Internal Revenue Bulletin 2018-42 (PDF rendition): IRS Revenue Procedures

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# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2018-42
October 15, 2018

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## Administrative

### REV. PROC. 2018-50, page 610.

User fees for applications for residency certifications made on
Form 8802 are increasing from $85 to $185 for non-individual
taxpayers as of December 1, 2018.

## Employee Plans

### REV. PROC. 2018-52, page 611.

The revenue procedure modifies and supersedes Rev. Proc.
2016-51, 2016-42 I.R.B. 465, which sets forth the Em-
ployee Plans Compliance Resolution System ("EPCRS"), a com-
prehensive system of correction programs administered by the
Employee Plans Division (TE/GE) for sponsors of retirement
plans that have failed to satisfy certain requirements under
§ 401(a), 403(a), 403(b), 408(k), or 408(p) of the Code. This
revenue procedure sets forth new procedures for using the
www.pay.gov website to file VCP submissions and pay user
fees. Beginning on April 1, 2019, the IRS will no longer accept
paper VCP submissions or process user fees paid with a paper
check. During the transition period from January 1, 2019,
through March 31, 2019, plan sponsors may file VCP submis-
sions with the IRS either by using www.pay.gov in accordance
with sections 10 and 11 of the revenue procedure or by filing
paper VCP submissions in accordance with the procedures in
sections 10 and 11 of Rev. Proc. 2016-51. Rev. Proc.
2016-51 is modified and superseded.

## Income Tax

### Notice 2018-76, page 599.

This notice provides transitional guidance on the deductibility of
expenses for certain business meals under § 274 of the Internal
Revenue Code. Section 274 was amended by the Tax Cuts and
Jobs Act, Pub. L. No. 115-97, § 13304, 131 Stat. 2054, 2123

(2017) (the Act). As amended by the Act, § 274 generally disal-
lows a deduction for expenses with respect to entertainment,
amusement, or recreation. However, the Act does not specifically
address the deductibility of expenses for business meals.

### Notice 2018-77, page 601.

Optional special per diem rates. This notice provides the
2018-2019 special per diem rates for taxpayers to use in
substantiating the amount of ordinary and necessary business
expenses incurred while traveling away from home. The notice
includes (1) the special transportation industry rate, (2) the rate
for the incidental expenses only deduction, and (3) the rates
and list of high-cost localities for the high-low substantiation
method.

### Notice 2018-78, page 604.

Notice 2018-78 announces extended deadlines for the basis
election provided in section 965 proposed regulations and
postponement for taxpayers affected by Hurricane Florence to
make elections, and file transfer agreements, related to sec-
tion 965. The notice also announces that the rules concerning
the determination of the aggregate foreign cash position will be
revised to be consistent with Notice 2018-07.

### Notice 2018-79, page 606.

This notice explains the circumstances under which the four-
year replacement period under section 1033(e)(2) is extended
for livestock sold on account of drought. The Appendix to this
notice contains a list of counties that experienced exceptional,
extreme, or severe drought conditions during the 12-month
period ending August 31, 2018. Taxpayers may use this list to
determine if any extension is available.

### Notice 2018-80, page 609.

This notice announces that the Treasury Department and the
IRS intend to issue proposed regulations providing that market
discount is not includible in income under section 451(b) of the
Internal Revenue Code, as added by section 13221 of the
TCJA.

Finding Lists begin on page ii.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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## Part III. Administrative, Procedural, and Miscellaneous

### Expenses for Business Meals Under § 274 of the Internal Revenue Code

Notice 2018-76

#### PURPOSE

This notice provides transitional guid-
ance on the deductibility of expenses for
certain business meals under § 274 of the
Internal Revenue Code. Section 274 was
amended by the Tax Cuts and Jobs Act,
Pub. L. No. 115-97, § 13304, 131 Stat.
2054, 2123 (2017) (the Act). As amended
by the Act, § 274 generally disallows a
deduction for expenses with respect to
entertainment, amusement, or recreation.
However, the Act does not specifically
address the deductibility of expenses for
business meals.

This notice also announces that the De-
partment of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) intend to publish proposed
regulations under § 274, which will in-
clude guidance on the deductibility of ex-
penses for certain business meals. Until
the proposed regulations are effective,
taxpayers may rely on the guidance in this
notice for the treatment under § 274 of
expenses for certain business meals.

#### BACKGROUND

Section 162(a) allows a deduction for
ordinary and necessary expenses paid or
incurred during the taxable year in carry-
ing on any trade or business. However,
§ 274(a)(1), as revised by the Act, gener-
ally disallows a deduction for any item
with respect to an activity that is of a type
generally considered to constitute enter-
tainment, amusement, or recreation.

Section 274(k) generally provides that
no deduction is allowed for the expense of
any food or beverages unless (A) such
expense is not lavish or extravagant under
the circumstances, and (B) the taxpayer (or
an employee of the taxpayer) is present at
the furnishing of such food or beverages.
Section 274(n)(1) generally provides that
the amount allowable as a deduction for any
expense for food or beverages shall not ex-

ceed 50 percent of the amount of the ex-
pense that otherwise would be allowable.

Prior to amendment by the Act,
§ 274(a)(1)(A) generally prohibited a
deduction with respect to an activity of a
type considered to constitute entertain-
ment, amusement, or recreation ("enter-
tainment expenses"). However, § 274(a)
(1)(A) provided exceptions to that pro-
hibition if the taxpayer established that:
(1) the item was directly related to the
active conduct of the taxpayer's trade or
business (the "directly related" excep-
tion), or (2) in the case of an item di-
rectly preceding or following a substan-
tial and bona fide business discussion
(including business meetings at a con-
vention or otherwise), that the item was
associated with the active conduct of the
taxpayer's trade or business (the “busi-
ness discussion" exception).

Prior to amendment by the Act,
§ 274(n)(1) generally limited the deduc-
tion of food and beverage (meal) ex-
penses and entertainment expenses to 50
percent of the amount that otherwise
would have been allowable. Thus, under
prior law, taxpayers could deduct 50
percent of meal expenses and could de-
duct 50 percent of entertainment ex-
penses that met the directly related or
business discussion exceptions.

The Act repealed the directly related and
business discussion exceptions to the gen-
eral prohibition on deducting entertainment
expenses in § 274(a)(1)(A). Thus, entertain-
ment expenses are no longer deductible.
The Act also amended the 50 percent
limitation in § 274(n)(1) to remove the
reference to entertainment expenses.
Otherwise allowable meal expenses re-
main deductible, subject to the 50 per-
cent limitation in § 274(n)(1).

Section 1.274-2(b)(1)(i) of the Income
Tax Regulations provides that the term
"entertainment" means any activity which
is of a type generally considered to consti-
tute entertainment, amusement, or recre-
ation, such as entertaining at night clubs,
cocktail lounges, theaters, country clubs,
golf and athletic clubs, sporting events, and
on hunting, fishing, vacation, and similar
trips, including such activity relating solely
to the taxpayer or the taxpayer's family. The
term "entertainment" may include an activ-

ity, the cost of which is claimed as a busi-
ness expense by the taxpayer, which satis-
fies the personal, living, or family needs of
any individual, such as providing food and
beverages, a hotel suite, or an automobile to
a business customer or the customer's fam-
ily. The term "entertainment" does not in-
clude activities which, although satisfying
personal, living, or family needs of an indi-
vidual, are clearly not regarded as constitut-
ing entertainment, such as (a) supper money
provided by an employer to an employee
working overtime, (b) a hotel room main-
tained by an employer for lodging of em-
ployees while in business travel status, or (c)
an automobile used in the active conduct of
trade or business even though also used for
routine personal purposes such as commut-
ing to and from work. On the other hand, the
providing of a hotel room or an automobile
by an employer to an employee who is on
vacation would constitute entertainment of
the employee.

Section 1.274-2(b)(1)(ii) provides that
an objective test shall be used to deter-
mine whether an activity is of a type gen-
erally considered to constitute entertain-
ment. Thus, if an activity is generally
considered to be entertainment, it will
constitute entertainment for purposes of
§ 274(a) and § 1.274-2 regardless of
whether the expenditure for the activity
can also be described otherwise, and even
though the expenditure relates to the tax-
payer alone. This objective test precludes
arguments such as that "entertainment"
means only entertainment of others or that
an expenditure for entertainment should
be characterized as an expenditure for ad-
vertising or public relations. However, in
applying this test the taxpayer's trade or
business shall be considered. Thus, al-
though attending a theatrical performance
would generally be considered entertain-
ment, it would not be considered enter-
tainment for a professional theater critic
attending in a professional capacity. Sim-
ilarly, if a manufacturer of dresses con-
ducts a fashion show to introduce its prod-
ucts to a group of store buyers, the show
generally would not be considered to con-
stitute entertainment. In contrast, if an ap-
pliance distributor conducts a fashion
show for its retailers, the fashion show

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generally would be considered to consti-
tute entertainment.

Section 274(e) enumerates nine specific
exceptions to § 274(a). Expenses that are
within one of the exceptions in § 274(e),
which may include certain meal expenses,
are not disallowed under § 274(a). How-
ever, those expenses may be subject to
the 50 percent limit on deductibility under
§ 274(n). The Treasury Department and the
IRS intend to issue separate guidance ad-
dressing the treatment under § 274(e)(1) and
274(n) of expenses for food and beverages
furnished primarily to employees on the em-
ployer's business premises.

## INTERIM GUIDANCE FOR BUSINESS MEALS

The Act did not change the definition of
entertainment under § 274(a)(1); therefore,
the regulations under § 274(a)(1) that define
entertainment continue to apply. The Act
did not address the circumstances in which
the provision of food and beverages might
constitute entertainment. However, the leg-
islative history of the Act clarifies that tax-
payers generally may continue to deduct 50
percent of the food and beverage expenses
associated with operating their trade or busi-
ness. See H.R. Rep. No. 115-466, at 407
(2017) (Conf. Rep.).

The Treasury Department and the IRS
intend to publish proposed regulations un-
der § 274 clarifying when business meal
expenses are nondeductible entertainment
expenses and when they are 50 percent
deductible expenses. Until the proposed
regulations are effective, taxpayers may
rely on the guidance in this notice for the
treatment under § 274 of expenses for
certain business meals.

Under this notice, taxpayers may de-
duct 50 percent of an otherwise allowable
business meal expense if:

1\. The expense is an ordinary and nec-
essary expense under § 162(a) paid or
incurred during the taxable year in
carrying on any trade or business;

2\. The expense is not lavish or extrava-
gant under the circumstances;

3\. The taxpayer, or an employee of the
taxpayer, is present at the furnishing
of the food or beverages;

4\. The food and beverages are provided
to a current or potential business cus-

tomer, client, consultant, or similar
business contact; and

5\. In the case of food and beverages
provided during or at an entertain-
ment activity, the food and beverages
are purchased separately from the en-
tertainment, or the cost of the food
and beverages is stated separately
from the cost of the entertainment on
one or more bills, invoices, or re-
ceipts. The entertainment disallow-
ance rule may not be circumvented
through inflating the amount charged
for food and beverages.

## EXAMPLES

For each example, assume that the food
and beverage expenses are ordinary and
necessary expenses under § 162(a) paid or
incurred during the taxable year in carry-
ing on a trade or business and are not
lavish or extravagant under the circum-
stances. Also assume that the taxpayer and
the business contact are not engaged in a
trade or business that has any relation to
the entertainment activity.

Example 1. (i) Taxpayer A invites B, a business
contact, to a baseball game. A purchases tickets for
A and B to attend the game. While at the game, A
buys hot dogs and drinks for A and B.

(ii) The baseball game is entertainment as de-
fined in § 1.274-2(b)(1)(i) and, thus, the cost of the
game tickets is an entertainment expense and is not
deductible by A. The cost of the hot dogs and drinks,
which are purchased separately from the game tick-
ets, is not an entertainment expense and is not sub-
ject to the § 274(a)(1) disallowance. Therefore, A
may deduct 50 percent of the expenses associated
with the hot dogs and drinks purchased at the game.

Example 2. (i) Taxpayer C invites D, a business
contact, to a basketball game. C purchases tickets for
C and D to attend the game in a suite, where they
have access to food and beverages. The cost of the
basketball game tickets, as stated on the invoice,
includes the food and beverages.

(ii) The basketball game is entertainment as de-
fined in § 1.274-2(b)(1)(i) and, thus, the cost of the
game tickets is an entertainment expense and is not
deductible by C. The cost of the food and beverages,
which are not purchased separately from the game
tickets, is not stated separately on the invoice. Thus,
the cost of the food and beverages also is an enter-
tainment expense that is subject to the § 274(a)(1)
disallowance. Therefore, C may not deduct any of
the expenses associated with the basketball game.

Example 3. (i) Assume the same facts as in
Example 2, except that the invoice for the basketball
game tickets separately states the cost of the food
and beverages.

(ii) As in Example 2, the basketball game is
entertainment as defined in § 1.274-2(b)(1)(i) and,
thus, the cost of the game tickets, other than the cost
of the food and beverages, is an entertainment ex-

pense and is not deductible by C. However, the cost of
the food and beverages, which is stated separately on
the invoice for the game tickets, is not an entertainment
expense and is not subject to the § 274(a)(1) disallow-
ance. Therefore, C may deduct 50 percent of the ex-
penses associated with the food and beverages pro-
vided at the game.

## REQUEST FOR COMMENTS

The Treasury Department and the IRS
request comments for future guidance to
further clarify the treatment of business
meal expenses and entertainment ex-
penses under § 274. In particular, com-
ments are requested concerning the fol-
lowing issues: (1) whether and what
further guidance is needed to clarify the
treatment of (a) entertainment expenses
under § 274(a)(1)(A) and (b) business
meal expenses; (2) whether the definition
of entertainment in § 1.274-2(b)(1)(i)
should be retained and, if so, whether and
how it should be revised; (3) whether
the objective test in § 1.274-2(b)(1)(ii)
should be retained and, if so, whether and
how it should be revised; and (4) whether
and what additional examples should be
addressed in guidance.

## WHERE TO SEND COMMENTS

Comments must be submitted by Tues-
day, January 8, 2019. Comments, identi-
fied by Notice 2018-76, may be sent by
one of the following methods to the ap-
plicable address listed below:

· By Mail:
Internal Revenue Service
Attn:
CC:PA:LPD:PR
(Notice
2018-76)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

· By Hand or Courier Delivery: Sub-
missions may be hand-delivered
Monday through Friday between
the hours of 8 a.m. and 4 p.m. to:

Courier's Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice
2018-76)
1111 Constitution Avenue, NW
Washington, DC 20224

· Electronically: Submissions may
be made electronically to Notice.

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Comments@irscounsel.treas.gov,
with "Notice 2018-76" in the sub-
ject line.

All submissions will be available for
public inspection and copying in room
1621, 1111 Constitution Avenue, NW,
Washington, DC, from 9 a.m. to 4 p.m.

## DRAFTING INFORMATION

The principal author of this notice is
Patrick M. Clinton of the Office of Asso-
ciate Chief Counsel (Income Tax & Ac-
counting). For further information regard-
ing this notice, contact Patrick M. Clinton
at (202) 317-7005 (not a toll-free num-
ber).

## 2018-2019 Special Per Diem Rates Notice 2018-77

### SECTION 1. PURPOSE

This annual notice provides the 2018-
2019 special per diem rates for taxpayers
to use in substantiating the amount of or-
dinary and necessary business expenses
incurred while traveling away from home,
specifically (1) the special transportation
industry meal and incidental expenses
(M&IE) rates, (2) the rate for the inciden-
tal expenses only deduction, and (3) the
rates and list of high-cost localities for
purposes of the high-low substantiation
method.

### SECTION 2. BACKGROUND

Rev. Proc. 2011-47, 2011-42 I.R.B.
520 (or successor), provides rules for us-
ing a per diem rate to substantiate, under
§ 274(d) of the Internal Revenue Code

and § 1.274-5 of the Income Tax Regu-
lations, the amount of ordinary and nec-
essary business expenses paid or incurred
while traveling away from home. Taxpay-
ers using the rates and list of high-cost
localities provided in this notice must
comply with Rev. Proc. 2011-47 (or suc-
cessor). Notice 2017-54, 2017-42 I.R.B.
321, provides the rates and list of high-
cost localities for the period October 1,
2017, to September 30, 2018.

Section 3.02(3) of Rev. Proc. 2011-47
(or successor) provides that the term "in-
cidental expenses" has the same meaning
as in the Federal Travel Regulations, 41
C.F.R. 300-3.1, and that future changes
to the definition of incidental expenses in
the Federal Travel Regulations would be
announced in the annual per diem notice.
Subsequent to the publication of Rev.
Proc. 2011-47, the General Services Ad-
ministration published final regulations
revising the definition of incidental ex-
penses under the Federal Travel Regula-
tions to include only fees and tips given to
porters, baggage carriers, hotel staff, and
staff on ships. Transportation between
places of lodging or business and places
where meals are taken, and the mailing
cost of filing travel vouchers and paying
employer-sponsored charge card billings,
are no longer included in incidental ex-
penses. Accordingly, taxpayers using the
per diem rates may separately deduct, if
permitted, or be reimbursed for transpor-
tation and mailing expenses.

SECTION 3. SPECIAL M&IE RATES
FOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayers
in the transportation industry are $66 for
any locality of travel in the continental
United States (CONUS) and $71 for any

locality of travel outside the continental
United States (OCONUS). See section
4.04 of Rev. Proc. 2011-47 (or succes-
sor).

## SECTION 4. RATE FOR INCIDENTAL EXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUS
locality of travel for the incidental ex-
penses only deduction is $5 per day. See
section 4.05 of Rev. Proc. 2011-47 (or
successor).

## SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

1\. Annual high-low rates. For purposes
of the high-low substantiation method, the
per diem rates in lieu of the rates de-
scribed in Notice 2017-54 (the per diem
substantiation method) are $287 for travel
to any high-cost locality and $195
for travel to any other locality within
CONUS. The amount of the $287 high
rate and $195 low rate that is treated as
paid for meals for purposes of § 274(n) is
$71 for travel to any high-cost locality and
$60 for travel to any other locality within
CONUS. See section 5.02 of Rev. Proc.
2011-47 (or successor). The per diem
rates in lieu of the rates described in No-
tice 2017-54 (the meal and incidental ex-
penses only substantiation method) are
$71 for travel to any high-cost locality and
$60 for travel to any other locality within
CONUS.

2\. High-cost localities. The following
localities have a federal per diem rate of
$241 or more, and are high-cost localities
for all of the calendar year or the portion
of the calendar year specified in parenthe-
ses under the key city name.

Key city

County or other defined location

Arizona

Sedona
California
Los Angeles
(October 1-October 31
and January 1-September 30)

City Limits of Sedona

Los Angeles, Orange, Ventura, Edwards AFB less
the city of Santa Monica

Monterey
(July 1-August 31)
Napa

Monterey

Napa

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Key city
(October 1-October 31 and May

County or other defined location

1-September 30)

Oakland

Alameda

San Diego

San Diego

(January 1-July 31)

San Francisco

San Francisco

San Mateo/Foster City/Belmont

San Mateo

Santa Barbara

Santa Barbara

Santa Monica

City limits of Santa Monica

Sunnyvale/Palo Alto/San Jose

Santa Clara

Colorado

Aspen

Pitkin

(October 1-March 31 and June 1-September 30)

Denver/Aurora

Denver, Adams, Arapahoe, and Jefferson

Grand Lake

Grand

(December 1-March 31)

Silverthorne/Breckenridge

Summit

(December 1-March 31)

Telluride

San Miguel

Vail (December 1-March 31 and July 1-August 31)

Eagle

Delaware

Lewes (July 1-August 31)

Sussex

District of Columbia

Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, in Virginia; and the counties of Montgomery and Prince George's in Maryland) (See also Maryland and Virginia)

Florida

Boca Raton/Delray Beach/Jupiter

Palm Beach and Hendry

(December 1-April 30)

Fort Lauderdale

Broward

(January 1-April 30)

Fort Meyers

Lee

(February 1-March 31)

Fort Walton Beach/De Funiak Springs

Okaloosa and Walton

(June 1-July 31)

Key West

Monroe

Miami

Miami-Dade

(December 1-March 31)

Naples

Collier

(February 1-April 30)

Vero Beach

Indian River

(December 1-April 30)

Georgia

Jekyll Island/Brunswick

Glynn

(March 1-July 31)

Illinois

Chicago

Cook and Lake

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Key city
(October 1-November 30 and April 1-September 30)

County or other defined location

Maine

Bar Harbor/Rockport

Hancock and Knox

(July 1-August 31)

Maryland

Ocean City

Worcester

(July 1-August 31)

Washington, DC Metro Area

Montgomery and Prince George's

Massachusetts

Boston/Cambridge

Suffolk, City of Cambridge

(October 1-November 30 and March 1-September 30)

Falmouth

City limits of Falmouth

(July 1-August 31)

Hyannis

Barnstable less the city of

(July 1-August 31)

Falmouth

Martha's Vineyard

Dukes

(June 1-September 30)

Nantucket

Nantucket

(June 1-September 30)

Michigan

Traverse City

Grand Traverse

(July 1-August 31)

Minnesota

Duluth

St. Louis

(June 1-August 31)

New York

Lake Placid

Essex

(July 1-August 31)

New York City

Bronx, Kings, New York, Queens, and Richmond

Oregon

Portland

Multnomah

(October 1-October 31 and April 1-September 30)

Seaside

Clatsop

(July 1-August 31)

Pennsylvania

Hershey

Hershey

(June 1-August 31)

Philadelphia

Philadelphia

(October 1-November 30 and April 1-September 30) Rhode Island

Jamestown/Middletown/Newport

Newport

(June 1-August 31)

South Carolina

Charleston (October 1-October 31 and March 1-September 30)

Charleston, Berkeley, and Dorchester

Texas

Pecos

Reeves

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Key city

County or other defined location

(January 1-March 31)

Utah

Moab

Grand

(October 1-October 31 and March 1-September 30)

Park City

Summit

(December 1-March 31)

Virginia

Virginia Beach

City of Virginia Beach

(June 1-August 31)

Wallops Island

Accomack

(July 1-August 31)

Washington, DC Metro Area Washington

Cities of Alexandria, Fairfax, and Falls Church; Counties of Arlington and Fairfax

Seattle

King

Vancouver

Clark, Cowlitz, and Skamania

(October 1-October 31 and April 1-September 30)

Wyoming

Cody

Park

(June 1-September 30)

Jackson/Pinedale

Teton and Sublette

(July 1-August 31)

3\. Changes in high-cost localities. The
list of high-cost localities in this notice
differs from the list of high-cost localities
in section 5 of Notice 2017-54.

a. The following localities have been
added to the list of high-cost locali-
ties: Sedona, Arizona; Los Angeles,
California; San Diego, California;
Vero Beach, Florida; Jekyll Island/
Brunswick, Georgia; Duluth, Minne-
sota; Pecos, Texas; Moab, Utah;
Cody, Wyoming.

b. The following localities have changed
the portion of the year in which they
are high-cost localities: Oakland,
California; Aspen, Colorado; Boca
Raton/Delray Beach/Jupiter, Florida;
Naples, Florida; Bar Harbor/Rockport,
Maine; Boston/Cambridge, Massachu-
setts; Jamestown/Middletown/New-
port, Rhode Island; Charleston, South
Carolina; Vancouver, Washington;
Jackson/Pinedale, Wyoming.

c. The following localities have been re-
moved from the list of high-cost local-
ities: Mill Valley/San Rafael/ Novato,
California; Steamboat Springs, Colo-

rado; Petoskey, Michigan; Saratoga
Springs/Schenectady, New York.

d. The following localities have been
redefined: Traverse City, Michigan
no longer includes Leland; Bar Har-
bor, Maine now includes Rockport.

## SECTION 6. EFFECTIVE DATE

This notice is effective for per diem
allowances for lodging, meal and inciden-
tal expenses, or for meal and incidental
expenses only, that are paid to any em-
ployee on or after October 1, 2018, for
travel away from home on or after Octo-
ber 1, 2018. For purposes of computing
the amount allowable as a deduction for
travel away from home, this notice is ef-
fective for meal and incidental expenses
or for incidental expenses only paid or
incurred on or after October 1, 2018. See
sections 4.06 and 5.04 of Rev. Proc.
2011-47 (or successor) for transition
rules for the last 3 months of calendar year
2018.

## SECTION 7. EFFECT ON OTHER DOCUMENTS

Notice 2017-54 is superseded.

## DRAFTING INFORMATION

The principal author of this notice is
Maxine Woo-Garcia of the Office of
Associate Chief Counsel (Income Tax &
Accounting). For further information re-
garding this notice contact Maxine Woo-
Garcia at (202) 317-7005 (not a toll-free
number).

## Additional Guidance Under Section 965 Notice 2018-78

### SECTION 1. OVERVIEW

On August 9, 2018, the Department of
the Treasury ("Treasury Department")
and the Internal Revenue Service ("IRS")
published in the Federal Register (83 FR
39514) a notice of proposed rulemaking
(REG-104226-18), which contained pro-
posed §§ 1.962-1 and 1.962-2, 1.965-1
through 1.965-9, and 1.986(c)-1 (the
"proposed regulations"). The proposed
regulations relate to section 965 of the
Internal Revenue Code.

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# SECTION 2. BASIS ELECTION UNDER PROPOSED § 1.965-2(f)(2)

Proposed § 1.965-2(f)(2) allows a sec-
tion 958(a) U.S. shareholder (as defined in
proposed § 1.965-1(f)(33)) to elect to make
certain basis adjustments with respect to
each deferred foreign income corporation
(as defined in proposed § 1.965-1(f)(17))
and each E&P deficit foreign corporation
(as defined in proposed § 1.965-1(f)(22))
(such election, the "basis election"). Pro-
posed § 1.965-2(f)(2)(iii)(B)(1)(i) provides
the general rule that the basis election must
be made no later than the due date (taking
into account extensions, if any) for the sec-
tion 958(a) U.S. shareholder's return for the
first taxable year that includes the last day of
the last taxable year of a deferred foreign
income corporation or E&P deficit foreign
corporation of the section 958(a) U.S. share-
holder that begins before January 1, 2018. If
the due date referred to in proposed
§ 1.965-2(f)(2)(iii)(B)(1)(i) occurred before
September 10, 2018, proposed § 1.965-
2(f)(2)(iii)(B)(1)(ii) (the "transition rule")
provides that the basis election must be
made by October 9, 2018.

The Treasury Department and the IRS
have determined that requiring taxpayers
to make a binding basis election before
the proposed regulations are finalized
would be too onerous for taxpayers. Ac-
cordingly, the Treasury Department and
the IRS intend that when final regulations
under section 965 are published in the
Federal Register (the "final regulations"),
the final regulations will provide that the
transition rule will apply with respect to
returns due (determined with regard to
any extension) before the date that is 90
days after the date that the final regula-
tions are published and that in such cases
the basis election must be made no later
than 90 days after the publication of the
final regulations in the Federal Register.
In addition, the final regulations will pro-
vide that if a basis election was made on
or before the date the final regulations are
published, the basis election may be re-
voked no later than 90 days after the pub-
lication of the final regulations in the Fed-
eral Register. Relevant tax returns must be
filed consistently with an election that has
been made and not revoked.

# SECTION 3. APPLICATION OF PROPOSED § 1.965-3(b) TO CONSOLIDATED GROUPS

Proposed § 1.965-3(b) provides rules
allowing a section 958(a) U.S. share-
holder to disregard certain assets for pur-
poses of determining its aggregate foreign
cash position (as defined in proposed
§ 1.965-1(f)(8)). Proposed § 1.965-8(e)
provides that all members of a consoli-
dated group that are section 958(a) U.S.
shareholders of a specified foreign corpo-
ration (as defined in proposed § 1.965-
1(f)(45)) are treated as a single section
958(a) U.S. shareholder for certain enu-
merated purposes that do not include pro-
posed § 1.965-3(b). To prevent the over-
statement of the aggregate foreign cash
position, the final regulations will provide
that all members of a consolidated group
that are section 958(a) U.S. shareholders
of a specified foreign corporation are also
treated as a single section 958(a) U.S.
shareholder for purposes of proposed
§ 1.965-3(b).

# SECTION 4. RELIEF IN CONNECTION WITH HURRICANE FLORENCE

On September 15, 2018, and Septem-
ber 24, 2018, in response to Hurricane
Florence, the IRS announced (IR-2018-
187, NC-2018-03, SC-2018-01) that
certain individual and business taxpayers
would have until January 31, 2019, to file
certain tax returns and make certain tax
payments. Questions have arisen as to
whether that announcement applies to
elections with respect to section 965 and
transfer agreements required to be filed
under the proposed regulations. This no-
tice provides a postponement for affected
taxpayers to make elections with respect
to section 965 and file transfer agreements
required to be filed under the proposed
regulations. Affected taxpayers for whom
elections with respect to section 965 or
transfer agreements are due on or after
September 7, 2018, and before January
31, 2019, are granted additional time to
file such elections or transfer agreements
until January 31, 2019.

An affected taxpayer is any taxpayer
whose principal residence or principal
place of business was located in a Hurri-
cane Florence covered disaster area, as

defined in § 301.7508A-1(d)(2), or whose
records necessary to meet its obligation
were maintained in such a covered disas-
ter area, or in the case of a transfer agree-
ment, a taxpayer who intends to enter into
a transfer agreement with such a taxpayer.

Taxpayers who believe they are entitled
to this relief should mark "Hurricane Flor-
ence" on the top of the relevant section 965
election statement or transfer agreement,
and, in the case of a transfer agreement, a
notation of which party to the agreement is
an affected taxpayer whose principal resi-
dence or principal place of business was
located in a Hurricane Florence covered di-
saster area, as defined in § 301.7508A-
1(d)(2), or whose records necessary to meet
its filing obligation were maintained in such
a covered disaster area.

## SECTION 5. SUBMISSION OF COMMENTS

The Treasury Department and the IRS
requested comments in the proposed regu-
lations on all aspects of the proposed regu-
lations, with a deadline of October 9, 2018,
for comments to be submitted. The Treasury
Department and the IRS are still considering
all of the comments that have been submit-
ted as of the date of this notice with respect
to the proposed regulations in the course of
developing final regulations under section
965. The Treasury Department and the IRS
continue to welcome the submission of ad-
ditional comments with respect to the pro-
posed regulations by the October 9, 2018,
deadline. This notice is being issued in ad-
vance of final regulations under section 965
due to the imminent filing deadlines that
could otherwise apply to the forms and elec-
tions described herein.

