Guidance Expands Use of Self-Correction Program for Employee Plans

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TABLE OF CONTENTS

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 establishing limited fees for voluntary corrections approved by the Internal Revenue Service (“IRS”), thereby reducing employers' uncertainty regarding their potential tax liability and participants' potential tax liability.

• Fees and sanctions should be graduated in a series of steps so that there is always an incentive to correct promptly.

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

• Administration of EPCRS should be consistent and uniform.

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

.03 Overview. EPCRS includes the following basic elements:

• Self-correction (SCP). A Plan Sponsor that has established compliance practices and procedures may, at any time without paying any fee or sanction, correct insignificant Operational Failures under a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan. For a SEP or SIMPLE IRA Plan, SCP is available only if the SEP or SIMPLE IRA Plan is established and maintained on a document approved by the IRS. In addition, in the case of a Qualified Plan or 403(b) Plan that satisfies the requirements of sections 4.03 and 4.04, the Plan Sponsor generally may correct significant Operational Failures and Plan Document Failures without payment of any fee or sanction if the correction is made within the time specified in section 9.02.

• Voluntary correction with IRS approval (VCP). A Plan Sponsor, at any time before audit, may pay a limited fee and receive the IRS's approval for correction of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan failure. Under VCP, there are special procedures for Anonymous Submissions and Group Submissions.

• Correction on audit (Audit CAP). If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.

SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS

.01 Effect on programs. This revenue procedure modifies and supersedes Rev. Proc. 2018-52, 2018-42 I.R.B. 611, the most recent prior consolidated statement of the correction programs under EPCRS. This update to Rev. Proc. 2018-52 is a limited update and is published primarily to expand SCP eligibility to permit correction of certain Plan Document Failures and certain plan loan failures, and also to provide an additional method of correcting Operational Failures by plan amendment under SCP. See the discussion of the expanded ability to correct under SCP in sections 2.02 and 2.03.

.02 Modifications relating to SCP. (1) In general. Practitioners have requested expansion of the ability to use SCP to correct certain failures, stating that expansion of SCP would increase compliance and reduce the costs and burdens associated with plan compliance. In light of those comments, the Department of the Treasury (Treasury Department) and the IRS have concluded that an expansion of SCP will facilitate compliance for plans, while reducing costs and burdens of compliance by allowing Plan Sponsors to self-correct in certain additional circumstances. Beginning April 19, 2019, Plan Sponsors that satisfy the eligibility requirements of SCP may use the procedures under this revenue procedure to correct certain Operational Failures or Plan Document Failures under SCP.

(2) Correcting certain Plan Document Failures under SCP. Section 4.01 is revised to provide that SCP is available to correct certain Plan Document Failures. Section 4.01(1)(b) provides that, if otherwise eligible to correct under SCP, a sponsor of a Qualified Plan or 403(b) Plan may correct certain Plan Document Failures under SCP, other than the initial failure to adopt a Qualified Plan or the failure to adopt a written 403(b) plan document timely, as required under §1.403(b)-3(b)(3) and Notice 2009-3, 2002 I.R.B. 250. Plan Document Failures under SCP are always treated as significant failures and must be corrected in accordance with section 9. Consistent with treating Plan Document Failures as significant failures, section 4.03(1) provides that certain Plan Document Failures may be corrected under SCP only if the Plan, as of the date of correction, is subject to a Favorable Letter and the correction is made within the SCP correction period. As under Rev. Proc. 2018-52, section 4.01(1)(c) provides that, for SEPs and SIMPLE IRAs, SCP is available to correct only insignificant Operational Failures. Section 4.01(1)(d) continues to provide that Demographic and Employer Eligibility Failures are not available for correction under SCP. Numerous conforming changes to the revenue procedure have been made to implement the expansion of SCP to permit correction of certain Plan Document Failures.

(3) New rules for correcting by plan amendment under SCP. This revenue procedure adds new rules for correcting Operational Failures by plan amendment under SCP. Under Rev. Proc. 2018-52, a Plan Sponsor could correct an Operational Failure by a plan amendment to conform the terms of the plan to the plan's prior operations for Operational Failures listed in section 2.07 of Appendix B. Under the new correction rules in this revenue procedure, an Operational Failure may be corrected by plan amendment under SCP if three conditions are satisfied: (a) the plan amendment would result in an increase of a benefit, right, or feature, (b) the increase in the benefit, right, or feature is available to all eligible employees, and (c) providing the increase in the benefit, right or feature is permitted under the Code and satisfies the correction principles of section 6.02. In addition to Operational Failures, section 4.05(2)(c) permits certain Plan Document Failures to be corrected by plan amendment if the plan has a Favorable Letter and satisfies section 9.

(4) SCP is available to correct certain plan loan failures. (a) In general. The revenue procedure permits certain plan loan failures to be corrected under SCP. section 6.07(1) provides that plan loan failures described in section 6.07 generally may be corrected under VCP, Audit CAP, or SCP, unless otherwise specified. The revenue procedure also provides that errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may be corrected under SCP in accordance with section 6.07(3)(d). The correction methods for a defaulted loan are the same as those provided under Rev. Proc. 2018-52; namely, permitting correction by either a single-sum repayment, re-amortization of the outstanding loan balance, or a combination of the two. The Department of Labor's Voluntary Fiduciary Correction Program (VFC Program), at 71 FR 20262, provides for a no-action letter for a defaulted loan failure corrected under VCP, provided the conditions of the VFC Program are met. Such no-action letters are conditioned under section 7.3(b) of that program on the inclusion of a VCP compliance statement, among other things. The Department of Labor has advised the IRS that it will not issue a no-action letter under section 7.3(b) of its VFC Program unless such failures are corrected under VCP.

(b) Reporting of deemed distributions. section 6.07(1) of Rev. Proc. 2018-52 provided that if correction of a plan loan failure is not made, a deemed distribution under §72(p)(1) must be reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with respect to the affected participant. Rev. Proc. 2018-52 permitted, as part of VCP and Audit CAP, a Plan Sponsor to report the deemed distribution on Form 1099-R in the year of correction (instead of the year of the failure), but only if the Plan Sponsor specifically requested that relief. section 6.07(2) of this revenue procedure eliminates the requirement that the reporting relief must be requested in order to report the deemed distribution in the year of correction.

(c) Plan loan statutory failures. section 6.07(3)(b) and (c) provides that failures related to: (a) plan loans that are made in excess of the loan limits under § 72(p)(2)(A), or (b) plan terms that do not meet the requirements of § 72(p)(2)(B) or (C), may be corrected only under VCP or Audit CAP.

(d) Failure to obtain spousal consent for a plan loan. section 6.07(4) provides a new correction method for failure to obtain spousal consent for a plan loan. Under the new correction method, the Plan Sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent. If spousal consent is not obtained, section 6.07(4)(b) provides that the failure must be corrected using either VCP or Audit CAP.

(e) Expanding SCP to correct certain plan loan failures by plan amendment. section 6.07(5) provides that a Plan Sponsor may correct a failure resulting from granting a number of plan loans that exceeds the number of loans permitted under a plan by adopting a plan amendment in accordance with the correction by plan amendment methods set forth in section 2.07(3) of Appendix B. New section 2.07(3) of Appendix B adds a new correction method for plan loans when the number of plan loans exceeds the number permitted under the plan, in addition to the current correction method relating to the failure of granting plan loans to a participant under a plan that does not permit plan loans. Under section 2.07(3) of Appendix B, the Plan Sponsor may correct by plan amendment if: (i) the amendment satisfies § 401(a), (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 and effective when plan loans were first made available, and (iii) plan loans (including plan loans in excess of the number permitted under the terms of the plan) were available to either all participants, or solely to one or more participants who were nonhighly compensated employees.

.03 Description of other modifications. The modifications to Rev. Proc. 2018-52 that are reflected in this revenue procedure include the following changes —

• Revising section 1.03 to reflect that SCP is available to correct certain Plan Document Failures, and to make other modifications. For a description of the expansion of SCP to correct certain Plan Document Failures, see section 2.02(2).

• Revising section 4.01 to provide that SCP is also available to correct certain Plan Document Failures and certain plan loan failures. For a description of the expansion of SCP to correct certain Plan Document Failures and certain plan loan failures, see section 2.02(2) and (4).

• Revising section 4.03(1) to provide that certain Plan Document Failures may be corrected under SCP if, as of the date of the correction, the plan is subject to a Favorable Letter and other applicable requirements are met.

• Revising section 4.04 to reflect that SCP is available to correct certain Plan Document Failures and to make other modifications. For a description of the expansion of SCP to correct certain Plan Document Failures, see section 2.02(2).

• Revising section 4.05(2) to add a new method to correct by plan amendment under SCP. For a description of the correction method, see section 2.02(3).

• Revising sections 4.10(2) and 4.12 to reflect that SCP is available to correct certain Plan Document Failures and to make other modifications. For a description of the expansion of SCP to correct certain Plan Document Failures, see section 2.02(2).

• Revising section 6.02(6) to reflect changes to the methods for correction of plan loan failures. For a description of changes to the methods for correction of plan loans, see section 2.02(4).

• Revising section 6.04 to provide that, in addition to VCP, failures to obtain spousal consent may also be corrected under SCP or Audit CAP.

• Revising section 6.07 to reflect changes to methods for correction of plan loan failures, including expanding SCP to correct certain plan loan failures, permitting the reporting of deemed distributions in the year of correction without an advance request of relief, and adding new correction methods for certain plan loan failures. For a description of changes to the correction of plan loans failures, see section 2.02(4).

• Revising sections 7 and 9 to reflect changes to SCP. For a description of the expansion of SCP, see section 2.02.

• Revising section 8 to reflect that additional examples illustrating whether an Operational Failure is insignificant will be made available on the IRS website.

• Revising section 2.07 of Appendix B to provide a new correction method when the number of plan loans exceeds the number permitted under the plan. For a description of the correction method, see section 2.02(4)(e) and Appendix B, section 2.07(3).

.04 Future enhancements.

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

(2) Recoupment of Overpayments. The Treasury Department and the IRS requested comments in Rev. Proc. 2015-27, 2015-16 I.R.B. 914, on potential changes relating to the recoupment of Overpayments. In addition, the Treasury Department and the IRS received comments on permitting the correction of Overpayments under SCP, and are currently developing guidance on these issues. As part of the process of developing changes to modify the EPCRS rules on the correction of Overpayments, the Treasury Department and the IRS are continuing to review those comments.

PART II. PROGRAM EFFECT AND ELIGIBILITY

SECTION 3. EFFECT OF EPCRS; RELIANCE

.01 Effect of EPCRS on retirement plans. For a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, if the eligibility requirements of section 4 are satisfied and the Plan Sponsor corrects a failure in accordance with the applicable requirements of SCP in section 7, VCP in section 10, or Audit CAP in section 13, the IRS will not treat the plan as failing to meet the requirements of § 401(a), 403(b), 408(k), or 408(p), as applicable, because of the failure. For example, if the Plan Sponsor corrects a failure in accordance with the requirements of this revenue procedure, the plan will not thereby be treated as failing to satisfy § 401(a), 403(b), 408(k), or 408(p), as applicable, for purposes of applying §§ 3121(a)(5) (FICA taxes) and 3306(b)(5) (FUTA taxes).

.02 Compliance statement. If a Plan Sponsor or Eligible Organization receives a compliance statement under VCP, the compliance statement is binding upon the IRS and the Plan Sponsor or Eligible Organization as provided in section 10.07.

.03 Excise and other taxes. See section 6.09 for rules relating to excise and other taxes.

.04 Reliance. Taxpayers may rely on this revenue procedure, including the relief described in section 3.01.

SECTION 4. PROGRAM ELIGIBILITY

.01 EPCRS Programs. (1) SCP. SCP is available to correct Operational Failures and certain Plan Document Failures as follows:

(a) Operational Failures. A Plan Sponsor of a Qualified Plan or 403(b) Plan that is otherwise eligible for correction under SCP may use SCP to correct significant and insignificant Operational Failures (including certain plan loan failures described in section 6.07). Operational Failures that are significant may be corrected under SCP only if the correction of the failure is completed or substantially completed (in accordance with section 9.03) by the last day of the correction period described in section 9.02.

(b) Plan Document Failures. A Plan Sponsor of a Qualified Plan or 403(b) Plan may use SCP to correct certain Plan Document Failures, as defined in section

5.01(2)(a) for a Qualified Plan and section 5.02(2)(a) for a 403(b) Plan, that are otherwise eligible for correction under SCP. A Plan Document Failure consisting of the initial failure to adopt a Qualified Plan, or the failure to adopt a written 403(b) Plan timely in accordance with §1.403(b)-3(b)(3) and Notice 2009-3 is treated as a Plan Document Failure that is not eligible to be corrected under SCP. All Plan Document Failures that are eligible to be corrected under SCP are treated as significant; thus, the correction must be completed by the last day of the correction period described in section 9.02.

(c) SEPs and SIMPLE IRA Plans. SEPs and SIMPLE IRA Plans are eligible to be corrected under SCP only with respect to insignificant Operational Failures.

(d) Demographic Failures and Employer Eligibility Failures. Demographic Failures and Employer Eligibility Failures may not be corrected under SCP.

(2) VCP. Qualified Plans, 403(b) Plans, SEPs, and SIMPLE IRA Plans are eligible for correction under VCP. VCP provides general procedures for correction of all Qualification Failures: Operational, Plan Document, Demographic, and Employer Eligibility. VCP also provides general procedures for the correction of plan loan failures (see section 6.07).

(3) Audit CAP. Unless otherwise provided, Audit CAP is available for the correction of Qualified Plans, 403(b) Plans, SEPs, and SIMPLE IRA Plans for all failures found on examination that have not been corrected in accordance with SCP or VCP. Audit CAP also provides general procedures for the correction of plan loan failures (see section 6.07).

(4) Eligibility for other arrangements. The IRS may extend EPCRS to other arrangements.

(5) Appropriate use of programs. In a particular case, the IRS may decline to make available one or more correction programs under EPCRS in the interest of sound tax administration.

.02 Effect of examination. If the plan or Plan Sponsor is Under Examination, VCP is not available. SCP is available only as follows:

(1) Insignificant Operational Failures. While the plan or Plan Sponsor is Under Examination, insignificant Operational Failures may be corrected under SCP.

(2) Significant Operational Failures. If correction of significant Operational Failures has been substantially completed (as described in section 9.03) before the plan or Plan Sponsor is Under Examination, the Plan Sponsor may complete correction of those failures under SCP.

.03 SCP eligibility requirements relating to plan documents. (1) Requirements for Qualified Plans and 403(b) Plans. The provisions of SCP relating to certain Plan Document Failures, as described in section 4.01(1)(b), and significant Operational Failures, as described in section 9, are available for a Qualified Plan that, as of the date of correction, is the subject of a Favorable Letter. See section 5.01(4) for the definition of Favorable letter for a Qualified Plan. The provisions of SCP relating to certain Plan Document Failures and significant Operational Failures are available for a 403(b) Plan if the conditions for being treated as having a Favorable Letter in section 6.10(2) are satisfied. See section 5.02(5) for the definition of Favorable letter for a 403(b) Plan.

(2) Requirements for SEPs and SIMPLE IRAs. The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SEP only if the plan document consists of either (i) a valid Model Form 5305-SEP, Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement, or 5305A-SEP, Salary Reduction Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement, 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 and that has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10. The provisions of SCP relating to insignificant Operational Failures are available for a SIMPLE IRA Plan only if the plan document consists of either (i) a valid Model Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) — for Use with a Designated Financial Institution, or 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) — Not for Use with a Designated Financial Institution, adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002-10) or (ii) a prototype SIMPLE IRA Plan that has a current favorable opinion letter and that has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10.

.04 Established practices and procedures. 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 in form and operation 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 or Plan Document Failure must have occurred through an oversight or mistake in applying them. SCP also may be used in situations in which the Operational Failure or Plan Document Failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure. A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under which excess annual additions under § 415(c) are regularly corrected by return of elective deferrals to the affected employee within 9½ months after the end of the plan's limitation year. The correction, however, should not violate another applicable Code requirement. In the case of a failure that relates to Transferred Assets or to a plan assumed in connection with a corporate merger, acquisition, or other similar employer transaction between the Plan Sponsor and the sponsor of the transferor plan or the prior Plan Sponsor of an assumed plan, the plan is considered to have established practices and procedures for the Transferred Assets if such practices and procedures are in effect for the Transferred Assets by the end of the first plan year that begins after the corporate merger, acquisition, or other similar transaction. (See section 6.10(2) for special rules regarding established practices and procedures for 403(b) Plans.)

.05 Correction by plan amendment. (1) Availability of correction by plan amendment in VCP or Audit CAP. A Plan Sponsor of a Qualified Plan or 403(b) Plan may use VCP or Audit CAP to correct Plan Document, Demographic, and Operational Failures by plan amendment, including to correct 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 applicable Code requirements (including the requirements of §§ 401(a)(4), 410(b), 411(d)(6), and 403(b)(12), as applicable). In addition, a Plan Sponsor may adopt a plan amendment to reflect corrective action. For example, if the plan failed to satisfy the actual deferral percentage (ADP) test required under § 401(k)(3) and the Plan Sponsor must make qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions. As explained further in sections 6.05 and 10.07(2), the issuance of a compliance statement constitutes a determination that the failure identified has been corrected, but does not constitute a determination that the terms of the plan, including the corrective plan amendment, satisfy the qualification requirements in form.

(2) Availability of correction by plan amendment in SCP. SCP is available for corrections made by plan amendment, as provided in section 4.05(2)(a), (b), and (c). In addition, a Plan Sponsor may adopt a plan amendment to reflect corrective action. For example, if the plan failed to satisfy the actual deferral percentage (ADP) test required under § 401(k)(3) and the Plan Sponsor must make qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions.

(a) Correction of Operational Failure by plan amendment for a Qualified Plan or 403(b) Plan. A Plan Sponsor of a Qualified Plan or 403(b) Plan may correct an Operational Failure by plan amendment in order to conform the terms of the plan to the plan's prior operations only if the following conditions are satisfied:

(i) The plan amendment would result in an increase of a benefit, right or feature.

(ii) The increase in the benefit, right, or feature applies to all employees eligible to participate in the plan.

(iii) Providing the increase in the benefit, right, or feature to participants is permitted under the Code (including the requirements of §§ 401(a)(4), 410(b), 411(d)(6), and 403(b)(12), as applicable), and satisfies the correction principles of section 6.02 and any other applicable rules of this revenue procedure.

(b) Operational Failure correction methods in accordance with Appendix B. In addition to correction by plan amendment as described in section 4.05(2)(a), a Plan Sponsor of a Qualified Plan or 403(b) Plan may use SCP to correct Operational Failures listed in section 2.07 of Appendix B by plan amendment, to conform the terms of the plan to the plan's prior operations. Under SCP, these failures must be corrected in accordance with the correction methods set forth in section 2.07 of Appendix B.

(c) Plan Document Failures. A Plan Sponsor of a Qualified Plan or 403(b) Plan may use SCP to correct an eligible Plan Document Failure, as described in section 4.01(1)(b), only if the following conditions are satisfied:

(i) The Qualified Plan or 403(b) Plan has been issued a Favorable Letter, as respectively defined in sections 5.01(4) and 5.02(5).

(ii) The Plan Sponsor satisfies the requirements in section 9 relating to correcting a Plan Document Failure. Thus, for example, the Plan Sponsor must adopt a corrective plan amendment by the end the correction period set forth in section 9.02.

.06 Availability of correction for Employer Eligibility Failures and Demographic Failures. SCP is not available for a Plan Sponsor to correct Employer Eligibility Failures or Demographic Failures.

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

.08 Availability of correction for an Orphan Plan. A failure in an Orphan Plan that is terminating may be corrected under VCP or Audit CAP if the party acting on behalf of the plan is an Eligible Party, as defined in section 5.03(2). See, generally, section 6. 02(2)(e)(i). SCP is not available for correcting failures in Orphan Plans. In the case of a terminating Orphan Plan, the IRS may, in its discretion, waive the user fee. In such a case, the submission must include a request for a waiver of the user fee. See section 11.04(14).

