rr-02-45.pdf

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Part I
Section 401.--Qualified Pension, Profit-sharing and Stock Bonus Plans
26 CFR 1.401-1: Qualified pension, profit-sharing, and stock bonus plans.
(Also §§ 404, 415, 4972; 1.415-6.)
Rev. Rul. 2002- 45
ISSUE
Under the facts described below, are payments to the trust of a defined
contribution plan qualified under § 401(a) of the Internal Revenue Code (the Code)
treated as contributions for purposes of § 401(a)(4), 401(k)(3), 401(m), 404, 415(c), or
4972?
FACTS
Situation 1. Employer M maintains Plan X, a defined contribution plan, for the
benefit of M’s employees. The plan is qualified under § 401(a). Employer M caused an
unreasonably large portion of the assets of Plan X to be invested in Entity G, a high-risk
investment. It is later determined that the investment has become worthless.
A group of participants in Plan X files a suit against Employer M alleging a
breach of fiduciary duty in connection with the investment in Entity G. Following the
filing of the suit, the parties agree to a settlement pursuant to which Employer M does
not admit that a breach of fiduciary duty occurred but makes a payment to Plan X equal

to the amount of the losses (including an appropriate adjustment to reflect lost
earnings) to Plan X from the investment in Entity G. The settlement also provides that
the payment will be allocated among the individual accounts of all of the participants
and beneficiaries in proportion to each account’s investment in Entity G over the
appropriate period. The court approves the settlement and enters a consent order.
Employer M makes the payment to Plan X and the payment is allocated to the
appropriate accounts.
Situation 2. The facts are the same as in Situation 1, except that no lawsuit is
filed against Employer M. However, Employer M becomes aware that participants in
Plan X are concerned about the investment in Entity G and are considering taking legal
action. Employer M also learns that lawsuits alleging fiduciary breach have been filed
against other companies by those companies’ employees over losses to their qualified
retirement plans due to investment in Entity G. Employer M decides to make the
payment to Plan X before a lawsuit is filed, after reasonably determining that it has a
reasonable risk of liability for breach of fiduciary duty based on all of the relevant facts
and circumstances.
LAW AND ANALYSIS
The provisions of the Code that apply to contributions to qualified defined
contribution plans include §§ 401(a)(4), 401(k)(3), 401(m), 404, 415 and 4972.
Section 401(a)(4) generally provides that the contributions or benefits provided
under a qualified defined contribution plan may not discriminate in favor of highly
compensated employees. Whether contributions under a defined contribution plan are

discriminatory is generally determined by comparing the amount of contributions
allocated to the accounts of highly compensated employees with the amount of
contributions allocated to the accounts of nonhighly compensated employees.
Section 401(k)(3) contains participation and nondiscrimination standards for
elective deferrals to qualified cash or deferred arrangements. Section 401(m) contains
nondiscrimination tests for matching contributions and employee contributions. Both §
401(k)(3) and § 401(m) provide rules regarding qualified matching contributions and
qualified nonelective contributions.
Section 404 generally provides that contributions paid by an employer to or
under a plan, if they would otherwise be deductible, are only deductible under § 404,
subject to various limitations under § 404(a).
Section 415(c) generally limits the amount of contributions and other additions
under a qualified defined contribution plan with respect to a participant for any year.
Section 4972(a) imposes a 10 percent excise tax on the amount of the
nondeductible contributions made to any “qualified employer plan,” including a plan
qualified under § 401(a) or 403(a).
A payment made to a qualified defined contribution plan is not treated as a
contribution to the plan, and accordingly is not subject to the Code provisions described
above, if the payment is made to restore losses to the plan resulting from actions by a
fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty
under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and plan
participants who are similarly situated are treated similarly with respect to the payment.