# SECTION 6. DRAFTING INFORMATION

The principal author of this notice is
Leni Perkins of the Office of Associate
Chief Counsel (International). However,
other personnel from the Treasury Depart-
ment and the IRS participated in its devel-
opment. For further information regarding
this notice, contact Ms. Perkins at (202)
317-6934 (not a toll free number).

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# Extension of Replacement Period for Livestock Sold on Account of Drought Notice 2018-79

## SECTION 1. PURPOSE

This notice provides guidance regard-
ing an extension of the replacement period
under § 1033(e) of the Internal Revenue
Code for livestock sold on account of
drought in specified counties.

## SECTION 2. BACKGROUND

.01 Nonrecognition of Gain on Invol-
untary Conversion of Livestock. Section
1033(a) generally provides for nonrecog-
nition of gain when property is involun-
tarily converted and replaced with prop-
erty that is similar or related in service or
use. Section 1033(e)(1) provides that a sale
or exchange of livestock (other than poultry)
held by a taxpayer for draft, breeding, or
dairy purposes in excess of the number that
would be sold following the taxpayer's
usual business practices is treated as an in-
voluntary conversion if the livestock is sold
or exchanged solely on account of drought,
flood, or other weather-related conditions.

.02 Replacement Period. Section
1033(a)(2)(A) generally provides that
gain from an involuntary conversion is
recognized only to the extent the amount
realized on the conversion exceeds the
cost of replacement property purchased
during the replacement period. If a sale or
exchange of livestock is treated as an invol-
untary conversion under § 1033(e)(1) and is
solely on account of drought, flood, or other
weather-related conditions that result in the
area being designated as eligible for assis-
tance by the federal government, § 1033(e)
(2)(A) provides that the replacement period
ends four years after the close of the first
taxable year in which any part of the gain
from the conversion is realized. Section
1033(e)(2)(B) provides that the Secretary
may extend this replacement period on a
regional basis for such additional time as the
Secretary determines appropriate if the
weather-related conditions that resulted in
the area being designated as eligible for
assistance by the federal government con-
tinue for more than three years. Section
1033(e)(2) is effective for any taxable year
with respect to which the due date (without

regard to extensions) for a taxpayer's return
is after December 31, 2002.

SECTION 3. EXTENSION OF
REPLACEMENT PERIOD UNDER
§ 1033(e)(2)(B)

Notice 2006-82, 2006-2 C.B. 529,
provides for extensions of the replacement
period under § 1033(e)(2)(B). If a sale or
exchange of livestock is treated as an
involuntary conversion on account of
drought and the taxpayer's replacement
period is determined under § 1033(e)
(2)(A), the replacement period will be ex-
tended under § 1033(e)(2)(B) and Notice
2006-82 until the end of the taxpayer's
first taxable year ending after the first
drought-free year for the applicable re-
gion. For this purpose, the first drought-
free year for the applicable region is the
first 12-month period that (1) ends August
31; (2) ends in or after the last year of the
taxpayer's four-year replacement period
determined under § 1033(e)(2)(A); and
(3) does not include any weekly period for
which exceptional, extreme, or severe
drought is reported for any location in the
applicable region. The applicable region is
the county that experienced the drought
conditions on account of which the live-
stock was sold or exchanged and all coun-
ties that are contiguous to that county.

A taxpayer may determine whether ex-
ceptional, extreme, or severe drought is
reported for any location in the applicable
region by reference to U.S. Drought Mon-
itor maps that are produced on a weekly
basis by the National Drought Mitigation
Center. U.S. Drought Monitor maps are
archived at http://droughtmonitor.unl.edu/
Maps/MapArchive.aspx.

In addition, Notice 2006-82 provides
that the Internal Revenue Service will
publish in September of each year a list of
counties, districts, cities, or parishes
(hereinafter "counties") for which excep-
tional, extreme, or severe drought was re-
ported during the preceding 12 months.
Taxpayers may use this list instead of U.S.
Drought Monitor maps to determine
whether exceptional, extreme, or severe
drought has been reported for any location
in the applicable region.

The Appendix to this notice contains
the list of counties for which exceptional,
extreme, or severe drought was reported
during the 12-month period ending Au-

gust 31, 2018. Under Notice 2006-82, the
12-month period ended on August 31,
2018, is not a drought-free year for an
applicable region that includes any county
on this list. Accordingly, for a taxpayer
who qualified for a four-year replacement
period for livestock sold or exchanged on
account of drought and whose replace-
ment period is scheduled to expire at the
end of 2018 (or, in the case of a fiscal year
taxpayer, at the end of the taxable year
that includes August 31, 2018), the re-
placement period will be extended under
§ 1033(e)(2) and Notice 2006-82 if the
applicable region includes any county on
this list. This extension will continue until
the end of the taxpayer's first taxable year
ending after a drought-free year for the
applicable region.

## SECTION 4. DRAFTING INFORMATION

The principal author of this notice is
Innessa Glazman of the Office of Asso-
ciate Chief Counsel (Income Tax & Ac-
counting). For further information re-
garding this notice, please contact Ms.
Glazman at (202) 317-7006 (not a toll-
free number).

## APPENDIX

### Alabama

Counties of Baldwin, Barbour, Bibb,
Blount, Bullock, Butler, Calhoun, Chero-
kee, Chilton, Clarke, Cleburne, Coffee,
Conecuh, Covington, Crenshaw, Cullman,
Dale, DeKalb, Escambia, Etowah, Fay-
ette, Geneva, Greene, Hale, Henry, Hous-
ton, Jackson, Jefferson, Lamar, Lee,
Limestone, Lowndes, Macon, Madison,
Marshall, Mobile, Monroe, Montgomery,
Pickens, Pike, Russell, Saint Clair,
Shelby, Sumter, Talladega, Tuscaloosa,
Walker, Winston.

### Arizona

Counties of Apache, Cochise, Co-
conino, Gila, Graham, Greenlee, La Paz,
Maricopa, Mohave, Navajo, Pima, Pinal,
Santa Cruz, Yavapai, Yuma.

### Arkansas

Counties of Arkansas, Ashley, Baxter,
Benton, Boone, Bradley, Calhoun, Car-
roll, Chicot, Clark, Clay, Cleburne, Cleve-

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land, Columbia, Conway, Craighead,
Crawford, Cross, Dallas, Desha, Drew,
Faulkner, Franklin, Fulton, Garland,
Grant, Greene, Hempstead, Hot Spring,
Howard, Independence, Izard, Jackson,
Jefferson, Johnson, Lafayette, Lawrence,
Lee, Lincoln, Little River, Logan, Lo-
noke, Madison, Marion, Miller, Missis-
sippi, Monroe, Montgomery, Nevada,
Newton, Ouachita, Perry, Phillips, Pike,
Poinsett, Polk, Pope, Prairie, Pulaski,
Randolph, Saint Francis, Saline, Scott,
Searcy, Sebastian, Sevier, Sharp, Stone,
Union, Van Buren, Washington, White,
Woodruff, Yell.

### California

Counties of Del Norte, Fresno, Impe-
rial, Kern, Kings, Los Angeles, Madera,
Mariposa, Merced, Modoc, Monterey, Or-
ange, Riverside, San Bernardino, San Di-
ego, San Luis Obispo, Santa Barbara, Sis-
kiyou, Tulare, Ventura.

### Colorado

Counties of Alamosa, Archuleta,
Baca, Bent, Boulder, Chaffee, Chey-
enne, Clear Creek, Conejos, Costilla,
Crowley, Custer, Delta, Dolores, Eagle,
Elbert, El Paso, Fremont, Garfield, Gil-
pin, Grand, Gunnison, Hinsdale, Huer-
fano, Jackson, Kiowa, Kit Carson, Lake,
La Plata, Larimer, Las Animas, Lincoln,
Mesa, Mineral, Moffat, Montezuma,
Montrose, Otero, Ouray, Park, Pitkin,
Prowers, Pueblo, Rio Blanco, Rio
Grande, Routt, Saguache, San Juan, San
Miguel, Summit, Teller.

#### District of Columbia

District of Columbia.

Florida

Counties of Bay, Broward, Calhoun,
Collier, Escambia, Franklin, Gadsden,
Gulf, Hendry, Holmes, Jackson, Jefferson,
Lee, Leon, Liberty, Madison, Miami-
Dade, Monroe, Okaloosa, Palm Beach,
Santa Rosa, Taylor, Wakulla, Walton,
Washington.

#### Georgia

Counties of Appling, Atkinson, Bacon,
Baker, Bartow, Berrien, Brantley, Brooks,
Bryan, Bulloch, Calhoun, Camden, Ca-

toosa, Charlton, Chatham, Chattahoochee,
Chattooga, Clay, Clinch, Coffee, Colquitt,
Cook, Crisp, Dade, Decatur, Dooly,
Dougherty, Early, Echols, Effingham, Ev-
ans, Floyd, Gilmer, Glynn, Gordon,
Grady, Irwin, Jeff Davis, Lanier, Lee, Lib-
erty, Long, Lowndes, McIntosh, Macon,
Marion, Miller, Mitchell, Murray, Musco-
gee, Pierce, Polk, Quitman, Randolph,
Schley, Screven, Seminole, Stewart,
Sumter, Tattnall, Taylor, Terrell, Thomas,
Tift, Turner, Walker, Ware, Wayne, Web-
ster, Whitfield, Wilcox, Worth.

Hawaii

Counties of Hawaii, Kauai, Maui.
Idaho

Counties of Bonner, Boundary, Canyon,
Cassia, Clearwater, Kootenai, Owyhee,
Payette, Shoshone, Washington.
Illinois

Counties of Adams, Calhoun, Greene,
Hancock, Henderson, Jersey, Macoupin,
Madison, Mercer, Monroe, Randolph,
Rock Island, Saint Clair, Warren.

Iowa

Counties of Adair, Allamakee, Appa-
noose, Clarke, Davis, Decatur, Des
Moines, Henry, Jasper, Jefferson, Ke-
okuk, Lee, Louisa, Lucas, Madison, Ma-
haska, Marion, Marshall, Monroe, Polk,
Ringgold, Tama, Taylor, Union, Van Bu-
ren, Wapello, Warren, Wayne, Win-
neshiek.

### Kansas

Counties of Allen, Anderson, Atchison,
Barber, Barton, Bourbon, Brown, Butler,
Chase, Chautauqua, Cherokee, Clark, Clay,
Coffey, Comanche, Cowley, Crawford,
Dickinson, Doniphan, Douglas, Edwards,
Elk, Ellis, Ellsworth, Finney, Ford, Frank-
lin, Geary, Gove, Grant, Gray, Greeley,
Greenwood, Hamilton, Harper, Harvey,
Haskell, Hodgeman, Jackson, Jefferson,
Johnson, Kearny, Kingman, Kiowa, La-
bette, Lane, Leavenworth, Lincoln, Linn,
Lyon, McPherson, Marion, Marshall,
Meade, Miami, Montgomery, Morris, Mor-
ton, Nemaha, Neosho, Ness, Osage, Os-
borne, Ottawa, Pawnee, Pottawatomie,
Pratt, Reno, Rice, Riley, Rush, Russell, Sa-

line, Scott, Sedgwick, Seward, Shawnee,
Stafford, Stanton, Stevens, Sumner, Trego,
Wabaunsee, Wallace, Wichita, Wilson,
Woodson, Wyandotte.

Louisiana

Parishes of Avoyelles, Bienville, Boss-
ier, Caddo, Caldwell, Catahoula, Clai-
borne, Concordia, De Soto, East Carroll,
Franklin, Grant, Jackson, La Salle, Lin-
coln, Madison, Morehouse, Natchitoches,
Ouachita, Rapides, Red River, Richland,
Sabine, Tensas, Union, Vernon, Webster,
West Carroll, Winn.

Maine

Counties of Cumberland, Hancock,
Knox, Lincoln, Sagadahoc, Waldo.

Maryland

City of Baltimore. Counties of Anne
Arundel, Baltimore, Charles, Harford,
Howard, Montgomery, Prince George's.

Michigan

Counties of Antrim, Charlevoix, Che-
boygan, Crawford, Emmet, Kalkaska,
Mackinac, Montmorency, Oscoda, Otsego,
Presque Isle.

Minnesota

Counties of Beltrami, Fillmore, Hous-
ton, Koochiching, Lake of the Woods,
Marshall, Pennington, Roseau.

Mississippi

Counties of Attala, Bolivar, Choctaw, Clai-
borne, Hinds, Holmes, Issaquena, Jefferson,
Kemper, Lauderdale, Leake, Lowndes, Mad-
ison, Neshoba, Newton, Noxubee, Oktibbeha,
Rankin, Scott, Sharkey, Warren, Washington,
Winston, Yazoo.

## Missouri

City of Saint Louis. Counties of Adair,
Andrew, Atchison, Audrain, Barry, Bar-
ton, Benton, Boone, Buchanan, Butler,
Caldwell, Callaway, Camden, Carroll,
Carter, Cass, Cedar, Chariton, Christian,
Clark, Clay, Clinton, Cole, Cooper, Craw-
ford, Dade, Dallas, Daviess, DeKalb,
Dent, Douglas, Dunklin, Franklin, Gas-
conade, Gentry, Greene, Grundy, Harri-

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son, Hickory, Holt, Howard, Howell, Iron,
Jackson, Jasper, Jefferson, Johnson,
Knox, Laclede, Lafayette, Lawrence,
Lewis, Lincoln, Linn, Livingston, Mc-
Donald, Macon, Madison, Maries, Mer-
cer, Moniteau, Monroe, Morgan, New
Madrid, Newton, Nodaway, Oregon,
Osage, Ozark, Pemiscot, Pettis, Phelps,
Platte, Polk, Pulaski, Putnam, Randolph,
Ray, Reynolds, Ripley, Saint Charles,
Saint Clair, Sainte Genevieve, Saint Fran-
cois, Saint Louis, Saline, Schuyler, Scot-
land, Shannon, Shelby, Stoddard, Stone,
Sullivan, Taney, Texas, Vernon, Warren,
Washington, Wayne, Webster, Worth,
Wright.

## Montana

Counties of Big Horn, Blaine, Broadwa-
ter, Carter, Cascade, Chouteau, Custer, Dan-
iels, Dawson, Fallon, Fergus, Flathead, Gal-
latin, Garfield, Glacier, Golden Valley, Hill,
Jefferson, Judith Basin, Lake, Lewis and
Clark, Liberty, Lincoln, McCone, Meagher,
Mineral, Missoula, Musselshell, Petroleum,
Phillips, Pondera, Powder River, Powell,
Prairie, Richland, Roosevelt, Rosebud,
Sanders, Sheridan, Teton, Toole, Treasure,
Valley, Wheatland, Wibaux, Yellowstone.

Nebraska

Counties of Pawnee, Richardson.

Nevada

Counties of Clark, Elko, Humboldt,
Washoe.

New Mexico

Counties of Bernalillo, Catron, Chaves,
Cibola, Colfax, Curry, DeBaca, Dona
Ana, Eddy, Grant, Guadalupe, Harding,
Hidalgo, Lea, Lincoln, Los Alamos, Luna,
McKinley, Mora, Otero, Quay, Rio Ar-
riba, Roosevelt, Sandoval, San Juan, San
Miguel, Santa Fe, Sierra, Socorro, Taos,
Torrance, Union, Valencia.

New York

Counties of Clinton, Essex, Franklin,
Hamilton, Warren.

North Carolina

Counties of Cabarrus, Caswell, Ca-
tawba, Chatham, Cherokee, Clay, Cleve-

land, Columbus, Cumberland, Davidson,
Davie, Durham, Edgecombe, Forsyth,
Franklin, Gaston, Graham, Granville,
Guilford, Halifax, Harnett, Hoke, Iredell,
Johnston, Lee, Lincoln, Mecklenburg,
Montgomery, Moore, Nash, Northamp-
ton, Orange, Person, Randolph, Rich-
mond, Robeson, Rockingham, Rowan,
Scotland, Stanly, Stokes, Surry, Union,
Vance, Wake, Warren, Yadkin.

## North Dakota

Counties of Adams, Barnes, Benson,
Billings, Bottineau, Bowman, Burke, Bur-
leigh, Cass, Cavalier, Dickey, Divide, Dunn,
Eddy, Emmons, Foster, Golden Valley,
Grand Forks, Grant, Griggs, Hettinger, Kid-
der, LaMoure, Logan, McHenry, McIntosh,
Mckenzie, McLean, Mercer, Morton,
Mountrail, Nelson, Oliver, Pembina, Pierce,
Ramsey, Ransom, Renville, Richland, Ro-
lette, Sargent, Sheridan, Sioux, Slope, Stark,
Steele, Stutsman, Towner, Traill, Walsh,
Ward, Wells, Williams.

## Ohio

Counties of Ashland, Columbiana, Co-
shocton, Cuyahoga, Erie, Fulton, Geauga,
Guernsey, Holmes, Huron, Knox, Lick-
ing, Lorain, Lucas, Mahoning, Medina,
Morrow, Muskingum, Ottawa, Portage,
Richland, Sandusky, Stark, Summit,
Trumbull, Tuscarawas, Wayne, Wood.

## Oklahoma

Counties of Adair, Alfalfa, Atoka, Bea-
ver, Beckham, Blaine, Bryan, Caddo, Ca-
nadian, Carter, Cherokee, Choctaw, Ci-
marron, Cleveland, Coal, Comanche,
Cotton, Craig, Creek, Custer, Delaware,
Dewey, Ellis, Garfield, Garvin, Grady,
Grant, Greer, Harmon, Harper, Haskell,
Hughes, Jackson, Jefferson, Johnston,
Kay, Kingfisher, Kiowa, Latimer, Le
Flore, Lincoln, Logan, Love, McClain,
McCurtain, McIntosh, Major, Marshall,
Mayes, Murray, Muskogee, Noble, No-
wata, Okfuskee, Oklahoma, Okmulgee,
Osage, Ottawa, Pawnee, Payne, Pittsburg,
Pontotoc, Pottawatomie, Pushmataha,
Roger Mills, Rogers, Seminole, Se-
quoyah, Stephens, Texas, Tillman, Tulsa,
Wagoner, Washington, Washita, Woods,
Woodward.

## Oregon

Counties of Baker, Benton, Clackamas,
Clatsop, Columbia, Coos, Crook, Curry,
Deschutes, Douglas, Gilliam, Grant, Har-
ney, Hood River, Jackson, Jefferson, Jo-
sephine, Klamath, Lake, Lane, Lincoln,
Linn, Malheur, Marion, Morrow, Mult-
nomah, Polk, Sherman, Tillamook, Uma-
tilla, Union, Wallowa, Wasco, Washing-
ton, Wheeler, Yamhill.

### Pennsylvania

Counties of Berks, Bradford, Carbon,
Chester, Columbia, Dauphin, Lack-
awanna, Lancaster, Lebanon, Lehigh, Lu-
zerne, Monroe, Montour, Northampton,
Northumberland, Pike, Schuylkill, Sulli-
van, Susquehanna, Wayne, Wyoming,
York.

Rhode Island

Counties of Kent, Providence, Wash-
ington.

South Carolina

Counties of Abbeville, Aiken, Allendale,
Bamberg, Barnwell, Beaufort, Berkeley,
Calhoun, Charleston, Chester, Chesterfield,
Clarendon, Colleton, Darlington, Dillon,
Dorchester, Edgefield, Fairfield, Florence,
Georgetown, Greenwood, Hampton, Horry,
Jasper, Kershaw, Lancaster, Laurens, Lee,
Lexington, McCormick, Marion, Marlboro,
Newberry, Orangeburg, Richland, Saluda,
Sumter, Union, Williamsburg, York.

South Dakota

Counties of Aurora, Beadle, Bennett,
Bon Homme, Brown, Brule, Buffalo,
Butte, Campbell, Charles Mix, Clark,
Codington, Corson, Custer, Davison, Day,
Dewey, Douglas, Edmunds, Fall River,
Faulk, Grant, Gregory, Haakon, Hand,
Harding, Hughes, Hutchinson, Hyde,
Jackson, Jerauld, Jones, Kingsbury, Law-
rence, Lyman, McPherson, Marshall,
Meade, Mellette, Miner, Oglala Lakota,
Pennington, Perkins, Potter, Roberts, San-
born, Spink, Stanley, Sully, Todd, Tripp,
Walworth, Yankton, Ziebach.

#### Tennessee

Counties of Anderson, Bedford, Bled-
soe, Bradley, Campbell, Claiborne, Cof-

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fee, Dyer, Fentress, Franklin, Giles,
Grainger, Grundy, Hamblen, Hamilton,
Hancock, Hardin, Hawkins, Jefferson,
Knox, Lake, Lauderdale, Lawrence, Lin-
coln, Loudon, McMinn, McNairy, Mar-
ion, Marshall, Meigs, Monroe, Moore,
Morgan, Obion, Polk, Rhea, Scott, Se-
quatchie, Shelby, Union, Van Buren,
Warren, Wayne.

Texas

Counties of Anderson, Andrews, An-
gelina, Aransas, Archer, Armstrong, Atas-
cosa, Austin, Bailey, Bandera, Bastrop,
Baylor, Bee, Bell, Bexar, Blanco, Borden,
Bosque, Bowie, Brazoria, Brazos, Brew-
ster, Briscoe, Brooks, Brown, Burleson,
Burnet, Caldwell, Calhoun, Callahan,
Cameron, Camp, Carson, Cass, Castro,
Chambers, Cherokee, Childress, Clay,
Cochran, Coke, Coleman, Collin, Colling-
sworth, Colorado, Comal, Comanche,
Concho, Cooke, Coryell, Cottle, Crane,
Crockett, Crosby, Culberson, Dallam,
Dallas, Dawson, Deaf Smith, Delta, Den-
ton, DeWitt, Dickens, Dimmit, Donley,
Duval, Eastland, Ector, Edwards, Ellis, El
Paso, Erath, Falls, Fannin, Fayette, Fisher,
Floyd, Foard, Fort Bend, Franklin, Free-
stone, Frio, Gaines, Galveston, Garza,
Gillespie, Glasscock, Goliad, Gonzales,
Gray, Grayson, Gregg, Grimes, Guadal-
upe, Hale, Hall, Hamilton, Hansford,
Hardeman, Hardin, Harrison, Hartley,
Haskell, Hays, Hemphill, Henderson, Hi-
dalgo, Hill, Hockley, Hood, Hopkins,
Houston, Howard, Hudspeth, Hunt,
Hutchinson, Irion, Jack, Jackson, Jasper,
Jeff Davis, Jefferson, Jim Hogg, Jim
Wells, Johnson, Jones, Karnes, Kaufman,
Kendall, Kenedy, Kent, Kerr, Kimble,
King, Kinney, Kleberg, Knox, Lamar,
Lamb, Lampasas, La Salle, Lavaca, Lee,
Leon, Liberty, Limestone, Lipscomb,
Live Oak, Llano, Loving, Lubbock, Lynn,
McCulloch, McLennan, McMullen, Mad-
ison, Marion, Martin, Mason, Matagorda,
Maverick, Medina, Menard, Midland, Mi-
lam, Mills, Mitchell, Montague, Moore,
Morris, Motley, Nacogdoches, Navarro,
Newton, Nolan, Nueces, Ochiltree, Old-
ham, Orange, Palo Pinto, Panola, Parker,
Parmer, Pecos, Polk, Potter, Presidio,
Rains, Randall, Reagan, Real, Red River,
Reeves, Refugio, Roberts, Robertson,
Rockwall, Runnels, Rusk, Sabine, San
Augustine, San Patricio, San Saba, Schlei-

cher, Scurry, Shackelford, Shelby, Sher-
man, Smith, Somervell, Starr, Stephens,
Sterling, Stonewall, Sutton, Swisher, Tar-
rant, Taylor, Terrell, Terry, Throckmor-
ton, Titus, Tom Green, Travis, Trinity,
Tyler, Upshur, Upton, Uvalde, Val Verde,
Van Zandt, Victoria, Ward, Washington,
Webb, Wharton, Wheeler, Wichita, Wil-
barger, Willacy, Williamson, Wilson,
Winkler, Wise, Wood, Yoakum, Young,
Zapata, Zavala.

Utah

Counties of Beaver, Box Elder, Cache,
Carbon, Daggett, Davis, Duchesne, Em-
ery, Garfield, Grand, Iron, Juab, Kane,
Millard, Morgan, Piute, Rich, Salt Lake,
San Juan, Sanpete, Sevier, Summit,
Tooele, Uintah, Utah, Wasatch, Washing-
ton, Wayne, Weber.

Vermont

Counties of Addison, Bennington,
Caledonia, Chittenden, Franklin, Grand
Isle, Lamoille, Orange, Orleans, Rutland,
Washington, Windham, Windsor.

Virginia

Cities of Alexandria, Bedford, Buena
Vista, Charlottesville, Colonial Heights,
Danville, Emporia, Fairfax, Falls Church,
Fredericksburg, Harrisonburg, Hopewell,
Lexington, Lynchburg, Manassas, Manas-
sas Park, Martinsville, Petersburg, Roa-
noke, Salem, Staunton, Waynesboro.
Counties of Albemarle, Amelia, Amherst,
Appomattox, Arlington, Augusta, Bed-
ford, Botetourt, Brunswick, Buckingham,
Campbell, Caroline, Charles City, Char-
lotte, Chesterfield, Culpeper, Cumberland,
Dinwiddie, Essex, Fairfax, Fauquier,
Floyd, Fluvanna, Franklin, Goochland,
Greene, Greensville, Halifax, Hanover,
Henrico, Henry, James City, King
George, Loudoun, Louisa, Lunenburg,
Madison, Mecklenburg, Montgomery,
Nelson, New Kent, Nottoway, Orange,
Page, Patrick, Pittsylvania, Powhatan,
Prince Edward, Prince George, Prince
William, Rappahannock, Richmond, Roa-
noke, Rockbridge, Rockingham, South-
ampton, Spotsylvania, Stafford, Surry,
Sussex, Warren, Westmoreland.

### Washington

Counties of Adams, Asotin, Benton,
Chelan, Clallam, Clark, Columbia, Cowlitz,
Douglas, Ferry, Franklin, Garfield, Grant,
Grays Harbor, Island, Jefferson, King, Kit-
sap, Kittitas, Klickitat, Lewis, Lincoln, Ma-
son, Okanogan, Pacific, Pend Oreille,
Pierce, San Juan, Skagit, Skamania, Sno-
homish, Spokane, Stevens, Thurston, Wah-
kiakum, Walla Walla, Whatcom, Whitman,
Yakima.

Wisconsin

Counties of Clark, Crawford, Eau
Claire, Grant, Jackson, Jefferson, Juneau,
Kenosha, La Crosse, Marathon, Milwau-
kee, Monroe, Racine, Rock, Trempealeau,
Vernon, Walworth, Waukesha, Wood.

Wyoming

Counties of Albany, Campbell, Car-
bon, Crook, Lincoln, Sheridan, Sweetwa-
ter, Uinta.

# Guidance Under Section 451(b) Relating to Market Discount

Notice 2018-80

## SECTION 1. PURPOSE

This notice announces that the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service
(IRS) intend to issue proposed regulations
under section 451(b) of the Internal Rev-
enue Code that will address the applica-
bility of section 451(b) to market discount
as defined in section 1278(a)(2). Section
451(b) was added on December 22, 2017,
by section 13221 of An Act to provide for
reconciliation pursuant to titles II and V of
the concurrent resolution on the budget
for fiscal year 2018, Pub. L. No. 115-97,
131 Stat. 2054, 2116 (2017).

## SECTION 2. TREATMENT OF MARKET DISCOUNT UNDER SECTION 451(b)

For an accrual method taxpayer, in-
come is includible in gross income when
all the events have occurred which fix the
right to receive such income and the

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amount thereof can be determined with
reasonable accuracy (all events test). See
§ 451(b)(1)(C); § 1.451-1(a) of the In-
come Tax Regulations. Section 451(b)
(1)(A) provides that the all events test is
met with respect to an item of gross in-
come no later than when the taxpayer
takes that item of gross income into ac-
count as revenue for financial accounting
purposes in an "applicable financial state-
ment" as defined in section 451(b)(3).
Section 451(b)(2) provides that the gen-
eral rule in section 451(b)(1) does not
apply to any item of gross income for
which the taxpayer uses a special method
of accounting, other than items accounted
for under a provision of part V of sub-
chapter P, which contains sections 1271
through 1288.

Section 1276(a)(1) treats gain (if any)
on the disposition of a market discount
bond as ordinary income to the extent that
the gain does not exceed the accrued
market discount on the bond. Section
1276(a)(3) provides that any partial prin-
cipal payment on a market discount bond
is includible in gross income to the extent
the payment does not exceed accrued mar-
ket discount on the bond.

Taxpayers have requested guidance as
to whether market discount is includible
in income under section 451(b). The Trea-
sury Department and the IRS intend to
issue proposed regulations providing that
accrued market discount is not includible
in income under section 451(b). The guid-
ance described in this notice will be ap-
plicable as of January 1, 2018.

## SECTION 3. DRAFTING AND GENERAL CONTACT INFORMATION

The principal author of this notice is
Alexa T. Dubert of the Office of the As-
sociate Chief Counsel (Financial Institu-
tions and Products). Other personnel from
the Treasury Department and the IRS par-
ticipated in its development. For further
information regarding this notice, contact
Charles W. Culmer of the Office of the
Associate Chief Counsel (Financial Insti-
tutions and Products) at (202) 317-4528
(not a toll-free number).

26 CFR 601.702: Publication, public inspection, and
specific requests for records.
(Also: Part l, Section 6103(p)(2))

Rev. Proc. 2018-50

## SECTION 1. PURPOSE

This revenue procedure announces a
change in user fees that will be charged by
the Service to process certain Forms 8802,
Application for United States Residency
Certification. This change in user fees will
apply to applications of non-individual
applicants that are postmarked on or after
December 1, 2018, and will be reflected in
the next revision of Form 8802 and ac-
companying instructions.

