
nonhighly compensated employees for 2006 was 0.5%.
Correction
:
Employer E uses the correction method for partial year exclusions, pursuant to section
2.02(1)(a)(ii), to correct the failure to include an eligible employee in the plan. Because Employee Z was
given an opportunity to make elective deferrals and after-tax employee contributions to the plan for at
least the last 9 months of the plan year (and the amount of the elective deferrals or after-tax employee
contributions that the employee had the opportunity to make was not less than the maximum elective
deferrals or after-tax employee contributions that the employee could have made if the employee had
been given the opportunity to make elective deferrals and after-tax employee contributions on January 1,
2006), under the special rule set forth in section 2.02(1)(a)(ii)(F), Employer E is not required to make a
QNEC for the failure to provide the employee with the opportunity to make either elective deferrals or
after-tax employee contributions. The employer only needs to make a corrective employer nonelective
contribution for the failure to provide the employee with the opportunity to receive matching contributions
on deferrals that could have been made during the first 3 months of the plan year. The calculation of the
corrective employer contribution required to correct this failure is shown as follows:
The missed matching contribution is determined by calculating the matching contribution that the
employee would have received had the employee been provided the opportunity to make elective
deferrals during the period of exclusion, i.e., January 1, 2006 through March 31, 2006. Assuming that the
employee elected to defer an amount equal to 3% of compensation (which is the ADP for the nonhighly
compensated employees for the plan year), then, under the terms of the plan, the employee would have
been entitled to a matching contribution of 2% of compensation. Pursuant to the provisions of section
2.02(1)(a)(ii)(E), Employer E determines compensation by prorating Employee Z’s annual compensation
for the portion of the year that Employee Z was not given the opportunity to make elective deferrals or
after-tax employee contributions. Accordingly, the missed matching contribution for the period of
exclusion is obtained by multiplying 2% by Employee Z’s compensation of $10,000 (3/12ths of the
employee’s 2006 plan compensation of $40,000). Based on this calculation, the missed matching
102
contribution is $200. However, when this amount is added to the matching contribution already received
($640), the total ($840) exceeds the $750 plan limit on matching contributions by $90. Accordingly,
pursuant to section 2.02(1)(a)(ii)(D), the missed matching contribution figure is reduced to $110 ($200
minus $90). The required corrective employer contribution is $110. The corrective contribution is adjusted
for Earnings.
Example 8
:
Employer G maintains a safe harbor §
401(k) plan that requires matching contributions that
satisfy the requirements of § 401(k)(12), which are equal to: 100% of elective deferrals that do not exceed
3% of an employee's compensation and 50% of elective deferrals that exceed 3% but do not exceed 5%
of an employee’s compensation. Employee M, a nonhighly compensated employee who met the eligibility
requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to
defer under the plan and was erroneously excluded for all of 2006. Employee M's compensation for 2006
was $20,000.
Correction
:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral
is equal to 3% multiplied by $20,000, or $600. Accordingly, the required QNEC for Employee M’s missed
deferral opportunity in 2006 is $300, i.e., 50% of $600. The missed matching contribution, based on the
missed deferral of $600, is $600. The required corrective contribution for Employee M’s missed matching
contribution is $600. Since the matching contribution is required to satisfy the requirements of
§ 401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before
adjustments for Earnings, on behalf of Employee M is $900 (i.e., $300 for the missed deferral opportunity,
plus $600 for the missed matching contribution). The QNEC is adjusted for Earnings.
Example 9
:
Same facts as Example 8, except that the plan provides for matching contributions equal to 100% of
elective deferrals that do not exceed 4% of an employee’s compensation.
Correction
:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor § 401(k) plan is 4% of compensation. The missed deferral is
4% of compensation because the plan provides for a 100% match for deferrals up to that level of
compensation. (See Appendix A, section .05(2)(d).) Therefore, in this case, Employee M’s missed
deferral is equal to 4% multiplied by $20,000, or $800. The QNEC for Employee M’s missed deferral
opportunity in 2006 is $400, i.e., 50% multiplied by $800. The missed matching contribution, based on the
missed deferral of $800, is $800. Thus, the required corrective contribution for Employee M’s missed
matching contribution is $800. Since the matching contribution is required to satisfy the requirements of
§ 401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before
adjustments for Earnings, on behalf of Employee M is $1,200 (i.e., $400 for the missed deferral
opportunity plus $800 for the missed matching contribution). The QNEC is adjusted for Earnings.
Example 10
:
103
Same facts as Example 8, except that the plan uses a rate of nonelective contributions to satisfy
the requirements of § 401(k)(12) and provides for a nonelective contribution equal to 3% of
compensation.
Correction
:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor §
401(k) plan is 3% of compensation. Thus, the missed deferral
is equal to 3% multiplied by $20,000, or $600. Thus, the QNEC for Employee M’s missed deferral
opportunity in 2006 is $300 (50% of $600). The required nonelective contribution, based on the plan’s
formula of 3% of compensation for nonelective contributions, is $600. Since the nonelective contribution
is required to satisfy the requirements of § 401(k)(12), the corrective contribution is made in the form of a
QNEC. The total required QNEC, before adjustments for Earnings, on behalf of Employee M is $900
(i.e., $300 for the missed deferral opportunity, plus $600 for the missed nonelective contribution). The
QNEC is adjusted for Earnings.
Example 11
:
Employer H maintains a §
401(k) plan. The plan limit on deferrals is the lesser of the deferral limit
under § 401(a)(30) or the limitation under § 415. The plan also provides that eligible participants (as
defined in § 414(v)(5)) may make contributions in excess of the plan’s deferral limits, up to the limitations
on catch-up contributions for the year. The plan also provides for a 60% matching contribution on elective
deferrals. The deferral limit under § 401(a)(30) for 2006 is $15,000. The limitation on catch-up
contributions under the terms of the plan and § 414(v)(2)(B)(i) is $5,000. Employee R, age 55, was
provided with the opportunity to make elective deferrals up to the plan limit, but was not provided the
option to make catch-up contributions. Employee R is a nonhighly compensated employee who earned
$60,000 in compensation and made elective deferrals totaling $15,000 in 2006.
Correction
:
In accordance with the provisions of Appendix A, section .05(4), Employee R’s missed deferral on
account of the plan’s failure to offer the opportunity to make catch-up contributions is $2,500 (or one half
of the limitation on catch-up contributions for 2006). The missed deferral opportunity is $1,250 (or 50% of
$2,500). Thus, the required QNEC for Employee R’s missed deferral opportunity relating to catch-up
contributions in 2006 is $1,250 adjusted for Earnings. In addition, Employee R was entitled to an
additional matching contribution, under the terms of the plan, equal to 60% of the missed deferral that is
attributable to the catch-up contribution that the employee would have made had the failure not occurred.
In this case, the missed deferral is $2,500 and the corresponding matching contribution is $1,500 (i.e.,
60% of $2,500). Thus, the required corrective contribution for the additional matching contribution that
should have been made on behalf of Employee R is $1,500 adjusted for Earnings.
Example 12
:
Employer K 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 compensation.
On January 1, 2006, Employee T made an election to contribute 10% of compensation for the 2006 plan
year. However, Employee T’s election was not processed, and the required amounts were not withheld
from Employee T’s salary in 2006. Employee T’s salary was $30,000 in 2006.
Correction
:
Employer K uses the correction method described in Appendix A, section .05(5), to correct the
failure to implement Employee T’s election to make elective deferrals under the plan for the full plan year
104
beginning January 1, 2006. Employer K calculates the corrective QNEC to be made on behalf of
Employee T as follows:
(1) Elective deferrals
: Employee T’s election to make elective deferrals, pursuant to an election, in
2006 was not implemented. Thus, pursuant to section .05(5)(a) of Appendix A, Employer K must make a
QNEC to the plan on behalf of Employee T equal to the missed deferral opportunity for Employee T,
which is 50% of Employee T’s missed deferral. The QNEC is adjusted for Earnings. The missed deferral
for Employee T is determined by using T’s elected deferral percentage (10%) for 2006 and multiplying
that percentage by Employee T’s compensation for 2006 ($30,000). Accordingly, the missed deferral for
Employee V, on account of the employee’s improper exclusion from the plan is $3,000 (10% x $30,000).
The missed deferral opportunity is $1,500 (i.e., 50% x $3,000). Thus, the required QNEC for the failure to
provide Employee V with the opportunity to make elective deferrals to the plan is $1,500 (adjusted for
Earnings).
(2) Matching contributions
: Employee T should have been eligible for but did not receive an
allocation of employer matching contributions because no elective deferrals were made on behalf of
Employee T in 2006. Thus, pursuant to section .05(5)(c) of Appendix A, Employer K must make a
corrective employer nonelective contribution to the plan on behalf of Employee T that is equal to the
matching contribution Employee T would have received had the missed deferral been made. The
corrective employer nonelective contribution is adjusted for Earnings. Under the terms of the plan, if
Employee T had made an elective deferral of $3,000 or 10% of compensation ($30,000), the employee
would have been entitled to a matching contribution equal to 100% of the first 3% of Employee T’s
compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed employer
matching contribution is $900 (adjusted for Earnings).
The total required corrective contribution, before adjustments for Earnings, on behalf of Employee
T is $2,400 ($1,500 for the missed deferral opportunity plus $900 for the missed matching contribution).
The corrective contribution for the missed deferral opportunity ($1,500) and related Earnings must be
made in the form of a QNEC.
(2) Exclusion of Eligible Employees In a Profit-Sharing Plan. (a) Correction
Methods. (i) Appendix A Correction Method. Appendix A, section .05, sets forth the
correction method for correcting the failure to make a contribution on behalf of the
employees improperly excluded from a defined contribution plan or to provide benefit
accruals for the employees improperly excluded from a defined benefit plan. In the case
of a defined contribution plan, the correction method is to make a contribution on behalf
of the excluded employee. Section 2.02(2)(a)(ii) of this Appendix B clarifies the
correction method in the case of a profit-sharing or stock bonus plan that provides for
nonelective contributions (within the meaning of §1.401(k)-6).
(ii) Additional Requirements for Appendix A Correction Method as applied to
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 Appendix A
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 Plan Sponsor makes a corrective contribution on behalf of the
105
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 balance of an eligible
employee who shared in the original allocation of the nonelective 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 15.)
(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 Appendix A correction method,
the exclusion of an eligible employee for a plan year from 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 correction 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 16 and 17.)
(B) Increase in Account Balance of Excluded Employee
. The account balance 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 Balances 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’s account had the failure not occurred. This amount is adjusted for Earnings
taking into account the rules set forth in section 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 allocation 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 balances in more than one investment fund, for administrative convenience, the
reduction to the employee's account balance may be adjusted by the lowest rate of
return of any fund for the period from the date of the original allocation of the
contribution through the date of correction.
106
(3) If an employee's account balance is reduced and the original allocation was
made to more than one investment fund or there was a subsequent distribution or
transfer from the fund receiving the original allocation, then reasonable, consistent
assumptions are used to determine the Earnings adjustment.
(4
) The amount determined in section 2.02(2)(a)(iii)(C)(1) for an employee after
the application of section 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 correction.
(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 Plan Sponsor 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 a pro rata
basis.
(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 investment funds selected in
any reasonable manner.
(F) Limitations on Use of Reallocation 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 permitted to retain a distribution are nonhighly compensated employees.
(b) Examples
.
Example 13
:
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 2006 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 nonhighly
compensated employees. No distributions have been made from the plan since 2006. If the five excluded
employees had shared in the original allocation, the allocation made on behalf of each employee would
have equaled 9% of compensation. The excluded employees began participating in the plan in the 2007
plan year.
107
Correction
:
Employer D uses the Appendix A correction method to correct the failure to include the five
eligible employees. Thus, Employer D makes a corrective contribution to the plan. The amount of the
corrective contribution on behalf of the five excluded employees for the 2006 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 2006 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 14
:
The facts are the same as in Example 13.
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 contribution for the 2006 plan year among all eligible 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. Accordingly, the account balance of each excluded employee
is increased by 9% of the employee's 2006 compensation, adjusted for Earnings. The account balance of
each of the eligible employees other than the excluded employees is reduced by 1% of the employee's
2006 compensation, adjusted for Earnings. Employer D determines the adjustment for Earnings using the
rate of return of each eligible employee's excess allocation (using reasonable, consistent assumptions).
