us-irs-revenue-procedures-rp-06-27•rp-06-27.pdf
Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.
This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.
- 1 -
Part III.---Administrative, Procedural and Miscellaneous
26 CFR 601.202: Closing agreements.
Rev. Proc. 2006-27
TABLE OF CONTENTS
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION
SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose. ................................................................................. p.
.02 General principles underlying EPCRS. ................................... p.
.03 Overview. ................................................................................ p.
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs. ............................................................... p.
.02 Future enhancements. .......................................................... p.
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01 Effect of EPCRS on Retirement Plans. ............................ p..
.02 Compliance Statement. ........................................................ p.
.03 Other taxes and penalties. ................................................... p.
.04 Reliance. .............................................................................. p.
SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs. ..................................................... p.
.02
Effect of examination. ........................... ............................. p.
.03 Favorable Letter requirement. ............................................. p.
.04 Established practices and procedures. ................................ p.
.05
Correction by plan amendment. ............................................p.
.06 Submission for a determination letter. .................................. p.
.07 Availability of correction of Employer Eligibility
Failure. .................................................................................. p.
.08 Availability of correction of a terminated plan......................p
.09
Availability of correction of an Orphan Plan........................p
.10 Availability of correction of § 457 plans..............................p
.11
Egregious failures ....................................................... p.
- 2 -
.12 Diversion or misuse of plan assets. ....................................... p.
.13 Abusive tax avoidance transactions..................................p
PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL
APPLICABILITY
SECTION 5. DEFINITIONS
.01 Definitions for Qualified Plans. .............................................. p.
.02 Definitions for 403(b) Plans. .................................................. p.
.03 Under Examination. ............................................................... p.
.04 SEP. .........................................................................p.
.05 SIMPLE IRA Plan. ........................................................p.
.06 Definitions for Orphan Plans. .........................................p.
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY
.01 Correction principles; rules of general
applicability. ........................................................................... p.
.02 Correction principles. ............................................................. p.
.03 Correction of an Employer Eligibility Failure. ......................... p.
.04 Correction of a failure to obtain spousal consent. ................p.
.05 Correction by plan amendment. ............................................. p.
.06 Special rules relating to Excess Amounts............................... p.
.07 Rules relating to reporting plan loan failures. ......................p.
.08 Correction under statute or regulations. ................................. p.
.09 Matters subject to excise taxes. ............................................. p.
.10 Correction for SEPs and SIMPLE IRA Plans. ........................ p.
.11 Confidentiality and disclosure. ............................................... p.
.12 No effect on other law. ........................................................... p.
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. .......................................................................... p.
.02 Factors. ..................................................................................... p.
.03 Multiple failures. ........................................................................ p.
.04
Examples. ................................................................................. p.
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01
Requirements. .......................................................................... p.
.02
Correction period. ..................................................................... p.
- 3 -
.03 Correction by plan amendment. ................................................ p.
.04 Substantial completion of correction. ................................... p.
.05 Examples. ................................................................................. p.
PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements. ............................................................................... p.
.02 Identification of failures. ........................................................................ p.
.03 Effect of VCP submission on examination. ........................................... p.
.04 No concurrent examination activity. ...................................................... p.
.05 Determination letter application
for plan amendments related to a VCP submission. .............................. p.
.06 Determination letter applications not related to a VCP submission. ........p.
.07 Processing of submission. ...................................................................... p.
.08 Compliance statement. ........................................................................... p.
.09 Effect of compliance statement on examination. ............................... p.
.10 Special rules relating to Anonymous (John Doe) Submissions. ............. p.
.11 Special rules relating to Group Submissions. ......................................... p
.12 Multiemployer and multiple employer plans. ........................................... p.
SECTION 11. APPLICATION PROCEDURES FOR VCP
.01 General rules. ............................................................................... p.
.02 Submission requirements. ...................................................................... p.
.03 Required documents. ................................................................. p.
.04 Date fee due generally. .......................................................................... p.
.05 Additional fee due for SEPs, SIMPLE IRA Plans and Group
Submissions........................................................................................... p.
.06 Signed submission. ................................................................................ p.
.07 Power of attorney requirements. ............................................................ p.
.08
Penalty of perjury statement. .................................................................. p.
.09 Checklist. ................................................................................................ p
.10
Designation.............................................................................p.
.11
Acknowledgement letter..............................................................p.
.12 VCP mailing address. ............................................................................ p.
.13 Maintenance of copies of submissions. ................................................. p.
.14
Assembling the submission..........................................................p
SECTION 12. VCP FEES
.01
VCP fees ......................... .................................................................. p.
.02 VCP fee for Qualified Plans and 403(b) Plans.......................................... p.
.03
VCP fee for nonamenders ................................................................... p.
.04 VCP fee for Group Submission................................................................. p.
.05
VCP fee for SEPs and SIMPLE IRA Plans ........................................p.
- 4 -
.06 VCP fee for egregious failures. ................................................................ p.
.07 Establishing the number of plan participants. .......................................... p.
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
.01 Audit CAP requirements. ..................................................................... p.
.02 Payment of sanction. ........................................................................... p.
.03 Additional requirements. ...................................................................... p.
.04 Failure to reach resolution. .................................................................. p.
.05 Effect of closing agreement. ................................................................ p.
.06 Other procedural rules. ........................................................................ p.
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction. .................................................................. p.
. 02 Factors considered. ............................................................................ p.
.03 Transferred Assets. ............................................................................ p.
.04 Fee for nonamenders discovered during the determination letter application
process not related to a VCP submission......................................p
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK
REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2003-44 modified and superseded............................. p.
SECTION 16. EFFECTIVE DATE ....................................................................... p.
SECTION 17. PAPERWORK REDUCTION ACT ................................................ p.
DRAFTING INFORMATION
APPENDIX A: OPERATIONAL FAILURES AND CORRECTION METHODS
.01
General rule. ................................................................................. p.
.02 Failure to properly provide the minimum
top-heavy benefit under § 416
to non-key employees. ...................................................................p.
.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). .............................................. p.
.04
Failure to distribute elective deferrals
- 5 -
in excess of the § 402(g) limit (in
contravention of § 401(a)(30)). ...................................................... p.
.05 Exclusion of an eligible employee from all
contributions or accruals under the plan for
one or more plan years. ................................................................ p.
.06
Failure to timely pay the minimum distribution
required under § 401(a)(9). ........................................................... p.
.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. ............................................... p.
.08 Failure to satisfy the § 415 limits in a
defined contribution plan. ............................................................... p.
APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT
METHODS AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION
REFERENCES
.01 Purpose. ....................................................................................... p.
.02 Assumptions for Examples. .......................................................... p.
.03 Section References. ..................................................................... p.
SECTION 2. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures. ....................................................................... p.
.02 Exclusion of Otherwise Eligible Employees. ................................. p.
.03 Vesting Failures..................................................................p.
.04 § 415 Failures. ............................................................................... p.
.05 Correction of Other Overpayment Failures. ............................. p.
.06
§ 401(a)(17) Failures.................................................. ........p.
.07 Correction by Amendment. ................................................... p.
SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings Adjustment Methods. ..................................................... p.
.02 Examples. ...................................................................................... p.
APPENDIX C: VCP CHECKLIST . ..................................................................... p.
APPENDIX D: SAMPLE FORMATS FOR VCP SUBMISSIONS
- 6 -
APPENDIX E: ACKNOWLEDGEMENT LETTER........................................p.
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION
SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose. This revenue procedure updates the comprehensive system of
correction programs for sponsors of retirement plans that are intended to satisfy the
requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue
Code (the "Code"), but that have not met these requirements for a period of time. This
system, the Employee Plans Compliance Resolution System ("EPCRS"), permits plan
sponsors to correct these failures and thereby continue to provide their employees with
retirement benefits on a tax-favored basis. The components of EPCRS are the Self-
Correction Program ("SCP"), the Voluntary Correction Program ("VCP"), and the Audit
Closing Agreement Program ("Audit CAP").
.02 General principles underlying EPCRS. EPCRS is based on the following
general principles:
• Sponsors and other administrators of eligible plans should be encouraged to
establish administrative practices and procedures that ensure that these
plans are operated properly in accordance with the applicable requirements
of the Code.
• Sponsors and other administrators of eligible plans should satisfy the
applicable plan document requirements of the Code.
• Sponsors and other administrators should make voluntary and timely
correction of any plan failures, whether involving discrimination in favor of
highly compensated employees, plan operations, the terms of the plan
document, or adoption of a plan by an ineligible employer. Timely and
efficient correction protects participating employees by providing them with
their expected retirement benefits, including favorable tax treatment.
• Voluntary compliance is promoted by providing for limited fees for voluntary
corrections approved by the Service, thereby reducing employers'
uncertainty regarding their potential tax liability and participants' potential
tax liability.
- 7 -
• Fees and sanctions should be graduated 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
corrective actions to maintain the tax-favored status of their plans.
.03 Overview. EPCRS includes the following basic elements:
• Self-correction (SCP). A Plan Sponsor that has established compliance
practices and procedures may, at any time without paying any fee or
sanction, correct insignificant Operational Failures under a Qualified Plan or
a 403(b) Plan, or a SEP or a SIMPLE IRA Plan, provided the SEP or
SIMPLE IRA Plan is established and maintained on a document approved
by the Service. In addition, in the case of a Qualified Plan that is the subject
of a favorable determination letter from the Service or in the case of a
403(b) Plan, the Plan Sponsor generally may correct even significant
Operational Failures without payment of any fee or sanction.
• Voluntary correction with Service approval (VCP). A Plan Sponsor, at any
time before audit, may pay a limited fee and receive the Service's approval
for correction of a Qualified Plan, 403(b) Plan, SEP or SIMPLE IRA Plan.
Under VCP, there are special procedures for anonymous submissions and
group submissions.
• Correction on audit (Audit CAP). If a failure (other than a failure corrected
through SCP or VCP) is identified on audit, the Plan Sponsor may correct
the failure and pay a sanction. The sanction imposed will bear a reasonable
relationship to the nature, extent, and severity of the failure, taking into
account the extent to which correction occurred before audit.
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs. This revenue procedure modifies and supersedes Rev.
Proc. 2003-44, 2003-1 C.B. 1051, which was the prior consolidated statement of the
correction programs under EPCRS. The modifications to Rev. Proc. 2003-44 that are
reflected in this revenue procedure include:
- 8 -
• providing that if the Plan Sponsor corrects the failures in accordance with
the requirements of this revenue procedure, the plan will be treated as
satisfying § 401(a), § 403(b), § 408(k), or § 408(p), as applicable, for
purposes of applying § 3121(a)(5) (FICA taxes) and § 3306(b)(5) (FUTA
taxes) (section 3.01)
• revising the requirements for submitting a determination letter application
when correcting certain Qualification Failures by plan amendment (sections
4.06, 10.08, and 11.03(3))
• clarifying that an egregious failure includes providing more favorable
benefits to an owner based on a purported collective bargaining agreement
where there has in fact been no good faith bargaining (section 4.11)
• providing rules relating to the availability of programs under EPCRS in
cases where the plan or plan sponsor is a party to an abusive tax avoidance
transaction (sections 4.13 and 11.02(11))
• updating the definition of Favorable Letter (section 5.01(4))
• revising provisions affecting 403(b) plans by revising the definition of Excess
Amounts (section 5.02(3))
• updating the definition of Under Examination (section 5.03)
• expanding VC and Audit CAP to terminating Orphan Plans and, with respect
to those plans, providing for a possible exception to the requirement for full
correction and a waiver of the VCP fee in appropriate circumstances
(sections 5.06, 6.02(5)(f), and 12.02(3))
• adding a correction method for certain plan loan failures (sections 6.02(6)
and 6.07), including adding a correction method for a plan that permits plan
loans operationally but does not have the appropriate plan loan language
(Appendix B 2.07(2))
• revising the correction method for a failure to include an eligible employee in
a cash or deferred arrangement under § 401(k) (section 6.02(7), Appendix A
.05, and Appendix B 2.02)
• adding an alternative correction method for a failure to obtain spousal
consent (section 6.04(2)(c))
- 9 -
• revising provisions affecting 403(b) plans by eliminating the term Total
Sanction Amount and replacing it with the term “Maximum Payment
Amount” and eliminating correction by retention of Excess Amounts
(sections 5.02(4) and 6.06(2))
• providing that as part of both VCP and Audit CAP, if the failure involves the
failure to satisfy the minimum required distribution requirements of §
401(a)(9), the Service will waive the excise tax requirements of § 4974 in
appropriate cases (section 6.09(2))
• expanding excise taxes that the Service may not pursue (section 6.09(3)
and (4))
• clarifying the scope of a compliance statement issued with respect to certain
nonamender failures
• clarifying submission procedures for Anonymous Submissions (section
10.10), and Group Submissions (section 10.11)
• revising the acknowledgement procedures of receipt of a submission
(section 11.11 and new Appendix E – Acknowledgement Letter)
• providing a submission assembly procedure (section 11.14)
• reducing the compliance fee for a plan where the sole failure is the failure to
satisfy the minimum distribution rules for 50 or fewer employees (section
12.02(2))
• reducing the compliance fee for a plan where the sole failure is the failure to
timely adopt certain plan amendments (section 12.03)
• reducing the general compliance fee for SEPs and SIMPLE IRAs (section
12.05)
• adding a fee schedule for plans in the determination letter process found to
be nonamenders of tax law changes (section 14.04)
• providing that if a nonamender failure is discovered during an Employee
Plans Examination, then it is expected that the applicable sanction will be
greater than the applicable fee under section 14.04 (section 14.02)
• providing a streamlined submission procedure for certain nonamender
failures (Appendix F)
- 10 -
.02 Future enhancements. (1) It is expected that the EPCRS revenue procedure
will continue to be updated from time to time, including, as noted above, further
improvements to EPCRS based on comments previously received. In addition, the
Service and Treasury continue to invite further comments on how to improve EPCRS.
Comments should be sent to:
Internal Revenue Service
Attention: SE:T:EP:RA:VC
1111 Constitution Avenue NW
Washington, D.C. 20224
(2) Comments are requested for certain specific issues under EPCRS. First,
comments are requested regarding methods to correct a failure to provide an
eligible employee the opportunity to make a catch-up contribution that is
permitted under the terms of the plan and § 414(v). (See 6.02(7) and
Appendix B 2.02.) Second, given that § 402A permits a § 401(a) or 403(b)
plan to offer employees the opportunity to designate elective deferrals as Roth
contributions for taxable years beginning after December 31, 2005, comments
are requested regarding methods to correct a failure to provide an eligible
employee with the opportunity to make elective deferrals for a plan that
permits an eligible employee to designate elective deferrals as Roth
contributions. Third, the correction mechanism in current §1.415-6(b)(6) of the
Income Tax Regulations is not included in the regulations that were proposed
under § 415 (70 FR 31214) and published on May 31, 2005. The preamble to
the proposed regulations provides that the correction mechanism (for excess
annual additions) will be included in EPCRS in the future. It is expected that
correction mechanism will in any event continue to be available under
EPCRS, including under SCP where correction of a significant operational
failure is permitted. Accordingly, comments are requested regarding the
applicable correction methods for this failure. Comments are also requested
on whether the correction mechanisms provided for in current §1.415-6(b)(6),
including the maintenance of suspense accounts, should be retained as
options under EPCRS, or whether correction of excess annual additions
should be treated as excess amounts under this revenue procedure (i.e.,
distributed or forfeited, as appropriate). Fourth, comments are
requested regarding whether additional correction methods are needed in
order for plans to take advantage of the fiduciary safe harbor recently issued
by the Department of Labor for Orphan Plans (71 FR 20820) where the plan is
subject to the requirements of §§ 401(a)(11) and 417 in light of the ability to
satisfy those requirements by purchase of a commercial annuity contract.
(3)
- 11 -
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01
Effect of EPCRS on retirement plans. For a Qualified Plan, a 403(b) Plan, a
SEP, or a SIMPLE IRA Plan, if the eligibility requirements of section 4 are satisfied and
the Plan Sponsor corrects a failure in accordance with the applicable requirements of
SCP in section 7, VCP in sections 10 and 11, or Audit CAP in section 13, the Service will
not treat the retirement plan as failing to meet § 401(a), § 403(b), § 408(k), or § 408(p), as
applicable. Thus, for example, if the Plan Sponsor corrects the failures in accordance with
the requirements of this revenue procedure, the plan will be treated as satisfying § 401(a),
§ 403(b), § 408(k), or § 408(p), as applicable, for purposes of applying § 3121(a)(5) (FICA
taxes) and § 3306(b)(5) (FUTA taxes).
.02
Compliance statement. If a Plan Sponsor or Eligible Organization receives a
compliance statement under VCP, the compliance statement is binding upon the Service
and the Plan Sponsor or Eligible Organization as provided in section 10.09.
.03 Other taxes and penalties. See section 6.09 for rules relating to other taxes
and penalties.
.04 Reliance. Taxpayers may rely on this revenue procedure, including the relief
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 eligible for SCP with respect to significant and
insignificant Operational Failures. SEPs and SIMPLE IRA Plans are eligible for SCP with
respect to insignificant Operational Failures only.
(2) VCP
. Qualified Plans, 403(b) Plans, SEPs and SIMPLE IRA Plans are eligible
for VCP. VCP provides general procedures for correction of all Qualification Failures:
Operational, Plan Document, Demographic, and Employer Eligibility.
(3) Audit CAP. Audit CAP is available for Qualified Plans, 403(b) Plans, SEPs and
SIMPLE IRA Plans for correction of all failures found on examination that have not been
corrected in accordance with SCP or VCP.
(4) Eligibility for other arrangements. The Service may extend EPCRS to other
arrangements.
.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
- 12 -
Under Examination, insignificant Operational Failures can be corrected under SCP; and, if
correction has been completed or substantially completed before the plan or Plan
Sponsor is Under Examination, correction of significant Operational Failures can be
completed under SCP
.03 Favorable Letter requirement. The provisions of SCP relating to significant
Operational Failures (see section 9) are available for a Qualified Plan only if the plan is
the subject of a Favorable Letter. The provisions of SCP relating to insignificant
Operational Failures (see section 8) are available for a SEP but only if the plan document
consists of either (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by an
employer in accordance with the instructions on the applicable form (see Rev. Proc.
2002-10, 2002-1 C.B. 401), or (ii) a prototype SEP that has a current favorable opinion
letter which has been amended in accordance with the procedures set forth in Rev. Proc.
2002-10. The provisions of SCP relating to insignificant Operational Failures (see section
8) are available for a SIMPLE IRA Plan but only if the plan document consists of either (i)
a valid Model Form 5305-SIMPLE or 5304-SIMPLE adopted by an employer in
accordance with the instructions on the applicable form (see Rev. Proc. 2002-10), or (ii) a
current favorable opinion letter for a Plan Sponsor that has adopted a prototype SIMPLE
IRA Plan which has been amended in accordance with the procedures set forth in Rev.
Proc. 2002-10.
.04 Established practices and procedures. In order to be eligible for SCP, the
Plan Sponsor or administrator of a plan must have established practices and procedures
(formal or informal) reasonably designed to promote and facilitate overall compliance with
applicable Code requirements. For example, the plan administrator of a Qualified Plan
that may be top-heavy under § 416 may include in its plan operating manual a specific
annual step to determine whether the plan is top-heavy and, if so, to ensure that the
minimum contribution requirements of the top-heavy rules are satisfied. A plan document
alone does not constitute evidence of established procedures. In order for a Plan Sponsor
or administrator to use SCP, these established procedures must have been in place and
routinely followed, and an Operational Failure must have occurred through an oversight or
mistake in applying them. In addition, SCP may also be used in situations where the
operational failure occurred because the procedures that were in place, while reasonable,
were not sufficient to prevent the occurrence of the failure. In the case of a failure that
relates to Transferred Assets or to a plan assumed in connection with a corporate merger,
acquisition, or other similar employer transaction between the Plan Sponsor and sponsor
of the transferor plan or the prior plan sponsor of an assumed plan, the plan is considered
to have established practices and procedures for the Transferred Assets if such practices
and procedures are in effect for the Transferred Assets by the end of the first plan year
that begins after the corporate merger, acquisition, or other similar transaction.
.05 .Correction by plan amendment. (1) Availability of correction by plan
amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a
Qualified Plan to correct Plan Document, Demographic, and Operational Failures by a
- 13 -
plan amendment, including correcting an Operational Failure by plan amendment to
conform the terms of the plan to the plan’s prior operations, provided that the amendment
complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4),
410(b), and 411(d)(6). In addition, a Plan Sponsor may correct an Operational Failure by
plan amendment to amend the plan to the extent necessary to reflect the corrective
action. For example, if the plan failed to satisfy the average deferral percentage (“ADP”)
test required under § 401(k)(3) and the Plan Sponsor must make qualified nonelective
contributions not already provided for under the plan, the plan may be amended to
provide for qualified nonelective contributions. Except as provided in section 4.06, the
issuance of a compliance statement does not constitute a determination as to the effect of
any plan amendment on the qualification of the plan.
(2) Availability of correction by plan amendment in SCP. A Plan Sponsor may
use SCP for a Qualified Plan to correct an Operational Failure by a plan amendment in
order to conform the terms of the plan to the plan’s prior operations only to correct
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. SCP is not otherwise available for a Plan Sponsor to correct an Operational Failure by
a plan amendment. Any plan amendment must comply with the requirements of § 401(a),
including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6).
.06 Submission for a determination letter. (1) Under VCP and Audit CAP, a
determination letter will be issued to correct a nonamender failure. In addition, a
determination letter may be issued (a) to correct a failure in a plan that is either submitted
under VCP or that is being examined during the last 12 months of the plan’s remedial
amendment cycle, as defined in section 13 of Rev. Proc. 2005-66, 2005-37 I.R.B. 509 (an
“on-cycle” filing), or (b) to correct a failure in either a VCP filing submitted for a terminating
plan or a terminating plan under examination. For this purpose, the term “nonamender
failure” means a failure to amend the plan to reflect a change in a qualification
requirement within the plan’s applicable remedial amendment period, as set forth in Rev.
Proc. 2005-66. A change in a qualification requirement includes a change arising from a
statutory change, or a change in the requirements provided in regulations or other
guidance published in the Internal Revenue Bulletin. A determination letter issued under
VCP with respect to a nonamender failure will include only a determination on all
applicable laws with respect to which the remedial amendment period has expired.
Notwithstanding the above, a determination letter will not be issued with respect to a
failure to amend a plan timely for (a) good faith plan amendments for the Economic
Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 (EGTRRA), within the
period described in Notice 2001-42, 2001-2 C.B. 70, including those changes listed in
Notice 2005-5, 2005-3 I.R.B. 337, (b) plan amendments for the final and temporary
regulations under §401(a)(9) as they appeared in the April 1, 2003, edition of 26 CFR Part
1 (the § 401(a)(9) final and temporary regulations) within the period described in Rev.
Proc. 2002-29, 2002-1 C.B. 1176, as modified by Rev. Proc. 2003-10, 2003-1 C.B. 259,
and (c) interim amendments as provided in section 5 of Rev. Proc. 2005-66. The
- 14 -
preceding sentence is not applicable if (i) the failure is submitted in a VCP filing made
during an on-cycle year, (ii) the plan is being examined during an on-cycle year, (iii) the
failure is submitted in a VCP filing for a terminating plan, or (iv) the plan is a terminating
plan Under Examination. Except as provided in section 10.08, in cases where a
determination letter is not issued with respect to failures corrected through plan
amendment, the issuance of a compliance statement or closing agreement will constitute
a determination as to the effect of any plan amendment on the qualification of the plan.
Notwithstanding any other provision of this section 4.06, the Service reserves the right to
require the submission of a determination letter application with respect to any
amendment proposed or adopted to correct any Qualification Failure under VCP or Audit
CAP.
(2) In the case of any correction of an Operational Failure through plan amendment
under SCP, as permitted under section 4.05(2), a Plan Sponsor must submit a
determination letter application. The determination letter application must be submitted
before the end of the plan’s applicable remedial amendment period described in Rev.
Proc. 2005-66. As part of the determination letter submission, the amendment under
SCP must be identified as such in the cover letter.
.07 Availability of correction of Employer Eligibility Failure. SCP is not available
for a Plan Sponsor to correct an Employer Eligibility Failure.
.08 Availability of correction of a terminated plan. Correction of Qualification
Failures in a terminated plan may be made under VCP and Audit CAP, whether or not the
plan trust is still in existence.
.09 Availability of correction of an Orphan Plan. An Orphan Plan that is
terminating may be corrected under VCP and Audit CAP, provided that the party acting
on behalf of the plan is an Eligible Party, as defined in section 5.06(2).
.10 Availability of correction of § 457 plans
. Submissions relating to § 457(b)
eligible governmental plans will be accepted by the Service on a provisional basis outside
of EPCRS through standards that are similar to EPCRS.
.11 Egregious failures. SCP is not available to correct Operational Failures that
are egregious. For example, any of the following would be considered egregious: (a) a
plan has consistently and improperly covered only highly compensated employees; (b) a
plan provides more favorable benefits for an owner of the employer based on a purported
collective bargaining agreement where there has in fact been no good faith bargaining
between bona fide employee representatives and the employer (see Notice 2003-24,
2003-1 C.B. 853, with respect to welfare benefit funds); or (c) a contribution to a defined
contribution plan for a highly compensated employee is several times greater than the
dollar limit set forth in § 415. VCP is available to correct egregious failures; however,
- 15 -
these failures are subject to the fees described in section 12.06. Audit CAP also is
available to correct egregious failures.
.12 Diversion or misuse of plan assets. SCP, VCP, and Audit CAP are not
available to correct failures relating to the diversion or misuse of plan assets.
.13 Abusive tax avoidance transactions. (1) Effect on Programs. (a) SCP.
With respect to SCP, in the event that the plan or the Plan Sponsor has been a party to
an abusive tax avoidance transaction (as defined in section 4.13(2)), SCP is not available
to correct any Operational Failure that is directly or indirectly related to the abusive tax
avoidance transaction.
(b) VCP. With respect to VCP, if the Service determines that a plan or Plan
Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as
defined in section 4.13(2)), then the matter will be referred to the Internal Revenue
Service’s Employee Plans’ Tax Shelter Coordinator. Upon receiving a response from the
Tax Shelter Coordinator, the Service may determine that the plan or the Plan Sponsor
has been a party to an abusive tax avoidance transaction, and that the failures addressed
in the VCP submission are related to that transaction. In those situations, the Service will
conclude the review of the submission without issuing a compliance statement and will
refer the case for examination. However, if the Tax Shelter Coordinator determines that
the plan failures are unrelated to the abusive tax avoidance transaction or that no abusive
tax avoidance transaction occurred, then the Service will continue to address the failures
identified in the VCP submission, and may issue a compliance statement with respect to
those failures. In no event may a compliance statement be relied on for the purpose of
concluding that the plan or Plan Sponsor was not a party to an abusive tax avoidance
transaction. In addition, even if it is concluded that the failures can be addressed pursuant
to a VCP submission, the Service reserves the right to make a referral of the abusive tax
avoidance transaction matter for examination.
(c) Audit CAP and SCP (for plans Under Examination)
. For plans Under
Examination, if the Service determines that the plan or Plan Sponsor was, or may have
been, a party to an abusive tax avoidance transaction, the matter may be referred to the
Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. With respect to
plans Under Examination, an abusive tax avoidance transaction includes a transaction
described in section 4.13(2) and any other transaction that the Service determines was
designed to facilitate the impermissible avoidance of tax. Upon receiving a response from
the Tax Shelter Coordinator, (i) if the Service determines that a failure is related to the
abusive tax avoidance transaction, the Service reserves the right to conclude that neither
Audit CAP nor SCP is available for that failure and (ii) if the Service determines that
satisfactory corrective actions have not been taken with regard to the transaction, the
Service reserves the right to conclude that neither Audit CAP nor SCP is available to the
plan.
- 16 -
(2) Definition. For purposes of section 4.13(1) (except to the extent otherwise
provided in section 4.13(1)(c)), an abusive tax avoidance transaction means any listed
transaction under § 1.6011-4(b)(2) and any other transaction identified as an abusive
transaction in the IRS web site entitled “EP Abusive Tax Transactions.”
PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF
GENERAL APPLICABILITY
SECTION 5. DEFINITIONS
The following definitions apply for purposes of this revenue procedure:
.01 Definitions for Qualified Plans. The definitions in this section 5.01 apply to
Qualified Plans.
(1) Qualified Plan. The term "Qualified Plan" means a plan intended to
satisfy the requirements of § 401(a) or § 403(a).
(2) Qualification Failure. The term “Qualification Failure” means any failure
that adversely affects the qualification of a plan. There are four types of Qualification
Failures: (a) Plan Document Failures; (b) Operational Failures; (c) Demographic Failures;
and (d) Employer Eligibility Failures.
(a) Plan Document Failure. The term "Plan Document Failure"
means a plan provision (or the absence of a plan provision) that, on its face, violates the
requirements of § 401(a) or § 403(a). Thus, for example, the failure of a plan to be
amended to reflect a new qualification requirement within the plan's applicable remedial
amendment period under § 401(b) is a Plan Document Failure. In addition, if a plan has
not been timely or properly amended during an applicable remedial amendment period for
adopting good faith or interim amendments with respect to disqualifying provisions, as
described in §1.401(b)-1(b)(1), the plan is considered to have a Plan Document Failure.
For purposes of this revenue procedure, a Plan Document Failure includes any
Qualification Failure that is a violation of the requirements of § 401(a) or § 403(a) and that
is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.
(b) Operational Failure. The term "Operational Failure" means a
Qualification Failure (other than an Employer Eligibility Failure) that arises solely from the
failure to follow plan provisions. A failure to follow the terms of the plan providing for the
satisfaction of the requirements of § 401(k) and § 401(m) is considered to be an
Operational Failure. A plan does not have an Operational Failure to the extent the plan is
permitted to be amended retroactively to reflect the plan's operations (e.g., pursuant to
§ 401(b)).