.09 Availability of correction for § 457(b) plans. The IRS will accept submissions relating to § 457(b) plans on a provisional basis outside of EPCRS through standards that are similar to those that apply with respect to VCP filings under sections 10 and 11, as applicable, including procedures for filing a submission on the www.pay.gov website. The availability of correction is generally limited to plans that are sponsored by governmental entities described in § 457(e)(1)(A). In the case of a § 457(b) plan that is an unfunded deferred compensation plan established for the benefit of top hat employees of a tax-exempt entity described in § 457(e)(1)(B), the IRS generally will not enter into an agreement to address problems associated with such a plan. However, the IRS may consider a submission for such a plan where, for example, the plan was erroneously established to benefit the entity's nonhighly compensated employees and the plan has been operated in a manner that is similar to a Qualified Plan.

.10 Egregious failures. (1) In general. Egregious failures include: (a) a plan that has consistently and improperly covered only highly compensated employees; (b) a plan that provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003-24, 2003-1 C.B. 853, with respect to good faith bargaining and welfare benefit funds); or (c) a defined contribution plan where a contribution is made on behalf of a highly compensated employee that is several times greater than the dollar limit set forth in § 415(c).

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

(3) VCP. VCP is available to correct egregious failures. However, the IRS reserves the right to impose a sanction that may be larger than the user fee described in Rev. Proc. 2019-4, 2019-1 I.R.B. 146 (and its annual successors). For this purpose, an egregious failure would include any case in which the IRS concludes that the parties controlling the plan recognized that the action taken would constitute a failure and the failure either involves a substantial number of participants or beneficiaries or involves participants who are predominantly highly compensated employees.

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

.11 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.

.12 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 4.12(2)), SCP is not available to correct any Operational Failure or Plan Document Failure that is directly or indirectly related to the abusive tax avoidance transaction.

(b) VCP. With respect to VCP, if the IRS determines that a plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as defined in section 4.12(2)), then the matter will be discussed and coordinated with appropriate IRS personnel. The IRS may determine that the plan or the Plan 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 IRS will conclude the review of the submission without issuing a compliance statement and will refer the case for examination. However, if the IRS determines that the plan failures are unrelated to the abusive tax avoidance transaction or that no abusive tax avoidance transaction occurred, then the IRS will permit the VCP submission to address the failures identified in the VCP submission, and may issue a compliance statement with respect to those failures. In no event may a compliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor was not a party to an abusive tax avoidance transaction. In addition, even if it is concluded that the failures can be addressed pursuant to a VCP submission, the IRS 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 IRS determines that the plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction, the matter may be discussed and coordinated with appropriate IRS personnel. With respect to plans Under Examination, an abusive tax avoidance transaction includes a transaction described in section 4.12(2) and any other transaction that the IRS determines was designed to facilitate the impermissible avoidance of tax. Upon receiving a response from the appropriate IRS personnel, (i) if the IRS determines that a failure is related to the abusive tax avoidance transaction, the IRS reserves the right to conclude that neither Audit CAP nor SCP is available for that failure, or (ii) if the IRS determines that satisfactory corrective actions have not been taken with regard to the transaction, the IRS reserves the right to conclude that neither Audit CAP nor SCP is available to the plan.

(2) Abusive tax avoidance transaction defined. For purposes of section 4.12(1) (except to the extent otherwise provided in section 4.12(1)(c)), an abusive tax avoidance transaction means any listed transaction under §1.6011-4(b)(2) and any other transaction identified as an abusive transaction on the IRS website 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. (i) In general. The term "Plan Document Failure" means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or 403(a). A Plan Document Failure includes any Qualification Failure that is a violation of the requirements of § 401(a) or 403(a) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure. This term includes a Nonamender Failure, a failure to adopt Good Faith Amendments, and a failure to adopt Interim Amendments. Failure to adopt a discretionary plan amendment by the plan amendment deadline set forth in section 8.02 of Rev. Proc. 2016-37, 2016-29 I.R.B. 136 (or section 5.05(2) of Rev. Proc. 2007-44, 2007-28 I.R.B. 54), is not considered a Plan Document Failure. Pursuant to section 4.01(1)(b), a Plan Document Failure consisting of the initial failure to adopt a Qualified Plan may not be corrected under SCP.

(ii) Specific definitions relating to Plan Document Failures:

(A) “Good Faith Amendment” includes the EGTRRA good faith amendments described in Notice 2001-42, 2001-2 C.B. 70, the amendment required for the plan to comply with the final regulations under § 401(a)(9) of the Code (see Rev. Proc. 2002-29, 2002-1 C.B. 1176, as modified by Rev. Proc. 2003-10, 2003-1 C.B. 259), the amendment updating the mortality table to reflect the guidance in Rev. Rul. 2001-62, 2001-2 C.B. 632, and the amendment updating the definition of compensation, for purposes of § 415(c)(3), to include “deemed § 125 compensation” pursuant to Rev. Rul. 2002-27, 2002-1 C.B. 925. For rules relating to a failure to adopt a Good Faith Amendment, see Rev. Proc. 2013-12.

(B) “Interim Amendment” means an amendment with respect to a disqualifying provision that results in the failure of the plan to satisfy the qualification requirements of the Code by reason of a change in those requirements that is effective after December 31, 2001, or that is integral to such disqualifying provision. See section 15.02 of Rev. Proc. 2016-37 for interim amendment requirements for Pre-approved Plans. For interim amendments required to be adopted in individually designed plans before January 1, 2017 (or before February 1, 2017 for Cycle A plans), see section 5.04 of Rev. Proc. 2007-44.

(C) “Nonamender Failure” means a failure to adopt an amendment that corrects a disqualifying provision described in §1.401(b)-1(b) within the applicable remedial amendment period. In general, a disqualifying provision includes a provision in the plan document that violates a qualification requirement of the Code or the absence of a provision that causes the plan to fail to satisfy a qualification requirement of the Code. A disqualifying provision also includes any provision designated by the Commissioner as a disqualifying provision under §1.401(b)-1(b)(3). See sections 5 and 15 of Rev. Proc. 2016-37. For an individually designed plan, a Nonamender Failure includes the failure to timely amend for provisions that appear on the Required Amendments List, as described in Rev. Proc. 2016-37. For purposes of VCP, the initial failure to adopt a Qualified Plan is not considered a Nonamender Failure.

(b) Operational Failure. The term "Operational Failure" means a Qualification Failure (other than an Employer Eligibility Failure) that arises solely from the failure to follow plan provisions. A failure to follow the terms of the plan providing for the satisfaction of the requirements of § 401(k) and (m) is considered to be an Operational Failure. A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively to reflect the plan's operations (for example, pursuant to §401(b)). In the situation where a Plan Sponsor timely adopted an amendment and the plan was not operated in accordance with the terms of such amendment, the plan is considered to have an Operational Failure.

(c) Demographic Failure. The term "Demographic Failure" means a failure to satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b) that is not an Operational Failure or an Employer Eligibility Failure. The correction of a Demographic Failure generally requires a corrective amendment to the plan adding more benefits or increasing existing benefits (see §1.401(a)(4)-11(g)).

(d) Employer Eligibility Failure. The term “Employer Eligibility Failure” means the adoption of a plan intended to include a qualified cash or deferred arrangement under §401(k) by an employer that fails to meet the employer eligibility requirements to establish a § 401(k) plan. An Employer Eligibility Failure is not a Plan Document, Operational, or Demographic Failure.

(3) Excess Amount; Excess Allocations; Overpayment. (a) Excess Amount. The term "Excess Amount" means a Qualification Failure due to a contribution, allocation, or similar credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed, allocated, or credited on behalf of the participant or beneficiary under the terms of the plan or that exceeds a limitation on contributions or allocations provided in the Code or regulations. Excess Amounts include: (i) an elective deferral or after-tax employee contribution that is in excess of the maximum contribution under the plan; (ii) an elective deferral or after-tax employee contribution made in excess of the limitation under § 415; (iii) an elective deferral in excess of the limitation of § 402(g); (iv) an excess contribution or excess aggregate contribution under § 401(k) or (m); (v) an elective deferral or after-tax employee contribution that is made with respect to compensation in excess of the limitation of §401(a)(17); and (vi) any other employer contribution that exceeds a limitation under §401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), 411(a)(3)(G), or 415, or that is made with respect to compensation in excess of the limitation under § 401(a)(17). However, an Excess Amount does not include a contribution, allocation, or other credit that is made pursuant to a correction method provided under this revenue procedure for a different Qualification Failure. Excess Amounts are limited to contributions, allocations, or annual additions under a defined contribution plan, after-tax employee contributions to a defined benefit plan, and contributions or allocations that are to be made to a separate account (with actual Earnings) under a defined benefit plan. See generally section 6.06 for the treatment and correction of certain Excess Amounts.

(b) Excess Allocation. The term "Excess Allocation" means an Excess Amount for which the Code or regulations do not provide any corrective mechanism. Excess Allocations include Excess Amounts as defined in section 5.01(3)(a) (i), (ii), (v), and (vi) (except with respect to § 401(m) or 411(a)(3)(G) violations). Excess Allocations must be corrected in accordance with section 6.06(2).

(c) Overpayment. The term "Overpayment" means a Qualification Failure due to a payment being made to a participant or beneficiary that exceeds the amount payable to the participant or beneficiary under the terms of the plan or that exceeds a limitation provided in the Code or regulations. Overpayments include both payments from a defined benefit plan and payments from a defined contribution plan (either not made from the participant's or beneficiary's account under the plan or not permitted to be paid under the Code, the regulations, or the terms of the plan). However, an Overpayment does not include a payment that is made pursuant to a correction method provided under this revenue procedure for a different Qualification Failure. Overpayments must be corrected in accordance with section 6.06(3) for defined benefit plans and section 6.06(4) for defined contribution plans and 403(b) Plans.

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

(a) Favorable Letter for individually designed Qualified Plans. In the case of an individually designed Qualified Plan, the term “Favorable Letter” means a determination letter issued with respect to the plan.

(b) Favorable Letter for Pre-approved Plans. In the case of a Pre-approved Plan, the term “Favorable Letter” means a favorable opinion or advisory letter issued with respect to the most recently expired six-year remedial amendment cycle under Rev. Proc. 2016-37. In the case of a terminated Pre-approved Plan, the plan is treated as having a favorable opinion letter or advisory letter if the plan is terminated prior to the expiration of the plan's current remedial amendment cycle determined under the provisions of Rev. Proc. 2016-37, and the plan was amended to reflect the qualification requirements that applied as of the date of termination.

(5) Maximum Payment Amount. The term "Maximum Payment Amount" means a monetary amount that is approximately equal to the tax the IRS could collect upon plan disqualification and is the sum for the open taxable years of the:

(a) tax on the trust (Form 1041, U.S. Income Tax Return for Estates and Trusts) (and any interest or penalties applicable to the trust return);

(b) additional income tax resulting from the loss of employer deductions for plan contributions (and any interest or penalties applicable to the Plan Sponsor's return);

(c) additional income tax resulting from income inclusion for participants in the plan (Form 1040, U.S. Individual Income Tax Return), including the tax on plan distributions that have been rolled over to other qualified trusts (as defined in §402(c)(8)(A)) or eligible retirement plans (as defined in § 402(c)(8)(B)) and any interest or penalties applicable to the participants' returns;

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

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

(6) Plan Sponsor. The term "Plan Sponsor" means the employer that establishes or maintains a Qualified Plan for its employees.

(7) Transferred Assets. The term “Transferred Assets” means plan assets that were received, in connection with a corporate merger, acquisition, or other similar employer transaction, by the plan in a transfer (including a merger or consolidation of plan assets) under § 414(l) from a plan sponsored by an employer that was not a member of the same controlled group as the Plan Sponsor immediately prior to the corporate merger, acquisition, or other similar employer transaction. If a transfer of plan assets related to the same employer transaction is accomplished through several transfers, then the date of the transfer is the date of the first transfer.

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

(a) a master plan, a prototype plan, or a volume submitter plan as described in Rev. Proc. 2015-36, 2015-27 I.R.B. 20, sections 4.01, 4.02 and 13.01, respectively; and

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

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

(1) 403(b) Plan. The term "403(b) Plan" means a plan or program intended to satisfy the requirements of § 403(b).

(2) 403(b) Failure. The term “403(b) Failure” means a failure that adversely affects the exclusion from income provided by § 403(b). There are four types of 403(b) Failures: (a) Plan Document Failures; (b) Operational Failures; (c) Demographic Failures; and (d) Employer Eligibility Failures.

(a) Plan Document Failure. The term "Plan Document Failure" means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 403(b). Thus, for example, the failure of a plan to be adopted in written form or to be amended to reflect a new requirement within the plan's applicable remedial amendment period is a Plan Document Failure. If a plan has not been timely or properly amended during an applicable remedial amendment period with respect to provisions required to maintain the status of the plan under § 403(b), the plan has a Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes any 403(b) Failure that adversely affects the status of the plan under §403(b) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure. Pursuant to section 4.01(1)(b), a Plan Document Failure consisting of the failure to adopt a written 403(b) Plan timely in accordance with §1.403(b)-3(b)(3) and Notice 2009-3 may not be corrected under SCP.

(b) Operational Failure. The term "Operational Failure" means a 403(b) Failure (other than an Employer Eligibility Failure) that arises solely from the failure to follow plan provisions. A failure to follow the terms of the plan providing for the satisfaction of the requirements of §§ 403(b)(12)(ii) (relating to the availability of elective deferral contributions) and 401(m) (as applied to 403(b) Plans pursuant to § 403(b)(12)(A)(i)) is an Operational Failure. A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively to reflect the plan's operations.

(c) Demographic Failure. The term "Demographic Failure" means a failure to satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b) (as applied to 403(b) Plans pursuant to § 403(b)(12)(A)(i)) that is not an Operational Failure or an Employer Eligibility Failure. The correction of a Demographic Failure generally requires a corrective amendment to the plan adding more benefits or increasing existing benefits (see §1.401(a)(4)-11(g)).

(d) Employer Eligibility Failure. The term "Employer Eligibility Failure" means the adoption of a plan intended to satisfy the requirements of § 403(b) by a Plan Sponsor that is not a tax-exempt organization described in § 501(c)(3) or a public educational organization described in § 170(b)(1)(A)(ii). An Employer Eligibility Failure is not a Plan Document, Operational, or Demographic Failure.

(3) Excess Amount. The term "Excess Amount" means a contribution or other credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed or credited on behalf of the participant or beneficiary under the terms of the plan or that exceeds a limitation on contributions provided in the Code or regulations. The term "Excess Amount" includes any amount in excess of the amount permitted under the requirements of § 402(g), 401(m), or 415. A contribution in excess of the limitation of § 415(c) is not an Excess Amount (or a 403(b) Failure) if that excess is maintained in a separate account in accordance with the rules in the regulations under §§ 403(b) and 415. Such separate account is considered to be a § 403(c) annuity contract (or, if applicable, an amount to which § 61, 83, or 402(b) applies). A contribution in excess of the limitation of § 415(c) that is not maintained in a separate account in accordance with the rules set forth in regulations under §§ 403(b) and 415 is an Excess Amount. Thus, the correction principles in section 6.06 apply.

(4) Overpayment. The term “Overpayment” means a 403(b) Failure due to a payment being made to a participant or beneficiary that exceeds the amount payable to the participant or beneficiary under the terms of the plan or that exceeds a limitation provided in the Code or regulations. Overpayments include payments made from the participant's or beneficiary's 403(b) custodial account or annuity contract under the plan that are not permitted to be paid under the Code, the regulations, or the terms of the plan. However, an Overpayment does not include a payment that is made pursuant to a correction method provided under this revenue procedure for a different 403(b) Failure. Overpayments must be corrected in accordance with section 6.06(4).

(5) Favorable Letter. The term "Favorable Letter" means a Favorable Letter as described in section 6.10(2).

(6) Maximum Payment Amount. The term "Maximum Payment Amount” means a monetary amount that is approximately equal to the tax the IRS could collect as a result of the 403(b) Failure and is the sum for the open taxable years of the:

(a) additional income tax resulting from income inclusion for employees or other participants (Form 1040), including the tax on distributions that have been rolled over to other qualified trusts (as defined in § 402(c)(8)(A)) or eligible retirement plans (as defined in § 402(c)(8)(B)) and any interest or penalties applicable to the participants' returns; and

(b) any other tax that results from a 403(b) Failure that would apply but for correction under this revenue procedure.

(7) Plan Sponsor. The term "Plan Sponsor” means the employer that offers a 403(b) Plan to its employees.

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

.03 Definitions for Orphan Plans.

(1) Orphan Plan. With respect to VCP and Audit CAP, the term “Orphan Plan” means any Qualified Plan, 403(b) Plan, or other plan with respect to which an “Eligible Party” (defined in section 5.03(2)) has determined that the Plan Sponsor (a) no longer exists, (b) cannot be located, or (c) is unable to maintain the plan. However, the term “Orphan Plan” does not include any plan subject to Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) that is terminated pursuant to 29 CFR 2578.1 of the Department of Labor regulations governing the termination of abandoned individual account plans.

(2) Eligible Party. The term “Eligible Party” means:

(a) A court appointed representative with authority to terminate the plan and dispose of the plan's assets;

(b) In the case of an Orphan Plan under investigation by the Department of Labor, a person or entity determined by the Department of Labor to have accepted responsibility for terminating the plan and distributing the plan's assets; or

(c) In the case of a Qualified Plan to which Title I of ERISA has never applied, a surviving spouse who is the sole beneficiary of a plan that provided benefits to a participant who was (i) the sole owner of the business that sponsored the plan and (ii) the only participant in the plan.

.04 Earnings. The term “Earnings” refers to the adjustment of a principal amount to reflect subsequent investment gains and losses, unless otherwise provided in a specific section of this revenue procedure.

.05 IRA. The term “IRA” means an individual retirement account (as defined in §408(a)) or an individual retirement annuity (as defined in § 408(b)).

.06 SEP. The term “SEP” means a plan intended to satisfy the requirements of §408(k). For purposes of this revenue procedure, the term SEP also includes a salary reduction SEP (“SARSEP”) described in § 408(k)(6), if applicable.

.07 SIMPLE IRA Plan. The term “SIMPLE IRA Plan” means a plan intended to satisfy the requirements of § 408(p).

.08 Under Examination. (1) The term "Under Examination" means: (a) a plan that is under an Employee Plans 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 IRS.

(2) A plan that is under an Employee Plans examination includes any plan for which the Plan Sponsor, or an authorized representative, has received verbal or written notification from Employee Plans of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination, and also includes any plan that has been under an Employee Plans examination and is in Appeals or in litigation for issues raised in an Employee Plans examination. A plan is considered to be Under Examination if it is aggregated for purposes of satisfying the nondiscrimination requirements of § 401(a)(4), the minimum participation requirements of § 401(a)(26), the minimum coverage requirements of § 410(b), or the requirements of § 403(b)(12)(A)(i), with any plan that is Under Examination. In addition, a plan is considered to be Under Examination with respect to a failure of a qualification requirement (other than those described in the preceding sentence) if the plan is aggregated with another plan for purposes of satisfying that qualification requirement (for example, § 401(a)(30), 415, or 416) and that other plan is Under Examination. For example, assume Plan A has a § 415 failure, Plan A is aggregated with Plan B only for purposes of § 415, and Plan B is Under Examination. In this case, Plan A is considered to be Under Examination with respect to the § 415 failure. However, if Plan A has a failure relating to the spousal consent rules under § 417 or the vesting rules of § 411, Plan A is not considered to be Under Examination with respect to the § 417 or 411 failure. For purposes of this revenue procedure, the term aggregation does not include consideration of benefits provided by various plans for purposes of the average benefits test set forth in § 410(b)(2).