## SECTION 2. BACKGROUND

01\. Form 8802 is used to request Form
6166, a letter that the applicant may use as
proof of the applicant's status as a resident
of the United States to claim benefits un-
der an income tax treaty or an exemption
from a value added tax (VAT) imposed by
a foreign country. Applicants that are fis-
cally transparent for U.S. federal tax pur-
poses, such as partnerships, S corpora-
tions and grantor trusts, may request
certification based on the status of their
partners, shareholders, owners or benefi-
ciaries. Custodians must submit a separate
Form 8802 on behalf of each account
holder. Applications filed after March 31,
2012, have been charged a user fee of
$85.00, without regard to whether the ap-
plicant is an individual or non-individual
applicant.

.02 Among other requirements, Form
8802 requires the applicant to specify its
taxpayer identification number (TIN) and,
in the case of applicants that are fiscally
transparent entities, the TINs of the appli-
cant's partners, shareholders, owners or
beneficiaries. (A TIN includes, among
other things, an individual taxpayer's So-
cial Security Number (SSN) or an entity's
Employer Identification Number (EIN).)
Form 8802 also requires the applicant to
specify the country or countries for which
certification is requested, the number of
Form(s) 6166 to be issued for each coun-
try, and the tax year(s) for which certifi-
cation is requested. An applicant may re-
quest Form 6166 for multiple countries
and multiple tax periods on a single Form
8802 application. See Form 8802 and in-
structions for additional information on
the application process.

.03 Payment of user fees for Form
8802 may be made by check, money or-
der, or electronic payment. The specific
instructions for making payments are in-
cluded in the instructions to Form 8802.

## SECTION 3. SCOPE

.01 Requests postmarked on or after
December 1, 2018. User fees for Forms
8802 postmarked on or after December 1,
2018, are as follows:

(1) Requests by individual appli-
cants. A user fee of $85.00 per Form 8802
will continue to be charged for a request
by an individual applicant, regardless of
the number of countries for which certifi-
cation is requested or the number of tax
year(s) to which the certification applies.
For this purpose, an individual applicant
means an individual who is a citizen of the
United States or a resident thereof, within
the meaning of section 7701(b)(1)(A) of
the Internal Revenue Code.

(2) Requests by applicants other
than individuals. A user fee of $185.00
per Form 8802 will be charged for a re-
quest by each non-individual applicant.

(3) Fiscally transparent entities. A
partnership, S corporation, grantor trust,
or other fiscally transparent entity will be
charged a single $185.00 user fee with
respect to all Forms 6166 issued under its
EIN, notwithstanding that the Internal
Revenue Service will verify the tax status
of each of the partners, owners, or bene-
ficiaries of the entity who have consented
to the request for certification.

(4) Custodial accounts. A custodian
requesting certification on behalf of an
account holder will continue to be charged
a user fee for each account holder TIN,
depending upon whether that account
holder is an individual or non-individual
applicant.

(5) Multiple requests. Because any
additional request for Form 6166 submit-
ted by an applicant on a separate Form
8802 will require the payment of an addi-
tional $85.00 or $185.00 user fee charge,
an applicant is encouraged to include all
Form 6166 requests relevant to a single
Form 8802 to avoid multiple user fee
charges.

(6) Generally non-refundable. The
Form 8802 user fee is not refundable ex-
cept in cases of overpayment due to math-
ematical error or mistake.

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.02 Private delivery services. Form
8802 will be treated as postmarked before
December 1, 2018, if it is delivered via a
private delivery service designated in
https://www.irs.gov/pds to the address
specified in the instructions to Form 8802
for private delivery and the private deliv-
ery service company accepts Form 8802
for delivery before December 1, 2018.

.03 Fax submissions. Filers may fax
Form 8802 to the IRS after paying the
user fee by electronic payment at the Pay-
.gov website (www.pay.gov) and record-
ing the electronic payment confirmation
number on Form 8802. In such cases,
Form 8802 will be treated as postmarked
before December 1, 2018, if the IRS re-
ceives Form 8802 with a valid electronic

payment confirmation number by fax at
one of the phone numbers designated in
the Form 8802 instructions before Decem-
ber 1, 2018.

# SECTION 4. EFFECT ON OTHER DOCUMENTS

This revenue procedure modifies and
supersedes Rev. Proc. 2006-35, 2006-2
C.B. 434, as modified by Notice 2006-90,
2006-2 C.B. 688, and Rev. Proc. 2007-
22, 2007-1 C.B. 675.

# SECTION 5. EFFECTIVE DATE

This revenue procedure is effective for
Form 8802 applications received with a

postmark date on or after December 1,
2018.

# SECTION 6. DRAFTING INFORMATION

The principal author of this revenue pro-
cedure is Jeffrey L. Vinnik of the Office of
Associate Chief Counsel (International). For
further information regarding this revenue
procedure, contact Mr. Vinnik at (202) 317-
4959 (not a toll free number). For the latest
information about developments related
to Form 8802 and its instructions, go to
www.irs.gov/form8802.

Rev. Proc. 2018-52

# TABLE OF CONTENTS

## PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTIONSYSTEM

SECTION 1. PURPOSE AND OVERVIEW

614

.01 Purpose

614

.02 General principles underlying EPCRS

614

.03 Overview

614

SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS

.01 Effect on programs

614

.02 Modifications relating to VCP submission procedures

614

.03 Description of other modifications

615

.04 Future enhancements

616

PART II. PROGRAM EFFECT AND ELIGIBILITY

SECTION 3. EFFECT OF EPCRS; RELIANCE

.01 Effect of EPCRS on retirement plans

616

.02 Compliance statement

616

.03 Excise and other taxes

616

.04 Reliance

616

SECTION 4. PROGRAM ELIGIBILITY

.01 EPCRS Programs

616

.02 Effect of examination

616

.03 SCP eligibility requirements relating to plan documents

616

.04 Established practices and procedures

617

.05 Correction by plan amendment

617

.06 Availability of correction for Employer Eligibility Failure

617

.07 Availability of correction for a terminated plan

617

.08 Availability of correction for an Orphan Plan

618

.09 Availability of correction for § 457(b) plans

618

.10 Egregious failures

618

.11 Diversion or misuse of plan assets

618

.12 Abusive tax avoidance transactions

618

PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY

SECTION 5. DEFINITIONS

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.01 Definitions for Qualified Plans

618

.02 Definitions for 403(b) Plans

620

.03 Definitions for Orphan Plans

621

.04 Earnings

621

.05 IRA

621

.06 SEP

621

.07 SIMPLE IRA Plan

621

.08 Under Examination

621

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of general applicability

622

.02 Correction principles.

622

.03 Correction of an Employer Eligibility Failure.

625

.04 Correction of a failure to obtain spousal consent

625

.05 Determination letter application not permitted

626

.06 Special rules relating to Excess Amounts

626

.07 Rules relating to reporting plan loan failures

628

.08 Correction under statute or regulations

628

.09 Matters subject to excise or other taxes

628

.10 Correction for 403(b) Plans

629

.11 Correction for SEPs and SIMPLE IRA Plans

630

.12 Confidentiality and disclosure

630

.13 No effect on other law

630

PART IV. SELF-CORRECTION (SCP)

SECTION 7. IN GENERAL

SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES

.01 Requirements.

631

.02 Factors

631

.03 Multiple failures

631

.04 Examples

631

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES

.01

Requirements.

631

.02

Correction period

631

.03.Substantial completion of correction

632

.04 Examples

632

PART V. VOLUNTARY CORRECTION PROGRAM WITH IRS APPROVAL (VCP)

SECTION 10. VCP PROCEDURES

.01

VCP requirements

632

.02

Identification of failures

632

.03

Effect of VCP submission on examination

632

.04

No concurrent examination activity

633

.05

Determination letter applications not related to a VCP submission

633

.06

Processing of submission

633

.07 Compliance statement

634

.08 Effect of compliance statement on examination

635

.09 Special rules relating to Anonymous Submissions

635

.10

Special rules relating to Group Submissions

635

.11

Multiemployer and multiple employer plans

636

SECTION 11. SUBMISSION PROCEDURES FOR VCP

.01

General rules

636

.02

Submission of model forms

636

.03

Mandatory submission process using the www.pay.gov website

637

.04

PDF file submission contents

637

.05

User fee due at the time of VCP submission using the www.pay.gov website

638

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.06 Additional amount due for Group Submissions

638

.07 Additional amounts due for certain submissions.

638

.08 Power of attorney requirements

639

.09 Acknowledgement of filing

639

.10 Maintenance of copies of submission

639

.11 Assembling the submission

639

SECTION 12. VCP USER FEES .01 User fees

639

PART VI. CORRECTION ON AUDIT (AUDIT CAP)

SECTION 13. DESCRIPTION OF AUDIT CAP

.01 Audit CAP requirements

640

.02 Payment of sanction

640

.03 Additional requirements

640

.04 Failure to reach resolution

640

.05 Effect of closing agreement

640

.06 Other procedural rules

640

SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction

640

.02 Factors considered

640

.03 Transferred Assets

640

.04 Sanction for Nonamender Failures discovered during the determination letter application process

641

PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK REDUCTION ACT

SECTION 15. EFFECT ON OTHER DOCUMENTS

SECTION 16. EFFECTIVE DATE

SECTION 17. PUBLIC COMMENTS

SECTION 18. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION

APPENDIX A: OPERATIONAL FAILURES AND CORRECTION METHODS

.01 General rule.
642

.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-key employees
642

.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)
642

.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30))
642

.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years
642

.06 Failure to timely pay the minimum distribution required under § 401(a)(9).
647

.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
647

.08 Failure to satisfy the § 415 limits in a defined contribution plan
648

.09 Orphan Plans; orphan contracts and other assets
648

APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS
AND EXAMPLES

SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES

.01 Purpose
649

.02 Assumptions for Examples
649

.03 Designated Roth contributions
649

.04 Section references
649

SECTION 2. CORRECTION METHODS AND EXAMPLES

.01 ADP/ACP Failures
649

.02 Exclusion of Otherwise Eligible Employees
650

.03 Vesting Failures
657

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<!-- PageHeader=".04 § 415 Failures" -->

658

.05 Correction of Other Overpayment Failures
660

.06 § 401(a)(17) Failures
660

.07 Correction by Amendment

660

## SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES

.01 Earnings Adjustment Methods

.02 Examples.

## PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

## SECTION 1. PURPOSE AND OVERVIEW

.01 Purpose. This revenue procedure
updates the comprehensive system of cor-
rection programs for sponsors of retire-
ment plans that are intended to satisfy the
requirements of § 401(a), 403(a), 403(b),
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 Compli-
ance Resolution System ("EPCRS"), per-
mits Plan Sponsors to correct these fail-
ures 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 Pro-
gram ("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 appli-
cable plan document requirements of
the Code.

· Sponsors and other administrators
should make voluntary and timely cor-
rection of any plan failures, whether
involving discrimination in favor of
highly compensated employees, plan
operations, the terms of the plan doc-
ument, or adoption of a plan by an
ineligible employer. Timely and effi-
cient correction protects participating
employees by providing them with

their expected retirement benefits, in-
cluding favorable tax treatment.

· Voluntary compliance is promoted by
establishing limited fees for voluntary
corrections approved by the Internal
Revenue Service ("IRS"), thereby re-
ducing employers' uncertainty regard-
ing their potential tax liability and par-
ticipants' potential tax liability.

· Fees and sanctions should be gradu-
ated in a series of steps so that there
is always an incentive to correct
promptly.

· Sanctions for plan failures identified
on audit should be reasonable in light
of the nature, extent, and severity of
the violation.

· Administration of EPCRS should be
consistent and uniform.

· Sponsors should be able to rely on the
availability of EPCRS in taking cor-
rective actions to maintain the tax-
favored status of their plans.

.03 Overview. EPCRS includes the fol-
lowing basic elements:

· Self-correction (SCP). A Plan Sponsor
that has established compliance prac-
tices and procedures may, at any time
without paying any fee or sanction,
correct insignificant Operational Fail-
ures under a Qualified Plan, a 403(b)
Plan, a SEP, or a SIMPLE IRA Plan.
For a SEP or SIMPLE IRA Plan, how-
ever, SCP is available only if the SEP
or SIMPLE IRA Plan is established
and maintained on a document ap-
proved by the IRS. In the case of a
Qualified Plan or 403(b) Plan that sat-
isfies the requirements of sections 4.03
and 4.04, the Plan Sponsor generally
may correct even significant Opera-
tional Failures without payment of any
fee or sanction if the correction is
made within the time specified in sec-
tion 9.02.

· Voluntary correction with IRS ap-
proval (VCP). A Plan Sponsor, at any
time before audit, may pay a limited

661
663

fee and receive the IRS's approval for
correction of a Qualified Plan, 403(b)
Plan, SEP, or SIMPLE IRA Plan fail-
ure. Under VCP, there are special pro-
cedures 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 reason-
able 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. 2016-51, 2016-42 I.R.B. 465, the
most recent prior consolidated statement
of the correction programs under EPCRS.
This update to Rev. Proc. 2016-51 is a
limited update and is published primarily
to set forth new VCP submission proce-
dures, including the required use of the
www.pay.gov website. See the discussion
of the new VCP submission procedures in
section 2.02 and 2.03. The IRS and the
Department of the Treasury (Treasury De-
partment) are currently developing guid-
ance on other issues relating to EPCRS.
See the general discussion in section
2.04(2).

.02 Modifications relating to VCP sub-
mission procedures. (1) In general. Be-
ginning April 1, 2019, Plan Sponsors must
use the www.pay.gov website when filing
a VCP submission and paying applicable
user fees. To ease the transition to the new
submission procedures, from January 1,
2019, through March 31, 2019, Plan
Sponsors may file VCP submissions with
the IRS either by using www.pay.gov in
accordance with sections 10 and 11 of this
revenue procedure or by filing paper VCP

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submissions in accordance with the pro-
cedures in sections 10 and 11 of Rev.
Proc. 2016-51. However, the IRS will not
accept paper VCP submissions post-
marked on or after April 1, 2019.

(2) Modifications to section 10. Section
10.01 is revised to modify and clarify the
requirements for satisfying the VCP
procedures, including new procedures
for filing a VCP submission and paying
applicable user fees on the www.pay.gov
website. Although the Plan Sponsor is
responsible for filing the VCP submis-
sion and paying the user fee using the
www.pay.gov website, section 10.01
clarifies that a Plan Sponsor may desig-
nate an authorized representative to file
the VCP submission if certain require-
ments are satisfied.

(3) Modifications to section 11. Section
11 sets forth filing procedures for VCP
submissions. These procedures have been
modified to reflect electronic filing of
VCP submissions and payment of appli-
cable user fees using the www.pay.gov
website. An electronic VCP submission
filed using the www.pay.gov website must
include many of the same documents as a
VCP submission filed on paper pursuant
to Rev. Proc. 2016-51; however, there are
procedural differences. First, an applicant
must use the www.pay.gov website to cre-
ate a pay.gov account. This pay.gov ac-
count will be used when filing a VCP sub-
mission and paying applicable user fees.
Second, after a pay.gov account has been
established, the applicant must complete
Form 8950, Application for Voluntary Cor-
rection Program (VCP) Submission Under
the Employee Plans Compliance Resolution
System, using the www.pay.gov website.
Beginning April 1, 2019, applicants are not
permitted to submit a paper version of Form
8950. Third, documents relating to the VCP
submission, including the description of
failures, Form 14568 (Model VCP Compli-
ance Statement), Schedules 1 through 9 of
Form 14568, and any other applicable items
(as set forth in section 11.04) for a VCP
submission generally must be converted
into a single PDF (Portable Document For-
mat) document and then uploaded onto the
www.pay.gov website. However, there is a
15 MB size limitation for uploading a PDF
document onto the www.pay.gov website;
thus special instructions are provided for
PDF files that exceed that limitation. Fourth,

section 11 provides new procedures relating
to the payment of user fees using the www.
pay. gov website, including the generation of
a payment confirmation. For submissions
made using the www.pay.gov website, the
IRS will no longer mail an acknowledgment
letter to the applicant. Receipt of a submis-
sion will be acknowledged through the gen-
eration of a unique Pay.gov Tracking ID on
the payment confirmation after the VCP
submission is filed and the user fee is paid.
A Plan Sponsor may designate an autho-
rized representative to file a VCP submis-
sion with the IRS using the www.pay.gov
website. Section 11.08(2) sets forth specific
instructions on how to designate an autho-
rized representative using the Form 2848,
Power of Attorney and Declaration of Rep-
resentation.

.03 Description of other modifications.
The Treasury Department and the IRS
also made modifications to Rev. Proc.
2016-51 to reflect recent changes in cer-
tain Employee Plans programs, including
changes to the Pre-approved Plan program
for Qualified Plans and the Pre-Approved
403(b) plan program, and to make certain
other changes. The modifications to Rev.
Proc. 2016-51 that are reflected in this
revenue procedure include the following
changes -

· Revising section 4.03 to clarify that
the provisions of SCP for significant
Operational Failures are available for a
403(b) Plan if the 403(b) Plan satisfies
the conditions for being treated as hav-
ing a Favorable Letter in section
6.10(2), and to make other minor mod-
ifications.

· Revising section 4.09 to reflect that
applicants of submissions for § 457(b)
plans must use the www.pay.gov web-
site to file submissions.

· Revising section 4.12 to remove refer-
ences to an "IRS Employee Plans Tax
Shelter Coordinator."

· Revising the definition of the term
"Favorable Letter" in sections
5.01(4)(b) and (8) and 5.02(8) to
reflect modifications made to the
IRS Pre-approved Plan program for
Qualified Plans.

· Revising section 6.02(5)(d)(ii) to clar-
ify why the IRS Letter Forwarding
Program is no longer used as a means
to search for participants and benefi-

ciaries and to remove the transition
rules in section 6.02(5)(d)(iii).

· Revising section 6.05(2)(a) and (b) to
apply to 403(b) Pre-approved Plans.

· Revising section 6.09(6) to clarify that
the additional amount that a Plan
Sponsor may pay as a condition for the
IRS to not pursue some or all of the
10% additional tax under section 72(t)
is a sanction, not an additional fee.

· Updating a reference in section
6.10(3).

· Revising section 10.06(2) to clarify
that, in certain cases, the IRS reserves
the right to not issue a compliance
statement and to set forth the circum-
stances under which a user fee may or
may not be refunded.

· Revising section 10.06(3) to clarify
that, if the IRS determines that a sub-
mission is complete and agrees with
the proposed correction method, a
compliance statement may be issued
without the IRS contacting the Plan
Sponsor (or its authorized representa-
tive).

· Revising section 10.06(8)(c) to clarify
procedures for including a penalty of
perjury statement in a submission, in-
cluding the procedures if a submission
is subsequently modified.

· Updating a reference in section
10.07(2)(d).

· Revising section 10.09 to update the
procedural requirements for Anony-
mous Submissions to reflect changes
for submissions made using the www.
pay.gov website, including procedures
for including a penalty of perjury state-
ment in a submission.

· Revising section 10.10 to update
special rules for Group Submis-
sions to reflect changes to the IRS
Pre-approved Plan programs, and
to make other minor modifications.

· Revising section 10.11 to remove for-
mer paragraph 10.11(2) relating to cal-
culating the user fee with respect to a
multiemployer or multiple employer
plan and to clarify that the plan admin-
istrator of such a plan must file the
VCP submission with respect to any
plan failures, but that the plan admin-
istrator may designate an authorized
representative to file a VCP submis-
sion with the IRS using the www.pay.

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gov website as described in section
11.08.

· Revising section 11.01(2) to provide
that, beginning January 1, 2019, an
applicant (generally, either a Plan
Sponsor or a representative authorized
pursuant to a valid Form 2848) is per-
mitted to use the www.pay.gov website
when filing a VCP submission and
paying the applicable user fee. This
electronic submission process be-
comes mandatory April 1, 2019. For a
general description of the changes in
section 11, see section 2.02.

· Revising section 12 to reflect that
changes to the VCP user fees are in-
cluded in annual revenue procedures
issued by the IRS.

· Revising section 13.02 to clarify that
the sanction under Audit CAP may be
paid using the payment methods avail-
able on the www.pay.gov website.

· Revising section 13.06 to reflect that
the procedural rules for Audit CAP are
provided in Internal Revenue Manual
("IRM") 4.71.3.3, EPCRS Closing
Agreements, and IRM 7.11.8, EP De-
terminations Closing Agreement Pro-
gram.

· Revising section 14.04 to reflect that
changes to the VCP user fees (on
which certain Audit CAP sanctions are
based) are included in annual revenue
procedures issued by the IRS.

· Correcting various citations, cross ref-
erences, and typographical errors and
making stylistic changes to improve
clarity.

.04 Future enhancements.

(1) In general. It is expected that the
IRS and the Treasury Department will
continue to update the EPCRS revenue
procedure, in whole or in part, from time
to time, including further improvements
to EPCRS based on comments received.
Accordingly, the IRS and Treasury De-
partment continue to invite further com-
ments on how to improve EPCRS. For
information on how to submit comments,
see section 17.

(2) Recoupment of Overpayments and
potential modifications to SCP. The Trea-
sury Department and the IRS requested
comments in Rev. Proc. 2015-27, 2015-16
I.R.B. 914, on potential changes to EPCRS
relating to the recoupment of Overpay-
ments. The Treasury Department and the

IRS received and are reviewing responsive
comments, and are in the process of devel-
oping further changes to modify the EPCRS
rules on the correction of Overpayments. In
addition, the Treasury Department and the
IRS have received comments relating to
expanding SCP and are in the process of
reviewing the comments received. The
Treasury Department and the IRS are con-
sidering changes to the program based on
those comments.

## 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 sec-
tion 13, the IRS 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 cor-
rects 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 pur-
poses 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
IRS and the Plan Sponsor or Eligible Or-
ganization as provided in section 10.07.

.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 re-
lief described in section 3.01.

## SECTION 4. PROGRAM ELIGIBILITY

.01 EPCRS Programs. (1) SCP. SCP is
available only for Operational Failures.
Qualified Plans and 403(b) Plans are eli-
gible 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 proce-
dures 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 pro-
vided, Audit CAP is available for Quali-
fied 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 IRS may extend EPCRS to other ar-
rangements.

(5) Appropriate use of programs. In a
particular case, the IRS 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 Oper-
ational Failures can be corrected under
SCP; and, if correction of significant Op-
erational Failures has been completed or
substantially completed (as described in
section 9.03) before the plan or Plan
Sponsor is Under Examination, correction
of those failures can be completed under
SCP.

.03 SCP eligibility requirements relat-
ing to plan documents. (1) Requirements
for Qualified Plans and 403(b) Plans. The
provisions of SCP relating to significant
Operational Failures are available for a
Qualified Plan that, as of the date of cor-
rection, is the subject of a Favorable Let-
ter. See section 5.01(4) for the definition
of Favorable letter for a Qualified Plan.
The provisions of SCP relating to signif-
icant Operational Failures are available
for a 403(b) Plan if the conditions for
being treated as having a Favorable Letter

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in section 6.10(2) are satisfied. See section
5.02(5).

(2) Requirements for SEPs and
SIMPLE IRAs. The provisions of SCP re-
lating to insignificant Operational Fail-
ures (see section 8) are available for a
SEP only if the plan document consists
of either (i) a valid Model Form 5305-
SEP, Simplified Employee Pension-In-
dividual Retirement Accounts Contribu-
tion Agreement, or 5305A-SEP, Salary
Reduction Simplified Employee Pen-
sion-Individual Retirement Accounts
Contribution Agreement, adopted by an
employer in accordance with the in-
structions 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 and 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 are
available for a SIMPLE IRA Plan only
if the plan document consists of either
(i) a valid Model Form 5305-SIMPLE,
Savings Incentive Match Plan for Em-
ployees of Small Employers (SIMPLE)-
for Use with a Designated Financial
Institution, or 5304-SIMPLE, Savings In-
centive Match Plan for Employees of
Small Employers (SIMPLE)-Not for
Use with a Designated Financial Institu-
tion, adopted by an employer in accor-
dance with the instructions on the appli-
cable form (see Rev. Proc. 2002-10) or
(ii) a prototype SIMPLE IRA Plan that
has a current favorable opinion letter and
that has been amended in accordance with
the procedures set forth in Rev. Proc.
2002-10.

.04 Established practices and proce-
dures. 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 compli-
ance in form and operation with applica-
ble Code requirements. For example, the
plan administrator of a Qualified Plan that
may be top-heavy under § 416 may in-
clude in its plan operating manual a spe-
cific 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 evi-

dence 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 oc-
curred 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 suf-
ficient to prevent the occurrence of the
failure. A plan that provides for elective
deferrals and nonelective employer contri-
butions that are not matching contribu-
tions is not treated as failing to have es-
tablished practices and procedures to
prevent the occurrence of a § 415(c) vio-
lation 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
91/2 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 corpo-
rate 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 as-
sumed 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 Trans-
ferred Assets by the end of the first plan
year that begins after the corporate
merger, acquisition, or other similar trans-
action. (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 amend-
ment 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 Oper-
ational Failures by a plan amendment, in-
cluding correcting an Operational Failure
by a plan amendment to conform the
terms of the plan to the plan's prior oper-
ations, provided that the amendment com-
plies with the applicable Code require-
ments, 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 ac-
tion. 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 pro-
vided for under the plan, the plan may be
amended to provide for qualified nonelec-
tive contributions. As explained further in
sections 6.05 and 10.07(2), the issuance of
a compliance statement constitutes a de-
termination that the failure identified has
been corrected, but does not constitute a
determination that the terms of the plan,
including the corrective plan amendment,
satisfy the qualification requirements in
form.

(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 oper-
ations 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 ADP test
required under § 401(k)(3) and the Plan
Sponsor makes qualified nonelective con-
tributions not already provided for under
the plan, the plan may be amended to
provide for qualified nonelective contribu-
tions. SCP is not otherwise available for a
Plan Sponsor to correct an Operational
Failure by a plan amendment.

.06 Availability of correction for Em-
ployer Eligibility Failure. SCP is not
available for a Plan Sponsor to correct an
Employer Eligibility Failure.

.07 Availability of correction for a ter-
minated plan. Correction of Qualification
Failures and 403(b) Failures in a termi-
nated plan may be made under VCP and
Audit CAP, whether or not the plan trust
or contract is still in existence.

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.08 Availability of correction for an
Orphan Plan. A failure in an Orphan Plan
that is terminating may be corrected under
VCP and Audit CAP if the party acting on
behalf of the plan is an Eligible Party, as
defined in section 5.03(2). See generally
section 6.02(2)(e)(i). SCP is not available
for correcting failures in Orphan Plans. In
the case of a terminating Orphan Plan, the
IRS may, in its discretion, waive the user
fee. In such a case, the submission must
include a request for a waiver of the user
fee. See section 11.04(14).

.09 Availability of correction for
§ 457(b) plans. The IRS will accept sub-
missions relating to § 457(b) plans on a
provisional basis outside of EPCRS
through standards that are similar to those
that apply with respect to VCP filings
under sections 10 and 11, as applicable,
including procedures for filing a submis-
sion on the www.pay.gov website. The
availability of correction is generally lim-
ited to plans that are sponsored by gov-
ernmental 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 de-
scribed in § 457(e)(1)(B), the IRS gener-
ally will not enter into an agreement to
address problems associated with such a
plan. However, the IRS may consider a
submission for such a plan where, for
example, the plan was erroneously estab-
lished 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 Egregious failures. (1) In general.
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 No-
tice 2003-24, 2003-1 C.B. 853, with re-
spect to good faith bargaining and welfare
benefit funds); or (c) a defined contribu-
tion 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).

(2) SCP. SCP is not available to correct
Operational Failures that are egregious.

(3) VCP. VCP is available to correct
egregious failures. However, the IRS re-
serves the right to impose a sanction that
may be larger than the user fee described
in the annual revenue procedure that sets
forth user fees, including VCP user fees.
For this purpose, 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.

(4) Audit CAP. Audit CAP also is
available to correct egregious failures.

.11 Diversion or misuse of plan assets.
SCP, VCP, and Audit CAP are not avail-
able to correct failures relating to the di-
version or misuse of plan assets.

.12 Abusive tax avoidance transac-
tions. (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 4.12(2)), SCP is not
available to correct any Operational Fail-
ure that is directly or indirectly related to
the abusive tax avoidance transaction.

(b) VCP. With respect to VCP, if the
IRS determines that a plan or Plan Spon-
sor was, or may have been, a party to an
abusive tax avoidance transaction (as de-
fined in section 4.12(2)), then the matter
will be discussed and coordinated with
appropriate IRS personnel. The IRS may
determine that the plan or the Plan Spon-
sor has been a party to an abusive tax
avoidance transaction, and that the fail-
ures addressed in the VCP submission are
related to that transaction. In those situa-
tions, the IRS will conclude the review of
the submission without issuing a compli-
ance statement and will refer the case for
examination. However, if the IRS deter-
mines that the plan failures are unrelated
to the abusive tax avoidance transaction or
that no abusive tax avoidance transaction
occurred, then the IRS will permit the
VCP submission 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 abu-
sive tax avoidance transaction. In addi-
tion, even if it is concluded that the fail-
ures can be addressed pursuant to a VCP
submission, the IRS reserves the right to
make a referral of the abusive tax avoid-
ance transaction matter for examination.

(c) Audit CAP and SCP (for plans Un-
der Examination). For plans Under Exam-
ination, if the IRS determines that the plan
or Plan Sponsor was, or may have been, a
party to an abusive tax avoidance transac-
tion, the matter may be discussed and
coordinated with appropriate IRS person-
nel. With respect to plans Under Exami-
nation, an abusive tax avoidance transac-
tion includes a transaction described in
section 4.12(2) and any other transaction
that the IRS determines was designed to
facilitate the impermissible avoidance of
tax. Upon receiving a response from the
appropriate IRS personnel, (i) if the IRS
determines that a failure is related to the
abusive tax avoidance transaction, the IRS
reserves the right to conclude that neither
Audit CAP nor SCP is available for that
failure, or (ii) if the IRS determines that
satisfactory corrective actions have not
been taken with regard to the transaction,
the IRS 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 4.12(1)
(except to the extent otherwise provided
in section 4.12(1)(c)), an abusive tax
avoidance transaction means any listed
transaction under § 1.6011-4(b)(2) and
any other transaction identified as an abu-
sive transaction on the IRS website enti-
tled "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).