Accordingly, for an employee who shared in the original allocation and directed the investment of the
allocation into more than one investment fund or who subsequently transferred a portion of a fund that
had been credited with a portion of the 2006 allocation to another fund, reasonable, consistent
assumptions are followed to determine the adjustment for Earnings. It is determined that the total of the
initially determined reductions in account balances exceeds the total of the required increases in account
balances. Accordingly, these initially determined reductions are decreased pro rata so 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 a pro rata basis among all of the funds in which each employee's account balance is invested.
Example 15
:
The facts are the same as in Example 13.
Correction
:
The correction is the same as in Example 14, except that, because most of the employees whose
account balances are being reduced are nonhighly compensated employees, for administrative
convenience, Employer D uses the rate of return of the fund with the lowest rate of return for the period of
the failure to adjust the reduction to each account balance. It is determined 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 contribution to the plan in an amount equal to the excess.
The reduction from account balances is made on a pro rata basis among all of the funds in which each
employee's account balance is invested.
108
.03 Vesting Failures
. (1) Correction Methods. (a) Contribution Correction Method.
A failure in a defined contribution plan to apply the proper vesting percentage to an
employee's account balance that results in forfeiture of too large a portion of the
employee's account balance may be corrected using the contribution correction method
set forth in this paragraph. The Plan Sponsor makes a corrective contribution on behalf
of the employee whose account balance was improperly forfeited in an amount equal to
the improper forfeiture. The corrective contribution is adjusted for Earnings. If, as a
result of the improper forfeiture, 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 16.)
(b) Reallocation Correction Method
. In lieu of the contribution correction method,
in a defined contribution 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
corrected under the reallocation correction method set forth in this paragraph. A
corrective 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 determined in accordance with sections
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 Plan Sponsor makes a corrective contribution to the plan
for the amount of the excess. In accordance with section 2.02(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
a pro rata basis. (See Example 17.)
(2) Examples
.
Example 16
:
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 forfeitures of account balances are reallocated among the account
balances of other eligible employees on the basis of compensation. During the 2006 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 2006. However, an
109
incorrect determination of Employee R's vested percentage 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 compensated 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 and subsequently
distributed to Employee R. No reduction is made from the account balances of the employees who
received an allocation of the improper forfeiture.
Example 17
:
The facts are the same as in Example 16.
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) and such increase will be distributed to Employee R. 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 compensated employees, for administrative
convenience, Employer E uses the rate of return of the fund with the lowest rate of return 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 a pro 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 § 415(b) may be corrected using the return
of Overpayment correction method set forth in this paragraph (1)(a)(i). The Plan
Sponsor takes reasonable steps to have the Overpayment (with appropriate interest)
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
Plan Sponsor or another person contributes the difference to the plan. In addition, in
accordance with section 6.06 of this revenue procedure, the Plan Sponsor must notify
the recipient 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 20 and 21.)
(ii) Adjustment of Future Payments Correction Method
. (A) In General. In addition
to the return of overpayment correction method, in the case of plan benefits that are
110
being distributed in the form of periodic payments, Overpayments 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 reduction is made to recoup the Overpayment (over a
period not longer than the remaining 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 18 and 19.)
(B) Joint and Survivor Annuity Payments
. If the employee is receiving payments
in the form of a joint and survivor annuity, with the employee's spouse to receive a life
annuity upon the employee'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 Overpayments made to the employee does not
reduce the amount of the spouse's survivor 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 corrected
under this adjustment of future payment correction method is not treated as an Excess
Amount as defined in section 5.01(3) of this revenue procedure.
(b) Examples.
Example 18
:
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 payments have
commenced. At the beginning of the 2006 plan year, Employee S retired and started receiving an annual
straight life annuity of $185,000 from the plan. Due to an administrative error, the annual amount received
by Employee S for 2006 included an Overpayment of $10,000 (because the § 415(b)(1)(A) limit for 2006
was $175,000). This error was discovered at the beginning of 2007.
Correction
:
Employer F uses the adjustment of future payments correction method to correct the failure to
satisfy the limit in § 415(b). Future annuity benefit 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 $175,000 and further reduced by $1,000 annually for life,
beginning in 2007. 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 2007 is
equal to the sum of $10,000 and interest 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
111
begins. Thus, Employee S's remaining benefit payments are reduced so that Employee S receives
$174,000 for 2007, and for each year thereafter.
Example 19
:
The facts are the same as in Example 18.
Correction
:
Employer F uses the adjustments of future payments correction method to correct the § 415(b)
failure, by recouping the entire excess payment made in 2006 from Employee S's remaining benefit
payments for 2007. Thus, Employee S's annual annuity benefit for 2007 is reduced to $164,400 to reflect
the excess benefit amounts (increased by interest) that were paid from the plan to Employee S during the
2006 plan year. Beginning in 2008, Employee S begins to receive annual benefit payments of $175,000.
Example 20
:
The facts are the same as in Example 18, except that the benefit was paid to Employee S in the
form of a single-sum distribution in 2006, which exceeded the maximum § 415(b) limits by $110,000.
Correction
:
Employer F uses the return of overpayment correction method to correct the § 415(b) failure.
Thus, Employer F notifies Employee S of the $110,000 Overpayment and 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). The notice also informs Employee S that the Overpayment (with interest
at the rate used by the plan to calculate the single-sum payment) 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 rate of return 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 21
:
The facts are the same as in Example 20.
Correction
:
Employer F uses the return of overpayment correction method to correct the § 415(b) failure.
Thus, Employer F notifies Employee S of the $110,000 Overpayment and 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). The notice also informs Employee S that the Overpayment (with interest
at the rate used by the plan to calculate the single-sum payment) 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 rate of return.
Accordingly, Employer F contributes the difference to the plan.
(2) Failures Relating to a § 415(c) Excess
. (a) Correction Methods. (i) Appendix
A Correction Method. Appendix A, section .08, sets forth the correction method for
correcting the failure to satisfy the § 415(c) limits on annual additions.
112
(ii) Forfeiture Correction Method
. In addition to the Appendix A correction
method, the failure to satisfy § 415(c) with respect to a nonhighly compensated
employee (A) who in the limitation year of the failure had annual additions consisting of
both (I) either elective deferrals or after-tax employee contributions or both and (II)
either matching or nonelective contributions or both, (B) for whom the matching and
nonelective contributions 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 nonelective
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 paragraph. The
§ 415(c) excess is deemed to consist solely of the matching and nonelective
contributions. If the employee's § 415(c) excess (adjusted for Earnings) has previously
been forfeited, the § 415(c) failure is deemed to be corrected. If the § 415(c) excess
(adjusted for Earnings) has not been forfeited, that amount is placed in an unallocated
account, as described in section 6.06(2) of this revenue procedure, to be used to reduce
employer nonelective 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
Appendix A 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 22 and 23.)
(iii) Return of Overpayment Correction Method
. A failure to satisfy § 415(c) that
includes a distribution of the § 415(c) excess attributable to nonelective contributions
and matching contributions may be corrected using the return of Overpayment
correction method set forth in section 6.06(3) of this revenue procedure.
(b) Examples
.
Example 22
:
Employer G maintains a
§ 401(k) plan. The plan provides for nonelective employer contributions,
elective deferrals, and after-tax employee contributions. 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 employee'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 compensation of $60,000, and, accordingly, a § 415(c)(1)(B) limit
of $15,000. Employee T made elective deferrals and after-tax employee 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, terminated his employment and received his entire vested account
113
balance (which consisted of his elective deferrals). The annual additions for Employees T and U
consisted of:
T U
Nonelective Contributions $ 7,500 $ 4,500
Elective Deferrals $10,000 $ 5,800
After-tax Contributions $ 500 $ 0
Total Contributions $18,000 $10,300
§ 415(c) Limit $15,000 $10,000
§ 415(c) Excess $ 3,000 $ 300
Correction
:
Employer G uses the Appendix A 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 after-tax employee 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 respect to Employee U. Thus, the § 415(c) excess
is deemed to consist solely of the nonelective contributions. Accordingly, Employee U's nonvested
account balance is reduced by $300 (adjusted for Earnings) which is placed in an unallocated account, as
described in section 6.06(2) of this revenue procedure, 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.
Example 23
:
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 employee'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 nonelective employer contribution. Thus, the annual additions for
Employee V exceeded the § 415(c) limit by $2,500.
Correction
:
Employer H uses the Appendix A 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 distributing to Employee V $750 (adjusted for Earnings) of the elective
deferrals and forfeiting $750 (adjusted for Earnings) of the associated employer matching contributions.
The forfeited matching contributions are placed in an unallocated account, as described in section 6.06(2)
of this revenue procedure, 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.
.05 Correction 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) (relating to
a § 415(c) excess), may be corrected in accordance with this section 2.05. An
Overpayment from a defined benefit plan is corrected in accordance with the rules in
114
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 Section 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 section 6.06(2) of this revenue procedure.
(2) Example
.
Example 24
:
Employer J maintains a money purchase pension plan. Under the plan, an eligible employee is
entitled to an employer contribution of 8% of the employee's compensation up to the § 401(a)(17) limit
($220,000 for 2006). During the 2006 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 2006 was $250,000. Employee W received a contribution of $20,000 for 2006 (8% of
$250,000), rather than the contribution of $17,600 (8% of $220,000) provided by the plan for that year,
resulting in an improper allocation of $2,400.
Correction
:
The § 401(a)(17) failure is corrected using the reduction of account balance method by reducing
Employee W's account balance by $2,400 (adjusted for Earnings) and crediting that amount to an
unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce
employer contributions in succeeding year(s).
.07 Correction by Amendment. (1) Section 401(a)(17) Failures. (a) Contribution
Correction Method. In addition to the reduction of account balance correction method
under section 6.06(2) of this revenue procedure, a Plan Sponsor may correct a
§ 401(a)(17) failure for a plan year under a defined contribution plan by using the
contribution correction method set forth in this paragraph. The Plan Sponsor 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, and amends the plan (as necessary) to provide for the additional
allocation. The amount contributed for an employee is equal to the employee's plan
compensation for the year of the failure multiplied 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 25.)
(b) Example
.
Example 25
:
The facts are the same as in Example 24.
115
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 2003 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 contribution percentage (and
the additional amount contributed on behalf of each eligible employee), the improperly allocated amount
($2,400) is divided by the § 401(a)(17) limit for 2006 ($220,000). Accordingly, the plan is amended to
increase the contribution percentage by 1.09 percentage points ($2,400/$220,000) from 8% to 9.09%. In
addition, each eligible employee for the 2006 plan year (other than Employee W) receives an additional
contribution of 1.09% multiplied by that employee's plan compensation for 2006. This additional
contribution is adjusted for Earnings.
(2) Hardship Distribution Failures and Plan Loan Failures. (a) Plan Amendment
Correction Method. The Operational Failure of making hardship distributions to
employees under a plan that does not provide for hardship distributions may be
corrected using the plan amendment correction method set forth in this paragraph. The
plan is amended retroactively to provide for the hardship distributions that were made
available. This paragraph does not apply unless (i) the amendment satisfies § 401(a),
and (ii) the plan as amended would have satisfied the qualification requirements of
§ 401(a) (including the requirements applicable to hardship distributions under § 401(k),
if applicable) had the amendment been adopted when hardship distributions were first
made available. (See Example 26.) The Plan Amendment Correction Method is also
available for the Operational Failure of permitting plan loans to employees under a plan
that does not provide for plan loans. The plan is amended retroactively to provide for the
plan loans that were made available. This paragraph does not apply unless (i) the
amendment satisfies § 401(a), and (ii) the plan as amended would have satisfied the
qualification requirements of § 401(a) (and the requirements applicable to plan loans
under § 72(p)) had the amendment been adopted when plan loans were first made
available.
(b) Example
.
Example 26
:
Employer K, a for-profit corporation, maintains a §
401(k) plan. Although plan provisions in 2005
did not provide for hardship distributions, beginning in 2005 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 satisfied the deemed hardship
distribution standards in § 1.401(k)-1(d). Hardship distributions were made to a number of employees
during the 2005 and 2006 plan years, creating an Operational Failure. The failure was discovered in
2007.
116
Correction:
Employer K corrects the failure under VCP by adopting a plan amendment, effective January 1,
2005, to provide a hardship distribution option that satisfies the rules applicable to hardship distributions
in § 1.401(k)-1(d). 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 2005 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 2005.