(3) An Employee Plans examination also includes a case in which a Plan Sponsor has submitted any Form 5300 (Application for Determination for Employee Benefit Plan), Form 5307 (Application for Determination for Adopters of Modified Volume Submitter Plans), or Form 5310 (Application for Determination for Terminating Plan) and the Employee Plans agent notifies the Plan Sponsor, or an authorized representative, of possible failures, whether or not the Plan Sponsor is officially notified of an "examination." This would include a case where, for example, a Plan Sponsor has applied for a determination letter on plan termination, and an Employee Plans agent notifies the Plan Sponsor that there are partial termination concerns. In addition, if, during the review process, the agent requests additional information that indicates the existence of a failure not previously identified by the Plan Sponsor, the plan is considered to be under an Employee Plans examination. If, in such a case, the determination letter request under review is subsequently withdrawn, the plan is nevertheless considered to be under an Employee Plans examination for purposes of eligibility under SCP and VCP with respect to those issues raised by the agent reviewing the determination letter application. The fact that a Plan Sponsor voluntarily submits a determination letter application does not constitute a voluntary identification of a failure to the IRS. In order to be eligible for VCP, the Plan Sponsor (or the authorized representative) must identify each failure, in writing, to the reviewing agent before the agent recognizes the existence of the failure or addresses the failure in communications with the Plan Sponsor (or the authorized representative).

(4) A Plan Sponsor that is under an Exempt Organizations examination includes any Plan Sponsor that has received (or whose authorized 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.

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of general applicability. The general correction principles in section 6.02 and rules of general applicability in sections 6.03 through 6.13 apply for purposes of this revenue procedure.

.02 Correction principles. Generally, a failure is not corrected unless full correction is made with respect to all participants and beneficiaries, and for all taxable years (whether or not the taxable year is closed). Even if correction is made for a closed taxable year, the tax liability associated with that year will not be redetermined because of the correction. Correction is determined taking into account the terms of the plan at the time of the failure. Correction should be accomplished taking into account the following principles:

(1) Restoration of benefits. The correction method should restore the plan to the position it would have been in had the failure not occurred, including restoration of current and former participants and beneficiaries to the benefits and rights they would have had if the failure had not occurred.

(2) Reasonable and appropriate correction. The correction should be reasonable and appropriate for the failure. Depending on the nature of the failure, there may be more than one reasonable and appropriate correction for the failure. For Qualified Plans and 403(b) Plans, any correction method permitted under Appendix A or Appendix B is deemed to be a reasonable and appropriate method of correcting the related failure. Any correction method permitted under Appendix A or Appendix B applicable to a SEP, or a SIMPLE IRA Plan is similarly deemed to be a reasonable and appropriate method of correcting the related failure. If a plan has a different but analogous failure to one set forth in Appendix A or B (such as the failure to provide a matching contribution by a governmental plan that is not subject to § 401(m)), then the analogous correction method under Appendix A or B is generally available to correct any failure. Whether any other particular correction method is reasonable and appropriate is determined taking into account the applicable facts and circumstances and the following principles:

(a) The correction method should, to the extent possible, resemble one already provided for in the Code, regulations, or other guidance of general applicability. For example, for Qualified Plans and 403(b) Plans, the correction method set forth in §1.402(g)-1(e)(2) would be the typical means of correcting a failure under § 402(g).

(b) The correction method should keep plan assets in the plan, except to the extent the Code, regulations, or other guidance of general applicability provide for correction by distribution to participants or beneficiaries or return of assets to the employer. For example, if an excess allocation (not in excess of the § 415 limits) made under a Qualified Plan was made for a participant under a plan (other than a § 401(k) plan), the excess should be reallocated to other participants or, depending on the facts and circumstances, used to reduce future employer contributions.

(c) The correction method for failures relating to nondiscrimination should provide benefits for nonhighly compensated employees. For example, for Qualified Plans, the correction method set forth in §1.401(a)(4)-11(g) (rather than methods making use of the special testing provisions set forth in §1.401(a)(4)-8 or §1.401(a)(4)-9) would be the typical means of correcting a failure to satisfy nondiscrimination requirements. Similarly, the correction of a failure to satisfy the requirements of § 401(k)(3) or 401(m)(2), or, for plan years beginning on or before December 31, 2001, the multiple use test of § 401(m)(9) (relating to nondiscrimination), solely by distributing excess amounts to highly compensated employees would not be the typical means of correcting such a failure.

(d) The correction method should not violate another applicable specific requirement of § 401(a) or 403(b) (for example, § 401(a)(4), 411(d)(6), or 403(b)(12), as applicable), 408(k) for SEPs, or 408(p) for SIMPLE IRA Plans, or a parallel requirement in Part 2 of Subtitle B of Title I of ERISA (for plans that are subject to Part 2 of Subtitle B of Title I of ERISA). If an additional failure is nevertheless created as a result of the use of a correction method in this revenue procedure, then that failure also must be corrected in conjunction with the use of that correction method and in accordance with the requirements of this revenue procedure.

(e) If a correction method is one that another government agency has authorized with respect to a violation of legal requirements within its interpretive authority and that correction relates to a violation for which there is a failure to which this revenue procedure applies, then the IRS may take the correction method of the other governmental agency into account for purposes of this revenue procedure. For example:

(i) If the plan is subject to ERISA, for a failure that results from the employer having ceased to exist, the employer no longer maintaining the plan, or similar reasons, the permitted correction is to terminate the plan and distribute plan assets to participants and beneficiaries in accordance with standards and procedures substantially similar to those set forth in 29 CFR 2578.1 of the Department of Labor regulations (relating to abandoned plans). This correction must satisfy four conditions. First, the correction must comply with standards and procedures substantially similar to those set forth in 29 CFR 2578.1. Second, the qualified termination administrator, based on plan records located and updated in accordance with the Department of Labor regulations, must have reasonably determined whether, and to what extent, the survivor annuity requirements of §§ 401(a)(11) and 417 apply to any benefit payable under the plan and must take reasonable steps to comply with those requirements (if applicable). Third, each participant and beneficiary must have been provided a nonforfeitable right to his or her accrued benefits as of the date of deemed termination under the Department of Labor regulations, subject to Earnings between that date and the date of distribution. Fourth, participants and beneficiaries must receive notification of their rights under §402(f). In addition, notwithstanding correction under this revenue procedure, the IRS reserves the right to pursue appropriate remedies under the Code against any party who is responsible for the plan, such as the Plan Sponsor, plan administrator, or owner of the business, even in its capacity as a participant or beneficiary under the plan. See also section.09(1) of Appendix A for parallel rules for plans that are not subject to ERISA.

(ii) In the case of a violation of the fiduciary standards imposed by Part 4 of Subtitle B of Title I of ERISA, correction under the VFC Program established by the Department of Labor for a fiduciary violation for which there is a similar failure under this revenue procedure would generally be taken into account as correction under this revenue procedure. (See also section 7.3(b) of the Department of Labor's VFC Program under which correction of a defaulted participant loan that provides for repayment in accordance with § 72(p)(2) requires only submission of the correction under VCP and inclusion of the VCP compliance statement (with proof of any required corrective payment).)

(3) Consistency requirement. Generally, if more than one correction method is available to correct a type of failure for a plan year (or if 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 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 failure for a plan year. In the case of a Group Submission, the consistency requirement applies on a plan-by-plan basis.

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

(a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for Earnings and forfeitures that would have been allocated to the participant's account if the failure had not occurred. However, a corrective allocation is not required to be adjusted for losses. Accordingly, corrective allocations must include gains and may be adjusted for losses. For additional information, see Appendix B section 3, Earnings Adjustment Methods and Examples.

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

(c) Corrective allocations should come only from employer nonelective contributions (including forfeitures if the plan permits their use to reduce employer contributions). For purpose of correcting a failed ADP, actual contribution percentage (ACP), or multiple use test, any amounts used to fund qualified nonelective contributions (QNECs) must satisfy the definition of QNEC in §1.401(k)-6.

(d) In the case of a defined benefit plan, a corrective distribution for an individual should be increased to take into account the delayed payment, in accordance with the plan's provisions for actuarial equivalence (after considering the applicable requirements of §§ 417(e)(3) and 415(b) or any other applicable provision) that were in effect on the date that the distribution should have been made. A corrective distribution is not subject to the requirements of § 417(e)(3) if it is made to make up for missed payments with respect to a benefit that is not subject to the requirements of § 417(e)(3).

(e)(i) In the case of a single employer defined benefit plan, a payment of benefits that fails to satisfy the requirements of § 436(b), (c), or (e) can be corrected by the Plan Sponsor (including another person acting on behalf of the Plan Sponsor) making a contribution to the plan equal to the following amount (with interest up to the date of the contribution): (A) in the case of a failure to satisfy § 436(b) with respect to an unpredictable contingent event benefit, the amount described in § 436(b)(2) with respect to that benefit; (B) in the case of a failure to satisfy § 436(c) with respect to an amendment, the amount described in § 436(c)(2) with respect to that amendment; and

(C) in the case of a failure to satisfy § 436(e), the amount described in § 436(e)(2) with respect to that failure. See also section 6.06(3) for correction of an Overpayment (including a payment of benefits that exceeds the limitations imposed by § 436(d) or 436(b), (c), or (e)).

(ii) A corrective distribution or a corrective amendment (where a correction is accomplished through a plan amendment) is not subject to the requirements of § 436, but, if the plan is subject to a restriction pursuant to § 436 at the time of the correction, generally the Plan Sponsor must make a contribution to the plan at the time of the correction in the following amount: (A) if a corrective distribution is made in a single-sum payment or other prohibited payment (as defined in § 436(d)(5)) at a time when the plan is subject to a restriction pursuant to § 436(d), the Plan Sponsor must generally contribute to the plan the amount of that corrective distribution (but only half of the corrective distribution must be contributed if the payment is made at a time when the plan is subject to a restriction pursuant to § 436(d)(3)); and (B) if a corrective amendment is made at a time when the plan is subject to a restriction pursuant to § 436(c), the Plan Sponsor must generally contribute to the plan an amount equal to the increase in the funding target of the plan (as defined in § 430) attributable to that amendment. No contribution is required to be made under this paragraph (e)(ii) if the corrective distribution is made in a form that is not a prohibited payment (for example, if the correction is made by actuarially increasing future payments that are made in a form that is not a prohibited payment).

(iii) Any contribution made by the Plan Sponsor pursuant to this paragraph (e) is treated in the same manner as a “section 436 contribution” (as defined in §1.436-1(j)(7)). Thus, the contribution is treated as separate from a minimum required contribution under § 430 and is disregarded in determining the amount added to a prefunding balance under § 430(f)(6). See §1.436-1(f)(2) generally for rules relating to § 436 contributions.

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

(5) Special exceptions to full correction. In general, a failure must be fully corrected. Although the mere fact that correction is inconvenient or burdensome is not enough to relieve a Plan Sponsor of the need to make full correction, full correction may not be required in certain situations if it is unreasonable or not feasible. Even in these situations, the correction method adopted must be one that does not have significant adverse effects on participants and beneficiaries or the plan, and that does not discriminate significantly in favor of highly compensated employees. The exceptions described below specify those situations in which full correction is not required.

(a) Reasonable estimates. If either (i) it is possible to make a precise calculation but the probable difference between the approximate and the precise restoration of a participant's benefits is insignificant and the administrative cost of determining precise restoration would significantly exceed the probable difference or (ii) it is not possible to make a precise calculation (for example, where it is impossible to provide plan data), reasonable estimates may be used in calculating appropriate correction. If it is not feasible to make a reasonable estimate of what the actual investment results would have been, a reasonable interest rate may be used. For this purpose, the interest rate used by the Department of Labor's Voluntary Fiduciary Correction Program Online Calculator is deemed to be a reasonable interest rate. The calculator can be found on the internet at http://www.dol.gov/ebsa/calculator.

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a participant with an account under the plan.

(c) Recovery of small Overpayments. Generally, if the total amount of an Overpayment to a participant or beneficiary is $100 or less, the Plan Sponsor is not required to seek the return of the Overpayment from the participant or beneficiary. The Plan Sponsor is not required to notify the participant or beneficiary that the Overpayment is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover).

(d) Locating lost participants. (i) Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address. In general, such actions include, but are not limited to, a mailing to the individual's last known address using certified mail, and, if that is unsuccessful, an additional search method, such as the use of a commercial locator service, a credit reporting agency, or Internet search tools. Depending on the facts and circumstances, the use of more than one of these additional search methods may be appropriate. A Plan Sponsor will not be considered to have failed to correct a failure due to the inability to locate an individual if reasonable actions to locate the individual have been undertaken in accordance with this paragraph; provided that, if the individual is later located, the additional benefits are provided to the individual at that time.

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

(e) Small Excess Amounts. Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $100 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover). See section 6.06(1) for such notice requirements.

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

(6) Correction principle for plan loan failures. In the case of a plan loan failure corrected in accordance with section 6.07(3)(b), (c), or (d), the participant is generally responsible for paying the corrective payment. However, with respect to the failure listed in section 6.07(3)(d)), the employer should pay a portion of the correction payment on behalf of the participant equal to the interest that accumulates as a result of such failure, generally determined at a rate equal to the greater of the plan loan interest rate or the rate of return under the plan.

(7) Correction for exclusion of employees with respect to elective deferrals or after-tax employee contributions. If a Qualified Plan or 403(b) Plan has an Operational Failure that consists of excluding an employee that should have been eligible to make an elective deferral or an after-tax employee contribution, the employer should contribute to the plan on behalf of the excluded employee an amount that makes up for the value of the lost opportunity for the employee to have a portion of his or her compensation contributed to the plan accumulated with earnings tax deferred in the future. This correction principle applies solely to this limited circumstance. It does not, for example, extend to the correction of a failure to satisfy a nondiscrimination test, such as, the ADP test pursuant to § 401(k)(3) and the ACP test pursuant to § 401(m)(2). Specific methods and examples to correct this failure are provided in Appendix A, section.05, and Appendix B, section 2.02. Similarly, the methods and examples provided for correcting this failure do not extend to other failures. Thus, the correction methods and the examples in Appendix A, section.05, and Appendix B, section 2.02, cannot, for example, be used to correct ADP/ACP failures.

(8) Correction by plan amendment in VCP, Audit CAP, and SCP. For the availability of correction by plan amendment, see section 4.05.

(9) Reporting. Any corrective distributions from the plan should be properly reported.

.03 Correction of an Employer Eligibility Failure. (1) The permitted correction of an Employer Eligibility Failure is the cessation of all contributions (including elective deferrals and after-tax employee contributions). For VCP submissions, the cessation must occur no later than the date the submission under VCP is filed. The assets in such a plan are to remain in the trust, annuity contract, or custodial account and are to be distributed no earlier than the occurrence of one of the applicable distribution events, for example, for 403(b) Plans, an event described in § 403(b)(7) (to the extent the assets are held in custodial accounts) or § 403(b)(11) (for those assets invested in annuity contracts that would be subject to § 403(b)(11) restrictions if the employer were eligible).

(2) Cessation of contributions is not required if continuation of contributions would not be an Employer Eligibility Failure (for example, with respect to a tax-exempt employer that may maintain a § 401(k) plan after 1996). In the case of a 403(b) Failure that is an Employer Eligibility Failure, correction may include treating contributions as not being excluded under § 403(b) (and thus the contributions would be treated as having been contributed, for example, to an annuity contract to which § 403(c) applies).

(3) A plan that is corrected through VCP or Audit CAP is treated as subject to all of the requirements and provisions of §§ 401(a) for a Qualified Plan, 403(b) for a 403(b) Plan, 408(k) for a SEP, and 408(p) for a SIMPLE IRA Plan (including Code provisions relating to rollovers). Therefore, the Plan Sponsor must also correct all other failures in accordance with this revenue procedure.

(4) If correction is accomplished under VCP or Audit CAP in accordance with the requirements of this section 6.03, then any rollovers made from the plan pursuant to a distributable event are deemed to have been made from an eligible retirement plan under § 402(c)(8)(B) for the purpose of determining whether the amounts qualify as an eligible rollover distribution under § 402(c) or 403(b)(8) (including the determination of excess contributions that are subject to the § 4973 excise tax).

.04 Correction of a failure to obtain spousal consent. (1) In general. Failures to obtain spousal consent described in this section 6.04 may be corrected under VCP, SCP, or Audit CAP. Normally, the correction method for a failure to obtain spousal consent for a distribution that is subject to the spousal consent rules under 401(a)(11) and 417 is similar to the correction method described in Appendix A, section.07. The Plan Sponsor must notify the affected participant and spouse (the spouse to whom the participant was married at the time of the distribution), so that the spouse can provide spousal consent to the distribution actually made or the participant may repay the distribution and receive a qualified joint and survivor annuity.

(2) Alternative correction methods when spousal consent is not obtained. (a) In general. 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) QJSA option. In the event that spousal consent to the prior distribution is not obtained (for example, because the spouse chooses not to consent, the spouse does not respond to the notice, or the spouse cannot be 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) Election between annuity and single-sum payment. In the event that spousal consent to the prior distribution is not obtained, the plan may offer the spouse the choice between (i) the survivor annuity benefit described in section 6.04(2)(b) or (ii) a single-sum payment equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under § 417(e)(3)). Any such single-sum payment is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or other eligible retirement plan. In the event that the plan is subject to a restriction on the payment of single sums pursuant to § 436(d) at the time the plan offers this choice to the spouse and the spouse elects to receive a single-sum payment, the plan sponsor must contribute to the plan the applicable amount under section 6.02(4)(e)(ii)(A).

.05 Determination letter application not permitted. (1) In general. A determination letter application may not be submitted with a VCP submission.

(a) Issuance of compliance statement or closing agreement for Plan Document Failures corrected through plan amendment under VCP or Audit CAP. The issuance of a compliance statement or closing agreement for Plan Document Failures corrected through plan amendment under VCP or Audit CAP does not constitute a determination that the terms of the plan, including the corrective plan amendment, satisfy the qualification requirements in form. See section 10.07(2)(a) and (b).

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

(2) Corrective amendments to Pre-approved Plans. (a) Effect of corrective amendment. Generally, under VCP or Audit CAP, a Plan Sponsor that is an adopter of a Pre-approved Plan or a 403(b) Pre-approved Plan may amend its plan to correct a Qualification Failure or a 403(b) Failure (provided the requirements of EPCRS are satisfied and the amendment satisfies the requirements of the Code). In some cases, the corrective amendment is not provided for among plan provision options that were pre-approved when the opinion or advisory letter was issued with respect to the plan. As a result, adopting such a corrective amendment would cause the Plan Sponsor to lose reliance on the plan's opinion or advisory letter, except in the limited circumstances provided in section 6.05(2)(b).

(b) Exception for certain amendments. In the case of a Pre-approved Plan or a 403(b) Pre-approved Plan, the adoption of a plan provision required to correct a failure under VCP or Audit CAP that is not provided for in the adoption agreement will not cause the Plan Sponsor to lose its reliance on the plan's opinion or advisory letter, provided that: (i) the corrective amendment would otherwise be permitted under the rules for Pre-approved Plans or 403(b) Pre-approved Plans, as applicable, and (ii) no other modification has been made to the plan that would cause the plan to lose its reliance on the opinion or advisory letter. If these conditions are satisfied, the Plan Sponsor will be allowed to continue to rely on the plan's opinion or advisory letter. In addition, the adoption of the corrective amendment will not cause the Pre-approved Plan to lose its eligibility to remain within the six-year remedial amendment cycle provided for in Rev. Proc. 2016-37 on a continuing basis until the expiration of the next six-year remedial amendment cycle described in section 16.01 of Rev. Proc. 2016-37.

.06 Special rules relating to Excess Amounts. (1) Treatment of Excess Amounts. Except as otherwise provided in section 6.02(5)(c) with respect to recovery of small Overpayments, a distribution of an Excess Amount is not eligible for the favorable tax treatment accorded to distributions from Qualified Plans or 403(b) Plans (such as eligibility for tax-free rollover). Thus, for example, if such a distribution was contributed to an IRA, the contribution is not a valid rollover contribution for purposes of determining the amount of excess contributions (within the meaning of § 4973) to the individual's IRA. A distribution of an Excess Amount is generally treated in the manner described in section 3 of Rev. Proc. 92-93, 1992-2 C.B. 505 (relating to the corrective disbursement of elective deferrals). The distribution must be reported on Form 1099-R for the year of distribution with respect to each participant or beneficiary receiving such a distribution. Except as otherwise provided in section 6.02(5)(c), where an Excess Amount has been or is being distributed, the Plan Sponsor must notify the recipient that (a) an Excess Amount has been or will be distributed and (b) an Excess Amount is not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under §402(c)(8)(B) (and, specifically, is not eligible for rollover).