In the situation where a Plan Sponsor timely adopted a good faith or interim
amendment which is not a disqualifying provision as described in § 1.401(b)-1(b)(1), and
- 17 -
the plan was not operated in accordance with the terms of such amendment, the plan is
considered to have an Operational Failure.
(c) Demographic Failure. The term "Demographic Failure" means a
failure to satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b) that is not an
Operational Failure or an Employer Eligibility Failure. The correction of a Demographic
Failure generally requires a corrective amendment to the plan adding more benefits or
increasing existing benefits (cf. § 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 and satisfy the requirements of § 401(a) or §403(a) 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. The term "Excess Amount" means (a) an
Overpayment, (b) an elective deferral or employee after-tax contribution returned to
satisfy § 415, (c) an elective deferral in excess of the limitation of § 402(g) that is
distributed, (d) an excess contribution or excess aggregate contribution that is distributed
to satisfy § 401(k) or § 401(m), (e) an elective deferral that is distributed to satisfy the
limitation of § 401(a)(17), or (f) any similar amount that is required to be distributed in
order to maintain plan qualification.
(4) Favorable Letter. The term "Favorable Letter" means, in the case of a
Qualified Plan, a current favorable determination letter for an individually designed plan
(including a volume submitter plan that is not identical to an approved volume submitter
plan), a current favorable opinion letter for a Plan Sponsor that has adopted a master or
prototype plan, (standardized or nonstandardized), or a current favorable advisory letter
and certification that the Plan Sponsor has adopted a plan that is identical to an approved
volume submitter plan. A plan has a current favorable determination letter, opinion letter,
or advisory letter if (a), (b), (c), or (d) below is satisfied:
(a) The plan has a favorable determination letter, opinion letter, or
advisory letter/certification that considers GUST (GUST is an acronym for the Uruguay
Round Agreements Act (GATT), the Uniformed Services Employment and Reemployment
Rights Act of 1994 (USERRA), the Small Business Job Protection Act of 1996 (SBJPA),
the Taxpayer Relief Act of 1997 (TRA ’97), the Internal Revenue Service Restructuring
and Reform Act of 1998 (RRA ’98), and the Community Renewal Tax Relief Act of 2000
(CRA).)
(b) The plan is initially adopted or effective after December 31, 2001,
and the Plan Sponsor timely submits an application for a determination letter or adopts
an approved master or prototype plan or volume submitter plan within the plan’s remedial
amendment period under § 401(b).
- 18 -
(c) The plan is terminated prior to the expiration of the applicable
GUST remedial amendment period under § 401(b) and the plan was amended to reflect
the provisions of GUST (including § 415, as provided in Rev. Rul. 2002-27, 2002-1 C.B.
925, in the case of defined contribution plans), the provisions of the 401(a)(9) final and
temporary regulations, and in the case of defined benefit plans, the 1994 Group Annuity
Reserving Table (94 GAR) (see Rev. Rul. 2001-62, 2001-2 C.B. 632).
(d) The plan is terminated prior to the expiration of the applicable
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) remedial
amendment period under § 401(b) and the plan was amended to reflect the provisions of
EGTRRA and any other legislation that was in effect when the plan was terminated.
(5) Maximum Payment Amount. The term "Maximum Payment Amount"
means a monetary amount that is approximately equal to the tax the Service could collect
upon plan disqualification and is the sum for the open taxable years of the:
(a) tax on the trust (Form 1041) (and any interest or penalties
applicable to the trust return),
(b) additional income tax resulting from the loss of employer
deductions for plan contributions (and any interest or penalties applicable to the Plan
Sponsor's return),
(c) additional income tax resulting from income inclusion for
participants in the plan (Form 1040), including the tax on plan distributions that have been
rolled over to other qualified trusts (as defined in § 402(c)(8)(A)) or eligible retirement
plans (as defined in § 402(c)(8)(B)) (and any interest or penalties applicable to the
participants’ returns), and
(d) any other tax that results from a Qualification Failure that would
apply but for the correction under this revenue procedure.
(6) Overpayment
. The term "Overpayment" means a distribution to an
employee or beneficiary that exceeds the employee's or beneficiary's benefit under the
terms of the plan, including a distribution that results from a failure to comply with plan
terms that implement § 401(a)(17), § 401(m) (but only with respect to the forfeiture of
nonvested matching contributions that are excess aggregate contributions),
§ 411(a)(3)(G), or § 415. An Overpayment does not include a distribution of any Excess
Amount described in section 5.01(3)(b) through (f).
(7) Plan Sponsor
. The term "Plan Sponsor" means the employer that
establishes or maintains a qualified retirement plan for its employees.
- 19 -
(8) Transferred Assets. The term “Transferred Assets” means plan assets
that were received, in connection with a corporate merger, acquisition or other similar
employer transaction, by the plan in a transfer (including a merger or consolidation of plan
assets) under § 414(l) from a plan sponsored by an employer that was not a member of
the same controlled group as the Plan Sponsor immediately prior to the corporate merger,
acquisition, or other similar employer transaction. If a transfer of plan assets related to the
same employer transaction is accomplished through several transfers, then the date of
the transfer is the date of the first transfer.
.02 Definitions for 403(b) Plans. The definitions in this section 5.02 apply to
403(b) Plans.
(1) 403(b) Plan. The term "403(b) Plan" means a plan or program intended
to satisfy the requirements of § 403(b).
(2) 403(b) Failure. A 403(b) Failure is any Operational, Demographic, or
Employer Eligibility Failure as defined below.
(a) Operational Failure. The term "Operational Failure" means any of the
following:
(i) A failure to satisfy the requirements of § 403(b)(12)(A)(ii)
(relating to the availability of salary reduction contributions);
(ii) A failure to satisfy the requirements of § 401(m) (as applied to
403(b) Plans pursuant to § 403(b)(12)(A)(i));
(iii) A failure to satisfy the requirements of § 401(a)(17) (as applied
to 403(b) Plans pursuant to § 403(b)(12)(A)(i));
(iv) A failure to satisfy the distribution restrictions of § 403(b)(7) or
§ 403(b)(11);
(v) A failure to satisfy the incidental death benefit rules of
§ 403(b)(10);
(vi) A failure to pay minimum required distributions under
§ 403(b)(10);
(vii) A failure to give employees the right to elect a direct rollover
under § 403(b)(10), including the failure to give meaningful notice of such right;
(viii) A failure of the annuity contract or custodial agreement to
provide participants with a right to elect a direct rollover under §§ 403(b)(10) and
401(a)(31);
(ix) A failure to satisfy the limit on elective deferrals under
§ 403(b)(1)(E);
(x) A failure of the annuity contract or custodial agreement to
provide the limit on elective deferrals under §§ 403(b)(1)(E) and 401(a)(30);
(xi) A failure involving contributions or allocations of Excess Amounts;
or
- 20 -
(xii) Any other failure to satisfy applicable requirements under
§ 403(b) that (A) results in the loss of § 403(b) status for the plan or the loss of § 403(b)
status for one or more custodial account(s) or annuity contract(s) under the plan and (B)
is not a Demographic Failure, an Employer Eligibility Failure, or a failure related to
contributions on behalf of individuals who are not employees of the employer.
(b) Demographic Failure. The term "Demographic Failure" means a failure to
satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b) (as applied to 403(b)
Plans pursuant to § 403(b)(12)(A)(i)).
(c) Employer Eligibility Failure. The term "Employer Eligibility Failure" means
any of the following:
(i) The adoption of a plan intended to satisfy the requirements of
§ 403(b) by a Plan Sponsor that is not a tax-exempt organization described in § 501(c)(3)
or a public educational organization described in § 170(b)(1)(A)(ii);
(ii) A failure to satisfy the nontransferability requirement of § 401(g);
(iii) A failure to initially establish or maintain a custodial account as
required by § 403(b)(7); or
(iv) A failure to purchase (initially or subsequently) either an annuity
contract from an insurance company (unless grandfathered under Rev. Rul. 82-102,
1982-1 C.B. 62) or a custodial account from a regulated investment company utilizing a
bank or an approved non-bank trustee/custodian.
(3) Excess Amount. The term "Excess Amount" means any amount
returned to ensure that the plan satisfies the requirements of § 401(a)(30), 415, or
403(b)(2) (for plan years prior to January 1, 2002). In addition, the term “Excess Amount”
includes (for all plan years) any distributions required to ensure that the plan complies
with the applicable requirements of § 403(b).
(4) Maximum Payment Amount
. The term "Maximum Payment Amount”
means a monetary amount that is approximately equal to the tax the Service could collect
as a result of the 403(b) Failure and is the sum for the open taxable years of the:
(a) additional income tax resulting from income inclusion for
employees or other participants (Form 1040), including the tax on distributions that have
been rolled over to other qualified trusts (as defined in § 402(c)(8)(A)) or eligible
retirement plans (as defined in § 402(c)(8)(B)) (and any interest or penalties applicable to
the participants’ returns), and
(b) any other tax that results from a 403(b) Failure that would apply
but for the correction under this revenue procedure.
- 21 -
(5) Plan Sponsor. The term "Plan Sponsor" means the employer that offers
a 403(b) Plan to its employees.
.03 Under Examination. (1) The term "Under Examination" means: (a) a plan that
is under an Employee Plans examination (that is, an examination of a Form 5500 series
or other Employee Plans examination); (b) a Plan Sponsor that is under an Exempt
Organizations examination (that is, an examination of a Form 990 series or other Exempt
Organizations examination); or (
c) a plan that is under investigation by the Criminal
Investigation Division of the Internal Revenue Service.
(2) A plan that is under an Employee Plans examination includes any plan
for which the Plan Sponsor, or a representative, has received verbal or written notification
from Employee Plans of an impending Employee Plans examination, or of an impending
referral for an Employee Plans examination, and also includes any plan that has been
under an Employee Plans examination and is now 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 minimum
coverage requirements of § 410(b), or the requirements of § 403(b)(12), with a plan(s)
that is Under Examination. In addition, a plan is considered to be Under Examination with
respect to a failure of a qualification requirement (other than those described in the
preceding sentence) if the plan is aggregated with another plan for purposes of satisfying
that qualification requirement (for example, § 401(a)(30), § 415, or § 416) and that other
plan is Under Examination. For example, assume Plan A has a § 415 failure, Plan A is
aggregated with Plan B only for purposes of § 415, and Plan B is Under Examination. In
this case, Plan A is considered to be Under Examination with respect to the § 415 failure.
However, if Plan A has a failure relating to the spousal consent rules under § 417 or the
vesting rules of § 411, Plan A is not considered to be Under Examination with respect to
the § 417 or § 411 failure. For purposes of this revenue procedure, the term aggregation
does not include consideration of benefits provided by various plans for purposes of the
average benefits test set forth in § 410(b)(2).
(3) An Employee Plans examination also includes a case in which a Plan
Sponsor has submitted any Form 5300 series form and the Employee Plans agent
notifies the Plan Sponsor, or a representative, of possible Qualification Failures, whether
or not the Plan Sponsor is officially notified of an "examination." This would include a
case where, for example, a Plan Sponsor has applied for a determination letter on plan
termination, and an Employee Plans agent notifies the Plan Sponsor that there are partial
termination concerns. In addition, if, during the review process, the agent requests
additional information that indicates the existence of a Qualification Failure(s) not
previously identified by the Plan Sponsor, the plan is considered to be under an
Employee Plans examination. If, in such a case, the determination letter request under
review is subsequently withdrawn, the plan is nevertheless considered to be under an
Employee Plans examination for purposes of eligibility under SCP and VCP with respect
- 22 -
to those issues raised by the agent reviewing the determination letter application. The fact
that a Plan Sponsor voluntarily submits a determination letter application does not
constitute a voluntary identification of Qualification Failures to the Service. In order to be
eligible to perfect a determination letter application into a VCP submission, the Plan
Sponsor (or the authorized representative) must identify each Qualification Failure, in
writing, to the reviewing agent before the agent recognizes the existence of the
Qualification Failure(s) or addresses the Qualification Failure(s) in communications with
the Plan Sponsor (or the authorized representative).
(4) A Plan Sponsor that is under an Exempt Organizations examination
includes any Plan Sponsor that has received (or whose representative has received)
verbal or written notification from Exempt Organizations of an impending Exempt
Organizations examination or of an impending referral for an Exempt Organizations
examination and also includes any Plan Sponsor that has been under an Exempt
Organizations examination and is now in Appeals or in litigation for issues raised in an
Exempt Organizations examination.
.04 SEP. The term “SEP” means a plan intended to satisfy the requirements of
§ 408(k). For purposes of this revenue procedure, the term SEP also includes a salary
reduction SEP (“SARSEP”) described in § 408(k)(6), when applicable.
.05 SIMPLE IRA Plan. The term “SIMPLE IRA Plan” means a plan intended to
satisfy the requirements of § 408(p).
.06 Definitions for Orphan Plans. (1) Orphan Plan. With respect to VCP and Audit
CAP, the term “Orphan Plan” means any Qualified Plan with respect to which an “Eligible
Party” (defined in section 5.06(2)) has determined that the Plan Sponsor (a) no longer
exists, (b) cannot be located, (c) is unable to maintain the plan, or (d) has abandoned the
plan pursuant to regulations issued by the Department of Labor. However, the term
“Orphan Plan” does not include any plan terminated pursuant to Department of Labor
regulations governing the termination of abandoned individual account plans.
(2) Eligible Party. For purposes of section 5.06(1), 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 who the Department of
Labor determined has accepted responsibility for terminating the
plan and distributing the plan's assets; or
(c) In the case of a Qualified Plan to which Title I of the Employee
Retirement Income Security Act of 1974 (“ERISA”) has never
- 23 -
applied, a surviving spouse who is the sole beneficiary of a
plan that provided benefits to a participant who was (i) the sole
owner of the business that sponsored the plan and (ii) the only
participant in the plan.
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY
.01 Correction principles; rules of general applicability. The general correction
principles in section 6.02 and rules of general applicability in sections 6.03 through 6.11
apply for purposes of this revenue procedure.
.02 Correction principles. Generally, a failure is not corrected unless full
correction is made with respect to all participants and beneficiaries, and for all taxable
years (whether or not the taxable year is closed). Even if correction is made for a closed
taxable year, the tax liability associated with that year will not be redetermined because of
the correction. Correction is determined taking into account the terms of the plan at the
time of the failure. Correction should be accomplished taking into account the following
principles:
(1) Restoration of benefits. The correction method should restore the plan
to the position it would have been in had the failure not occurred, including restoration of
current and former participants and beneficiaries to the benefits and rights they would
have had if the failure had not occurred.
(2) Reasonable and appropriate correction. The correction should be
reasonable and appropriate for the failure. Depending on the nature of the failure, there
may be more than one reasonable and appropriate correction for the failure. For
Qualified Plans, any correction method permitted under Appendix A or Appendix B is
deemed to be a reasonable and appropriate method of correcting the related Qualification
Failure. Any correction method permitted under Appendix A or Appendix B applicable to
a 403(b) Plan, a SEP, or a SIMPLE IRA Plan is deemed to be a reasonable and
appropriate method of correcting the related failure. Whether any other particular
correction method is reasonable and appropriate is determined taking into account the
applicable facts and circumstances and the following principles:
(a) The correction method should, to the extent possible, resemble
one already provided for in the Code, regulations thereunder, 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 for failures relating to nondiscrimination
should provide benefits for nonhighly compensated employees. For example, for
Qualified Plans, the correction method set forth in § 1.401(a)(4)-11(g) (rather than
- 24 -
methods making use of the special testing provisions set forth in § 1.401(a)(4)-8 or
§ 1.401(a)(4)-9) would be the typical means of correcting a failure to satisfy
nondiscrimination requirements. Similarly, the correction of a failure to satisfy the
requirements of § 401(k)(3), § 401(m)(2), or § 401(m)(9) (relating to nondiscrimination),
solely by distributing excess amounts to highly compensated employees would not be the
typical means of correcting such a failure.
(c) The correction method should keep plan assets in the plan,
except to the extent the Code, regulations, or other guidance of general applicability
provide for correction by distribution to participants or beneficiaries or return of assets to
the employer or Plan Sponsor. For example, if an excess allocation (not in excess of the
§ 415 limits) made under a Qualified Plan was made for a participant under a plan (other
than a cash or deferred arrangement), the excess should be reallocated to other
participants or, depending on the facts and circumstances, used to reduce future
employer contributions.
(d) The correction method should not violate another applicable
specific requirement of § 401(a) or § 403(b) (for example, § 401(a)(4), § 411(d)(6), or
§ 403(b)(12), as applicable), § 408(k) for SEPs, or § 408(p) for SIMPLE IRA Plans, or a
parallel requirement in Part 2 of Subtitle B of Title I of ERISA (for plans that are subject to
Subtitle B of Part 2 of Title I of ERISA). If an additional failure is created as a result of the
use of a correction method in this revenue procedure, then that failure also must be
corrected in conjunction with the use of that correction method and in accordance with the
requirements of this revenue procedure.
(3) Consistency requirement. Generally, where more than one correction
method is available to correct a type of Operational Failure for a plan year (or where there
are alternative ways to apply a correction method), the correction method (or one of the
alternative ways to apply the correction method) should be applied consistently in
correcting all Operational Failures of that type for that plan year. Similarly, earnings
adjustment methods generally should be applied consistently with respect to corrective
contributions or allocations for a particular type of Operational Failure for a plan year. In
the case of a Group Submission, the consistency requirement applies on a plan by plan
basis.
(4) Principles regarding corrective allocations and corrective distributions
.
The following principles apply where an appropriate correction method includes the use of
corrective allocations or corrective distributions:
(a) Corrective allocations under a defined contribution plan should
be based upon the terms of the plan and other applicable information at the time of the
failure (including the compensation that would have been used under the plan for the
period with respect to which a corrective allocation is being made) and should be adjusted
for earnings (including losses) and forfeitures that would have been allocated to the
- 25 -
participant's account if the failure had not occurred. However, the corrective allocation
need not be adjusted for losses. See section 3 of Appendix B for additional information on
calculation of earnings for corrective allocations.
(b) A corrective allocation to a participant's account because of a
failure to make a required allocation in a prior limitation year will not be considered an
annual addition with respect to the participant for the limitation year in which the
correction is made, but will be considered an annual addition for the limitation year to
which the corrective allocation relates. However, the normal rules of § 404, regarding
deductions, apply.
(c) Corrective allocations should come only from employer
contributions (including forfeitures if the plan permits their use to reduce employer
contributions).
(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, consistent
with the plan's actuarial adjustments.
(5) Special exceptions to full correction. In general, a failure must be fully
corrected. Although the mere fact that correction is inconvenient or burdensome is not
enough to relieve a Plan Sponsor of the need to make full correction, full correction may
not be required in certain situations because it is unreasonable or not feasible. Even in
these situations, the correction method adopted must be one that does not have
significant adverse effects on participants and beneficiaries or the plan, and that does not
discriminate significantly in favor of highly compensated employees. The exceptions
described below specify those situations in which full correction is not required.
(a) Reasonable estimates. If either, (i) it is possible to make a
precise calculation but the probable difference between the approximate and the precise
restoration of a participant's benefits is insignificant and the administrative cost of
determining precise restoration would significantly exceed the probable difference or (ii) it
is not possible to make a precise calculation (for example, where it is impossible to
provide plan data), reasonable estimates may be used in calculating appropriate
correction. If it is not feasible to make a reasonable estimate of what the actual
investment results would have been, a reasonable interest rate may be used.
(b) Delivery of small benefits. If the total corrective distribution due a
participant or beneficiary is $50 or less, the Plan Sponsor is not required to make the
corrective distribution if the reasonable direct costs of processing and delivering the
distribution to the participant or beneficiary would exceed the amount of the distribution.
This section 6.02(5)(b) does not apply to corrective contributions.
- 26 -
(c) Recovery of small Overpayments. Generally, under VCP or Audit
CAP, if the total amount of an Overpayment made to a participant or beneficiary is $100
or less, the Plan Sponsor is not required to seek the return of the Overpayment from the
participant or beneficiary. The Plan Sponsor is not required to notify the participant or
beneficiary that the Overpayment is not eligible for favorable tax treatment accorded to
distributions from Qualified Plans (and, specifically, is not eligible for tax-free rollover).
(d) Locating lost participants. Reasonable actions must be taken to
find all current and former participants and beneficiaries to whom additional benefits are
due, but who have not been located after a mailing to the last known address. In general,
such actions include use of the Internal Revenue Service Letter Forwarding Program (see
Rev. Proc. 94-22, 1994-1 C.B. 608) or the Social Security Administration Employer
Reporting Service. A plan will not be considered to have failed to correct a failure due to
the inability to locate an individual if either of these programs is used; provided that, if the
individual is later located, the additional benefits are provided to the individual at that time.
The Internal Revenue Service Letter Forwarding Program may not be used to locate
participants in order to collect amounts owed to the plan.
(e) Small Excess Amounts. Generally, under VCP or Audit CAP, 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, including earnings, is not eligible
for favorable tax treatment accorded to distributions from Qualified Plans (and,
specifically, is not eligible for tax-free rollover). See section 6.06(1) for such notice
requirements.
(f) Orphan Plans. The Service retains the discretion to determine
under VCP and Audit CAP whether full correction will be required in a terminating Orphan
Plan.
(6) Correction principle for loan failures
. In the case of a loan failure
corrected in accordance with section 6.07(2)(b) or (c) and section 6.07(3), the participant
is generally responsible for paying the corrective payment. However, with respect to the
failure listed in section 6.07(3), the employer should pay a portion of the correction
payment on behalf of the participant equal to the interest that accumulates as a result of
such failure -- generally determined at a rate equal to the greater of the plan loan rate or
the rate of return under the plan.
(7) Correction for exclusion of employees for elective contributions or after-
tax employee contributions. If a Qualified Plan has an Operational Failure that consists of
excluding an employee that should have been eligible to make an elective contribution
under a cash or deferred arrangement or an after-tax employee contribution, the
employer should contribute to the plan on behalf of the excluded employee an amount
- 27 -
that makes up for the value of the lost opportunity to the employee to have a portion of his
or her compensation contributed to the plan accumulated with earnings tax free in the
future. This correction principle applies solely to this limited circumstance. It does not, for
example, extend to the correction of a failure to satisfy a nondiscrimination test, e.g., the
ADP test pursuant to § 401(k)(3) and the ACP test pursuant to § 401(m)(2). Specific
methods and examples to correct this failure are provided in Appendix A .05 and
Appendix B 2.02. Similarly, the methods and examples provided for correcting this failure
do not extend to other failures. Thus, the correction methods and the examples in
Appendix A .05 and Appendix B 2.02 cannot, for example, be used to correct ADP/ACP
failures. Finally, the methods and examples do not address situations where an
employee was excluded from a plan that provided for the opportunity to make designated
Roth contributions.
(8) Reporting. Any corrective distributions from the plan should be properly
reported.
.03 Correction of an Employer Eligibility Failure. (1) The permitted
correction of an Employer Eligibility Failure is the cessation of all contributions (including
salary reduction and after-tax contributions) beginning no later than the date the
application under VCP is filed. Pursuant to VCP correction, 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, e.g., for 403(b)
Plans, the events described in § 403(b)(7) (to the extent the assets are held in custodial
accounts) or § 403(b)(11) (for those assets invested in annuity contracts that would be
subject to § 403(b)(11) restrictions if the employer were eligible).
(2) Cessation of contributions is not required if continuation of contributions
would not be an Employer Eligibility Failure (for example, with respect to a tax-exempt
employer that may maintain a § 401(k) plan after 1996).
(3) A plan that is corrected through VCP 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.
.04 Correction of a failure to obtain spousal consent. (1) Normally, the
correction method under VCP for a failure to obtain spousal consent for a distribution that
is subject to the spousal consent rules under §§ 401(a)(11) and 417 is similar to the
correction method described in Appendix A .07. The Plan Sponsor must notify the
affected participant and spouse (to whom the participant was married at the time of the
distribution), so that the spouse can provide spousal consent to the distribution actually
made or the participant may repay the distribution and receive a qualified joint and
survivor annuity.
- 28 -
(2)(a) As alternatives to the correction method in section 6.04(1), correction
for a failure to obtain spousal consent may be made under either section 6.04(2)(b) or
section 6.04(2)(c).
(b) In the event that spousal consent to the prior distribution is not obtained
(e.g., because the spouse chooses not to consent, the spouse does not respond to the
notice, or the spouse cannot be located), the spouse is entitled to a benefit under the plan
equal to the portion of the qualified joint and survivor annuity that would have been
payable to the spouse upon the death of the participant had a qualified joint and survivor
annuity been provided to the participant under the plan at the annuity starting date for the
prior distribution. Such spousal benefit must be provided if a claim is made by the
spouse.
(c) In the event that spousal consent to the prior distribution is not obtained,
the plan may offer the spouse the choice between (i) the survivor annuity benefit
described in section 6.04(2)(b) or (ii) a single-sum payment equal to the actuarial present
value of that survivor annuity benefit (calculated using the applicable interest rate and
mortality table under § 417(e)(3)). Any such single-sum payment is treated in the same
manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an
IRA or other eligible retirement plan.
.05 Correction by plan amendment. In a case in which correction of a
Qualification Failure includes correction of a Plan Document Failure, Demographic
Failure, or Operational Failure by plan amendment, a determination letter application may
be required. See section 4.06.
.06 Special rules relating to Excess Amounts. (1) Treatment of Excess
Amounts under Qualified Plans. Except as otherwise provided in section 6.02(5)(c), a
distribution of an Excess Amount is not eligible for the favorable tax treatment accorded to
distributions from Qualified Plans (such as eligibility for rollover under § 402(c)). Thus, for
example, if such a distribution was contributed to an individual retirement arrangement
("IRA"), the contribution is not a valid rollover contribution for purposes of determining the
amount of excess contributions (within the meaning of § 4973) to the individual's IRA. A
distribution of an Excess Amount is generally treated in the manner described in section 3
of Rev. Proc. 92-93, 1992-2 C.B. 505, relating to the corrective disbursement of elective
deferrals. The distribution must be reported on Forms 1099-R for the year of distribution
with respect to each participant or beneficiary receiving such a distribution. Except as
otherwise provided in section 6.02(5)(c), where an Excess Amount has been or is being
distributed, the Plan Sponsor must notify the recipient that (a) an Excess Amount has
been or will be distributed and (b) an Excess Amount is not eligible for favorable tax
treatment accorded to distributions from Qualified Plans (and, specifically, is not eligible
for tax-free rollover).
- 29 -
(2) Treatment of Excess Amounts under 403(b) Plans. The distribution of
Excess Amounts is not an eligible rollover distribution within the meaning of § 403(b)(8). A
distribution of Excess Amounts is generally treated in the manner described in section 3
of Rev. Proc. 92-93 relating to the corrective disbursement of elective deferrals. The
distribution must be reported on Forms 1099-R for the year of distribution with respect to
each participant or beneficiary receiving such a distribution. Except as otherwise
provided in section 6.02(5)(c), where an Excess Amount has been or is being distributed,
the Plan Sponsor must notify the recipient that (a) an Excess Amount has been or will be
distributed and (b) an Excess Amount is not eligible for favorable tax treatment accorded
to distributions from Qualified Plans (and, specifically, is not eligible for tax-free rollover).
.07 Rules relating to reporting plan loan failures. (1) General rule for
loans. Unless correction is made in accordance with this section 6.07(2) or (3), a deemed
distribution under § 72(p)(1) in connection with a failure relating to a loan to a participant
made from a Qualified Plan or a 403(b) Plan must be reported on Form 1099-R with
respect to the affected participant and any applicable income tax withholding amount that
was required to be paid in connection with the failure (see § 1.72(p)-1, Q&A-15) must be
paid by the employer. As part of VCP, 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).
.
(2) Special rules for loans. (a) In general. The correction methods set forth
in this section 6.07(2) (b) and (c) and section 6.07(3) are only available for plan loan
failures that are corrected through VCP. The correction methods described in section
6.07(2) (b) and (c) and section 6.07(3) are not available if the maximum period for
repayment of the loan pursuant to § 72(p)(2)(B) has expired. The Service reserves the
right to limit the use of the correction methods listed in section 6.07(2) (b) and (c) and
section 6.07(3) to situations that it considers appropriate; for example, where the loan
failure is caused by employer action. A deemed distribution corrected under section
6.07(2) (b) or (c) or under section 6.07(3) is not required to be reported on Form 1099-R
and repayments made by correction under sections 6.07(2) and 6.07(3) do not result in
the affected participant having additional basis in the plan for purposes of determining the
tax treatment of subsequent distributions from the plan to the affected participant.
(b) Loans in excess of § 72(p)(2)(A)
. A failure to comply with plan
provisions requiring that loans comply with § 72(p)(2)(A) may be corrected by a corrective
repayment to the plan based on the excess of the loan amount over the maximum loan
amount under § 72(p)(2)(A). In the event that loan repayments were made in accordance
with the amortization schedule for the loan before correction, such prior repayments may
be applied (i) solely to reduce the portion of the loan that did not exceed the maximum
loan amount under § 72(p)(2)(A) (so that the corrective repayment would equal the
original loan excess plus interest thereon), (ii) to reduce the loan excess to the extent of
the interest thereon, with the remainder of the repayments applied to reduce the portion of
the loan that did not exceed the maximum loan amount under § 72(p)(2)(A) (so that the
- 30 -
corrective repayment would equal the original loan excess), or (iii) pro rata against the
loan excess and the maximum loan amount under § 72(p)(2)(A) (so that the corrective
repayment would equal the outstanding balance remaining on the original loan excess on
the date that corrective repayment is made). After the corrective payment is made, the
loan may be reformed to amortize the remaining principal balance as of the date of
repayment over the remaining period of the original loan. This is permissible as long as
the recalculated payments over the remaining period would not cause the loan to violate
the maximum duration permitted under § 72(p)(2)(B). The maximum duration is
determined from the date the original loan was made. In addition, the amortization
payments determined for the remaining period must comply with the level amortization
requirements of § 72(p)(2)(C).