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(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. (i) In gen-
eral. 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). 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, Demo-
graphic Failure, or Employer Eligibility
Failure. This term includes a Nonamender
Failure, a failure to adopt Good Faith
Amendments, and a failure to adopt In-
terim Amendments. Failure to adopt a dis-
cretionary plan amendment by the plan
amendment deadline set forth in section
8.02 of Rev. Proc. 2016-37 (or section
5.05(2) of Rev. Proc. 2007-44) is not
considered a plan document failure.

(ii) Specific definitions relating to Plan
Document Failures:

(A) "Good Faith Amendment" includes
the EGTRRA good faith amendments de-
scribed 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 mortal-
ity table to reflect the guidance in Rev. Rul.
2001-62, 2001-2 C.B. 632, and the amend-
ment updating the definition of compensa-
tion, for purposes of § 415(c)(3), to include
"deemed § 125 compensation" pursuant to
Rev. Rul. 2002-27, 2002-1 C.B. 925. For
rules relating to a failure to adopt a Good
Faith Amendment, see Rev. Proc. 2013-12.

(B) "Interim Amendment" means an
amendment with respect to a disqualifying
provision that results in the failure of the
plan to satisfy the qualification require-
ments of the Code by reason of a change
in those requirements that is effective af-
ter December 31, 2001, or that is integral
to such disqualifying provision. See
section 15.02 of Rev. Proc. 2016-37 for
interim amendment requirements for pre-
approved plans. For interim amendments

required to be adopted in individually de-
signed plans before January 1, 2017 (or
before February 1, 2017 for Cycle A
plans), see section 5.04 of Rev. Proc.
2007-44.

(C) "Nonamender Failure" means a
failure to adopt an amendment that cor-
rects a disqualifying provision described
in § 1.401(b)-1(b) within the applicable
remedial amendment period. In general, a
disqualifying provision includes a provi-
sion 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 re-
quirement of the Code. A disqualifying
provision also includes any provision des-
ignated by the Commissioner as a disqual-
ifying provision under § 1.401(b)-1(b)(3).
See sections 5 and 15 of Rev. Proc. 2016-
37. For an individually designed plan, a
Nonamender Failure includes the failure
to timely amend for provisions that appear
on the Required Amendments List, as de-
scribed in Rev. Proc. 2016-37.

(b) Operational Failure. The term
"Operational Failure" means a Qualifica-
tion Failure (other than an Employer Eli-
gibility Failure) that arises solely from the
failure to follow plan provisions. A failure
to follow the terms of the plan providing
for the satisfaction of the requirements of
§ 401(k) and (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 retroac-
tively to reflect the plan's operations (for
example, pursuant to § 401(b)). In the
situation where a Plan Sponsor timely ad-
opted an amendment 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 Oper-
ational Failure or an Employer Eligibility
Failure. The correction of a Demographic
Failure generally requires a corrective
amendment to the plan adding more ben-
efits 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 un-

der § 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 Alloca-
tions; Overpayment. (a) Excess Amount.
The term "Excess Amount" means a
Qualification Failure due to a contribu-
tion, allocation, or similar credit that is
made on behalf of a participant or bene-
ficiary to a plan in excess of the maximum
amount permitted to be contributed, allo-
cated, or credited on behalf of the partic-
ipant or beneficiary under the terms of the
plan or that exceeds a limitation on con-
tributions or allocations provided in the
Code or regulations. Excess Amounts in-
clude: (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 em-
ployee contribution made in excess of the
limitation under § 415; (iii) an elective de-
ferral in excess of the limitation of § 402(g);
(iv) an excess contribution or excess aggre-
gate 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(m) (but only with respect to the for-
feiture of nonvested matching contributions
that are excess aggregate contributions),
411(a)(3)(G), or 415, or that is made with
respect to compensation in excess of the
limitation under § 401(a)(17). However, an
Excess Amount does not include a contri-
bution, 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, allo-
cations, or annual additions under a defined
contribution plan, after-tax employee contri-
butions to a defined benefit plan, and con-
tributions 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 pro-
vide any corrective mechanism. Excess Al-
locations include Excess Amounts as de-

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fined in section 5.01(3)(a) (i), (ii), (v), and
(vi) (except with respect to § 401(m) or
411(a)(3)(G) violations). Excess Alloca-
tions must be corrected in accordance with
section 6.06(2).

(c) Overpayment. The term "Overpay-
ment" 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 reg-
ulations. Overpayments include both pay-
ments 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 in-
clude a payment that is made pursuant to
a correction method provided under this
revenue procedure for a different Qualifi-
cation Failure. Overpayments must be
corrected in accordance with section
6.06(3) for defined benefit plans and sec-
tion 6.06(4) for defined contribution plans
and 403(b) Plans.

(4) Favorable Letter. With respect to a
Qualified Plan, the term "Favorable Let-
ter" is defined in the following manner.

(a) Favorable Letter for individually
designed Qualified Plans. In the case of an
individually designed Qualified Plan, the
term "Favorable Letter" means a determi-
nation letter issued with respect to the
plan.

(b) Favorable Letter for Pre-approved
Plans. In the case of a Pre-approved Plan,
the term "Favorable Letter" means a fa-
vorable opinion or advisory letter issued
with respect to the most recently expired
six-year remedial amendment cycle under
Rev. Proc. 2016-37. In the case of a ter-
minated Pre-approved Plan, the plan is
treated as having a favorable opinion let-
ter or advisory letter if the plan is termi-
nated prior to the expiration of the plan's
current remedial amendment cycle deter-
mined under the provisions of Rev. Proc.
2016-37, and the plan 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 IRS could collect upon

plan disqualification and is the sum for the
open taxable years of the:

(a) tax on the trust (Form 1041, U.S.
Income Tax Return for Estates and Trusts)
(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, U.S. Individual In-
come Tax Return), 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;

(d) in the case of any participant loan
that did not comply with the requirements
of § 72(p)(2), the tax the IRS could collect
as a result of the loan not being excluded
from gross income under § 72(p)(2); and

(e) any other tax that results from a
Qualification Failure that would apply but
for correction under this revenue proce-
dure.

(6) Plan Sponsor. The term "Plan
Sponsor" means the employer that estab-
lishes 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 con-
solidation of plan assets) under § 414(l)
from a plan sponsored by an employer
that was not a member of the same con-
trolled group as the Plan Sponsor imme-
diately prior to the corporate merger, ac-
quisition, 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.

(8) Pre-approved Plan. For purposes
of this revenue procedure, the term "Pre-
approved Plan" means:

(a) a master plan, a prototype plan, or a
volume submitter plan as described in
Rev. Proc. 2015-36, 2015-27 I.R.B. 20,

sections 4.01, 4.02 and 13.01, respective-
ly; and

(b) a pre-approved plan described in
section 4.07 of Rev. Proc. 2017-41,
2017-29 I.R.B. 92.

.02 Definitions for 403(b) Plans. The
definitions in this section 5.02 apply to
403(b) Plans. For 403(b) Plans, the defi-
nitions under Rev. Proc. 2008-50 apply to
failures that occurred in taxable years be-
ginning before January 1, 2009.

(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 pro-
vided by § 403(b). There are four types of
403(b) Failures: (a) Plan Document Fail-
ures; (b) Operational Failures; (c) Demo-
graphic Failures; and (d) Employer Eligi-
bility Failures.

(a) Plan Document Failure. The term
"Plan Document Failure" means a plan
provision (or the absence of a plan provi-
sion) that, on its face, violates the require-
ments 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 ap-
plicable 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 Fail-
ure, or Employer Eligibility Failure.

(b) Operational Failure. The term
"Operational Failure" means a 403(b)
Failure (other than an Employer Eligibil-
ity 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 availabil-
ity of elective deferral contributions) and
401(m) (as applied to 403(b) Plans pursu-
ant to § 403(b)(12)(A)(i)) is an Opera-
tional Failure. A plan does not have an
Operational Failure to the extent the plan

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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 Em-
ployer Eligibility Failure. The correction
of a Demographic Failure generally re-
quires a corrective amendment to the plan
adding more benefits or increasing exist-
ing 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 de-
scribed in § 170(b)(1)(A)(ii). An Employer
Eligibility Failure is not a Plan Document,
Operational, or Demographic Failure.

(3) Excess Amount. The term "Excess
Amount" means a contribution or other
credit that is made on behalf of a partici-
pant 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 reg-
ulations. The term "Excess Amount" in-
cludes any amount in excess of the
amount permitted under the requirements
of § 402(g), 401(m), or 415. A contribu-
tion 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 consid-
ered to be a § 403(c) annuity contract (or,
if applicable, an amount to which § 61, 83,
or 402(b) applies). A contribution in ex-
cess of the limitation of § 415(c) that is
not maintained in a separate account in
accordance with the rules set forth in reg-
ulations under §§ 403(b) and 415 is an
Excess Amount. Thus, the correction prin-
ciples in section 6.06 apply.

(4) Overpayment. The term "Overpay-
ment" means a 403(b) Failure due to a
payment being made to a participant or
beneficiary that exceeds the amount pay-
able to the participant or beneficiary under
the terms of the plan or that exceeds a

limitation provided in the Code or regula-
tions. Overpayments include payments
made from the participant's or beneficia-
ry's 403(b) custodial account or annuity
contract under the plan that are not per-
mitted to be paid under the Code, the
regulations, or the terms of the plan. How-
ever, an Overpayment does not include a
payment that is made pursuant to a cor-
rection method provided under this reve-
nue procedure for a different 403(b) Fail-
ure. Overpayments must be corrected in
accordance with section 6.06(4).

(5) Favorable Letter. The term “Favor-
able 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 IRS 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 inter-
est or penalties applicable to the partici-
pants' 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.

(8) 403(b) Pre-approved Plan. The
term "403(b) Pre-approved Plan" means a
plan described in section 3.17 of Rev.
Proc. 2013-22, 2013-18 I.R.B. 985.

.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 "Eli-
gible 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. How-
ever, 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 29 CFR 2578.1 of the Depart-
ment of Labor regulations governing the

termination of abandoned individual ac-
count 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;

(b) In the case of an Orphan Plan under
investigation by the Department of Labor,
a person or entity determined by the De-
partment of Labor to have accepted re-
sponsibility 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 bene-
ficiary 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" re-
fers to the adjustment of a principal
amount to reflect subsequent investment
gains and losses, unless otherwise pro-
vided 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 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") de-
scribed in § 408(k)(6), if applicable.

.07 SIMPLE IRA Plan. The term "SIM-
PLE IRA Plan" means a plan intended to
satisfy the requirements of § 408(p).

.08 Under Examination. (1) The term
"Under Examination" means: (a) a plan
that is under an Employee Plans examina-
tion (that is, an examination of a Form
5500 series or other Employee Plans ex-
amination); (b) a Plan Sponsor that is un-
der an Exempt Organizations examination
(that is, an examination of a Form 990
series or other Exempt Organizations ex-
amination); or (c) a plan that is under
investigation by the Criminal Investiga-
tion Division of the IRS.

(2) A plan that is under an Employee
Plans examination includes any plan for
which the Plan Sponsor, or an authorized
representative, has received verbal or
written notification from Employee Plans
of an impending Employee Plans exami-

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nation, or of an impending referral for an
Employee Plans examination, and also in-
cludes any plan that has been under an
Employee Plans examination and is in
Appeals or in litigation for issues raised 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 mini-
mum 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 fail-
ure of a qualification requirement (other
than those described in the preceding sen-
tence) if the plan is aggregated with an-
other 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 pur-
poses of § 415, and Plan B is Under Ex-
amination. In this case, Plan A is consid-
ered 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 Spon-
sor has submitted any Form 5300 (Appli-
cation for Determination for Employee
Benefit Plan), Form 5307 (Application for
Determination for Adopters of Modified
Volume Submitter Plans), or Form 5310
(Application for Determination for Termi-
nating Plan) and the Employee Plans
agent notifies the Plan Sponsor, or an au-
thorized representative, of possible fail-
ures, whether or not the Plan Sponsor is
officially notified of an "examination."
This would include a case where, for ex-
ample, 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 termi-

nation concerns. In addition, if, during the
review process, the agent requests addi-
tional information that indicates the exis-
tence of a failure not previously identified
by the Plan Sponsor, the plan is consid-
ered to be under an Employee Plans ex-
amination. If, in such a case, the determi-
nation letter request under review is
subsequently withdrawn, the plan is nev-
ertheless considered to be under an Em-
ployee Plans examination for purposes of
eligibility under SCP and VCP with re-
spect to those issues raised by the agent
reviewing the determination letter appli-
cation. The fact that a Plan Sponsor vol-
untarily submits a determination letter ap-
plication does not constitute a voluntary
identification of a failure to the IRS. 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 rec-
ognizes the existence of the failure or ad-
dresses the failure in communications
with the Plan Sponsor (or the authorized
representative).

(4) A Plan Sponsor that is under an
Exempt Organizations examination in-
cludes any Plan Sponsor that has received
(or whose authorized representative has
received) verbal or written notification
from Exempt Organizations of an impend-
ing Exempt Organizations examination or
of an impending referral for an Exempt
Organizations examination and also in-
cludes any Plan Sponsor that has been
under an Exempt Organizations examina-
tion and is now in Appeals or in litigation
for issues raised in an Exempt Organiza-
tions examination.

## SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of gen-
eral 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 correc-
tion is made with respect to all partici-
pants 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 asso-

ciated with that year will not be redeter-
mined because of the correction. Correc-
tion 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 correc-
tion 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 cor-
rection. The correction should be reason-
able and appropriate for the failure. De-
pending 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 cor-
rection method permitted under Appendix
A or Appendix B is deemed to be a rea-
sonable and appropriate method of cor-
recting 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 correc-
tion 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 appli-
cable facts and circumstances and the fol-
lowing principles:

(a) The correction method should, to
the extent possible, resemble one already
provided for in the Code, 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 cor-
rection by distribution to participants or
beneficiaries or return of assets to the em-

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ployer. For example, if an excess alloca-
tion (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) plan), the excess should be real-
located 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 pro-
vide 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 provi-
sions 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 nondis-
crimination requirements. Similarly, the
correction of a failure to satisfy the re-
quirements 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 nondiscrim-
ination), solely by distributing excess
amounts to highly compensated employ-
ees would not be the typical means of
correcting such a failure.

(d) The correction method should not
violate another applicable specific require-
ment of § 401(a) or 403(b) (for example,
§ 401(a)(4), 411(d)(6), or 403(b)(12), as ap-
plicable), 408(k) for SEPs, or 408(p) for
SIMPLE IRA Plans, or a parallel require-
ment 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 accor-
dance with the requirements of this revenue
procedure.

(e) If a correction method is one that
another government agency has autho-
rized with respect to a violation of legal
requirements within its interpretive au-
thority and that correction relates to a vi-
olation for which there is a failure to
which this revenue procedure applies,
then the IRS 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 ter-
minate the plan and distribute plan assets
to participants and beneficiaries in accor-
dance with standards and procedures sub-
stantially similar to those set forth in 29
CFR 2578.1 of the Department of Labor
regulations (relating to abandoned plans).
This correction must satisfy four condi-
tions. First, the correction must comply
with standards and procedures substan-
tially similar to those set forth in 29 CFR
2578.1. Second, the qualified termination
administrator, based on plan records lo-
cated and updated in accordance with the
Department of Labor regulations, must
have reasonably determined whether, and
to what extent, the survivor annuity re-
quirements of §§ 401(a)(11) and 417 ap-
ply 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. Fourth, participants and
beneficiaries must receive notification of
their rights under § 402(f). In addition,
notwithstanding correction under this rev-
enue procedure, the IRS 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 busi-
ness, 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 fail-
ure under this revenue procedure would
generally be taken into account as correc-
tion 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 de-
faulted 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 ap-
plied 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 con-
sistency requirement applies on a plan by
plan basis.

(4) Principles regarding corrective al-
locations and corrective distributions.
The following principles apply where an
appropriate correction method includes
the use of corrective allocations or correc-
tive distributions:

(a) Corrective allocations under a de-
fined contribution plan should be based
upon the terms of the plan and other ap-
plicable information at the time of the
failure (including the compensation that
would have been used under the plan for
the period with respect to which a correc-
tive allocation is being made) and should
be adjusted for Earnings and forfeitures
that would have been allocated to the par-
ticipant's account if the failure had not
occurred. However, a corrective alloca-
tion 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 Adjust-
ment Methods And Examples.

(b) A corrective allocation to a partic-
ipant's account because of a failure to
make a required allocation in a prior lim-
itation year is not considered an annual
addition with respect to the participant for
the limitation year in which the correction
is made, but is considered an annual ad-
dition for the limitation year to which the
corrective allocation relates. However, the
normal rules of § 404, regarding deduc-
tions, apply.

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(c) Corrective allocations should come
only from employer nonelective contribu-
tions (including forfeitures if the plan per-
mits their use to reduce employer contri-
butions). For purpose of correcting a
failed ADP, actual contribution percent-
age (ACP), or multiple use test, any
amounts used to fund qualified nonelec-
tive contributions (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 equiva-
lence (after considering the applicable re-
quirements 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 dis-
tribution 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 per-
son 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 re-
spect to that failure. See also section
6.06(3) for correction of an Overpayment
(including a payment of benefits that ex-
ceeds the limitations imposed by § 436(d)
or 436(b), (c), or (e)).

(ii) A corrective distribution or a cor-
rective 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 cor-
rection, 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 restric-
tion pursuant to § 436(d), the Plan Spon-
sor must generally contribute to the plan
the amount of that corrective distribution
(but only half of the corrective distribu-
tion 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 re-
striction 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 dis-
tribution is made in a form that is not a
prohibited payment (for example, if the
correction is made by actuarially increas-
ing 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 con-
tribution under § 430 and is disregarded in
determining the amount added to a pre-
funding balance under § 430(f)(6). See
§ 1.436-1(f)(2) generally for rules relat-
ing to § 436 contributions.

(f) In the case of a defined contribution
plan, a corrective contribution or distribu-
tion should be adjusted for Earnings from
the date of the failure (determined without
regard to any Code provision which per-
mits a corrective contribution or distribu-
tion to be made at a later date).

(5) Special exceptions to full correc-
tion. In general, a failure must be fully
corrected. Although the mere fact that cor-
rection is inconvenient or burdensome is
not enough to relieve a Plan Sponsor of
the need to make full correction, full cor-
rection may not be required in certain
situations if it is unreasonable or not fea-
sible. Even in these situations, the correc-
tion method adopted must be one that
does not have significant adverse effects
on participants and beneficiaries or the
plan, and that does not discriminate sig-

nificantly in favor of highly compensated
employees. The exceptions described be-
low 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 ex-
ceed 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 esti-
mate 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 Vol-
untary Fiduciary Correction Program On-
line 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 partici-
pant or beneficiary is $75 or less, the Plan
Sponsor is not required to make the cor-
rective distribution if the reasonable direct
costs of processing and delivering the dis-
tribution to the participant or beneficiary
would exceed the amount of the distribu-
tion. This section 6.02(5)(b) does not ap-
ply to corrective contributions. Corrective
contributions are required to be made with
respect to a participant with an account
under the plan.

(c) Recovery of small Overpayments.
Generally, if the total amount of an Over-
payment to a participant or beneficiary is
$100 or less, the Plan Sponsor is not re-
quired to seek the return of the Overpay-
ment 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) Rea-
sonable actions must be taken to find all
current and former participants and bene-
ficiaries to whom additional benefits are
due, but who have not been located after a

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mailing to the last known address. In gen-
eral, such actions include, but are not lim-
ited 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 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 meth-
ods may be appropriate. A Plan Sponsor
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 under-
taken in accordance with this paragraph;
provided that, if the individual is later
located, the additional benefits are pro-
vided to the individual at that time.

(ii) The IRS Letter Forwarding Pro-
gram was modified to provide that the IRS
would no longer forward letters from in-
dividuals, companies or organizations that
control assets that may be due taxpayers.
See Rev. Proc. 2012-35, 2012-37 I.R.B.
341. Therefore, the IRS Letter Forwarding
Program is not available as a means to
search for participants and beneficiaries to
whom benefits under the plan are due.

(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 Excess Amount exceeds a statutory
limit, the participant or beneficiary must
be notified that the Excess Amount, in-
cluding any investment gains, is not eligi-
ble for favorable tax treatment accorded to
distributions from the plan (and, specifi-
cally, is not eligible for tax-free rollover).
See section 6.06(1) for such notice re-
quirements.

(f) Orphan Plans. The IRS retains the
discretion to determine under VCP and
Audit CAP whether full correction will be
required with respect to a terminating Or-
phan Plan.

(6) Correction principle for loan fail-
ures. 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 cor-
rective payment. However, with respect to
the failure listed in section 6.07(3), the
employer should pay a portion of the cor-

rection payment on behalf of the partici-
pant equal to the interest that accumulates
as a result of such failure generally deter-
mined 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 employ-
ees with respect to elective deferrals or
after-tax employee contributions. If a
Qualified Plan or 403(b) Plan has an Op-
erational Failure that consists of excluding
an employee that should have been eligi-
ble to make an elective deferral or an
after-tax employee contribution, the em-
ployer 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 con-
tributed to the plan accumulated with
earnings tax deferred in the future. This
correction principle applies solely to this
limited circumstance. It does not, for ex-
ample, extend to the correction of a failure
to satisfy a nondiscrimination test, such
as, 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 pro-
vided for correcting this failure do not
extend to other failures. Thus, the correc-
tion methods and the examples in Appen-
dix A, section .05, and Appendix B, sec-
tion 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 avail-
ability of correction by plan amendment,
see section 4.05.

(9) Reporting. Any corrective distribu-
tions from the plan should be properly
reported.

.03 Correction of an Employer Eligi-
bility Failure. (1) The permitted correc-
tion of an Employer Eligibility Failure is
the cessation of all contributions (includ-
ing elective deferrals and after-tax em-
ployee contributions). For VCP submis-
sions, 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, for ex-

ample, for 403(b) Plans, an event de-
scribed 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 Fail-
ure (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 Eli-
gibility Failure, correction may include
treating contributions as not being ex-
cluded under § 403(b) (and thus the con-
tributions 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 qual-
ify as an eligible rollover distribution un-
der § 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 correc-
tion 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 Ap-
pendix A, section .07. The Plan Sponsor
must notify the affected participant and
spouse (to whom the participant was mar-
ried at the time of the distribution), so that
the spouse can provide spousal consent to
the distribution actually made or the par-
ticipant may repay the distribution and

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receive a qualified joint and survivor an-
nuity.

(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 (for
example, because the spouse chooses not
to consent, the spouse does not respond to
the notice, or the spouse cannot be lo-
cated), 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 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 be-
tween (i) the survivor annuity benefit de-
scribed 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 in-
terest rate and mortality table under
§ 417(e)(3)). Any such single-sum pay-
ment is treated in the same manner as a
distribution under § 402(c)(9) for pur-
poses 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 pay-
ment, the plan sponsor must contribute to
the plan the applicable amount under sec-
tion 6.02(4)(e)(ii)(A).

.05 Determination letter application
not permitted. (1) In general. A determi-
nation letter application may not be sub-
mitted with a VCP submission.

(a) Issuance of compliance statement
or closing agreement for Plan Document
Failures corrected through plan amend-
ment under VCP or Audit CAP. The issu-
ance of a compliance statement or closing
agreement for Plan Document Failures
corrected through plan amendment under
VCP or Audit CAP does not constitute a
determination that the terms of the plan,

including the corrective plan amendment,
satisfy the qualification requirements in
form. See section 10.07(2)(a) and (b).

(b) Issuance of compliance statement
or closing agreement for Operational
Failures corrected through plan amend-
ment under VCP and Audit CAP. If a Plan
Sponsor submits a VCP filing correcting
an Operational Failure through a plan
amendment or corrects such a failure un-
der Audit CAP, and the plan amendment
is accepted as a proper correction, then the
compliance statement under VCP or clos-
ing agreement issued under Audit CAP
constitutes a determination that the Oper-
ational Failure has been corrected, but is
not a determination that the terms of the
plan, including the corrective plan amend-
ment, satisfy the qualification require-
ments in form. See section 10.07(2)(c).

(2) Corrective amendments to Pre-
approved Plans. (a) Effect of corrective
amendment. Generally, under VCP or Au-
dit CAP, a Plan Sponsor that is an adopter
of a Pre-approved Plan or a 403(b) Pre-
approved Plan may amend its plan to cor-
rect a Qualification Failure or a 403(b)
Failure (provided the requirements of EP-
CRS are satisfied and the amendment sat-
isfies 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 sec-
tion 6.05(2)(b).

(b) Exception for certain amendments.
In the case of a Pre-approved Plan or a
403(b) Pre-approved Plan, the adoption of
a plan provision required to correct a fail-
ure under VCP or Audit CAP that is not
provided for in the adoption agreement
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 or
403(b) Pre-approved Plans, as applicable,
and (ii) no other modification has been
made to the plan that would cause the plan
to lose its reliance on the opinion or ad-
visory letter. If these conditions are satis-
fied, 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 Pre-approved Plan to lose its
eligibility to remain within the six-year
remedial amendment cycle provided for in
Rev. Proc. 2016-37 on a continuing basis
until the expiration of the next six-year
remedial amendment cycle described in
section 18.01 of Rev. Proc. 2016-37.

.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 contrib-
uted to an IRA, the contribution is not a
valid rollover contribution for purposes of
determining the amount of excess contribu-
tions (within the meaning of § 4973) to the
individual's IRA. A distribution of an Ex-
cess Amount is generally treated in the man-
ner described in section 3 of Rev. Proc.
92-93, 1992-2 C.B. 505 (relating to the
corrective disbursement of elective defer-
rals). The distribution must be reported on
Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc., for
the year of distribution with respect to
each participant or beneficiary receiving
such a distribution. Except as otherwise pro-
vided 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 cor-
rected in accordance with the Reduction
of Account Balance Correction Method
set forth in this paragraph. Under this
method, the account balance of an em-
ployee who received an Excess Allocation
is reduced by the Excess Allocation (ad-
justed for Earnings). If the Excess Allo-
cation would have been allocated to other
employees in the year of the failure had
the failure not occurred, then that amount

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(adjusted for Earnings) is reallocated to
those employees in accordance with the
plan's allocation formula. If the improp-
erly 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 par-
ticipant or beneficiary (an unallocated ac-
count) established for the purpose of hold-
ing Excess Allocations, adjusted for
Earnings, to be used to reduce employer
contributions (other than elective defer-
rals) 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 contribu-
tions (adjusted for Earnings) must be dis-
tributed to the participant. For qualifica-
tion purposes, an Excess Allocation that is
corrected pursuant to this paragraph is dis-
regarded for purposes of §§ 402(g) and
415, the ADP test of § 401(k)(3), and the
ACP test of § 401(m)(2). If an Excess
Allocation resulting from a violation of
§ 415 consists of annual additions attrib-
utable 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 Earn-
ings) 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 em-
ployee contributions that are matched, the
excess is apportioned first to after-tax em-
ployee contributions with the associated
matching employer contributions and then
to elective deferrals with the associated
matching employer contributions. Any
matching contribution or nonelective em-
ployer contribution (adjusted for Earn-
ings) which constitutes an Excess Alloca-
tion 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 (de-
fined benefit plans). An Overpayment
from a defined benefit plan is corrected in
accordance with rules similar to the Re-
turn of Overpayment and Adjustment of
Future Payments correction methods
described in section 2.04(1) of Appendix
B or any other appropriate correction
method. Depending on the nature of the
Overpayment, an appropriate correction
method may include using rules similar to
the correction method described in section
2.04(1) of Appendix B but having the
employer or another person contribute the
amount of the Overpayment (with appro-
priate interest) to the plan instead of seek-
ing recoupment from a plan participant or
beneficiary. Another example of an appro-
priate correction method includes a Plan
Sponsor adopting a retroactive amend-
ment to conform the plan document to the
plan's operations (subject to the require-
ments of section 4.05). Any other correc-
tion method used must satisfy the correc-
tion principles of section 6.02 and any
other applicable rules in this revenue pro-
cedure.

(4) Correction of Overpayment (de-
fined 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 section 6.06(4). Under this method,
the employer takes reasonable steps to
have the Overpayment repaid to the plan,
adjusted for Earnings at the plan's earn-
ings rate from the date of the distribution
to the date of the correction of the Over-
payment.

(b) Make-whole contribution. To the
extent the amount of an Overpayment ad-
justed for Earnings at the plan's earnings
rate is not repaid to the plan, the employer
or another person must contribute the dif-
ference to the plan. The preceding sen-
tence does not apply when the failure
arose solely because a payment was made
from the plan to a participant or benefi-
ciary in the absence of a distributable
event (but was otherwise determined in
accordance with the terms of the plan (for
example, an impermissible in-service dis-
tribution)).

(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 unallo-
cated account, as described in section
6.06(2), to be used to reduce employer
contributions (other than elective defer-
rals) in the current 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 Overpay-
ment was solely considered a distribution
in the absence of a distributable event 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 fa-
vorable tax treatment accorded to distri-
butions from an eligible retirement plan
under § 402(c)(8)(B) (and, specifically,
was not eligible for tax-free rollover).

(f) Other correction methods. Other
appropriate correction methods may be
used to correct Overpayment failures from
a defined contribution plan. Depending on
the nature of the Overpayment, an appro-
priate correction method may include us-
ing rules similar to the correction method
in section 6.06(4)(a) but having the em-
ployer or another person contribute the
amount of the Overpayment (with appro-
priate interest) to the plan instead of seek-
ing recoupment from a plan participant or
beneficiary. Another example of an appro-
priate correction method includes a Plan
Sponsor adopting a retroactive amend-
ment to conform the plan document to the
plan's operations (subject to the require-
ments of section 4.05). Any other correc-
tion method used must satisfy the correc-
tion principles of section 6.02 and any
other applicable rules of this revenue pro-
cedure.

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.07 Rules relating to reporting plan
loan failures. (1) General rules for loans.
Unless correction is made in accordance
with section 6.07(2) or (3), a deemed dis-
tribution under § 72(p)(1) in connection
with a failure relating to a loan to a par-
ticipant made from a plan must be re-
ported on Form 1099-R with respect to the
affected participant and any applicable in-
come 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 specifi-
cally requests such relief.