(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment
Correction Method. The Operational Failure of including an otherwise eligible employee
in the plan who either (i) has not completed the plan’s minimum age or service
requirements, or (ii) has completed the plan’s minimum age or service requirements but
became a participant in the plan on a date earlier than the applicable plan entry date,
may be corrected by using the plan amendment correction method set forth in this
paragraph. The plan is amended retroactively to change the eligibility or entry date
provisions to provide for the inclusion of the ineligible employee to reflect the plan’s
actual operations. The amendment may change the eligibility or entry date 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. For a defined
benefit plan, a contribution may have to be made to the plan for a correction that is
accomplished through a plan amendment if the plan is subject to the requirements of
§ 436(c) at the time of the amendment, as described in section 6.02(4)(e)(ii).
(b) Example.
Example 27
:
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 2007, it is discovered
that all four employees who were hired by Employer L in 2006 were permitted to make salary reduction
contributions to the plan effective with the first weekly paycheck 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 2006 (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, 2006, to provide that there is no service eligibility requirement
under the plan and submitting the amendment to the Service for a determination letter.
117
SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings 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 contribution plan includes a corrective contribution or allocation that
increases one or more employees' account balances (now or in the future), the
contribution or allocation is adjusted for Earnings and forfeitures. This section 3
provides Earnings adjustment methods (but not forfeiture adjustment methods) that may
be used by a Plan Sponsor to adjust a corrective contribution or allocation for Earnings
in a defined contribution plan. Consequently, these Earnings adjustment methods may
be used to determine the Earnings adjustments for corrective contributions or
allocations made under the correction methods in section 2 and under the correction
methods in Appendix A. If an Earnings adjustment method in this section 3 is used to
adjust a corrective contribution or allocation, that adjustment is treated as satisfying the
Earnings adjustment 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 contributions or allocations to reflect Earnings.
(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 reasonable
estimates in certain circumstances applies for purposes of this section 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 precise
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 administrative cost of a precise determination would significantly
exceed the probable difference, reasonable estimates may be used in calculating the
appropriate Earnings.
(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
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 section 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
correction method described in section 2.01(1)(b)(iii).
118
(2) Period of the Failure
. (a) General 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 forfeiture of an employee's
account balance, the beginning of the period of the failure is the date as of which the
account balance was improperly reduced. See section 6.02(4)(f) of this revenue
procedure.
(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., elective deferrals, matching contributions, or discretionary
nonelective employer contributions) were made for other employees 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
allocated 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) during which an employee was improperly excluded from
making periodic elective deferrals or after-tax employee contributions, or from receiving
periodic matching contributions, the Plan Sponsor 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
Plan Sponsor may treat the date on which the contributions would have been made as
the first date of the plan year (or the portion of the plan year) during which an employee
was excluded, provided that the Earnings rate used is one half of the Earnings 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 Earnings
rate generally is based on the investment 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 allocation is made are nonhighly compensated employees, the
rate of return of the fund with the highest rate of return 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 applicable investment choices, the
Earnings rate may be based on the rate of return under the plan as a whole (i.e., the
average of the rates earned by all of the funds in the valuation periods during the period
119
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 Assumptions
. 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 determined without regard to any special investment provisions that vary
according to the size of the fund. Further, the Earnings rate applicable to the corrective
contribution or allocation for a portion of a valuation period may be a pro rata portion of
the Earnings rate for the entire valuation period, unless the application of this rule would
result in either a significant understatement or overstatement of the actual Earnings
during that portion of the valuation period.
(4) Allocation Methods
. (a) In General. For purposes of this section 3, the
Earnings amount generally may be allocated in accordance with any of the methods 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 28.)
(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 Earnings for the valuation period during
which the corrective contribution or allocation is made, the corrective contribution or
allocation (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 contribution made during that valuation period, plan Earnings for
the valuation period during which the corrective contribution or allocation is made may
be allocated as if that employee's account balance had been increased as of the last
day of the prior valuation period by the corrective contribution or allocation, including
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 corrective contribution or
allocation is made by that portion of the Earnings amount attributable to Earnings after
the last day of the prior valuation period. (See Example 29.)
120
(d) Bifurcated Allocation Method. Under the bifurcated allocation method, the
entire Earnings amount for the valuation 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 valuation period during which the corrective contribution or
allocation is made is allocated 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
30.)
(e) Current Period Allocation Method
. Under the current period allocation
method, the portion of the Earnings amount attributable to the valuation period during
which the period of the failure begins ("first partial valuation period") is allocated in the
same manner as Earnings for the valuation period during which the corrective
contribution or allocation is made in accordance with section 3.01(4)(b). The Earnings
for the subsequent full valuation periods ending before the beginning of the valuation
period during which the corrective contribution or allocation is made are allocated solely
to the employee for whom the required contribution 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 accordance with the
plan's method for allocating other Earnings for that valuation period in accordance with
section 3.01(4)(b). (See Example 31.)
.02 Examples
.
Example 28
:
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 allocated in proportion to account balances as of the last day of the
prior year, after reduction for distributions during the current year but without regard to contributions
received during the current 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 Appendix A 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 corrected 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%.
121
Earnings Adjustment on the Corrective Contribution:
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 allocated using the plan allocation method. Employer L determines that a pro
rata simplifying 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
investment return for that period. Accordingly, Employer L determines that the Earnings rate for that
period is 15% (9/12 of the plan's 20% Earnings rate for the year). Thus, applicable Earnings rates under
the plan during the period of the failure are:
Time Periods Earnings 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)
Earnings for 1999 would have been increased by the 1999 Earnings on the additional $5,000 contribution
(including 1998 Earnings 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 allocation 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 contribution ($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 contribution 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 balance) will share in the 2000 portion of the earnings amount based on the
estimated January 1, 2000 to June 1, 2000 Earnings included in the corrective contribution equal to $759
($6,325(.12)). (See Table 1.)
122
TABLE 1
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Amount
Allocated to
Corrective
Contribution
$5,000 Employee X
First Partial Valuation
Period Earnings
15%
$7501
All 12/31/1997
Account Balances4
1999 Earnings
10%
$5752 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 Earnings are being determined but without
regard to contributions received during the year for which Earnings are being determined.
Example 29
:
The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution
:
The earnings amount on the corrective contribution is the same as in Example 28, but the
earnings 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 December 31, 1998, $575
for 1999, and $759 for January 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.)
123
TABLE 2
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period
Earnings
15% $7501
Employee X
1999 Earnings 10% $5752 Employee X
Second Partial Valuation
Period Earnings
12%
$7593
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%
Example 30
:
The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution
:
The earnings amount on the corrective contribution is the same as in Example 28, but the
earnings 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 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
$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 corrective contribution equal to $759 ($6,325(.12)). (See, Table 3.)
TABLE 3
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period
Earnings
15%
$7501
Employee X
1999 Earnings 10% $5752 Employee X
Second Partial Valuation
Period Earnings
12%
$7593
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%
4After reduction for distributions during the 2000 year but without regard to contributions received during
the 2000 year.
.
124
Example 31:
The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution
:
The earnings amount on the corrective contribution is the same as in Example 28, but the
earnings 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 Earnings.
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, 1999 is increased by the sum of
$5,500 ($5,000(1.10)) and the remaining 1999 Earnings on the corrective contribution equal to $75
($5,000(.15)(.10)). Further, both (1) the estimated March 31, 1998 to December 31, 1998 Earnings on the
corrective 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
balance). (See, Table 4.) Thus, Employee X is allocated 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 Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period
Earnings
15%
$7501
12/31/99 Account
Balances (including
Employee X's $5,575)
4
1999 Earnings 10% $5752 Employee X
Second Partial Valuation
Period Earnings
12%
$7593
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%
4After 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.
125
APPENDIX C
Model VCP Submission Documents
INSTRUCTIONS
Appendix C is composed of two parts.
Part I sets forth a Model Compliance Statement, which is designed to assist VCP
applicants by providing a standardized framework to complete the VCP submission
process. The Model Compliance Statement helps to ensure that applicants are including
all necessary information needed for processing a VCP submission. The format and
content of the Model Compliance Statement may not be modified in any way.
Part II contains Schedules (formerly Appendix F Schedules) that set forth standardized
descriptions of failures and correction methods that can be used to resolve certain
qualification failures. These Schedules can be used with the Model Compliance
Statement by attaching the appropriate Schedule to the applicable parts of the Model
Compliance Statement. If you are not using the Model Compliance Statement, the
Schedules still may be used to satisfy the requirements of section 11.03 of Rev. Proc.
2013-12 relating to the description of qualification failures, correction methods, and
changes to plan administrative procedures. However, if a Schedule is used, the format
and content may not be modified.
126
APPENDIX C-PART I
MODEL VCP SUBMISSION COMPLIANCE STATEMENT
Plan Name: __________________________________ EIN: _______________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number on each page of the
compliance statement.)
SECTION I. PLAN INFORMATION
1. APPLICANT’S NAME _______________________________________________________________________
2. APPLICANT’S EIN ________________________ 3. PLAN NO. _____________________________________
(do not use Social Security Number)
4. PLAN NAME _______________________________________________________________________________
SECTION II. APPLICANT’S DESCRIPTION OF FAILURES
Attach additional pages, as needed. Label attachment “SECTION II. APPLICANT’S DESCRIPTION OF
FAILURES.” List and number each failure separately. If using the Appendix C, Part II Schedules, simply specify
the Schedule(s) that are to be part of this compliance statement and attach them to this compliance statement.
SECTION III. APPLICANT’S DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
Attach additional pages, as needed. Label attachment “SECTION III. APPLICANT’S DESCRIPTION OF THE
PROPOSED METHOD OF CORRECTION.” Describe the correction method applicable to each failure listed in
Section II. If using the Appendix C, Part II Schedules, simply specify the Schedule(s) that are to be part of this
compliance statement and attach them to this compliance statement.
SECTION IV. APPLICANT’S PROPOSED PROCEDURES TO LOCATE AND NOTIFY FORMER
EMPLOYEES OR BENEFICIARIES
Attach additional pages, as needed. Label attachment “SECTION IV. APPLICANT’S PROPOSED PROCEDURES
TO LOCATE AND NOTIFY FORMER EMPLOYEES OR BENEFICIARIES.” Describe the method(s) that will
be used to locate and notify former employees and beneficiaries, or provide an affirmative statement that no former
employees or beneficiaries were affected by each failure listed in Part II or will be affected by the correction
methods described in Section III. See section 6.02(5) (d) of Rev. Proc. 2013-12.
127
Plan Name: __________________________________ EIN: _______________ Plan #: _____
SECTION V. APPLICANT’S PROPOSED REVISION TO ADMINISTRATIVE PROCEDURES
Attach additional pages, as needed. Label attachment “SECTION V. APPLICANT’S PROPOSED REVISION TO
ADMINISTRATIVE PROCEDURES.” Please include an explanation of how and why the failures arose and a
description of the measures that will be implemented to ensure that the same failures do not occur in the future. If
using the Appendix C, Part II Schedules, simply specify the Schedule(s) that are to be part of this compliance
statement and attach them to this compliance statement.
SECTION VI. REQUESTS RELATED TO EXCISE TAXES, ADDITIONAL TAX, AND TAX
REPORTING
The Applicant requests that the Internal Revenue Service (“Service”) not pursue the following taxes under
the Internal Revenue Code (“Code”) (attach supporting rationale as required by section 6.09 of Rev. Proc.
2013-12):
Excise tax under Code section 4972 with respect to failure(s) #________.
Excise tax under Code section 4973 with respect to failure(s) #________.
Excise tax under Code section 4974 with respect to failure(s) #________.
Excise tax under Code section 4979 with respect to failure(s) #________.
Imposition of additional tax under Code section 72(t) with respect to failure(s) #________.
The Applicant requests that the Service grant the following with respect to plan loan failures as described in
section 6.07 of Rev. Proc. 2013-12:
With respect to failure(s) #________, that a deemed distribution corrected pursuant to this VCP
submission not be required to be reported on Form 1099-R and that repayments made by such
correction not result in the affected participant having additional basis in the plan for purposes of
determining the tax treatment of subsequent distributions from the plan.
With respect to failure(s) #________, that a deemed distribution be reported on Form 1099-R with
respect to affected participants for the year of correction instead of the year of the failure.