(2) Correction of Excess Allocations. In general, an Excess Allocation is corrected in accordance with the Reduction of Account Balance Correction Method set forth in this paragraph. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for Earnings). If the Excess Allocation would have been allocated to other employees in the year of the failure had the failure not occurred, then that amount (adjusted for Earnings) is reallocated to those employees in accordance with the plan's allocation formula. If the improperly allocated amount would not have been allocated to other employees absent the failure, that amount (adjusted for Earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for Earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year. While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals. Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant. For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of §§ 402(g) and 415, the ADP test of § 401(k)(3), and the ACP test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee's after-tax contributions (adjusted for Earnings) and then the unmatched employee's elective deferrals (adjusted for Earnings). If any excess remains, and is attributable to either elective deferrals or after-tax employee contributions that are matched, the excess is apportioned first to after-tax employee contributions with the associated matching employer contributions and then to elective deferrals with the associated matching employer contributions. Any matching contribution or nonelective employer contribution (adjusted for Earnings) which constitutes an Excess Allocation is then forfeited and placed in an unallocated account established for the purpose of holding Excess Allocations to be used to reduce employer contributions in the current year and succeeding year. Such unallocated account is adjusted for Earnings. While such amounts remain in the unallocated account, the employer is not permitted to make contributions (other than elective deferrals) to the plan.

(3) Correction of Overpayment (defined benefit plans). An Overpayment from a defined benefit plan is corrected in accordance with rules similar to the Return of Overpayment and Adjustment of Future Payments correction methods described in section 2.04(1) of Appendix B or any other appropriate correction method. Depending on the nature of the Overpayment, an appropriate correction method may include using rules similar to the correction method described in section 2.04(1) of Appendix B but having the employer or another person contribute the amount of the Overpayment (with appropriate interest) to the plan instead of seeking recoupment from a plan participant or beneficiary. Another example of an appropriate correction method includes a Plan Sponsor adopting a retroactive amendment to conform the plan document to the plan's operations (subject to the requirements of section 4.05). Any other correction method used must satisfy the correction principles of section 6.02 and any other applicable rules in this revenue procedure.

(4) Correction of Overpayment (defined contribution plans and 403(b) Plans). (a) In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected in accordance with the Return of Overpayment method set forth in this section 6.06(4). Under this method, the employer takes reasonable steps to have the Overpayment repaid to the plan, adjusted for Earnings at the plan's earnings rate from the date of the distribution to the date of the correction of the Overpayment.

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

(c) Unallocated account. Except as provided in section 6.06(4)(d), a corrected Overpayment, adjusted for Earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or, if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula).

(d) Repayment by the participant or beneficiary. To the extent an Overpayment was solely considered a distribution in the absence of a distributable event but was otherwise determined in accordance with the terms of the plan, any amount returned to the plan by the participant or beneficiary is to be allocated to his or her account.

(e) Notification of employee. Except as provided in section 6.02(5)(c) with respect to the recovery of small overpayments, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under § 402(c)(8)(B) (and, specifically, was not eligible for tax-free rollover).

(f) Other correction methods. Other appropriate correction methods may be used to correct Overpayment failures from a defined contribution plan. Depending on the nature of the Overpayment, an appropriate correction method may include using rules similar to the correction method in section 6.06(4)(a) but having the employer or another person contribute the amount of the Overpayment (with appropriate interest) to the plan instead of seeking recoupment from a plan participant or beneficiary. Another example of an appropriate correction method includes a Plan Sponsor adopting a retroactive amendment to conform the plan document to the plan's operations (subject to the requirements of section 4.05). Any other correction method used must satisfy the correction principles of section 6.02 and any other applicable rules of this revenue procedure.

.07 Correction of plan loan failures. (1) In general. Plan loan failures may be corrected under VCP, SCP, or Audit CAP, unless otherwise specified in this section 6.07.

(2) Plan loan failures treated as deemed distributions under § 72(p). Unless correction is made in accordance with section 6.07(3) (to the extent applicable), a deemed distribution under § 72(p)(1) in connection with a failure relating to a plan loan to a participant 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. In this case, 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).

(3) Correction methods for certain § 72(p) plan loan failures. (a) In general. The correction methods set forth in section 6.07(3)(b), (c), and (d) apply to plan loans that do not comply with one or more requirements of § 72(p)(2); however, these correction methods are not available if the maximum period for repayment of the loan pursuant to §72(p)(2)(B) has expired. Further, the IRS reserves the right to limit the use of these correction methods to situations that it considers appropriate, for example, if the loan failure is caused by employer action. A deemed distribution corrected under section 6.07(3)(b), (c), or (d) is not required to be reported on Form 1099-R, and corrective payments under section 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 of plan loan terms to satisfy §72(p)(2)(A) may be corrected only under VCP or Audit CAP. The failure may be corrected by a corrective payment 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 payment would equal the original loan excess plus interest thereon), (ii) to reduce the loan excess to the extent of the interest thereon, with the remainder of the repayments applied to reduce the portion of the loan that did not exceed the maximum loan amount under § 72(p)(2)(A) (so that the corrective payment 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 payment would equal the outstanding balance remaining on the original loan excess on the date that the corrective payment is made). After the corrective payment is made, the loan may be reformed to amortize the remaining principal balance as of the date of the corrective payment over the remaining period of the original loan. This is permissible as long as the recalculated repayments over the remaining loan period would not cause the loan to violate the maximum repayment term requirement under § 72(p)(2)(B). The maximum repayment term is determined from the date the original loan was made. In addition, the amortized repayments determined for the remaining loan period must comply with the level amortization requirement of § 72(p)(2)(C).

(c) Plan loan terms that do not satisfy § 72(p)(2)(B) or (C). A failure of plan loan terms to satisfy the maximum repayment term requirement of § 72(p)(2)(B) or the level amortization requirement of § 72(p)(2)(C) may be corrected only under VCP or Audit CAP. The failure may be corrected by a reamortization of the loan balance in accordance with § 72(p)(2)(C) over the remainder of the maximum period that complies with § 72(p)(2)(B), as measured from the original date of the loan.

(d) Defaulted loans. A failure to repay a loan in accordance with loan terms that satisfy § 72(p)(2) may be corrected by (i) a single-sum corrective payment equal to the amount that the affected participant would have paid to the plan if there had been no failure to repay the plan, plus interest accrued on the missed payments, (ii) reamortizing the outstanding balance of the loan, including accrued interest, over the remaining payment schedule of the original term of the loan or the period remaining had the loan been amortized over the maximum period that complies with § 72(p)(2)(B), as measured from the original date of the loan, or (iii) any combination of (i) or (ii).

(e) No requirement for plan provisions. This section 6.07 applies even if the plan does not require loans to satisfy the requirements of § 72(p)(2). However, under the Department of Labor's VFC Program, to correct the ERISA fiduciary violations associated with the failures described in section 6.07(3)(b), (c), and (d), the plan must include plan provisions requiring that loans comply with § 72(p)(2)(A), (B), and (C).

(4) Failure to obtain spousal consent for a plan loan. (a) Spousal consent obtained. The correction method for the failure to obtain spousal consent for a plan loan is that the Plan Sponsor must notify the affected participant and spouse (the spouse to whom the participant was married at the time of the plan loan), so that the spouse can provide spousal consent to the plan loan.

(b) No spousal consent obtained. If spousal consent is not obtained, as described in section 6.07(4)(a), the failure to obtain spousal consent for a plan loan must be corrected under either VCP or Audit CAP.

(5) Number of loans exceeds a loan limitation established by plan. An Operational Failure that results from a participant obtaining a number of loans that exceeds the number of loans permitted under the terms of the plan may be corrected by adopting a plan amendment in accordance with the correction method set forth in section 2.07(3) of Appendix B.

.08 Correction under statute or regulations. Generally, none of the correction programs is available to correct failures that can be corrected under the Code and related regulations. For example, as a general rule, a Plan Document Failure that is a disqualifying provision for which the remedial amendment period under § 401(b) has not expired can be corrected under provisions of the Code through retroactive remedial amendment.

.09 Matters subject to excise or other taxes. (1) General rule. Except as provided in this revenue procedure, the correction programs are not available for events for which the Code provides tax consequences other than plan disqualification (such as the imposition of an excise tax or additional income tax). For example, funding deficiencies (failures to make the required contributions to a plan subject to § 412), prohibited transactions, and failures to file the Form 5500 series cannot be corrected under this revenue procedure.

(2) Section 4974. As part of VCP and Audit CAP, if a failure involves the failure to satisfy the minimum required distribution requirements of § 401(a)(9), in appropriate cases, the IRS will waive the excise tax under § 4974 applicable to plan participants or beneficiaries. The waiver will be included in the compliance statement or in the closing agreement in the case of Audit CAP. Under VCP, the Plan Sponsor, as part of the submission, must request the waiver and, in cases where the participant subject to the excise tax is either an owner-employee as defined in § 401(c)(3) or a 10% owner of a corporation, the Plan Sponsor must also provide an explanation supporting the request. Under Audit CAP, the Plan Sponsor must make a specific request for waiver of the excise tax under § 4974. The Plan Sponsor should also provide an explanation supporting the request for a waiver. Upon reviewing the request, the reasons for the failure, and other facts or circumstances of the case under examination, the IRS will determine whether it is appropriate to approve the waiver of the excise tax as part of the closing agreement negotiated under Audit CAP.

(3) Section 4972. As part of VCP, if the failure involves a correction that requires the Plan Sponsor to make a plan contribution that is not deductible, in appropriate cases, the IRS will not pursue the excise tax under § 4972 on such nondeductible contributions. The Plan Sponsor, as part of the submission must request the relief and provide an explanation supporting the request.

(4) Section 4979. As part of VCP, if a failure results in excess contributions as defined in § 4979(c) or excess aggregate contributions as defined in § 4979(d) under a plan, in appropriate cases, the IRS will not pursue the excise tax under § 4979, for example, where correction is made for any case in which the ADP test was timely performed but, due to reliance on inaccurate data, resulted in an insufficient amount of excess elective deferrals having been distributed to HCEs. The Plan Sponsor, as part of the submission, must request the relief and provide an explanation supporting the request.

(5) Section 4973. Subject to section 6.03(4), as part of VCP, in appropriate cases, the IRS will not pursue the excise tax under § 4973 relating to excess contributions made to a 403(b) Plan or IRA under any of the following circumstances:

(a) As part of the proposed correction for Overpayments, the participant or beneficiary (“recipient”) removes the Overpayment (adjusted for Earnings) from the recipient's 403(b) Plan or IRA and returns that amount to the plan.

(b) As part of the proposed correction for Excess Amounts, the recipient removes the Excess Amount (adjusted for Earnings) from the recipient's 403(b) Plan or IRA and reports that amount (reduced by any applicable after-tax employee contribution) as a taxable distribution for the year in which the Excess Amount (adjusted for Earnings) is removed from the recipient's 403(b) Plan or IRA. The amount removed is generally taxed in a manner that is similar to the manner in which the corrective disbursement of elective deferrals is taxed, as described in section 3 of Rev. Proc. 92-93.

(c) The Plan Sponsor, as part of the submission, must request relief from the §4973 excise tax and provide an explanation supporting the request.

(6) Section 72(t). As part of VCP, in appropriate cases, the IRS will not pursue the 10% additional income tax under § 72(t) (or will pursue only a portion thereof) if, as part of the proposed correction of an Overpayment that occurred solely because an employee received a distribution from his or her vested account balance that was not a distributable event, the participant or beneficiary (“recipient”) returns the improperly distributed amount, adjusted for Earnings, to the plan. If the improperly distributed amount was rolled over to the recipient's IRA, then correction will include removing the amount improperly distributed and rolled over (adjusted for Earnings) from the recipient's IRA and returning that amount to the plan. In appropriate cases, as a condition for not pursuing all or a portion of the additional tax, the IRS may require the Plan Sponsor to pay a sanction not in excess of the 10% additional income tax under § 72(t). The Plan Sponsor, as part of the submission, must request the relief and provide an explanation supporting the request.

.10 Correction for 403(b) Plans. (1) Correction for 403(b) Plans generally. Except as provided in sections 6.03(2) and 6.10(2), the correction for a 403(b) Plan is expected to be the same as the correction required for a Qualified Plan with the same Failure (that is, a Plan Document Failure, Operational Failure, Demographic Failure, or Employer Eligibility Failure).

(2) Special correction principles. In general, a 403(b) Failure can be corrected by treating a contract as a § 403(c) annuity contract (or, if applicable, as an amount to which § 61, 83, or 402(b) applies), such as for purposes of correcting an Employer Eligibility Failure, a failure to provide for full vesting (including a failure to maintain a separate account), or an exchange made to a vendor which is not part of the plan (and for which there is no information sharing agreement). In addition, for purposes of this revenue procedure, a 403(b) Plan will be treated as having a Favorable Letter if either

(a) the employer is an eligible employer and, on or before December 31, 2009 (or the date a 403(b) Plan is established, if later), the employer has adopted a written 403(b) Plan that is intended to satisfy § 403(b) (including the regulations thereunder) effective as of January 1, 2009 (or the first day of the plan year in which a 403(b) Plan is established, if later), or (b) the employer has failed to adopt a written 403(b) Plan timely and corrects the failure in accordance with section 6.10(3) below. In addition, for purposes of section 4.04 (requiring that the Plan Sponsor or administrator of the plan have established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements in order to be eligible for SCP to be available to correct Operational Failures and Plan Document Failures), the requirement to have established practices and procedures only applies for failures during periods after December 31, 2009.

(3) Correction for failure to adopt a written 403(b) Plan timely. A failure to adopt a written 403(b) Plan timely in accordance with the final regulations under § 403(b) and Notice 2009-3 may be corrected under VCP or Audit CAP. The issuance of a compliance statement or closing agreement for the failure to adopt a written 403(b) Plan timely will result in the written 403(b) Plan being treated as if it had been adopted timely for the purpose of making available the extended remedial amendment period set forth in Rev. Proc. 2017-18, 2017-5 I.R.B 743. However, the issuance of a compliance statement or closing agreement does not constitute a determination as to whether the written plan, as drafted, complies with the applicable requirements of § 403(b) of the Code and the final 403(b) regulations.

.11 Correction for SEPs and SIMPLE IRA Plans. (1) Correction for SEPs and SIMPLE IRA Plans generally. Generally, the correction for a SEP or a SIMPLE IRA Plan is expected to be similar to the correction required for a Qualified Plan with a similar Qualification Failure (that is, a Plan Document Failure, Operational Failure, Demographic Failure, or Employer Eligibility Failure).

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

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

(a) The Plan Sponsor may make contributions that are 100% vested to all eligible nonhighly compensated employees (to the extent permitted by § 415) necessary to raise the deferral percentage to an amount sufficient to pass the test. This amount may be calculated as the same percentage of compensation (regardless of the terms of the SEP).

(b) The Plan Sponsor may effect distribution of excess contributions, adjusted for Earnings through the date of correction, to highly compensated employees to correct the failure. The Plan Sponsor must also contribute to the SEP an amount equal to the total amount distributed. This amount must be allocated to (i) current employees who were nonhighly compensated employees in the year of the failure, (ii) current nonhighly compensated employees who were nonhighly compensated employees in the year of the failure, or (iii) employees (both current and former) who were nonhighly compensated employees in the year of the failure.

(4) Treatment of undercontributions to a SEP or a SIMPLE IRA Plan. (a) Make-up contributions; Earnings. The Plan Sponsor should correct undercontributions to a SEP or a SIMPLE IRA Plan by contributing make-up amounts that are fully vested, adjusted for Earnings from the date of the failure to the date of correction.

(b) Earnings adjustment methods. Insofar as SEP and SIMPLE IRA Plan assets are held in IRAs, there is no earnings rate under the SEP or SIMPLE IRA Plan as a whole. If it is not feasible to make a reasonable estimate of what the actual investment results would have been, a reasonable interest rate may be used.

(5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan. (a) Distribution of Excess Amounts. For purposes of this section 6.11, an Excess Amount is an amount contributed on behalf of an employee that is in excess of an employee's benefit under the plan, or an elective deferral in excess of the limitations of § 402(g) or 408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan Sponsor may effect distribution of the Excess Amount, adjusted for Earnings through the date of correction, to the affected participant. The amount distributed to the affected participant is includible in gross income in the year of distribution. The distribution is reported on Form 1099-R for the year of distribution with respect to each participant receiving the distribution. In addition, the Plan Sponsor must inform affected participants that the distribution of an Excess Amount is not eligible for favorable tax treatment accorded to distributions from a SEP or a SIMPLE IRA Plan (and, specifically, is not eligible for tax-free rollover). If the Excess Amount is attributable to employer contributions, the Plan Sponsor may effect distribution of the employer Excess Amount, adjusted for Earnings through the date of correction, to the Plan Sponsor. The amount distributed to the Plan Sponsor is not includible in the gross income of the affected participant. The Plan Sponsor is not entitled to a deduction for such employer Excess Amount. The distribution is reported on Form 1099-R issued to the participant indicating the taxable amount as zero.

(b) Retention of Excess Amounts. If the failure involves an Excess Amount under a SEP or a SIMPLE IRA Plan and the Plan Sponsor retains the Excess Amount in the SEP or SIMPLE IRA Plan, a sanction applies, in addition to the SEP or SIMPLE IRA Plan user fee described in Appendix A of Rev. Proc. 2019-4 (and its annual successors). A sanction equal to at least 10% of the Excess Amount with no adjustment for Earnings is imposed. In addition, the Plan Sponsor is not entitled to a deduction for an Excess Amount retained in the SEP or SIMPLE IRA Plan. In the case of an Excess Amount retained in a SEP that is attributable to a § 415 failure, the Excess Amount, adjusted for Earnings through the date of correction, must reduce an affected participant's applicable § 415 limit for the year following the year of correction (or for the year of correction if the Plan Sponsor so chooses), and 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 sanction described in section 6.11(5)(b) does not apply.

.12 Confidentiality and disclosure. Because each correction program relates directly to the enforcement of Code requirements, the information received or generated by the IRS under the program is subject to the confidentiality requirements of § 6103 and is not a written determination within the meaning of § 6110.

.13 No effect on other law. Correction under these programs has no effect on the rights of any party under any other law, including title I of ERISA. The Department of Labor maintains a VFC 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. AVAILABILITY OF SCP FOR CERTAIN OPERATIONAL FAILURES AND PLAN DOCUMENT FAILURES

.01 In general. (1) Operational Failures. 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 7.02, and either 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).

(2) Plan Document Failures. The requirements of this section 7 are satisfied with respect to an eligible Plan Document Failure if the Plan Sponsor of a Qualified Plan or a 403(b) Plan satisfies the requirements of section 7.03 and section 9.

.02 Operational Failures. (1) In general. Operational Failures may be corrected under SCP in accordance with the correction principles and rules of general applicability set forth in section 6.

(2) Corrective amendments for Operational Failures. Operational Failures may be corrected under SCP by adoption of a plan amendment that conforms the terms of the plan to the plan's prior operations, provided the requirements of section 4.05(2) are satisfied.

(3) Plan loan failures. The following plan loan failures may be corrected under SCP: defaulted loans (described in section 6.07(3)(d)); the failure to obtain spousal consent (described in section 6.07(4)(a)); and the failure to abide by a limitation on the number of plan loans permitted per participant as set forth under the terms of the plan (described in section 6.07(5)).

.03 Plan Document Failures. An eligible Plan Document Failure, as described in section 4.01(1)(b), may be corrected under SCP provided that the requirements described in section 4.05(2)(c)(i) (Favorable Letter requirement) and 4.05(2)(c)(ii) (treating Plan Document Failures under SCP as significant failures) are satisfied.

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 Plan Sponsor of a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan corrects the Operational Failure 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.