(c) Loan terms that do not satisfy § 72(p)(2)(B) or (C). For a failure of loan
repayment terms to provide for a repayment schedule that complies with § 72(p)(2)(B) or
(C), the failure may be corrected by a reamortization of the loan balance in accordance
with § 72(p)(2)(C) over the remaining period that is the maximum period that complies
with § 72(p)(2)(B) measured from the original date of the loan.
(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 lump sum repayment
equal to the additional repayments that the affected participant would have made to the
plan if there had been no failure to repay the plan, plus interest accrued on the missed
repayments, (ii) reamortizing the outstanding balance of the loan, including accrued
interest, over the remaining payment schedule of the original term of the loan, or (iii) any
combination of (i) or (ii).
.08 Correction under statute or regulations. Generally, none of the correction
programs are available to correct failures that can be corrected under the Code and
related regulations. For example, as a general rule, a Plan Document Failure that is a
disqualifying provision for which the remedial amendment period under § 401(b) has not
expired can be corrected by operation of the Code through retroactive remedial
amendment.
.09 Matters subject to excise taxes
. (1) Except as provided in this revenue
procedure, the correction programs are not available for events for which the Code
provides tax consequences other than plan disqualification (such as the imposition of an
excise tax or additional income tax). For example, funding deficiencies (failures to make
the required contributions to a plan subject to § 412), prohibited transactions, and failures
to file the Form 5500 cannot be corrected under the correction programs.
(2) As part of VCP and Audit CAP, if the failure involves the failure to satisfy
the minimum required distribution requirements of § 401(a)(9), in appropriate cases, the
Service will waive the excise tax under § 4974 applicable to plan participants. The waiver
will be included in the compliance statement or in the closing agreement in the case of
- 31 -
Audit CAP. The Plan Sponsor, as part of the submission, must request the waiver and in
cases where the participant subject to the excise tax is an owner-employee, as defined in
§ 401(c)(3), or a 10 percent owner of a corporation, the Plan Sponsor must also provide
an explanation supporting the request. See section 12.02(2) relating to the applicable
compliance fee for certain § 401(a)(9) failures.
(3) As part of VCP, if the failure involves a correction that requires the Plan
Sponsor to make a plan contribution that is not deductible, in appropriate cases, the
Service will not pursue the excise tax under § 4972 on such nondeductible contributions.
The Plan Sponsor, as part of the submission must request the relief and provide an
explanation supporting the request.
(4) As part of VCP, if a failure results in excess contributions as defined in
§4979(c) or excess aggregate contributions as defined in §4979(d) under a plan, the
Service will not pursue the excise tax under § 4979 in appropriate cases, e.g., where
correction is made for any case in which the ADP test was timely performed but, due to
reliance on inaccurate data, resulted in an insufficient amount of excess elective
contributions having been distributed to HCEs. The Plan Sponsor, as part of the
submission, must request the relief and provide an explanation supporting the request.
.10 Correction for SEPs and SIMPLE IRA Plans. (1) Correction for SEPs and
SIMPLE IRA Plans generally. Generally, the correction for a SEP or a SIMPLE IRA Plan
is expected to be similar to the correction required for a Qualified Plan with a similar
Qualification Failure (i.e., Plan Document Failure, Operational Failure, Demographic
Failure and Employer Eligibility Failure).
(2) Special correction for SEPs and SIMPLE IRA Plans. In any case in which
correction under section 6.10(1) is not feasible for a SEP or SIMPLE IRA Plan or in any
other case determined by the Service in its discretion (including failures relating to §§
402(g), 415, and 401(a)(17), failures relating to deferral percentages, discontinuance of
contributions to a SARSEP or SIMPLE IRA Plan, and retention of Excess Amounts for
cases in which there has been no violation of a statutory limitation with respect to a SEP
or SIMPLE IRA Plan), the Service may provide for a different correction. See section
12.06(2) for a special fee that may apply in such a case.
(3) Correction of failure to satisfy deferral percentage test
. If the failure
involves a violation of the deferral percentage test under § 408(k)(6)(A)(iii) applicable to a
SARSEP, the failure may be corrected in either one of the following ways:
(a) The Plan Sponsor may make contributions that are 100% vested
to all eligible nonhighly compensated employees (to the extent permitted by § 415)
necessary to raise the deferral percentage needed to pass the test. This amount may be
calculated as the same percentage of compensation (regardless of the terms of the SEP).
- 32 -
(b) The Plan Sponsor may effect distribution of excess contributions,
adjusted for earnings through the date of correction, to highly compensated employees to
correct the failure. The Plan Sponsor must also contribute to the SEP an amount equal to
the total amount distributed. This amount must be allocated to (i) current employees who
were nonhighly compensated employees in the year of the failure, (ii) current nonhighly
compensated employees who were nonhighly compensated employees in the year of the
failure, or (iii) employees (both current and former) who were nonhighly compensated
employees in the year of the failure.
(4) Treatment of undercontributions to a SEP or a SIMPLE IRA Plan. (a)
Make-up contributions; earnings
. The Plan Sponsor should correct undercontributions to
a SEP or a SIMPLE IRA Plan by contributing make-up amounts that are fully vested,
adjusted for earnings credited from the date of the failure to the date of correction.
(b) Earnings adjustment methods. Insofar as SEP and SIMPLE IRA
Plan assets are held in IRAs, there is no earnings rate under the SEP or SIMPLE IRA
Plan as a whole. If it is not feasible to make a reasonable estimate of what the actual
investment results would have been, a reasonable interest rate may be used.
(5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan. (a)
Distribution of Excess Amounts. For purposes of section 6.10, an Excess Amount is an
amount contributed on behalf of an employee that is in excess of an employee’s benefit
under the plan, or an elective deferral in excess of the limitations of §§ 402(g) or
408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan
Sponsor may effect distribution of the Excess Amount, adjusted for earnings through the
date of correction, to the affected participant. The amount distributed to the affected
participant is includible in gross income in the year of distribution. The distribution is
reported on Form 1099-R for the year of distribution with respect to each participant
receiving the distribution. In addition, the Plan Sponsor must inform affected participants
that the distribution of an Excess Amount is not eligible for favorable tax treatment
accorded to distributions from a SEP or a SIMPLE IRA Plan (and, specifically, is not
eligible for tax-free rollover). If the Excess Amount is attributable to employer
contributions, the Plan Sponsor may effect distribution of the employer Excess Amount,
adjusted for earnings through the date of correction, to the Plan Sponsor. The amount
distributed to the Plan Sponsor is not includible in the gross income of the affected
participant. The Plan Sponsor is not entitled to a deduction for such employer Excess
Amount. The distribution is reported on Form 1099-R issued to the participant indicating
the taxable amount as zero.
(b) Retention of Excess Amounts
. If an Excess Amount is retained in
the SEP or SIMPLE IRA Plan under section 6.10(5), a special fee, in addition to the VCP
submission fee, will apply. See section 12.05(2) for the special fee. The Plan Sponsor is
not entitled to a deduction for an Excess Amount retained in the SEP or SIMPLE IRA
Plan. In the case of an Excess Amount retained in a SEP that is attributable to a § 415
- 33 -
failure, the Excess Amount, adjusted for earnings through the date of correction, must
reduce affected participants' applicable § 415 limit for the year following the year of
correction (or for the year of correction if the Plan Sponsor so chooses), and subsequent
years, until the excess is eliminated.
(c) De minimis Excess Amounts. If the total Excess Amount in a SEP
or SIMPLE IRA Plan, whether attributable to elective deferrals or employer contributions,
is $100 or less, the Plan Sponsor is not required to distribute the Excess Amount and the
special fee described in section 12.05(2) does not apply.
.11 Confidentiality and disclosure. Because each correction program relates
directly to the enforcement of the Code qualification requirements, the information
received or generated by the Service under the program is subject to the confidentiality
requirements of § 6103 and is not a written determination within the meaning of § 6110.
.12 No effect on other law. Correction under these programs has no effect on the
rights of any party under any other law, including Title I of ERISA. The Department of
Labor maintains a Voluntary Fiduciary Correction Program under which certain ERISA
fiduciary violations may be corrected. The Department of Labor also maintains a
Delinquent Filer Voluntary Compliance Program under which certain failures to comply
with the annual reporting requirements (Form 5500 series) under ERISA may be
corrected.
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
The requirements of this section 7 are satisfied with respect to an Operational
Failure if the Plan Sponsor of a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA
Plan satisfies the requirements of section 8 (relating to insignificant Operational Failures)
or, in the case of a Qualified Plan or a 403(b) Plan, section 9 (relating to significant
Operational Failures).
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. The requirements of this section 8 are satisfied with respect
to an Operational Failure if the Operational Failure is corrected and, given all the facts
and circumstances, the Operational Failure is insignificant. This section 8 is available for
correcting an insignificant Operational Failure even if the plan or Plan Sponsor is Under
Examination and even if the Operational Failure is discovered on examination.
- 34 -
.02 Factors. The factors to be considered in determining whether or not an
Operational Failure under a plan is insignificant include, but are not limited to: (1) whether
other failures occurred during the period being examined (for this purpose, a failure is not
considered to have occurred more than once merely because more than one participant
is affected by the failure); (2) the percentage of plan assets and contributions involved in
the failure; (3) the number of years the failure occurred; (4) the number of participants
affected relative to the total number of participants in the plan; (5) the number of
participants affected as a result of the failure relative to the number of participants who
could have been affected by the failure; (6) whether correction was made within a
reasonable time after discovery of the failure; and (7) the reason for the failure (for
example, data errors such as errors in the transcription of data, the transposition of
numbers, or minor arithmetic errors). No single factor is determinative. Additionally,
factors (2), (4), and (5) should not be interpreted to exclude small businesses.
.03 Multiple failures. In the case of a plan with more than one Operational
Failure in a single year, or Operational Failures that occur in more than one year, the
Operational Failures are eligible for correction under this section 8 only if all of the
Operational Failures are insignificant in the aggregate. Operational Failures that have
been corrected under SCP in section 9 and VCP in sections 10 and 11 are not taken into
account for purposes of determining if Operational Failures are insignificant in the
aggregate.
.04 Examples. The following examples illustrate the application of this section
8. It is assumed, in each example, that the eligibility requirements of section 4 relating to
SCP have been satisfied and that no Operational Failures occurred other than the
Operational Failures identified below.
Example 1: In 1991, Employer X established Plan A, a profit-sharing plan that satisfies the
requirements of § 401(a) in form. In 2003, the benefits of 50 of the 250 participants in Plan A were limited
by § 415(c). However, when the Service examined Plan A in 2006, it discovered that, during the 2003
limitation year, the annual additions allocated to the accounts of 3 of these employees exceeded the
maximum limitations under § 415(c). Employer X contributed $3,500,000 to the plan for the plan year. The
amount of the excesses totaled $4,550. Under these facts, because the number of participants affected by
the failure relative to the total number of participants who could have been affected by the failure, and the
monetary amount of the failure relative to the total employer contribution to the plan for the 2003 plan year,
are insignificant, the § 415(c) failure in Plan A that occurred in 2003 would be eligible for correction under
this section 8.
Example 2
: The facts are the same as in Example 1, except that the failure to satisfy § 415
occurred during each of the 2003, 2004, and 2005 limitation years. In addition, the three participants
affected by the § 415 failure were not identical each year. The fact that the § 415 failures occurred during
more than one limitation year did not cause the failures to be significant; accordingly, the failures are still
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
under § 415(c) during the 2003 limitation year, and the amount of the excesses ranged from $1,000 to
- 35 -
$9,000, and totaled $150,000. Under these facts, taking into account the number of participants affected by
the failure relative to the total number of participants who could have been affected by the failure for the
2003 limitation year (and the monetary amount of the failure relative to the total employer contribution), the
failure is significant. Accordingly, the § 415(c) failure in Plan A that occurred in 2003 is ineligible for
correction under this section 8 as an insignificant failure.
Example 4
: Employer J maintains Plan C, a money purchase pension plan established in 1992.
The plan document satisfies the requirements of § 401(a) of the Code. The formula under the plan provides
for an employer contribution equal to 10% of compensation, as defined in the plan. During its examination
of the plan for the 2004 plan year, the Service discovered that the employee responsible for entering data
into the employer's computer made minor arithmetic errors in transcribing the compensation data with
respect to 6 of the plan's 40 participants, resulting in excess allocations to those 6 participants' accounts.
Under these facts, the number of participants affected by the failure relative to the number of participants
that could have been affected is insignificant, and the failure is due to minor data errors. Thus, the failure
occurring in 2004 would be insignificant and therefore eligible for correction under this section 8.
Example 5
: Public School maintains for its 200 employees a salary reduction 403(b) Plan (the
"Plan") that satisfies the requirements of § 403(b). The business manager has primary responsibility for
administering the Plan, in addition to other administrative functions within Public School. During the 2004
plan year, a former employee should have received an additional minimum required distribution of $278
under § 403(b)(10). Another participant received an impermissible hardship withdrawal of $2,500. Another
participant made elective deferrals of which $1,000 was in excess of the § 402(g) limit. Under these facts,
even though multiple failures occurred in a single plan year, the failures will be eligible for correction under
this section 8 because in the aggregate the failures are insignificant.
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. The requirements of this section 9 are satisfied with respect to
an Operational Failure (even if significant) if the Operational Failure is corrected and the
correction is either completed or substantially completed (in accordance with section
9.04) by the last day of the correction period described in section 9.02.
.02 Correction period. (1) End of correction period. The last day of the correction
period for an Operational Failure is the last day of the second plan year following the plan
year for which the failure occurred. However, in the case of a failure to satisfy the
requirements of § 401(k)(3), 401(m)(2), or 401(m)(9), the correction period does not end
until the last day of the second plan year following the plan year that includes the last day
of the additional period for correction permitted under § 401(k)(8) or 401(m)(6). If a 403(b)
Plan does not have a plan year, the plan year is deemed to be the calendar year for
purposes of this subsection.
(2) Extension of correction period for Transferred Assets. In the case of an
Operational Failure that relates only to Transferred Assets, or to a plan assumed in
connection with a corporate merger, acquisition or other similar employer transaction, the
correction period does not end until the last day of the first plan year that begins after the
corporate merger, acquisition, or other similar employer transaction between the Plan
Sponsor and the sponsor of the transferor plan or the prior sponsor of an assumed plan.
- 36 -
(3) Effect of examination. The correction period for an Operational Failure that
occurs for any plan year ends, in any event, on the first date the plan or Plan Sponsor is
Under Examination for that plan year (determined without regard to the second sentence
of section 9.02). (But see section 9.04 for special rules permitting completion of
correction after the end of the correction period.)
.03 Correction by plan amendment. In order to complete correction by plan
amendment (as permitted under section 4.05), the appropriate determination letter
application must be submitted before the end of the plan’s applicable remedial
amendment period described in Rev. Proc. 2005-66.
.04 Substantial completion of correction. Correction of an Operational Failure is
substantially completed by the last day of the correction period only if the requirements of
either paragraph (1) or (2) are satisfied.
(1) The requirements of this paragraph (1) are satisfied if:
(a) during the correction period, the Plan Sponsor is reasonably
prompt in identifying the Operational Failure, formulating a correction method, and
initiating correction in a manner that demonstrates a commitment to completing correction
of the Operational Failure as expeditiously as practicable, and
(b) within 90 days after the last day of the correction period, the Plan
Sponsor completes correction of the Operational Failure.
(2) The requirements of this paragraph (2) are satisfied if:
(a) during the correction period, correction is completed with respect
to 85 percent of all participants affected by the Operational Failure, and
(b) thereafter, the Plan Sponsor completes correction of the
Operational Failure with respect to the remaining affected participants in a diligent
manner.
.05 Examples
. The following examples illustrate the application of this section 9.
Assume that the eligibility requirements of section 4 relating to SCP have been met.
Example 1: Employer Z established a qualified defined contribution plan in 2003 and received a
favorable determination letter. During 2005, while doing a self-audit of the operation of the plan for the
2004 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 2004 Operational Failures occurred because the
elective deferrals of additional employees exceeded the § 402(g) limit and Employer Z failed to make the
required top-heavy minimum contribution. During the 2005 plan year, the Plan Sponsor made corrective
contributions on behalf of the excluded employees, distributed the excess deferrals to the affected
- 37 -
participants, and made a top-heavy minimum contribution to all participants entitled to that contribution for
the 2004 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. Under these facts, the Plan Sponsor has corrected the Operational Failures for the
2004 plan year within the correction period and thus satisfied the requirements of this section 9.
Example 2
: Employer A established a qualified defined contribution plan, Plan A, in 1990 and has
received a favorable determination letter for the applicable law changes. In April 2003, Employer A
purchased all of the stock of Employer B, a wholly-owned subsidiary of Employer C. Employees of
Employer B participated in Plan C, a qualified defined contribution plan sponsored by Employer C.
Following Employer A’s review of Plan C, Employer A and Employer C agreed that Plan A would accept a
transfer of plan assets attributable to the account balances of the employees of Employer B who had
participated in Plan C. As part of this agreement, Employer C represented to Employer A that Plan C is tax
qualified. Employers A and C also agreed that such transfer would be in accordance with § 414(l) and
§ 1.414(l)-1 and addressed issues related to costs associated with the transfer. Following the transaction,
the employees of Employer B began participation in Plan A. Effective July 1, 2003, Plan A accepted the
transfer of plan assets from Plan C. After the transfer, Employer A determined that all the participants in
one division of Employer B had been incorrectly excluded from allocation of the profit sharing contributions
for the 1998 and 1999 plan years. During 2004, Employer A made corrective contributions on behalf of the
affected participants. The corrective contributions were credited with earnings at a rate appropriate for the
plan from the date the corrective contribution should have been made to the date of correction and
Employer A otherwise complied with the requirements of SCP. Under these facts, Employer A has, within
the correction period, corrected the Operational Failures for the 1998 and 1999 plan years with respect to
the assets transferred to Plan A, and thus satisfied the requirements of this section 9.
PART V. VOLUNTARY CORRECTION PROGRAM WITH SERVICE APPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements. The requirements of this section 10 are satisfied with
respect to failures submitted in accordance with the requirements of this section 10 if the
Plan Sponsor pays the compliance fee required under section 12 and implements the
corrective actions and satisfies any other conditions in the compliance statement
described in section 10.08.
.02 Identification of failures
. VCP is not based upon an examination of the plan by
the Service. Only the failures raised by the Plan Sponsor or failures identified by the
Service in processing the application are addressed under VCP, and only those failures
will be covered by the VCP compliance statement. The Service will not make any
investigation or finding under VCP concerning whether there are failures.
.03 Effect of VCP submission on examination. Because VCP does not arise out of
an examination, consideration under VCP does not preclude or impede (under § 7605(b)
or any administrative provisions adopted by the Service) a subsequent examination of the
Plan Sponsor or the plan by the Service with respect to the taxable year (or years)
involved with respect to matters that are outside the compliance statement. However, a
- 38 -
Plan Sponsor's statements describing failures are made only for purposes of VCP and will
not be regarded by the Service as an admission of a failure for purposes of any
subsequent examination. See section 5.03 for the definition of Under Examination.
.04 No concurrent examination activity
. Except in unusual circumstances, a plan
that has been properly submitted under VCP will not be examined while the submission is
pending. Notwithstanding the above, a plan that is eligible for a Group Submission under
section 10.11 may be examined while the Group Submission is pending with respect to
issues not identified in the Group Submission at the time such plan comes Under
Examination. In addition, if it is determined that either the plan or the Plan Sponsor was,
or may have been a party to an abusive tax avoidance transaction (as defined in section
4.13(2)), the Service may authorize the examination of the plan, even if a submission
pursuant to VCP is pending. This practice regarding concurrent examinations does not
extend to other plans of the Plan Sponsor. Thus, any plan of the Plan Sponsor that is not
pending under VCP could be subject to examination.
.05 Determination letter application for plan amendments related to a VCP
submission. In any case in which a determination letter is submitted pursuant to section
4.06, the Plan Sponsor must submit a copy of the amendment, the appropriate application
form (i.e., Form 5300 series) , and the appropriate user fee concurrently and to the same
address as the VCP submission. The user fee for the determination letter application and
the fee for the VCP submission must be submitted on separate checks made payable to
the U.S. Treasury. See section 11.12 for the VCP mailing address.
.06 Determination letter applications not related to a VCP submission. (1) The
Service may process a determination letter application submitted under the determination
letter program (including an application requested on Form 5310) concurrently with a VCP
submission for the same plan. However, issuance of the determination letter in response
to an application made on a Form 5310 will be suspended pending the closure of the VCP
submission.
(2) A submission of a plan under the determination letter program does not
constitute a submission under VCP. If the Plan Sponsor discovers a Qualification Failure,
the Qualification Failure may not be corrected as part of the determination letter process.
The Plan Sponsor may use SCP and VCP instead, as applicable. If the Service in
connection with a determination letter application discovers a Qualification Failure, the
Service may issue a closing agreement with respect to the failures identified or, if
appropriate, refer the case to Employee Plans Examinations. In either case, the fee
structure in section 12, relating to VCP will not apply. Except as provided in section
10.06(3), the fee structure in section 14 relating to Audit CAP will apply. See section
5.03(3) for a description of when a plan submitted for a determination letter is considered
to be Under Examination.
- 39 -
(3) If the Service in connection with a determination letter application discovers the
plan has not been amended timely for tax legislation changes, the fee structure in section
14.04 will apply.
.07 Processing of submission
. (1) Screening of submission. Upon receipt of a
submission under VCP, the Service will review 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 Service
determines that a VCP submission is seriously deficient or that the application of VCP
would be inappropriate or impractical, the Service reserves the right to return the
submission, including any compliance fee, without contacting the Plan Sponsor.
(3) Review of submission. Once the Service determines that the submission is
complete under VCP, the Service will consult with the Plan Sponsor or the Plan Sponsor's
representative to discuss the proposed corrections and the plan's administrative
procedures.
(4) Additional information required. If additional information is required, a
Service representative will generally contact the Plan Sponsor or the Plan Sponsor's
representative and explain what is needed to complete the submission. The Plan Sponsor
will have 21 calendar days from the date of this contact to provide the requested
information. If the information is not received within 21 days, the matter will be closed,
the compliance fee will not be returned, and the case may be referred to Employee Plans
Examinations. Any request for an extension of the 21-day time period must be made in
writing within the 21-day time period and must be approved by the Service (by the
applicable group manager).
(5) Additional failures discovered after initial submission. (a) A Plan Sponsor that
discovers additional unrelated Qualification or 403(b) Failures after its initial submission
may request that such failures be added to its submission. However, the Service retains
the discretion to reject the inclusion of such failures if the request is not timely; for
example, if the Plan Sponsor makes its request when processing of the submission is
substantially complete.
(b) If the Service discovers an unrelated Qualification or 403(b) Failure while
the request is pending, the failure generally will be added to the failures under
consideration. However, the Service retains the discretion to determine that a failure is
outside the scope of the voluntary request for consideration because the Plan Sponsor
did not voluntarily bring it forward. In this case, if the additional failure is significant, all
aspects of the plan may be examined and the rules pertaining to Audit CAP will apply.
(6) Conference right. If the Service initially determines that it cannot issue a
compliance statement because the parties cannot agree upon correction or a change in
- 40 -
administrative procedures, the Plan Sponsor (generally through the Plan Sponsor's
representative) will be contacted by the Service representative and offered a conference
with the Service. The conference can be held either in person or by telephone and must
be held within 21 calendar days of the date of contact. The Plan Sponsor will have 21
calendar days after the date of the conference to submit additional information in support
of the submission. Any request for an extension of the 21-day time period must be made
in writing within the 21-day time period and must be approved by the Service (by the
applicable group manager). Additional conferences may be held at the discretion of the
Service.
(7) Failure to reach resolution. If the Service and the Plan Sponsor cannot
reach agreement with respect to the submission, the matter will be closed, the
compliance fee will not be returned, and the case may be referred to Employee Plans
Examinations. In the case of an Anonymous Submission that fails to reach resolution
under this revenue procedure, the Service will refund 50% of the applicable VCP fee. See
section 12.01 for the VCP fee.
(8) Issuance of compliance statement. If agreement is reached, the Service will
send to the Plan Sponsor a compliance statement specifying the corrective action
required. If the original submission is subsequently materially modified, then, unless the
Plan Sponsor has submitted a penalty of perjury statement with respect to such
subsequent modifications, the Plan Sponsor will be required to sign the compliance
statement. In such case, the Service will send to the Plan Sponsor an unsigned
compliance statement specifying the corrective action required. Within 30 calendar days
of the date the compliance statement is sent, a Plan Sponsor must sign the compliance
statement and return it and any compliance fee required to be paid at the time that the
compliance statement is signed (see section 11.05). The Service will then issue a signed
copy of the compliance statement to the Plan Sponsor. If the Plan Sponsor does not sign
the compliance statement and send it to the Service (with a compliance fee, if applicable)
within 30 calendar days, the plan may be referred to Employee Plans Examinations.
(9) Timing of correction
. The Plan Sponsor must implement the specific
corrections and administrative changes set forth in the compliance statement within 150
days of the date of the compliance statement. Any request for an extension of this time
period must be made prior to the expiration of the correction period and in writing and
must be approved by the Service.
(10) Modification of compliance statement
. Once the compliance statement has
been issued (based on the information provided), the Plan Sponsor cannot request a
modification of the compliance terms except by a new request for a compliance
statement. However, if the requested modification is minor and is postmarked no later
than 30 days after the compliance statement is issued, the compliance fee for the
modification will be the lesser of the original compliance fee or $3,000.
- 41 -
(11) Verification. Once the compliance statement has been issued, the Service
may require verification that the correction methods have been complied with and that
any plan administrative procedures required by the compliance statement have been
implemented. This verification does not constitute an examination of the books and
records of the employer or the plan (within the meaning of § 7605(b)). If the Service
determines that the Plan Sponsor did not implement the corrections and procedures
within the stated time period, the plan may be referred to Employee Plans Examinations.
.08 Compliance statement. (1) General description of compliance statement.
The compliance statement issued for a VCP submission addresses the failures identified,
the terms of correction, including any revision of administrative procedures, and the time
period within which proposed corrections must be implemented, including any changes in
administrative procedures. The compliance statement also provides that the Service will
not treat the plan as failing to satisfy the applicable requirements of the Code on account
of the failures described in the compliance statement if the conditions of the compliance
statement are satisfied. Unless a determination letter application is included with a VCP
submission for an on-cycle or terminating plan in accordance with section 4.06, with
respect to a failure to amend a plan timely for (a) good faith plan amendments for the
Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 (EGTRRA),
within the period described in Notice 2001-42 including those changes listed in Notice
2005-5, (b) plan amendments for the final and temporary regulations under § 401(a)(9) as
they appeared in the April 1, 2003, edition of 26 CFR Part 1 (the § 401(a)(9) final and
temporary regulations) within the period described in Rev. Proc. 2002-29 as modified by
Rev. Proc. 2003-10, and (c) interim amendments as provided in section 5 of Rev. Proc.
2005-66, the issuance of a compliance statement will result in the corrective amendments
being treated as if they had been adopted timely for the purpose of determining the
availability of the remedial amendment period currently described in Rev. Proc. 2005-66.
However, the issuance of such a compliance statement will not constitute a determination
as to whether the plan amendment as drafted complies with the change in qualification
requirement. Where current procedures are inadequate for operating the plan in
conformance with the applicable requirements of the Code, the compliance statement will
be conditioned upon the implementation of stated administrative procedures. The Service
may prescribe appropriate administrative procedures in the compliance statement.
(2) 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.
(3) Authority delegated. Compliance statements (including relief from any
excise tax as provided under section 6.09) are authorized to be signed by Area Managers
reporting to the Director, Employee Plans Examinations, and managers within Employee
Plans Rulings and Agreements, under the Tax Exempt and Government Entities
Operating Division of the Service.
- 42 -
.09 Effect of compliance statement on examination. The compliance statement is
binding upon both the Service and the Plan Sponsor or Eligible Organization (as defined
in section 10.11(2)) with respect to the specific tax matters identified therein for the
periods specified, but does not preclude or impede an examination of the plan by the
Service relating to matters outside the compliance statement, even with respect to the
same taxable year or years to which the compliance statement relates.
.10 Special rules relating to Anonymous (John Doe) Submissions. (1) The
Anonymous Submission procedure in this section 10.10 permits submission of Qualified
Plans, 403(b) Plans, SEPs and SIMPLE IRA Plans under VCP without initially identifying
the applicable plan(s), the Plan Sponsor(s), or the Eligible Organization. The
requirements of this revenue procedure relating to VCP, including sections 10, 11, and
12, apply to these submissions. However, information identifying the plan or the Plan
Sponsor may be redacted (and the power of attorney statement and the penalty of perjury
statement need not be included with the initial submission). In addition, if a determination
letter application will be requested as part of the submission, the determination letter
application should not be submitted until the time all identifying information is provided to
the Service. For purposes of processing the submission, the State of the Plan Sponsor
must be identified in the initial submission. All anonymous submissions must be
numbered or labeled on the first page of the VCP submission by the plan sponsor or its
representative to facilitate identification and tracking of the submission. The identification
number should be unique to the submission and should not be used with respect to any
other anonymous submission of the plan sponsor or representative. Once the Service and
the plan representative reach agreement with respect to the submission, the Service will
contact the plan representative in writing indicating the terms of the agreement. The Plan
Sponsor will have 21 calendar days from the date of the letter of agreement to identify the
plan and Plan Sponsor. If the Plan Sponsor does not submit the identifying material
(including the power of attorney statement and the penalty of perjury statement) within 21
calendar days of the letter of agreement, the matter will be closed and the compliance fee
will not be returned.
(2) Notwithstanding section 10.04, until the plan(s) and Plan Sponsor(s) are
identified to the Service, a submission under this subsection does not preclude or impede
an examination of the Plan Sponsor or its plan(s). Thus, a plan submitted under the
Anonymous Submission procedure that comes Under Examination prior to the date the
plan(s) and Plan Sponsor(s) identifying materials are received by the Service will no
longer be eligible under VCP.