128
Plan Name: __________________________________ EIN: _______________ Plan #: _____
SECTION VII. ENFORCEMENT RESOLUTION (to be completed by IRS only)
The Applicant will neither attempt to nor otherwise amortize, deduct, or recover from the Service any portion of the
compliance fee nor receive any Federal tax benefit on account of payment of such compliance fee
.
The Service will not pursue the sanction of revoking the tax-favored status of the plan under § 401(a), 403(b),
408(k), or 408(p) of the Internal Revenue Code (“Code”) on account of the failure(s) described in this submission.
This compliance statement considers only the acceptability of the correction method(s) and the revision(s) of
administrative procedures described in the submission and does not express an opinion as to the accuracy or
acceptability of any calculations or other materials submitted with the submission. The reliance provided by this
compliance statement is limited to the specific failures and years specified and does not provide reliance for any
other failure or year. In no event may this compliance statement be relied on for the purpose of concluding that the
plan or Plan Sponsor was not a party to an abusive tax avoidance transaction. The compliance statement should not
be construed as affecting the rights of any party under any other law, including Title I of the Employee Retirement
Income Security Act of 1974.
This compliance statement is conditioned on (1) there being no misstatement or omission of material facts in
connection with the submission and (2) the completion of all corrections described in this compliance statement
within one hundred fifty (150) days of the date of the compliance statement.
The Service will treat the failure to adopt interim amendments or amendments for optional law changes, as
described in section 6.05(3)(a) of Rev. Proc. 2013-12 as if they had been adopted timely for the purpose of
making available the extended remedial amendment period currently set forth in Revenue Procedure 2007-
44, 2007-2 C.B. 54, or its successors. However, this compliance statement does not constitute a
determination as to whether any such plan amendments, as drafted, comply with the applicable changes in
qualification requirements.
With regard to failure #_______ relating to the 403(b) Plan failure to timely adopt a written plan, as
required under the final § 403(b) regulations and Notice 2009-3, the Service will treat the written plan as if
it had been adopted timely for the purposes of making available the extended remedial amendment period
set forth in Announcement 2009-89. However, this compliance statement does not constitute a
determination as to whether the written plan, as drafted, complies with the applicable requirements
associated with § 403(b) and the final § 403(b) regulations.
With regard to failure #_______ (provided that no modification has been made to either the plan
document or adoption agreement of the plan that would otherwise cause the employer to lose reliance on
the plan’s opinion or advisory letter), the corrective amendment will not cause the plan to lose its status as a
Master or Prototype plan or Volume Submitter plan and (provided that no modification has been made that
would otherwise affect the employer’s eligibility for the six-year remedial amendment cycle) the employer
will be allowed to remain within the six-year remedial amendment cycle described in Revenue Procedure
2007-44, 2007-2, on a continuing basis until the expiration of the next six-year remedial amendment cycle
as provided in section 18.01 of Rev. Proc. 2007-44, or, if different, the deadline announced by the Service,
as provided in section 18.03 of that revenue procedure. In addition, the issuance of this compliance
statement constitutes a determination of the effect of the corrective plan amendment on the qualification of
the plan, and a subsequent filing of a determination letter request on such amendment will not be required
until the expiration of the next six-year remedial amendment cycle.
129
Plan Name: __________________________________ EIN: _______________ Plan #: _____
The Service will not pursue the following on account of the qualification failure(s) described in this
submission:
Excise tax under Code section 4972.
Excise tax under Code section 4973.
Excise tax under Code section 4974.
Excise tax under Code section 4979.
With respect to the Overpayment failures described in this submission that were corrected by
removing improper distributions from the IRA(s) of the affected participant(s) and returning those
distributions to the plan, the Service will not pursue ______ % of the 10% additional income tax
under Code § 72(t).
With respect to the loan failure(s) described in this submission:
Loan(s) that are corrected in accordance with one of the methods described in section 6.07(2) or
6.07(3) of Rev. Proc. 2013-12: The Service will not require deemed distributions under Code
§ 72(p) to be reported on Form 1099-R with respect to the participant(s) affected by the failure(s),
and repayments made pursuant to the correction of such loan(s) will not result in an affected
participant having additional basis in the plan for the purpose of determining the tax treatment of
subsequent distributions from the plan to such participant(s).
Loan(s) that are not being corrected in accordance with one of the methods described in section
6.07(2) or 6.07(3) of Rev. Proc. 2013-12: The Service will require deemed distributions under
Code § 72(p) to be reported on Form 1099-R with respect to the participant(s) affected by the
failure(s). However, the plan will be permitted to report deemed distributions on Form 1099-R in
the year of correction, instead of the year of the failure.
Approved: _______________________________
Manager, Employee Plans Voluntary Compliance
Tax Exempt and Government Entities Division
Date: _______________________________
130
APPENDIX C PART II, SCHEDULE 1
Interim and Certain Discretionary Nonamender Failures
Plan Name: ___________________________ EIN: _______________ Plan #: ______
(Please include the plan name, Applicant’s EIN, and plan number on each page of the submission, including
attachments.)
Instructions
:
(1) This Schedule 1 can be used to report the correction of a failure to timely adopt good faith, interim
amendments, or discretionary amendments required because of the plan’s implementation of an optional
law change. Correction under this Schedule 1 results in the corrective amendment being treated as if it had
been timely adopted for purposes of determining the availability of the extended remedial amendment
period. Thus, a Plan Sponsor may use this Schedule 1 for the failure to adopt a required interim or
discretionary amendment ONLY if the corrective amendment was adopted before the expiration of the
plan’s extended remedial amendment period (as determined under Rev. Proc. 2007-44) for that amendment.
If the corrective amendment was adopted after the expiration of the extended remedial amendment period,
then the Plan Sponsor must use Appendix C Part II, Schedule 2.
(2) In accordance with (1) above, this Schedule 1 may be used to correct the failure to timely adopt a
discretionary amendment required because of the plan’s implementation of an optional law change. For
other failures to operate the plan in accordance with plan terms, do not use this Schedule 1.
(3) All corrective amendments must be properly identified. Separate signed and dated amendments should be
submitted. If the amendments are incorporated into a signed and dated restated document, the VCP
submission must specify the page and section of the document that contains the amendment.
SECTION I. IDENTIFICATION OF FAILURES
(1) Were the amendments used to correct the failures under this Schedule 1 adopted before the expiration of the
applicable extended remedial amendment period? Check applicable box and follow applicable instruction below:
YES
NO
If “Yes,” proceed to (2) of this Section 1.
If “No,” STOP - do NOT use this Schedule 1
. In cases where late or non-amender failures are corrected after the
expiration of the plan’s extended remedial amendment period, use Schedule 2.
(2) Were the amendments adopted to correct the failure to timely adopt interim amendments or amendments
required to implement optional law changes (see section 6.05(3)(a) of Rev. Proc. 2013-12)?
YES
NO
If “Yes,” proceed to (3) of this Section I.
If “No,” STOP - do NOT use this Schedule 1
131
Plan Name: ____________________________ EIN: __________ Plan #: ____
(3) The Plan Sponsor identified did not timely adopt amendments for the following:
(List each statutory, regulatory, or other requirement for which the Plan was not timely amended, and specify for
each such requirement the published cumulative list in which such requirement appears and the location of the
corrective amendment in the documents included with the VCP submission (for example, by amendment number
and paragraph number, or in the case of a restated plan, by page and section number). Do not use a general
statement referring only to a cumulative list or statute. For instance, the following description would not
be
acceptable: “All interim amendments associated with the 20XX cumulative list [or the Pension Protection Act of
2006 (PPA)] were not timely adopted.”)
Attach additional pages as needed. Label the attachment “Identification of Nonamender Failures” and include the
plan name, plan sponsor’s EIN and plan number on each page.)
SECTION II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
The Plan Sponsor has adopted amendments reflecting the items listed in Section I(3) of this Schedule 1. These
amendments are effective retroactive to the effective dates of the specific provisions contained in the amendments.
The signed and dated amendments have been enclosed with this submission.
SECTION III. CHANGE IN ADMINISTRATIVE PROCEDURES
The Applicant has taken the following step(s) to ensure that the failure(s) will not recur:
132
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION IV. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses copies of the signed and dated amendments used to correct the failure(s) identified in Part I of this Schedule
1.
APPENDIX C PART II, SCHEDULE 2
Nonamender Failures (other than those to which Schedule 1 applies) and Failure to Adopt
a 403(b) Plan Timely
Plan Name: __________________________________ EIN: _______________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number on each page of the submission.)
SECTION I. IDENTIFICATION OF FAILURES
A. Qualified Plans: The plan identified above was not amended to comply with the applicable provisions of the
following legislative and regulatory requirements by the applicable deadlines in accordance with § 401(b) and the
regulations thereunder:
The Employee Retirement Income Security Act of 1974 (ERISA)
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
The Deficit Reduction Act of 1984 (DEFRA)
The Retirement Equity Act of 1984 (REA)
The Tax Reform Act of 1986 (TRA ’86)
The Unemployment Compensation Amendments of 1992 (UCA)
The Omnibus Budget Reconciliation Act of 1993 (OBRA)
GUST (includes The Uruguay Round Agreements Act, the Uniformed Services Employment and
Reemployment Rights Act of 1994, the Small Business Job Protection Act of 1996, the Taxpayer
Relief Act of 1997, the Internal Revenue Service Restructuring and Reform Act of 1998, and the
Community Renewal Tax Relief Act of 2000)
The changes required by the Cumulative List for the plan’s last on-cycle year:
The changes required by the 2004 Cumulative List (Notice 2004-84, 2004-2 C.B. 1030)
for an eligible employer using a pre-approved defined contribution plan who failed to adopt the
pre-approved plan by 4/30/10, as required by Announcement 2008-23, 2008-1 C.B. 731.
The changes required by the 2005 Cumulative List (Notice 2005-101, 2005-2 C.B. 1219)
for Cycle A individually designed plans.
The changes required by the 2006 Cumulative List (Notice 2007-3, 2007-1 C.B. 255) for
Cycle B individually designed plans, and any eligible employer using a pre-approved defined
benefit plan who failed to adopt the pre-approved plan by 4/30/12, as required by Announcement
2010-20, 2010-15 I.R.B. 551.)
The changes required by the 2007 Cumulative List (Notice 2007-94, 2007-2 C.B. 1179)
for Cycle C individually designed plans.
The changes required by the 2008 Cumulative List (Notice 2008-108, 2008-50 I.R.B.
1275) for Cycle D individually designed plans.
The changes required by the 2009 Cumulative List (Notice 2009-98, 2009-52 I.R.B. 974)
for Cycle E individually designed plans.
The changes required by the 2010 Cumulative List (Notice 2010-90, 2010-52 I.R.B. 909)
for Cycle A individually designed plans.
The changes required by the 2011 Cumulative List (Notice 2011-97, 2011-52 I.R.B. 923)
for Cycle B individually designed plans.
The changes required by the 2012 Cumulative List (Notice 2012-76, 2012-52 I.R.B. 775)
for Cycle C individually designed plans.
Plan Name: ____________________________ EIN: __________ Plan #: ____
Amendments required as a condition for a favorable determination letter. If this item was selected
answer the following questions by checking the applicable boxes:
Is this the sole failure for the VCP submission?
Yes No
Were the amendments signed within three months of the expiration of the remedial
amendment period for adopting the amendments?
Yes No
Other (specify the legal requirement and applicable Cumulative List):
B. 403(b) Plan:
The Plan Sponsor did not timely adopt a written plan as required by the final 403(b) regulations and
Notice 2009-3, 2009-2 I.R.B. 250.
SECTION II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
A. Qualified Plan. The Plan Sponsor has adopted (or will adopt) amendments that satisfy the requirements of all
of the items checked in Section IA of this Appendix C Part II, Schedule 2, retroactively to the effective dates of the
specific provisions contained in the amendments. The amendments and restated plan documents (where applicable)
are enclosed with this submission.
B. 403(b) Plan. Failure to adopt a written plan timely. The Plan Sponsor has adopted a written plan retroactive to
the later of the effective date of the final 403(b) regulations or the initial effective date of the plan. A copy of the
signed and dated 403(b) plan is enclosed with this submission.