(2) Special rules for loans. (a) In gen-
eral. 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 require-
ments of § 72(p)(2) and are corrected
through VCP or Audit CAP. The correc-
tion 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 IRS re-
serves 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 par-
ticipant 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 partici-
pant's loan as a deemed distribution on
Form 1099-R, as described in the pre-
ceding sentence, applies only if the Plan
Sponsor specifically requests such relief

and provides an explanation supporting
the request.

(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 ex-
cess of the loan amount over the maxi-
mum loan amount under § 72(p)(2)(A).
In the event that loan repayments were
made in accordance with the amortiza-
tion schedule for the loan before correc-
tion, such prior repayments may be ap-
plied (i) solely to reduce the portion of
the loan that did not exceed the maxi-
mum loan amount under § 72(p)(2)(A)
(so that the corrective repayment would
equal the original loan excess plus in-
terest thereon), (ii) to reduce the loan
excess to the extent of the interest
thereon, with the remainder of the re-
payments applied to reduce the portion
of the loan that did not exceed the max-
imum 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 re-
maining 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 am-
ortize the remaining principal balance as
of the date of repayment over the re-
maining 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 amorti-
zation payments determined for the re-
maining 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 repay-
ment 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 max-
imum 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 re-
quirements of § 72(p)(2). However, under
the Department of Labor's Voluntary Fi-
duciary Correction Program, to correct the
ERISA fiduciary violations associated
with the failures described in section
6.07(2)(b) and (c) and section 6.07(3) of
this revenue procedure, the plan must con-
tain 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 pay-
ment 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), mea-
sured from the original date of the loan, or
(iii) any combination of (i) or (ii).

.08 Correction under statute or regula-
tions. Generally, none of the correction pro-
grams 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 disqualify-
ing 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 pro-
vided in this revenue procedure, the cor-
rection programs are not available for
events for which the Code provides tax
consequences other than plan disqualifica-
tion (such as the imposition of an excise
tax or additional income tax). For exam-
ple, funding deficiencies (failures to make
the required contributions to a plan sub-
ject to § 412), prohibited transactions, and
failures to file the Form 5500 series can-
not be corrected under this revenue pro-
cedure.

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(2) Section 4974. As part of VCP and
Audit CAP, if a failure involves the failure
to satisfy the minimum required distribu-
tion requirements of § 401(a)(9), in appro-
priate cases, the IRS will waive the excise
tax under § 4974 applicable to plan par-
ticipants 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 Spon-
sor, as part of the submission, must re-
quest the waiver and, in cases where the
participant subject to the excise tax is ei-
ther an owner-employee as defined in
§ 401(c)(3) or a 10% owner of a corpora-
tion, the Plan Sponsor must also provide
an explanation supporting the request. Un-
der 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 sup-
porting 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 IRS will
determine whether it is appropriate to ap-
prove 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 contribu-
tion that is not deductible, in appropriate
cases, the IRS 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) un-
der a plan, in appropriate cases, the IRS
will not pursue the excise tax under
§ 4979, for example, 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 insuffi-
cient 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.

(5) Section 4973. Subject to section
6.03(4), as part of VCP, in appropriate
cases, the IRS will not pursue the excise

tax under § 4973 relating to excess con-
tributions 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 ben-
eficiary ("recipient") removes the Over-
payment (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 re-
moves 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 con-
tribution) as a taxable distribution for the
year in which the Excess Amount (ad-
justed for Earnings) is removed from the
recipient's 403(b) Plan or IRA. The
amount removed is generally taxed in a
manner that is similar to the manner in
which the corrective disbursement of elec-
tive 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 expla-
nation supporting the request.

(6) Section 72(t). As part of VCP, in
appropriate cases, the IRS will not pursue
the 10% additional income tax under
§ 72(t) (or will pursue only a portion
thereof) if, as part of the proposed correc-
tion 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 correc-
tion will include removing the amount
improperly distributed and rolled over
(adjusted for Earnings) from the recipi-
ent'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 IRS may require the
Plan Sponsor to pay a sanction 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 re-
quest.

.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 (that is, a Plan Document
Failure, Operational Failure, Demo-
graphic Failure, or 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 main-
tain a separate account), or an exchange
made to a vendor which is not part of the
plan (and for which there is no informa-
tion sharing agreement). In addition, for
purposes of this revenue procedure, a
403(b) Plan 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 estab-
lished, if later), or (b) the employer has
failed to adopt a written 403(b) Plan
timely and corrects the failure in accor-
dance with section 6.10(3) below. In
addition, for purposes of section 4.04 (re-
quiring that the Plan Sponsor or adminis-
trator of the plan have established prac-
tices and procedures reasonably designed
to promote and facilitate overall compli-
ance with applicable Code requirements
in order to be eligible for SCP to be avail-
able 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 ac-
cordance with the final regulations under
§ 403(b) and Notice 2009-3 may be cor-
rected 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

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of making available the extended remedial
amendment period set forth in Rev. Proc.
2017-18, 2017-5 I.R.B 743. 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 appli-
cable 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 (that
is, a Plan Document Failure, Operational
Failure, Demographic Failure, or Em-
ployer Eligibility Failure).

(2) Special correction for SEPs and
SIMPLE IRA Plans. In any case in which
correction under section 6.11(1) is not fea-
sible for a SEP or SIMPLE IRA Plan or in
any other case determined by the IRS in
its discretion (including failures relating
to § 402(g), 415, or 401(a)(17), failures
relating to deferral percentages, discontin-
uance of contributions to a SARSEP or
SIMPLE IRA Plan, and retention of Ex-
cess Amounts for cases in which there has
been no violation of a statutory limitation
with respect to a SEP or SIMPLE IRA
Plan), the IRS may provide for a different
correction.

(3) Correction of failure to satisfy defer-
ral percentage test. If the failure involves a
violation of the deferral percentage test un-
der § 408(k)(6)(A)(iii) applicable to a
SARSEP, the failure may be corrected in
either of the following ways:

(a) The Plan Sponsor may make con-
tributions that are 100% vested to all eli-
gible nonhighly compensated employees
(to the extent permitted by § 415) neces-
sary 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 dis-
tribution of excess contributions, adjusted
for Earnings through the date of correc-
tion, 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 compen-
sated employees in the year of the failure,
(ii) current nonhighly compensated em-
ployees who were nonhighly compensated
employees in the year of the failure, or
(iii) employees (both current and former)
who were nonhighly compensated em-
ployees 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 undercontri-
butions 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 cor-
rection.

(b) Earnings adjustment methods. In-
sofar as SEP and SIMPLE IRA Plan as-
sets 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 in-
vestment results would have been, a rea-
sonable interest rate may be used.

(5) Treatment of Excess Amounts un-
der a SEP or a SIMPLE IRA Plan. (a)
Distribution of Excess Amounts. For pur-
poses of this section 6.11, an Excess
Amount is an amount contributed on be-
half of an employee that is in excess of an
employee's benefit under the plan, or an
elective deferral in excess of the limita-
tions of § 402(g) or 408(k)(6)(A)(iii). If an
Excess Amount is attributable to elective
deferrals, the Plan Sponsor may effect dis-
tribution of the Excess Amount, adjusted
for Earnings through the date of correc-
tion, to the affected participant. The
amount distributed to the affected partic-
ipant 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 partici-
pant receiving the distribution. In addi-
tion, the Plan Sponsor must inform af-
fected participants that the distribution of
an Excess Amount is not eligible for fa-
vorable tax treatment accorded to distri-
butions 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 de-
duction for such employer Excess
Amount. The distribution is reported on
Form 1099-R issued to the participant in-
dicating the taxable amount as zero.

(b) Retention of Excess Amounts. 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 sanc-
tion applies, in addition to the SEP or
SIMPLE IRA Plan user fee described in
Appendix A of Rev. Proc. 2018-4,
2018-1 I.R.B. 146 (and its annual succes-
sors). A sanction equal to at least 10% of
the Excess Amount with no adjustment
for Earnings is imposed. In addition, 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 subse-
quent 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 re-
quired to distribute the Excess Amount
and the sanction described in section
6.11(5)(b) does not apply.

.12 Confidentiality and disclosure. Be-
cause each correction program relates di-
rectly to the enforcement of Code require-
ments, the information received or
generated by the IRS under the program is
subject to the confidentiality requirements
of § 6103 and is not a written determina-
tion 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 Depart-
ment of Labor maintains a Voluntary Fi-
duciary 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

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failures to comply with the annual report-
ing requirements (Form 5500 series) un-
der 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 sec-
tion 8 (relating to insignificant Opera-
tional Failures) or, in the case of a Qual-
ified Plan or a 403(b) Plan, section 9
(relating to significant Operational Fail-
ures).

## 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 Fail-
ure is insignificant. This section 8 is avail-
able for correcting an insignificant Oper-
ational Failure even if the plan or Plan
Sponsor is Under Examination and even if
the Operational Failure is discovered on
examination.

.02 Factors. The factors to be consid-
ered in determining whether an Opera-
tional 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 contri-
butions involved in the failure; (3) the
number of years the failure occurred; (4)
the number of participants affected rela-
tive 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 rea-
sonable time after discovery of the failure;
and (7) the reason for the failure (for ex-
ample, data errors such as errors in the
transcription of data, the transposition of
numbers, or minor arithmetic errors). No
single factor is determinative. Addition-

ally, 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 Fail-
ure in a single year, or Operational Fail-
ures that occur in more than one year, the
Operational Failures are eligible for cor-
rection under this section 8 only if all of
the Operational Failures are insignificant
in the aggregate. Operational Failures that
have been corrected under SCP in section
9 and VCP in sections 10 and 11 are not
taken into account for purposes of deter-
mining if Operational Failures are insig-
nificant in the aggregate.

.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 relat-
ing to SCP (for example, the requirements
of section 4.04 relating to established
practices and procedures) have been sat-
isfied and that no Operational Failures oc-
curred other than the Operational Failures
identified below.

Example 1: In 1991, Employer X established
Plan A, a profit-sharing plan that satisfies the re-
quirements 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 IRS examined Plan
A in 2008, it discovered that, during the 2005 limi-
tation year, the annual additions allocated to the
accounts of 3 of these employees exceeded the max-
imum limitations under § 415(c). Employer X con-
tributed $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 correc-
tion 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 limi-
tation year does not cause the failures to be signifi-
cant; accordingly, the failures are still eligible for
correction under this section 8.

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 un-
der § 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 af-
fected 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 mone-
tary amount of the failure relative to the total em-
ployer contribution), the failure is significant. Ac-
cordingly, 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 compensa-
tion, as defined in the plan. During its examination
of the plan for the 2005 plan year, the IRS discov-
ered 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 af-
fected by the failure relative to the number of par-
ticipants that could have been affected is insignifi-
cant, and the failure is due to minor data errors.
Thus, the failure occurring in 2005 is insignificant
and therefore eligible for correction under this sec-
tion 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 respon-
sibility for administering Plan B, in addition to other
administrative functions within Public School. Dur-
ing the 2005 plan year, a former employee should
have received an additional minimum required dis-
tribution of $278 under § 403(b)(10). Another par-
ticipant received an impermissible hardship with-
drawal 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 mul-
tiple failures occurred in a single plan year, the
failures are eligible for correction under this section
8 because in the aggregate the failures are insignif-
icant.

# 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 signifi-
cant) if the Operational Failure is cor-
rected and the correction is either com-
pleted or substantially completed (in
accordance with section 9.03) by the last
day of the correction period described in
section 9.02.

.02 Correction period. (1) End of cor-
rection period. The last day of the correc-
tion period for an Operational Failure is
the last day of the second plan year fol-
lowing the plan year for which the failure
occurred. However, in the case of a 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

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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 ad-
ditional 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 sec-
tion 9.02.

(2) Extension of correction period for
Transferred Assets. In the case of an Op-
erational 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, ac-
quisition, or other similar employer trans-
action between the Plan Sponsor and the
sponsor of the transferor plan or the prior
sponsor of an assumed plan.

(3) Effect of examination. The correc-
tion 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 9.03 for special rules permit-
ting completion of correction after the end
of the correction period.)

.03 Substantial completion of correc-
tion. Correction of an Operational Failure
is substantially completed by the last day
of the correction period only if the re-
quirements of either paragraph (1) or (2)
of this section 9.03 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, for-
mulating a correction method, and initiat-
ing correction in a manner that demon-
strates 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, cor-
rection is completed with respect to 65%

of all participants affected by the Opera-
tional Failure; and

(b) thereafter, the Plan Sponsor com-
pletes correction of the Operational Fail-
ure with respect to the remaining affected
participants in a diligent manner.

.04 Examples. The following examples
illustrate the application of this section 9.
It is assumed, in each example, that the
eligibility requirements of section 4 relat-
ing 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 employ-
ees exceeded the § 402(g) limit and Employer Z
failed to make the required top-heavy minimum con-
tribution. In addition, during the review of the ad-
ministration 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 cor-
rected 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 ap-
plicable 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 de-
fined contribution plan sponsored by Employer C.
Following Employer A's review of Plan C, Em-
ployer A and Employer C agreed that Plan A would
accept a transfer of plan assets from Plan C attrib-
utable 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 Em-
ployer A that Plan C was tax qualified. Employers A
and C also agreed that such transfer would be in
accordance with § 414(1) and § 1.414(1)-1 and ad-
dressed 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 af-
fected 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 require-
ments of SCP. Under these facts, Employer A has,
within the correction period, corrected the Opera-
tional 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 IRS
APPROVAL (VCP)

# SECTION 10. VCP PROCEDURES

.01 VCP requirements. The require-
ments of VCP are satisfied with respect to
a failure if, on the www.pay.gov website,
the Plan Sponsor files a VCP submission
and pays the applicable user fee set forth
in Appendix A of Rev. Proc. 2018-4 (and
its annual successors), in accordance with
the requirements of this section 10 and
section 11, and implements the corrective
actions and satisfies any other conditions
set forth in the compliance statement de-
scribed in section 10.07. As provided in
section 11.08, a Plan Sponsor may desig-
nate an authorized representative to file a
VCP submission with the IRS on its be-
half, if specific requirements are satisfied.

.02 Identification of failures. VCP is
not based upon an examination of the plan
by the IRS. Only the failures raised by the
Plan Sponsor or failures identified by the
IRS in processing the submission are ad-
dressed under VCP, and only those fail-
ures are covered by a VCP compliance
statement. The IRS will not make any
investigation or finding under VCP con-
cerning whether there are other failures.

.03 Effect of VCP submission on exam-
ination. Because VCP does not arise out
of an examination, consideration under
VCP does not preclude or impede (under
§ 7605(b) or any administrative provi-
sions adopted by the IRS) a subsequent
examination of the Plan Sponsor or the
plan by the IRS with respect to the taxable
year (or years) involved with respect to

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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 IRS as an admission of a
failure for purposes of any subsequent ex-
amination. See section 5.08 for the defi-
nition of Under Examination.

.04 No concurrent examination activ-
ity. Except in unusual circumstances, a
plan that has been properly submitted un-
der VCP will not be examined while the
submission is pending. However, a plan
that is included in a Group Submission
under section 10.10 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. Also, 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 4.12(2)), the IRS
may authorize the examination of the
plan, even if a submission pursuant to
VCP is pending. In addition, this practice
regarding concurrent examinations does
not extend to other plans of the Plan Spon-
sor. Thus, any plan of the Plan Sponsor
that is not pending under VCP could be
subject to examination.

.05 Determination letter applications
not related to a VCP submission. (1) The
IRS may process a determination letter
application (including an application re-
quested on Form 5310) submitted under
the determination letter program (as set
forth in Rev. Proc. 2018-4 (and its annual
successors) and Rev. Proc. 2016-37, and
any subsequent guidance issued in the In-
ternal Revenue Bulletin) while separately
processing a VCP submission for the
same plan. Generally, issuance of the de-
termination letter in response to an appli-
cation made on a Form 5310 will be sus-
pended 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 fail-
ure may not be corrected as part of the
determination letter process. The Plan
Sponsor may use SCP and VCP instead,
as applicable. If the IRS, in connection
with a determination letter application,
discovers failures, the IRS may issue a

closing agreement with respect to the fail-
ures identified or, if appropriate, refer the
case to Employee Plans Examinations. In
such a case, the VCP user fee does not
apply. Instead, except as provided in sec-
tion 10.05(3), the sanction in section
14.01 relating to Audit CAP applies. See
section 5.08 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 IRS 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.

.06 Processing of submission.

(1) Screening of submission. Upon re-
ceipt of a VCP submission, the IRS will
review the submission to determine
whether the eligibility requirements of
section 4 and the submission requirements
of section 11 are satisfied.

(2) Eligibility of submission. If, at any
stage of the review process, the IRS de-
termines that a VCP submission is seri-
ously deficient or that issuing a compli-
ance statement with respect to the VCP
submission would be inappropriate or im-
practicable, the IRS reserves the right to
not issue a compliance statement. If no
substantive processing of the case has oc-
curred, the IRS will refund the user fee
submitted with the request. Otherwise, the
user fee will not be refunded.

(3) Review of submission. Once the
IRS determines that the submission is
complete under VCP, the IRS may contact
the Plan Sponsor or the Plan Sponsor's
authorized representative to discuss the
proposed corrections and the plan's ad-
ministrative procedures. However, if the
IRS determines that the submission is
complete and sets forth an acceptable cor-
rection method, the IRS may issue a com-
pliance statement without contacting the
Plan Sponsor or the Plan Sponsor's autho-
rized representative.

(4) Additional information required. If
additional information is required, an IRS
representative generally will contact the
Plan Sponsor or the Plan Sponsor's autho-
rized 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 be closed, the user fee will not be
returned, and the case may be referred to
Employee Plans Examinations. Any re-
quest 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 IRS (by the applicable group man-
ager).

(5) Additional failures discovered after
initial submission. (a) A Plan Sponsor that
discovers additional unrelated failures af-
ter its initial submission may request that
such failures be added to its submission.
However, the IRS retains the discretion to
reject the inclusion of such failures if the
request is not timely (for example, if the
Plan Sponsor makes its request when pro-
cessing of the submission is substantially
complete) or the application of VCP
would be inappropriate or impracticable.

(b) If the IRS discovers an unrelated
failure while the request is pending, the
failure generally will be added to the fail-
ures under consideration. However, the
IRS retains the discretion to determine
that a failure is outside the scope of the
voluntary request for consideration be-
cause the Plan Sponsor did not voluntarily
bring this failure forward. In this case, if
the additional failure is significant, all as-
pects of the plan may be examined, and
the rules pertaining to Audit CAP will
apply.

(6) Conference right. If the IRS ini-
tially 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 authorized representative) will
be contacted by the IRS representative
and offered a conference with the IRS.
The conference can be held either in per-
son or by telephone and must be held
within 21 calendar days of the date of
contact. The Plan Sponsor will have 21
calendar days after the date of the confer-
ence to submit additional information in
support of the submission. Any request for
an extension of the 21-day time period
must be made in writing within the 21-day
time period and must be approved by the
IRS (by the applicable group manager).
Additional conferences may be held at the
discretion of the IRS.

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(7) Failure to reach resolution. If the
IRS and the Plan Sponsor cannot reach
agreement with respect to the submission,
the matter will be closed, the user fee will
not be returned, and the case may be re-
ferred to Employee Plans Examinations.

(8) Issuance of compliance statement.
(a) In general. If agreement has been
reached and all applicable user fees have
been paid, the IRS will send to the Plan
Sponsor a compliance statement signed by
the IRS specifying the corrective action
required. However, the IRS reserves the
right to require the Plan Sponsor to sign
the compliance statement. In such a case,
the IRS will send to the Plan Sponsor an
unsigned compliance statement. Within
30 calendar days of the date the compli-
ance statement is sent, the Plan Sponsor
must sign and return the compliance state-
ment and pay any outstanding user fee
that may be required (see sections 4.08
and 11.06). The IRS will then issue a
signed copy of the compliance statement
to the Plan Sponsor. If the Plan Sponsor
does not return the compliance statement
(and pay any outstanding user 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 Examina-
tions.

(b) Model VCP Compliance Statement.
If the Plan Sponsor included a completed
Form 14568, Model VCP Compliance
Statement with its VCP submission, then
the IRS will sign and send to the Plan
Sponsor the compliance statement speci-
fying the corrective action required. The
format and content of the Form 14568 as
set forth by the IRS may not be modified
or changed in any way. In appropriate
circumstances, the IRS reserves the right
to issue an individually drafted compli-
ance statement in lieu of the Form 14568.
See section 11.02.

(c) Modifications to VCP Submission.
If a Plan Sponsor materially modifies a
VCP submission that was previously filed
with the IRS, the Plan Sponsor should
include the penalty of perjury statement
set forth in section 11.04(16) with respect
to such subsequent modifications. If the
Plan Sponsor does not submit a penalty of
perjury statement, the Plan Sponsor will
be required to sign and return the compli-

ance statement under the general proce-
dures described in section 10.06(8)(a).
See section 11.03(8) for information con-
cerning submission of any such modifica-
tion prior to the assignment of the case to
an IRS representative.

(9) Timing of correction. (a) In gen-
eral. The Plan Sponsor must implement
the specific corrections and administrative
changes set forth in the compliance state-
ment within 150 days of the date of the
compliance statement. Any request for an
extension of this correction period must
be made in writing prior to the expiration
of the correction period and must be ap-
proved by the IRS.

(b) Interim Amendments and Non-
amender Failures. Correction of the fail-
ure to timely adopt Interim Amendments
or other required amendments, as de-
scribed in section 5.01(2)(a)(ii)(B) and
(C), must be made by the date of the
submission. Thus, the submission must
include the executed amendments that
would correct this failure.

(c) Other plan amendments. If a cor-
rective plan amendment is required as part
of a VCP submission, the corrective plan
amendment must be adopted no later than
150 days after the date of the compliance
statement. However, for a governmental
plan (within the meaning of § 414(d)), the
corrective amendment must be adopted by
the later of 150 days after the date of the
compliance statement or the close of the
first regular legislative session of the leg-
islative body with the authority to amend
the plan that begins on or after 91 days
after the date of the compliance statement.

(10) Modification of compliance state-
ment. Once the compliance statement has
been issued (based on the information
provided), the Plan Sponsor cannot re-
quest a modification of the compliance
terms except by a new request for a com-
pliance statement, accompanied by a new
user fee, submitted in accordance with the
submission procedures set forth in section
11.

(11) Verification. Once the compliance
statement has been issued, the IRS may
require verification that the plan has com-
plied with the correction methods and that
any plan administrative procedures re-
quired 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
IRS determines that the Plan Sponsor did
not implement the corrections and proce-
dures within the stated time period, the
plan may be referred to Employee Plans
Examinations.

.07 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 ad-
ministrative procedures), and the time pe-
riod within which proposed corrections
must be implemented (including any
changes in administrative procedures).
The compliance statement also provides
that the IRS will not treat the plan as
failing to satisfy the applicable require-
ments of the Code on account of the fail-
ures described in the compliance state-
ment if the conditions of the compliance
statement are satisfied. The reliance pro-
vided by a compliance statement is lim-
ited to the specific failures and years spec-
ified and does not provide reliance for any
other failure or year.

(2) Correction through plan amend-
ment. (a) Interim Amendment Failures.
With respect to a failure to amend a plan
timely for Interim Amendments, as de-
scribed in section 5.01(2)(a)(ii)(B), the is-
suance of a compliance statement will re-
sult in the corrective amendments being
treated as if they had been adopted timely
for the purpose of determining the avail-
ability of the remedial amendment period
in Rev. Proc. 2007-44 and Rev. Proc.
2016-37. However, the issuance of such a
compliance statement does not constitute
a determination as to whether the Interim
Amendment, as drafted, complies with the
change in qualification requirement, or
whether the terms of the plan, including
the corrective plan amendment, satisfy the
qualification requirements in form.

(b) Nonamender Failures. With respect
to a failure to amend a plan timely for
disqualifying provisions or a failure to
timely adopt applicable required amend-
ments provided on the Required Amend-
ments List, as described in section
5.01(2)(a)(ii)(C) (the definition of Non-
amender Failure), the issuance of a com-
pliance statement will result in the correc-
tive amendments being treated as if they

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had been timely adopted during the appli-
cable remedial amendment period. How-
ever, the issuance of such a compliance
statement does not constitute a determi-
nation as to whether the corrective plan
amendment as drafted complies with
the change in qualification requirement,
whether the corrective plan amendment
conforms the terms of the plan to the
plan's prior operations, or whether the
terms of the plan, including the correc-
tive plan amendment, satisfy the quali-
fication requirements in form.

(c) Operational Failures. If a Plan
Sponsor submits a VCP filing correcting
an Operational Failure through a plan
amendment and the plan amendment is
accepted as a proper correction of the Op-
erational Failure, then the compliance
statement issued under VCP constitutes a
determination that the Operational Failure
has been corrected, but is not a determi-
nation that the terms of the plan, including
the corrective plan amendment, satisfy the
qualification requirements in form.

(d) Failure to adopt 403(b) Plan
timely. A failure to adopt a 403(b) Plan
timely in accordance with the final regu-
lations under § 403(b) and Notice 2009-3
may be corrected under VCP. The issu-
ance 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 Rev. Proc.
2017-18. However, the issuance of a
compliance statement does not constitute
a determination as to whether the written
plan, as drafted, complies with the appli-
cable requirements of § 403(b) and the
final § 403(b) regulations.

(3) Administrative procedures re-
quired. Where current procedures are in-
adequate for operating the plan in confor-
mance with the applicable requirements of
the Code, the compliance statement will
be conditioned upon the implementation
of stated administrative procedures. The
IRS may prescribe appropriate adminis-
trative procedures in the compliance state-
ment.

(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 ex-
cise tax or other penalty as provided under
section 6.09) are authorized to be signed
by managers within Employee Plans Rul-
ings and Agreements, under the Tax Ex-
empt and Government Entities Operating
Division of the IRS.

.08 Effect of compliance statement on
examination. The compliance statement is
binding upon both the IRS and the Plan
Sponsor or Eligible Organization (as de-
fined in section 10.10(1)) 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 IRS relating to matters outside
the compliance statement, even with re-
spect to the same taxable year or years to
which the compliance statement relates.

.09 Special rules relating to Anony-
mous Submissions. (1) The Anonymous
Submission procedure in this section
10.09 permits submission of a Qualified
Plan, 403(b) Plan, SEP, or SIMPLE IRA
Plan under VCP without initially identify-
ing the applicable plan, the Plan Sponsor,
or the Eligible Organization. The require-
ments 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. If the submission is
made by an individual who is authorized
to represent the Plan Sponsor, such indi-
vidual must satisfy the power of attorney
requirements described in section 11.08.
As part of the submission filed on the
www.pay.gov website, the authorized rep-
resentative must, under penalty of perjury,
assert that the authorized representative
complies with the power of attorney re-
quirements described in section 11.08,
and that the authorized representative will
submit an executed copy of a Form 2848,
Power of Attorney and Declaration of
Representation, upon the disclosure of the
identity of the Plan Sponsor to the IRS.
Once the IRS and the authorized represen-
tative reach agreement with respect to the
submission, the IRS will contact the au-
thorized representative in writing indicat-
ing the terms of the agreement. The Plan
Sponsor will have 21 calendar days from
the date of the letter of agreement to iden-

tify the plan and Plan Sponsor and to
submit to the IRS the executed Form 2848
and the penalty of perjury statement set
forth in section 11.04(16). If the Plan
Sponsor does not submit the identifying
documents (including the executed Form
2848 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 user fee will not be re-
turned.

(2) Notwithstanding section 10.04, un-
til a plan and Plan Sponsor is identified to
the IRS, a submission under this subsec-
tion does not preclude or impede an ex-
amination of the Plan Sponsor or its plan.
Thus, a plan submitted under the Anony-
mous Submission procedure that comes
Under Examination prior to the date the
identifying documents of the plan and
Plan Sponsor are received by the IRS will
no longer be eligible under VCP.

.10 Special rules relating to Group
Submissions. (1) 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. 2015-36) of a
master or prototype plan, (b) a volume
submitter practitioner (as that term is de-
fined in section 13.05 of Rev. Proc. 2015-
36), (c) a mass submitter (as that term is
defined in sections 4.08 and 13.06 of Rev.
Proc. 2015-36 and section 4.04 of Rev.
Proc. 2017-41), (d) a provider (as that
term is defined in section 4.08 of Rev.
Proc. 2017-41), (e) an insurance com-
pany or other entity that has issued annu-
ity contracts or provides services with re-
spect to assets for 403(b) Plans, or (f) an
entity that provides its clients with admin-
istrative 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 Eligi-
ble Organization that affects at least 20
plans and results in at least 20 plans im-
plementing correction. If, at any time be-
fore the IRS issues the compliance state-
ment, the number of plans falls below 20,
the Eligible Organization must notify the
IRS that it is no longer eligible to make a
Group Submission. Under these circum-
stances, the user fee may be retained by
the IRS.

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(2) General rules. An Eligible Organi-
zation may submit a VCP request for a
Qualified Plan, a 403(b) Plan, a SEP, or a
SIMPLE IRA Plan under a Group Sub-
mission for Plan Document, Operational,
and Employer Eligibility Failures. A sep-
arate user fee must be submitted for each
plan submitted. For this purpose, in the
case of a plan that consists of a basic plan
document and adoption agreements, the
number of plans submitted is determined
by reference to the number of basic plan
documents submitted.

(3) Special Group Submission proce-
dures. (a) In general, a Group Submission
is subject to the same procedures as any
VCP submission in accordance with sec-
tions 10 and 11, except that the Eligible
Organization is responsible for perform-
ing the procedural obligations imposed on
the Plan Sponsor under sections 10 and
11. See section 11.04(13) 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 pro-
vides the IRS with the information re-
quired in section 10.10(3)(c). The purpose
of the notice is to provide each Plan Spon-
sor with information relating to the Group
Submission request. The notice should ex-
plain 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 Spon-
sor responds within the 90-day period re-
questing that the Plan Sponsor's plan be
excluded from the Group Submission.