.11 Special rules relating to Group Submissions
. (1) General rules. An Eligible
Organization may submit a VCP request for a Qualified Plan, a 403(b) Plan, a SEP, or a
SIMPLE IRA Plan under a Group Submission for Plan Document, Operational and
Employer Eligibility Failures. If a Sponsor of a master or prototype plan submits failures
with respect to more than one master or prototype plan, each plan will be treated as a
- 43 -
separate submission and a separate fee must be submitted for each prototype plan.
Similarly, if a Volume Submitter practitioner submits failures with respect to more than
one Volume Submitter plan, each plan will be treated as a separate submission and a
separate fee must be submitted for each specimen plan.
(2) Eligible Organizations. For purposes of a Group Submission, the term
“Eligible Organization” means either (a) a Sponsor (as that term is defined in section 4.07
of Rev. Proc. 2005-16, 2005-10 I.R.B. 674) of a master or prototype plan, (b) a Volume
Submitter practitioner, as that term is defined in section 13.04 of Rev. Proc. 2005-16, (c)
an insurance company or other entity that has issued annuity contracts or provides
services with respect to assets for 403(b) Plans, or (d) an entity that provides its clients
with administrative services with respect to Qualified Plans, 403(b) Plans, SEPs or
SIMPLE IRA Plans. An Eligible Organization is not eligible to make a Group Submission
unless the submission includes a failure resulting from a systemic error involving the
Eligible Organization that affects at least 20 plans and that result in at least 20 plans
implementing correction. If, at any time before the Service issues the compliance
statement, the number of plans falls below 20, the Eligible Organization must notify the
Service that it is no longer eligible to make a Group Submission (and the compliance fee
may be retained).
(3) Special Group Submission procedures. (a) In general, a Group
Submission is subject to the same procedures as any VCP submission in accordance
with sections 10 and 11, except that the Eligible Organization is responsible for
performing the procedural obligations imposed on the Plan Sponsor under sections 10
and 11. See section 11.02(15) for a special submission requirement with respect to
Group Submissions.
(b) The Eligible Organization must provide notice to all Plan Sponsors of the
plans included in the Group Submission. The notice must be provided at least 90 days
before the Eligible Organization provides the Service with the information required in
section 10.11(3)(c). The purpose of the notice is to provide each Plan Sponsor with
information relating to the Group Submission request. The notice should explain the
reason for the Group Submission and inform the Plan Sponsor that the Plan Sponsor’s
plan will be included in the Group Submission unless the Plan Sponsor responds within
the 90-day period to exclude the Plan Sponsor’s plan from the Group Submission.
(c) When an Eligible Organization receives an unsigned compliance
statement on the proposed correction and agrees to the terms of the compliance
statement, the Eligible Organization must return to the Service within 120 calendar days
not only the signed compliance statement and any additional compliance fee under
section 12.05, but also a list containing (i) the employers’ tax identification numbers for
the Plan Sponsors of the plans to which the compliance statement may be applicable, (ii)
the plans by name, plan number, type of plan and number of plan participants, (iii) a
certification that each Plan Sponsor received notice of the Group Submission, and (iv) a
- 44 -
certification that each Plan Sponsor timely filed the Form 5500 return for each plan. This
list can be submitted at any stage of the submission process provided that the
requirements of section 10.11(3)(b) have been satisfied. Applicants are encouraged to
submit the list on a computer disk in Microsoft Word. Only those plans for which
correction is actually made within 240 calendar days of the date of the signed compliance
statement (or within such longer period as may be agreed to by the Service at the request
of the Eligible Organization) will be covered by the compliance statement.
(d) Notwithstanding section 4.02, if a Plan Sponsor of a plan that is
eligible to be included in the Group Submission is notified of an impending Employee
Plans examination after the Eligible Organization filed the Group Submission application,
the Plan Sponsor’s plan will be included in the Group Submission. However, with respect
to such plan, the Group Submission will not preclude or impede an examination of the
plan with respect to any failures not identified in the Group Submission application at the
time the plan comes Under Examination.
.12 Multiemployer and multiple employer plans. (1) In the case of a multiemployer
or multiple employer plan, the plan administrator (rather than any contributing or adopting
employer) must request consideration of the plan under the programs. The request must
be with respect to the plan, rather than a portion of the plan affecting any particular
employer.
(2) If a VCP submission for a multiemployer or multiple employer plan has
failures that apply to fewer than all of the employers under the plan, the plan administrator
may choose to have the compliance fee (in section 12) or sanction (in section 14)
calculated separately for each employer based on the assets attributable to that
employer, rather than being attributable to the assets of the entire plan. Thus, the plan
administrator may choose to apply the provisions of this paragraph where the failure is
attributable in whole or in part to data, information, actions, or inactions that are within the
control of the employers rather than the multiemployer or multiple employer plan (such as
attribution in whole or in part to the failure of a employer to provide the plan administrator
with full and complete information).
SECTION 11. APPLICATION PROCEDURES FOR VCP
.01 General rules. The requirements of this section 11 are satisfied if the request
for a compliance statement from the Service under VCP satisfies the informational and
other requirements of this section 11. In general, a request under VCP consists of a letter
from the Plan Sponsor (which may be a letter from the Plan Sponsor's representative) or
Eligible Organization (or representative) to the Service that contains a description of the
failures, a description of the proposed methods of correction, and other procedural items,
and includes supporting information and documentation as described below. If the sole
failure involves the failure by the Plan Sponsor to amend a plan timely for (a) good faith
- 45 -
plan amendments for EGTRRA, (b) plan amendments for the final and temporary
regulations under § 401(a)(9) or (c) interim amendments, then the Plan Sponsor may
follow the streamlined submission procedure described in Appendix F. In such
circumstance, a complete submission pursuant to Appendix F will satisfy the submission
requirements provided below.
.02 Submission requirements. The letter from the Plan Sponsor or the Plan
Sponsor's representative must contain the following:
(1) A statement identifying the type of plan submitted (e.g., Qualified Plan,
403(b) Plan, SEP, or SIMPLE IRA Plan) and, if applicable, whether the submission is a
Group Submission, an Anonymous Submission, a nonamender submission, a
multiemployer or multiple employer plan submission, or an Orphan Plan submission. In
addition, if the submission involves a Qualified Plan, the statement should also identify
the type of Qualified Plan being submitted (e.g. Defined Benefit, Money Purchase, Profit
Sharing, or Stock Bonus, and 401(k) or ESOP).
(2) A complete description of the failures, the years in which the failures
occurred, including closed years (that is, years for which the statutory period has expired),
and the number of employees affected by each failure.
(3) A description of the administrative procedures in effect at the time the
failures occurred.
(4) An explanation of how and why the failures arose.
(5) A detailed description of the method for correcting the failures that the
Plan Sponsor has implemented or proposes to implement. Each step of the correction
method must be described in narrative form. The description must include the specific
information needed to support the suggested correction method. This information
includes, for example, the number of employees affected and the expected cost of
correction (both of which may be approximated if the exact number cannot be determined
at the time of the request), the years involved, and calculations or assumptions the Plan
Sponsor used to determine the amounts needed for correction.
(6) A description of the methodology that will be used to calculate earnings
or actuarial adjustments on any corrective contributions or distributions (indicating the
computation periods and the basis for determining earnings or actuarial adjustments, in
accordance with section 6.02(4)).
(7) Specific calculations for each affected employee or a representative
sample of affected employees. The sample calculations must be sufficient to
demonstrate each aspect of the correction method proposed. For example, if a Plan
- 46 -
Sponsor requests a compliance statement with respect to a failure to satisfy the
contribution limits of § 415(c) and proposes a correction method that involves elective
contributions (whether matched or unmatched) and matching contributions, the Plan
Sponsor must submit calculations illustrating the correction method proposed with respect
to each type of contribution. As another example, with respect to a failure to satisfy the
ADP test in § 401(k)(3), the Plan Sponsor must submit the ADP test results both before
the correction and after the correction.
(8) The method that will be used to locate and notify former employees and
beneficiaries, or an affirmative statement that no former employees or beneficiaries were
affected by the failures or will be affected by the correction.
(9) A description of the measures that have been or will be implemented to
ensure that the same failures will not recur.
(10) A statement that, to the best of the Plan Sponsor's knowledge, neither
the plan nor the Plan Sponsor is Under Examination.
(11) A statement that neither the plan nor the Plan Sponsor has been a
party to an abusive tax avoidance transaction (as defined in section 4.13(2)) or a brief
identification of any abusive tax avoidance transaction to which the plan or the Plan
Sponsor has been a party.
(12) If a submission includes a failure that relates to Transferred Assets and
the failure occurred prior to the transfer, a description of the transaction (including the
dates of the employer change and the plan transfer).
(13) A statement (if applicable) that the plan is currently being considered in
a determination letter application that is not related to the VCP application. If the request
for a determination letter is made while a request for consideration under VCP is pending,
the Plan Sponsor must update the VCP request to add this information.
(14) In the case of a 403(b) Plan submission, a statement that the Plan
Sponsor has contacted all other entities involved with the plan and has been assured of
cooperation in implementing the applicable correction, to the extent necessary. For
example, if the plan’s failure is the failure to satisfy the requirements of § 403(b)(1)(E) on
elective deferrals, the Plan Sponsor must, prior to making the VCP application, contact
the insurance company or custodian with control over the plan’s assets to assure
cooperation in effecting a distribution of the excess deferrals and the earnings thereon.
An application under VCP must also contain a statement as to the type of employer (e.g.,
a tax-exempt organization described in § 501(c)(3)) submitting the VCP application.
(15) A Group Submission must be signed by the Eligible Organization or the
Eligible Organization's authorized representative and accompanied by a copy of the
- 47 -
relevant portions of the plan document(s). In addition, a Group Submission must include
a separate page for each affected Plan Sponsor that provides the Plan Sponsor’s name,
EIN, plan name, and failure(s).
.03 Required documents
. A VCP submission must be accompanied by the
following documents:
(1) Form 5500 or similar information
. (a) In the case of a plan required to
file Form 5500, a copy of the first three pages of the most recently filed Form 5500 series
return and the applicable Financial Information Schedule. In the case of a terminated
plan, the Form 5500 must be the one filed for the plan year prior to the plan year for which
the Final Form 5500 return was filed.
(b) In the case of any plan not required to file Form 5500, e.g., a
governmental plan, nonelecting church plan, SEP, SIMPLE IRA Plan, or an applicable
403(b) plan,
the information that generally would be included on the first three pages of
Form 5500, including the name and number of the plan, the Plan Sponsor’s EIN, and the
amount of plan assets to the extent that the information is available to the Plan Sponsor.
(c) In the case of an Anonymous Submission, the employee census may be
redacted and replaced by numbers that are rounded up.
(2) Plan document. A copy of the entire plan document or the relevant
portions of the plan document. For example, in a case involving an improper exclusion of
eligible employees from a profit-sharing plan with a cash or deferred arrangement,
relevant portions of the plan document include the eligibility, allocation, and cash or
deferred arrangement provisions of the basic plan document (and the adoption
agreement, if applicable), along with applicable definitions in the plan. If the plan is a
403(b) Plan and a plan document is not available, a written description of the plan should
be submitted, with sample salary reduction agreements if relevant. In the case of a SEP
and a SIMPLE IRA Plan, the entire plan document should be submitted.
(3) Determination letter application. In any case in which correction of a
Qualification Failure is made by plan amendment, as permitted under section 4.05, other
than the adoption of an amendment designated by the Service as a model amendment or
the adoption of a prototype or volume submitter plan for which the Plan Sponsor has
reliance on the plan’s opinion or advisory letter as provided in Rev. Proc. 2006-6, 2006-1
I.R.B. 204, and the Plan Sponsor is submitting a determination letter request as permitted
under section 4.06, the Plan Sponsor must submit a copy of the amendment, the
appropriate application form (i.e., Form 5300 series) to the extent required by section
4.06, and the appropriate user fee concurrently and to the same address as the VCP
submission. The user fee for the determination letter application and the fee for the VCP
submission must be submitted on separate checks made payable to the U.S. Treasury.
See section 11.12 for the VCP mailing address.
- 48 -
.04 Date fee due generally. Except as provided in sections 11.05 and 12.02(3), the
VCP fee under section 12 and, if applicable, the determination letter user fee, must be
included with the submission. The VCP fee and the determination letter user fee must be
submitted on separate checks made payable to the U.S. Treasury. If the appropriate fees
are not included in the submission, the submission will be returned.
.05 Additional fee due for SEPs, SIMPLE IRA Plans, and Group Submissions. In
the case of a SEP, a SIMPLE IRA Plan, or a Group Submission, the initial fee described
in section 12.02, 12.04, or 12.05 must be included in the submission and any additional
fee is due at the time the compliance statement is signed by the Plan Sponsor and
returned to the Service, or when agreement has been reached between the Service and
the Plan Sponsor regarding correction of the failure(s).
.06 Signed submission. The submission must be signed by the Plan Sponsor or
the sponsor's authorized representative.
.07 Power of attorney requirements. To sign the submission or to appear before
the Service in connection with the submission, the Plan Sponsor's representative must
comply with the requirements of section 9.02(11) and (12) of Rev. Proc. 2006-4, 2006-1
I.R.B. 132, and submit Form 2848 Power of Attorney and Declaration of Representative.
A Form 2848 that designates a representative not qualified to sign Part II of the Form
2848, e.g., an unenrolled return preparer, will not be accepted. A Plan Sponsor may
authorize an individual, such as an unenrolled return preparer, to inspect or receive
confidential information using Form 8821 Tax Information Authorization (See Form 8821
and Instructions.)
.08 Penalty of perjury statement. The following declaration must accompany a
request and any factual information or change in the submission at a later time: "Under
penalties of perjury, I declare that I have examined this submission, including
accompanying documents, and, to the best of my knowledge and belief, the facts
presented in support of this submission are true, correct, and complete." The
declaration must be signed by the Plan Sponsor, not the Plan Sponsor's representative.
. 09 Checklist.
The Service will be able to respond more quickly to a VCP request
if the request is carefully prepared and complete. The checklist in Appendix C is
designed to assist Plan Sponsors and their representatives in preparing a submission that
contains the information and documents required under this revenue procedure. The
checklist in Appendix C must be completed, signed, and dated by the Plan Sponsor or the
Plan Sponsor's representative. A photocopy of this checklist may be used.
.10 Designation
. The letter to the Service should indicate in the upper right hand
corner of the letter the type of plan submitted under VCP, a Qualified Plan, 403(b) Plan,
SEP, or SIMPLE IRA Plan. In addition, if the submission is a Group Submission, an
- 49 -
Anonymous Submission, a nonamender submission, a multiemployer or multiple
employer plan submission, or an Orphan Plan submission, the letter should so indicate.
.11 Acknowledgement Letter. The Service will acknowledge receipt of a VCP
submission if the Plan Sponsor or the Plan Sponsor’s representative completes the
Acknowledgement Form in Appendix E and includes it in the submission. A photocopy of
Appendix E may be used.
.12 VCP mailing address. All VCP submissions and accompanying determination
applications, if applicable, should be mailed to:
Internal Revenue Service
Attention: SE:T:EP:RA:VC
P.O. Box 27063
McPherson Station
Washington, D.C. 20038
.13 Maintenance of copies of submissions. Plan Sponsors and their
representatives should maintain copies of all correspondence submitted to the Service
with respect to their VCP requests.
.14 Assembling the submission. The Service will be able to process a submission
more quickly if the submission package contains all of the items required by the Appendix
C check list and is assembled in the following order:
1. If applicable, Form 8717 User Fee for Employee Plan Determination Letter Request
and the check for the determination letter user fee made payable to the U.S. Treasury.
2. Determination letter application (i.e., Form 5300 series form), if applicable
3. Submission signed by the Plan Sponsor or Plan Sponsor’s authorized representative,
with a check for the VCP fee made payable to the U.S. Treasury attached to the front
of the submission letter. The submission should include the following:
• Type of plan (or group of plans) being submitted
• Description of the failures (if the failures relate to Transferred Assets,
include a description of the related employer transaction)
• An explanation of how and why the failures arose
• Description of the method for correcting failures, including earnings
methodology (if applicable) and supporting computations (if applicable)
• Description of the method used to locate or notify former employees
affected by the failures or corrections. If no former employees are affected
by the failures or corrections, then the letter should affirmatively state that
position when addressing this issue.
- 50 -
• Description of the administrative procedures that have been or will be
implemented to ensure that the failures do not recur
• Whether a request that participant loans corrected under this revenue
procedure not be treated as distributions §72(p) is being made and
supporting rationale for such request. Alternatively, whether a request that
participant loans corrected under this revenue procedure should be treated
as distributions in the year of correction is being made and supporting
rationale for such request.
• Whether relief from imposition of the excise taxes under §§ 4972, 4974 or
4979 is being requested, and the supporting rationale for such relief
• If the plan is an Orphan Plan, whether relief from the VCP application fee is
being requested, and the supporting rationale for such relief
• A statement on whether the plan is being considered in an unrelated
determination letter application (if applicable)
• Statement that the plan is not Under Examination
• Statement that the Plan Sponsor is not under an Exempt Organizations
examination
• A statement that neither the plan nor the Plan Sponsor has been a party to
an abusive tax avoidance transaction (as defined in section 4.13(2)) or a
brief identification of any abusive tax avoidance transaction to which the
plan or the Plan Sponsor has been a party.
• Penalty of perjury statement
4. Completed and signed Appendix C checklist
5. Appendix E acknowledgement letter
6. Power of attorney (Form 2848) or Tax Information Authorization (Form 8821), if
applicable
7. Form 5500, (first three pages and the applicable Financial Information Schedule) or
equivalent information
8. Copy of opinion or determination letter (if applicable)
9. Relevant plan document language or plan document (if applicable)
10. Any other items that may be relevant to the submission
SECTION 12. VCP FEES
.01 VCP fees
. The compliance fees for all submissions under VCP are
determined under this section 12. All fees must be submitted by check made payable to
the U.S. Treasury and, except for the special fees described in sections 12.04 and
12.05(2), must be included with the initial submission.
.02 VCP fee for Qualified Plans and 403(b) Plans. (1) Subject to section
12.02(2), the compliance fee for a submission under VCP for Qualified Plans and 403(b)
- 51 -
Plans (including Anonymous Submissions) is determined in accordance with the following
chart.
Number of Participants Fee
20 or fewer $ 750
21 to 50 $ 1,000
51 to 100 $ 2,500
101 to 500 $ 5,000
501 to 1,000 $ 8,000
1001 to 5,000 $ 15,000
5,001 to 10,000 $ 20,000
Over 10,000 $ 25,000
(2) If (a) the VCP submission involves the failure to satisfy the minimum
distribution requirements of § 401(a)(9) for 50 or fewer participants, (b) such failure is the
only failure of the submission, and (c) the failure would result in the imposition of the
excise tax under § 4974, the compliance fee is $500.
(3) At the discretion of the Service, the VCP fee may be waived in the case
of a terminating Orphan Plan. In such cases, the submission must include a request for a
waiver of the VCP fee.
.03 VCP fee for nonamender failures. In general, the compliance fee for plans
with a nonamender failure, as described in section 4.06, is determined in accordance with
the chart in section 12.02. The applicable fee for a VCP submission that contains only
nonamender failures is reduced by 50% if it is submitted within a one-year period
following the expiration of the plan’s remedial amendment period for complying with such
changes. Notwithstanding the above, the compliance fee for a submission that contains
only a failure to amend the plan timely with respect to (a) good faith plan amendments for
EGTRRA within the period described in Notice 2001-42 including those changes listed in
Notice 2005-5, (b) plan amendments for the § 401(a)(9) final and temporary regulations
within the period described in Rev. Proc. 2002-29, as modified by Rev. Proc. 2003-10, or
(c) interim amendments as provided in section 5 of Rev. Proc. 2005-66 is $375.00.
.04 VCP fee for Group Submission. The compliance fee for a Group Submission
is based on the number of plans affected by the failure as described in the compliance
statement. The initial fee for the first 20 plans is $10,000. An additional fee is due equal
to the product of the number of plans in excess of 20 multiplied by $250. The maximum
compliance fee for a Group Submission is $50,000. If more than one master or prototype
plan is submitted as a Group Submission, each master or prototype plan is considered a
separate Group Submission for purposes of the compliance fee.
- 52 -
.05 VCP fee for SEPs and SIMPLE IRA Plans. (1) In general, the compliance fee
for a SEP or a SIMPLE IRA Plan submission (including an Anonymous Submission) is
$250. Notwithstanding the preceding sentence, the Service reserves the right to impose
the fee schedule under section 12.02 or section 12.06 in appropriate circumstances.
(2) In any case in which a SEP or SIMPLE IRA Plan correction is not similar
to a correction for a similar Qualification Failure (as provided under section 6.10(1)), the
Service may impose an additional fee. If the failure involves an Excess Amount to a SEP
or a SIMPLE IRA Plan and the Plan Sponsor retains the Excess Amount in the SEP or
SIMPLE IRA Plan, a fee equal to at least 10 percent of the Excess Amount excluding
earnings will be imposed. This is in addition to the SEP or SIMPLE IRA Plan compliance
fee set forth in section 12.05(1).
.06 VCP fee for egregious failures. Notwithstanding the preceding provisions of
this section 12, in cases involving failures that are egregious (as described in section
4.08), the compliance fee for Qualified Plans, 403(b) Plans, SEPs and SIMPLE IRA Plans
is the greater of (1) the fee that would be determined under the preceding provisions of
this section 12, or (2) an amount equal to a negotiated percentage of the Maximum
Payment Amount, such percentage not to exceed 40 percent.
.07 Establishing the number of plan participants. Compliance fees under this
section 12 are determined based on the total number of plan participants. For a
description of participant, see the Instructions for Form 5500, lines 6 and 7. For new plans
and ongoing plans, the number of plan participants is determined from the most recently
filed Form 5500 series. Thus, with respect to the 2004 Form 5500, the Plan Sponsor
would use the number shown in item 7f (or the equivalent item on the Form 5500 C/R or
EZ) to establish the total number of plan participants. In the case of a terminated plan, the
Form 5500 used to determine the number of plan participants must be the one filed for
the plan year prior to the plan year for which the Final Form 5500 return was filed. If the
submission involves a plan with Transferred Assets and no new incidents of the failure
occurred after the end of the second plan year that begins after the corporate merger,
acquisition, or other similar employer transaction, the Plan Sponsor may calculate the
number of plan participants based on the Form 5500 information that would have been
filed by the Plan Sponsor for the plan year that includes the employer transaction if the
Transferred Assets were maintained as a separate plan.
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
- 53 -
.01 Audit CAP requirements. If the Service identifies a Qualification or 403(b)
Failure (other than a failure that has been corrected in accordance with SCP or VCP)
upon an Employee Plans or Exempt Organizations examination of a Qualified Plan,
403(b) Plan, SEP, or SIMPLE IRA Plan, the requirements of this section 13 are satisfied
with respect to the failure if the Plan Sponsor corrects the failure, pays a sanction in
accordance with section 14, satisfies any additional requirements of section 13.03, and
enters into a closing agreement with the Service.
.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 U.S. Treasury.
.03 Additional requirements. Depending on the nature of the failure, the Service
will discuss the appropriateness of the plan's existing administrative procedures with the
Plan Sponsor. If existing administrative procedures are inadequate for operating the plan
in conformance with the applicable requirements of the Code, the closing agreement may
be conditioned upon the implementation of stated procedures. In addition, for Qualified
Plans, pursuant to section 4.06, the Plan Sponsor may be required to obtain a Favorable
Letter before the closing agreement is signed. If a Favorable Letter is required, the Plan
Sponsor is required to pay the applicable user fee for obtaining the letter.
.04 Failure to reach resolution. If the Service and the Plan Sponsor cannot reach
an agreement with respect to the correction of the failure(s) or the amount of the sanction,
the plan will be disqualified or, in the case of a 403(b) Plan, SEP, or SIMPLE IRA Plan will
not have reliance on this revenue procedure.
.05 Effect of closing agreement. A closing agreement constitutes an agreement
between the Service and the Plan Sponsor that is binding with respect to the tax matters
identified therein for the periods specified.
.06 Other procedural rules
. The procedural rules for Audit CAP are set forth in
Internal Revenue Manual ("IRM") 7.2.2, EPCRS.
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction
. Except as otherwise provided in section 14.04, the
sanction under Audit CAP is a negotiated percentage of the Maximum Payment Amount.
Sanctions will not be excessive and will bear a reasonable relationship to the nature,
extent, and severity of the failures, based on the factors below.
.02 Factors considered. Factors include: (1) the steps taken by the Plan Sponsor
to ensure that the plan had no failures; (2) the steps taken to identify failures that may
- 54 -
have occurred; (3) the extent to which correction had progressed before the examination
was initiated, including full correction; (4) the number and type of employees affected by
the failure; (5) the number of nonhighly compensated employees who would be adversely
affected if the plan were not treated as qualified or as satisfying the requirements of
§ 403(b), § 408(k) or § 408(p); (6) whether the failure is a failure to satisfy the
requirements of § 401(a)(4), § 401(a)(26), or § 410(b), either directly or through
§ 403(b)(12); (7) the period over which the failure(s) occurred (for example, the time that
has elapsed since the end of the applicable remedial amendment period under § 401(b)
for a Plan Document Failure; and (8) the reason for the failure(s) (for example, data errors
such as errors in transcription of data, the transposition of numbers, or minor arithmetic
errors). Factors relating only to Qualified Plans also include: (1) whether the plan is the
subject of a Favorable Letter; (2) whether the plan has both Operational and other
failures; (3) the extent to which the plan has accepted Transferred Assets, and the extent
to which the failure(s) relate to Transferred Assets and occurred before the transfer; and
(4) whether the failure(s) were discovered during the determination letter process. If one
of the failures discovered during an Employee Plans examination includes the failure to
amend the plan timely for relevant legislation, it is expected that the sanction will be
greater than the applicable fee described in section 14.04. Additional factors relating only
to 403(b) Plans include: (1) whether the plan has a combination of Operational,
Demographic, or Employer Eligibility Failures; (2) the extent to which the failure relates to
Excess Amounts; and (3) whether the failure is solely an Employer Eligibility Failure.
.03 Transferred Assets. If the examination involves a plan with Transferred
Assets and the Service determines that no new incidents of the failures that relate to the
Transferred Assets occur after the end of the second plan year that begins after the
corporate merger, acquisition, or other similar employer transaction, the sanction under
Audit CAP will not exceed the sanction that would apply if the Transferred Assets were
maintained as a separate plan.
.04 Fee for nonamenders discovered during the determination letter application
process not related to a VCP submission. (1) The compliance fee for nonamenders (as
defined in section 4.06) not voluntarily identified by the Plan Sponsor, but instead
discovered by the Service in connection with the determination letter application process
as described in section 5.03(3) is determined in accordance with the chart below. This fee
schedule applies if the only failure in the submission is the nonamender failure.
(2) The acronyms listed in the chart refer to the following laws:
(a) Employee Retirement Income Security Act of 1974 (ERISA),
(b) Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA); Deficit Reduction
Act of 1984 (DEFRA); and Retirement Equity Act of 1984 (REA) together
(T/D/R),
(c) Tax Reform Act of 1986 (TRA ’86),
- 55 -
(d) Unemployment Compensation Act of 1992 (UCA); Omnibus Budget and
Reconciliation Act of 1993 (OBRA ’93),
(e) The Uruguay Round Agreements Act; the Uniformed Services Employment and
Reemployment Rights Act of 1994; the Small Business Job Protection Act of
1996; the Taxpayer Relief Act of 1997; the Internal Revenue Service
Restructuring and Reform Act of 1998; and the Community Renewal Tax Relief
Act of 2000 (collectively known as “GUST”),
(f) Final and temporary regulations under § 401(a)(9), 74 FR 18987, published on
April 17, 2002 (“401(a)(9) Regs”),
(g) The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”).
Number of
Participants
EGTRRA/
subsequent
legislation
GUST/
401(a)(9)
Regs
UCA/
OBRA
‘93
TRA ‘86
T/D/R
ERISA
20 or less
$ 2,500 $ 3,000 $ 3,500 $ 4,000 $ 4,500 $ 5,000
21-50
$ 5,000 $ 6,000 $ 7,000 $ 8,000 $ 9,000 $10,000
51-100
$ 7,500 $ 9,000 $10,500 $12,000 $13,500 $15,000
101-500
$12,500 $15,000 $17,500 $20,000 $22,500 $25,000
501-1,000
$17,500 $21,000 $24,500 $28,000 $31,500 $35,000
1,001-5,000
$25,000 $30,000 $35,000 $40,000 $45,000 $50,000
5,001 – 10,000
$32,500 $39,000 $45,500 $52,000 $58,500 $65,000
Over 10,000
$40,000 $48,000 $56,000 $64,000 $72,000 $80,000
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK
REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2003-44 modified and superseded
. Rev. Proc. 2003-44 is modified
and superseded by this revenue procedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is generally effective September 1, 2006. However, (1)
sections 11.11, 11.14, and 14.04 are effective on or after May 30, 2006, and (2) plan
sponsors are permitted, at their option, to apply the provisions of this revenue procedure
on or after May 30, 2006.
- 56 -
Specifically, except in the case of (1) above and unless a plan sponsor applies the
provisions of this revenue procedure earlier, this revenue procedure is effective:
(a) with respect to SCP, for failures for which correction is not complete before
September 1, 2006;
(b) with respect to VCP, for applications submitted on or after September 1, 2006;
and
(c) with respect to Audit CAP, for examinations begun on or after September 1,
2006.
SECTION 17. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1673.
An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays a valid OMB control
number.
The collection of information in this revenue procedure is in sections 4.05,
6.02(5)(d), 6.05, 10.01, 10.02, 10.05-.07, 10.10-10.12, 11.02-11.04, 11.06-11.14, 13.01,
section 2.01-2.07 of Appendix B, Appendix C, and Appendix E. This information is
required to enable the Commissioner, Tax Exempt and Government Entities Division of
the Internal Revenue Service to make determinations regarding the issuance of various
types of closing agreements and compliance statements. This information will be used to
issue closing agreements and compliance statements to allow individual plans to continue
to maintain their tax qualified and tax-deferred status. As a result, favorable tax treatment
of the benefits of the eligible employees is retained. The likely respondents are
individuals, state or local governments, businesses or other for-profit institutions, nonprofit
institutions, and small businesses or organizations.