SECTION III. CHANGE IN ADMINISTRATIVE PROCEDURES
The Plan Sponsor has taken the following step(s) to ensure that the failure(s) will not recur:
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION IV. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following documents, as appropriate, with this submission:
Copies of all amendments used to correct the failure(s), either as adopted or in proposed form,
A copy of the plan document in effect prior to any of the amendments used to correct the failure(s),
A copy of the most recent determination letter issued with respect to the plan (if applicable),
If required by Section 6.05 of Rev. Proc. 2013-12,
a determination letter application (Form 5300, 5307, or 5310
along with Form 8717 and the applicable user fee payment made payable to the United States Treasury), or
For 403(b) Plans, a copy of the signed and dated 403(b) plan document.
APPENDIX C PART II, SCHEDULE 3
SEPs and SARSEPs
Plan Name: __________________________________ EIN: _______________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
Instructions: This Schedule 3 is available for Simplified Employee Pension plans (SEPs), including SEPs that
include salary reduction arrangements (i.e. Salary Reduction Simplified Employee Pension plans
(SARSEPs)).
SECTION I. IDENTIFICATION OF FAILURE(S) AND PROPOSED METHOD(S) OF CORRECTION
The following failure(s) occurred with respect to the plan identified above. Check the failure(s) that apply. Within
each failure, check applicable boxes, and provide the information requested:
A. Employer Eligibility Failure (SARSEPs only)
The Plan Sponsor was not eligible to sponsor a SARSEP because the plan was established on
______________________________________________________________________________ .
(Plan Sponsors were not permitted to establish SARSEPs after December 31, 1996.)
The plan was adopted by a Plan Sponsor who was (or subsequently became) ineligible to sponsor
a SARSEP under the requirements of § 408(k)(6) because the Plan Sponsor (and, if applicable its
related controlled group or affiliated service group employers) had more than 25 employees
(including leased employees, if applicable) during the following plan year(s):
_______________________________________________________________________________
The plan was adopted by a Plan Sponsor that became ineligible to sponsor a SARSEP under the
requirements of § 408(k)(6) because, in one or more plan year(s), fewer
than 50% of the
employees eligible to participate in the plan elected to make salary reduction contributions. The
failure occurred during the following plan year(s):
_______________________________________________________________________________
Description of Proposed Method of Correction
:
All contributions ceased as of __________________ (insert date beginning no later than the date this VCP
submission is filed with the Service). The Plan Sponsor will not permit any new salary reduction
contributions to the plan.
B. Failure to satisfy the deferral percentage test (SARSEPs only)
At least one highly compensated employee (“HCE”) deferred an amount which, as a percentage of
compensation, was more than 125% of the average deferral percentage (“ADP”) for all nonhighly
compensated employees (“NHCEs”) eligible to participate in the plan (§ 408(k)(6)(A)(iii)).
The total excess deferrals for each affected plan year were as follows:
Plan Name: ____________________________ EIN: __________ Plan #: ____
Year Excess Deferrals
Description of the Proposed Method of Correction
:
The Plan Sponsor has made (or will make) nonforfeitable contributions on behalf of all eligible NHCEs. Each
eligible NHCE will receive a contribution equal to a uniform percentage of compensation. The uniform percentage
is equal to the difference between the (1) ADP that would have been required for an HCE’s deferral percentage to
have passed the nondiscrimination test and (2) the actual ADP for NHCEs. (Example: In a particular plan year, an
HCE defers 10% of compensation. The ADP for NHCEs for the same plan year is 5% of compensation. However,
in order for the plan to pass the nondiscrimination test, the ADP should have been 8% of compensation. The
corrective contribution on behalf of each eligible NHCE will be equal to 3% of compensation.) The corrective
contribution made on behalf of each NHCE will also be adjusted for Earnings. Earnings will be calculated from the
last day of the plan year for which the failure occurred through the date of the corrective contribution. The
corrective contribution (adjusted for Earnings) will be made to each affected NHCE’s SARSEP IRA account. If an
affected employee does not have a SARSEP IRA account, a SARSEP IRA account will be established for that
employee. Earnings will be calculated for an affected NHCE’s account on the basis of one of the following methods
(check one):
Actual investment results of the affected NHCE’s SARSEP IRA account.
The interest rate incorporated in the Department of Labor’s Voluntary Fiduciary Correction Program
Online Calculator (“VFCP Online Calculator”) (http://www.dol.gov/ebsa/calculator/main.html), since the
actual Earnings of the affected NHCE’s SARSEP IRA account cannot be ascertained.
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online
Calculator for years in which the actual Earnings of the affected NHCE’s SARSEP IRA account cannot be
ascertained. The VFCP Online Calculator was or will be used for the following year(s):
______________________________________________________________________________________
Plan Name: ____________________________ EIN: __________ Plan #: ____
The total corrective contribution (before adjusting for Earnings) on behalf of the affected NHCEs for each plan year
is as follows:
Year Corrective Contribution
Former employees affected by the failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted, and
corrective contributions will be made to their SARSEP IRA accounts. To the extent that an affected former
employee or beneficiary cannot be located following a mailing to the last known address, the Plan Sponsor
will take the actions specified below to locate that employee or beneficiary:
After such actions are taken, if an affected employee or beneficiary is not found but is subsequently located
on a later date, the Plan Sponsor will make corrective contributions to the affected SARSEP IRA account at
that time.
C. Failure to Make Required Employer Contributions (SEPs or SARSEPs)
The Plan Sponsor failed to make employer contributions on behalf of eligible employees as required under
the terms of the plan.
The failure occurred on account of the erroneous exclusion of eligible employees.
Other (describe): _________________________________________________________________
_______________________________________________________________________________
The failure occurred for the following plan year(s): ____________________________________________
Plan Name: ____________________________ EIN: __________ Plan #: ____
Description of the Proposed Method of Correction
:
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected
employee. For each affected employee, the corrective contribution will be determined by calculating the
contribution the employee would have been entitled to under the terms of the plan and subtracting any contributions
already made on behalf of the participant for the plan year. The required contribution made on behalf of an affected
participant will be adjusted for Earnings. Earnings will be calculated from the last day of the plan year for which the
failure occurred through the date of the corrective contribution. The corrective contribution (adjusted for Earnings)
will be made to each affected employee’s SEP (or SARSEP, if applicable) IRA account. If an affected employee
does not have a SEP (or SARSEP, if applicable) IRA account, a SEP (or SARSEP, if applicable) account will be
established for that employee.
The total corrective contribution (before adjusting for Earnings) for each year is:
Year Corrective Contribution
Earnings will be calculated for an affected employee on the basis of the following method(s) (check one):
Actual investment results of the affected employee’s SEP or SARSEP IRA account.
The interest rate incorporated in the VFCP Online Calculator, since the actual Earnings of the affected
employee’s IRA account cannot be ascertained.
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online
Calculator for years in which the actual Earnings of the affected employee’s IRA cannot be ascertained.
The VFCP Online Calculator was or will be used for the following year(s):
______________________________________________________________________________________
Plan Name: ____________________________ EIN: __________ Plan #: ____
Former employees affected by the failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted, and
corrective contributions will be made to their SEP or SARSEP IRA accounts. To the extent that an affected
former employee or beneficiary cannot be located following a mailing to the last known address, the Plan
Sponsor will take the actions specified below to locate that employee or beneficiary:
After such actions are taken, if an affected employee or beneficiary is not found but is subsequently located
on a later date, the Plan Sponsor will make corrective contributions to the affected SEP or SARSEP IRA
account at that time.
D. Failure to provide eligible employees with the opportunity to make elective deferrals (SARSEPs only)
The plan did not provide employee(s) who satisfied the applicable eligibility requirements with the opportunity to
make elective deferrals to the SARSEP. The failure occurred for the following plan year(s):
Description of the Proposed Method of Correction
:
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected
employee. The corrective contribution will be made to compensate the affected employee(s) for the missed deferral
opportunity. The corrective contribution on behalf of each affected employee is equal to 50% of what the
employee’s deferral might have been had he or she been provided with the opportunity to make elective deferrals to
the plan. Since the employee’s deferral decision is not known, the deferral amount is estimated by determining the
average of the deferral percentages for the employee’s group (highly compensated or nonhighly compensated).
(Example: N, an NHCE, was erroneously excluded from the plan. During the year of exclusion, N made $10,000 in
compensation. The average of the deferral percentages for other NHCEs who were provided with the opportunity to
make elective deferrals was 5%. N’s missed deferral is estimated to be: 5% times $10,000 or $500. The required
corrective contribution on behalf of N, before adjusting for Earnings, is 50% of $500 or $250.)
Plan Name: ____________________________ EIN: __________ Plan #: ____
The total corrective contribution (before adjusting for Earnings) on behalf of the affected NHCEs for each plan year
is as follows:
Year Corrective Contribution
The corrective contribution made on behalf of each affected employee will also be adjusted for Earnings. Earnings
will be calculated from the date(s) that the contribution(s) should have been made through the date of the corrective
contribution. The corrective contribution (adjusted for Earnings) will be made to each affected employee’s
SARSEP IRA account. If an affected employee does not have a SARSEP IRA account, a SARSEP IRA account
will be established for that employee. Earnings will be calculated on the basis of one of the following methods
(check one):
Actual investment results of the affected employee’s SARSEP IRA account.
The interest rate incorporated in the VFCP Online Calculator, since the actual Earnings of the affected
employee’s IRA account cannot be ascertained.
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online
Calculator for years in which the actual Earnings of the affected employee’s IRA account cannot be
ascertained. The VFCP Online Calculator was or will be used for the following year(s):
______________________________________________________________________________________
Former employees affected by the failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted, and
corrective contributions will be made to their SARSEP IRA accounts. To the extent that an affected former
employee or beneficiary cannot be located following a mailing to the last known address, the Plan Sponsor
will take the actions specified below to locate that employee or beneficiary:
After such actions are taken, if an affected employee or beneficiary is not found but is subsequently located
on a later date, the Plan Sponsor will make corrective contributions to the affected SEP or SARSEP IRA
account at that time.
Plan Name: ____________________________ EIN: __________ Plan #: ____
E. Excess Amounts Contributed
The Plan Sponsor contributed Excess Amounts to the Plan on behalf of participants as follows:
(check boxes that apply)
Amounts were contributed in excess of the benefit the participants were entitled to under the plan.
SARSEP only: Elective deferrals were contributed to the SARSEP in excess of the limitation
under the terms of the SARSEP (e.g., the lesser of 25% of compensation or the applicable limit
under § 402(g)).
The total of the Excess Amounts for each affected plan year was as follows:
Year Excess Amounts
Number of Participants
Affected
Description of the Proposed Method of Correction
(check all correction methods that apply)
Distribution of Excess Elective Deferrals (SARSEPs only)
The Plan Sponsor has effected (or will effect) a corrective distribution of the Excess Amounts, adjusted for
Earnings through the date of correction, to the affected participant(s). The Earnings adjustment will be
based on the actual rates of return of the participant’s SARSEP IRA account from the date(s) that the
excess deferrals were made through the date of correction.
Affected participants were (or will be) informed that the corrective distribution of an Excess Amount is not
eligible for favorable tax treatment accorded to distributions from a SARSEP and, specifically, is not
eligible for tax-free rollover.
Plan Name: ____________________________ EIN: __________ Plan #: ____
The total corrective distribution (before adjusting for Earnings) for each affected year is as follows:
Year Corrective Distribution
Number of Participants
Affected
Distribution of Excess Employer Contributions
The Plan Sponsor has effected (or will effect) the return of excess employer contributions, adjusted for
Earnings through the date of correction, to the Plan Sponsor. The Earnings adjustment will be based on the
actual rates of return of the SEP or SARSEP from the date(s) that the excess employer contributions were
made through the date of correction. The amount returned to the Plan Sponsor is not includible in the gross
income of the affected participant(s). The Plan Sponsor is not entitled to a deduction for such excess
employer contributions. The amount returned is reported on Form 1099-R as a distribution issued to the
affected participant(s), indicating the taxable amount as zero.
The amount to be returned to the Plan Sponsor (before adjusting for Earnings) for each affected year is as
follows:
Year
Return of Excess Employer
Contributions
Number of Participants
Affected
Plan Name: ____________________________ EIN: __________ Plan #: ____
Retention of Excess Amounts
Note: If this correction method is selected, an additional VCP fee is required. (See section 12.06(2) of Rev.
Proc. 2013-12.)
The Excess Amounts (including Earnings) were retained in the SARSEP or SEP IRA accounts of
the affected participants as follows:
Year Excess Amounts Retained
Number of Participants
Affected
The Earnings adjustment will be based on the actual rates of return of the SEP or SARSEP from the date(s)
that the excess employer contributions were made through the date of correction.