(c) When an Eligible Organization re-
ceives an unsigned compliance statement
on the proposed correction and agrees to
the terms of the compliance statement, the
Eligible Organization must return the
signed compliance statement and any ad-
ditional user fee required under Appendix
A of Rev. Proc. 2018-4 (and its annual
successors) to the IRS within 120 calendar
days, in accordance with section 11.06. In
addition, the Eligible Organization must
submit a list containing (i) the employer
tax identification numbers for the Plan
Sponsors of the plans that have consented
to be included in the Group Submission
and 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 re-
cent 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
10.10(3)(b) have been satisfied. If the El-
igible Organization submits this list with
the initial submission, the list must be
included in the PDF file described in sec-
tion 11.03(2). If the list is not submitted
with the initial submission, then once the
submission has been assigned to an IRS
representative, the Eligible Organization
must submit the list on a USB drive in
Microsoft Word or Excel to the IRS rep-
resentative. Only those plans for which
correction is actually made within 240
calendar days of the date of the signed
compliance statement (or within such lon-
ger period as may be agreed to by the IRS
at the request of the Eligible Organiza-
tion) 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
10.10(3)(b) is notified of an impending
Employee Plans examination after the El-
igible Organization filed the Group Sub-
mission with the IRS, the Plan Sponsor's
plan will be included in the Group Sub-
mission. However, with respect to such
plan, the Group Submission will not pre-
clude or impede an examination of the
plan with respect to any failures not iden-
tified in the Group Submission at the time
the plan comes Under Examination.

.11 Multiemployer and multiple em-
ployer plans. In the case of a multiem-
ployer or multiple employer plan, the plan
administrator (rather than any contribut-
ing or adopting employer) must file a sub-
mission under VCP with respect to any
plan failures. The plan administrator may
designate an authorized representative to
file a VCP submission with the IRS using
the www.pay.gov website as described in
section 11.08. The request must be with

respect to the plan, rather than a portion of
the plan affecting any particular employer.

# SECTION 11. SUBMISSION PROCEDURES FOR VCP

.01 General rules. (1) A VCP submis-
sion must satisfy the requirements of this
section 11.

(2) Beginning April 1, 2019, all VCP
submissions must be filed using the www.
pay.gov website, as described in this sec-
tion 11. On the www.pay.gov website, ap-
plicants (generally, either a Plan Sponsor
or a representative authorized pursuant to
a valid Form 2848 as provided in section
11.08) will file a VCP submission and pay
applicable user fees online. From January
1, 2019, through March 31, 2019, an ap-
plicant may file a VCP submission with
the IRS either by using the www.pay.gov
website in accordance with section 11.03
of this revenue procedure or by filing a
paper VCP submission in accordance with
the procedures in sections 10 and 11 of
Rev. Proc. 2016-51. However, paper
VCP submissions postmarked after March
31, 2019, will be returned to the applicant.

(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.

.02 Submission of model forms. (1) Ap-
plicants may submit Form 14568 (Model
VCP Compliance Statement) and attach
separate narrative documents that describe
the qualification failures, correction meth-
ods, and other items described in section
11.04.

(2) Schedules 1 through 9 to Form
14568 (Forms 14568-A through 14568-I)
provide descriptions of common qualifi-
cation failures and standardized correction
methods that may be submitted in lieu of
the separate narrative documents de-
scribed in section 11.02(1). Even if an
applicant does not submit the Form
14568, the applicant may include Sched-
ules 1-9, as applicable, as part of the VCP
submission to satisfy the requirements of
this revenue procedure relating to the de-
scription and correction of identified fail-
ures and related changes in administrative
procedures.

(3) Applicants who submit the Form
14568 series should complete the forms
digitally and combine all submission doc-

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uments into a single PDF (Portable Doc-
ument Format) file that includes the com-
pleted forms. See sections 11.03(2) and
11.04.

(4) Multiple schedules may be in-
cluded in a single VCP submission.

(5) A schedule may be submitted only
if its content applies, without modifica-
tion, to the applicant's situation.

(6) If an applicant submits the Form
14568 or any of its applicable schedules,
the applicant must submit the current
versions of Form 14568 and Forms
14568-A through 14568-I, as applicable,
which are available on the IRS website
(https://www.irs.gov/retirement-plans/
correcting-plan-errors-fill-in-vcp-submission-
documents). The IRS reserves the right to
modify the Form 14568 series to im-
prove usability, reflect changes in law,
or create additional schedules by adding
new forms to the Form 14568 series.

.03 Mandatory Submission Process us-
ing the www.pay.gov website. Pursuant to
section 11.01, for filings submitted on or
after April 1, 2019, applicants must use
the www.pay.gov website to file a VCP
submission with the IRS and pay the ap-
plicable user fee. The submission process
requires the following actions:

(1) Read the instructions to Form
8950. Prior to using the www.pay.gov
website, the applicant should read the in-
structions to Form 8950, Application for
Voluntary Correction Program (VCP)
Submission Under the Employee Plans
Compliance Resolution System. The in-
structions are located at https://www.irs.
gov/pub/irs-pdf/i8950.pdf.

(2) Combine required items into PDF
file. The applicant must convert all appli-
cable items required in section 11.04 into
PDF documents and combine them into a
single PDF file that follows the suggested
ordering of documents in section 11.11. If
the combined PDF file exceeds 15 MB,
the applicant must remove some docu-
ments (or parts of documents) so that the
PDF file does not exceed 15MB. Applica-
ble documents that cannot be included in
the PDF file because of the size limitation
must be faxed to the IRS as described in
section 11.03(7).

(3) Create a pay.gov account. The ap-
plicant must create a pay.gov account on
the www.pay.gov website. Using the

pay.gov account, the applicant must com-
plete and sign Form 8950, Application for
Voluntary Correction Program (VCP)
Submission Under the Employee Plans
Compliance Resolution System.

(4) Upload and attach PDF. After
completing and signing the Form 8950 on
the www.pay.gov website, the applicant
must upload the single PDF that contains
copies of all submission documents re-
quired by this section 11. See section
11.03(7) for instructions for faxing VCP
submission documents that are not in-
cluded in the PDF file due to the 15 MB
limitation.

(5) Pay the applicable user fee. Submit
the applicable user fee using the payment
methods available on the www.pay.gov
website.

(6) Payment confirmation. The www.
pay.gov website will generate a payment
confirmation notice after the VCP submis-
sion has been filed. The Pay.gov Tracking
ID on this receipt will serve as the IRS
control number for the VCP submission.
The confirmation may be emailed to the
pay.gov account holder, with copies to
other email addresses that the account
holder chooses to provide. The applicant
should retain a copy of the payment con-
firmation notice. If a payment confirma-
tion is not generated by the www.pay.gov
website, then the VCP submission process
has not been successful and the applicant
should contact IRS customer account ser-
vices at (877) 829-5500.

(7) Required documents not part of up-
loaded PDF due to size limitation. If there
are required VCP submission documents
that cannot be part of the submitted PDF
file due to the www.pay.gov attachment
file size limitation, the applicant must fax
these documents to the IRS using fax
number (855) 203-6996. Include the EIN,
applicant name, plan name, and Pay.gov
Tracking ID (the IRS control number) on
the fax coversheet. This fax number is to
be used only to supplement VCP submis-
sions filed with the IRS on the www.pay.
gov website. A fax used to submit docu-
ments that cannot be part of the submitted
PDF file due to the www.pay.gov 15 MB
limitation must include the IRS control
number in order for the documents to be
associated with the appropriate submis-
sion in a timely manner and to avoid sig-
nificant delays in case processing.

(8) Subsequent changes or revisions. If
an applicant needs to revise or amend a
filed VCP submission (or any of its attach-
ments) before it is assigned to an IRS
representative, the applicant should not
file a new submission. Instead, the appli-
cant should call the VCP Status Inquiry
Line at (626) 927-2011 (not a toll-free
number). The IRS will assist the applicant
to determine how the revised documents
should be submitted.

.04 PDF file submission contents. The
single PDF file described in section
11.03(2) and this section 11.04 that is
uploaded to the www.pay.gov website
must include the following information:

(1) Identification of failures. A com-
plete 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 proce-
dures applicable to the failures in effect at
the time the failures occurred.

(3) Proposed method of correction. A
detailed description of the method for cor-
recting the failures that the Plan Sponsor
has implemented or proposes to imple-
ment. Each step of the correction method
must be described in narrative form. The
description must include specific informa-
tion needed to support the proposed cor-
rection method. This information in-
cludes, for example, the number of
employees affected and the expected cost
of correction (both of which may be ap-
proximated if the exact number cannot be
determined at the time of the request), the
years involved, and calculations or as-
sumptions the Plan Sponsor used to deter-
mine 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 contribu-
tions or distributions (indicating the com-
putation periods and the basis for deter-
mining Earnings or actuarial adjustments,
in accordance with section 6.02(4)).

(5) Computations. Specific calculations
for each affected employee or a represen-
tative sample of affected employees. The
sample calculations must be sufficient to

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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 pro-
poses a correction method that involves
elective deferrals (whether matched or un-
matched) and matching contributions, the
Plan Sponsor must submit calculations
illustrating the correction method pro-
posed with respect to each type of con-
tribution. As another example, with re-
spect 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 benefi-
ciaries, 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 proce-
dures. A description of the measures that
have been or will be implemented to en-
sure that the same failures will not recur.

(8) Plan document. A copy of the en-
tire 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
plan document (including an adoption
agreement, if applicable), along with ap-
plicable definitions in the plan. In the case
of a SEP or a SIMPLE IRA Plan, the
entire plan document should be included
in the PDF document. For submissions
limited to Plan Document Failures defined
in section 5.01 and 5.02 for which an
applicant has adopted a Pre-approved Plan
that uses an adoption agreement format, as
provided in Rev. Proc. 2015-36, section
4.04 and Rev. Proc. 2017-41, section
4.07(3), a completed copy of the signed
and dated adoption agreement is all that is
necessary to be included in the PDF doc-
ument; it is not necessary to include a
copy of the entire plan document.

(9) Request for excise tax relief
(§ 4972, 4973, 4974, or 4979) or addi-
tional tax relief under § 72(t). If excise tax
or additional tax relief is sought, a specific

request for that relief should be included
in the submission, along with explana-
tions, where applicable, supporting such
request.

(10) Loan failures and income tax re-
porting relief. A specific request for relief
must be made if the applicant 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.

(11) Transferred Assets. If a submis-
sion includes a failure that relates to
Transferred Assets and the failure oc-
curred prior to the transfer, a description
of the transaction (including the dates of
the employer change and the plan trans-
fer).

(12) 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 imple-
menting 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, con-
tact the insurance company or custodian
with control over the plan's assets to as-
sure cooperation in effecting a distribution
of the excess deferrals adjusted for Earn-
ings thereon. The VCP submission must
also contain a statement as to the type of
employer (for example, a tax-exempt or-
ganization described in § 501(c)(3)) that is
making the VCP submission.

(13) Group Submissions. For a group
submission, a copy of the relevant por-
tions of the plan document(s).

(14) Orphan Plans. If the plan is an
Orphan Plan, information that establishes
that the applicant is an Eligible Party, as
defined in section 5.03(2). In addition, the
applicant should indicate whether relief
from full correction or from the user fee is
being requested and the support for such
relief. See sections 4.08 and 6.02(5)(f).

(15) Plan Sponsor Authorization. If the
Plan Sponsor is authorizing an individual
to represent it before the IRS, sign and file
a VCP submission on its behalf, or inspect
and receive confidential information, a
Form 2848, or Form 8821, Tax Informa-

tion Authorization, as applicable. See sec-
tion 11.08.

(16) Penalty of Perjury. If the Plan
Sponsor is authorizing an individual to
sign and file the VCP submission (includ-
ing any subsequent material modifications
of such submission), on its behalf, the
following declaration: "Under penalties
of perjury, I declare that I have exam-
ined this submission, including accom-
panying documents, and, to the best of
my knowledge and belief, the facts pre-
sented in support of this submission are
true, correct, and complete." The decla-
ration must be signed by the Plan Sponsor,
not the Plan Sponsor's representative.
This paragraph does not apply to Anony-
mous Submissions. See section 10.09 for
rules relating to penalty of perjury decla-
rations for Anonymous Submissions.

.05 User fee due at the time of VCP
submission using the www.pay.gov web-
site. Except as provided in sections 4.08
and 11.06, the user fee set forth in Appen-
dix A of Rev. Proc. 2018-4 (and its an-
nual successors) must be paid on the
www.pay.gov website as part of the VCP
submission process. If the appropriate
user fee is not paid, the VCP submission
will not be processed.

.06 Additional user fee due for Group
Submissions. In the case of a Group Sub-
mission, the initial user fee (described in
Rev. Proc. 2018-4 (and its annual succes-
sors)) must be paid when the submission
is first made to the IRS on the www.pay.
gov website. Any additional user fee
amount (also described in Appendix A of
Rev. Proc. 2018-4 (and its annual succes-
sors)) is due at the time the compliance
statement is signed by the Plan Sponsor
and returned to the IRS, or when agree-
ment has been reached between the IRS
and the Plan Sponsor regarding correction
of the failure(s). The payment of this ad-
ditional user fee must be made using the
www.pay.gov website and the pay.gov
version of Form 8951, Additional User
Fee Payment for Open Application for
Voluntary Correction Program (VCP) Un-
der the Employee Plans Compliance Res-
olution System (EPCRS).

.07 Additional amounts due for certain
submissions. In the case of a SEP or a
SIMPLE IRA Plan, a sanction may be
imposed pursuant to a closing agreement
over and above the specified user fee in

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limited circumstances. See section 6.11(5)
(b) for details. Also, in any case involving
§ 72(t), a sanction may be imposed pur-
suant to a closing agreement. See section
6.09(6).

.08 Power of attorney requirements.
(1) To appear before the IRS in connec-
tion with a submission, the Plan Sponsor's
authorized representative must comply
with the requirements of section 6.02(11)
and (12) of Rev. Proc. 2018-4 (and its
annual successors) and include a Form
2848. A Form 2848 that designates a rep-
resentative who is not qualified to sign
Part II of the Form 2848 (for example, an
unenrolled return preparer) will not be
accepted. However, a Plan Sponsor may
authorize an individual, such as an unen-
rolled return preparer, to inspect or re-
ceive confidential information using Form
8821 (see Form 8821 and Instructions).
The Form 2848 and Form 8821, as appli-
cable, must be included in the PDF file
uploaded to the www.pay.gov website. See
sections 11.03(2) and 11.04.

(2) A Plan Sponsor may designate an
authorized representative to file a VCP
submission with the IRS using the www.
pay.gov website as described in this sec-
tion 11. If the Plan Sponsor is authorizing
an individual to sign and submit a VCP
submission on its behalf, the Plan Sponsor
must specifically indicate the scope of
such authorization on the Form 2848. In
order to properly authorize such individ-
ual, the Plan Sponsor should check the
box in line 5a for "Other acts authorized"
on Form 2848 and include as a description
"signing and filing of the Form 8950 and
accompanying documents as part of a
VCP submission." This option is not
available for individuals listed on a Form
8821. See section 11.04(16) requiring a
penalty of perjury declaration signed by
the Plan Sponsor to be included in the
application. See also section 10.09 for
special rules relating to power of attorney
requirements for Anonymous Submis-
sions.

.09 Acknowledgement of filing. For
submissions filed on the www.pay.gov
website, the IRS will not mail an acknowl-
edgement letter to an applicant or its au-
thorized representative that has filed a
VCP submission (or non-VCP submission
for a § 457(b) plan, as permitted by sec-
tion 4.09). However, when a VCP submis-

sion is filed through the www.pay.gov
website, a “Payment Confirmation-Appli-
cation for Voluntary Correction Program"
is generated when the VCP submission is
successfully filed. The Pay.gov Tracking
ID on this receipt serves as the IRS con-
trol number for the filed VCP submission
and should be considered an official ac-
knowledgement. See section 11.03(6).

.10 Maintenance of copies of submis-
sions. Plan Sponsors and their authorized
representatives should maintain copies of
all correspondence submitted to the IRS
with respect to their VCP submissions.

.11 Assembling the submission. The
IRS will be able to process a VCP sub-
mission more quickly if the documents in
the PDF uploaded on the www.pay.gov
website, as described in section 11.03(2)
and 11.04, are presented in the following
order:

(1) Plan Sponsor's Penalty of Perjury
Statement.

(2) Power of Attorney (Form 2848) or
Tax Information Authorization
(Form 8821).

(3) Applicable cover letter.

(4) The following narrative information:

· Description of the failures (if the fail-
ures relate to Transferred Assets, in-
clude a description of the related em-
ployer transaction).

· An explanation of how and why the
failures occurred. This information
may be provided using an applicable
schedule in the Form 14568-A through
14568-I series.

· Description of the method for correct-
ing failures, including Earnings meth-
odology (if applicable) and supporting
computations (if applicable). This in-
formation may be provided using
an applicable schedule in the Form
14568-A through 14568-I series, in-
cluding required enclosures.

· 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 fail-
ures or corrections, then affirmatively
state that fact when addressing this is-
sue. This description may be provided
using an applicable schedule in the
Form 14568-A through 14568-I series.

· Description of the administrative pro-
cedures that have been or will be im-

plemented to ensure that the failures
do not recur. This description may be
provided using an applicable schedule
in the Form 14568-A through 14568-I
series.

· Whether a request is being made in
order for participant loans cor-
rected under this revenue proce-
dure to not be treated as deemed
distributions under § 72(p) and the
supporting rationale for such re-
quest. Alternatively, whether a re-
quest 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. In either case,
this request may be provided using
an applicable schedule in the Form
14568-A through 14568-I series,
including required enclosures.

· 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. This request for relief
may be provided using an applicable
schedule in the Form 14568-A through
14568-I series, including required en-
closures.

· If the plan is an Orphan Plan, the sup-
porting rationale relating to a request
for relief from the user fee.

(5) If the VCP submission includes ei-
ther Form 14568, Model Compliance
Statement and/or any schedule
(Forms 14568-A through 14568-I),
any required information and enclo-
sures, and any related schedules.

(6) Supporting computations relating to
correction, including computations
for Earnings (if applicable).

(7) Relevant plan document language, or
plan document (if applicable).

(8) Copy of opinion, advisory, or deter-
mination letter (if applicable).

(9) Any other items that may be relevant
to the VCP submission.

# SECTION 12. VCP USER FEES

.01 User fees. The user fees for all
submissions under VCP are set forth in
Appendix A of Rev. Proc. 2018-4 (and
its annual successors). Plan Sponsors
should refer to the annual Employee Plans

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revenue procedure in effect at the time
they file their VCP submission with the
IRS to determine the applicable user fee.
All user fees must be paid upon filing the
VCP submission (except as provided in
sections 4.08 and 11.06).

PART VI. CORRECTION ON AUDIT
(AUDIT CAP)

## SECTION 13. DESCRIPTION OF AUDIT CAP

.01 Audit CAP requirements. If the IRS
identifies a Qualification or 403(b) Failure
(other than a failure that has been cor-
rected in accordance with SCP or VCP)
upon an Employee Plans or Exempt Or-
ganizations 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 IRS. This section 13
also applies if the IRS identifies a partic-
ipant 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 examina-
tion 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
submitted by certified check or cashier's
check made payable to the United States
Treasury. However, at the Plan Sponsor's
option, the sanction under Audit CAP may
be paid using the payment methods avail-
able on the www.pay.gov website.

.03 Additional requirements. Depend-
ing on the nature of the failure, the IRS
will discuss the appropriateness of the
plan's existing administrative procedures
with the Plan Sponsor. If existing admin-
istrative procedures are inadequate for op-
erating the plan in conformance with the
applicable requirements of the Code, the
closing agreement may be conditioned
upon the implementation of stated proce-
dures.

.04 Failure to reach resolution. If the
IRS and the Plan Sponsor cannot reach an
agreement with respect to the correction

of the failure(s) or the amount of the sanc-
tion 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 appli-
cable.

.05 Effect of closing agreement. A
closing agreement constitutes an agree-
ment between the IRS and the Plan Spon-
sor that is binding with respect to the tax
matters identified in the agreement for the
periods specified.

.06 Other procedural rules. The proce-
dural rules for Audit CAP are set forth in
IRM 4.71.3.3.1, EPCRS Closing Agree-
ments, and IRM 7.11.8, EP Determina-
tions Closing Agreement Program.

## SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction. The
sanction under Audit CAP is a negotiated
amount that is determined based on the
facts and circumstances, including the rel-
evant factors described in section 14.02.
Sanctions will not be excessive and will
bear a reasonable relationship to the na-
ture, extent, and severity of the failures,
based on the factors below. The sanction
generally will not be less than the VCP
user fee applicable to the plan. See section
14.04 for special rules relating to the sanc-
tion for Nonamender Failures discovered
during the determination letter application
process.

.02 Factors considered. Factors in-
clude:

(1) For all plans (as appropriate):

(a) the steps taken by the Plan Sponsor
to ensure that the plan had no failures;

(b) the steps taken by the Plan Sponsor
to identify failures that may have oc-
curred;

(c) the extent to which correction had
progressed before the examination was
initiated, including full correction;

(d) the number and type of employees
affected by the failure;

(e) the number of nonhighly compen-
sated 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);

(f) 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);

(g) whether the failure is solely an Em-
ployer Eligibility Failure;

(h) the period over which the failure oc-
curred (for example, the time that has
elapsed since the end of the applicable re-
medial amendment period under § 401(b)
for a Plan Document Failure);

(i) the reason for the failure (for exam-
ple, data errors such as errors in transcrip-
tion of data, the transposition of numbers,
or minor arithmetic errors), and

(j) the Maximum Payment Amount.

(2) Additional factors for Nonamender
Failures in Qualified Plans. The factors
considered for Nonamender Failures in
Qualified Plans also include:

(a) whether the plan is the subject of a
Favorable Letter;

(b) the internal controls implemented by
the Plan Sponsor to ensure the timely
adoption of required amendments;

(c) the extent to which the Plan Sponsor
had adopted a timely plan amendment
which later is found not to satisfy the
qualification requirements of the Code;

(d) the extent to which the Plan Sponsor
had otherwise adopted applicable amend-
ments identified on the Required Amend-
ments List described in § 9 of Rev. Proc.
2016-37 and published annually in the
Internal Revenue Bulletin; and

(e) the extent to which the Plan Sponsor
had reasonably determined that a provi-
sion on the Required Amendments List
described in § 9 of Rev. Proc. 2016-37
was not applicable to the Plan Sponsor's
plan.

(3) Participant loan failure. An addi-
tional 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 examina-
tion involves a plan with Transferred As-
sets and the IRS determines that no new
incidents of the failures that relate to the
Transferred Assets occurred 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

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sanction that would apply if the Trans-
ferred Assets were maintained as a sepa-
rate plan.

.04 Sanction for Nonamender Failures
discovered during the determination letter
application process. (1) Except as pro-
vided in section 14.04(2) and (3), if the
only failure identified by the IRS during
the determination letter application pro-
cess is a Nonamender Failure that was not
voluntarily identified by the Plan Sponsor:

(a) The sanction for an individually
designed plan is determined as follows:

(i) 150% of the applicable VCP user
fee described in Appendix A of Rev. Proc.
2018-4 (and its annual successors) if the
Nonamender Failure arose in connection
with an amendment that was required to
be adopted after the end of the plan's last
remedial amendment cycle to which Rev.
Proc. 2007-44 applied, and

(ii) 250% of the applicable VCP user
fee described Appendix A of Rev. Proc.
2018-4 (and its annual successors) if the
Nonamender Failure arose in connection
with an amendment that was required to
be adopted at any time before the end of
the plan's last remedial amendment cycle
to which Rev. Proc. 2007-44 applied.

(b) The sanction for a Pre-approved
Plan is determined as follows:

(i) 150% of the applicable VCP user
fee described in Appendix A of Rev. Proc.
2018-4 (and its annual successors) if the
Nonamender Failure arose in connection
with an amendment that was required to
be adopted after the end of the plan's
second six-year remedial amendment cy-
cle, and

(ii) 250% of the applicable VCP user
fee described in Appendix A of Rev. Proc.
2018-4 (and its annual successors) if the
Nonamender Failure arose in connection
with an amendment that was required to
be adopted at any time before the end of
the plan's second six-year remedial
amendment cycle.

(2) The sanction prescribed in section
14.04(1) may be reduced or increased in
the following circumstances:

(a) If a plan amendment was timely
adopted in order to maintain the plan's
qualified status but is found not to satisfy
the qualification requirements of the
Code, the applicable sanction described in
section 14.04(1) may be reduced based on
the facts and circumstances, including the

factors described in section 14.02(2)(a),
(b) and (c). However, the sanction gener-
ally will not be less than the VCP user fee
applicable to the plan.

(b) If a Nonamender Failure is egre-
gious, the sanction will be determined un-
der section 14.01. Whether a Nonamender
Failure is egregious will be determined
based on the facts and circumstances, in-
cluding:

(i) the number of plan amendments that
were not timely adopted;

(ii) the number of years that had
elapsed from the end of the remedial
amendment period until amendments
were adopted (if at all); and

(iii) the extent to which the plan lacked
internal controls to facilitate the timely
adoption of amendments.

## PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK REDUCTION ACT

## SECTION 15. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2016-51 is modified and
superseded by this revenue procedure.

## SECTION 16. EFFECTIVE DATE

This revenue procedure is generally ef-
fective January 1, 2019. However, Plan
Sponsors are permitted to file paper VCP
submissions with the IRS in accordance
with the instructions set forth in sections
10 and 11 of Rev. Proc. 2016-51 through
March 31, 2019. Beginning April 1, 2019,
all VCP submissions must be filed on the
www.pay.gov website and the IRS will no
longer accept paper VCP submissions.

## SECTION 17. PUBLIC COMMENTS

The Treasury Department and the IRS
invite comments on this revenue procedure.
Send submissions to CC:PA:LPD:PR, (Rev.
Proc. 2018-52), Room 5203, Internal Rev-
enue Service, PO Box 7604, Ben Franklin
Station, Washington, D.C. 20044. Com-
ments may also be hand delivered Monday
through Friday between the hours of 8 a.m.
and 4:00 p.m. to: Internal Revenue Service,
CC:PA:LPD:PR, (Rev. Proc. 2018-52),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, N.W., Washing-
ton DC. Alternatively, comments may be
submitted using the Internet at notice.

comments@irscounsel.treas.gov (Rev. Proc.
2018-52). All comments will be available for
public inspection.

# SECTION 18. PAPERWORK REDUCTION ACT

The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
1673.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less 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), 6.09(5), 6.09(6), 10, 11, 13.01,
sections .05(8)(c) and .05(9)(c) of Appen-
dix A, and sections 2.01-2.07 of Appen-
dix B. This information is required to en-
able the Commissioner, Tax Exempt and
Government Entities Division of the IRS
to consider the issuance of various types
of closing agreements and compliance
statements. This information will be used
to issue closing agreements and compli-
ance 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 indi-
viduals, state or local governments, busi-
nesses or other for-profit institutions, non-
profit institutions, and small businesses or
organizations.

The estimated total annual reporting or
recordkeeping burden is 91,791 hours.

The estimated annual burden per re-
spondent/recordkeeper varies from .5 to
45.5 hours, depending on individual cir-
cumstances, with an estimated average of
25.28 hours. The estimated number of re-
spondents or recordkeepers is 5,375.

The estimated frequency of responses
is occasional.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and tax
return information are confidential, as re-
quired by 26 U.S.C. § 6103.

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# DRAFTING INFORMATION

The principal authors of this revenue
procedure are Kathleen Herrmann and
Vernon S. Carter of the Office of the As-
sociate Chief Counsel (Tax Exempt and
Government Entities). For further infor-
mation regarding this revenue procedure,
please contact the Employee Plans' tax-
payer assistance telephone service at
(877) 829-5500 (a toll-free number) be-
tween the hours of 8:30 a.m. and 4:30
p.m. Eastern Time, Monday through
Friday.

# APPENDIX A

## OPERATIONAL FAILURES AND CORRECTION METHODS

.01 General rule. (1) In general. This
appendix sets forth Operational Failures
and Correction Methods relating to Qual-
ified Plans. In each case, the method de-
scribed corrects the Operational Failure
identified in the headings below. Correc-
tive allocations and distributions should
reflect Earnings and actuarial adjustments
in accordance with section 6.02(4) of this
revenue procedure. The correction meth-
ods in this appendix are acceptable to cor-
rect Qualification Failures under VCP,
and to correct Qualification Failures under
SCP that occurred notwithstanding that
the plan has established practices and pro-
cedures 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, such as the correction method for
an Employee Elective Deferral failure in
section .05(9), may similarly be used to
correct the failure.

(2) Correction methods permitted in
Appendix A and Appendix B are safe har-
bors. Correction methods permitted in
Appendix A and Appendix B are deemed
to be reasonable and appropriate methods
of correcting a failure. Both Appendices
set forth various correction methods that
may be used to correct a failure, depend-
ing on the facts and circumstances. A Plan
Sponsor may choose any correction
method by which the plan can satisfy the
eligibility requirements. For example, a

§ 401(k) plan that improperly excluded an
employee may use the general correction
method under .05(2). However, if the
§ 401(k) plan has an automatic contribu-
tion feature, the plan may use the correc-
tion method under .05(8), assuming the
plan meets the eligibility requirements in
.05(8)(a). If the § 401(k) plan doesn't
have an automatic contribution feature but
corrects the failure within a specified time
period, the plan may use the correction
method under .05(9)(a) or (b), assuming
the plan meets the eligibility requirements
in .05(9)(a) or (b).