.02 Factors. The factors to be considered in determining whether an Operational Failure under a plan is insignificant include, but are not limited to: (1) whether other failures occurred during the period being examined (for this purpose, a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure); (2) the percentage of plan assets and contributions involved in the failure; (3) the number of years the failure occurred; (4) the number of participants affected relative to the total number of participants in the plan; (5) the number of participants affected as a result of the failure relative to the number of participants who could have been affected by the failure; (6) whether correction was made within a reasonable time after discovery of the failure; and (7) the reason for the failure (for example, data errors such as errors in the transcription of data, the transposition of numbers, or minor arithmetic errors). No single factor is determinative. Additionally, factors (2), (4), and (5) should not be interpreted to exclude small businesses.

.03 Multiple failures. In the case of a plan with more than one Operational Failure in a single year, or Operational Failures that occur in more than one year, the Operational Failures are eligible for correction under this section 8 only if all of the Operational Failures are insignificant in the aggregate. Operational Failures that have been corrected under SCP in section 9 and VCP in sections 10 and 11 are not taken into account for purposes of determining if Operational Failures are insignificant in the aggregate.

.04 Examples. (1) In general. The following examples illustrate the application of this section 8. The IRS plans to provide additional examples illustrating whether an Operational Failure is insignificant. The additional examples will be provided on the IRS.gov website. It is expected that a link to these examples will appear on the “Correcting Plan Errors” webpage on the IRS.gov website.

(2) Assumptions for examples in section 4.04. It is assumed, in each example, that the eligibility requirements of section 4 relating to SCP (for example, the requirements of section 4.04 relating to established practices and procedures) have been satisfied and that no Operational Failures occurred other than the Operational Failures identified below.

Example 1: In 1991, Employer X established Plan A, a profit-sharing plan that satisfies the requirements of § 401(a) in form. In 2005, the benefits of 50 of the 250 participants in Plan A were limited by § 415(c). However, when the IRS examined Plan A in 2008, it discovered that, during the 2005 limitation year, the annual additions allocated to the accounts of 3 of these employees exceeded the maximum limitations under § 415(c). Employer X contributed $3,500,000 to the plan for the plan year. The amount of the excesses totaled $4,550. Under these facts, because the number of participants affected by the failure relative to the total number of participants who could have been affected by the failure, and the monetary amount of the failure relative to the total employer contribution to the plan for the 2005 plan year, are insignificant, the § 415(c) failure in Plan A that occurred in 2005 would be eligible for correction under this section 8.

Example 2: The facts are the same as in Example 1, except that the failure to satisfy § 415 occurred during each of the 2005 and 2007 limitation years. In addition, the three participants affected by the § 415 failure were not identical each year. The fact that the § 415 failures occurred during more than one limitation year does not cause the failures to be significant; accordingly, the failures are still eligible for correction under this section 8.

Example 3: The facts are the same as in Example 1, except that the annual additions of 18 of the 50 employees whose benefits were limited by § 415(c) nevertheless exceeded the maximum limitations under § 415(c) during the 2005 limitation year, and the amount of the excesses ranged from $1,000 to $9,000, and totaled $150,000. Under these facts, taking into account the number of participants affected by the failure relative to the total number of participants who could have been affected by the failure for the 2005 limitation year (and the monetary amount of the failure relative to the total employer contribution), the failure is significant. Accordingly, the § 415(c) failure in Plan A that occurred in 2005 is ineligible for correction under this section 8 as an insignificant failure.

Example 4: Employer J maintains Plan C, a money purchase pension plan established in 1992. The plan document satisfies the requirements of § 401(a). The formula under the plan provides for an employer contribution equal to 10% of compensation, as defined in the plan. During its examination of the plan for the 2005 plan year, the IRS discovered that the employee responsible for entering data into the employer's computer made minor arithmetic errors in transcribing the compensation data with respect to 6 of the plan's 40 participants, resulting in excess allocations to those 6 participants' accounts. Under these facts, the number of participants affected by the failure relative to the number of participants that could have been affected is insignificant, and the failure is due to minor data errors. Thus, the failure occurring in 2005 is insignificant and therefore eligible for correction under this section 8.

Example 5: Public School maintains for its 200 employees a salary reduction 403(b) Plan ("Plan B") that is intended to satisfy the requirements of § 403(b). The business manager has primary responsibility for administering Plan B, in addition to other administrative functions within Public School. During the 2005 plan year, a former employee should have received an additional minimum required distribution of $278 under § 403(b)(10). Another participant received an impermissible hardship withdrawal of $2,500. Another participant made elective deferrals of which $1,000 was in excess of the §402(g) limit. Under these facts, even though multiple failures occurred in a single plan year, the failures are eligible for correction under this section 8 because in the aggregate the failures are insignificant.

SECTION 9. SELF-CORRECTION OF CERTAIN SIGNIFICANT OPERATIONAL FAILURES AND PLAN DOCUMENT FAILURES

.01 Requirements. The requirements of this section 9 are satisfied with respect to a significant Operational Failure or a Plan Document Failure if the Plan Sponsor of a Qualified Plan or 403(b) Plan corrects the failure, and the correction is either completed or, in the case of an Operational Failure, is substantially completed (in accordance with section 9.03) by the last day of the correction period described in section 9.02.

.02 Correction period. (1) End of correction period. The last day of the correction period is the last day of the second plan year following the plan year for which the failure occurred. However, in the case of a failure to satisfy the requirements of § 401(k)(3), 401(m)(2), or, for plan years beginning on or before December 31, 2001, the multiple use test of § 401(m)(9), the correction period does not end until the last day of the second plan year following the plan year that includes the last day of the additional period for correction permitted under § 401(k)(8) or 401(m)(6). If a 403(b) Plan does not have a designated plan year, the plan year is deemed to be the calendar year for purposes of this section 9.02.

(2) Extension of correction period for Transferred Assets. In the case of an Operational Failure or Plan Document Failure that relates only to Transferred Assets, or to a plan assumed in connection with a corporate merger, acquisition, or other similar employer transaction, the correction period does not end until the last day of the first plan year that begins after the corporate merger, acquisition, or other similar employer transaction between the Plan Sponsor and the sponsor of the transferor plan or the prior sponsor of an assumed plan.

(3) Effect of examination. The correction period for an Operational Failure or Plan Document Failure that occurs for any plan year ends, in any event, on the first date the plan or Plan Sponsor is Under Examination for that plan year (determined without regard to the second sentence of section 9.02). (But see section 9.03 for special rules permitting completion of correction of an Operational Failure after the end of the correction period.)

.03 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) of this section 9.03 are satisfied.

(1) The requirements of this paragraph (1) are satisfied if:

(a) during the correction period, the Plan Sponsor is reasonably prompt in identifying the Operational Failure, formulating a correction method, and initiating correction in a manner that demonstrates a commitment to completing correction of the failure as expeditiously as practicable; and

(b) within 120 days after the last day of the correction period, the Plan Sponsor completes correction of the failure.

(2) The requirements of this paragraph (2) are satisfied if:

(a) during the correction period, correction is completed with respect to 65% of all participants affected by the Operational Failure; and

(b) thereafter, the Plan Sponsor completes correction of the Operational Failure with respect to the remaining affected participants in a diligent manner.

.04 Examples. The following examples illustrate the application of this section 9. It is assumed, in each example, that the eligibility requirements of section 4 relating to SCP have been met.

Example 1: Employer Z established a qualified defined contribution plan in 2003 and received a favorable determination letter. During 2007, while doing a self-audit of the operation of the plan for the 2006 plan year, the plan administrator discovered that, despite the practices and procedures established by Employer Z with respect to the plan, several employees eligible to participate in the plan were excluded from participation. The administrator also found that for 2006 Operational Failures occurred because the elective deferrals of additional employees exceeded the § 402(g) limit and Employer Z failed to make the required top-heavy minimum contribution. In addition, during the review of the administration for the 2006 year, it was found that the plan administrator intended to implement correction for the failure to satisfy the ADP test (as described in § 401(k)(3)) for the 2005 plan year. During the 2008 plan year, the Plan Sponsor made QNECs on behalf of the excluded employees, distributed the excess deferrals to the affected participants, and made a top-heavy minimum contribution to all participants entitled to that contribution for the 2006 plan year. Each corrective contribution and distribution was credited with Earnings at a rate appropriate for the plan from the date the corrective contribution or distribution should have been made to the date of correction. The failed ADP test for 2005 was corrected by making corrective contributions, adjusted for Earnings, on behalf of nonhighly compensated employees using the method described in Appendix A, section.03 of this revenue procedure. Under these facts, the Plan Sponsor has corrected the ADP test failure for the 2005 plan year and the Operational Failures for the 2006 plan year within the correction period and thus satisfied the requirements of this section 9.

Example 2: Employer A established a qualified defined contribution plan, Plan A, in 1993 and has received a favorable determination letter for the applicable law changes. In April 2007, Employer A purchased all of the stock of Employer B, a wholly-owned subsidiary of Employer C. Employees of Employer B participated in Plan C, a qualified defined contribution plan sponsored by Employer C. Following Employer A's review of Plan C, Employer A and Employer C agreed that Plan A would accept a transfer of plan assets from Plan C attributable to the account balances of the employees of Employer B who had participated in Plan C. As part of this agreement, Employer C represented to Employer A that Plan C was tax qualified. Employers A and C also agreed that such transfer would be in accordance with §414(l) and §1.414(l)-1 and addressed issues related to costs associated with the transfer. Following the transaction, the employees of Employer B began participation in Plan A. Effective July 1, 2007, Plan A accepted the transfer of plan assets from Plan C. After the transfer, Employer A determined that all the participants in one division of Employer B had been incorrectly excluded from allocation of the profit sharing contributions for the 2002 and 2003 plan years. During 2008, Employer A made corrective contributions on behalf of the affected participants. The corrective contributions were credited with Earnings at a rate appropriate for the plan from the date the corrective contributions should have been made to the date of correction and Employer A otherwise complied with the requirements of SCP. Under these facts, Employer A has, within the correction period, corrected the Operational Failures for the 2002 and 2003 plan years with respect to the assets transferred to Plan A, and thus satisfied the requirements of this section 9.

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

SECTION 10. VCP PROCEDURES

.01 VCP requirements. The requirements of VCP are satisfied with respect to a failure if, on the www.pay.gov website, the Plan Sponsor files a VCP submission and pays the applicable user fee set forth in Appendix A of Rev. Proc. 2019-4 (and its annual successors), in accordance with the requirements of this section 10 and section 11, and implements the corrective actions and satisfies any other conditions set forth in the compliance statement described in section 10.07. As provided in section 11.08, a Plan Sponsor may designate an authorized representative to file a VCP submission with the IRS on its behalf, if specific requirements are satisfied.

.02 Identification of failures. VCP is not based upon an examination of the plan by the IRS. Only the failures raised by the Plan Sponsor or failures identified by the IRS in processing the submission are addressed under VCP, and only those failures are covered by a VCP compliance statement. The IRS will not make any investigation or finding under VCP concerning whether there are other 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 IRS) a subsequent examination of the Plan Sponsor or the plan by the IRS with respect to the taxable year (or years) involved with respect to matters that are outside the compliance statement. However, a Plan Sponsor's statements describing failures are made only for purposes of VCP and will not be regarded by the IRS as an admission of a failure for purposes of any subsequent examination. See section 5.08 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. However, a plan that is included in a Group Submission under section 10.10 may be examined while the Group Submission is pending with respect to issues not identified in the Group Submission at the time such plan comes Under Examination. Also, if it is determined that either the plan or the Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as defined under section 4.12(2)), the IRS may authorize the examination of the plan, even if a submission pursuant to VCP is pending. In addition, this practice regarding concurrent examinations does not extend to other plans of the Plan Sponsor. Thus, any plan of the Plan Sponsor that is not pending under VCP could be subject to examination.

.05 Determination letter applications not related to a VCP submission. (1) The IRS may process a determination letter application (including an application requested on Form 5310) submitted under the determination letter program (as set forth in Rev. Proc. 2019-4 (and its annual successors) and Rev. Proc. 2016-37, and any subsequent guidance issued in the Internal Revenue Bulletin) while separately processing a VCP submission for the same plan. Generally, issuance of the determination letter in response to an application made on a Form 5310 will be suspended pending the closure of the VCP submission.

(2) A submission of a plan under the determination letter program does not constitute a submission under VCP. If the Plan Sponsor discovers a failure, the failure may not be corrected as part of the determination letter process. The Plan Sponsor may use SCP and VCP instead, as applicable. If the IRS, in connection with a determination letter application, discovers failures, the IRS may issue a closing agreement with respect to the failures identified or, if appropriate, refer the case to Employee Plans Examinations. In such a case, the VCP user fee does not apply. Instead, except as provided in section 10.05(3), the sanction in section 14.01 relating to Audit CAP applies. See section 5.08 for a description of when a plan submitted for a determination letter is considered to be Under Examination for purposes of EPCRS.

(3) If the IRS in connection with a determination letter application discovers the plan has not been amended timely for tax legislation changes, the fee structure in section 14.04 applies.

.06 Processing of submission.

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

(2) Eligibility of submission. If, at any stage of the review process, the IRS determines that a VCP submission is seriously deficient or that issuing a compliance statement with respect to the VCP submission would be inappropriate or impracticable, the IRS reserves the right to not issue a compliance statement. If no substantive processing of the case has occurred, the IRS will refund the user fee submitted with the request. Otherwise, the user fee will not be refunded.

(3) Review of submission. Once the IRS determines that the submission is complete under VCP, the IRS may contact the Plan Sponsor or the Plan Sponsor's authorized representative to discuss the proposed corrections and the plan's administrative procedures. However, if the IRS determines that the submission is complete and sets forth an acceptable correction method, the IRS may issue a compliance statement without contacting the Plan Sponsor or the Plan Sponsor's authorized representative.

(4) Additional information required. If additional information is required, an IRS representative generally will contact the Plan Sponsor or the Plan Sponsor's authorized representative and explain what is needed to complete the submission. The Plan Sponsor will have 21 calendar days from the date of this contact to provide the requested information. If the information is not received within 21 days, the matter will be closed, the user fee will not be returned, and the case may be referred to Employee Plans Examinations. Any request for an extension of the 21-day time period must be made in writing within the 21-day time period and must be approved by the IRS (by the applicable group manager).

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

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

(6) Conference right. If the IRS initially determines that it cannot issue a compliance statement because the parties cannot agree upon correction or a change in administrative procedures, the Plan Sponsor (generally through the Plan Sponsor's authorized representative) will be contacted by the IRS representative and offered a conference with the IRS. 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 IRS (by the applicable group manager). Additional conferences may be held at the discretion of the IRS.

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

(8) Issuance of compliance statement. (a) In general. If agreement has been reached and all applicable user fees have been paid, the IRS will send to the Plan Sponsor a compliance statement signed by the IRS specifying the corrective action required. However, the IRS reserves the right to require the Plan Sponsor to sign the compliance statement. In such a case, the IRS will send to the Plan Sponsor an unsigned compliance statement. Within 30 calendar days of the date the compliance statement is sent, the Plan Sponsor must sign and return the compliance statement and pay any outstanding user fee that may be required (see sections 4.08 and 11.06). The IRS will then issue a signed copy of the compliance statement to the Plan Sponsor. If the Plan Sponsor does not return the compliance statement (and pay any outstanding user fee) within 30 calendar days, the VCP submission will be closed, and no further action will be taken with respect to the submission. In appropriate circumstances, the plan may be referred to Employee Plans Examinations.

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

(c) Modifications to VCP Submission. If a Plan Sponsor materially modifies a VCP submission that was previously filed with the IRS, the Plan Sponsor should include the penalty of perjury statement set forth in section 11.04(16) with respect to such subsequent modifications. If the Plan Sponsor does not submit a penalty of perjury statement, the Plan Sponsor will be required to sign and return the compliance statement under the general procedures described in section 10.06(8)(a). See section 11.03(8) for information concerning submission of any such modification prior to the assignment of the case to an IRS representative.

(9) Timing of correction. (a) In general. 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 correction period must be made in writing prior to the expiration of the correction period and must be approved by the IRS.

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

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

(10) Modification of compliance 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, accompanied by a new user fee, submitted in accordance with the submission procedures set forth in section 11.

(11) Verification. Once the compliance statement has been issued, the IRS may require verification that the plan has complied with the correction methods 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 IRS 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.

.07 Compliance statement. (1) General description of compliance statement. The compliance statement issued for a VCP submission only addresses the failures identified in the submission, the terms of correction (including any revision of 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 IRS will not treat the plan as failing to satisfy the applicable requirements of the Code on account of the failures described in the compliance statement if the conditions of the compliance statement are satisfied. The reliance provided by a compliance statement is limited to the specific failures and years specified and does not provide reliance for any other failure or year.

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

(b) Nonamender Failures. With respect to a failure to amend a plan timely for disqualifying provisions or a failure to timely adopt applicable required amendments provided on the Required Amendments List, as described in section 5.01(2)(a)(ii)(C) (the definition of Nonamender Failure), the issuance of a compliance statement will result in the corrective amendments being treated as if they had been timely adopted during the applicable remedial amendment period. However, the issuance of such a compliance statement does not constitute a determination as to whether the corrective plan amendment as drafted complies with the change in qualification requirement, whether the corrective plan amendment conforms the terms of the plan to the plan's prior operations, or whether the terms of the plan, including the corrective plan amendment, satisfy the qualification requirements in form.

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

(d) Failure to adopt 403(b) Plan timely. A failure to adopt a 403(b) Plan timely in accordance with the final regulations under § 403(b) and Notice 2009-3 may be corrected under VCP. The issuance of a compliance statement will result in the 403(b) Plan being treated as if it had been adopted timely for the purpose of making available the extended remedial amendment period set forth in Rev. Proc. 2017-18. However, the issuance of a compliance statement does not constitute a determination as to whether the written plan, as drafted, complies with the applicable requirements of §403(b) and the final § 403(b) regulations.

(3) Administrative procedures required. Where current procedures are inadequate for operating the plan in conformance with the applicable requirements of the Code, the compliance statement will be conditioned upon the implementation of stated administrative procedures. The IRS may prescribe appropriate administrative procedures in the compliance statement.

(4) Compliance statement conditioned upon timely correction. The compliance statement is conditioned on (i) there being no misstatement or omission of material facts in connection with the submission, and (ii) the implementation of the specific corrections and satisfaction of any other conditions in the compliance statement.

(5) Authority delegated. Compliance statements (including relief from any excise tax or other penalty as provided under section 6.09) are authorized to be signed by managers within Employee Plans Rulings and Agreements, under the Tax Exempt and Government Entities Operating Division of the IRS.

.08 Effect of compliance statement on examination. The compliance statement is binding upon both the IRS and the Plan Sponsor or Eligible Organization (as defined in section 10.10(1)) with respect to the specific tax matters identified therein for the periods specified, but does not preclude or impede an examination of the plan by the IRS relating to matters outside the compliance statement, even with respect to the same taxable year or years to which the compliance statement relates.

.09 Special rules relating to Anonymous Submissions. (1) The Anonymous Submission procedure in this section 10.09 permits submission of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan under VCP without initially identifying the applicable plan, the Plan Sponsor, or the Eligible Organization. The requirements of this revenue procedure relating to VCP, including sections 10, 11, and 12, apply to these submissions. Information identifying the plan or the Plan Sponsor may be redacted. If the submission is made by an individual who is authorized to represent the Plan Sponsor, such individual must satisfy the power of attorney requirements described in section 11.08. As part of the submission filed on the www.pay.gov website, the authorized representative must, under penalty of perjury, assert that the authorized representative complies with the power of attorney requirements described in section 11.08, and that the authorized representative will submit an executed copy of a Form 2848, Power of Attorney and Declaration of Representation, upon the disclosure of the identity of the Plan Sponsor to the IRS. Once the IRS and the authorized representative reach agreement with respect to the submission, the IRS will contact the authorized 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 and to submit to the IRS the executed Form 2848 and the penalty of perjury statement set forth in section 11.04(16). If the Plan Sponsor does not submit the identifying documents (including the executed Form 2848 and the penalty of perjury statement) within 21 calendar days from the date of the letter of agreement, the matter will be closed and the user fee will not be returned.