Excess Amounts of $100 or less. (See section 6.02(5)(e) of Rev. Proc. 2013-12.)
For one or more participants, the total Excess Amount (employer contributions and/or elective
deferrals before adjusting for Earnings) is $100 or less. The Excess Amount will not be
distributed.
SECTION II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be
implemented to ensure that the same failures will not recur.
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION III. REQUEST(S) FOR EXCISE TAX RELIEF
(check applicable boxes)
Excise tax pursuant to § 4979. The Applicant requests that the Service not pursue the excise tax under
§ 4979. (This applies only to failures to satisfy the nondiscrimination test for elective deferrals. See
section 6.09(4) of Rev. Proc. 2013-12 for an example of a situation where a request for relief under § 4979
would be considered. Please enclose a written explanation in support of your request for relief from this
excise tax.)
Excise tax pursuant to § 4972. The Applicant requests that the Service not pursue the excise tax under
§ 4972. (This applies to situations where corrective contributions made in accordance with this submission
would be nondeductible contributions for the year of correction and thus would be subject to the excise tax
under § 4972. See section 6.09(3) of Rev. Proc. 2013-12. Please enclose a written explanation in support
of your request for relief from this excise tax.)
SECTION IV. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following with this submission:
• The applicable plan document. (This could be an IRS form document, such as a Form 5305-SEP or 5305A-
SEP, or a prototype plan document developed by a financial institution. If a prototype plan document is
used, include a copy of the most recent favorable opinion letter issued for such plan document).
• A written explanation of how and why the failure(s) described in this submission occurred, including a
description of the administrative procedures applicable to the failure(s) in effect at the time the failure(s)
occurred.
• For failures that involve corrective contributions or corrective distributions, a description of assumptions
and supporting calculations used to determine the amounts needed for correction:
1) For failures to satisfy the nondiscrimination test for elective deferrals, computations in support of
the proposed correction including:
a) The determination of HCEs and NHCEs,
b) The deferral percentages of individual employees and the applicable ADP calculations,
c) The determination of corrective contributions on behalf of NHCEs to correct the ADP
test, and,
d) Calculations showing how the Earnings adjustment and the ultimate corrective
contribution on behalf of affected employees will be determined. (Please use estimates,
including an estimated correction date, if corrective distributions have not been made
yet.)
2) For failures to make required employer contributions and for failures to provide eligible
employees with the opportunity to make elective deferrals:
a) Computations in support of the corrective contribution amounts attributable to each
participant. In the case of a failure to provide eligible employees with the opportunity to
make elective deferrals, please include computations showing how the average deferral
percentage, missed deferral, and corrective contribution amount was determined.,
b) Calculations showing how the Earnings adjustment and the ultimate corrective
contribution on behalf of affected employees will be determined.
Plan Name: ____________________________ EIN: __________ Plan #: ____
3) For failures involving the contribution of Excess Amounts:
a) Computations in support of the excess contribution amounts attributable to each
participant; and
b) Calculations showing how the Earnings adjustment and the ultimate corrective
distribution amounts are determined. (Please use estimates, including an estimated
correction date, if corrective distributions have not been made yet.)
• Explanations in support of requests for excise tax relief.
• Any other information that would be useful for the purpose of understanding the proposals made under the
submission.
APPENDIX C PART II, SCHEDULE 4
SIMPLE IRAs
Plan Name: _________________________________ EIN: ________________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
SECTION I. IDENTIFICATION OF FAILURE(S) AND PROPOSED METHOD(S) OF CORRECTION
The following failure(s) occurred with respect to the SIMPLE IRA Plan identified above: (Check failure(s) that
apply. Within each failure, check applicable boxes, and provide the information requested.)
A. Employer Eligibility Failure
The plan was adopted by a Plan Sponsor who was (or subsequently became) ineligible to sponsor
a SIMPLE IRA Plan under the requirements of § 408(p) because the Plan Sponsor (and, if
applicable, its related controlled group or affiliated service group employers) had more than 100
employees (including leased employees, if applicable) who earned $5,000 or more in
compensation during the following plan year(s):
_______________________________________________________________________________
The plan was adopted by a Plan Sponsor who was not eligible to sponsor a SIMPLE IRA Plan
under the requirements of § 408(p) because the Plan Sponsor established or maintained a Qualified
Plan with respect to which contributions were made (or under which benefits were accrued) during
any plan year of the SIMPLE IRA Plan. The failure occurred during the following plan year(s):
_______________________________________________________________________________
Description of the Proposed Method of Correction
:
All contributions to the plan ceased as of _____________ (insert a date no later than the date this
VCP submission is filed with the Service). The Plan Sponsor will not permit any new employer or
salary reduction contributions to be made to the plan.
B. Failure to Make Required Employer Contributions
The Plan Sponsor failed to make employer contributions on behalf of eligible employees as required under
the terms of the plan.
The failure occurred on account of the erroneous exclusion of eligible employees
Other (describe):
_______________________________________________________________________________
_______________________________________________________________________________
The failure occurred for the following plan years:______________________________________________
For the applicable plan years, the provisions of the plan document required the Plan Sponsor to make
employer contributions based on the following formula:
2% nonelective contribution on behalf of each eligible employee who earned at least $5,000 in
compensation for the year.
Plan Name: ____________________________ EIN: __________ Plan #: ____
Matching contribution on behalf of each eligible employee equal to deferrals up to 3% of
compensation.
Grace period applied. The plan provided for a matching contribution on behalf of each eligible
employee equal to deferrals up to ____________% of compensation.
(Note: If the failure occurred for multiple plan years and different employer contribution criteria applied
during those years, check the applicable box, and indicate the plan years for which the formula applied.)
Description of the Proposed Method of Correction
:
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each
affected employee. For each affected employee, the corrective contribution will be determined by
calculating the contribution the employee would have been entitled to receive under the terms of the plan
and subtracting any contributions already made on behalf of the employee for the plan year. The corrective
contribution made on behalf of an affected employee will be adjusted for Earnings. Earnings will be
calculated from the last day of the plan year for which the failure occurred through the date of the
corrective contribution. The corrective contribution (adjusted for Earnings) will be made to each affected
employee’s SIMPLE IRA account. If an affected employee does not have a SIMPLE IRA account, an
account will be established for that employee.
If the plan did not provide eligible employees with the opportunity to make elective deferrals and the plan
provides for matching contributions, the corrective matching contribution will be based on the assumption
that the eligible employee would have made an elective deferral equal to 3% of compensation.
The total corrective contribution (before adjusting for Earnings) for each plan year is:
Year Corrective Contribution
The Earnings calculation for an affected employee will be based on one of the following method(s)
(check one):
Actual investment results of the affected employee’s SIMPLE IRA account.
The interest rate incorporated in the Department of Labor’s Voluntary Fiduciary Correction
Program Online Calculator (“VFCP Online Calculator”)
(http://www.dol.gov/ebsa/calculator/main.html), since the actual Earnings of the affected
employee’s IRA account cannot be ascertained.
Actual investment results for years in which data for the affected employee is available, and the
rate incorporated in the VFCP Online Calculator for years in which the actual investment results
of the affected employee’s IRA account cannot be ascertained. The VFCP Online Calculator was
or will be used for the following year(s):
_______________________________________________________________________________
Plan Name: ____________________________ EIN: __________ Plan #: ____
Former employees affected by the failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted,
and corrective contributions will be made to their SIMPLE IRA accounts. To the extent that an
affected former employee or beneficiary cannot be located following a mailing to the last known
address, the Plan Sponsor will take the actions specified below to locate that employee or
beneficiary:
After such actions are taken, if an affected employee or beneficiary is not found but is
subsequently located on a later date, the Plan Sponsor will make corrective contributions to the
affected SIMPLE IRA account at that time.
C. Failure to provide eligible employees with the opportunity to make elective deferrals
The Plan Sponsor did not provide employee(s) who satisfied the applicable eligibility requirements with the
opportunity to make elective deferrals to the SIMPLE IRA plan. The failure occurred for the following
plan year(s):
_____________________________________________________________________________________.
Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each
affected employee. The corrective contribution will be made to compensate the affected employee(s) for
the missed deferral opportunity. The corrective contribution on behalf of each affected employee is equal
to 50% of what the employee’s deferral might have been had he or she been provided with the opportunity
to make elective deferrals to the plan. Since the employee’s deferral decision is not known, the deferral
amount is estimated by assuming that the excluded employee would have made an elective deferral equal to
3% of his or her compensation. (Example: N, a nonhighly compensated employee was erroneously
excluded from the plan. During the year of exclusion, N made $10,000 in compensation. N’s missed
deferral is estimated to be: 3% times $10,000 or $300. The required corrective contribution on behalf of N,
before adjusting for Earnings, is 50% of $300 or $150). Thus, the required corrective contribution for an
employee who was erroneously excluded from making elective deferrals from a SIMPLE IRA Plan is equal
to 1.5% of compensation (adjusted for Earnings).
Plan Name: ____________________________ EIN: __________ Plan #: ____
The total corrective contribution (before adjusting for Earnings) on behalf of the affected employees for
each plan year is as follows:
Year Corrective contribution
The corrective contribution made on behalf of each affected employee will also be adjusted for Earnings.
Earnings will be calculated from the date(s) that the contribution(s) should have been made through the
date of the corrective contribution. The corrective contribution (adjusted for Earnings) will be made to
each affected employee’s SIMPLE IRA account. If an affected employee does not have a SIMPLE IRA
account, a SIMPLE IRA account will be established for that employee. Earnings will be calculated on the
basis of one of the following methods (check one):
Actual investment results of the affected employee’s SIMPLE IRA account.
The interest rate incorporated in the VFCP Online Calculator, since the actual Earnings of the
affected employee’s IRA account cannot be ascertained.
Actual investment results for years in which data for the affected employee is available, and the
rate incorporated in the VFCP Online Calculator for years in which the actual investment results
of the affected employee’s IRA account cannot be ascertained. The VFCP Online Calculator was
or will be used for the following year(s):
_______________________________________________________________________________
Plan Name: ____________________________ EIN: __________ Plan #: ____
Former employees affected by the failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted,
and corrective contributions will be made to their SIMPLE IRA accounts. To the extent that an
affected former employee or beneficiary cannot be located following a mailing to the last known
address, the Plan Sponsor will take the actions specified below to locate that employee or
beneficiary:
After such actions are taken, if an affected employee or beneficiary is not found but is
subsequently located on a later date, the Plan Sponsor will make a corrective contribution to the
affected SIMPLE IRA account at that time.
D. Excess Amounts Contributed
The Plan Sponsor contributed Excess Amounts to the plan on behalf of participants as follows:
(check boxes that apply)
Amounts were contributed in excess of the benefit the participants were entitled to under the plan.
Elective deferrals were made to the SIMPLE IRA in excess of the limitation under the terms of the
SIMPLE IRA (e.g., the applicable limit under § 408(p)(2)(E)).
The total of the Excess Amounts for each affected plan year was as follows:
Year Excess Amounts Number of Participants Affected
Plan Name: ____________________________ EIN: __________ Plan #: ____
Description of the Proposed Method of Correction
:
(check all correction methods that apply)
Distribution of Excess Elective Deferrals
The Plan Sponsor has effected (or will effect) a distribution of the Excess Amounts, adjusted for Earnings
through the date of correction, to the affected participant(s). The Earnings adjustment will be based on the
actual rates of return of the participant’s SIMPLE IRA account from the date(s) that the excess deferrals
were made through the date of correction.
Affected participants were (or will be) informed that the distribution of an Excess Amount is not eligible
for favorable tax treatment accorded to distributions from a SIMPLE IRA and, specifically, is not eligible
for tax-free rollover.
The total corrective distribution (before adjusting for Earnings) for each affected plan year is as follows:
Year Corrective Distribution
Number of Participants
Affected
Distribution of Excess Employer Contributions
The Plan Sponsor has effected (or will effect) the return of excess employer contributions, adjusted for
Earnings through the date of correction, to the Plan Sponsor. The Earnings adjustment will be based on the
actual rates of return on the affected participants’ SIMPLE IRA accounts from the date(s) that the excess
employer contributions were made through the date of correction. The amount returned to the Plan Sponsor
is not includible in the gross income of the affected participant(s). The Plan Sponsor is not entitled to a
deduction for such excess employer contributions. The amount returned is reported on Form 1099-R as a
distribution issued to the affected participant(s), indicating the taxable amount as zero.