(3) Other reasonable correction meth-
ods permitted. As provided in section
6.02(2), there may be more than one rea-
sonable and appropriate correction of a
failure. Any correction method used that
is not described in Appendix A or Appen-
dix 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 require-
ment 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 em-
ployees 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 Ap-
pendix A, and the Plan Sponsor would
need to satisfy the general correction prin-
ciples 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 contribu-
tion 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 re-
quired benefit must be accrued in the man-
ner 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 begin-
ning on or before December 31, 2001, the
multiple use test of § 401(m)(9). The per-
mitted correction method is to make
QNECs (as defined in § 1.401(k)-6) on
behalf of the nonhighly compensated em-

ployees to the extent necessary to raise the
actual deferral percentage or actual con-
tribution percentage of the nonhighly
compensated employees to the percentage
needed to pass the test or tests. For pur-
poses 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 contribu-
tions must be made on behalf of all eligi-
ble nonhighly compensated employees (to
the extent permitted under § 415) and
must be the same percentage of compen-
sation. QNECs contributed to satisfy the
ADP test need not be taken into account
for determining additional contributions
(for example, a matching contribution), if
any. For purposes of this section .03, em-
ployees who would have received a
matching contribution had they made
elective deferrals must be counted as eli-
gible 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 cover-
ing 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 eligi-
ble 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 defer-
rals in excess of the § 402(g) limit (in
contravention of § 401(a)(30)). The per-
mitted correction method is to distribute
the excess deferral to the employee and to
report the amount as taxable in the year of
deferral and in the year distributed. The
inclusion of the deferral and the distribu-
tion in gross income applies whether or
not any portion of the excess deferral is
attributable to a designated Roth contribu-
tion (see § 402A(d)(3)). In accordance
with § 1.402(g)-1(e)(1)(ii), a distribution
to a highly compensated employee is in-
cluded 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: em-
ployer provided contributions or benefits.
For plans with employer provided contri-

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butions or benefits (which are neither
elective deferrals under a qualified cash or
deferred arrangement under § 401(k) nor
matching or after-tax employee contribu-
tions 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 con-
tribution plan or to provide benefit accru-
als 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 contribu-
tion 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 con-
tributions) 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 to 50% of the em-
ployee'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 em-
ployee'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 defer-
ral 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 ex-
cludable 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 ap-
plicable ADP, the corresponding missed de-
ferral, and the required QNEC. The QNEC
required for the employee for the missed

deferral opportunity for the year of exclu-
sion 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 correc-
tive employer nonelective contribution on
behalf of the affected employee. The correc-
tive employer nonelective contribution is
equal to the matching contribution the em-
ployee would have received had the em-
ployee made a deferral equal to the missed
deferral determined under section .05(2)(b).
The corrective employer nonelective contri-
bution 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 con-
tributions) 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 pro-
vides a matching contribution rate that is
at least as favorable as 100% of the elec-
tive deferral made by the employee. If the
employee was not provided the opportu-
nity 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 esti-
mate of the missed deferral replaces the
estimate based on the ADP test in a tradi-
tional § 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 re-
quired 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 case of a safe harbor

§ 401(k) plan that uses nonelective con-
tributions to satisfy the safe harbor re-
quirements of § 401(k)(12). The QNEC
required to replace the employee's missed
deferral opportunity and the correspond-
ing 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 fail-
ure), 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 subse-
quent 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 tradi-
tional § 401(k) plan. The required correc-
tive 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 defer-
ral, 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), which-
ever applies under the plan. The employer
contribution for the missed deferral op-
portunity must be a QNEC. The corrective
employer contribution consisting of the
QNEC required to replace the employee's
missed deferral opportunity and the corre-
sponding matching or nonelective contri-
bution 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)

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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 un-
der § 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 compensa-
tion 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 regu-
lations, at 74 FR 23134).

(e) If the employee should have been
eligible to elect and make after-tax em-
ployee contributions (other than desig-
nated Roth contributions), the employer
must make a QNEC to the plan on behalf
of the employee that is equal to the
"missed opportunity for making after-tax
employee contributions." The missed op-
portunity for making after-tax employee
contributions is equal to 40% of the em-
ployee's "missed after-tax contributions."
The employee's missed after-tax contribu-
tions are equal to the actual contribution
percentage (ACP) for the employee's group
(either highly compensated or nonhighly
compensated) times the employee's com-
pensation, but with the resulting amount not
to exceed applicable plan limits. If the ACP
consists of both matching and after-tax em-
ployee contributions, then, in lieu of basing
the employee's missed after-tax employee
contributions on the ACP for the employ-
ee'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 (ei-
ther highly compensated or nonhighly com-
pensated), 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 ex-
cluded 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 em-
ployer 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 de-
termined under section .05(2)(e). The cor-
rective 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 fail-
ures 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 meth-
ods described in section .05(2)(b) through
(f) cannot be used until after correction of
the ADP or ACP test failures. For pur-
poses 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 eligi-
ble employees who were provided with
the opportunity to make elective deferrals
or after-tax employee contributions and
receive an allocation of employer match-
ing contributions, in accordance with the
terms of the plan, and may disregard the
employees who were improperly ex-
cluded.

(3) Improperly excluded employees:
designated Roth contributions. For em-
ployees 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 elec-
tive deferrals as designated Roth contribu-
tions, the correction is the same as de-
scribed under section .05(2). Thus, for
example, the corrective employer contri-
bution required to replace the missed de-
ferral 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 § 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 in-
cluded in an employee's gross income)

and thus may not be contributed or al-
located to a Roth account (as described
in § 402A(b)(2)). The corrective em-
ployer contribution must be allocated to
an account established for receiving a
QNEC or any other employer contribu-
tion in which the employee is fully
vested and subject to the withdrawal
restrictions that apply to elective defer-
rals.

(4) Improperly excluded employees:
catch-up contributions only. (a) Correc-
tion 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 em-
ployer 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 em-
ployee 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 contribu-
tions. 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 pre-
cluded 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 (that
is, 50% of the missed deferral attributable to
catch-up contributions of $2,500). The
QNEC required to replace the missed defer-
ral opportunity for the year of exclusion is
adjusted for Earnings to the date the correc-
tive 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 mak-
ing catch-up contributions under this sec-

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tion .05(4), the Plan Sponsor should as-
certain 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 match-
ing 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 contribu-
tion is equal to the additional matching
contribution the employee would have re-
ceived had the employee made a deferral
equal to the missed deferral determined
under paragraph (a) of this section .05(4).
The corrective employer nonelective con-
tribution 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 cor-
rection of the ACP test failure. For pur-
poses 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 em-
ployee contributions and receive an allo-
cation of employer matching contribu-
tions, 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 elec-
tive 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 defer-
ral." The missed deferral is determined by
multiplying the employee's elected defer-
ral percentage by the employee's compen-
sation. 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 defer-
ral 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 ad-
justed for Earnings to the date the correc-
tive QNEC is made on behalf of the af-
fected employee.

(b) Missed opportunity for after-tax
employee contributions. For eligible em-
ployees who filed elections to make after-
tax employee contributions under the Plan
which the Plan Sponsor failed to imple-
ment 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 percent-
age 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 match-
ing 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 con-
tribution had either the missed deferral or
after-tax employee contribution been made,
then the Plan Sponsor must make a correc-
tive 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 non-
elective 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 cor-
rective 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.

(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 fail-

ures. 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 de-
scribed 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 Spon-
sor's failure to implement employee elec-
tions and received allocations of employer
matching contributions, in accordance
with the terms of the plan, and may dis-
regard 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 spe-
cific rules in this section .05(6), the cor-
rection 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 sub-
ject 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 compen-
sation.

(8) Special safe harbor correction
method for failures related to automatic
contribution features in a § 401(k) plan or

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a 403(b) Plan. (a) Eligibility to use safe
harbor correction method. This safe har-
bor correction method is available for cer-
tain Employee Elective Deferral Failures
(as defined in section .05(10) of this ap-
pendix associated with missed elective de-
ferrals for eligible employees who are
subject to an automatic contribution fea-
ture in a § 401(k) plan or 403(b) Plan
(including employees who made affirma-
tive elections in lieu of automatic contri-
butions but whose elections were not im-
plemented correctly). If the failure to
implement an automatic contribution fea-
ture for an affected eligible employee or
the failure to implement an affirmative
election of an eligible employee who is
otherwise subject to an automatic contri-
bution feature does not extend beyond the
end of the 91/2-month period after the end
of the plan year of the failure (which is
generally the filing deadline of the Form
5500 series return, including automatic
extensions), no QNEC for the missed
elective deferrals is required, provided
that the following conditions are satisfied:

(i) Correct deferrals begin no later than
the earlier of the first payment of compen-
sation made on or after the last day of the
91/2-month period after the end of the plan
year in which the failure first occurred for
the affected eligible employee or, if the
Plan Sponsor was notified of the failure by
the affected eligible employee, the first
payment of compensation made on or af-
ter the end of the month after the month of
notification;

(ii) Notice of the failure that satisfies
the content requirements of section
.05(8)(c) of this appendix is given to the
affected eligible employee not later than
45 days after the date on which correct
deferrals begin; and

(iii) If the eligible employee would
have been entitled to additional matching
contributions had the missed deferrals
been made, the Plan Sponsor makes a
corrective allocation (adjusted for Earn-
ings) on behalf of the employee equal to
the matching contributions that would
have been required under the terms of the
plan as if the missed deferrals had been
contributed to the plan in accordance with
timing requirements under SCP for signif-
icant operational failures (described in
section 9.02).

(b) Calculation of Earnings for certain
failures to implement automatic contribu-
tion features. This correction method pro-
vides an alternative safe harbor method
for calculating Earnings for Employee
Elective Deferral Failures under § 401(k)
plans or 403(b) Plans that have automatic
contribution features and that are cor-
rected in accordance with the procedures
in this section .05(8). If an affected eligi-
ble employee has not affirmatively desig-
nated an investment alternative, missed
Earnings may be calculated based on the
plan's default investment alternative, pro-
vided that, with respect to a correction
made in accordance with the procedures
in this section .05(8), any cumulative
losses reflected in the Earnings calculation
will not result in a reduction in the re-
quired corrective contributions relating to
any matching contributions. The Plan
Sponsor may also use the Earnings adjust-
ment methods set forth in section 3 of
Appendix B.

(c) Content of notice requirement. The
notice required under section .05(8)(a)(ii)
of this appendix must include the follow-
ing information:

(i) General information relating to the
failure, such as the percentage of eligi-
ble compensation that should have been
deferred and the approximate date that
the compensation should have begun to
be deferred. The general information
need not include a statement of the dol-
lar amounts that should have been de-
ferred.

(ii) A statement that appropriate
amounts have begun to be deducted from
compensation and contributed to the plan
(or that appropriate deductions and contri-
butions will begin shortly).

(iii) A statement that corrective allo-
cations relating to missed matching con-
tributions have been made (or that cor-
rective allocations will be made).
Information relating to the date and the
amount of corrective allocations need
not be provided.

(iv) An explanation that the affected
participant may increase his or her defer-
ral percentage in order to make up for the
missed deferral opportunity, subject to ap-
plicable limits under § 402(g).

(v) The name of the plan and plan
contact information (including name,

street address, email address, and tele-
phone number of a plan contact).

(d) Sunset of safe harbor correction
method. The safe harbor correction method
described in this section .05(8) of this ap-
pendix is available for plans only with re-
spect to failures that begin on or before
December 31, 2020.

(9) Safe harbor correction methods for
Employee Elective Deferral Failures in
§ 401(k) plans or 403(b) Plans. (a) Safe
harbor correction method for Employee
Elective Deferral Failures that do not ex-
ceed three months. Under this safe harbor
correction method, an Employee Elective
Deferral Failure (as defined in section
.05(10) of this appendix ) can be corrected
without a QNEC for missed elective de-
ferrals if the following conditions are sat-
isfied:

(i) Correct deferrals begin no later
than the earlier of the first payment of
compensation made on or after the last
day of the three-month period that be-
gins when the failure first occurred for
the affected eligible employee or, if the
Plan Sponsor was notified of the failure
by the affected eligible employee, the
first payment of compensation made on
or after the end of the month after the
month of notification;

(ii) Notice of the failure that satisfies
the content requirements of section
.05(9)(c) of this appendix is given to the
affected eligible employee not later than
45 days after the date on which correct
deferrals begin; and

(iii) If the eligible employee would
have been entitled to additional matching
contributions had the missed deferrals
been made, the Plan Sponsor makes a
corrective allocation (adjusted for Earn-
ings, which may be calculated as de-
scribed in section .05(8)(b) of this appen-
dix) on behalf of the employee equal to
the matching contributions that would
have been required under the terms of the
plan as if the missed deferrals had been
contributed to the plan in accordance with
the timing requirements under SCP for
significant operational failures (described
in section 9.02).

(b) Safe harbor correction method for
Employee Elective Deferral Failures that
extend beyond three months but do not
extend beyond the SCP correction period
for significant failures. This safe harbor

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correction is for failures that exceed three
months (or the conditions for the safe har-
bor correction method described in sec-
tion .05(8) or .05(9)(a) of this appendix
are not met by the Plan Sponsor). Under
this safe harbor correction, the required
corrective employer contribution is equal
to 25% of the missed deferrals (25%
QNEC) in lieu of the higher QNEC re-
quired in sections .05(2)(b) and .05(5)(a)
of this appendix. In order to use this safe
harbor correction method, the Plan Spon-
sor must satisfy the following conditions:

(i) Correct deferrals begin no later than
the earlier of the first payment of compen-
sation made on or after the last day of the
second plan year following the plan year
in which the failure occurred or, if the
Plan Sponsor was notified of the failure by
the affected eligible employee, the first
payment of compensation made on or af-
ter the end of the month after the month of
notification;

(ii) Notice of the failure that satisfies
the content requirements of section
.05(9)(c) of this Appendix A is given to an
affected participant not later than 45 days
after the date on which correct deferrals
begin; and

(iii) Corrective allocations, as de-
scribed in section 6.02(4) of this revenue
procedure (including the 25% QNEC and
employer contributions to make up for
any missed matching contributions), are
made in accordance with timing require-
ments under SCP for significant opera-
tional failures (described in section 9.02
of this revenue procedure), including ad-
justments for Earnings, which may be cal-
culated as described in section .05(8)(b) of
this appendix.

(c) Content of notice requirement. The
notice required under section .05(9)(a)(ii)
and section .05(9)(b)(ii) of this appendix
must include the following information:

(i) General information relating to the
failure, such as the percentage of eligible
compensation that should have been de-
ferred and the approximate date that the
compensation should have begun to be
deferred. The general information need
not include a statement of the dollar
amounts that should have been deferred.

(ii) A statement that appropriate
amounts have begun to be deducted from
compensation and contributed to the plan

(or that appropriate deductions and contri-
butions will begin shortly).

(iii) A statement that corrective alloca-
tions have been made (or that corrective
allocations will be made). Information re-
lating to the date and the amount of cor-
rective allocations need not be provided.

(iv) An explanation that the affected
participant may increase his or her defer-
ral percentage in order to make up for the
missed deferral opportunity, subject to ap-
plicable limits under § 402(g).

(v) The name of the plan and plan
contact information (including name,
street address, email address, and tele-
phone number of a plan contact).

(10) Employee Elective Deferral Fail-
ure. For purposes of sections .05(8) and
.05(9) of this appendix, an "Employee
Elective Deferral Failure" is a failure to
implement elective deferrals correctly in a
§ 401(k) plan or 403(b) Plan, including
elective deferrals pursuant to an affirma-
tive election or pursuant to an automatic
contribution feature under a § 401(k) plan
or 403(b) Plan, and a failure to afford an
employee the opportunity to make an af-
firmative election because the employee
was improperly excluded from the plan.
Automatic contribution features include
automatic enrollment and automatic esca-
lation features (including automatic esca-
lation features that were affirmatively
elected).

.06 Failure to timely pay the minimum
distribution required under § 401(a)(9).
In a defined contribution plan, the permit-
ted correction method is to distribute the
required minimum distributions (with
Earnings from the date of the failure to the
date of the distribution). The amount re-
quired 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 correc-
tion method is to distribute the required
minimum distributions, plus an interest pay-
ment based on the plan's actuarial equiva-
lence 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 pay-
ments pursuant to § 436(d), the Plan Spon-
sor must contribute to the plan the applica-
ble 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 con-
sent 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 ac-
tuarially reduced to take into account dis-
tributions already received by the partici-
pant. 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 partici-
pant. Thus, for example, if, in accordance
with the automatic qualified joint and sur-
vivor annuity option under a plan, a mar-
ried participant who retired would have
received a qualified joint and survivor an-
nuity 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 partici-
pant's accrued benefit under the plan, then
the $600 monthly annuity payable during
the participant's lifetime may be actuari-
ally reduced to take the single-sum distri-
bution 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 con-
sent for the distribution actually made, (ii)
receiving a qualified joint and survivor an-
nuity (both (i) and (ii) of this section .07(2)
are described in section .07(1) of this Ap-
pendix A), or (iii) a single-sum payment to

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the participant's spouse equal to the actuar-
ial 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 partici-
pant'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 distri-
bution under § 402(c)(9) for purposes of
rolling over the payment to an IRA or
other eligible retirement plan. If correc-
tion 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 Sponsor (or other person) contrib-
utes 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 de-
ferrals and after-tax employee contribu-
tions) 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 reason-
able error in estimating compensation) is
to place the excess annual additions into
an unallocated account, similar to the sus-
pense account described in § 1.415-
6(b)(6)(iii) (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 ac-
count, 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 de-
ferrals or after-tax employee contributions
(even if the excess did not result from a
reasonable error in determining compen-
sation, the amount of elective deferrals or

after-tax employee contributions that
could be made with respect to an individ-
ual under the § 415 limits) is to distribute
the elective deferrals or after-tax em-
ployee contributions using a method sim-
ilar 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 ad-
ditions 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 pe-
riods. 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 (4).

.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 lon-
ger maintaining the plan, or similar rea-
sons and (b) the plan is an Orphan Plan, as
defined in section 5.03, the permitted cor-
rection is to terminate the plan and dis-
tribute plan assets to participants and ben-
eficiaries. 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 Depart-
ment of Labor regulations (relating to
abandoned plans). Second, the qualified
termination administrator, as defined in
2578.1(g) of the Department of Labor reg-
ulations, based on plan records located
and updated in accordance with the De-
partment of Labor regulations, must have
reasonably determined whether, and to
what extent, the survivor annuity require-
ments of §§ 401(a)(11) and 417 apply to
any 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 nonforfeit-

able right to his or her accrued benefits
as of the date of deemed termination
under the Department of Labor regula-
tions, subject to income, expenses,
gains, and losses between that date and
the date of distribution. Fourth, partici-
pants and beneficiaries must receive no-
tification of their rights under § 402(f).
In addition, notwithstanding correction
under this revenue procedure, the IRS
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 adminis-
trator, or owner of the business, even in
its capacity as a participant or benefi-
ciary under the plan. However, with re-
spect to the first through third conditions
above, notice need not be furnished to
the Department of Labor, and notices
furnished to the Plan Sponsor, partici-
pants, 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 con-
tracts or other assets. (a) Former employ-
ees 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 in-
surance annuity contract) held under a de-
fined contribution plan on behalf of a par-
ticipant who is a former employee or on
behalf of a beneficiary, a permitted cor-
rection 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 La-
bor 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 ven-
dor to which contributions are being made
under the plan in order to become a con-
tract which is held under the plan without
regard to the special rules in § 1.403(b)-
10(b).

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# 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 Oper-
ational Failures under Qualified Plans.
This appendix also sets forth Earnings ad-
justment 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 ad-
justments in accordance with section
6.02(4) of this revenue procedure. The
correction methods in this appendix are
acceptable to correct Qualification Fail-
ures under VCP, and to correct Qualifica-
tion Failures under SCP that occurred not-
withstanding that the plan has established
practices and procedures reasonably de-
signed 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 simi-
larly be used to correct the failure.

.02 Assumptions for Examples. Unless
otherwise specified, for ease of presenta-
tion, the examples assume that:

(1) the plan year and the § 415 limita-
tion 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 Oper-
ational Failures and the eligibility and
other requirements for SCP, VCP, or Au-
dit CAP, whichever applies, are satisfied;
and

(5) there are no Qualification Failures
other than the described Operational Fail-
ures, and if a corrective action would re-
sult in any additional Qualification Fail-
ure, appropriate corrective action is taken
for that additional Qualification Failure in
accordance with EPCRS.

.03 Designated Roth contributions.
The examples in this Appendix B gener-
ally do not identify whether the plan of-
fers designated Roth contributions. The
results in the examples, including correc-
tive 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 cor-
rection method for a failure to satisfy the
actual deferral percentage ("ADP"), actual
contribution percentage ("ACP"), or, for
plan years beginning on or before Decem-
ber 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 cor-
rected 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 deter-
mined and assigned to highly compen-
sated employees as provided in paragraph
(1)(b)(ii) below. That excess contribution
amount (adjusted for Earnings) is either
distributed to the highly compensated em-
ployees or forfeited from the highly com-
pensated employees' accounts as provided
in paragraph (1)(b)(iii) below. That same
dollar amount (that is, the excess contri-
bution 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 com-
ponent plans is not permitted. This correc-
tion method may also be used to correct a
failure to satisfy the multiple use test for
plan years beginning on or before Decem-
ber 31, 2001.

(ii) Determination of the Excess Con-
tribution 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 begin-
ning 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 correc-
tions that complied with §§ 401(k)(8) and
401(m)(6), and, for plan years beginning
on or before December 31, 2001, the mul-
tiple use test.

(iii) Distributions and Forfeitures of
the Excess Contribution Amount. (A) The
portion of the excess contribution amount
assigned to a particular highly compen-
sated 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 accor-
dance 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 Spon-
sor must notify the employee that the Ex-
cess 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 (ad-
justed for Earnings) are forfeited in accor-
dance 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 em-
ployee and that payment is a forfeitable
match described in either paragraph
(1)(b)(iii)(A) or (B), then it is an Over-
payment defined in section 5.01(3)(c) of

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this revenue procedure that must be cor-
rected (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) (that
is, 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 pro-
vided 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 peri-
ods prior to the effective date of those
regulations, Notice 98-1, 1998-1 C.B.
327. The contribution made under para-
graph (1)(b)(iv)(A) is allocated to the ac-
count 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 compen-
sated employees for that year and who
also are nonhighly compensated employ-
ees for the year of correction. Alterna-
tively, the contribution is allocated to ac-
count 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, eligible employ-
ees must receive a uniform allocation (as a
percentage of compensation) of the con-
tribution. (See Examples 1 and 2.) Under
the one-to-one correction method, the
amount allocated to the account balance
of an employee (that is, the employee's
share of the total amount contributed un-
der 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) ap-
plies 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 pe-
riods 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 com-
pensated 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 contribu-
tions 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 Em-
ployee Q). The corrective contribution is allocated to
the account balances of eligible nonhighly compen-
sated employees for 2005, pro rata based on their
compensation for 2005 (subject to § 415 for 2005).
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 contribu-
tions equal to 50% of the sum of an employee's
elective deferrals and after-tax employee contribu-
tions that do not exceed 10% of the employee's
compensation. The plan provides that matching con-

tributions are subject to the plan's 20% per year of
service vesting schedule and that matching contribu-
tions are forfeited and used to reduce employer con-
tributions if associated elective deferrals or after-tax
employee contributions are distributed to correct an
ADP or ACP test failure. For 2005, nonhighly com-
pensated employees made after-tax employee contri-
butions 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 con-
tribution 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 Ex-
ample 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 asso-
ciated 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 contri-
butions are $2,937.50 and $1,468.75, respectively.
Thus, $1,718.75 is forfeited from Employee P's ac-
count 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 Em-
ployee P is $250 and for Employee Q is $220. The
total amount of the forfeitures of $3,657.50 (Em-
ployee 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 Em-
ployees in a § 401(k) or (m) Plan. (a)
Correction Method. (i) Appendix A Cor-
rection 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 mak-
ing elective deferrals (other than desig-
nated Roth contributions) and after-tax
employee contributions to a plan that pro-
vides benefits that are subject to the re-
quirements 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 elec-
tive deferrals and the corrective contribu-
tions for employees who were improperly
excluded from electing and making elec-
tive deferrals to a safe harbor § 401(k)
plan for one or more full plan years. (See
Examples 8, 9, and 10.) Appendix A, sec-
tion .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

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to make designated Roth contributions. Ap-
pendix A, section .05(4) sets forth the cor-
rection 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 contribu-
tions 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 imple-
ment 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
from all contributions (including designated
Roth contributions) under a § 401(k) or (m)
plan for a full year, as described in Appen-
dix 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 contri-
butions for a full plan year as described in
Appendix A, section .05(4), and (III) the
exclusion of an eligible employee on ac-
count of the failure to implement an em-
ployee'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 em-
ployee who was improperly excluded
from electing and making elective defer-
rals (including designated Roth contribu-
tions) 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 contribu-
tions) 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 de-
scribed to correct the failure to include

otherwise eligible employees do not ap-
ply until after correction of other quali-
fication failures. Thus, for example, in
the case of a § 401(k) plan that does not
apply the safe harbor contribution re-
quirements of § 401(k)(12) or 401(k)
(13) the correction for improperly ex-
cluding an employee from making elec-
tive deferrals, as described in the narra-
tive 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 con-
tributions) 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 employ-
ee's missed deferral is determined by mul-
tiplying 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 de-
ferral is determined by multiplying 3%
(or, if greater, whatever percentage of the
participant's compensation which, if con-
tributed as an elective deferral, would
have been matched at a rate of 100% or
more) by the employee's plan compensa-
tion for the portion of the year during
which the employee was improperly ex-
cluded. The missed deferral for the por-
tion 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 para-
graph) and any elective deferrals actually
made by the employee for that year would
exceed (ii) the maximum elective defer-
rals permitted under the plan for the em-
ployee for that plan year (including the
§ 402(g) limit). The corrective contribu-
tion is adjusted for Earnings. For purposes
of correcting other failures under this rev-
enue procedure (including determination
of any required matching contribution) af-
ter correction has occurred under this sec-
tion 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 ex-
cluded. (See Examples 4 and 5.)

(2) The appropriate corrective contri-
bution 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 ad-
justed 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 di-
vided by 12. The missed deferral for the
portion of the plan year during which the
eligible employee was improperly ex-
cluded 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 elec-
tive deferrals actually made by the em-
ployee for that year would exceed (ii) the
maximum elective deferrals permitted un-
der 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 cor-
rection method can be used, as described
in Appendix A, section .05(5)(d), still ap-
ply.

(C) After-Tax Employee Contribution
Failures. (1) The appropriate corrective
contribution for the failure to allow employ-
ees to elect and make after-tax employee
contributions for a portion of the plan year is
equal to the missed after-tax employee con-
tributions opportunity, which is an amount
equal to 40% of the employee's missed
after-tax employee contributions. The em-

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ployee's missed after-tax employee contri-
butions 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 contribu-
tions, 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 com-
pensated or nonhighly compensated), the
Plan Sponsor is permitted to determine sep-
arately the portions of the ACP that are
attributable to matching contributions and
after-tax employee contributions and base
the missed after-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 em-
ployee 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 correc-
tive 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 contri-
bution 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 con-
tributions 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 com-
pensation for the portion of the year dur-
ing 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 contrib-

uted 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 em-
ployee was excluded from making after-
tax employee contributions divided by 12.
The missed after-tax employee contribu-
tion 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 pas-
sage of the ACP test before this correction
method can be used, as described in Appen-
dix A, section .05(5)(d), still apply.

(D) Matching Contribution Failures.
(1) The appropriate corrective contribu-
tion for the failure to make matching con-
tributions 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 (deter-
mined 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 contri-
butions 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(2)(g), still apply.

(2) The appropriate corrective contri-
bution 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 elec-

tive 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 ap-
plicable, the after-tax employee contribu-
tion 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 con-
tributions 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 per-
mitted 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 cor-
rection method can be used, as described
in Appendix A, section .05(5)(d), still ap-
ply.

(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 compen-
sation for the portion of the year during
which the employee was improperly ex-
cluded, a pro rata portion of the employ-
ee'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 Spon-
sor is not required to make a corrective
contribution with respect to elective defer-
rals (including designated Roth contribu-
tions) or after-tax employee contributions,
as provided in sections 2.02(1)(a)(ii)(B)
and (C), but is required to make a correc-
tive 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 contribu-
tions 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

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amount that would have been permitted if
no failure had occurred. (See Examples 6
and 7.)

(b) Examples.

Example 3:

Employer B maintains a § 401(k) plan. The plan
provides for matching contributions for eligible em-

ployees 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 desig-

nated 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 Jan-
uary 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 multi-
plying that percentage by Employee V's compensa-
tion for 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 (that is,
50% x $2,400). Thus, the required corrective contri-
bution for the failure to provide Employee V with
the opportunity to make elective deferrals to the plan
is $1,200 (plus Earnings). The corrective contribu-
tion is made to a pre-tax QNEC account for Em-
ployee 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 allo-
cation 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 con-
tribution 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 contri-
bution is adjusted for Earnings. Under the terms of
the plan, if Employee V had made an elective defer-
ral 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 Em-
ployee V's compensation ($30,000) or $900. Ac-
cordingly, 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 op-
portunity to, elect and make after-tax employee con-
tributions in 2006. Employer B must make a QNEC
to the plan equal to the missed opportunity for mak-
ing 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 contribu-
tion 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 com-
pensation for 2006. Accordingly, the missed after-
tax employee contribution for Employee V, on ac-
count of the employee's improper exclusion from the
plan is $189 (0.63% x $30,000). The missed oppor-
tunity to make after-tax employee contributions to
the plan is $76 (40% x $189). Thus, the required

corrective contribution for the failure to provide Em-
ployee 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 op-
portunity ($1,200), the missed opportunity for after-
tax employee contributions ($76), and related Earn-
ings 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 eli-
gible employee's plan compensation during the pay-
roll 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 eli-
gibility requirements and should have entered the
plan on January 1, 2006, was not offered the oppor-
tunity 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

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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 De-
cember 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
compensation for each payroll period from Septem-
ber 1, 2006 through December 31, 2006 ($10,000).
After being allowed to participate in the plan, Em-
ployee X made $250 of after-tax employee contri-
butions for the 2006 plan year. The ADP for non-
highly 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 em-
ployee contributions for nonhighly compensated em-
ployees for 2006 was 0.5%.