The estimated total annual reporting or recordkeeping burden is 76,222 hours.
The estimated annual burden per respondent/recordkeeper varies from .5 to 45.5
hours, depending on individual circumstances, with an estimated average of 20.4 hours.
The estimated number of respondents or recordkeepers is 3,745.
The estimated frequency of responses is occasional.
Books or records relating to a collection of information must be retained as long as
their contents may become material in the administration of any internal revenue law.
- 57 -
Generally tax returns and tax return information are confidential, as required by 26 U.S.C.
§ 6103.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Avaneesh Bhagat and Louis Leslie
of the Tax Exempt and Government Entities Division. For further information concerning
this revenue procedure, please contact the Employee Plans’ taxpayer assistance
telephone service at 1-877-829-5500 between 8:30 a.m. and 6:30 p.m., Eastern Time,
Monday through Friday (a toll-free number). Mr. Bhagat and Mr. Leslie may be reached
at (202) 283-9888 (not a toll-free number).
- 58 -
APPENDIX A
OPERATIONAL FAILURES AND CORRECTION METHODS
.01 General rule. This appendix sets forth Operational Failures and Correction
Methods relating to Qualified Plans. In each case, the method described corrects the
Operational Failure identified in the headings below. Corrective allocations and
distributions should reflect earnings and actuarial adjustments in accordance with section
6.02(4) of Rev. Proc. 2006-27. The correction methods in this appendix are acceptable
under SCP and VCP. Additionally, the correction methods and the earnings adjustment
methods in Appendix B are acceptable under SCP and VCP. To the extent a failure listed
in this appendix could occur under a 403(b) Plan, a SEP or a SIMPLE IRA Plan, the
correction method listed for such failure may be used to correct the failure.
.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-
key employees. In a defined contribution plan, the permitted correction method is to
properly contribute and allocate the required top-heavy minimums to the plan in the
manner provided for in the plan on behalf of the non-key employees (and any other
employees required to receive top-heavy allocations under the plan). In a defined benefit
plan, the minimum required benefit must be accrued in the manner provided in the plan.
.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth in
§ 401(m)(2), or, for plan years beginning on or before December 31, 2001, the multiple
use test of § 401(m)(9). The permitted correction method is to make qualified nonelective
contributions (QNCs) (as defined in §1.401(k)-6 and formerly in § 1.401(k)-1(g)(13)(ii)) on
behalf of the nonhighly compensated employees to the extent necessary to raise the
actual deferral percentage or actual contribution percentage of the nonhighly
compensated employees to the percentage needed to pass the test or tests. The
contributions must be made on behalf of all eligible nonhighly compensated employees
(to the extent permitted under § 415) and must be the same percentage of compensation.
QNCs contributed to satisfy the ADP test need not be taken into account for determining
additional contributions (e.g., a matching contribution), if any. Employees who would
have been eligible for a matching contribution had they made elective contributions must
be counted as eligible employees for the ACP test, and the plan must satisfy the ACP
test. Under this correction method, a plan may not be treated as two separate plans, one
covering otherwise excludable employees and the other covering all other employees (as
permitted in § 1.410(b)-6(b)(3)), in order to reduce the number of employees eligible to
receive QNCs. 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
QNCs.
.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in
contravention of § 401(a)(30)). The permitted correction method is to distribute the
- 59 -
excess deferral to the employee and to report the amount as taxable in the year of
deferral and in the year distributed. In accordance with § 1.402(g)-1(e)(1)(ii), a
distribution to a highly compensated employee is included in the ADP test; a distribution
to a nonhighly compensated employee is not included in the ADP test.
.05 Exclusion of an eligible employee from all contributions or accruals under the
plan for one or more plan years. (1) For plans with employer provided contributions or
benefits (which are neither elective contributions under a qualified cash or deferred
arrangement under § 401(k) nor matching or after-tax employee contributions that are
subject to § 401(m)), the permitted correction method is to make a contribution to the plan
on behalf of the employees excluded from a defined contribution plan or to provide benefit
accruals for the employees excluded from a defined benefit plan.
(2) For plans providing benefits subject to § 401(k) or § 401(m), the corrective
contribution for an improperly excluded employee is described in the following
paragraphs. (See examples 3 through 10 of Appendix B.)
(a) If the employee was not provided the opportunity to elect and make elective
deferrals (other than designated Roth contributions) to a 401(k) plan that does not satisfy
the safe harbor contribution requirements of section 401(k)(12), the employer must make
a QNC to the plan on behalf of the employee that compensates for the “missed deferral
opportunity.” The missed deferral opportunity is equal to 50% of the employee’s “missed
deferral.” The missed deferral is determined by multiplying the actual deferral percentage
for the employee's group in the plan (either highly compensated or nonhighly
compensated) for the year of exclusion by the employee’s compensation for that year.
The employee’s missed deferral amount is reduced further to the extent necessary to
ensure that the missed deferral does not exceed applicable plan limits, including the
annual deferral limit under § 402(g) for the calendar year in which the failure occurred.
Under this correction method, a plan may not be treated as two separate plans, one
covering otherwise excludable employees and the other covering all other employees (as
permitted in § 1.410(b)-6(b)(3)) in order to reduce the applicable ADP, the corresponding
missed deferral and the required QNC. Likewise, restructuring the plan into component
plans is not permitted in order to reduce the applicable ADP, the corresponding missed
deferral and the required QNC. The QNC required to compensate the employee for the
missed deferral opportunity for the year of exclusion is adjusted for earnings until the
corrective QNC is made on behalf of the affected employee.
(b) 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 should make a QNC on
behalf of the affected employee. The QNC will be equal to the matching contribution the
employee would have received had the employee made a deferral equal to the missed
deferral determined under section .05(2)(a) of this Appendix A. The QNC must be
- 60 -
adjusted for earnings until the corrective QNC is made on behalf of the affected
employee.
(c) If the employee was not provided the opportunity to elect and make elective
deferrals (other than designated Roth contributions) to a safe harbor 401(k) plan that uses
a rate of matching contributions to satisfy the safe harbor requirements of § 401(k)(12),
then the missed deferral is deemed equal to the greater of 3% of compensation or the
maximum deferral percentage for which the employer provides a matching contribution
rate that is at least as favorable as 100% of the elective deferral made by the employee.
This estimate of the missed deferral replaces the estimate based on the ADP test in a
traditional 401(k) plan. The required QNC on behalf of the excluded employee is equal to
(i) the missed deferral opportunity, which is an amount equal to 50% of the missed
deferral, plus (ii) the matching contribution that would apply based on the missed deferral.
If an employee was not provided the opportunity to elect and make elective deferrals 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. The required QNC on behalf of the excluded employee is equal to (i) 50%
of the missed deferral, plus (ii) the nonelective contribution required to be made on behalf
of the employee. The QNC required to compensate the employee for the missed deferral
opportunity and the corresponding matching or nonelective contribution is adjusted for
earnings until the corrective QNC is made on behalf of the affected employee.
(d) If the employee should have been eligible to elect and make after-tax employee
contributions (other than designated Roth contributions), the employer must make a QNC
to the plan on behalf of the employee that is equal to the “missed opportunity for making
after-tax employee contributions.” The missed opportunity for making after-tax employee
contributions is equal to 40% of the employee’s “missed after-tax contributions.” The
employee’s missed after-tax contributions are equal to the actual contribution percentage
(ACP) for the employee’s group (either highly compensated or nonhighly compensated)
times the employee’s compensation, but with the resulting amount not to exceed
applicable plan limits. If the ACP consists of both matching and after-tax employee
contributions, then, in lieu of basing the employee’s missed after-tax employee
contributions on the ACP for the employee’s group, the employer is permitted to
determine separately the portion of the ACP that is attributable to after-tax employee
contributions for the employee’s group (either highly compensated or nonhighly
compensated), multiplied by the employee’s compensation for the year of exclusion. The
QNC also must be adjusted for earnings until the corrective QNC is made on behalf of the
affected employee.
(e) If the employee was improperly excluded from an allocation of employer
matching contributions because he or she was not given the opportunity to make after-tax
employee contributions (other than designated Roth contributions), the employer should
make a QNC on behalf of the affected employee. The QNC is equal to the matching
contribution the employee would have received had the employee made an after-tax
- 61 -
employee contribution equal to the missed after-tax employee contribution determined
under section .05(2)(d).
(f) The methods for correcting the failures described in this section .05(2) do not
apply until after the correction of other qualification failures. Thus, for example, if in
addition to the failure of excluding an eligible employee, the plan also failed the ADP or
ACP test, the correction methods described in section .05(2)(a) through (e) cannot be
used until after correction of the ADP or ACP test failures.
.06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a
defined contribution plan, the permitted correction method is to distribute the required
minimum distributions. The amount to be distributed for each year in which the failure
occurred should be determined by dividing the adjusted account balance on the
applicable valuation date by the applicable distribution period. For this purpose, adjusted
account balance means the actual account balance, determined in accordance with
§ 1.401(a)(9)-5 Q&A-3 of the regulations, reduced by the amount of the total missed
minimum distributions for prior years. In a defined benefit plan, the permitted correction
method is to distribute the required minimum distributions, plus an interest payment
representing the loss of use of such amounts.
.07 Failure to obtain participant or spousal consent for a distribution subject to the
participant and spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417. (1) The
permitted correction method is to give each affected participant a choice between
providing informed consent for the distribution actually made or receiving a qualified joint
and survivor annuity. In the event that participant or spousal consent is required but
cannot be obtained, the participant must receive a qualified joint and survivor annuity
based on the monthly amount that would have been provided under the plan at his or her
retirement date. This annuity may be actuarially reduced to take into account distributions
already received by the participant. However, the portion of the qualified joint and
survivor annuity payable to the spouse upon the death of the participant may not be
actuarially reduced to take into account prior distributions to the participant. Thus, for
example, if in accordance with the automatic qualified joint and survivor annuity option
under a plan, a married participant who retired would have received a qualified joint and
survivor annuity of $600 per month payable for life with $300 per month payable to the
spouse for the spouse’s life beginning upon the participant's death, but instead received a
single-sum distribution equal to the actuarial present value of the participant's accrued
benefit under the plan, then the $600 monthly annuity payable during the participant's
lifetime may be actuarially reduced to take the single-sum distribution into account.
However, the spouse must be entitled to receive an annuity of $300 per month payable
for life beginning at the participant's death.
(2) An alternative permitted correction method is to give each affected participant
a choice between (i) providing informed consent for the distribution actually made, (ii)
receiving a qualified joint and survivor annuity (both (i) and (ii) of this section .07(2) are as
- 62 -
described in section .07(1) of this Appendix A), or (iii) a single-sum payment equal to the
actuarial present value of that survivor annuity benefit (calculated using the applicable
interest rate and mortality table under § 417(e)(3)). For example, if the actuarial present
value of a $300 per month annuity payable to the spouse for the spouse’s life beginning
upon the participant's death is $7,837 (calculated using the applicable interest rate and
mortality table under § 417(e)(3), and based on the assumptions that the participant is
age 65, that the spouse is age 62, and that the applicable interest rate is 6%), then the
single-sum payment under clause (iii) of this section .07(2) is equal to $7,837. If the
spouse elects to receive the single-sum payment, then the payment is treated in the same
manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an
IRA or other eligible retirement plan.
.08 Failure to satisfy the § 415 limits in a defined contribution plan. The permitted
correction for failure to limit annual additions (other than elective deferrals and after-tax
employee contributions) allocated to participants in a defined contribution plan as required
in § 415 (even if the excess did not result from the allocation of forfeitures or from a
reasonable error in estimating compensation) is to place the excess annual additions into
an unallocated account, similar to the suspense account described in § 1.415-6(b)(6)(iii),
to be used as an employer contribution in the succeeding year(s). While such amounts
remain in the unallocated account, the employer is not permitted to make additional
contributions to the plan. The permitted correction for failure to limit annual additions that
are elective deferrals or employee contributions (even if the excess did not result from a
reasonable error in determining the amount of elective deferrals or after-tax employee
contributions that could be made with respect to an individual under the § 415 limits) is to
distribute the elective deferrals or after-tax employee contributions using a method similar
to that described under § 1.415-6(b)(6)(iv). Elective deferrals and after-tax employee
contributions that are matched may be returned, provided that the matching contributions
relating to such contributions are forfeited (which will also reduce excess annual additions
for the affected individuals). The forfeited matching contributions are to be placed into an
unallocated account to be used as an employer contribution in succeeding periods.
- 63 -
APPENDIX B
CORRECTION METHODS AND EXAMPLES;
EARNINGS ADJUSTMENT METHODS AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION
REFERENCES
.01 Purpose. (1) This appendix sets forth correction methods relating to
Operational Failures under Qualified Plans. This appendix also sets forth earnings
adjustment methods. The correction methods and earnings adjustment methods
described in this appendix are acceptable under SCP and VCP.
(2) To the extent a failure listed in this appendix could occur under a 403(b)
Plan, SEP, or a SIMPLE IRA Plan, the correction method listed for such failure may be
used to correct the failure.
.02 Assumptions for Examples. Unless otherwise specified, for ease of
presentation, the examples assume that:
(1) the plan year and the § 415 limitation year are the calendar year;
(2) the employer maintains a single plan intended to satisfy § 401(a) and
has never maintained any other plan;
(3) in a defined contribution plan, the plan provides that forfeitures are used
to reduce future employer contributions;
(4) the Qualification Failures are Operational Failures and the eligibility and
other requirements for SCP, VCP or Audit CAP, whichever applies, are satisfied; and
(5) there are no Qualification Failures other than the described Operational
Failures, and if a corrective action would result in any additional Qualification Failure,
appropriate corrective action is taken for that additional Qualification Failure in
accordance with EPCRS.
.03 Section references. References to section 2 and section 3 are references to
the section 2 and 3 in this appendix.
SECTION 2. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures.
(1) Correction Methods. (a) Appendix A Correction Method. Appendix A,
section .03 sets forth a correction method for a failure to satisfy the actual deferral
percentage ("ADP"), actual contribution percentage ("ACP"), or, for plan years beginning
on or before December 31, 2001, multiple use test set forth in §§ 401(k)(3), 401(m)(2),
and 401(m)(9), respectively.
- 64 -
(b) One-to-One Correction Method. (i) General. In addition to the
correction method in Appendix A, a failure to satisfy the ADP test, ACP test, or, for plan
years beginning on or before December 31, 2001, the multiple use test may be corrected
by using the one-to-one correction method set forth in this section 2.01(1)(b). Under the
one-to-one correction method, an excess contribution amount is determined and assigned
to highly compensated employees as provided in paragraph (1)(b)(ii) below. That excess
contribution amount (adjusted for earnings) is either distributed to the highly compensated
employees or forfeited from the highly compensated employees' accounts as provided in
paragraph (1)(b)(iii) below. That same dollar amount (i.e., the excess contribution amount,
adjusted for earnings) is contributed to the plan and allocated to nonhighly compensated
employees as provided in paragraph (1)(b)(iv) below. Under this correction method, a
plan may not be treated as two separate plans, one covering otherwise excludable
employees and the other covering all other employees (as permitted in § 1.410(b)-
6(b)(3)). Likewise, restructuring the plan into component plans is not permitted.
(ii) Determination of the Excess Contribution Amount. The excess contribution
amount for the year is equal to the excess of (A) the sum of the excess contributions (as
defined in § 401(k)(8)(B)), the excess aggregate contributions (as defined in
§ 401(m)(6)(B)), and for plan years beginning on or before December 31, 2001 the
amount treated as excess contributions or excess aggregate contributions under the
multiple use test for the year, as assigned to each highly compensated employee in
accordance with § 401(k)(8)(C) and (m)(6)(C), over (B) previous corrections that complied
with § 401(k)(8), (m)(6), and, for plan years beginning on or before December 31, 2001,
the multiple use test.
(iii) Distributions and Forfeitures of the Excess Contribution Amount. (A) The
portion of the excess contribution amount assigned to a particular highly compensated
employee under paragraph (1)(b)(ii) is adjusted for earnings through the date of
correction. The amount assigned to a particular highly compensated employee, as
adjusted, is distributed or, to the extent the amount was forfeitable as of the close of the
plan year of the failure, is forfeited. If the amount is forfeited, it is used in accordance with
the plan provisions relating to forfeitures that were in effect for the year of the failure. If
the amount so assigned to a particular highly compensated employee has been
previously distributed, the amount is an Excess Amount within the meaning of section
5.01(3) of this revenue procedure. Thus, pursuant to section 6.05 of this revenue
procedure, the employer must notify the employee that the Excess Amount was not
eligible for favorable tax treatment accorded to distributions from qualified plans (and,
specifically, was not eligible for tax-free rollover).
(B) If any matching contributions (adjusted for earnings) are forfeited in
accordance with § 411(a)(3)(G), the forfeited amount is used in accordance with the plan
provisions relating to forfeitures that were in effect for the year of the failure.
- 65 -
(C) If a payment was made to an employee and that payment is a forfeitable
match described in either paragraph (1)(b)(iii)(A) or (B), then it is an Overpayment defined
in section 5.01(6) of this revenue procedure that must be corrected (see sections 2.04
and 2.05 below).
(iv) Contribution and Allocation of Equivalent Amount. (A) The employer makes
a contribution to the plan that is equal to the aggregate amounts distributed and forfeited
under paragraph (1)(b)(iii)(A) (i.e., the excess contribution amount adjusted for earnings,
as provided in paragraph (1)(b)(iii)(A), which does not include any matching contributions
forfeited in accordance with § 411(a)(3)(G) as provided in paragraph (1)(b)(iii)(B)). The
contribution must satisfy the vesting requirements and distribution limitations of
§ 401(k)(2)(B) and (C).
(B)(1) This paragraph (1)(b)(iv)(B)(1) applies to a plan that uses the current year
testing method described in §1.401(k)-2(a)(2), §1.401(m)-2(a)(2) and, for periods prior to
the effective date of those regulations, Notice 98-1, 1998-1 C.B. 327. The contribution
made under paragraph (1)(b)(iv)(A) is allocated to the account balances of those
individuals who were either (I) the eligible employees for the year of the failure who were
not highly compensated employees for that year or (II) the eligible employees for the year
of the failure who were not highly compensated employees for that year and who also are
not highly compensated employees for the year of correction. Alternatively, the
contribution is allocated to account balances of eligible employees described in (I) or (II)
of the preceding sentence, except that the allocation is made only to the account
balances of those employees who are employees on a date during the year of the
correction that is no later than the date of correction. Regardless of which of these four
options (described in the two preceding sentences) the employer selects, eligible
employees must receive a uniform allocation (as a percentage of compensation) of the
contribution. (See Examples 1 and 2.) Under the one-to-one correction method, the
amount allocated to the account balance of an employee (i.e., the employee's share of
the total amount contributed under paragraph (1)(b)(iv)(A)) is not further adjusted for
earnings and is treated as an annual addition under § 415 for the year of the failure for
the employee for whom it is allocated.
(2
) This paragraph (1)(b)(iv)(B)(2) applies to a plan that uses the prior year
testing method described in §1.401(k)-2(a)(2), §1.401(m)-2(a)(2) and, for periods prior to
the effective date of those regulations, Notice 98-1. Paragraph (1)(b)(iv)(B)(1
) is applied
by substituting "the year prior to the year of the failure" for "the year of the failure".
(2) Examples.
Example 1:
Employer A maintains a profit-sharing plan with a cash or deferred arrangement that is intended to
satisfy § 401(k) using the current year testing method. The plan does not provide for matching
contributions or employee after-tax contributions. In 2005, it was discovered that the ADP test for
- 66 -
2003 was not performed correctly. When the ADP test was performed correctly, the test was not
satisfied for 2003. For 2003, the ADP for highly compensated employees was 9% and the ADP for
nonhighly compensated employees was 4%. Accordingly, the ADP for highly compensated
employees exceeded the ADP for nonhighly compensated employees by more than two percentage
points (in violation of § 401(k)(3)). There were two highly compensated employees eligible under
the 401(k) plan during 2003, 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 2003. Employee Q
made elective deferrals of $9,500, which is equal to 8% of Employee Q's compensation of
$118,750 for 2003.
Correction
:
On June 30, 2005, Employer A uses the one-to-one correction method to correct the failure to
satisfy the ADP test for 2003. Accordingly, Employer A calculates the dollar amount of the excess
contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B).
The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount
of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In
accordance with § 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to
Employee P and $2,937.50 to Employee Q. It is determined that the earnings on the assigned
amounts through June 30, 2005 are $687 and $587 for Employees P and Q, respectively. The
assigned amounts and the earnings are distributed to Employees P and Q. Therefore, Employee P
receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ($2,937.50 + $587). In
addition, on the same date, Employer A makes a corrective contribution to the 401(k) plan equal to
$7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to
Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly
compensated employees for 2003, pro rata based on their compensation for 2003 (subject to § 415
for 2003).
Example 2
:
The facts are the same as in Example 1, except that for 2003 the plan also provides for (1) after-tax
employee contributions and (2) matching contributions equal to 50% of the sum of an employee's
elective deferrals and after-tax employee contributions that do not exceed 10% of the employee's
compensation. The plan provides that matching contributions are subject to the plan's 20% per
year of service vesting schedule and that matching contributions are forfeited and used to reduce
employer contributions if associated elective deferrals or employee after-tax contributions are
distributed to correct an ADP or ACP test failure. For 2003, nonhighly compensated employees
made after-tax employee contributions and no highly compensated employee made any after-tax
employee contributions. Employee P received a matching contribution of $5,000 (50% of $10,000)
and Employee Q received a matching contribution of $4,750 (50% of $9,500). Employees P and Q
were 100% vested in 2003. It was determined that the plan satisfied the requirements of the ACP
test for 2003.
Correction:
The same corrective actions are taken as in Example 1. In addition, in accordance with the plan's
terms, corrective action is taken to forfeit Employee P's and Employee Q's matching contributions
associated with their distributed excess contributions. Employee P's distributed excess
contributions and associated matching contributions are $3,437.50 and $1,718.75, respectively.
Employee Q's distributed excess contributions and associated matching contributions are
$2,937.50 and $1,468.75, respectively. Thus, $1,718.75 is forfeited from Employee P's account
and $1,468.75 is forfeited from Employee Q's account. In addition, the earnings on the forfeited
amounts are also forfeited. It is determined that the respective earnings on the forfeited amount for
- 67 -
Employee P is $250 and for Employee Q is $220. The total amount of the forfeitures of $3,657.50
(Employee P's $1,718.75 + $250 and Employee Q's $1,468.75 + $220) is used to reduce
contributions for 2005 and subsequent years.
.02 Exclusion of Otherwise Eligible Employees.
(1) Exclusion of Eligible Employees in a 401(k) or (m) Plan. (a) Correction
Method. (i) Appendix A Correction Method for Full Year Exclusion. Appendix A, section
.05 sets forth the correction method for the exclusion of an eligible employee from
electing and making elective deferrals (other than designated Roth contributions) and
after-tax employee contributions (other than designated Roth contributions) to a plan that
provides benefits that are subject to the requirements of § 401(k) or (m) for one or more
full plan years. (See Example 3.) Appendix A section .05 also specifies the method for
determining missed deferrals and the corrective contributions for employees who were
improperly excluded from electing and making elective deferrals to a safe harbor 401(k)
plan for one or more full plan years. (See Examples 8, 9 and 10.) In section 2.02(1)(a)(ii)
below, the correction method for the exclusion of an eligible employee from all
contributions (other than designated Roth contributions) under a 401(k) or (m) plan for a
full year is expanded to include correction for the exclusion of an eligible employee from
all contributions (other than designated Roth contributions) under a 401(k) or (m) plan for
a partial plan year. This correction for a partial year exclusion may be used in conjunction
with the correction for a full year exclusion.
(ii) Expansion of Correction Method to Partial Year Exclusion. (A) In General.
The correction method in Appendix A, section .05 is expanded to cover an employee who
was improperly excluded from electing and making elective deferrals (other than
designated Roth contributions) or after-tax employee contributions (other than designated
Roth contributions) for a portion of a plan year or from receiving matching contributions
(on either elective deferrals or after-tax employee contributions) for a portion of a plan
year. In such case, a permitted correction method for the failure is for the employer to
satisfy this section 2.02(1)(a)(ii). The employer makes a corrective contribution on behalf
of the excluded employee that satisfies the vesting requirements and distribution
limitations of § 401(k)(2)(B) and (C). The method and examples described to correct the
failure to include otherwise eligible employees do not apply until after correction of other
qualification failures. Thus, for example, the corrections described in the narrative and
examples in this section cannot be used until after correction of ADP or ACP test failures.
(B) Elective Deferral Failures. The appropriate corrective contribution for the failure
to allow an employee to elect and make elective deferrals (other than designated Roth
contributions) for a portion of the plan year is equal to the missed deferral opportunity
which is an amount equal to 50% of the employee’s missed deferral. The employee’s
missed deferral is determined by multiplying the ADP of the employee's group (either
highly or nonhighly compensated), determined prior to correction under this section
2.02(1)(a)(ii), by the employee's plan compensation for the portion of the year during
- 68 -
which the employee was improperly excluded. In a safe harbor 401(k) plan, the
employee’s missed deferral is determined by multiplying 3% (or, if greater, whatever
percentage of the participant’s compensation which, if contributed as an elective deferral,
would have been matched at a rate of 100% or more) by the employee’s plan
compensation for the portion of the year during which the employee was improperly
excluded. The corrective contribution for the portion of the plan year during which the
employee was improperly excluded from being eligible to make elective deferrals is
reduced to the extent that (1
) the sum of the missed deferral and any elective deferrals
actually made by the employee for that year would exceed (2) the maximum elective
deferrals permitted under the plan for the employee for that plan year (including the
§ 402(g) limit). The corrective contribution is adjusted for earnings. For purposes of
correcting other failures under this revenue procedure (including determination of any
required matching contribution) after correction has occurred under this section
2.02(1)(ii)(B), the employee is treated as having made pre-tax elective deferrals equal to
the employee’s missed deferral for the portion of the year during which the employee was
improperly excluded. (See Examples 4 and 5.)
(C) After-tax Employee Contribution Failures. The appropriate corrective
contribution for the failure to allow employees to elect and make after-tax employee
contributions for a portion of the plan year is equal to the missed after-tax employee
contributions opportunity, which is an amount equal to 40% of the employee’s missed
after-tax employee contributions. The employee’s missed after-tax employee
contributions is determined by multiplying the ACP of the employee's group (either highly
or nonhighly compensated), determined prior to correction under this section
2.02(1)(a)(ii)(C), by the employee's plan compensation for the portion of the year during
which the employee was improperly excluded. If the ACP consists of both matching and
after-tax employee contributions, then for purposes of the preceding sentence, in lieu of
basing the missed after-tax employee contributions on the ACP for the employee's group
(either highly compensated or nonhighly compensated), the employer is permitted to
determine separately the portions of the ACP that are attributable to matching
contributions and after-tax employee contributions and base the missed after-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 (1
)
the sum of that contribution and the actual total after-tax employee contributions made by
the employee for the plan year would exceed (2
) the sum of the maximum after-tax
employee contributions permitted under the plan for the employee for the plan year. The
corrective contribution is adjusted for earnings.
(D) Matching Contribution Failures. The appropriate corrective contribution for the
failure to make matching contributions for an employee because the employee was
precluded from making elective deferrals (other than 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
- 69 -
(determined under section 2.02(1)(a)(i)(B)) or (2) the employee’s after-tax contribution for
that portion of the plan year had equaled the employee’s missed after-tax employee
contribution (determined under section 2.02(1)(a)(ii)(C). This matching contribution is
reduced to the extent that (1) the sum of this contribution and other matching
contributions actually made on behalf of the employee for the plan year would exceed (2)
the maximum matching contribution permitted if the employee had made the maximum
matchable contributions permitted under the plan for the plan year. The corrective
contribution is adjusted for earnings.
(E) Use of Prorated Compensation. For purposes of this paragraph (1)(a)(ii), for
administrative convenience, in lieu of using the employee's actual plan compensation for
the portion of the year during which the employee was improperly excluded, a pro rata
portion of the employee's plan compensation that would have been taken into account for
the plan year, if the employee had not been improperly excluded, may be used.
(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax
Employee Contributions. An employer is not required to make a corrective contribution
with respect to elective deferrals or after-tax employee contributions, as provided in
sections 2.02(1)(a)(ii)(B) and (C), (but is required to make a corrective contribution with
respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D)) for an
employee for a plan year if the employee has been provided the opportunity to make
elective deferrals or after-tax employee contributions under the plan for a period of at
least the last 9 months in that plan year and during that period the employee had the
opportunity to make elective deferrals or after-tax employee contributions in an amount
not less than the maximum amount that would have been permitted if no failure had
occurred. (See Examples 6 and 7.)
(b) Examples.
Example 3:
Employer B maintains a 401(k) plan. The plan provides for matching contributions for eligible
employees equal to 100% of elective deferrals that do not exceed 3% of an employee's
compensation. The plan allows employees to make after-tax employee contributions up to a
maximum of the lesser of 2% of compensation or $1,000. The after-tax employee contributions are
not matched. The plan provides that employees who complete one year of service are eligible to
participate in the plan on the next designated entry date. The entry dates are January 1, and July 1.
In 2005, it is discovered that Employee V, a NHCE with compensation of $30,000, was excluded
from the plan for the 2003 plan year even though she satisfied the plan’s eligibility requirements as
of January 1, 2003.
For the 2003 plan year, the relevant employee and contribution information is as follows:
Compensation
Elective deferral Match After-Tax Employee
Contribution
- 70 -
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, to correct the failure to include Employee V in the plan for the full plan year beginning January
1, 2003. Employer B calculates the corrective QNC 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 2003. Thus, Employer B must make a QNC to the plan on behalf of
Employee V equal to the missed deferral opportunity for Employee V- 50% of Employee V’s missed
deferral. The QNC is adjusted for earnings. The missed deferral for Employee V is estimated by
using the ADP for NHCEs for 2003 and multiplying that percentage by Employee V’s compensation
for 2003. Accordingly, the missed deferral for Employee V, on account of the employee’s improper
exclusion from the plan is $2,400 (8% x $30,000). The missed deferral opportunity is $1,200 (i.e.