Plan Name: ____________________________ EIN: __________ Plan #: ____
The return of the excess employer contributions (before adjusting for Earnings) for each affected plan year
is as follows:
Year Return of Excess Employer Contributions
Number of Participants
Affected
Retention of Excess Amounts
Note: If this correction method is selected, an additional VCP fee is required. (See section 12.06(2) of Rev.
Proc. 2013-12.)
The Excess Amounts (including Earnings) were retained in the SIMPLE IRA accounts of the
affected participants as follows:
Year Excess Amounts Retained
Number of Participants
Affected
The Earnings adjustment will be based on the actual rates of return of the SIMPLE IRA from the date(s)
that the excess employer contributions were made through the date of correction.
Excess Amounts of $100 or less (See section 6.02(5)(e) of Rev. Proc. 2013-12.)
For one or more participants, the total Excess Amount (employer contributions and/or elective deferrals
before adjusting for Earnings) is $100 or less. The Excess Amount will not be distributed.
Plan Name: ____________________________ EIN: __________ Plan #: ____
Former employees affected by the Excess Amounts failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted,
and corrective contributions will be made to their SIMPLE IRA accounts. To the extent that an
affected former employee or beneficiary cannot be located following a mailing to the last known
address, the Plan Sponsor will take the actions specified below to locate that employee or
beneficiary.
After such actions are taken, if an affected employee or beneficiary is not found but is
subsequently located on a later date, the Plan Sponsor will make corrective contributions to the
affected SIMPLE IRA account at that time.
SECTION II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be
implemented to ensure that the same failures will not recur.
SECTION III. REQUEST(S) FOR EXCISE TAX RELIEF
(check if applicable)
Excise tax pursuant to § 4972. The Plan Sponsor requests that the Service not pursue the excise tax under
§ 4972. (This applies to situations where corrective contributions made in accordance with this submission
would be nondeductible contributions for the year of correction and subject to the excise tax under § 4972.
See section 6.09(3) of Rev. Proc. 2013-12. Please enclose a written explanation in support of your request
for relief from this excise tax.)
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION IV. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following with this submission:
• The applicable plan document. (This could be an IRS form document, such as a 5305-SIMPLE or 5304
SIMPLE, or a prototype document developed by a financial institution. If a prototype plan document is
used, please send a copy of the most recent opinion letter issued with respect to such plan document.)
• A written explanation of how and why the failure(s) described in this submission occurred, including a
description of the administrative procedures applicable to the failure(s) in effect at the time the failure(s)
occurred.
• For failures that involve corrective contributions or corrective distributions, a description of assumptions
and supporting calculations used to determine the amount needed for correction:
1) For failures to make required employer contributions and for failures to provide eligible
employees with the opportunity to make elective deferrals:
a) Computations in support of the corrective contribution amounts attributable to each
participant. In the case of a failure to provide eligible employees with the opportunity to
make elective deferrals, please include computations showing how the average deferral
percentage, missed deferral, and corrective contribution amount were determined.
b) Calculations showing how the Earnings adjustment and the ultimate corrective
contribution on behalf of affected employees will be determined. (Please use estimates,
including an estimated correction date, if corrective contributions have not been made
yet.)
2) For failures involving the contribution of Excess Amounts:
a) Computations in support of the excess contribution amounts attributable to each
participant.
b) Calculations showing how the Earnings adjustment and the ultimate corrective
distribution amounts are determined. (Please use estimates, including an estimated
correction date, if corrective distributions have not been made yet.)
• Explanations in support of requests for excise tax relief.
• Any other information that would be useful for the purpose of understanding the proposals made under the
submission.
APPENDIX C PART II, SCHEDULE 5
Plan Loan Failures
(Qualified Plans and 403(b) Plans)
Plan Name: __________________________________ EIN: _______________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
SECTION I. IDENTIFICATION OF FAILURE
The plan identified above did not comply with the requirements of § 72(p)(2) of the Internal Revenue Code. (Note:
The conditions of § 72(p)(2) must be satisfied for a participant loan to be exempt from being treated as a distribution
to the participant under § 72(p)(1).) The failure occurred for the following reason(s) (check applicable boxes and
provide the information requested):
A. The loan(s) exceeded the limit under § 72(p)(2)(A)
Plan Year
Number of participants affected
Total number of
loans issued that violated
§ 72(p)(2)(A)
B. Loan terms did not satisfy the limits on the duration of the loan under § 72(p)(2)(B)
Plan Year
Number of participants affected Total number of loans issued that
violated § 72(p)(2)(B)
Plan Name: ____________________________ EIN: __________ Plan #: ____
C. Loan terms did not satisfy § 72(p)(2)(C) relating to the frequency and amortization of payments
Plan Year
Number of participants affected Total number of loans issued that
violated § 72(p)(2)(C)
D. Defaulted loan(s) (where the loan terms satisfied the requirements of § 72(p)(2), but default(s) occurred
because loan payments were not made in accordance with the terms of the loan)
Plan Year of loan defaults
Number of participants affected Total number of
loans in default
SECTION II. ELIGIBILITY FOR USE OF APPENDIX C, SCHEDULE 5
Yes No
A.
Is any affected participant either a key employee (as defined in § 416(i)(1)) or an owner-employee
(as defined in § 401(c)(3))?
If “Yes,” proceed to Section II B
.
If “No,” skip Section II B and proceed to Section II C
.
Plan Name: ____________________________ EIN: __________ Plan #: ____
Yes No
B.
Is the purpose of this request limited to permitting the Plan Sponsor to report the loan as a deemed
distribution in the year of correction instead of the year of the failure?
If “Yes,” complete Section III and then proceed directly to Section IV D
. (Sections IV A, B, and
C do not apply.)
If “No,” STOP - do NOT use this schedule
. Any request for relief should be made by filing a
detailed written attachment describing the relief requested and the reasons why such relief should
be granted..
Yes No
C.
Will correction be completed before the maximum period for repayment of the loan (pursuant to
§ 72(p)(2)(B)) has expired? (Note: The maximum period is determined from the original date of the loan.
Generally, this period is five years from the original date of the loan, except for home loans
as described in § 72(p)(2)(B)(ii).)
If ”Yes,” and the Plan Sponsor wants relief from reporting the loan as a deemed distribution,
complete Section III and then answer applicable questions in Sections IV
A through IV C
.
If “No,” complete Section III and then proceed to Section IV D
.
SECTION III. EXPLANATION OF HOW AND WHY THE PLAN LOAN FAILURES OCCURRED
SECTION IV. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
If the Plan Sponsor is requesting relief from reporting loans as deemed distributions, then complete Sections
IV A, B, or C, as applicable.
If the Plan Sponsor is only requesting postponement of reporting loans as deemed distributions on Form
1099-R, then proceed directly to Section IV D.
A. Correction for Loans in Excess of § 72(p)(2)(A):
Any participant affected by this failure will make a corrective repayment to the plan. After repaying the excess of
the loan amount over the maximum loan amount under § 72(p)(2)(A) (the “excess loan amount”), the remaining
balance of the loan will be repaid over the remaining period of the original loan (not beyond the period permitted
under § 72(p)(2)(B), determined from the original date of the loan) in a manner that complies with the frequency and
level payment requirements of § 72(p)(2)(C). The excess loan amount that will be repaid by the participant is
determined based on how previously made payments have been applied to the loan. The previous loan payments
were applied as follows (check applicable box, and complete necessary information)
Plan Name: ____________________________ EIN: __________ Plan #: ____
Prior loan payments were made in accordance with an amortization schedule that complied with the
requirements of § 72(p)(2)(B) relating to the terms of the loan and § 72(p)(2)(C) relating to frequency, and
level loan payments. For the purpose of determining the excess loan amount and the remaining outstanding
amount of the loan to be repaid over the remaining period of the loan, the previously made loan payments
will be applied as follows (check box that applies)
1. Solely to reduce the portion of the loan that did not exceed the maximum loan amount under
§ 72(p)(2)(A). Result: The corrective repayment would equal the excess loan amount
plus interest thereon.
2. To reduce the excess loan amount to the extent of the interest thereon, with the remainder of the
repayments applied to reduce the portion of the loan that did not exceed the maximum loan
amount under § 72(p)(2)(A). Result: The corrective repayment would equal the excess loan
amount.
3. Pro rata against the excess loan amount and the maximum loan amount under § 72(p)(2)(A).
Result: The corrective repayment would equal the outstanding balance remaining on the excess
loan amount on the date that corrective repayment is made.
Prior loan payments were not made in accordance with an amortization schedule that complied with the
requirements of § 72(p)(2)(B) or (C):
Methodology for determining the excess loan amount that will be repaid and the remaining outstanding
balance of the loan that will be amortized over the remaining period of the loan:
After the corrective repayment is made:
(Check one of the two options listed below)
.
Option 1: The remaining loan balance will be repaid according to the original amortization
schedule. (This option is available only if the original amortization schedule would result
in the loan being repaid within the maximum period permitted under § 72(p)(2)(B)
determined from the original date of the loan.)
Option 2: The loan will be reformed to amortize the remaining principal balance as of the date of
repayment over the remaining period of the original loan, provided that the recalculated
payments over the remaining period comply with the requirements of § 72(p)(2)(B)
determined from the original date of the loan.
Plan Name: ____________________________ EIN: __________ Plan #: ____
B. Correction for loans with terms that: (i) provided for a repayment period that exceeded the period
permitted under § 72(p)(2)(B) and/or (ii) provided for payments that did not provide for
substantially level amortization with payments not less frequently than quarterly, as provided under
§ 72(p)(2)(C)
:
(check the box that applies)
1. The loan balance will be reamortized with payments made on a substantially level basis (per
§ 72(p)(2)(C)), made at least quarterly.
2 The reamortized loan balance will be paid over a remaining period that does not extend beyond
five years from the date of the original loan (per § 72(p)(2)(B)).
C. Correction for defaulted loans with terms that complied with the requirements of § 72(p)(2)(A), (B),
and (C)
:
(check the box that applies)
1. A lump sum repayment will be made to the plan in an amount equal to the additional repayments
that the affected participant would have made to the plan if there had been no failure to repay the
plan, plus interest accrued on the missed repayments.
2. The outstanding balance of the loan, including accrued interest, will be reamortized over a
remaining period that does not extend beyond five years from the date of the original loan.
3. The Applicant will use a combination of the methods described in #1 and #2 above, as follows:
Determination of Interest Accrued on Missed Repayments:
(check the box that applies)
Plan loan rate [insert rate]
Rate of return of investments under plan [insert rate]
Note: This option may only be used if the rate of investment return under the plan equals or exceeds the
plan loan rate.
Plan Name: ____________________________ EIN: __________ Plan #: ____
The interest rate for missed payments was determined as follows:
The additional unpaid interest (
will be / has been (check one)) paid by the: (check the box that
applies)
Plan Sponsor
Affected participants
(Note
: Irrespective of the Plan Sponsor’s election to have the affected participants pay the unpaid interest,
in accordance with section 6.02(6) of Rev. Proc. 2013-12, the Service may, based on the facts and
circumstances, determine that the Plan Sponsor should pay all or a portion of the additional unpaid interest.
If the Service makes this determination, the Plan Sponsor will be requested to revise this submission.)
D. Correction for Deemed Distributions
(check if applicable)
The Plan Sponsor is not eligible to or will not correct in accordance with Parts IV A through IV C
of this Appendix C, Part II Schedule 5. The Plan Sponsor proposes that the loans be reported as
deemed distributions (using Form 1099 R) for the year of correction instead of the year of the
failure. The Plan Sponsor shall pay any applicable income tax withholding amount that was
required to be paid in connection with the failure. (See Income Tax Regulations § 1.72(p)-1,
Q&A-15.)
SECTION V. DESCRIPTION OF STEPS TAKEN TO ENSURE THAT THE FAILURE DOES NOT
RECUR
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION VI. REQUEST FOR RELIEF
Yes No
The Plan Sponsor requests relief from reporting participant loans as deemed distributions.
The Plan Sponsor requests that the plan be permitted to report the participant loans as deemed
distributions in the year of correction instead of the year of the failure.
SECTION VII. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following with this submission:
• Loan amortization schedules for affected participants. (A sample representation may be provided if there
are multiple participants affected.)