For purposes of this revenue ruling, these payments are referred to as “restorative
payments.”
The determination of whether a payment to a qualified defined contribution plan
is treated as a restorative payment, rather than as a contribution, is based on all of the
relevant facts and circumstances. As a general rule, payments to a defined contribution
plan are restorative payments for purposes of this revenue ruling only if the payments
are made in order to restore some or all of the plan’s losses due to an action (or a
failure to act) that creates a reasonable risk of liability for breach of fiduciary duty. In
contrast, payments made to a plan to make up for losses due to market fluctuations
and that are not attributable to a fiduciary breach are generally treated as contributions
and not as restorative payments. In no case will amounts paid in excess of the amount
lost (including appropriate adjustments to reflect lost earnings) be considered
restorative payments. Furthermore, payments that result in different treatment for
similarly situated plan participants are not restorative payments. The failure to allocate
a share of the payment to the account of a fiduciary responsible for the losses does not
result in different treatment for similarly situated participants.
Payments to a plan made pursuant to a Department of Labor (DOL) order or
court-approved settlement to restore losses to a qualified defined contribution plan on
account of a breach of fiduciary duty generally are treated as having been made on
account of a reasonable risk of liability.
1

1
Whether a payment is made under the Voluntary Fiduciary Correction (VFC) Program
established by the DOL may be taken into account in determining whether there is a
reasonable risk of liability. Final rules describing the VFC Program were issued by the
DOL on March 28, 2002 (67 Fed. Reg. 15062). The VFC Program is designed to
encourage employers to voluntarily comply with Title I of ERISA by correcting certain
violations of the law. If an applicant meets the VFC Program criteria it will receive a no

In no event are payments required under a plan or necessary to comply with a
requirement of the Code considered restorative payments, even if the payments are
delayed or otherwise made in circumstances under which there has been a breach of
fiduciary duty. Thus, for example, while the payment of delinquent elective deferrals or
employee contributions is part of an acceptable correction under the VFC Program,
such payment is not a restorative payment for purposes of this revenue ruling.
Similarly, payments made under the Employee Plans Compliance Resolution System
(EPCRS), Rev. Proc. 2002-47, at page [insert page number] of this Bulletin, or
otherwise, to correct qualification failures are generally considered contributions and do
not constitute restorative payments for purposes of this revenue ruling. However, the
payment of appropriate adjustments to reflect lost earnings required under EPCRS is
generally treated in the same manner as a restorative payment.
In Situation 1, the payment by Employer M to restore losses to Plan X on
account of the investment in Entity G is made pursuant to a court-approved settlement
of the suit filed against it by plan participants and is not in excess of the amount lost
(including appropriate adjustments to reflect lost earnings). In Situation 2, the payment
by Employer M is made after it reasonably determines, based on all of the relevant
facts and circumstances, that it has a reasonable risk of liability for breach of fiduciary
duty even though no suit has yet been filed. In reaching this determination the following
facts are taken into account: that Entity G was a high-risk investment, that a large
portion of the plan assets had been invested in Entity G, that participants expressed

action letter from the DOL, pursuant to which the DOL will neither initiate a civil
investigation under ERISA regarding the applicant’s responsibility for any transaction
described in the letter nor assess a civil penalty under section 502(l) of ERISA on the
correction amount paid to the plan or its participants.

concern about the investment, and that several lawsuits had been filed against other
employers alleging fiduciary breach in connection with the investment of plan assets in
Entity G.
In both Situation 1 and Situation 2, therefore, the payment is made based on a
reasonable determination that there is a reasonable risk of liability for breach of
fiduciary duty and to restore losses to the plan. In addition, the payment is allocated
among the individual accounts of the participants and beneficiaries in proportion to
each account’s investment in Entity G so that similarly situated participants are not
treated differently.
In both Situation 1 and Situation 2, the payment is a restorative payment (as
defined in this revenue ruling) and, as such, is not a contribution to a qualified plan.
Accordingly, the payment is not taken into account under § 401(a)(4) or 415(c) or, if
applicable to the plan, § 401(k)(3) or (m). In addition, the restorative payments to Plan
X are not subject to the provisions of § 404 or 4972.
HOLDING
The payments to the defined contribution plans qualified under § 401(a) under
the facts described in Situation 1 and Situation 2 above are not contributions for
purposes of § 401(a)(4), 401(k)(3), 401(m), 404, 415(c), or 4972.
Drafting Information
The principal author of this revenue ruling is Diane S. Bloom of the Employee
Plans, Tax Exempt and Government Entities Division. For further information regarding

this revenue ruling, please contact the Employee Plans’ taxpayer assistance telephone
service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and
6:30 p.m. Eastern time, Monday through Friday. Ms. Bloom may be reached at 1-202-
283-9888 (not a toll-free number).