50% x $2,400). Thus, the required corrective contribution for the failure to provide Employee V with
the opportunity to make elective deferrals to the plan is $1,200 (plus earnings).
Matching contributions: Employee V should have been eligible for. but did not receive an allocation
of. employer matching contributions because Employee V was not provided the opportunity to make
elective deferrals in 2003. Thus, Employer B must make a QNC 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 QNC is adjusted for earnings. Under the terms of the plan, if Employee V
had made an elective deferral of $2,400 or 8% of compensation ($30,000), the employee would
have been entitled to a matching contribution equal to 100% of first 3% of Employee V’s
compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed
employer matching contribution is $900 (plus earnings).
After-tax employee contributions: Employee V was eligible to, but was not provided with the
- 71 -
opportunity to, elect and make after-tax employee contributions in 2003. Employer B must make a
QNC to the plan equal to the missed opportunity for making after-tax employee contributions for
Employee V - 40% of Employee V’s missed after-tax employee contribution. The QNC is adjusted
for earnings. The missed after-tax employee contribution for Employee V is estimated by using the
ACP for NHCEs (to the extent that the ACP is attributable to after-tax employee contributions) for
2003 and multiplying that percentage by Employee V’s compensation for 2003. Accordingly, the
missed after-tax employee contribution for Employee V, on account of the employee’s improper
exclusion from the plan is $189 (0.63% x $30,000). The missed opportunity to make after-tax
employee contributions to the plan is $76 (40% x $189). Thus, the required corrective contribution
for the failure to provide Employee V with the opportunity to make the $189 after-tax employee
contribution to the plan is $76 (plus earnings).
The total required corrective QNC, 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 QNC is further adjusted for earnings.
Example 4
:
Employer C maintains a 401(k) plan. The plan provides for matching contributions for each payroll
period that are equal to 100% of an employee's elective deferrals that do not exceed 2% of the
eligible employee's plan compensation during the payroll period. The plan provides for after-tax
employee contributions. The after-tax employee contribution cannot exceed $1,000 for the plan
year. The plan provides that employees who complete one year of service are eligible to participate
in the plan on the next January 1 or July 1 entry date. Employee X, a nonhighly compensated
employee, who met the eligibility requirements and should have entered the plan on January 1,
2003 was not offered the opportunity to participate in the plan. In August of 2003, the error was
discovered and Employer C offered Employee X the opportunity to make elective deferrals and
after-tax employee contributions as of September 1, 2003. Employee X made elective deferrals
equal to 4% of the employee's plan compensation for each payroll period from September 1, 2003
through December 31, 2003 (resulting in elective deferrals of $400). Employee X’s plan
compensation for 2003 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 September 1, 2003
through December 31, 2003 ($10,000). After being allowed to participate in the plan, Employee X
made $250 of after-tax employee contributions for the 2003 plan year. The ADP for nonhighly
compensated employees for 2003 was 3% and the ACP for nonhighly compensated employees for
2003 was 2.3%. The ACP attributable to matching contributions for nonhighly compensated
employees for 2003 was 1.8%. The ACP attributable to employee contributions for nonhighly
compensated employees for 2003 was 0.5%.
Correction
:
In accordance with section 2.02(1)(a)(ii), Employer C uses the correction method described in
Appendix A section .05 to correct for the failure to provide Employee X the opportunity to elect and
make elective deferrals and after-tax employee contributions, and as a result, not receiving
matching contributions for a portion of the plan year (January 1, 2003 through August 31, 2003).
Thus, Employer C makes a corrective contribution on behalf of Employee X that satisfies the
requirements of section 2.02(1)(a)(ii). Employer C elects to utilize the provisions of section
2.02(1)(a)(ii)(E) to determine Employee X’s compensation for the portion of the year in which
Employee X was not provided the opportunity to make elective deferrals and after-tax employee
contributions. Thus, for administrative convenience, in lieu of using actual plan compensation of
$26,000 for the period Employee X was excluded, Employee X’s annual plan compensation is
- 72 -
prorated for the eight-month period that the employee was excluded from participating in the plan.
The corrective contribution is determined as follows:
(1) Corrective contribution for missed deferral: Employee X was eligible to, but was not provided
with the opportunity to, elect and make elective deferrals from January 1 through August 31 of
2003. Employer C must make a corrective contribution to the plan on behalf of Employee X
equal to Employee X’s missed deferral opportunity for that period - 50% of Employee X’s
missed deferral. From January 1 through August 31, 2003. The corrective contribution is
adjusted for earnings. Employee X’s missed deferral is determined by multiplying the 3% ADP
for nonhighly compensated employees by $24,000 (8/12ths of the employee’s 2003
compensation of $36,000). Accordingly, the missed deferral is $720. The missed deferral is
not reduced because when this amount is added to the amount already deferred, no plan limit
(including § 402(g)) was exceeded. Accordingly, the required corrective contribution is $360
(i.e. 50% multiplied by the missed deferral amount of $720). The required corrective
contribution is adjusted for earnings.
(2) Corrective contribution for missed matching contribution: Under the terms of the plan, if
Employee X had made an elective deferral of $720 or 3% of compensation for the period of
exclusion ($24,000), the employee would have been entitled to a matching contribution equal to
2% of $24,000 or $480. The missed matching contribution is not reduced because no plan limit
is exceeded when this amount is added to the matching contribution already contributed for the
2003 plan year. Accordingly, the required corrective contribution is $480. The required
corrective contribution is adjusted for earnings.
(3) Corrective contribution for missed after-tax employee contribution: Employee X was eligible to,
but was not provided with the opportunity to elect and make after-tax employee contributions
from January 1 through August 31 of 2003. Employer C must make a corrective contribution 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 corrective contribution 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 2003 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 corrective contribution is $48 (i.e. 40% multiplied by the missed after-tax employee
contribution of $120). The corrective contribution is adjusted for earnings.
The total required QNC on behalf of the employee 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).
Example 5
:
The facts (including the ADP and ACP data) are the same as in Example 5, except that it is now
determined that Employee X, after being included in the plan in 2003, made after-tax employee
contributions of $950.
Correction
:
- 73 -
The correction is the same as in Example 4, except that the corrective contribution required to
replace the missed after-tax employee contribution will be re-calculated to take into account
applicable plan limits in accordance with the provisions of section 2.02(1)(a)(ii)(C). The required
corrective contribution is determined as follows:
Corrective contribution for missed after-tax employee contribution: The missed after-tax employee
contribution amount is equal to the 0.5% ACP attributable to after-tax employee contributions for
nonhighly compensated employees multiplied by $24,000 (8/12ths of the employee’s 2003 plan
compensation of $36,000). The missed after-tax employee contribution amount, based on this
calculation, is $120. However, the sum of this amount ($120) and the previously made after-tax
employee contribution ($950) is $1,070. Because the plan limit for after-tax employee contributions
is $1,000, the missed after-tax employee contribution needs to be reduced by $70, to ensure that
the total after-tax employee contributions comply with the plan limit. Accordingly, the missed after-
tax employee contribution is $50. ($120-$70), and, the required corrective contribution is $20 (i.e.
40% multiplied by the missed after-tax employee contribution of $50). The corrective contribution is
adjusted for earnings.
Example 6:
Employer D sponsors a 401(k) plan. The plan has a one year of service eligibility requirement and
provides for January 1 and July 1 entry dates. Employee Y, who should have been provided the
opportunity to elect and make elective deferrals on January 1, 2003 was not provided the
opportunity to elect and make elective deferrals until July 1, 2003. The employee made $5,000 in
elective deferrals to the plan in 2003. The employee was a highly compensated employee with
compensation for 2003 of $200,000. Employee Y’s compensation from January 1 through June 30,
2003 was $100,000. The ADP for highly compensated employees for 2003 was 10%. The ADP for
nonhighly compensated employees for 2003 was 8%. The § 402(g) limit for deferrals made in 2003
was $12,000.
Correction:
Corrective contribution for missed deferral: Employee W’s missed deferral is equal to the 10% ADP
for highly compensated employees multiplied by $100,000 (compensation earned for the portion of
the year in which Employee W was erroneously excluded, i.e., January 1 through June 30, 2003).
The missed deferral amount, based on this calculation is $10,000. However, the sum of this
amount ($10,000) and the previously made elective contribution ($5,000) is $15,000. The 2003 §
402(g) limit for elective deferrals is $12,000. In accordance with the provisions of section
2.02(1)(a)(ii)(B), the missed deferral needs to be reduced by $3,000, to ensure that the total
elective contribution complies with the applicable § 402(g) limit. Accordingly, the missed deferral is
$7,000 ($10,000 -$3,000), and the required corrective contribution is $3,500 (i.e. 50% multiplied by
the missed deferral of $7,000). The corrective contribution is adjusted 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
eligible employee's plan compensation during the payroll period. The plan also provides that the
annual limit on matching contributions is $750. The plan provides for after-tax employee
contributions. The after-tax employee contribution cannot exceed $1,000 during a plan year. The
plan provides that employees who complete one year of service are eligible to participate in the
plan on the next January 1 or July 1 entry date. Employee Z, a nonhighly compensated employee
who met the eligibility requirements and should have entered the plan on January 1, 2003 was not
- 74 -
offered the opportunity to participate in the plan. In March of 2003, the error was discovered and
Employer E offered the employee an election opportunity as of April 1, 2003. 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 2003 plan year. The employee
made elective deferrals equal to 3% of the employee's plan compensation for each payroll period
from April 1, 2003 through December 31, 2003 (resulting in elective deferrals of $960). The
employee's plan compensation for 2003 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, 2003 through December 31, 2003 ($32,000). After being allowed to participate in the plan,
the employee made $500 in after-tax employee contributions. The ADP for nonhighly compensated
employees for 2003 was 3% and the ACP for nonhighly compensated employees for 2003 was
2.3%. The portion of the ACP attributable to matching contributions for nonhighly compensated
employees for 2003 was 1.8%. The portion of the ACP attributable to after-tax employee
contributions for nonhighly compensated employees for 2003 was 0.5%.
Correction
:
Employer E uses the correction method for partial year exclusions, pursuant to section
2.02(1)(a)(ii), to correct the failure to include an eligible employee in the plan. Because Employee Z
was given an opportunity to make elective deferrals and after-tax employee contributions to the
plan for at least the last 9 months of the plan year (and the amount of the elective deferrals or after-
tax employee contributions that the employee had the opportunity to make was not less than the
maximum elective deferrals or after-tax employee contributions that the employee could have made
if the employee had been given the opportunity to make elective deferrals and after-tax employee
contributions on January 1, 2003), under the special rule set forth in section 2.02(1)(a)(ii)(F),
Employer E is not required to make a corrective contribution for the failure to provide the employee
with the opportunity to make either elective deferrals or after-tax employee contributions. The
employer only needs to make a corrective 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 contribution required to correct
this failure is shown as follows:
The missed matching contribution is determined by calculating the matching contribution that the
employee would have received had the employee been provided the opportunity to make elective
deferrals during the period of exclusion, i.e., January 1, 2003 through March 31, 2003. Assuming
that the employee elected to defer an amount equal to 3% of compensation (which is the ADP for
the nonhighly compensated employees for the plan year), then, under the terms of the plan, the
employee would have been entitled to a matching contribution of 2% of compensation. Pursuant to
the provisions of section 2.02(1)(a)(ii)(E), Employer E determines compensation by prorating
Employee Z’s annual compensation for the portion of the year that Employee Z was not given the
opportunity to make elective deferrals or after-tax employee contributions. Accordingly, the
required matching contribution for the period of exclusion is obtained by multiplying 2% by
Employee Z’s compensation of $10,000 (3/12ths of the employee’s 2003 plan compensation of
$40,000). Based on this calculation, the missed matching contribution is $200. However, when this
amount is added to the matching contribution already received ($640), the total ($840) exceeds the
$750 plan limit on matching contributions by $90. Accordingly, pursuant to section 2.02(1)(a)(ii)(D),
the missed matching contribution figure is reduced to $110 ($200 minus $90). The required
corrective contribution is $110. The corrective contribution is adjusted for earnings.
Example 8
:
- 75 -
Employer G maintains a safe harbor 401(k) plan that uses a rate of matching contributions to satisfy
the requirements of §401(k)(12). Employee M, a nonhighly compensated employee who met the
eligibility requirements and should have entered the plan on January 1, 2003, was not offered the
opportunity to defer under the plan and was erroneously excluded for all of 2003. Employee M's
compensation for 2003 was $20,000.
The plan provides for matching contributions 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.
Correction
:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor 401(k) plan is 3% of compensation. Thus, the missed
deferral is equal to 3% multiplied by $20,000, or $600. Accordingly, the required corrective
contribution for Employee M’s missed deferral opportunity in 2003 is $300, i.e., 50% of $600. The
required matching contribution, based on the missed deferral of $600, is $600. The required
corrective contribution for Employee M’s missed matching contribution is $600. The total required
corrective contribution, before adjustments for earnings, on behalf of Employee M is $900 (i.e.,
$300 for the missed deferral opportunity, plus $600 for the missed matching contribution). The
corrective contribution is adjusted for earnings.
Example 9:
Same facts as Example 8, except that the plan provides for matching contributions equal to 100%
of elective deferrals that do not exceed 4% of an employee’s compensation.
Correction
:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor 401(k) plan is 4% of compensation. The missed deferral
is 4% of compensation because the plan provides for a 100% match for deferrals up to that level of
compensation. (See Appendix A .05(2)(c).) Therefore, in this case, Employee M’s missed deferral is
equal to 4% multiplied by $20,000, or $800. The required corrective contribution for Employee M’s
missed deferral opportunity in 2003 is $400, i.e., 50% multiplied by $800. The required matching
contribution, based on the missed deferral of $800, is $800. Thus, the required corrective
contribution for Employee M’s missed matching contribution is $800. The total required corrective
contribution, before adjustments for earnings, on behalf of Employee M is $1,200 (i.e., $400 for the
missed deferral opportunity plus $800 for the missed matching contribution). The corrective
contribution 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
compensation.
Correction
:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor 401(k) plan is 3% of compensation. Thus, the missed
deferral is equal to 3% multiplied by $20,000, or $600. Thus, the required corrective contribution for
Employee M’s missed deferral opportunity in 2003 is $300 (50% of $600). The required nonelective
- 76 -
contribution, based on the plan’s formula of 3% of compensation for nonelective contributions, is
$600. The total required corrective contribution, before adjustments for earnings, on behalf of
Employee M is $900 (i.e., $300 for the missed deferral opportunity, plus $600 for the missed
nonelective contribution). The corrective contribution is adjusted for earnings.
(2) Exclusion of Eligible Employees In a Profit-Sharing Plan.
(a) Correction Methods. (i) Appendix A Correction Method. Appendix A,
section .05 sets forth the correction method for correcting the failure to make a
contribution on behalf of the employees improperly excluded from a defined contribution
plan or to provide benefit accruals for the employees improperly excluded from a defined
benefit plan. In the case of a defined contribution plan, the correction method is to make a
contribution on behalf of the excluded employee. Section 2.02(2)(a)(ii) below clarifies the
correction method in the case of a profit-sharing or stock bonus plan that provides for
nonelective contributions (within the meaning of §1.401(k)-6 and formerly 1.401(k)-
1(g)(10)).
(ii) Additional Requirements for Appendix A Correction Method as applied to
Profit-Sharing Plans. To correct for the exclusion of an eligible employee from nonelective
contributions in a profit-sharing or stock bonus plan under the Appendix A correction
method, an allocation amount is determined for each excluded employee on the same
basis as the allocation amounts were determined for the other employees under the
plan's allocation formula (e.g., the same ratio of allocation to compensation), taking into
account all of the employee's relevant factors (e.g., compensation) under that formula for
that year. The employer makes a corrective contribution on behalf of the excluded
employee that is equal to the allocation amount for the excluded employee. The
corrective contribution is adjusted for earnings. If, as a result of excluding an employee,
an amount was improperly allocated to the account balance of an eligible employee who
shared in the original allocation of the nonelective contribution, no reduction is made to
the account balance of the employee who shared in the original allocation on account of
the improper allocation. (See Example 11.)
(iii) Reallocation Correction Method. (A) In General. Subject to the limitations set
forth in section 2.02(2)(a)(iii)(F) below, in addition to the Appendix A correction method,
the exclusion of an eligible employee for a plan year from a profit-sharing or stock bonus
plan that provides for nonelective contributions may be corrected using the reallocation
correction method set forth in this section 2.02(2)(a)(iii). Under the reallocation correction
method, the account balance of the excluded employee is increased as provided in
paragraph (2)(a)(iii)(B) below, the account balances of other employees are reduced as
provided in paragraph (2)(a)(iii)(C) below, and the increases and reductions are
reconciled, as necessary, as provided in paragraph (2)(a)(iii)(D) below. (See Examples
12 and 13.)
- 77 -
(B) Increase in Account Balance of Excluded Employee. The account balance of
the excluded employee is increased by an amount that is equal to the allocation the
employee would have received had the employee shared in the allocation of the
nonelective contribution. The amount is adjusted for earnings.
(C) Reduction in Account Balances of Other Employees. (1) The account balance
of each employee who was an eligible employee who shared in the original allocation of
the nonelective contribution is reduced by the excess, if any, of (I) the employee's
allocation of that contribution over (II) the amount that would have been allocated to that
employee had the failure not occurred. This amount is adjusted for earnings taking into
account the rules set forth in section 2.02(2)(a)(iii)(C)(2
) and (3) below. The amount after
adjustment for earnings is limited in accordance with section 2.02(2)(a)(iii)(C)(4) below.
(2) This paragraph (2)(a)(iii)(C)(2) applies if most of the employees with account
balances that are being reduced are nonhighly compensated employees. If there has
been an overall gain for the period from the date of the original allocation of the
contribution through the date of correction, no adjustment for earnings is required to the
amount determined under section 2.02(2)(a)(iii)(C)(1) for the employee. If the amount for
the employee is being adjusted for earnings and the plan permits investment of account
balances in more than one investment fund, for administrative convenience, the reduction
to the employee's account balance may be adjusted by the lowest earnings rate 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 original allocation, then reasonable, consistent assumptions
are used to determine the earnings adjustment.
(4) The amount determined in section 2.02(2)(a)(iii)(C)(1) for an employee after
the application of section 2.02(2)(a)(iii)(C)(2
) and (3) may not exceed the account balance
of the employee on the date of correction, and the employee is permitted to retain any
distribution made prior to the date of correction.
(D) Reconciliation of Increases and Reductions. If the aggregate amount of the
increases under section 2.02(2)(a)(iii)(B) exceeds the aggregate amount of the reductions
under section 2.02(2)(a)(iii)(C), the employer makes a corrective contribution to the plan
for the amount of the excess. If the aggregate amount of the reductions under section
2.02(2)(a)(iii)(C) exceeds the aggregate amount of the increases under section
2.02(2)(a)(iii)(B), then the amount by which each employee's account balance is reduced
under section 2.02(2)(a)(iii)(C) is decreased on a pro rata basis.
(E) Reductions Among Multiple Investment Funds. If an employee's account
balance is reduced and the employee's account balance is invested in more than one
- 78 -
investment fund, then the reduction may be made from the investment funds selected in
any reasonable manner.
(F) Limitations on Use of Reallocation Correction Method. If any employee would
be permitted to retain any distribution pursuant to section 2.02(2)(a)(iii)(C)(4
), then the
reallocation correction method may not be used unless most of the employees who would
be permitted to retain a distribution are nonhighly compensated employees.
(b) Examples.
Example 11:
Employer D maintains a profit-sharing plan that provides for discretionary nonelective employer
contributions. The plan provides that the employer's contributions are allocated to account balances
in the ratio that each eligible employee's compensation for the plan year bears to the compensation
of all eligible employees for the plan year and, therefore, the only relevant factor for determining an
allocation is the employee's compensation. The plan provides for self-directed investments among
four investment funds and daily valuations of account balances. For the 2003 plan year, Employer
D made a contribution to the plan of a fixed dollar amount. However, five employees who met the
eligibility requirements were inadvertently excluded from participating in the plan. The contribution
resulted in an allocation on behalf of each of the eligible employees, other than the excluded
employees, equal to 10% of compensation. Most of the employees who received allocations under
the plan for the year of the failure were nonhighly compensated employees. No distributions have
been made from the plan since 2003. If the five excluded employees had shared in the original
allocation, the allocation made on behalf of each employee would have equaled 9% of
compensation. The excluded employees began participating in the plan in the 2004 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 corrective contribution to the plan. The amount of the
corrective contribution on behalf of the five excluded employees for the 2003 plan year is equal to
10% of compensation of each excluded employee, the same allocation that was made for other
eligible employees, adjusted for earnings. The excluded employees receive an allocation equal to
10% of compensation (adjusted for earnings) even though, had the excluded employees originally
shared in the allocation for the 2003 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 12
:
The facts are the same as in Example 11.
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 2003 plan year among all eligible employees,
including the five excluded employees. The inclusion of the excluded employees in the allocation of
that contribution would have resulted in each eligible employee, including each excluded employee,
receiving an allocation equal to 9% of compensation. Accordingly, the account balance of each
- 79 -
excluded employee is increased by 9% of the employee's 2003 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 2003 compensation, adjusted for earnings.
Employer D determines the adjustment for earnings using the earnings rate of each eligible
employee's excess allocation (using reasonable, consistent assumptions). Accordingly, for an
employee who shared in the original allocation and directed the investment of the allocation into
more than one investment fund or who subsequently transferred a portion of a fund that had been
credited with a portion of the 2003 allocation to another fund, reasonable, consistent assumptions
are followed to determine the adjustment for earnings. It is determined that the total of the initially
determined reductions in account balances exceeds the total of the required increases in account
balances. Accordingly, these initially determined reductions are decreased pro rata so that the total
of the actual reductions in account balances equals the total of the increases in the account
balances, and Employer D does not make any corrective contribution. The reductions from the
account balances are made on a pro rata basis among all of the funds in which each employee's
account balance is invested.
Example 13
:
The facts are the same as in Example 11.
Correction
:
The correction is the same as in Example 12, except that, because most of the employees whose
account balances are being reduced are nonhighly compensated employees, for administrative
convenience, Employer D uses the earnings rate of the fund with the lowest earnings rate for the
period of the failure to adjust the reduction to each account balance. It is determined that the
aggregate amount (adjusted for earnings) by which the account balances of the excluded
employees is increased exceeds the aggregate amount (adjusted for earnings) by which the other
employees' account balances are reduced. Accordingly, Employer D makes a contribution to the
plan in an amount equal to the excess. The reduction from account balances is made on a pro rata
basis among all of the funds in which each employee's account balance is invested.
.03 Vesting Failures.
(1) Correction Methods. (a) Contribution Correction Method. A failure in a defined
contribution plan to apply the proper vesting percentage to an employee's account
balance that results in forfeiture of too large a portion of the employee's account balance
may be corrected using the contribution correction method set forth in this paragraph.
The employer makes a corrective contribution on behalf of the employee whose account
balance was improperly forfeited in an amount equal to the improper forfeiture. The
corrective contribution is adjusted for earnings. If, as a result of the improper forfeiture, an
amount was improperly allocated to the account balance of another employee, no
reduction is made to the account balance of that employee. (See Example 14.)
(b) Reallocation Correction Method. In lieu of the contribution correction method,
in a defined contribution plan under which forfeitures of account balances are reallocated
among the account balances of the other eligible employees in the plan, a failure to apply
the proper vesting percentage to an employee's account balance which results in
forfeiture of too large a portion of the employee's account balance may be corrected
- 80 -
under the reallocation correction method set forth in this paragraph. A corrective
reallocation is made in accordance with the reallocation correction method set forth in
section 2.02(2)(a)(iii), subject to the limitations set forth in section 2.02(2)(a)(iii)(F). In
applying section 2.02(2)(a)(iii)(B), the account balance of the employee who incurred the
improper forfeiture is increased by an amount equal to the amount of the improper
forfeiture and the amount is adjusted for earnings. In applying section
2.02(2)(a)(iii)(C)(1
), the account balance of each employee who shared in the allocation
of the improper forfeiture is reduced by the amount of the improper forfeiture that was
allocated to that employee's account. The earnings adjustments for the account balances
that are being reduced are determined in accordance with sections 2.02(2)(a)(iii)(C)(2
)
and (3
) and the reductions after adjustments for earnings are limited in accordance with
section 2.02(2)(a)(iii)(C)(4). In accordance with section 2.02(2)(a)(iii)(D), if the aggregate
amount of the increases exceeds the aggregate amount of the reductions, the employer
makes a corrective contribution to the plan for the amount of the excess. In accordance
with section 2.02(2)(a)(iii)(D), if the aggregate amount of the reductions exceeds the
aggregate amount of the increases, then the amount by which each employee's account
balance is reduced is decreased on a pro rata basis. (See Example 15.)
(2) Examples.
Example 14:
Employer E maintains a profit-sharing plan that provides for nonelective contributions. The plan
provides for self-directed investments among four investment funds and daily valuation of account
balances. The plan provides that forfeitures of account balances are reallocated among the
account balances of other eligible employees on the basis of compensation. During the 2003 plan
year, Employee R terminated employment with Employer E and elected and received a single-sum
distribution of the vested portion of his account balance. No other distributions have been made
since 2003. However, an incorrect determination of Employee R's vested percentage was made
resulting in Employee R receiving a distribution of less than the amount to which he was entitled
under the plan. The remaining portion of Employee R's account balance was forfeited and
reallocated (and these reallocations were not affected by the limitations of § 415). Most of the
employees who received allocations of the improper forfeiture were nonhighly compensated
employees.
Correction
:
Employer E uses the contribution correction method to correct the improper forfeiture. Thus,
Employer E makes a contribution on behalf of Employee R equal to the incorrectly forfeited amount
(adjusted for earnings) and Employee R's account balance is increased accordingly. No reduction
is made from the account balances of the employees who received an allocation of the improper
forfeiture.
Example 15
:
The facts are the same as in Example 14.
Correction
:
- 81 -
Employer E uses the reallocation correction method to correct the improper forfeiture. Thus,
Employee R's account balance is increased by the amount that was improperly forfeited (adjusted
for earnings). The account of each employee who shared in the allocation of the improper forfeiture
is reduced by the amount of the improper forfeiture that was allocated to that employee's account
(adjusted for earnings). Because most of the employees whose account balances are being
reduced are nonhighly compensated employees, for administrative convenience, Employer E uses
the earnings rate of the fund with the lowest earnings rate for the period of the failure to adjust the
reduction to each account balance. It is determined that the amount (adjusted for earnings) by
which the account balance of Employee R is increased exceeds the aggregate amount (adjusted
for earnings) by which the other employees' account balances are reduced. Accordingly, Employer
E makes a contribution to the plan in an amount equal to the excess. The reduction from the
account balances is made on a pro rata basis among all of the funds in which each employee's
account balance is invested.
.04 § 415 Failures.
(1) Failures Relating to a § 415(b) Excess.
(a) Correction Methods. (i) Return of Overpayment Correction Method.
Overpayments as a result of amounts being paid in excess of the limits of § 415(b) may
be corrected using the return of Overpayment correction method set forth in this
paragraph (1)(a)(i). The employer takes reasonable steps to have the Overpayment (with
appropriate interest) returned by the recipient to the plan and reduces future benefit
payments (if any) due to the employee to reflect § 415(b). To the extent the amount
returned by the recipient is less than the Overpayment, adjusted for earnings at the plan's
earnings rate, then the employer or another person contributes the difference to the plan.
In addition, in accordance with section 6.05 of this revenue procedure, the employer must
notify the recipient that the Overpayment was not eligible for favorable tax treatment
accorded to distributions from qualified plans (and, specifically, was not eligible for tax-
free rollover). (See Examples 18 and 19.)
(ii) Adjustment of Future Payments Correction Method. (A) In General. In addition
to the return of overpayment correction method, in the case of plan benefits that are being
distributed in the form of periodic payments, Overpayments as a result of amounts being
paid in excess of the limits in § 415(b) may be corrected by using the adjustment of future
payments correction method set forth in this paragraph (1)(a)(ii). Future payments to the
recipient are reduced so that they do not exceed the § 415(b) maximum limit and an
additional reduction is made to recoup the Overpayment (over a period not longer than
the remaining payment period) so that the actuarial present value of the additional
reduction is equal to the Overpayment plus interest at the interest rate used by the plan to
determine actuarial equivalence. (See Examples 16 and 17.)
(B) Joint and Survivor Annuity Payments. If the employee is receiving payments
in the form of a joint and survivor annuity, with the employee's spouse to receive a life
annuity upon the employee's death equal to a percentage (e.g., 75%) of the amount being
paid to the employee, the reduction of future annuity payments to reflect § 415(b) reduces
- 82 -
the amount of benefits payable during the lives of both the employee and spouse, but any
reduction to recoup Overpayments made to the employee does not reduce the amount of
the spouse's survivor benefit. Thus, the spouse's benefit will be based on the previous
specified percentage (e.g., 75%) of the maximum permitted under § 415(b), instead of the
reduced annual periodic amount payable to the employee.
(C) Overpayment Not Treated as an Excess Amount. An Overpayment corrected
under this adjustment of future payment correction method is not treated as an Excess
Amount as defined in section 5.01(3) of this revenue procedure.
(b) Examples.
Example 16:
Employer F maintains a defined benefit plan funded solely through employer contributions. The
plan provides that the benefits of employees are limited to the maximum amount permitted under
§ 415(b), disregarding cost-of-living adjustments under § 415(d) after benefit payments have
commenced. At the beginning of the 1998 plan year, Employee S retired and started receiving an
annual straight life annuity of $140,000 from the plan. Due to an administrative error, the annual
amount received by Employee S for 1998 included an Overpayment of $10,000 (because the
§ 415(b)(1)(A) limit for 1998 was $130,000). This error was discovered at the beginning of 1999.