Correction:

In accordance with section 2.02(1)(a)(ii), Em-
ployer 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 con-
tributions, 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 con-
tribution on behalf of Employee X that satisfies
the requirements of section 2.02(1)(a)(ii). Em-
ployer C elects to utilize the provisions of section
2.02(1)(a)(ii)(E) to determine Employee X's com-
pensation 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 conve-
nience, in lieu of using actual plan compensation
of $26,000 for the period Employee X was ex-
cluded, Employee X's annual plan compensation
is prorated for the 8-month period that the em-
ployee 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 con-
tribution 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 compensa-
tion 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
(that is, 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 Em-
ployee 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 re-
duced because no plan limit is exceeded when this
amount is added to the matching contribution al-
ready contributed for the 2006 plan year. Accord-
ingly, the required corrective employer contribution
is $480. The required corrective employer contribu-
tion 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 Jan-
uary 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 (that is, 40%
multiplied by the missed after-tax employee contri-
bution 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 contribu-
tions ($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 contribu-
tions 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 accor-
dance 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 com-
pensated employees multiplied by $24,000 (8/12ths
of the employee's 2006 plan compensation of
$36,000). The missed after-tax employee contribu-
tion amount, based on this calculation, is $120. How-
ever, the sum of this amount ($120) and the previ-

ously made after-tax employee contribution ($950)
is $1,070. Because the plan limit for after-tax em-
ployee contributions is $1,000, the missed after-tax
employee contribution needs to be reduced by $70,
to ensure that the total after-tax employee contribu-
tions comply with the plan limit. Accordingly, the
missed after-tax employee contribution is $50 ($120
minus $70) and the required QNEC is $20 (that is,
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. Em-
ployee Y, who should have been provided the op-
portunity 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 compen-
sated 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, that
is, 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 ap-
plicable § 402(g) limit. Accordingly, the missed de-
ferral is $10,000 ($13,000 minus $3,000) and the
required QNEC is $5,000 (that is, 50% multiplied by
the missed deferral of $10,000). The QNEC is ad-
justed for Earnings.

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 eli-
gible employee's plan compensation during the pay-
roll 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 re-
quirements 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

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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 employ-
ee'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 partici-
pate 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 compen-
sated employees for 2006 was 1.8%. The portion of
the ACP attributable to after-tax employee contribu-
tions for nonhighly compensated employees for
2006 was 0.5%.

Correction:

Employer E uses the correction method for par-
tial 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 em-
ployee contributions that the employee had the op-
portunity 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 elec-
tive deferrals or after-tax employee contributions.
The employer only needs to make a corrective em-
ployer 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 contribu-
tion 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 de-
ferrals during the period of exclusion, that is, Janu-
ary 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 non-
highly 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 Em-
ployee Z was not given the opportunity to make
elective deferrals or after-tax employee contribu-
tions. Accordingly, the missed matching contribu-
tion for the period of exclusion is obtained by mul-
tiplying 2% by Employee Z's compensation of
$10,000 (3/12ths of the employee's 2006 plan com-
pensation of $40,000). Based on this calculation, the
missed matching contribution is $200. However,
when this amount is added to the matching contri-
bution already received ($640), the total ($840) ex-
ceeds 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 cor-
rective 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 non-
highly compensated employee who met the eligibil-
ity 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 defer-
ral 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, that is,
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 re-
quirements of § 401(k)(12), the corrective contribu-
tion must be made in the form of a QNEC. The total
QNEC, before adjustments for Earnings, on behalf
of Employee M is $900 (that is, $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 com-
pensation. (See Appendix A, section .05(2)(d).)
Therefore, in this case, Employee M's missed defer-
ral is equal to 4% multiplied by $20,000, or $800.
The QNEC for Employee M's missed deferral op-

portunity in 2006 is $400, that is, 50% multiplied by
$800. The missed matching contribution, based on
the missed deferral of $800, is $800. Thus, the re-
quired corrective contribution for Employee M's
missed matching contribution is $800. Since the
matching contribution is required to satisfy the re-
quirements of § 401(k)(12), the corrective contribu-
tion must be made in the form of a QNEC. The total
QNEC, before adjustments for Earnings, on behalf
of Employee M is $1,200 (that is, $400 for the
missed deferral opportunity plus $800 for the missed
matching contribution). The QNEC is adjusted for
Earnings.

Example 10:

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 compensa-
tion.

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 defer-
ral 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 nonelec-
tive 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 Em-
ployee M is $900 (that is, $300 for the missed
deferral opportunity, plus $600 for the missed non-
elective 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 de-
fined in § 414(v)(5)) may make contributions in
excess of the plan's deferral limits, up to the limita-
tions 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 con-
tributions in 2006 is $1,250 adjusted for Earnings. In
addition, Employee R was entitled to an additional

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matching contribution, under the terms of the plan,
equal to 60% of the missed deferral that is attribut-
able 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 corre-
sponding matching contribution is $1,500 (that is,
60% of $2,500). Thus, the required corrective con-
tribution 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 em-
ployees 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 pro-
cessed, 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 de-
scribed 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
beginning January 1, 2006. Employer K calculates
the corrective QNEC to be made on behalf of Em-
ployee 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 sec-
tion .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 Em-
ployee 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 oppor-
tunity is $1,500 (that is, 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 alloca-
tion 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. Un-
der 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. Ac-
cordingly, the contribution required to replace the
missed employer matching contribution is $900 (ad-
justed 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 op-
portunity ($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 Meth-
ods. (i) Appendix A Correction Method. Ap-
pendix A, section .05, sets forth the correc-
tion method for correcting the failure to
make a contribution on behalf of the em-
ployees improperly excluded from a defined
contribution plan or to provide benefit ac-
cruals for the employees improperly ex-
cluded from a defined benefit plan. In the
case of a defined contribution plan, the cor-
rection 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 mean-
ing of § 1.401(k)-6).

(ii) Additional Requirements for Ap-
pendix 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 Ap-
pendix A correction method, an allocation
amount is determined for each excluded
employee on the same basis as the alloca-
tion amounts were determined for the
other employees under the plan's alloca-
tion formula (for example, the same ratio
of allocation to compensation), taking into
account all of the employee's relevant fac-
tors (for example, compensation) under
that formula for that year. The Plan Spon-
sor makes a corrective contribution on
behalf of the excluded employee that is
equal to the allocation amount for the ex-
cluded employee. The corrective contri-
bution 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 allo-
cation on account of the improper alloca-
tion. (See Example 15.)

(iii) Reallocation Correction Method.
(A) In General. Subject to the limitations
set forth in section 2.02(2)(a)(iii)(F) be-

low, 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 ex-
cluded employee is increased as provided
in paragraph (2)(a)(iii)(B) below, the ac-
count balances of other employees are re-
duced as provided in paragraph (2)(a)(iii)
(C) below, and the increases and reduc-
tions are reconciled, as necessary, as pro-
vided 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 allo-
cation of the nonelective contribution is
reduced by the excess, if any, of (I) the
employee's allocation of that contribu-
tion 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) be-
low. 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) ap-
plies if most of the employees with ac-
count balances that are being reduced are
nonhighly compensated employees. If
there has been an overall gain for the
period from the date of the original allo-
cation of the contribution through the date
of correction, no adjustment for Earnings
is required to the amount determined un-
der 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 ad-
ministrative convenience, the reduction to

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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.

(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 orig-
inal 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 re-
ductions under section 2.02(2)(a)(iii)(C),
the Plan Sponsor makes a corrective con-
tribution 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 in-
creases under section 2.02(2)(a)(iii)(B),
then the amount by which each employ-
ee's account balance is reduced under sec-
tion 2.02(2)(a)(iii)(C) is decreased on a
pro rata basis.

(E) Reductions Among Multiple Invest-
ment Funds. If an employee's account bal-
ance is reduced and the employee's ac-
count balance is invested in more than one
investment fund, then the reduction may
be made from the investment funds se-
lected in any reasonable manner.

(F) Limitations on Use of Reallocation
Correction Method. If any employee
would be permitted to retain any distribu-
tion 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 com-
pensated employees.

(b) Examples.

Example 13:

Employer D maintains a profit-sharing plan that
provides for discretionary nonelective employer con-
tributions. 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 eligi-
ble 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 compen-
sation. Most of the employees who received alloca-
tions 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 allo-
cation, the allocation made on behalf of each em-
ployee would have equaled 9% of compensation.
The excluded employees began participating in the
plan in the 2007 plan year.

Correction:

Employer D uses the Appendix A correction
method to correct the failure to include the five
eligible employees. Thus, Employer D makes a cor-
rective 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 employ-
ees, adjusted for Earnings. The excluded employees
receive an allocation equal to 10% of compensation
(adjusted for Earnings) even though, had the ex-
cluded 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 inclu-
sion of the excluded employees in the allocation of
that contribution would have resulted in each eligible
employee, including each excluded employee, re-
ceiving 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 Earn-
ings. Employer D determines the adjustment for
Earnings using the rate of return of each eligible
employee's excess allocation (using reasonable, con-
sistent assumptions). Accordingly, for an employee
who shared in the original allocation and directed the
investment of the allocation into more than one in-
vestment fund or who subsequently transferred a
portion of a fund that had been credited with a

portion of the 2006 allocation to another fund, rea-
sonable, consistent assumptions are followed to de-
termine 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 conve-
nience, 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 bal-
ances of the excluded employees is increased ex-
ceeds the aggregate amount (adjusted for Earnings)
by which the other employees' account balances are
reduced. Accordingly, Employer D makes a contri-
bution 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.

.03 Vesting Failures. (1) Correction
Methods. (a) Contribution Correction
Method. A failure in a defined contribu-
tion 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 ac-
count balance may be corrected using
the contribution correction method set
forth in this paragraph. The Plan Spon-
sor 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 im-
proper forfeiture, an amount was im-
properly allocated to the account bal-
ance 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 reallo-
cated among the account balances of the
other eligible employees in the plan, a
failure to apply the proper vesting per-
centage to an employee's account balance

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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 para-
graph. A corrective reallocation is made in
accordance with the reallocation correc-
tion 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 bal-
ance of the employee who incurred the
improper forfeiture is increased by an
amount equal to the amount of the im-
proper forfeiture and the amount is ad-
justed for Earnings. In applying section
2.02(2)(a)(iii)(C)(1), the account balance
of each employee who shared in the allo-
cation of the improper forfeiture is re-
duced by the amount of the improper
forfeiture that was allocated to that em-
ployee's account. The Earnings adjust-
ments for the account balances that are
being reduced are determined in accor-
dance with sections 2.02(2)(a)(iii)(C)(2)
and (3) and the reductions after adjust-
ments for Earnings are limited in accor-
dance 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 ag-
gregate amount of the increases, then the
amount by which each employee's ac-
count 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 pro-
vides for self-directed investments among four in-
vestment funds and daily valuation of account bal-
ances. The plan provides that forfeitures of account
balances are reallocated among the account balances
of other eligible employees on the basis of compen-
sation. During the 2006 plan year, Employee R ter-
minated 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 incorrect
determination of Employee R's vested percentage
was made resulting in Employee R receiving a dis-
tribution 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, Em-
ployer E makes a contribution on behalf of Em-
ployee 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, Em-
ployee 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 (ad-
justed for Earnings). Because most of the employees
whose account balances are being reduced are non-
highly 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 Em-
ployee R is increased exceeds the aggregate amount
(adjusted for Earnings) by which the other employ-
ees' account balances are reduced. Accordingly, Em-
ployer 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 Relat-
ing to a § 415(b) Excess. (a) Correction
Methods. (i) Return of Overpayment Cor-
rection 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 in-
terest) 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 recip-
ient is less than the Overpayment, adjusted
for Earnings at the plan's earnings rate, then
the Plan Sponsor or another person contrib-
utes 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 eli-
gible for favorable tax treatment accorded to
distributions from qualified plans (and, spe-

cifically, was not eligible for tax-free roll-
over). (See Examples 20 and 21.)

(ii) Adjustment of Future Payments
Correction Method. (A) In General. In
addition to the return of overpayment cor-
rection method, in the case of plan bene-
fits that are 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 para-
graph (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 lon-
ger than the remaining payment period) so
that the actuarial present value of the ad-
ditional reduction is equal to the Overpay-
ment plus interest at the interest rate used
by the plan to determine actuarial equiv-
alence. (See Examples 18 and 19.)

(B) Joint and Survivor Annuity Pay-
ments. If the employee is receiving pay-
ments 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 (for example,
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 (for
example, 75%) of the maximum permitted
under § 415(b), instead of the reduced
annual periodic amount payable to the
employee.

(C) Overpayment Not Treated as an
Excess Amount. An Overpayment cor-
rected under this adjustment of future pay-
ment 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 un-
der § 415(d) after benefit payments have com-
menced. At the beginning of the 2006 plan year,

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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 re-
ceived by Employee S for 2006 included an Over-
payment of $10,000 (because the § 415(b)(1)(A)
limit for 2006 was $175,000). This error was discov-
ered at the beginning of 2007.

Correction:

Employer F uses the adjustment of future pay-
ments correction method to correct the failure to
satisfy the limit in § 415(b). Future annuity 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 Over-
payment. Accordingly, Employee S's future benefit
payments from the plan are reduced to $175,000 and
further reduced by $1,000 annually for life, begin-
ning 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 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 pay-
ments correction method to correct the § 415(b)
failure, by recouping the entire excess payment made
in 2006 from Employee S's remaining benefit pay-
ments 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 cor-
rection 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 dis-
tributions 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 cor-
rection 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 dis-
tributions 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 re-
turned 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) Ap-
pendix 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.

(ii) Forfeiture Correction Method. In
addition to the Appendix A correction
method, the failure to satisfy § 415(c) with
respect to a nonhighly compensated em-
ployee (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 employ-
ee's annual addition that exceeds the lim-
its under § 415(c) ("§ 415(c) excess") for
the limitation year, and (C) who has ter-
minated 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) ex-
cess is deemed to consist solely of the
matching and nonelective contributions. If
the employee's § 415(c) excess (adjusted
for Earnings) has previously been for-
feited, 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 ac-
count, as described in section 6.06(2) of
this revenue procedure, to be used to re-
duce employer nonelective contributions
in succeeding year(s) (or if the amount
would have been allocated to other em-
ployees who were in the plan for the year
of the failure if the failure had not oc-
curred, 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 Ap-
pendix A correction method, this correc-
tion 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 contri-
butions and matching contributions may
be corrected using the return of Overpay-
ment correction method set forth in sec-
tion 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 contribu-
tions. The plan provides that the nonelective contri-
butions vest under a 5-year cliff vesting schedule.
The plan provides that when an employee terminates
employment, the employee's nonvested account bal-
ance is forfeited five years after a distribution of the
employee's vested account balance and that forfei-
tures 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, accord-
ingly, a § 415(c)(1)(B) limit of $15,000. Employee T
made elective deferrals and after-tax employee con-
tributions. For the 1998 limitation year, Employee U
had § 415 compensation of $40,000, and, accord-
ingly, 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 re-
ceived his entire vested account balance (which con-
sisted of his elective deferrals). The annual additions
for Employees T and U consisted of:

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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 (that is, $3,000). Thus, a distribution of
plan assets (and corresponding reduction of the ac-
count balance) consisting of $500 (adjusted for Earn-
ings) of after-tax employee contributions and $2,500
(adjusted for Earnings) of elective deferrals is made
to Employee T. Employer G uses the forfeiture cor-
rection 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 contri-
butions. Accordingly, Employee U's nonvested ac-
count balance is reduced by $300 (adjusted for Earn-
ings) which is placed in an unallocated account, as
described in section 6.06(2) of this revenue proce-
dure, 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 com-
pensation 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 ad-
ditions 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 nonelec-
tive employer contribution. Thus, the annual addi-
tions 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 (that is, $2,500). Accordingly,
$1,000 of the unmatched elective deferrals (ad-
justed 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 unallo-
cated account, as described in section 6.06(2) of
this revenue procedure, to be used to reduce em-
ployer 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) (relat-
ing to a § 415(c) excess), may be cor-
rected in accordance with this section
2.05. An Overpayment from a defined
benefit plan is corrected in accordance
with the rules in section 2.04(1). An Over-
payment from a defined contribution plan
is corrected in accordance with the rules
in section 2.04(2)(a)(iii).

.06 § 401(a)(17) Failures. (1) Reduc-
tion of Account Balance Correction
Method. The allocation of contributions or
forfeitures under a defined contribution
plan for a plan year on the basis of com-
pensation 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 sec-
tion 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 contri-
bution 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 unal-
located account, as described in section 6.06(2) of
this revenue procedure, to be used to reduce em-
ployer contributions in succeeding year(s).

.07 Correction by Amendment. (1) Sec-
tion 401(a)(17) Failures. (a) Contribution

Correction Method. In addition to the re-
duction of account balance correction
method under section 6.06(2) of this rev-
enue procedure, a Plan Sponsor may cor-
rect a § 401(a)(17) failure for a plan year
under a defined contribution plan by us-
ing 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) fail-
ure) who received an allocation for the
year of the failure, and amends the plan
(as necessary) to provide for the addi-
tional allocation. The amount contrib-
uted for an employee is equal to the
employee's plan compensation for the
year of the failure multiplied by a frac-
tion, the numerator of which is the im-
properly allocated amount made on be-
half 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.
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 em-
ployee), 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 percent-
age points ($2,400/$220,000) from 8% to 9.09%. In
addition, each eligible employee for the 2006 plan

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year (other than Employee W) receives an additional
contribution of 1.09% multiplied by that employee's
plan compensation for 2006. This additional contri-
bution is adjusted for Earnings.

(2) Hardship Distribution Failures and
Plan Loan Failures. (a) Plan Amendment
Correction Method. The Operational Fail-
ure of making hardship distributions to
employees under a plan that does not pro-
vide for hardship distributions may be
corrected using the plan amendment cor-
rection method set forth in this paragraph.
The plan is amended retroactively to pro-
vide for the hardship distributions that
were made available. This paragraph does
not apply unless (i) the amendment satis-
fies § 401(a), and (ii) the plan as amended
would have satisfied the qualification re-
quirements of § 401(a) (including the re-
quirements applicable to hardship distri-
butions under § 401(k), if applicable) had
the amendment been adopted when hard-
ship distributions were first made avail-
able. (See Example 26.) The Plan Amend-
ment 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, begin-
ning 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 sat-
isfied 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 Fail-
ure. The failure was discovered in 2007.

Correction:

Employer K corrects the failure under VCP by
adopting a plan amendment in 2007, effective Janu-
ary 1, 2005, to provide a hardship distribution option
that satisfies the rules applicable to hardship distri-
butions 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 2007 would
have satisfied § 401(a) (including § 1.401(a)(4)-4
and the requirements applicable to hardship distribu-
tions under § 401(k)) if the amendment had been
adopted in 2005.

(3) Early Inclusion of Otherwise Eligi-
ble Employee Failure. (a) Plan Amend-
ment 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 com-
pleted the plan's minimum age or service
requirements but became a participant in
the plan on a date earlier than the appli-
cable 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 op-
erations. 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 applica-
ble 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 dis-
covered 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 em-
ployed. Three of the four employees are nonhighly
compensated. Employer L matched these employ-
ees' 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.

# 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 ap-
propriate correction method for an Oper-
ational Failure in a defined contribution
plan includes a corrective contribution or
allocation that increases one or more em-
ployees' 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 Spon-
sor to adjust a corrective contribution or
allocation for Earnings in a defined contri-
bution plan. Consequently, these Earnings
adjustment methods may be used to deter-
mine the Earnings adjustments for correc-
tive contributions or allocations made under
the correction methods in section 2 and un-
der the correction methods in Appendix A.
If an Earnings adjustment method in this
section 3 is used to adjust a corrective con-
tribution or allocation, that adjustment is
treated as satisfying the Earnings adjustment
requirement of section 6.02(4)(a) of this rev-
enue procedure. Other Earnings adjustment
methods, different from those illustrated in
this section 3, may also be appropriate for
adjusting corrective contributions or alloca-
tions 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 fail-
ure (determined under section 3.01(2)).
The Earnings amount is allocated in ac-
cordance 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

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made in accordance with the rules of ad-
ministrative convenience set forth in this
section 3 is treated as a precise determi-
nation of Earnings. Thus, if the probable
difference between an approximate deter-
mination of Earnings and a determination
of Earnings under this section 3 is insig-
nificant and the administrative cost of a
precise determination would significantly
exceed the probable difference, reason-
able estimates may be used in calculating
the appropriate Earnings.

(d) This section 3 does not apply to
corrective distributions or corrective re-
ductions in account balances. Thus, for
example, while this section 3 applies in
increasing the account balance of an im-
properly excluded employee to correct the
exclusion of the employee under the real-
location correction method described in
section 2.02(2)(a)(iii)(B), this section 3
does not apply in reducing the account
balances of other employees under the
reallocation correction method. (See sec-
tion 2.02(2)(a)(iii)(C) for rules that apply
to the Earnings adjustments for such reduc-
tions.) In addition, this section 3 does not
apply in determining Earnings adjustments
under the one-to-one correction method de-
scribed in section 2.01(1)(b)(iii).

(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 em-
ployee's account balance, the beginning
of the period of the failure is the date as of
which the account balance was improp-
erly reduced. See section 6.02(4)(f) of this
revenue procedure.

(b) Rules for Beginning Date for Ex-
clusion of Eligible Employees from Plan.
(i) General Rule. In the case of an exclu-
sion of an eligible employee from a plan
contribution, the beginning of the period
of the failure is the date on which contri-
butions of the same type (for example,
elective deferrals, matching contributions,
or discretionary nonelective employer
contributions) were made for other em-
ployees for the year of the failure. In the
case of an exclusion of an eligible em-
ployee from an allocation of a forfeiture,
the beginning of the period of the failure
is the date on which forfeitures were allo-

cated to other employees for the year of
the failure.

(ii) Exclusion from a § 401(k) or (m)
Plan. For administrative convenience, for
purposes of calculating the Earnings rate
for corrective contributions for a plan year
(or the portion of the plan year) during
which an employee was improperly ex-
cluded from making periodic elective de-
ferrals or after-tax employee contribu-
tions, 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 Earn-
ings rate applicable under section 3.01(3)
for the plan year (or the portion of the plan
year) for which the failure occurred.

(3) Earnings Rate. (a) General Rule.
For purposes of this section 3, the Earn-
ings rate generally is based on the invest-
ment results that would have applied to
the corrective contribution or allocation if
the failure had not occurred.

(b) Multiple Investment Funds. If a
plan permits employees to direct the in-
vestment 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 pe-
riod of the failure. For administrative con-
venience, if most of the employees for
whom the corrective contribution or allo-
cation 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 (that is, the average of the
rates earned by all of the funds in
the valuation periods during the period of
the failure weighted by the portion of the
plan assets invested in the various funds
during the period of the failure).

(c) Other Simplifying Assumptions. For
administrative convenience, the Earnings
rate applicable to the corrective contribu-
tion 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 with-
out regard to any special investment pro-
visions that vary according to the size of
the fund. Further, the Earnings rate appli-
cable to the corrective contribution or al-
location 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 dur-
ing that portion of the valuation period.

(4) Allocation Methods. (a) In General.
For purposes of this section 3, the Earn-
ings 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, Exam-
ple 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 be-
half the corrective contribution or allo-
cation is made (regardless of whether
the plan's allocation method would have
allocated the Earnings solely to that em-
ployee). 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 dur-
ing 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

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period, plan Earnings for the valuation pe-
riod during which the corrective contribu-
tion 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 contribu-
tion or allocation, including only that por-
tion 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 alloca-
tion is made by that portion of the Earnings
amount attributable to Earnings after the last
day of the prior valuation period. (See Ex-
ample 29.)

(d) Bifurcated Allocation Method. Un-
der the bifurcated allocation method, the
entire Earnings amount for the valuation
periods ending before the date the correc-
tive contribution or allocation is made is
allocated solely to the account balance of
the employee on whose behalf the correc-
tive contribution or allocation is made.
The Earnings amount for the valuation
period during which the corrective contri-
bution or allocation is made is allocated in
accordance with the plan's method for
allocating other Earnings for that valua-
tion 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 attribut-
able 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 sec-
tion 3.01(4)(b). The Earnings for the subse-
quent full valuation periods ending before
the beginning of the valuation period during
which the corrective contribution or alloca-
tion is made are allocated solely to the em-
ployee for whom the required contribution
should have been made. The Earnings
amount for the valuation period during
which the corrective contribution or alloca-
tion is made ("second partial valuation pe-
riod") 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 con-
tributions 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 opera-
tional failure occurred for 1997 because Employee
X was improperly excluded from the plan. Em-
ployer L decides to correct the failure by using the
Appendix A correction method for the exclusion
of an eligible employee from nonelective contri-
butions 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%.

Earnings Adjustment on the Corrective Contri-
bution:

The $5,000 corrective contribution on behalf
of Employee X is adjusted to reflect an earnings
amount based on the Earnings rates for the period
of the failure (March 31, 1998 through June 1,
2000) and the earnings amount is allocated using
the plan allocation method. Employer L deter-
mines 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 un-
derstate or overstate the actual investment return
for that period. Accordingly, Employer L deter-
mines 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 con-
tributed for Employee X on March 31, 1998, (1) Earn-
ings 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) al-
located 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 (De-

cember 31, 1999) account balances along with
other 2000 Earnings. Accordingly, the $5,000 cor-
rective contribution is adjusted to reflect an Earn-
ings 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 allo-
cation of Earnings for 1998 is increased, as of De-
cember 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, includ-
ing 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 Em-
ployee X's account balance has already shared in

the 1999 Earnings, excluding the $575. Accord-
ingly, Employee X's account balance as of De-
cember 31, 1999 will include $500 of the 1999
portion of the earnings amount based on the
$5,000 corrective contribution allocated to Em-
ployee 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 (that is, 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 Em-
ployee X's account balance) will share in the 2000
portion of the earnings amount based on the esti-
mated January 1, 2000 to June 1, 2000 Earnings
included in the corrective contribution equal to $759
($6,325(.12)). (See Table 1.)

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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%

$7593

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 contribu-
tion is the same as in Example 28, but the earnings
amount is allocated using the specific employee al-
location method. Thus, the entire earnings amount

for all periods through June 1, 2000 (that is, $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 in-

creased by $7,084. Alternatively, Employee X's ac-
count 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 in-
creased by the remaining $759. (See Table 2.)

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 contribu-
tion 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 val-

uation 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 Em-
ployee 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.)

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TABLE 3 CALCULATION AND ALLOCATION OF THE CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate

Amount

Corrective Contribution

$5,000

First Partial Valuation Period Earnings

15%

$7501

1999 Earnings

10%

$5752

Second Partial Valuation Period Earnings

12%

$7593

Total Amount Contributed

$7,084

Allocated to:

Employee X

Employee X

Employee X

12/31/99 Account Balances (including
Employee X's $6,325)4

1$5,000 x 15%

2$5,750($5,000 + $750) x 10%

3$6,325($5,000 +$750 +$575) x 12%

4 After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year.

### Example 31:

The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribu-
tion:

The earnings amount on the corrective contribu-
tion is the same as in Example 28, but the earnings
amount is allocated using the current period alloca-
tion 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)). Em-
ployee 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 con-
tribution 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 ac-
count balances as of December 31, 1999 (including
Employee X's increased account balance). (See, Ta-
ble 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%

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.

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# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

# Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

IC-Insurance Company.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

COOP-Cooperative.

LR-Lessor.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

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## Numerical Finding List1

Bulletin 2018-27 through 2018-42

### Announcements:

2018-09, 2018-28 I.R.B. 206
2018-12, 2018-30 I.R.B. 232

### Notices:

2018-48, 2018-28 I.R.B. 9
2018-56, 2018-27 I.R.B. 3

2018-58, 2018-33 I.R.B. 305
2018-59, 2018-28 I.R.B. 196
2018-60, 2018-31 I.R.B. 275
2018-61, 2018-31 I.R.B. 278
2018-62, 2018-34 I.R.B. 316
2018-63, 2018-34 I.R.B. 318
2018-64, 2018-35 I.R.B. 347
2018-65, 2018-35 I.R.B. 350
2018-67, 2018-36 I.R.B. 409
2018-68, 2018-36 I.R.B. 418
2018-69, 2018-37 I.R.B. 426
2018-70, 2018-38 I.R.B. 441
2018-71, 2018-41 I.R.B. 548
2018-72, 2018-40 I.R.B. 522
2018-73, 2018-40 I.R.B. 526
2018-74, 2018-40 I.R.B. 529
2018-75, 2018-41 I.R.B. 556
2018-76, 2018-42 I.R.B. 599
2018-77, 2018-42 I.R.B. 601
2018-78, 2018-42 I.R.B. 604
2018-79, 2018-42 I.R.B. 606
2018-80, 2018-42 I.R.B. 609

### Proposed Regulations:

REG-130244-17, 2018-41 I.R.B. 593
REG-103474-18, 2018-32 I.R.B. 284
REG-104397-18, 2018-41 I.R.B. 560
REG-106977-18, 2018-27 I.R.B. 6
REG-107892-18, 2018-35 I.R.B. 353
REG-112176-18, 2018-37 I.R.B. 430

## Revenue Procedures:

2018-35, 2018-28 I.R.B. 204

2018-36, 2018-38

I.R.B. 442

2018-37, 2018-29

I.R.B. 210

2018-38, 2018-31

I.R.B. 280

2018-39, 2018-34

I.R.B. 319

2018-40, 2018-34

I.R.B. 320

2018-42, 2018-36

I.R.B. 424

2018-43, 2018-36

I.R.B. 425

2018-44, 2018-37

I.R.B. 426

2018-45, 2018-37

I.R.B. 428

2018-46, 2018-39

I.R.B. 460

2018-47, 2018-39

I.R.B. 518

2018-48, 2018-40

I.R.B. 521

2018-49, 2018-41

I.R.B. 548

Revenue Procedures :- Continued

2018-50, 2018-42 I.R.B. 610
2018-52, 2018-42 I.R.B. 611

### Revenue Rulings:

2018-19, 2018-27 I.R.B. 1
2018-20, 2018-28 I.R.B. 8

2018-21, 2018-32 I.R.B. 282

2018-22, 2018-34 I.R.B. 308
2018-23, 2018-36 I.R.B. 405

2018-24, 2018-36 I.R.B. 407
2018-25, 2018-39 I.R.B. 445

2018-26, 2018-40 I.R.B. 520
2018-27, 2018-41 I.R.B. 546

### Treasury Decisions:

9834, 2018-31 I.R.B. 233
9835, 2018-33 I.R.B. 288

9836, 2018-33 I.R.B. 291
9838, 2018-34 I.R.B. 309
9839, 2018-35 I.R.B. 325

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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## Finding List of Current Actions on Previously Published Items1

Bulletin 2018-27 through 2018-42

Notices:

2014-5
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2015-28
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2016-57
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2017-45
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

### Revenue Procedures:

2015-27
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2018-31
Modified by
Rev. Proc. 2018-44, 2018-37 I.R.B. 426

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.