(2) Notwithstanding section 10.04, until a plan and Plan Sponsor is identified to the IRS, a submission under this subsection does not preclude or impede an examination of the Plan Sponsor or its plan. Thus, a plan submitted under the Anonymous Submission procedure that comes Under Examination prior to the date the identifying documents of the plan and Plan Sponsor are received by the IRS will no longer be eligible under VCP.

.10 Special rules relating to Group Submissions. (1) Eligible Organizations. For purposes of a Group Submission, the term “Eligible Organization” means either (a) a sponsor (as that term is defined in section 4.07 of Rev. Proc. 2015-36) of a master or prototype plan, (b) a volume submitter practitioner (as that term is defined in section 13.05 of Rev. Proc. 2015-36), (c) a mass submitter (as that term is defined in sections 4.08 and 13.06 of Rev. Proc. 2015-36 and section 4.04 of Rev. Proc. 2017-41), (d) a provider (as that term is defined in section 4.08 of Rev. Proc. 2017-41), (e) an insurance company or other entity that has issued annuity contracts or provides services with respect to assets for 403(b) Plans, or (f) an entity that provides its clients with administrative services with respect to Qualified Plans, 403(b) Plans, SEPs, or SIMPLE IRA Plans. An Eligible Organization is not eligible to make a Group Submission unless the failures in the submission result from a systemic error involving the Eligible Organization that affects at least 20 plans and results in at least 20 plans implementing correction. If, at any time before the IRS issues the compliance statement, the number of plans falls below 20, the Eligible Organization must notify the IRS that it is no longer eligible to make a Group Submission. Under these circumstances, the user fee may be retained by the IRS.

(2) 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. A separate user fee must be submitted for each plan submitted. For this purpose, in the case of a plan that consists of a basic plan document and adoption agreements, the number of plans submitted is determined by reference to the number of basic plan documents submitted.

(3) Special Group Submission 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 11.04(13) for a special submission requirement with respect to Group Submissions.

(b) The Eligible Organization must provide notice to all Plan Sponsors of the plans included in the Group Submission. The notice must be provided at least 90 days before the Eligible Organization provides the IRS with the information required in section 10.10(3)(c). The purpose of the notice is to provide each Plan Sponsor with information relating to the Group Submission request. The notice should explain the reason for the Group Submission and inform the Plan Sponsor that the Plan Sponsor's plan will be included in the Group Submission unless the Plan Sponsor responds within the 90-day period requesting that the Plan Sponsor's plan be excluded from the Group Submission.

(c) When an Eligible Organization receives an unsigned compliance statement on the proposed correction and agrees to the terms of the compliance statement, the Eligible Organization must return the signed compliance statement and any additional user fee required under Appendix A of Rev. Proc. 2019-4 (and its annual successors) to the IRS within 120 calendar days, in accordance with section 11.06. In addition, the Eligible Organization must submit a list containing (i) the employer tax identification numbers for the Plan Sponsors of the plans that have consented to be included in the Group Submission and to which the compliance statement may be applicable, (ii) the plans by name, plan number, type of plan, and number of plan participants, (iii) a certification that each Plan Sponsor received notice of the Group Submission, and (iv) a certification that each Plan Sponsor timely filed the Form 5500 series return for the most recent plan year for which the Form 5500 series return was required to have been filed. This list can be submitted at any stage of the submission process provided that the requirements of section 10.10(3)(b) have been satisfied. If the Eligible Organization submits this list with the initial submission, the list must be included in the PDF file described in section 11.03(2). If the list is not submitted with the initial submission, then once the submission has been assigned to an IRS representative, the Eligible Organization must submit the list on a USB drive in Microsoft Word or Excel to the IRS representative. 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 IRS at the request of the Eligible Organization) will be covered by the compliance statement.

(d) Notwithstanding section 4.02, if a Plan Sponsor of a plan that is eligible to be included in the Group Submission and has not requested to be excluded from the Group Submission pursuant to section 10.10(3)(b) is notified of an impending Employee Plans examination after the Eligible Organization filed the Group Submission with the IRS, the Plan Sponsor's plan will be included in the Group Submission. However, with respect to such plan, the Group Submission will not preclude or impede an examination of the plan with respect to any failures not identified in the Group Submission at the time the plan comes Under Examination.

.11 Multiemployer and multiple employer plans. In the case of a multiemployer or multiple employer plan, the plan administrator (rather than any contributing or adopting employer) must file a submission under VCP with respect to any plan failures. The plan administrator may designate an authorized representative to file a VCP submission with the IRS using the www.pay.gov website as described in section 11.08. The request must be with respect to the plan, rather than a portion of the plan affecting any particular employer.

SECTION 11. SUBMISSION PROCEDURES FOR VCP

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

(2) All VCP submissions must be filed using the www.pay.gov website, as described in this section 11. On the www.pay.gov website, applicants (generally, either a Plan Sponsor or a representative authorized pursuant to a valid Form 2848 as provided in section 11.08) will file a VCP submission and pay applicable user fees online. Paper VCP submissions postmarked after March 31, 2019, will be returned to the applicant.

(3) A VCP submission must include a description of the failures, a description of the proposed methods of correction, and other procedural items set forth in this section 11.

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

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

(3) Applicants who submit the Form 14568 series should complete the forms digitally and combine all submission documents into a single PDF (Portable Document Format) file that includes the completed forms. See sections 11.03(2) and 11.04.

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

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

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

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

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

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

(3) Create a pay.gov account. The applicant must create a pay.gov account on the www.pay.gov website. Using the pay.gov account, the applicant must complete and sign Form 8950, Application for Voluntary Correction Program (VCP) Submission Under the Employee Plans Compliance Resolution System.

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

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

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

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

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

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

(1) Identification of failures. A complete description of the failures, the years in which the failures occurred, including closed years (that is, years for which the statutory period has expired), and the number of employees affected by each failure.

(2) Explanation. An explanation of how and why the failures arose, including a description of the administrative procedures applicable to the failures in effect at the time the failures occurred.

(3) Proposed method of correction. A detailed description of the method for correcting the failures that the Plan Sponsor has implemented or proposes to implement. Each step of the correction method must be described in narrative form. The description must include specific information needed to support the proposed correction method. This information includes, for example, the number of employees affected and the expected cost of correction (both of which may be approximated if the exact number cannot be determined at the time of the request), the years involved, and calculations or assumptions the Plan Sponsor used to determine the amounts needed for correction.

(4) Earnings or actuarial adjustments. A description of the methodology that will be used to calculate Earnings or actuarial adjustments on any corrective contributions or distributions (indicating the computation periods and the basis for determining Earnings or actuarial adjustments, in accordance with section 6.02(4)).

(5) Computations. Specific calculations for each affected employee or a representative sample of affected employees. The sample calculations must be sufficient to demonstrate each aspect of the correction method proposed. For example, if a Plan Sponsor requests a compliance statement with respect to a failure to satisfy the contribution limits of § 415(c) and proposes a correction method that involves elective deferrals (whether matched or unmatched) and matching contributions, the Plan Sponsor must submit calculations illustrating the correction method proposed with respect to each type of contribution. As another example, with respect to a failure to satisfy the ADP test in § 401(k)(3), the Plan Sponsor must submit the ADP test results both before the correction and after the correction.

(6) Former employees or beneficiaries. The method(s) that will be used to locate and notify former employees and beneficiaries, or an affirmative statement that no former employees or beneficiaries were affected by the failures or will be affected by the correction.

(7) Change in administrative procedures. A description of the measures that have been or will be implemented to ensure that the same failures will not recur.

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

(9) Request for excise tax relief (§ 4972, 4973, 4974, or 4979) or additional tax relief under § 72(t). If excise tax or additional tax relief is sought, a specific request for that relief should be included in the submission, along with explanations, where applicable, supporting such request.

(10) Loan failures and income tax reporting relief. A specific request for relief must be made if the applicant wants relief from reporting a corrected participant loan as a deemed distribution or wants to report the loan as a deemed distribution in the year of correction instead of the year in which the deemed distribution occurred.

(11) Transferred Assets. If a 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).

(12) 403(b) Plans. In the case of a 403(b) Plan submission, a statement that the Plan Sponsor has contacted all other entities involved with the plan and has been assured of cooperation in implementing the applicable correction, to the extent necessary. For example, if the plan's failure is the failure to satisfy the requirements of §403(b)(1)(E) regarding elective deferrals, the Plan Sponsor must, prior to making the VCP submission, contact the insurance company or custodian with control over the plan's assets to assure cooperation in effecting a distribution of the excess deferrals adjusted for Earnings thereon. The VCP submission must also contain a statement as to the type of employer (for example, a tax-exempt organization described in §501(c)(3)) that is making the VCP submission.

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

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

(15) Plan Sponsor Authorization. If the Plan Sponsor is authorizing an individual to represent it before the IRS, sign and file a VCP submission on its behalf, or inspect and receive confidential information, a Form 2848, or Form 8821, Tax Information Authorization, as applicable. See section 11.08.

(16) Penalty of Perjury. If the Plan Sponsor is authorizing an individual to sign and file the VCP submission (including any subsequent material modifications of such submission), on its behalf, the following declaration: "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. This paragraph does not apply to Anonymous Submissions. See section 10.09 for rules relating to penalty of perjury declarations for Anonymous Submissions.

.05 User fee due at the time of VCP submission using the www.pay.gov website. Except as provided in sections 4.08 and 11.06, the user fee set forth in Appendix A of Rev. Proc. 2019-4 (and its annual successors) must be paid on the www.pay.gov website as part of the VCP submission process. If the appropriate user fee is not paid, the VCP submission will not be processed.

.06 Additional user fee due for Group Submissions. In the case of a Group Submission, the initial user fee (described in Rev. Proc. 2019-4 (and its annual successors)) must be paid when the submission is first made to the IRS on the www.pay.gov website. Any additional user fee amount (also described in Appendix A of Rev. Proc. 2019-4 (and its annual successors)) is due at the time the compliance statement is signed by the Plan Sponsor and returned to the IRS, or when agreement has been reached between the IRS and the Plan Sponsor regarding correction of the failure(s). The payment of this additional user fee must be made using the www.pay.gov website and the pay.gov version of Form 8951, Additional User Fee Payment for Open Application for Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution System (EPCRS).

.07 Additional amounts due for certain submissions. In the case of a SEP or a SIMPLE IRA Plan, a sanction may be imposed pursuant to a closing agreement over and above the specified user fee in limited circumstances. See section 6.11(5)(b) for details. Also, in any case involving § 72(t), a sanction may be imposed pursuant to a closing agreement. See section 6.09(6).

.08 Power of attorney requirements. (1) To appear before the IRS in connection with a submission, the Plan Sponsor's authorized representative must comply with the requirements of section 6.02(11) and (12) of Rev. Proc. 2019-4 (and its annual successors) and include a Form 2848. A Form 2848 that designates a representative who is not qualified to sign Part II of the Form 2848 (for example, an unenrolled return preparer) will not be accepted. However, a Plan Sponsor may authorize an individual, such as an unenrolled return preparer, to inspect or receive confidential information using Form 8821 (see Form 8821 and Instructions). The Form 2848 and Form 8821, as applicable, must be included in the PDF file uploaded to the www.pay.gov website. See sections 11.03(2) and 11.04.

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

.09 Acknowledgement of filing. For submissions filed on the www.pay.gov website, the IRS will not mail an acknowledgement letter to an applicant or its authorized representative that has filed a VCP submission (or non-VCP submission for a § 457(b) plan, as permitted by section 4.09). However, when a VCP submission is filed through the www.pay.gov website, a “Payment Confirmation-Application for Voluntary Correction Program” is generated when the VCP submission is successfully filed. The Pay.gov Tracking ID on this receipt serves as the IRS control number for the filed VCP submission and should be considered an official acknowledgement. See section 11.03(6).

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

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

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

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

(3) Applicable cover letter.

(4) The following narrative information:

• Description of the failures (if the failures relate to Transferred Assets, include a description of the related employer transaction).

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

• Description of the method for correcting failures, including Earnings methodology (if applicable) and supporting computations (if applicable). This information may be provided using an applicable schedule in the Form 14568-A through 14568-I series, including required enclosures.

• Description of the method(s) used to locate or notify former employees or beneficiaries affected by the failures or corrections. If no former employees or beneficiaries are affected by the failures or corrections, then affirmatively state that fact when addressing this issue. This description may be provided using an applicable schedule in the Form 14568-A through 14568-I series.

• Description of the administrative procedures that have been or will be implemented to ensure that the failures do not recur. This description may be provided using an applicable schedule in the Form 14568-A through 14568-I series.

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

• Whether relief is being requested from imposition of the excise taxes under §4972, 4973, 4974, or 4979, or the 10% additional income tax under § 72(t), and the supporting rationale for such relief. This request for relief may be provided using an applicable schedule in the Form 14568-A through 14568-I series, including required enclosures.

• If the plan is an Orphan Plan, the supporting rationale relating to a request for relief from the user fee.

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

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

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

(8) Copy of opinion, advisory, or determination letter (if applicable).

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

SECTION 12. VCP USER FEES

.01 User fees. The user fees for all submissions under VCP are set forth in Appendix A of Rev. Proc. 2019-4 (and its annual successors). Plan Sponsors should refer to the annual Employee Plans revenue procedure in effect at the time they file their VCP submission with the IRS to determine the applicable user fee. All user fees must be paid upon filing the VCP submission (except as provided in sections 4.08 and 11.06).

PART VI. CORRECTION ON AUDIT (AUDIT CAP)

SECTION 13. DESCRIPTION OF AUDIT CAP

.01 Audit CAP requirements. If the IRS identifies a Qualification or 403(b) Failure (other than a failure that has been 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 IRS. This section 13 also applies if the IRS identifies a participant loan that did not comply with the requirements of § 72(p)(2) (other than a loan failure that is corrected in accordance with SCP or VCP) upon an Employee Plans or Exempt Organizations examination of a Qualified Plan or 403(b) Plan.

.02 Payment of sanction. Payment of the sanction under section 14 generally is required at the time the closing agreement is signed. All sanction amounts should be submitted by certified check or cashier's check made payable to the United States Treasury. However, at the Plan Sponsor's option, the sanction under Audit CAP may be paid using the payment methods available on the www.pay.gov website.

.03 Additional requirements. Depending on the nature of the failure, the IRS will discuss the appropriateness of the plan's existing administrative procedures with the Plan Sponsor. If existing 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.

.04 Failure to reach resolution. If the IRS and the Plan Sponsor cannot reach an agreement with respect to the correction of the failure(s) or the amount of the sanction then the plan will be disqualified, the plan or contract will be treated as if it did not comply with § 403(b), the SEP will be treated as if it did not comply with § 408(k), or the SIMPLE IRA Plan will be treated as if it did not comply with § 408(p), as applicable.

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

.06 Other procedural rules. The procedural rules for Audit CAP are set forth in IRM 4.71.3.3.1, EPCRS Closing Agreements, and IRM 7.11.8, EP Determinations Closing Agreement Program.

SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction. The sanction under Audit CAP is a negotiated amount that is determined based on the facts and circumstances, including the relevant factors described in section 14.02. 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. The sanction generally will not be less than the VCP user fee applicable to the plan. See section 14.04 for special rules relating to the sanction for Nonamender Failures discovered during the determination letter application process.

.02 Factors considered. Factors include:

(1) For all plans (as appropriate):

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

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

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

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

(e) the number of nonhighly 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);

(f) whether the failure is a failure to satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b), either directly or through § 403(b)(12);

(g) whether the failure is solely an Employer Eligibility Failure;

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

(i) the reason for the failure (for example, data errors such as errors in transcription of data, the transposition of numbers, or minor arithmetic errors), and

(j) the Maximum Payment Amount.

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

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

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

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

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

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

(3) Participant loan failure. An additional factor taken into account with respect to a participant loan that did not comply with the requirements of § 72(p)(2) is the extent to which the failure is a result solely of action (or inaction) of the employer or its agents (or the extent to which the failure is a result of the employee's or beneficiary's actions or inaction).

.03 Transferred Assets. If the examination involves a plan with Transferred Assets and the IRS determines that no new incidents of the failures that relate to the Transferred Assets occurred after the end of the second plan year that begins after the corporate merger, acquisition, or other similar employer transaction, the sanction under Audit CAP will not exceed the sanction that would apply if the Transferred Assets were maintained as a separate plan.

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

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

(i) 150% of the applicable VCP user fee described in Appendix A of Rev. Proc. 2019-4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted after the end of the plan's last remedial amendment cycle to which Rev. Proc. 2007-44 applied, and

(ii) 250% of the applicable VCP user fee described Appendix A of Rev. Proc. 2019-4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted at any time before the end of the plan's last remedial amendment cycle to which Rev. Proc. 2007-44 applied.

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

(i) 150% of the applicable VCP user fee described in Appendix A of Rev. Proc. 2019-4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted after the end of the plan's second six-year remedial amendment cycle, and

(ii) 250% of the applicable VCP user fee described in Appendix A of Rev. Proc. 2019-4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted at any time before the end of the plan's second six-year remedial amendment cycle

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

(a) If a plan amendment was timely adopted in order to maintain the plan's qualified status but is found not to satisfy the qualification requirements of the Code, the applicable sanction described in section 14.04(1) may be reduced based on the facts and circumstances, including the factors described in section 14.02(2)(a), (b) and (c). However, the sanction generally will not be less than the VCP user fee applicable to the plan.

(b) If a Nonamender Failure is egregious, the sanction will be determined under section 14.01. Whether a Nonamender Failure is egregious will be determined based on the facts and circumstances, including:

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

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

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

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

SECTION 15. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2018-52 is modified and superseded by this revenue procedure.

SECTION 16. EFFECTIVE DATE

This revenue procedure is effective April 19, 2019.

SECTION 17. PUBLIC COMMENTS

The Treasury Department and the IRS invite comments on this revenue procedure. Send submissions to CC:PA:LPD:PR, (Rev. Proc. 2019-19), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be hand delivered Monday through Friday between the hours of 8 a.m. and 4:00 p.m. to: Internal Revenue Service, CC:PA:LPD:PR, (Rev. Proc. 2019-19), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington DC. Alternatively, comments may be submitted using the Internet at notice.comments@irscounsel.treas.gov (Rev. Proc. 2019-19). All comments will be available for public inspection.

SECTION 18. 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), 6.09(5), 6.09(6), 10, 11, 13.01, sections.05(8)(c) and.05(9)(c) of Appendix A, and sections 2.01-2.07 of Appendix B. This information is required to enable the Commissioner, Tax Exempt and Government Entities Division of the IRS to consider the issuance of various types of closing agreements and compliance statements. This information will be used to issue closing agreements and compliance statements to allow individual plans to continue to maintain their tax favored status. As a result, favorable tax treatment of the benefits of the eligible employees is retained. The likely respondents are individuals, state or local governments, businesses or other for-profit institutions, nonprofit institutions, and small businesses or organizations.

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

The estimated annual burden per respondent/recordkeeper varies from.5 to 45.5 hours, depending on individual circumstances, with an estimated average of 25.28 hours. The estimated number of respondents or recordkeepers is 5,375.

The estimated frequency of responses is occasional.

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

DRAFTING INFORMATION

The principal author of this revenue procedure is Naomi Lehr of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). For further information regarding this revenue procedure, please contact the Employee Plans' taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:30 a.m. and 4:30 p.m. Eastern Time, Monday through Friday.

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APPENDIX A

OPERATIONAL FAILURES AND CORRECTION METHODS

.01 General rule. (1) In general. This appendix sets forth Operational Failures and Correction Methods relating to Qualified Plans. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect Earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure. To the extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, the correction method listed for such failure, such as the correction method for an Employee Elective Deferral failure in section.05(9), may similarly be used to correct the failure.

(2) Correction methods permitted in Appendix A and Appendix B are safe harbors. Correction methods permitted in Appendix A and Appendix B are deemed to be reasonable and appropriate methods of correcting a failure. Both Appendices set forth various correction methods that may be used to correct a failure, depending on the facts and circumstances. A Plan Sponsor may choose any correction method by which the plan can satisfy the eligibility requirements. For example, a § 401(k) plan that improperly excluded an employee may use the general correction method under.05(2). However, if the § 401(k) plan has an automatic contribution feature, the plan may use the correction method under.05(8), assuming the plan meets the eligibility requirements in.05(8)(a). If the § 401(k) plan doesn't have an automatic contribution feature but corrects the failure within a specified time period, the plan may use the correction method under.05(9)(a) or (b), assuming the plan meets the eligibility requirements in .05(9)(a) or (b).