Correction
:
Employer F uses the adjustment of future payments correction method to correct the failure to
satisfy the limit in § 415(b). Future annuity benefit payments to Employee S are reduced so that
they do not exceed the § 415(b) maximum limit, and, in addition, Employee S's future benefit
payments from the plan are actuarially reduced to recoup the Overpayment. Accordingly,
Employee S's future benefit payments from the plan are reduced to $130,000 and further reduced
by $1,000 annually for life, beginning in 1999. The annual benefit amount is reduced by $1,000
annually for life because, for Employee S, the actuarial present value of a benefit of $1,000
annually for life commencing in 1999 is equal to the sum of $10,000 and 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 $129,000 for 1999, and for each year
thereafter.
Example 17
:
The facts are the same as in Example 16.
Correction
:
Employer F uses the adjustments of future payments correction method to correct the § 415(b)
failure, by recouping the entire excess payment made in 1998 from Employee S's remaining benefit
payments for 1999. Thus, Employee S's annual annuity benefit for 1999 is reduced to $119,400 to
reflect the excess benefit amounts (increased by interest) that were paid from the plan to Employee
S during the 1998 plan year. Beginning in 2000, Employee S begins to receive annual benefit
payments of $130,000.
- 83 -
Example 18:
The facts are the same as in Example 16, except that the benefit was paid to Employee S in the
form of a single-sum distribution in 1998, which exceeded the maximum § 415(b) limits by
$110,000.
Correction
:
Employer F uses the return of overpayment correction method to correct the § 415(b) failure. Thus,
Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not
eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically,
was not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment
(with interest at the rate used by the plan to calculate the single-sum payment) is owed to the plan.
Employer F takes reasonable steps to have the Overpayment (with interest at the rate used by the
plan to calculate the single-sum payment) paid to the plan. Employee S pays the $110,000 (plus
the requested interest) to the plan. It is determined that the plan's earnings rate for the relevant
period was 2 percentage points more than the rate used by the plan to calculate the single-sum
payment. Accordingly, Employer F contributes the difference to the plan.
Example 19
:
The facts are the same as in Example 18.
Correction
:
Employer F uses the return of overpayment correction method to correct the § 415(b) failure. Thus,
Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not
eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically,
was not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment
(with interest at the rate used by the plan to calculate the single-sum payment) is owed to the plan.
Employer F takes reasonable steps to have the Overpayment (with interest at the rate used by the
plan to calculate the single-sum payment) paid to the plan. As a result of Employer F's recovery
efforts, some, but not all, of the Overpayment (with interest) is recovered from Employee S. It is
determined that the amount returned by Employee S to the plan is less than the Overpayment
adjusted for earnings at the plan’s earnings rate. Accordingly, Employer F contributes the
difference to the plan.
(2) Failures Relating to a § 415(c) Excess.
(a) Correction Methods. (i) Appendix A Correction Method. Appendix A, section
.08 sets forth the correction method for correcting the failure to satisfy the § 415(c) limits
on annual additions.
(ii) Forfeiture Correction Method. In addition to the Appendix A correction method,
the failure to satisfy § 415(c) with respect to a nonhighly compensated employee (A) who
in the limitation year of the failure had annual additions consisting of both (I) either
elective deferrals or employee after-tax contributions or both and (II) either matching or
nonelective contributions or both, (B) for whom the matching and nonelective
contributions equal or exceed the portion of the employee's annual addition that exceeds
the limits under § 415(c) ("§ 415(c) excess") for the limitation year, and (C) who has
- 84 -
terminated with no vested interest in the matching and nonelective contributions (and has
not been reemployed at the time of the correction), may be corrected by using the
forfeiture correction method set forth in this paragraph. The § 415(c) excess is deemed to
consist solely of the matching and nonelective contributions. If the employee's § 415(c)
excess (adjusted for earnings) has previously been forfeited, the § 415(c) failure is
deemed to be corrected. If the § 415(c) excess (adjusted for earnings) has not been
forfeited, that amount is placed in an unallocated account, similar to the suspense
account described in § 1.415-6(b)(6)(iii), to be used to reduce employer contributions in
succeeding year(s) (or if the amount would have been allocated to other employees who
were in the plan for the year of the failure if the failure had not occurred, then that amount
is reallocated to the other employees in accordance with the plan's allocation formula).
Note that while this correction method will permit more favorable tax treatment of elective
deferrals for the employee than the Appendix A correction method, this correction method
could be less favorable to the employee in certain cases, for example, if the employee is
subsequently reemployed and becomes vested. (See Examples 20 and 21.)
(iii) Return of Overpayment Correction Method. A failure to satisfy § 415(c) that
includes a distribution of the § 415(c) excess attributable to nonelective contributions and
matching contributions may be corrected using the return of Overpayment correction
method set forth in this paragraph. The employer takes reasonable steps to have the
Overpayment (i.e., the distribution of the § 415(c) excess adjusted for earnings to the date
of the distribution), plus appropriate interest from the date of the distribution to the date of
the repayment, returned by the employee to the plan. To the extent the amount returned
by the employee is less than the Overpayment adjusted for earnings at the plan's
earnings rate, then the employer or another person contributes the difference to the plan.
The Overpayment, adjusted for earnings at the plan's earnings rate to the date of the
repayment, is to be placed in an unallocated account, similar to the suspense account
described in § 1.415-6(b)(6)(iii), to be used to reduce employer contributions in
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). In addition, the employer must notify the employee that the
Overpayment was not eligible for favorable tax treatment accorded to distributions from
qualified plans (and, specifically, was not eligible for tax-free rollover).
(b) Examples.
Example 20:
Employer G maintains a 401(k) plan. The plan provides for nonelective employer contributions,
elective deferrals, and employee after-tax contributions. The plan provides that the nonelective
contributions vest under a 5-year cliff vesting schedule. The plan provides that when an employee
terminates employment, the employee's nonvested account balance is forfeited five years after a
distribution of the employee's vested account balance and that forfeitures are used to reduce
employer contributions. For the 1998 limitation year, the annual additions made on behalf of two
- 85 -
nonhighly compensated employees in the plan, Employees T and U, exceeded the limit in § 415(c).
For the 1998 limitation year, Employee T had § 415 compensation of $60,000, and, accordingly, a
§ 415(c)(1)(B) limit of $15,000. Employee T made elective deferrals and employee after-tax
contributions. For the 1998 limitation year, Employee U had § 415 compensation of $40,000, and,
accordingly, a § 415(c)(1)(B) limit of $10,000. Employee U made elective deferrals. Also, on
January 1, 1999, Employee U, who had three years of service with Employer G, terminated his
employment and received his entire vested account balance (which consisted of his elective
deferrals). The annual additions for Employees T and U consisted of:
T U
Nonelective
Contributions $ 7,500 $ 4,500
Elective 10,000 5,800
Deferrals
After-tax
Contributions 500 0
_______ _______
Total Contributions $18,000 $ 10,300
§ 415(c) Limit $15,000 $ 10,000
§ 415(c) Excess $ 3,000 $ 300
Correction:
Employer G uses the Appendix A correction method to correct the § 415(c) excess with respect to
Employee T (i.e., $3,000). Thus, a distribution of plan assets (and corresponding reduction of the
account balance) consisting of $500 (adjusted for earnings) of employee after-tax contributions and
$2,500 (adjusted for earnings) of elective deferrals is made to Employee T. Employer G uses the
forfeiture correction method to correct the § 415(c) excess with respect to Employee U. Thus, the
§ 415(c) excess is deemed to consist solely of the nonelective contributions. Accordingly,
Employee U's nonvested account balance is reduced by $300 (adjusted for earnings) which is
placed in an unallocated account, similar to the suspense account described in § 1.415-6(b)(6)(iii),
to be used to reduce employer contributions in succeeding year(s). After correction, it is
determined that the ADP and ACP tests for 1998 were satisfied.
Example 21
:
Employer H maintains a 401(k) plan. The plan provides for nonelective employer contributions,
matching contributions and elective deferrals. The plan provides for matching contributions that are
equal to 100% of an employee's elective deferrals that do not exceed 8% of the employee's plan
compensation for the plan year. For the 1998 limitation year, Employee V had § 415 compensation
of $50,000, and, accordingly, a § 415(c)(1)(B) limit of $12,500. During that limitation year, the
annual additions for Employee V totaled $15,000, consisting of $5,000 in elective deferrals, a
$4,000 matching contribution (8% of $50,000), and a $6,000 nonelective employer contribution.
Thus, the annual additions for Employee V exceeded the § 415(c) limit by $2,500.
Correction
:
- 86 -
Employer H uses the Appendix A correction method to correct the § 415(c) excess with respect to
Employee V (i.e., $2,500). Accordingly, $1,000 of the unmatched elective deferrals (adjusted for
earnings) are distributed to Employee V. The remaining $1,500 excess is apportioned equally
between the elective deferrals and the associated matching employer contributions, so Employee
V's account balance is further reduced by distributing to Employee V $750 (adjusted for earnings)
of the elective deferrals and forfeiting $750 (adjusted for earnings) of the associated employer
matching contributions. The forfeited matching contributions are placed in an unallocated account;
similar to the suspense account described in § 1.415-6(b)(6)(iii), to be used to reduce employer
contributions in succeeding year(s). After correction, it is determined that the ADP and ACP tests
for 1998 were satisfied.
.05 Correction of Other Overpayment Failures.
An Overpayment, other than one described in section 2.04(1) (relating to a
§ 415(b) excess) or section 2.04(2) (relating to a § 415(c) excess), may be corrected in
accordance with this section 2.05. An Overpayment from a defined benefit plan is
corrected in accordance with the rules in section 2.04(1). An Overpayment from a
defined contribution plan is corrected in accordance with the rules in section
2.04(2)(a)(iii).
.06 § 401(a)(17) Failures.
(1) Reduction of Account Balance Correction Method. The allocation of
contributions or forfeitures under a defined contribution plan for a plan year on the basis
of compensation in excess of the limit under § 401(a)(17) for the plan year may be
corrected using the reduction of account balance correction method set forth in this
paragraph. The account balance of an employee who received an allocation on the basis
of compensation in excess of the § 401(a)(17) limit is reduced by this improperly allocated
amount (adjusted for earnings). If the improperly allocated amount would have been
allocated to other employees in the year of the failure if the failure had not occurred, then
that amount (adjusted for earnings) is reallocated to those employees in accordance with
the plan's allocation formula. If the improperly allocated amount would not have been
allocated to other employees absent the failure, that amount (adjusted for earnings) is
placed in an unallocated account, similar to the suspense account described in § 1.415-
6(b)(6)(iii), to be used to reduce employer contributions in succeeding year(s). For
example, if a plan provides for a fixed level of employer contributions for each eligible
employee, and the plan provides that forfeitures are used to reduce future employer
contributions, the improperly allocated amount (adjusted for earnings) would be used to
reduce future employer contributions. (See Example 20.) If a payment was made to an
employee and that payment was attributable to an improperly allocated amount, then it is
an Overpayment defined in section 5.01(6) of this revenue procedure that must be
corrected (see sections 2.04 and 2.05).
(2) Example.
- 87 -
Example 22:
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 ($200,000 for 2003). During the 2003 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 2003 was $220,000. Employee W received a contribution of
$17,600 for 2003 (8% of $220,000), rather than the contribution of $16,000 (8% of $200,000)
provided by the plan for that year, resulting in an improper allocation of $1,600.
Correction
:
The § 401(a)(17) failure is corrected using the reduction of account balance method by reducing
Employee W's account balance by $1,600 (adjusted for earnings) and crediting that amount to an
unallocated account, similar to the suspense account described in § 1.415-6(b)(6)(iii), to be used to
reduce employer contributions in succeeding year(s).
.07 Correction by Amendment.
(1) § 401(a)(17) Failures. (a) Contribution Correction Method. In addition to the
reduction of account balance correction method under section 2.06 of this Appendix B, an
employer may correct a § 401(a)(17) failure for a plan year under a defined contribution
plan by using the contribution correction method set forth in this paragraph. The
employer contributes an additional amount on behalf of each of the other employees
(excluding each employee for whom there was a § 401(a)(17) failure) who received an
allocation for the year of the failure, amending the plan (as necessary) to provide for the
additional allocation. The amount contributed for an employee is equal to the employee's
plan compensation for the year of the failure multiplied by a fraction, the numerator of
which is the improperly allocated amount made on behalf of the employee with the largest
improperly allocated amount, and the denominator of which is the limit under § 401(a)(17)
applicable to the year of the failure. The resulting additional amount for each of the other
employees is adjusted for earnings. (See Example 21.)
(b) Examples.
Example 23:
The facts are the same as in Example 22.
Correction
:
Employer J corrects the failure under VCP using the contribution correction method by (1)
amending the plan to increase the contribution percentage for all eligible employees (other than
Employee W) for the 2003 plan year and (2) contributing an additional amount (adjusted for
earnings) for those employees for that plan year. To determine the increase in the plan's
contribution percentage (and the additional amount contributed on behalf of each eligible
employee), the improperly allocated amount ($1,600) is divided by the § 401(a)(17) limit for 2003
($200,000). Accordingly, the plan is amended to increase the contribution percentage by 0.8
- 88 -
percentage points ($1,600/$200,000) from 8% to 8.8%. In addition, each eligible employee for the
2003 plan year (other than Employee W) receives an additional contribution of 0.8% multiplied by
that employee's plan compensation for 2003. This additional contribution is adjusted for earnings.
(2) Hardship Distribution Failures and Plan Loan Failures. (a) Plan Amendment
Correction Method. The Operational Failure of making hardship distributions to
employees under a plan that does not provide for hardship distributions may be corrected
using the plan amendment correction method set forth in this paragraph. The plan is
amended retroactively to provide for the hardship distributions that were made available.
This paragraph does not apply unless (i) the amendment satisfies § 401(a), and (ii) the
plan as amended would have satisfied the qualification requirements of § 401(a)(including
the requirements applicable to hardship distributions under § 401(k), if applicable) had the
amendment been adopted when hardship distributions were first made available. (See
Example 24.) The Plan Amendment Correction Method is also available for the
Operational Failure of permitting plan loans to employees under a plan that does not
provide for plan loans. The plan is amended retroactively to provide for the plan loans
that were made available. This paragraph does not apply unless (i) the amendment
satisfies § 401(a), and (ii) the plan as amended would have satisfied the qualification
requirements of § 401(a) (and the requirements applicable to plan loans under § 72(p))
had the amendment been adopted when plan loans were first made available.
(b) Example.
Example 24:
Employer K, a for-profit corporation, maintains a 401(k) plan. Although plan provisions in 2002 did
not provide for hardship distributions, beginning in 2002 hardship distributions of amounts allowed
to be distributed under § 401(k) were made currently and effectively available to all employees
(within the meaning of § l.401(a)(4)-4). The standard used to determine hardship satisfied the
deemed hardship distribution standards in § 1.401(k)-1(d)(2). Hardship distributions were made to
a number of employees during the 2002 and 2003 plan years, creating an Operational Failure. The
failure was discovered in 2004.
Correction
:
Employer K corrects the failure under VCP by adopting a plan amendment, effective January 1,
2002, to provide a hardship distribution option that satisfies the rules applicable to hardship
distributions in § 1.401(k)-1(d)(2). The amendment provides that the hardship distribution option is
available to all employees. Thus, the amendment satisfies § 401(a), and the plan as amended in
2004 would have satisfied § 401(a) (including § 1.401(a)(4)-4 and the requirements applicable to
hardship distributions under § 401(k)) if the amendment had been adopted in 2002.
(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment
Correction Method. The Operational Failure of including an otherwise eligible employee
in the plan who either (i) has not completed the plan’s minimum age or service
requirements, or (ii) has completed the plan’s minimum age or service requirements but
became a participant in the plan on a date earlier than the applicable plan entry date, may
be corrected by using the plan amendment correction method set forth in this paragraph.
- 89 -
The plan is amended retroactively to change the eligibility or entry date provisions to
provide for the inclusion of the ineligible employee to reflect the plan’s actual operations.
The amendment may change the eligibility or entry date provisions with respect to only
those ineligible employees that were wrongly included, and only to those ineligible
employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the
amendment would have satisfied § 401(a) had the amendment been adopted at the
earlier time when it is effective, and (iii) the employees affected by the amendment are
predominantly nonhighly compensated employees.
(b) Example
Example 25:
Employer L maintains a 401(k) plan applicable to all of its employees who have at least six months
of service. The plan is a calendar year plan. The plan provides that Employer L will make matching
contributions based upon an employee’s salary reduction contributions. In 2001, it is discovered
that all four employees who were hired by Employer L in 2000 were permitted to make salary
reduction contributions to the plan effective with the first weekly paycheck after they were
employed. Three of the four employees are nonhighly compensated. Employer L matched these
employees’ salary reduction contributions in accordance with the plan’s matching contribution
formula. Employer L calculates the ADP and ACP tests for 2000 (taking into account the salary
reduction and matching contributions that were made for these employees) and determines that the
tests were satisfied.
Correction
:
Employer L corrects the failure under SCP by adopting a plan amendment, effective for employees
hired on or after January 1, 2000, to provide that there is no service eligibility requirement under the
plan and submitting the amendment to the Service for a determination letter.
SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings Adjustment Methods. (1) In general. (a) Under section 6.02(4)(a) of
this revenue procedure, whenever the appropriate correction method for an Operational
Failure in a defined contribution plan includes a corrective contribution or allocation that
increases one or more employees' account balances (now or in the future), the
contribution or allocation is adjusted for earnings and forfeitures. This section 3 provides
earnings adjustment methods (but not forfeiture adjustment methods) that may be used
by an employer to adjust a corrective contribution or allocation for earnings in a defined
contribution plan. Consequently, these earnings adjustment methods may be used to
determine the earnings adjustments for corrective contributions or allocations made under
the correction methods in section 2 and under the correction methods in Appendix A. If
an earnings adjustment method in this section 3 is used to adjust a corrective contribution
or allocation, that adjustment is treated as satisfying the earnings adjustment requirement
of section 6.02(4)(a) of this revenue procedure. Other earnings adjustment methods,
different from those illustrated in this section 3, may also be appropriate for adjusting
corrective contributions or allocations to reflect earnings.
- 90 -
(b) Under the earnings adjustment methods of this section 3, a corrective
contribution or allocation that increases an employee's account balance is adjusted to
reflect an "earnings amount" that is based on the earnings rate(s) (determined under
section 3.01(3)) for the period of the failure (determined under section 3.01(2)). The
earnings amount is allocated in accordance with section 3.01(4).
(c) The rule in section 6.02(5)(a) of this revenue procedure permitting reasonable
estimates in certain circumstances applies for purposes of this section 3. For this
purpose, a determination of earnings made in accordance with the rules of administrative
convenience set forth in this section 3 is treated as a precise determination of earnings.
Thus, if the probable difference between an approximate determination of earnings and a
determination of earnings under this section 3 is insignificant and the administrative cost
of a precise determination would significantly exceed the probable difference, reasonable
estimates may be used in calculating the appropriate earnings.
(d) This section 3 does not apply to corrective distributions or corrective reductions
in account balances. Thus, for example, while this section 3 applies in increasing the
account balance of an improperly excluded employee to correct the exclusion of the
employee under the reallocation correction method described in section 2.02(2)(a)(iii)(B),
this section 3 does not apply in reducing the account balances of other employees under
the reallocation correction method. (See section 2.02(2)(a)(iii)(C) for rules that apply to
the earnings adjustments for such reductions.) In addition, this section 3 does not apply
in determining earnings adjustments under the one-to-one correction method described in
section 2.01(1)(b)(iii).
(2) Period of the Failure. (a) General Rule. For purposes of this section 3, the
"period of the failure" is the period from the date that the failure began through the date of
correction. For example, in the case of an improper forfeiture of an employee's account
balance, the beginning of the period of the failure is the date as of which the account
balance was improperly reduced.
(b) Rules for Beginning Date for Exclusion of Eligible Employees from Plan. (i)
General Rule. In the case of an exclusion of an eligible employee from a plan
contribution, the beginning of the period of the failure is the date on which contributions of
the same type (e.g., elective deferrals, matching contributions, or discretionary
nonelective employer contributions) were made for other employees for the year of the
failure. In the case of an exclusion of an eligible employee from an allocation of a
forfeiture, the beginning of the period of the failure is the date on which forfeitures were
allocated to other employees for the year of the failure.
(ii) Exclusion from a 401(k) or (m) Plan. For administrative convenience, for
purposes of calculating the earnings rate for corrective contributions for a plan year (or
the portion of the plan year) during which an employee was improperly excluded from
- 91 -
making periodic elective deferrals or employee after-tax contributions, or from receiving
periodic matching contributions, the employer may treat the date on which the
contributions would have been made as the midpoint of the plan year (or the midpoint of
the portion of the plan year) for which the failure occurred. Alternatively, in this case, the
employer may treat the date on which the contributions would have been made as the
first date of the plan year (or the portion of the plan year) during which an employee was
excluded, provided that the earnings rate used is one half of the earnings rate applicable
under section 3.01(3) for the plan year (or the portion of the plan year) for which the
failure occurred.
(3) Earnings Rate. (a) General Rule. For purposes of this section 3, the earnings
rate generally is based on the investment results that would have applied to the corrective
contribution or allocation if the failure had not occurred.
(b) Multiple Investment Funds. If a plan permits employees to direct the
investment of account balances into more than one investment fund, the earnings rate is
based on the rate applicable to the employee's investment choices for the period of the
failure. For administrative convenience, if most of the employees for whom the corrective
contribution or allocation is made are nonhighly compensated employees, the rate of
return of the fund with the highest earnings rate under the plan for the period of the failure
may be used to determine the earnings rate for all corrective contributions or allocations.
If the employee had not made any applicable investment choices, the earnings rate may
be based on the earnings rate under the plan as a whole (i.e., the average of the rates
earned by all of the funds in the valuation periods during the period of the failure weighted
by the portion of the plan assets invested in the various funds during the period of the
failure).
(c) Other Simplifying Assumptions. For administrative convenience, the earnings
rate applicable to the corrective contribution or allocation for a valuation period with
respect to any investment fund may be assumed to be the actual earnings rate for the
plan's investments in that fund during that valuation period. For example, the earnings
rate may be determined without regard to any special investment provisions that vary
according to the size of the fund. Further, the earnings rate applicable to the corrective
contribution or allocation for a portion of a valuation period may be a pro rata portion of
the earnings rate for the entire valuation period, unless the application of this rule would
result in either a significant understatement or overstatement of the actual earnings during
that portion of the valuation period.
(4) Allocation Methods. (a) In General. For purposes of this section 3, the
earnings amount generally may be allocated in accordance with any of the methods set
forth in this paragraph (4). The methods under paragraph (4)(c), (d), and (e) are intended
to be particularly helpful where corrective contributions are made at dates between the
plan's valuation dates.
- 92 -
(b) Plan Allocation Method. Under the plan allocation method, the earnings
amount is allocated to account balances under the plan in accordance with the plan's
method for allocating earnings as if the failure had not occurred. (See, Example 26.)
(c) Specific Employee Allocation Method. Under the specific employee allocation
method, the entire earnings amount is allocated solely to the account balance of the
employee on whose behalf the corrective contribution or allocation is made (regardless of
whether the plan's allocation method would have allocated the earnings solely to that
employee). In determining the allocation of plan earnings for the valuation period during
which the corrective contribution or allocation is made, the corrective contribution or
allocation (including the earnings amount) is treated in the same manner as any other
contribution under the plan on behalf of the employee during that valuation period.
Alternatively, where the plan's allocation method does not allocate plan earnings for a
valuation period to a contribution made during that valuation period, plan earnings for the
valuation period during which the corrective contribution or allocation is made may be
allocated as if that employee's account balance had been increased as of the last day of
the prior valuation period by the corrective contribution or allocation, including only that
portion of the earnings amount attributable to earnings through the last day of the prior
valuation period. The employee's account balance is then further increased as of the last
day of the valuation period during which the corrective contribution or allocation is made
by that portion of the earnings amount attributable to earnings after the last day of the
prior valuation period. (See Example 27.)
(d) Bifurcated Allocation Method. Under the bifurcated allocation method, the
entire earnings amount for the valuation periods ending before the date the corrective
contribution or allocation is made is allocated solely to the account balance of the
employee on whose behalf the corrective contribution or allocation is made. The earnings
amount for the valuation period during which the corrective contribution or allocation is
made is allocated in accordance with the plan's method for allocating other earnings for
that valuation period in accordance with section 3.01(4)(b). (See Example 28.)
(e) Current Period Allocation Method. Under the current period allocation method,
the portion of the earnings amount attributable to the valuation period during which the
period of the failure begins ("first partial valuation period") is allocated in the same
manner as earnings for the valuation period during which the corrective contribution or
allocation is made in accordance section 3.01(4)(b). The earnings for the subsequent full
valuation periods ending before the beginning of the valuation period during which the
corrective contribution or allocation is made are allocated solely to the employee for
whom the required contribution should have been made. The earnings amount for the
valuation period during which the corrective contribution or allocation is made ("second
partial valuation period") is allocated in accordance with the plan's method for allocating
other earnings for that valuation period in accordance with section 3.01(4)(b). (See
Example 29.)
- 93 -
.02 Examples.
Example 26:
Employer L maintains a profit-sharing plan that provides only for nonelective contributions. The
plan has a single investment fund. Under the plan, assets are valued annually (the last day of the
plan year) and earnings for the year are allocated in proportion to account balances as of the last
day of the prior year, after reduction for distributions during the current year but without regard to
contributions received during the current year (the "prior year account balance"). Plan contributions
for 1997 were made on March 31, 1998. On April 20, 2000 Employer L determines that an
operational failure occurred for 1997 because Employee X was improperly excluded from the plan.
Employer L decides to correct the failure by using the Appendix A correction method for the
exclusion of an eligible employee from nonelective contributions in a profit-sharing plan. Under this
method, Employer L determines that this failure is corrected by making a contribution on behalf of
Employee X of $5,000 (adjusted for earnings). The earnings rate under the plan for 1998 was
+20%. The earnings rate under the plan for 1999 was +10%. On May 15, 2000, when Employer L
determines that a contribution to correct for the failure will be made on June 1, 2000, a reasonable
estimate of the earnings rate under the plan from January 1, 2000 to June 1, 2000 is +12%.
Earnings Adjustment on the Corrective Contribution
:
The $5,000 corrective contribution on behalf of Employee X is adjusted to reflect an earnings
amount based on the earnings rates for the period of the failure (March 31, 1998 through June 1,
2000) and the earnings amount is allocated using the plan allocation method. Employer L
determines that a pro rata simplifying assumption may be used to determine the earnings rate for
the period from March 31, 1998 to December 31, 1998, because that rate does not significantly
understate or overstate the actual earnings for that period. Accordingly, Employer L determines
that the earnings rate for that period is 15% (9/12 of the plan's 20% earnings rate for the year).
Thus, applicable earnings rates under the plan during the period of the failure are:
Time Periods Earnings Rate
3/31/98 - 12/31/98 (First Partial Valuation Period) +15%
1/1/99 - 12/31/99 +10%
1/1/00 - 6/1/00 (Second Partial Valuation Period) +12%
If the $5,000 corrective contribution had been contributed for Employee X on March 31, 1998, (1)
earnings for 1998 would have been increased by the amount of the earnings on the additional
$5,000 contribution from March 31, 1998 through December 31, 1998 and would have been
allocated as 1998 earnings in proportion to the prior year (December 31, 1997) account balances,
(2) Employee X's account balance as of December 31, 1998 would have been increased by the
additional $5,000 contribution, (3) earnings for 1999 would have been increased by the 1999
earnings on the additional $5,000 contribution (including 1998 earnings thereon) allocated in
proportion to the prior year (December 31, 1998) account balances along with other 1999 earnings,
and (4) earnings for 2000 would have been increased by the earnings on the additional $5,000
(including 1998 and 1999 earnings thereon) from January 1 to June 1, 2000 and would be allocated
in proportion to the prior year (December 31, 1999) account balances along with other 2000
earnings. Accordingly, the $5,000 corrective contribution is adjusted to reflect an earnings amount
of $2,084 ($5,000[(1.15)(1.10)(1.12)-1]) and the earnings amount is allocated to the account
balances under the plan allocation method as follows:
(a) Each account balance that shared in the allocation of earnings for 1998 is increased, as of
December 31, 1998, by its appropriate share of the earnings amount for 1998, $750 ($5,000(.15)).
- 94 -
(b) Employee X's account balance is increased, as of December 31, 1998, by $5,000.
(c) The resulting December 31, 1998 account balances will share in the 1999 earnings, including
the $575 for 1999 earnings included in the corrective contribution ($5,750(.10)), to determine the
account balances as of December 31, 1999. However, each account balance other than Employee
X's account balance has already shared in the 1999 earnings, excluding the $575. Accordingly,
Employee X's account balance as of December 31, 1999 will include $500 of the 1999 portion of
the earnings amount based on the $5,000 corrective contribution allocated to Employee X's
account balance as of December 31, 1998 ($5,000(.10)). Then each account balance that
originally shared in the allocation of earnings for 1999 (i.e., excluding the $5,500 additions to
Employee X's account balance) is increased by its appropriate share of the remaining 1999 portion
of the earnings amount, $75.
(d) The resulting December 31, 1999 account balances (including the $5,500 additions to Employee
X's account balance) will share in the 2000 portion of the earnings amount based on the estimated
January 1, 2000 to June 1, 2000 earnings included in the corrective contribution equal to $759
($6,325(.12)). (See Table 1.)
______________________________________________________________________
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%
750
1
All 12/31/1997 Account
Balances
4
1999 Earnings
10%
575
2
Employee X ($500)/ All
12/31/1998 Account
Balances ($75)
4
Second Partial
Valuation Period
Earnings
12%
759
3
All 12/31/1999 Account
Balances (including
Employee X's $5,500)
4
Total Amount
Contributed
$7,084
1
$5,000 x 15%
2
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
4
After reduction for distributions during the year for which earning are being determined but without regard
to contributions received during the year for which earnings are being determined.
____________________________________________________________________
Example 27
:
The facts are the same as in Example 26.