• 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 (e.g.,
for a failure with respect to a loan that exceeds the maximum amount permitted by § 72(p)(2)(A), the
calculations must include the amounts of the excess loan amounts that will be repaid to the plan,
determination of the outstanding loan balance, and the proposed method of repayment of the outstanding
loan balance; for the correction of a defaulted loan, the enclosure should set forth the periods of such loan
defaults.)
- 163 -
APPENDIX C PART II, SCHEDULE 6
Employer Eligibility Failure (§ 401(k) and 403(b) Plans only)
Plan Name: __________________________________ EIN: ________________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
SECTION I. IDENTIFICATION OF FAILURE
The following failure occurred with respect to the plan identified above (check failure that applies)
403(b) Plans
The plan was intended to satisfy the requirements of § 403(b) but was adopted by a Plan Sponsor that was
not a tax-exempt organization described in § 501(c)(3) or a public educational organization described in
§ 170(b)(1)(A)(ii).
The type of organization sponsoring the Plan during the period of the failure was:
_____________________________________________________________________________________
The failure occurred during the following plan year(s): _________________________________________
Section 401(k) Plans
The plan was intended to include a qualified cash or deferred arrangement and satisfy the requirements of
§§ 401(a) and 401(k) but was adopted by an employer that failed to meet the eligibility requirements to
establish a § 401(k) Plan.
Describe why the employer was ineligible to maintain the § 401(k) plan:
SECTION II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
Section 403(b) Plans
1. All contributions under the plan ceased as of_________________. (Insert date beginning no later
than the date the VCP submission was filed with the Service.)
2. No new employee or employer contributions will be permitted in the future.
3. The assets in the plan will remain in the trust, annuity contract, or custodial account and will be
distributed no earlier than the occurrence of one of the permitted events under § 403(b)(7) or
§ 403(b)(11).
- 164 -
Plan Name: ____________________________ EIN: __________ Plan #: ____
Section 401(k) Plans
1. All contributions under the plan ceased as of_________________. (Insert date beginning no later
than the date the VCP submission was filed with the Service.)
2. No new employee or employer contributions will be permitted in the future.
3. The assets in the plan will remain in the trust, annuity contract, or custodial account and will be
distributed no earlier than the occurrence of one of the permitted events under § 401(k).
SECTION III. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be
implemented to ensure that the same failures will not recur.
- 165 -
APPENDIX C PART II, SCHEDULE 7
Failure to Distribute Elective Deferrals in Excess of the § 402(g) Limit
Plan Name: _________________________________ EIN: ________________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
SECTION I. IDENTIFICATION OF FAILURE
Calendar Years
(Year of Deferral)
Number of Affected
Participants
Amount of Excess Deferrals
Distributed (excluding Earnings)
SECTION II. DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
The plan will distribute the excess deferral to the employee(s) and report the amount as taxable in the year of
deferral and in the year distributed. In accordance with Income Tax Regulations § 1.402(g)-1(e)(1)(ii), a distribution
to a highly compensated employee is included in the Average Deferral Percentage (ADP) test; however, a
distribution to a nonhighly compensated employee is not included in the ADP test.
For any distributions attributable to elective deferrals designated as Roth Contributions, all distributions will be
reported as taxable in the year distributed. Designated Roth contributions will have already been included in income
in the year of deferral.
The excess deferral to be distributed will also be adjusted for Earnings. Earnings will be determined from the end of
the year in which the failure occurred through the year of correction. Earnings will be included in the distribution
amount that is to be reported as taxable in the year of distribution.
- 166 -
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION III. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be
implemented to ensure that the same failures will not recur.
SECTION IV. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following with this submission:
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.)
APPENDIX C PART II, SCHEDULE 8
Failure to Pay Required Minimum Distributions Timely under § 401(a)(9)
Plan Name: _________________________________ EIN: ________________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
SECTION I. IDENTIFICATION OF FAILURE
Calendar Years
Number of Affected
Participants
Total Amount of Missed Required
Minimum Distributions
SECTION II. DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
Defined Contribution plan only - The plan will distribute the required minimum distributions (with
Earnings from the date of the failure to the date of distribution) to affected participants. For each affected
participant, the amount to be distributed for each year in which the failure occurred will be determined by
dividing the adjusted account balance on the applicable valuation 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-3 of the Income Tax Regulations, reduced by the amount of the total missed
minimum distributions for prior years.
Defined Benefit plan only - The plan will distribute the required minimum distributions plus an interest
payment representing the loss of use of such amounts. The interest adjustment is determined as follows:
167
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION III. REQUEST FOR RELIEF
A.
The Applicant requests relief with regard to excise taxes under § 4974
Yes No
At least one affected participant is either an owner-employee (see § 401(c)(3)) or, if the Plan
Sponsor is a corporation, a 10 percent owner of such corporation.
If “Yes,” the Applicant submits the following explanation for its request for relief from the § 4974 excise tax:
SECTION IV. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be
implemented to ensure that the same failures will not recur.
SECTION V. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following with this submission:
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 a defined benefit
plan, these specific calculations must illustrate the interest rate used to represent the loss of the use of the missed
required minimum distributions.)
168
APPENDIX C PART II, SCHEDULE 9
Correction by Plan Amendment (in accordance with Appendix B)
Plan Name: _________________________________ EIN: ________________ Plan #: _____
(Please include the plan name, Applicant’s EIN, and plan number information on each page of the
submission.)
SECTION I. IDENTIFICATION OF FAILURE(S) AND PROPOSED METHOD(S) OF CORRECTION
The following failure(s) occurred with respect to the plan identified above (check failure(s) that apply)
A. § 401(a)(17) Failure in a Defined Contribution Plan
(check as applicable)
Contributions
Forfeitures
were allocated on the basis of compensation in excess of the limit under § 401(a)(17) as provided below:
Enter the plan years in which the failure occurred, the amount of the allocations in excess of § 401(a)(17)
made for each plan year (including Earnings), and the number of participants affected by the failure for
each plan year:
Plan Year
Amounts Allocated in Excess of
§ 401(a)(17)
Number of Participants Affected
Description of Proposed Method of Correction:
An additional amount has been (or will be) contributed to the plan on behalf of each of the employees who
received an allocation for the year of the failure (excluding each employee for whom there was a
§ 401(a)(17) failure). The amount contributed for an employee is equal to the employee's plan
compensation for the year of the failure multiplied 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. In addition, the
plan will be retroactively amended to reflect the increased contribution and allocation percentages for the
plan’s participants.
169
Plan Name: ____________________________ EIN: __________ Plan #: ____
Enter the plan years in which the failure occurred, the fraction used to determine the additional amount
allocated to employees other than those for whom there was a § 401(a)(17) failure, and the total required
contribution (before adjusting for Earnings) for each plan year in which the failure occurred:
Plan Year
Fraction Used to Determine
the Additional Amount
Allocated
Total Required Contribution (before
adjusting for Earnings)
The resulting additional amount will be adjusted for Earnings from the end of the plan year in which the
failure occurred through the date of the corrective contribution. The method for determining the Earnings
adjustment is as follows:
170
Plan Name: ____________________________ EIN: __________ Plan #: ____
Former employees affected by the failure (check one):
There are no former employees affected by the failure.
Affected former employees (or if deceased, their estate or known beneficiary) will be contacted
and contributions will be made to the plan on their behalf. To the extent that an affected former employee
or beneficiary cannot be located following a mailing to the last known address, the Plan Sponsor will take
the actions specified below to locate that employee or beneficiary:
After such actions are taken, if an affected employee or beneficiary is not found but is subsequently located
on a later date, the Plan Sponsor will make corrective contributions on behalf of the affected employee at
that time.
B. Hardship Distribution Failure
Hardship distributions were made to participants under the plan. All plan participants were entitled to
request hardship distributions, and all requests were evaluated in accordance with uniform eligibility
standards, as described below:
Enter the plan years in which the failure occurred, the number of hardship distributions made for each plan
year, and the number and amount of distributions made to highly compensated employees (HCEs) and
nonhighly compensated employees (NHCEs) respectively, affected by the failure for each plan year.
171
Plan Name: ____________________________ EIN: __________ Plan #: ____
Plan
Year
Number of
Hardship
Distributions
Made
During the
Plan Year
Number of Hardship
Distributions Made
to NHCEs
Amount of
Distributions
Number of
Hardship
Distributions
Made to HCEs
Amount of
Distribution
Description of the Proposed Method of Correction:
The failure was (or will be) corrected by retroactively amending the plan to provide for the hardship
distributions that were made available. The effective date of the corrective amendment is:
_____________________________________________________________________________________.
C. Plan Loan Failure
Plan loans were made to participants under the plan. All plan participants were entitled to request plan
loans under uniform standards of eligibility, and all plan loans made satisfied the requirements of § 72(p).
Enter the plan years in which the failure occurred, the number of participant plan loans made for each plan
year, and the number and amount of plan loans made to highly compensated employees (HCEs) and
nonhighly compensated employees (NHCEs) respectively, affected by the failure for each plan year.
Plan Year
Number of Plan
Loans Made
During the Plan
Year
Number of Plan
Loans Made to
NHCEs
Amount of Plan
Loans
Number of Plan
Loans Made to
HCEs
Amount of Plan
Loans
172
Plan Name: ____________________________ EIN: __________ Plan #: ____
Description of the Proposed Method of Correction:
The failure was (or will be) corrected by retroactively amending the plan to provide for the plan loans that
were made available. The effective date of the corrective amendment is: ___________________________
D. Early Inclusion of Otherwise Eligible Employee Failure
Employees:
(check applicable boxes)
Who had not satisfied the plan’s minimum age or service requirements were treated as eligible
participants on a date prior to their being eligible under the plan and were entitled to the same
benefits under the plan to which they would have been entitled had they completed the minimum
age or service requirements of the plan.
Who had completed the plan’s minimum age or service requirements were treated as eligible
participants prior to the applicable plan entry date and were entitled to the same benefits under the
plan to which they would have been entitled had they entered the plan timely.
The plan’s minimum age or service requirements and plan entry date, as applicable, for the years of the
failure were as follows:
173
Plan Name: ____________________________ EIN: __________ Plan #: ____
Enter the plan years in which the failure occurred and the number of participants affected by the failure,
broken down by type of employee (highly compensated employee (HCE) or nonhighly compensated
employee (NHCE) respectively, for each plan year.
Plan Year
Number of NHCEs Affected by
the Failure During the Plan
Year
Number of HCEs Affected by the
Failure During the Plan Year
Description of the Proposed Correction Method:
The failure was (or will be) corrected by retroactively amending the plan to provide for the inclusion of the
ineligible employees. The effective date of the corrective amendment is: ___________________________
SECTION II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be
implemented to ensure that the same failures will not recur.
174
Plan Name: ____________________________ EIN: __________ Plan #: ____
SECTION III. ENCLOSURES
In addition to the applicable items listed on the Procedural Requirements Checklist for Form 8950, the Plan Sponsor
encloses the following with this submission:
• Copies of all amendments used to correct the failure(s), either as adopted or in proposed form. (required)
• A copy of the plan document in effect prior to any of the amendments used to correct the failure(s).
(required)
• For a § 401(a)(17) failure in a defined contribution plan, 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, the determination of the fraction used to
determine the additional amount to be allocated to each employee (other than those for whom there was a
§ 401(a)(17) failure) must be demonstrated.)
175
176
APPENDIX D
ACKNOWLEDGEMENT LETTER
[
] [INSERT NAME AND
[ ] ADDRESS OF PLAN
[ ] SPONSOR OR
[ ] AUTHORIZED REPRESENTATIVE
[ ] AT LEFT]
Applicant’s Name: _______________________________________________________
Plan Name: ____________________________________________________________
[insert plan name]
Plan No. ______________
[insert plan number]
Control No.: _________________________________
(to be completed by IRS)
Received Date: ______________________________
(to be completed by IRS)
The Internal Revenue Service, Employee Plans Voluntary Compliance, has received
your VCP submission for the above-captioned plan. Your request has been assigned
the control number listed above. This number should be referred to in any
communication to us concerning your submission. If a determination letter application
was included with your VCP submission, any acknowledgement letter issued by the
Service with regard to such application will be mailed to you under separate cover.
You will be contacted when the VCP case is assigned to an agent. If you need to
inquire about the status of your case prior to that date, please call (626) 312-4921 (not a
toll-free number). Please leave a message with the name of the plan, the Control
Number, your name, and a phone number where you can be reached.
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