(3) Other reasonable correction methods permitted. As provided in section 6.02(2), there may be more than one reasonable and appropriate correction of a failure. Any correction method used that is not described in Appendix A or Appendix B would need to satisfy the correction principles of section 6.02. For example, the sponsor of a 403(b) Plan that failed to satisfy the universal availability requirement of §403(b)(12)(A)(ii) might propose to determine the missed deferral for an excluded employee using a percentage based on the average deferrals for all employees in the plan instead of using the rule for calculating missed deferrals set out in.05(6)(b). In doing so, the proposed correction method would fall outside Appendix A, and the Plan Sponsor would need to satisfy the general correction principles of section 6.02 and other applicable rules in this revenue procedure.

.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-key employees. In a defined contribution plan, the permitted correction method is to properly contribute and allocate the required top-heavy minimums to the plan in the manner provided for in the plan on behalf of the non-key employees (and any other employees required to receive top-heavy allocations under the plan). In a defined benefit plan, the minimum required benefit must be accrued in the manner provided in the plan.

.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth in § 401(m)(2), or, for plan years beginning on or before December 31, 2001, the multiple use test of § 401(m)(9). The permitted correction method is to make QNECs (as defined in §1.401(k)-6) on behalf of the nonhighly compensated employees to the extent necessary to raise the actual deferral percentage or actual contribution percentage of the nonhighly compensated employees to the percentage needed to pass the test or tests. For purposes of correcting a failed ADP, ACP, or multiple use test, any amounts used to fund QNECs must satisfy the definition of QNEC in §1.401(k)-6). The contributions must be made on behalf of all eligible nonhighly compensated employees (to the extent permitted under § 415) and must be the same percentage of compensation. QNECs contributed to satisfy the ADP test need not be taken into account for determining additional contributions (for example, a matching contribution), if any. For purposes of this section.03, employees who would have received a matching contribution had they made elective deferrals must be counted as eligible employees for the ACP test, and the plan must satisfy the ACP test. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in §1.410(b)-6(b)(3)), in order to reduce the number of employees eligible to receive QNECs. Likewise, under this correction method, the plan may not be restructured into component plans in order to reduce the number of employees eligible to receive QNECs.

.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. The inclusion of the deferral and the distribution in gross income applies whether or not any portion of the excess deferral is attributable to a designated Roth contribution (see § 402A(d)(3)). In accordance with §1.402(g)-1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test and a distribution to a nonhighly compensated employee is not included in the ADP test.

.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years. (1) Improperly excluded employees: employer provided contributions or benefits. For plans with employer provided contributions or benefits (which are neither elective deferrals under a qualified cash or deferred arrangement under § 401(k) nor matching or after-tax employee contributions that are subject to § 401(m)), the permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a defined contribution plan or to provide benefit accruals for the employees excluded from a defined benefit plan.

(2) Improperly excluded employees: contributions subject to § 401(k) or 401(m).

(a) For plans providing benefits subject to § 401(k) or 401(m), the corrective contribution for an improperly excluded employee is described in the following paragraphs of this section.05(2). (See Examples 3 through 12 of Appendix B.)

(b) If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a § 401(k) plan that does not satisfy § 401(k)(3) by applying the safe harbor contribution requirements of § 401(k)(12) or 401(k)(13), the employer must make a QNEC to the plan on behalf of the employee that replaces the “missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the employee's “missed deferral.” The missed deferral is determined by multiplying the actual deferral percentage for the year of exclusion (whether or not the plan is using current or prior year testing) for the employee's group in the plan (either highly compensated or nonhighly compensated) by the employee's compensation for that year. The employee's missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in §1.410(b)-6(b)(3)) in order to reduce the applicable ADP, the corresponding missed deferral, and the required QNEC. Likewise, restructuring the plan into component plans is not permitted in order to reduce the applicable ADP, the corresponding missed deferral, and the required QNEC. The QNEC required for the employee for the missed deferral opportunity for the year of exclusion is adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

(c) If the employee should have been eligible for but did not receive an allocation of employer matching contributions under a non-safe harbor plan because he or she was not given the opportunity to make elective deferrals, the employer must make a corrective employer nonelective contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under section.05(2)(b). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee.

(d)(i) If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a safe harbor § 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of §401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee. If the employee was not provided the opportunity to elect and make elective deferrals (other than Roth contributions) to a safe harbor § 401(k) plan that uses nonelective contributions to satisfy the safe harbor requirements of § 401(k)(12), then the missed deferral is deemed equal to 3% of compensation. In either event, this estimate of the missed deferral replaces the estimate based on the ADP test in a traditional § 401(k) plan. The required QNEC on behalf of the excluded employee is equal to (i) 50% of the missed deferral, plus (ii) either (A) an amount equal to the contribution that would have been required as a matching contribution based on the missed deferral in the case of a safe harbor § 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of § 401(k)(12) or (B) the nonelective contribution that would have been made on behalf of the employee in the case of a safe harbor § 401(k) plan that uses nonelective contributions to satisfy the safe harbor requirements of § 401(k)(12). The QNEC required to replace the employee's missed deferral opportunity and the corresponding matching or nonelective contribution is adjusted for Earnings to the date the corrective QNEC is made on behalf of the employee.

(ii) If the employee was not provided the opportunity to make an affirmative election with respect to elective deferrals (other than designated Roth contributions) to a safe harbor § 401(k) plan that uses an automatic contribution arrangement to satisfy the safe harbor requirements of § 401(k)(13) and the failure occurs for a period that does not extend past the last day of the first plan year which begins after the date on which the first deferral would have been made (but for the failure), then the missed deferral is deemed to equal 3% of the employee's compensation under the plan. If the failure occurs for a plan year or plan years subsequent to the period described in the prior sentence, then the missed deferral for each subsequent plan year is equal to the qualified percentage specified in the plan document to comply with § 401(k)(13)(C)(iii). The missed deferral determined in accordance with this section.05(2)(d)(ii) replaces the estimate based on the ADP test in a traditional § 401(k) plan. The required corrective employer contribution on behalf of the excluded employee is equal to (i) the missed deferral opportunity, which is an amount equal to 50% of the missed deferral, plus (ii) an amount equal to either the matching contribution that would apply under § 401(k)(13) based on the missed deferral or the nonelective contribution that would have been made on behalf of the employee under § 401(k)(13), whichever applies under the plan. The employer contribution for the missed deferral opportunity must be a QNEC. The corrective employer contribution consisting of the QNEC required to replace the employee's missed deferral opportunity and the corresponding matching or nonelective contribution is adjusted for Earnings to the date the corrective employer contribution is made on behalf of the employee.

(iii) In the case of a failure to make the required nonelective contribution for a plan year under a safe harbor § 401(k) plan that uses the nonelective contribution under §401(k)(12)(C) to satisfy the safe harbor requirements of § 401(k)(12) or that uses the nonelective contribution under § 401(k)(13)(D)(i)(I) to satisfy the safe harbor requirements of § 401(k)(13), the nonelective contribution (which must be a QNEC in the case of a plan that uses § 401(k)(12) to satisfy ADP) required to be made on behalf of the employee is equal to 3% of the employee's compensation during the period of the failure. For this purpose, the period of the failure for any plan year ends at the end of the plan year or, if earlier, the later of June 18, 2009 or the date 30 days after notice was provided to employees as required under applicable Treasury Regulations (see §1.401(k)-3(g)(ii) of the proposed regulations, at 74 FR 23134).

(e) If the employee should have been eligible to elect and make after-tax employee contributions (other than designated Roth contributions), the employer must make a QNEC to the plan on behalf of the employee that is equal to the “missed opportunity for making after-tax employee contributions.” The missed opportunity for making after-tax employee contributions is equal to 40% of the employee's “missed after-tax contributions.” The employee's missed after-tax contributions are equal to the actual contribution percentage (ACP) for the employee's group (either highly compensated or nonhighly compensated) times the employee's compensation, but with the resulting amount not to exceed applicable plan limits. If the ACP consists of both matching and after-tax employee contributions, then, in lieu of basing the employee's missed after-tax employee contributions on the ACP for the employee's group, the employer is permitted to determine separately the portion of the ACP that is attributable to after-tax employee contributions for the employee's group (either highly compensated or nonhighly compensated), multiplied by the employee's compensation for the year of exclusion. The QNEC must be adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

(f) If the employee was improperly excluded from an allocation of employer matching contributions because he or she was not given the opportunity to make after-tax employee contributions (other than designated Roth contributions), the employer must make a corrective employer nonelective contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the matching contribution the employee would have received had the employee made an after-tax employee contribution equal to the missed after-tax employee contribution determined under section.05(2)(e). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee.

(g) The methods for correcting the failures described in this section.05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section.05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded.

(3) Improperly excluded employees: designated Roth contributions. For employees who were improperly excluded from plans that (i) are subject to § 401(k) (as described in section.05(2)) and (ii) provide for the optional treatment of elective deferrals as designated Roth contributions, the correction is the same as described under section.05(2). Thus, for example, the corrective employer contribution required to replace the missed deferral opportunity is made in accordance with the method described in section.05(2)(b) in the case of a § 401(k) plan that is not a safe harbor §401(k) plan or.05(2)(d) in the case of a safe harbor § 401(k) plan. However, none of the corrective contributions made by the employer may be treated as designated Roth contributions (and may not be included in an employee's gross income) and thus may not be contributed or allocated to a Roth account (as described in § 402A(b)(2)). The corrective employer contribution must be allocated to an account established for receiving a QNEC or any other employer contribution in which the employee is fully vested and subject to the withdrawal restrictions that apply to elective deferrals.

(4) Improperly excluded employees: catch-up contributions only. (a) Correction for missed catch-up contributions. If an eligible employee was not provided the opportunity to elect and make catch-up contributions to a § 401(k) plan, the employer must make a QNEC to the plan on behalf of the employee that replaces the “missed deferral opportunity” attributable to the failure to permit an eligible employee to make a catch-up contribution pursuant to § 414(v). The missed deferral opportunity for catch-up contributions is equal to 50% of the employee's missed deferral attributable to catch-up contributions. For this purpose, the missed deferral attributable to catch-up contributions is one half of the applicable catch-up contribution limit for the year in which the employee was improperly excluded. Thus, for example if an eligible employee was improperly precluded from electing and making catch-up contributions in 2006, the missed deferral attributable to catch-up contributions is $2,500, which is one half of $5,000, the 2006 catch-up contribution limit for a § 401(k) plan. The eligible employee's missed deferral opportunity is $1,250 (that is, 50% of the missed deferral attributable to catch-up contributions of $2,500). The QNEC required to replace the missed deferral opportunity for the year of exclusion is adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee. For purposes of this correction, an eligible employee, pursuant to § 414(v)(5), refers to any participant who (i) would have attained age 50 by the end of the plan's taxable year and (ii) in the absence of the plan's catch-up provision, could not make additional elective deferrals on account of the plan or statutory limitations described in § 414(v)(3) and §1.414(v)-1(b)(1).

(b) Correction for missed matching contributions on catch-up contributions. If an employee was precluded from making catch-up contributions under this section.05(4), the Plan Sponsor should ascertain whether the affected employee would have been entitled to an additional matching contribution on account of the missed deferral. If the employee would have been entitled to an additional matching contribution, then the employer must make a corrective employer nonelective contribution for the matching contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the additional matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under paragraph (a) of this section.05(4). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee. If in addition to the failure to provide matching contributions under this section.05(4)(b), the plan also failed the ACP test, the correction methods described in this section cannot be used until after correction of the ACP test failure. For purposes of this section, in order to determine whether the plan passed the ACP test the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard any employer matching contribution that was not made on account of the plan's failure to provide an eligible employee with the opportunity to make a catch-up contribution.

(5) Failure to implement an employee election. (a) Missed opportunity for elective deferrals. For eligible employees who filed elections to make elective deferrals under the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the “missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the employee's “missed deferral.” The missed deferral is determined by multiplying the employee's elected deferral percentage by the employee's compensation. If the employee elected a dollar amount for an elective deferral, the missed deferral would be the specified dollar amount. The employee's missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. The QNEC must be adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

(b) Missed opportunity for after-tax employee contributions. For eligible employees who filed elections to make after-tax employee contributions under the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the employee's missed opportunity for after-tax employee contributions. The missed opportunity for making after-tax employee contributions is equal to 40% of the employee's “missed after-tax contributions.” The missed after-tax employee contribution is determined by multiplying the employee's elected after-tax employee contribution percentage by the employee's compensation. The QNEC must be adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

(c) Missed opportunity affecting matching contributions. In the event of failure described in paragraph (a) or (b) of this section.05(5), if the employee would have been entitled to an additional matching contribution had either the missed deferral or after-tax employee contribution been made, then the Plan Sponsor must make a corrective employer nonelective contribution for the matching contribution on behalf of the affected employee, or a corrective QNEC in the case of a safe harbor plan under § 401(k)(12). The corrective employer nonelective contribution or QNEC is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under this paragraph. The corrective employer nonelective contribution or QNEC must be adjusted for Earnings to the date the corrective contribution or QNEC is made on behalf of the affected employee.

(d) Coordination with correction of other Qualification Failures. The method for correcting the failures described in this section.05(5) does not apply until after the correction of other qualification failures. Thus, for example, if in addition to the failure to implement an employee's election, the plan also failed the ADP test or ACP test, the correction methods described in section.05(5)(a), (b), or (c) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section.05(5), in order to determine whether the plan passed the ADP or ACP test the plan may rely on a test performed with respect to those eligible employees who were not impacted by the Plan Sponsor's failure to implement employee elections and received allocations of employer matching contributions, in accordance with the terms of the plan, and may disregard employees whose elections were not properly implemented.

(6) Failure of a 403(b) Plan to satisfy the universal availability requirement of §403(b)(12)(A)(ii). (a) Subject to the specific rules in this section.05(6), the correction methods set forth in this section.05 (and section 2.02 of Appendix B) for a Qualified Plan also apply to a 403(b) Plan that has a similar failure.

(b) If the employee was not provided the opportunity to elect and make elective deferrals to a 403(b) Plan, then, in lieu of determining the missed deferral based on the actual deferral percentage as described in section.05(2)(b), the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the Plan Sponsor provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee.

(7) Improper exclusion of an eligible employee from a SIMPLE IRA plan subject to the requirements of § 408(p). (a) Subject to the specific rules in this section.05(7), the correction methods set forth in this section.05 for a Qualified Plan also apply to a SIMPLE IRA plan that has a similar failure.

(b) If the employee was not provided the opportunity to elect and make elective deferrals to a SIMPLE IRA plan, then, in lieu of determining the missed deferral based on the actual deferral percentage as described in section.05(2)(b), the missed deferral is deemed to be 3% of compensation.

(8) Special safe harbor correction method for failures related to automatic contribution features in a § 401(k) plan or a 403(b) Plan. (a) Eligibility to use safe harbor correction method. This safe harbor correction method is available for certain Employee Elective Deferral Failures (as defined in section.05(10) of this appendix associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a § 401(k) plan or 403(b) Plan (including employees who made affirmative elections in lieu of automatic contributions but whose elections were not implemented correctly). If the failure to implement an automatic contribution feature for an affected eligible employee or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature does not extend beyond the end of the 9½-month period after the end of the plan year of the failure (which is generally the filing deadline of the Form 5500 series return, including automatic extensions), no QNEC for the missed elective deferrals is required, provided that the following conditions are satisfied:

(i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the 9½-month period after the end of the plan year in which the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;

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

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

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

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

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

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

(iii) A statement that corrective allocations relating to missed matching contributions have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.

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

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

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

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

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

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

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

(b) Safe harbor correction method for Employee Elective Deferral Failures that extend beyond three months but do not extend beyond the SCP correction period for significant failures. This safe harbor correction is for failures that exceed three months (or the conditions for the safe harbor correction method described in section.05(8) or .05(9)(a) of this appendix are not met by the Plan Sponsor). Under this safe harbor correction, the required corrective employer contribution is equal to 25% of the missed deferrals (25% QNEC) in lieu of the higher QNEC required in sections.05(2)(b) and .05(5)(a) of this appendix. In order to use this safe harbor correction method, the Plan Sponsor must satisfy the following conditions:

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

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

(iii) Corrective allocations, as described in section 6.02(4) of this revenue procedure (including the 25% QNEC and employer contributions to make up for any missed matching contributions), are made in accordance with timing requirements under SCP for significant operational failures (described in section 9.02 of this revenue procedure), including adjustments for Earnings, which may be calculated as described in section.05(8)(b) of this appendix.

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

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

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

(iii) A statement that corrective allocations have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.

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

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

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

.06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with Earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with §1.401(a)(9)-5, Q&A-3, reduced by the amount of the total missed minimum distributions for prior years. In a defined benefit plan, the permitted correction method is to distribute the required minimum distributions, plus an interest payment based on the plan's actuarial equivalence factors in effect on the date that the distribution should have been made. See section 6.02(4)(d) of this revenue procedure. If this correction is made at the time the plan is subject to a restriction on single-sum payments pursuant to §436(d), the Plan Sponsor must contribute to the plan the applicable amount under section 6.02(4)(e)(ii)(A) as part of the correction.

.07 Failure to obtain participant or spousal consent for a distribution subject to the participant and spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417. (1) The permitted correction method is to give each affected participant a choice between providing informed consent for the distribution actually made or receiving a qualified joint and survivor annuity. In the event that participant or spousal consent is required but cannot be obtained, the participant must receive a qualified joint and survivor annuity based on the monthly amount that would have been provided under the plan at his or her retirement date. This annuity may be actuarially reduced to take into account distributions already received by the participant. However, the portion of the qualified joint and survivor annuity payable to the spouse upon the death of the participant may not be actuarially reduced to take into account prior distributions to the participant. Thus, for example, if, in accordance with the automatic qualified joint and survivor annuity option under a plan, a married participant who retired would have received a qualified joint and survivor annuity of $600 per month payable for life with $300 per month payable to the spouse for the spouse's life beginning upon the participant's death, but instead received a single-sum distribution equal to the actuarial present value of the participant's accrued benefit under the plan, then the $600 monthly annuity payable during the participant's lifetime may be actuarially reduced to take the single-sum distribution into account. However, the spouse must be entitled to receive an annuity of $300 per month payable for life beginning at the participant's death.

(2) An alternative permitted correction method is to give each affected participant a choice between (i) providing informed consent for the distribution actually made, (ii) receiving a qualified joint and survivor annuity (both (i) and (ii) of this section.07(2) are described in section.07(1) of this Appendix A), or (iii) a single-sum payment to the participant's spouse equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under § 417(e)(3)). For example, assuming the actuarial present value of a $300 per month annuity payable to the spouse for the spouse's life beginning upon the participant's death was $7,837 (calculated using the applicable interest rate and applicable mortality table under §417(e)(3)), the single-sum payment to the spouse under clause (iii) of this section.07(2) is equal to $7,837. If the single-sum payment is made to the spouse, then the payment is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or other eligible retirement plan. If correction is made at the time the plan is subject to a restriction on single-sum payments pursuant to § 436(d), then the alternative permitted correction in this section .07(2) is available only if the Plan Sponsor (or other person) contributes to the plan the applicable amount under section 6.02(4)(e)(ii)(A) as part of the correction.