Earnings Adjustment on the Corrective Contribution
:
- 95 -
The earnings amount on the corrective contribution is the same as in Example 23, but the earnings
amount is allocated using the specific employee allocation method. Thus, the entire earnings
amount for all periods through June 1, 2000 (i.e., $750 for March 31, 1998 to December 31, 1998,
$575 for 1999, and $759 for January 1, 2000 to June 1, 2000) is allocated to Employee X.
Accordingly, Employer L makes a contribution on June 1, 2000 to the plan of $7,084
($5,000(1.15)(1.10)(1.12)). Employee X's account balance as of December 31, 2000 is increased
by $7,084. Alternatively, Employee X's account balance as of December 31, 1999 is increased by
$6,325 ($5,000(1.15)(1.10)), which shares in the allocation of earnings for 2000, and Employee X's
account balance as of December 31, 2000 is increased by the remaining $759. (See Table 2.)
______________________________________________________________________
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%
750
1
Employee X
1999 Earnings
10%
575
2
Employee X
Second Partial
Valuation Period
Earnings
12%
759
3
Employee X
Total Amount
Contributed
$7,084
1
$5,000 x 15%
2
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
______________________________________________________________________
Example 28
:
The facts are the same as in Example 26.
Earnings Adjustment on the Corrective Contribution
:
The earnings amount on the corrective contribution is the same as in Example 23, but the earnings
amount is allocated using the bifurcated allocation method. Thus, the earnings for the first partial
valuation period (March 31, 1998 to December 31, 1998) and the earnings for 1999 are allocated to
Employee X. Accordingly, Employer L makes a contribution on June 1, 2000 to the plan of $7,084
($5,000(1.15)(1.10)(1.12)). Employee X's account balance as of December 31, 1999 is increased
by $6,325 ($5,000(1.15)(1.10)); and the December 31, 1999 account balances of employees
(including Employee X's increased account balance) will share in estimated January 1, 2000 to
June 1, 2000 earnings on the corrective contribution equal to $759 ($6,325(.12)). (See, Table 3.)
______________________________________________________________________
- 96 -
TABLE 3
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Amount
Allocated to:
Corrective Contribution
$5,000
Employee X
First Partial Valuation
Period Earnings
15%
750
1
Employee X
1999 Earnings
10%
575
2
Employee X
Second Partial
Valuation Period
Earnings
12%
759
3
12/31/99 Account
Balances (including
Employee X's $6,325)
4
Total Amount
Contributed
$7,084
1
$5,000 x 15%
2
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
4
After reduction for distributions during the 2000 year but without regard to contributions received during the
2000 year.
______________________________________________________________________
Example 29
:
The facts are the same as in Example 26.
Earnings Adjustment on the Corrective Contribution
:
The earnings amount on the corrective contribution is the same as in Example 23, but the earnings
amount is allocated using the current period allocation method. Thus, the earnings for the first
partial valuation period (March 31, 1998 to December 31, 1998) are allocated as 2000 earnings.
Accordingly, Employer L makes a contribution on June 1, 2000 to the plan of $7,084 ($5,000
(1.15)(1.10)(1.12)). Employee X's account balance as of December 31, 1999 is increased by the
sum of $5,500 ($5,000(1.10)) and the remaining 1999 earnings on the corrective contribution equal
to $75 ($5,000(.15)(.10)). Further, both (1) the estimated March 31, 1998 to December 31, 1998
earnings on the corrective contribution equal to $750 ($5,000(.15)) and (2) the estimated January 1,
2000 to June 1, 2000 earnings on the corrective contribution equal to $759 ($6,325(.12)) are
treated in the same manner as 2000 earnings by allocating these amounts to the December 31,
2000 account balances of employees in proportion to account balances as of December 31, 1999
(including Employee X's increased account balance). (See, Table 4.) Thus, Employee X is
allocated the earnings for the full valuation period during the period of the failure.
______________________________________________________________________
TABLE 4
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
- 97 -
Earnings Rate Amount Allocated to:
Corrective Contribution
$5,000
Employee X
First Partial Valuation
Period Earnings
15%
750
1
12/31/99 Account
Balances (including
Employee X's $5,575)
4
1999 Earnings
10%
575
2
Employee X
Second Partial
Valuation Period
Earnings
12%
759
3
12/31/99 Account
Balances (including
Employee X's $5,575)
4
Total Amount
Contributed
$7,084
1
$5,000 x 15%
2
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
4
After reduction for distributions during the year for which earnings are being determined but without regard
to contributions received during the year for which earnings are being determined.
- 98 -
APPENDIX C
VCP CHECKLIST
IS YOUR SUBMISSION COMPLETE?
INSTRUCTIONS
The Service will be able to respond more quickly to your VCP request if it is carefully
prepared and complete. To ensure that your request is in order, use this checklist.
Answer each question in the checklist by inserting yes, no, or N/A, as appropriate, in the
blank next to the item. Sign and date the checklist (as taxpayer or authorized
representative) and include it in the submission as provided in section 11.09 of Rev. Proc.
2006-27 (Hereafter, all section references are to Rev. Proc. 2006-27.)
You must submit a completed copy of this checklist with your request. If a completed
checklist is not submitted with your request, substantive consideration of your submission
will be deferred until a completed checklist is received.
TAXPAYER'S NAME ________________________________________________
TAXPAYER'S I.D. NO. ____________________________________________
PLAN NAME & NO. ________________________________________________
ATTORNEY/P.O.A. ________________________________________________
The following items relate to all submissions:
______ 1. Does the submission consist solely of a failure to amend a plan
timely for (a) good faith plan amendments for EGTRRA, (b) plan
amendments for the final and temporary regulations under §
401(a)(9) or (c) interim amendments? If yes, please proceed to
Appendix F. (See section 11.01 and sections 4.06 and 10.08.)
______ 2. Have you included an explanation of how and why the failure(s)
arose, including a description of the administrative procedures for the
plan in effect at the time the failure(s) occurred? (See section
11.02(3) and (4).)
- 99 -
______ 3. Have you included a detailed description of the method for
correcting the failure(s) identified in your submission? This
description must include, for example, the number of employees
affected and the expected cost of correction (both of which may be
approximated if the exact number cannot be determined at the time
of the request), the years involved, and calculations or assumptions
the Plan Sponsor used to determine the amounts needed for
correction. In lieu of providing correction calculations with respect to
each employee affected by a failure, you may submit calculations
with respect to a representative sample of affected employees.
However, the representative sample calculations must be sufficient to
demonstrate each aspect of the correction method proposed. Note
that each step of the correction method must be described in
narrative form. (See section 11.02(5).)
______ 4. Have you described the earnings or interest methodology
(indicating computation period and basis for determining earnings or
interest rates) that will be used to calculate earnings or interest on
any corrective contributions or distributions? (As a general rule, the
interest rate (or rates) earned by the plan during the applicable
period(s) should be used in determining the earnings for corrective
contributions or distributions.) (See section 11.02(6).)
______ 5. Have you submitted specific calculations for either affected
employees or a representative sample of affected employees? (See
section 11.02(7).)
______ 6. Have you described the method that will be used to locate and
notify former employees or, if there are no former employees affected
by the failure(s) or the correction(s), provided an affirmative
statement to that effect? (See section 11.02(8).)
______ 7. Have you provided a description of the administrative measures
that have been or will be implemented to ensure that the same
failure(s) do not recur? (See section 11.02(9).)
______ 8. Have you included a statement that, to the best of the Plan
Sponsor's knowledge, the plan is not currently under an Employee
Plans examination? (See section 11.02(10).)
______ 9. Have you included a statement that, to the best of the Plan
Sponsor's knowledge, the Plan Sponsor is not under an Exempt
Organizations examination? (See section 11.02(10).)
- 100 -
_______ 10. Have you included a statement that neither the plan nor the Plan
Sponsor has been a party to an abusive tax avoidance transaction?
Alternatively, have you provided a statement identifying the abusive
tax avoidance transaction(s) to which the plan or the Plan Sponsor
has been a party? (See section 11.02(11).)
______ 11. If the submission includes a failure related to Transferred Assets,
have you included a description of the related employer transaction,
including the date of the employer transaction and the date the
assets were transferred to the plan? (See section 11.02(12).)
______ 12. Have you included a copy of the portions of the plan document
(and adoption agreement, if applicable) relevant to the failure(s) and
method(s) of correction? (See section 11.03(2).)
______ 13. Have you included the original signature of the sponsor or the
sponsor's authorized representative? (See section 11.06.)
_____ 14. Have you included a Power of Attorney (Form 2848) or Tax
Information Authorization (Form 8821)? Note: Authorization to
represent a plan sponsor before the Service using Form 2848 is
limited to attorneys, certified public accountants, enrolled agents, and
enrolled actuaries. (See section 11.07.)
______ 15. Have you included a Penalty of Perjury Statement signed
(original signature only) and dated by the Plan Sponsor? (See
section 11.08.)
______ 16. Have you designated your submission for a Qualified Plan,
403(b) Plan, SEP, SIMPLE IRA Plan, or Orphan Plan? In addition,
the submission should indicate if the submission is a Group
Submission, an Anonymous Submission, a nonamender submission,
a multiemployer or multiple employer plan submission. (See section
11.10.)
_______ 17. Have you submitted the Appendix E acknowledgement letter?
(See section 11.11.)
______ 18. If you are requesting a waiver of the excise tax under § 4974 of
the Code, have you included the request, and, if applicable, an
explanation supporting the request for any affected owner-employee
or 10 percent owner? (See section 6.09(2).)
- 101 -
________ 19. If you are requesting relief of the excise tax under §§ 4972 or
4979, have you included the request and a detailed description of the
failure? (See sections 6.09(3) & (4).)
________ 20. If you are you requesting that participant loans being corrected
under this revenue procedure not be treated as distributions pursuant
to § 72(p), have you included the request and a detailed description
of the failure? Alternatively, if you are requesting that participant
loans being corrected under this revenue procedure be recognized
as distributions in the year of correction, instead of the year that the
deemed distribution occurred under § 72(p), have you included the
request and a detailed description of the failure? (See sections
6.02(6) and 6.07.)
______ 21. Where applicable, have you submitted an application for a
determination letter and Form 8717 together with a check for the user
fee made payable to the U.S. Treasury? (See sections 10.06 and
11.03(3).)
_______ 22. If the plan is currently being considered in an unrelated
determination letter application, have you included a statement to
that effect? (See section 11.02(12).)
______ 23. Have you included a copy of the first three pages of the Form
5500 (which includes employee census information) and the
applicable Financial Information Schedule of the most recently filed
Form 5500 series return? Note: If a Form 5500 is not applicable,
insert N/A and furnish the name of the plan, and the census
information required of Form 5500 series filers. (See section
11.03(1).)
______ 24. Have you included a check for the VCP compliance fee, and, if
applicable, a separate check for the determination letter fee each
made payable to the U. S. Treasury? (See sections 10.06 and
12.01).)
_______ 25. If your submission is for a terminating Orphan Plan, have you
included a request for a waiver of the VCP fee? (See section
12.02(3).)
_______ 26. Have you assembled your submission as described in section
11.14?
- 102 -
If you inserted "N/A" for any item enter explanation:
_______________________________________________________________________
_______________________________________________________________________
____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
__________________________________________ ____________________
Signature Date
_________________________________________________________________
Title or Authority
Typed or printed name of person signing checklist
- 103 -
APPENDIX D
SAMPLE FORMATS FOR VCP SUBMISSIONS
The following sample submission formats may be photocopied and used as part of a VCP
submission.
I. SAMPLE FORMAT FOR VCP SUBMISSION FOR QUALIFIED PLAN
Indicate Plan Type, and whether submission is a Group or Anonymous Submission
Identification of Failures
A complete description, for each failure, which includes (but is not limited to):
1) A description of the failure
2) Years in which the failure occurred (including closed years)
3) Number of participants affected (may be estimated)
4) A description of the administrative procedures in effect at the time the failures
occurred
5) Explanation of how and why the failures occurred
Description of Proposed Method of Correction
A complete description of the correction proposed, for each failure, which includes (but is
not limited to):
1) a complete description of the method of correction proposed for correcting the failure
and if multiple steps are involved, a narrative of the steps involved in implementing the
proposed correction
2) the number of employees affected (may be estimated)
3) the expected cost of correction (may be estimated)
4) the years involved
5) calculations or assumptions used to determine the amounts needed for correction
6) a description of the methodology that will be used to calculate earnings or actuarial
adjustments on any corrective contributions or distributions (indicating the computation
- 104 -
periods and the basis for determining earnings or actuarial adjustments in accordance
with section 6.02(4) of Rev. Proc. 2006-27)
7) specific calculations, sufficient to demonstrate each aspect of the correction method
proposed, for each affected employee or a representative sample of affected
employees
8) the method that will be used to locate and notify former employees and beneficiaries,
or an affirmative statement that no former employees or beneficiaries were affected by
the failures or will be affected by the correction
9) if a submission includes a failure that refers to Transferred Assets and the failure
occurred prior to the transfer, a description of the transaction (including the dates of
the employer change and the plan transfer)
10) any request (with supporting rationale) for either not treating participant loans as
distributions pursuant to § 72(p) or that deemed distributions under § 72(p) be
recognized in the year of correction
11) any specific request (with supporting rationale) for relief from excise taxes under
§§ 4972, 4974 or 4979
12) for Orphan Plans only, any specific request for relief (with supporting rationale) from
imposition of the Voluntary Compliance fee
Description of Administrative Procedures
A description of the administrative measures that have been or will be implemented to
ensure that the failure(s) will not recur
Sample Statement regarding status of examination:
To the best of the Plan Sponsor's knowledge (1) the subject Plan is not currently under
examination of either an Employee Plans Form 5500 series return or other Employee
Plans examination, (2) the Plan Sponsor is not under an Exempt Organizations
examination (that is, an examination of a Form 990 series return or other Exempt
Organizations examination, (3) neither the Employer nor any of its representatives have
received verbal or written notification from the TEGE Division of an impending
examination or of any impending referral for such examination, nor is the Plan in Appeals
or litigation for any issues raised in such an examination, and (4) the subject Plan is not
currently under investigation by the Criminal Investigation Division of the Internal
Revenue Service.
Sample Statement (if applicable) regarding status of any determination letter
application not related to the VCP submission
The Plan Sponsor applied for and has currently pending an application for a favorable
determination letter with the Service filed on (insert date).
- 105 -
Sample Statement regarding abusive tax avoidance transactions if neither the Plan
nor the Plan Sponsor was a party to such a transaction (note - if either the plan or
plan sponsor was a party to such a transaction, a statement describing the
transaction will be required)
Neither the Plan nor the Plan Sponsor has been a party to an abusive tax avoidance
transaction as defined in section 4.13(2) of Rev. Proc. 2006-27.
Sample Penalty of Perjury
:
Under penalties of perjury, I declare that I have examined this submission, including
accompanying documents and, to the best of my knowledge and belief, the facts and
information presented in support of this submission are true, correct and complete.
________________________________________________
Name and Title (Executed by Plan Sponsor)
Required Documentation:
___ Copy of plan document (or relevant plan provisions, i.e., those provisions relating to
the failure(s) described in the submission)
___ Copy of the first three pages of the most recently filed Form 5500 series return and
the applicable Financial Information Schedule. (In the case of a terminated plan, the Form
5500 must be the one filed for the plan year prior to the plan year for which the Final Form
5500 return was filed.)
___ Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if
applicable
___A statement that neither the plan nor the Plan Sponsor has been a party to an abusive
tax avoidance transaction (as defined in section 4.13(2)) or a brief identification of any
abusive tax avoidance transaction to which the plan or the Plan Sponsor has been a party
Determination letter application
Your submission must include a determination letter application on the appropriate Form
5300 series application form if you are correcting a nonamender failure. A nonamender
failure is a failure to amend the plan to reflect a change in a qualification requirement
within the plan’s applicable remedial amendment period. A change in a qualification
requirement includes a change arising from a statutory change, issuance of regulations or
- 106 -
other guidance published in the Internal Revenue Bulletin. If you are correcting the
nonamender failure through the adoption of an amendment designated by the Service as
a model amendment or the adoption of a prototype or volume submitter plan for which
you have reliance on the plan’s opinion or advisory letter as provided in Rev. Proc. 2006-
6, 2006-1 I.R.B. 204, no determination letter application is necessary. If your plan is
terminating, or if you are correcting a failure other than a nonamender failure through a
plan amendment and you are submitting your VCP submission during the same year the
plan’s remedial amendment period is expiring, you may request a determination letter on
the plan. When submitting for a determination letter with a VCP submission, please
submit the following documents:
___ a copy of the amendment (or entire plan, in the case of a nonamender failure)
___ the appropriate Form 5300 series application form , and
___ Form 8717 and the appropriate determination letter user fee
Assembling your submission
Please assemble your submission package in the order provided in section 11.14 of this
revenue procedure (and partially reproduced below). The sample format above may be
used as a tool for preparing the information required for your submission.
1. If applicable, Form 8717 User Fee for Employee Plan Determination Letter
Request and the check for the determination letter user fee made payable to the
U.S. Treasury
2. Determination letter application (Form 5300 series), if applicable
3. Submission signed by the Plan Sponsor or Plan Sponsor’s authorized
representative, with a check for the VCP fee made payable to the U.S. Treasury
attached to the front of the submission letter. The submission should include the
following:
• Type of plan (or group of plans) being submitted
• Description of the failures (if the failures relate to Transferred Assets,
include a description of the related employer transaction)
• An explanation of how and why the failures arose
• Description of the method for correcting failures, including earnings
methodology (if applicable) and supporting computations (if applicable)
• Description of the method used to locate or notify former employees
affected by the failures or corrections and if no former employees are
affected by the failures or corrections, then the letter should affirmatively
state that position when addressing this issue
• Description of the administrative procedures that have been or will be
implemented to ensure that the failures do not recur
- 107 -
• Whether a request that participant loans corrected under this revenue
procedure not be treated as distributions §72(p) is being made and
supporting rationale for such request. Alternatively, whether a request that
participant loans corrected under this revenue procedure should be treated
as distributions in the year of correction is being made and supporting
rationale for such request.
• Whether relief from imposition of the excise taxes under §§ 4972, 4974 or
4979 is being requested, and the supporting rationale for such relief
• If the plan is an Orphan Plan, whether relief from the VCP application fee is
being requested, and the supporting rationale for such relief
• A statement on whether the plan is being considered in an unrelated
determination letter application (if applicable)
• Statement that the plan is not Under Examination
• Statement that the Plan Sponsor is not under an Exempt Organizations
examination
• A statement that neither the plan nor the Plan Sponsor has been a party to
an abusive tax avoidance transaction (as defined in section 4.13(2)) or a
brief identification of any abusive tax avoidance transaction to which the
plan or the Plan Sponsor has been a party.
• Penalty of perjury statement
4. Completed and signed checklist (see Appendix C of Rev. Proc. 2006-27)
5. Acknowledgement Letter, if desired (see Appendix E of Rev. Proc. 2006-27)
6. Power of attorney (Form 2848) or Tax Information Authorization (Form 8821), if
applicable
7. Form 5500, (first three pages and the applicable Financial Information Schedule)
or equivalent information
8. Copy of opinion or determination letter (if applicable)
9. Relevant plan document language or plan document (if applicable)
10. Any other items that may be relevant to the submission
- 108 -
II. SAMPLE FORMAT FOR VCP SUBMISSION FOR QUALIFIED PLAN WHERE THE
ONLY ISSUE IS A NONAMENDER FAILURE
Indicate Plan Type, and whether submission is a Group or Anonymous Submission
Identification of Failures
1) Indicate which tax legislation is the subject of the submission: (check all that apply)
_______ The Employee Retirement Security Act of 1974 (ERISA)
_______ The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
_______ The Deficit Reduction Act of 1984 (DEFRA)
________ The Retirement Equity Act of 1984 (REA)
________ The Tax Reform Act of 1986 (TRA ’86)
________ The Unemployment Compensation Act of 1992 (UCA)
________ The Omnibus Budget Reconciliation Act of 1993 (OBRA ’93)
_______ The Uruguay Round Agreements Act; the Uniformed Services
Employment and Reemployment Rights Act of 1994; the Small Business
Job Protection Act of 1996; the Taxpayer Relief Act of 1997; the Internal
Revenue Service Restructuring and Reform Act of 1998; and the
Community Renewal Tax Relief Act of 2000 (collectively known as
“GUST”)
_______ The good faith plan amendments for the Economic Growth and Tax Relief
Reconciliation Act of 2001 (“EGTRRA”), within the period described in
Notice 2001-42 including those changes listed in Notice 2005-5
_______ The final and temporary regulations under § 401(a)(9) of the
Internal Revenue Code
_______ interim amendments pursuant to section 5 of Rev. Proc. 2005-66
Please List:
__________________________________________________________
- 109 -
__________________________________________________________
__________________________________________________________
__________________________________________________________
_______ EGTRRA
_______ Other:
Please list: ________________________________________________
2) Years in which the failure(s) occurred (including closed years)
3) A description of the administrative procedures in effect at the time the failures
occurred
4) Explanation of how and why the failures occurred
Description of Proposed Method of Correction
Include appropriate determination letter application (see “Required Documentation,”
below).
Description of Administrative Procedures
A description of the administrative measures that have been or will be implemented to
ensure that the failure(s) will not recur
Sample Statement regarding status of examination:
To the best of the Plan Sponsor's knowledge (1) the subject Plan is not currently under
examination of either an Employee Plans Form 5500 series return or other Employee
Plans examination, (2) the Plan Sponsor is not under an Exempt Organizations
examination (that is, an examination of a Form 990 series return or other Exempt
Organizations examination, (3) neither the Employer nor any of its representatives have
received verbal or written notification from the TEGE Division of an impending
examination or of any impending referral for such examination, nor is the Plan in Appeals
or litigation for any issues raised in such an examination, and (4) the subject Plan is not
currently under investigation by the Criminal Investigation Division of the Internal
Revenue Service.
Sample Statement regarding abusive tax avoidance transactions if neither the Plan
nor the Plan Sponsor was a party to such a transaction (note - if either the plan or
plan sponsor was a party to such a transaction, a statement describing the
transaction will be required)
- 110 -
Neither the Plan nor the Plan Sponsor has been a party to an abusive tax avoidance
transaction as defined in section 4.13(2) of Rev. Proc. 2006-27.
Sample Statement (if applicable) regarding status of any determination letter
application not related to the VCP submission
The Plan Sponsor applied for and has currently pending an application for a favorable
determination letter with the Service filed on (insert date).
Sample Penalty of Perjury:
Under penalties of perjury, I declare that I have examined this submission, including
accompanying documents and, to the best of my knowledge and belief, the facts and
information presented in support of this submission are true, correct, and complete.
________________________________________________
Name and Title (Executed by Plan Sponsor
Required Documentation:
___ Appropriate determination letter application form (i.e., Form 5300 series)
___ Copy of plan document in effect prior to proposed amendment
___ Copy of the proposed plan amendment
___ Form 8717 and determination user fee
___ Any other materials required to be submitted with determination letter application
(see Forms 5300, 5310 & Schedule Q, and 5303)
___ Copy of the first three pages of the most recently filed Form 5500 series return and
the applicable Financial Information Schedule (In the case of a terminated plan, include
the Form 5500 filed for the plan year prior to the plan year for which the Final Form 5500
return was filed.)
___ Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if
applicable
- 111 -
___ A statement that neither the plan nor the Plan Sponsor has been a party to an
abusive tax avoidance transaction (as defined in section 4.13(2)) or a brief identification of
any abusive tax avoidance transaction to which the plan or the Plan Sponsor has been a
party
___ Copy of determination letter most recently issued with respect to the plan
Your submission must include a determination letter application on the appropriate Form
5300 series application form if you are correcting a nonamender failure. A nonamender
failure is a failure to amend the plan to reflect a change in a qualification requirement
within the plan’s applicable remedial amendment period. A change in a qualification
requirement includes a change arising from a statutory change, issuance of regulations or
other guidance published in the Internal Revenue Bulletin. If you are correcting the
nonamender failure through the adoption of an amendment designated by the Service as
a model amendment or the adoption of a prototype or volume submitter plan for which
you have reliance on the plan’s opinion or advisory letter as provided in Rev. Proc. 2006-
6, 2006-1 I.R.B. 204, no determination letter application is necessary. If your plan is
terminating, or if you are correcting a failure other than a nonamender failure through a
plan amendment and you are submitting your VCP submission during the same year the
plan’s remedial amendment period is expiring, you may request a determination letter on
the plan.
Assembling your submission
If you are preparing your submission using the sample format provided above, please
assemble your submission package in the following order:
1. If applicable, Form 8717, User Fee for Employee Plan Determination Letter
Request, and the check for the determination letter user fee made payable to the
U.S. Treasury
2. Determination letter application (Form 5300 series), if applicable
3. Submission, with a check for the VC fee made payable to the U.S. Treasury
attached to the front of the submission letter, and including:
• Identification of Failures
• Description of Proposed Method of Correction
• Description of Administrative Procedures
• Statement regarding status of examination
• Statement regarding abusive tax avoidance transactions
• Statement regarding unrelated determination letter application (if
applicable)
• Penalty of Perjury statement
4. Completed and signed Checklist (see Appendix C of Rev. Proc. 2006-27)
- 112 -
5. Acknowledgement Letter, if desired (see Appendix E of Rev. Proc. 2006-27)
6. Power of attorney (Form 2848) or Tax Information Authorization (Form 8821), if
applicable
7. Form 5500 (first three pages and the applicable Financial Information Schedule) or
equivalent information including: number of participants in the plan and total
amount of plan assets
8. Copy of opinion or determination letter
9. Copy of plan document in effect prior to the proposed plan amendment(s)
10. Copy of the proposed plan amendments
- 113 -
Appendix E
Acknowledgement Letter
[ ] INSERT NAME AND
[ ] ADDRESS OF PLAN
[ ] SPONSOR OR
[ ] POWER OF
ATTORNEY AT LEFT
Plan Name: [Insert plan name and plan number]
Control #: _________________ [To be completed by the Internal Revenue Service]
Received Date: ______________ [To be completed by the Internal Revenue Service]
The Internal Revenue Service, Employee Plans Voluntary Compliance, has received your
VCP Submission for the above-captioned plan. Your request has been assigned the
control number listed above. This number should be referred to in any communication to
us concerning your submission.
You will be contacted when the case is assigned to an agent. If you are not contacted
within 120 days from the date of this letter, and need to inquire about the status of your
case, please call (202) 283-9888 (not a toll-free number). Please leave a message with
the name of the Plan, the Control Number, your name and a phone number where you
can be reached.
Thank you for your cooperation.
- 114 -
APPENDIX F
VCP SAMPLE SUBMISSION FOR INTERIM NONAMENDERS
PLAN SPONSOR'S NAME ________________________________________________
PLAN SPONSOR'S I.D. NO. ______________________________________________
PLAN SPONSOR’S ADDRESS:
_____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
PLAN NAME & NO. _____________________________________________________
PLAN SPONSOR REPRESENTATIVE NAME _________________________________
PLAN SPONSOR REPRESENTATIVE ADDRESS:
_____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Identification of Failures:
The Plan identified above was not amended timely for: (check failure(s) that apply):
_____
the good faith plan amendments for the Economic Growth and Tax Relief Reconciliation
Act of 2001 (“EGTRRA”), within the period described in Notice 2001-42 including those changes
listed in Notice 2005-5
______ the final and temporary regulations under § 401(a)(9) of the Internal Revenue Code
______ interim amendments pursuant to section 5 of Rev. Proc. 2005-66
Please List:
_____________________________________________________________________
______________________________________________________________________
- 115 -
Description of Proposed Method of Correction
The Plan Sponsor adopted amendments required to correct the failure(s) identified above. The
signed and dated amendments are attached to this submission.
Description of steps taken to ensure that the failure does not recur [INSERT below]
Plan Sponsor’s representations:
To the best of my knowledge (1) the subject Plan is not currently under examination of either an
Employee Plans Form 5500 series return or other Employee Plans examination, (2) the Plan
Sponsor is not under an Exempt Organizations examination (that is, an examination of a Form
990 series return or other Exempt Organizations examination, (3) neither the Employer nor any
of its representatives have received verbal or written notification from the TEGE Division of an
impending examination or of any impending referral for such examination, nor is the Plan in
Appeals or litigation for any issues raised in such an examination, and (4) the subject Plan is not
currently under investigation by the Criminal Investigation Division of the Internal Revenue
Service.
Neither the Plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction
as defined in section 4.13(2) of Rev. Proc. 2006-27.
The Plan Sponsor will neither attempt to amortize, deduct, or recover from the Internal
Revenue Service any compliance fee paid in connection with this compliance statement, nor
receive any Federal tax benefit on account of payment of such compliance fee.
Under penalties of perjury, I declare that I have examined this submission, including
accompanying documents and, to the best of my knowledge and belief, the facts and information
presented in support of this submission are true, correct and complete.
Signed: _________________________________
Name (printed): _________________________________
Title: ____________________________________
- 116 -
Plan Sponsor’s documents:
In addition to the corrective plan amendments, described in the “Proposed Method of
Correction,” the Plan Sponsor encloses the following documents with this submission:
• VC fee of $375 made payable to the U.S. Treasury
• Copy of the first three pages of the most recently filed Form 5500 series return
and the applicable Financial Information Schedule (In the case of a terminated
plan, the Form 5500 must be the one filed for the plan year prior to the plan year
for which the Final Form 5500 return was filed.)
• Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if
applicable
Enforcement Resolution:
The Internal Revenue Service will not pursue the sanction of plan disqualification on account of
the qualification failures described in this VCP submission.
The Internal Revenue Service will treat the adoption of the amendments as making available the
remedial amendment period, currently described in Rev. Proc. 2005-66.
Approved: _______________________________
Joyce Kahn, Manager
Employee Plans Voluntary Compliance
Tax Exempt and Government Entities Division
Internal Revenue Service
Date: _______________________________Poursuivez vos recherches dans ChatGPT ou Claude
Connectez Omnilex pour rechercher dans le corpus juridique depuis votre assistant IA.