.08 Failure to satisfy the § 415 limits in a defined contribution plan. For limitation years beginning before January 1, 2009, the permitted correction for failure to limit annual additions (other than elective deferrals and after-tax employee contributions) allocated to participants in a defined contribution plan as required in § 415 (even if the excess did not result from the allocation of forfeitures or from a reasonable error in estimating compensation) is to place the excess annual additions into an unallocated account, similar to the suspense account described in §1.415-6(b)(6)(iii) (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under § 415, to be used as an employer contribution, other than elective deferrals, in the succeeding year(s). While such amounts remain in the unallocated account, the Plan Sponsor is not permitted to make additional contributions to the plan. The permitted correction for failure to limit annual additions that are elective deferrals or after-tax employee contributions (even if the excess did not result from a reasonable error in determining compensation, the amount of elective deferrals or after-tax employee contributions that could be made with respect to an individual under the § 415 limits) is to distribute the elective deferrals or after-tax employee contributions using a method similar to that described under §1.415-6(b)(6)(iv) (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under §415. Elective deferrals and after-tax employee contributions that are matched may be returned to the employee, provided that the matching contributions relating to such contributions are forfeited (which will also reduce excess annual additions for the affected individuals). The forfeited matching contributions are to be placed into an unallocated account to be used as an employer contribution, other than elective deferrals, in succeeding periods. For limitation years beginning on or after January 1, 2009, the failure to limit annual additions allocated to participants in a defined contribution plan as required in § 415 is corrected in accordance with section 6.06(2) and (4).

.09 Orphan Plans; orphan contracts and other assets. (1) Orphan Plans. If (a) a plan has one or more failures (whether a Qualification Failure or a 403(b) Failure) that result from the Plan Sponsor having ceased to exist, the Plan Sponsor no longer maintaining the plan, or similar reasons and (b) the plan is an Orphan Plan, as defined in section 5.03, the permitted correction is to terminate the plan and distribute plan assets to participants and beneficiaries. This correction must satisfy four conditions. First, the correction must comply with conditions, standards, and procedures substantially similar to those set forth in section 2578.1 of the Department of Labor regulations (relating to abandoned plans). Second, the qualified termination administrator, as defined in 2578.1(g) of the Department of Labor regulations, based on plan records located and updated in accordance with the Department of Labor regulations, must have reasonably determined whether, and to what extent, the survivor annuity requirements of §§ 401(a)(11) and 417 apply to any benefit payable under the plan and take reasonable steps to comply with those requirements (if applicable). Third, each participant and beneficiary must have been provided a nonforfeitable right to his or her accrued benefits as of the date of deemed termination under the Department of Labor regulations, subject to income, expenses, gains, and losses between that date and the date of distribution. Fourth, participants and beneficiaries must receive notification of their rights under § 402(f). In addition, notwithstanding correction under this revenue procedure, the IRS reserves the right to pursue appropriate remedies under the Code against any party who is responsible for the plan, such as the Plan Sponsor, plan administrator, or owner of the business, even in its capacity as a participant or beneficiary under the plan. However, with respect to the first through third conditions above, notice need not be furnished to the Department of Labor, and notices furnished to the Plan Sponsor, participants, or beneficiaries need not indicate that the procedures followed or notices furnished actually comply with, or are required under, Department of Labor regulations.

(2) 403(b) Failures for orphan contracts or other assets. (a) Former employees or beneficiaries. In any case in which a 403(b) Failure results from the Plan Sponsor having ceased involvement with respect to specific assets (including an insurance annuity contract) held under a defined contribution plan on behalf of a participant who is a former employee or on behalf of a beneficiary, a permitted correction is to distribute those plan assets to the participant or beneficiary. Compliance with the distribution rules of section 2578.1(d)(2)(vii) of the Department of Labor regulations satisfies this paragraph.09(2))

(b) Failures Relating to Information Sharing Agreements. In any case in which a 403(b) Failure results from a contract issued in an exchange not being part of a 403(b) Plan due to the failure to have an information sharing agreement pursuant to §1.403(b)-10(b)(2)(i)(C), a permitted correction is for the assets held under the contract to be transferred to another vendor to which contributions are being made under the plan in order to become a contract which is held under the plan without regard to the special rules in §1.403(b)-10(b).

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APPENDIX B

CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS AND EXAMPLES

SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES

.01 Purpose. (1) This appendix sets forth correction methods relating to Operational Failures under Qualified Plans. This appendix also sets forth Earnings adjustment methods. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect Earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure.

(2) To the extent a failure listed in this appendix could occur under a 403(b) Plan, SEP, or SIMPLE IRA Plan, the correction method listed for such failure may similarly be used to correct the failure.

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

(1) the plan year and the § 415 limitation year are the calendar year;

(2) the Plan Sponsor maintains a single plan intended to satisfy § 401(a) and has never maintained any other plan;

(3) in a defined contribution plan, the plan provides that forfeitures are used to reduce future employer contributions;

(4) the Qualification Failures are Operational Failures and the eligibility and other requirements for SCP, VCP, or Audit CAP, whichever applies, are satisfied; and

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

.03 Designated Roth contributions. The examples in this Appendix B generally do not identify whether the plan offers designated Roth contributions. The results in the examples, including corrective contributions, would be the same whether or not the plan offered designated Roth contributions.

.04 Section references. References to section 2 and section 3 are references to section 2 and 3 in this appendix.

SECTION 2. CORRECTION METHODS AND EXAMPLES

.01 ADP/ACP Failures. (1) Correction Methods. (a) Appendix A Correction Method. Appendix A.03 sets forth a correction method for a failure to satisfy the actual deferral percentage ("ADP"), actual contribution percentage ("ACP"), or, for plan years beginning on or before December 31, 2001, multiple use test set forth in §§ 401(k)(3), 401(m)(2), and 401(m)(9), respectively.

(b) One-to-One Correction Method. (i) General. In addition to the correction method in Appendix A, a failure to satisfy the ADP test or ACP test may be corrected by using the one-to-one correction method set forth in this section 2.01(1)(b). Under the one-to-one correction method, an excess contribution amount is determined and assigned to highly compensated employees as provided in paragraph (1)(b)(ii) below. That excess contribution amount (adjusted for Earnings) is either distributed to the highly compensated employees or forfeited from the highly compensated employees' accounts as provided in paragraph (1)(b)(iii) below. That same dollar amount (that is, the excess contribution amount, adjusted for Earnings) is contributed to the plan and allocated to nonhighly compensated employees as provided in paragraph (1)(b)(iv) below. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in §1.410(b)-6(b)(3)). Likewise, restructuring the plan into component plans is not permitted. This correction method may also be used to correct a failure to satisfy the multiple use test for plan years beginning on or before December 31, 2001.

(ii) Determination of the Excess Contribution Amount. The excess contribution amount for the year is equal to the excess of (A) the sum of the excess contributions (as defined in § 401(k)(8)(B)), the excess aggregate contributions (as defined in §401(m)(6)(B)), and for plan years beginning on or before December 31, 2001 the amount treated as excess contributions or excess aggregate contributions under the multiple use test for the year, as assigned to each highly compensated employee in accordance with §§ 401(k)(8)(C) and 401(m)(6)(C), over (B) previous corrections that complied with §§ 401(k)(8) and 401(m)(6), and, for plan years beginning on or before December 31, 2001, the multiple use test.

(iii) Distributions and Forfeitures of the Excess Contribution Amount. (A) The portion of the excess contribution amount assigned to a particular highly compensated employee under paragraph (1)(b)(ii) is adjusted for Earnings from the end of the plan year of the year of the failure through the date of correction. The amount assigned to a particular highly compensated employee, as adjusted, is distributed or, to the extent the amount was forfeitable as of the close of the plan year of the failure, is forfeited. If the amount is forfeited, it is used in accordance with the plan provisions relating to forfeitures that were in effect for the year of the failure. If the amount so assigned to a particular highly compensated employee has been previously distributed, the amount is an Excess Amount within the meaning of section 5.01(3) of this revenue procedure. Thus, pursuant to section 6.06 of this revenue procedure, the Plan Sponsor must notify the employee that the Excess Amount is not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, is not eligible for tax-free rollover).

(B) If any matching contributions (adjusted for Earnings) are forfeited in accordance with § 411(a)(3)(G), the forfeited amount is used in accordance with the plan provisions relating to forfeitures that were in effect for the year of the failure.

(C) If a payment was made to an employee and that payment is a forfeitable match described in either paragraph (1)(b)(iii)(A) or (B), then it is an Overpayment defined in section 5.01(3)(c) of this revenue procedure that must be corrected (see sections 2.04 and 2.05 below).

(iv) Contribution and Allocation of Equivalent Amount. (A) The Plan Sponsor makes a contribution to the plan that is equal to the aggregate amounts distributed and forfeited under paragraph (1)(b)(iii)(A) (that is, the excess contribution amount adjusted for Earnings, as provided in paragraph (1)(b)(iii)(A), which does not include any matching contributions forfeited in accordance with § 411(a)(3)(G) as provided in paragraph (1)(b)(iii)(B)). The contribution must be a QNEC as defined in §1.401(k)-6.

(B)(1) This paragraph (1)(b)(iv)(B)(1) applies to a plan that uses the current year testing method described in §§1.401(k)-2(a)(2), 1.401(m)-2(a)(2), and, for periods prior to the effective date of those regulations, Notice 98-1, 1998-1 C.B. 327. The contribution made under paragraph (1)(b)(iv)(A) is allocated to the account balances of those individuals who were either (I) the eligible employees for the year of the failure who were nonhighly compensated employees for that year or (II) the eligible employees for the year of the failure who were nonhighly compensated employees for that year and who also are nonhighly compensated employees for the year of correction. Alternatively, the contribution is allocated to account balances of eligible employees described in (I) or (II) of the preceding sentence, except that the allocation is made only to the account balances of those employees who are employees on a date during the year of the correction that is no later than the date of correction. Regardless of which of these four options (described in the two preceding sentences) the Plan Sponsor selects, 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 (that is, the employee's share of the total amount contributed under paragraph (1)(b)(iv)(A)) is not further adjusted for Earnings and is treated as an annual addition under § 415 for the year of the failure for the employee for whom it is allocated.

(2) This paragraph (1)(b)(iv)(B)(2) applies to a plan that uses the prior year testing method described in §§1.401(k)-2(a)(2) and 1.401(m)-2(a)(2) and, for periods prior to the effective date of those regulations, Notice 98-1. Paragraph (1)(b)(iv)(B)(1) is applied by substituting "the year prior to the year of the failure" for "the year of the failure."

(2) Examples.

Example 1:

Employer A maintains a profit-sharing plan with a cash or deferred arrangement that is intended to satisfy § 401(k) using the current year testing method. The plan does not provide for matching contributions or after-tax employee contributions. In 2007, it was discovered that the ADP test for 2005 was not performed correctly. When the ADP test was performed correctly, the test was not satisfied for 2005. For 2005, the ADP for highly compensated employees was 9% and the ADP for nonhighly compensated employees was 4%. Accordingly, the ADP for highly compensated employees exceeded the ADP for nonhighly compensated employees by more than two percentage points (in violation of §401(k)(3)). There were two highly compensated employees eligible under the § 401(k) plan during 2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which is equal to 10% of Employee P's compensation of $100,000 for 2005. Employee Q made elective deferrals of $9,500, which is equal to 8% of Employee Q's compensation of $118,750 for 2005.

Correction:

On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with § 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and $2,937.50 to Employee Q. It is determined that the Earnings on the assigned amounts through June 30, 2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the Earnings are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ( $2,937.50 + $587). In addition, on the same date, Employer A makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their compensation for 2005 (subject to § 415 for 2005).

Example 2:

The facts are the same as in Example 1, except that for 2005 the plan also provides for (1) after-tax employee contributions and (2) matching contributions equal to 50% of the sum of an employee's elective deferrals and after-tax employee contributions that do not exceed 10% of the employee's compensation. The plan provides that matching contributions are subject to the plan's 20% per year of service vesting schedule and that matching contributions are forfeited and used to reduce employer contributions if associated elective deferrals or after-tax employee contributions are distributed to correct an ADP or ACP test failure. For 2005, nonhighly compensated employees made after-tax employee contributions and no highly compensated employee made any after-tax employee contributions. Employee P received a matching contribution of $5,000 (50% of $10,000) and Employee Q received a matching contribution of $4,750 (50% of $9,500). Employees P and Q were 100% vested in 2005. It was determined that the plan satisfied the requirements of the ACP test for 2005.

Correction:

The same corrective actions are taken as in Example 1. In addition, in accordance with the plan's terms, corrective action is taken to forfeit Employee P's and Employee Q's matching contributions associated with their distributed excess contributions. Employee P's distributed excess contributions and associated matching contributions are $3,437.50 and $1,718.75, respectively. Employee Q's distributed excess contributions and associated matching contributions are $2,937.50 and $1,468.75, respectively. Thus, $1,718.75 is forfeited from Employee P's account and $1,468.75 is forfeited from Employee Q's account. In addition, the Earnings on the forfeited amounts are also forfeited. It is determined that the respective Earnings on the forfeited amount for Employee P is $250 and for Employee Q is $220. The total amount of the forfeitures of $3,657.50 (Employee P's $1,718.75 + $250 and Employee Q's $1,468.75 + $220) is used to reduce contributions for 2007 and subsequent years.

.02 Exclusion of Otherwise Eligible Employees. (1) Exclusion of Eligible Employees in a § 401(k) or (m) Plan. (a) Correction Method. (i) Appendix A Correction Method for Full Year Exclusion. Appendix A, section.05(2) sets forth the correction method for the exclusion of an eligible employee from electing and making elective deferrals (other than designated Roth contributions) and after-tax employee contributions to a plan that provides benefits that are subject to the requirements of §401(k) or 401(m) for one or more full plan years. (See Example 3.) Appendix A, section.05(2) also specifies the method for determining missed elective deferrals and the corrective contributions for employees who were improperly excluded from electing and making elective deferrals to a safe harbor § 401(k) plan for one or more full plan years. (See Examples 8, 9, and 10.) Appendix A, section.05(3) sets forth the correction method for the exclusion of an eligible employee from electing and making elective deferrals in a plan that (i) is subject to § 401(k) and (ii) provides employees with the opportunity to make designated Roth contributions. Appendix A, section.05(4) sets forth the correction method for the situation where an eligible employee was permitted to make an elective deferral, but was not provided with the opportunity to make catch-up contributions under the terms of the plan and § 414(v), and correction is being made by making a QNEC on behalf of the excluded employee. (See Example 11.) Appendix A, section.05(5) sets forth the correction method for the failure by a plan to implement an employee's election with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions. (See Example 12.) In section 2.02(1)(a)(ii) below, the correction methods for (I) the exclusion of an eligible employee from all contributions (including designated Roth contributions) under a § 401(k) or (m) plan for a full year, as described in Appendix A, sections.05(2) and.05(3), (II) the exclusion of an eligible employee who was permitted to make elective deferrals, but was not permitted to make catch-up contributions for a full plan year as described in Appendix A, section.05(4), and (III) the exclusion of an eligible employee on account of the failure to implement an employee's election to make elective deferrals or after-tax employee contributions to the plan as described in Appendix A, section.05(5) are expanded to include correction for the exclusion from these contributions (including designated Roth contributions) under a § 401(k) or (m) plan for a partial plan year. This correction for a partial year exclusion may be used in conjunction with the correction for a full year exclusion.

(ii) Expansion of Correction Method to Partial Year Exclusion. (A) In General. The correction method in Appendix A, section.05, is expanded to cover an employee who was improperly excluded from electing and making elective deferrals (including designated Roth contributions) or after-tax employee contributions for a portion of a plan year or from receiving matching contributions (on either elective deferrals or after-tax employee contributions) for a portion of a plan year. In such a case, a permitted correction method for the failure is for the Plan Sponsor to satisfy this section 2.02(1)(a)(ii). The Plan Sponsor makes a QNEC on behalf of the excluded employee. The method and examples described to correct the failure to include otherwise eligible employees do not apply until after correction of other qualification failures. Thus, for example, in the case of a § 401(k) plan that does not apply the safe harbor contribution requirements of § 401(k)(12) or 401(k)(13) the correction for improperly excluding an employee from making elective deferrals, as described in the narrative and the examples in this section cannot be used until after correction of the ADP test failure. (See Appendix A, section.05(2)(g).)

(B) Elective Deferral Failures. (1) The appropriate QNEC for the failure to allow an employee to elect and make elective deferrals (including designated Roth contributions) for a portion of the plan year is equal to the missed deferral opportunity which is an amount equal to 50% of the employee's missed deferral. The employee's missed deferral is determined by multiplying the ADP of the employee's group (either highly or nonhighly compensated), determined prior to correction under this section 2.02(1)(a)(ii), by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. In a safe harbor § 401(k) plan, the employee's missed deferral is determined by multiplying 3% (or, if greater, whatever percentage of the participant's compensation which, if contributed as an elective deferral, would have been matched at a rate of 100% or more) by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. The missed deferral for the portion of the plan year during which the employee was improperly excluded from being eligible to make elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding two sentences of this paragraph) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for Earnings. For purposes of correcting other failures under this revenue procedure (including determination of any required matching contribution) after correction has occurred under this section 2.02(1)(a)(ii)(B), the employee is treated as having made pre-tax elective deferrals equal to the employee's missed deferral for the portion of the year during which the employee was improperly excluded. (See Examples 4 and 5.)

(2) The appropriate corrective contribution for the plan's failure to implement an employee's election with respect to elective deferrals is equal to the missed deferral opportunity which is an amount equal to 50% of the employee's missed deferral. Corrective contributions are adjusted for Earnings. The missed deferral is determined by multiplying the employee's deferral percentage by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a fixed dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a fixed dollar amount to be deferred for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making elective deferral contributions divided by 12. The missed deferral for the portion of the plan year during which the eligible employee was improperly excluded from making elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding three sentences) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ADP test before this correction method can be used, as described in Appendix A, section.05(5)(d), still apply.

(C) After-Tax Employee Contribution Failures. (1) The appropriate corrective contribution for the failure to allow employees to elect and make after-tax employee contributions for a portion of the plan year is equal to the missed after-tax employee contributions opportunity, which is an amount equal to 40% of the employee's missed after-tax employee contributions. The employee's missed after-tax employee contributions are determined by multiplying the ACP of the employee's group (either highly or nonhighly compensated), determined prior to correction under this section 2.02(1)(a)(ii)(C), by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. If the ACP consists of both matching and after-tax employee contributions, then, for purposes of the preceding sentence, in lieu of basing the missed after-tax employee contributions on the ACP for the employee's group (either highly compensated or nonhighly compensated), the Plan Sponsor is permitted to determine separately the portions of the ACP that are attributable to matching contributions and after-tax employee contributions and base the missed after-tax employee contributions on the portion of the ACP that is attributable to after-tax employee contributions. The missed after-tax employee contribution is reduced to the extent that (i) the sum of that contribution and the actual total after-tax employee contributions made by the employee for the plan year would exceed (ii) the sum of the maximum after-tax employee contributions permitted under the plan for the employee for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section.05(2)(g), still apply.

(2) The appropriate corrective contribution for the plan's failure to implement an employee's election with respect to after-tax employee contributions for a portion of the plan year is equal to the missed after-tax employee contributions opportunity, which is an amount equal to 40% of the employee's missed after-tax employee contributions. Corrective contributions are adjusted for Earnings. The missed after-tax employee contribution is determined by multiplying the employee's elected after-tax employee contribution percentage by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a flat dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a flat dollar amount to be contributed for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making after-tax employee contributions divided by 12. The missed after-tax employee contribution is reduced to the extent that (i) the sum of that contribution and the actual total after-tax employee contributions made by the employee for the plan year would exceed (ii) the sum of the maximum after-tax employee contributions permitted under the plan for the employee for the plan year. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section.05(5)(d), still apply.

(D) Matching Contribution Failures. (1) The appropriate corrective contribution for the failure to make matching contributions for an employee because the employee was precluded from making elective deferrals (including designated Roth contributions) or after-tax employee contributions for a portion of the plan year is equal to the matching contribution that would have been made for the employee if (1) the employee's elective deferrals for that portion of the plan year had equaled the employee's missed deferrals (determined under section 2.02(1)(a)(i)(B)) or (2) the employee's after-tax contribution for that portion of the plan year had equaled the employee's missed after-tax employee contribution (determined under section 2.02(1)(a)(ii)(C)). This matching contribution is reduced to the extent that (i) the sum of this contribution and other matching contributions actually made on behalf of the employee for the plan year would exceed (ii) the maximum matching contribution permitted if the employee had made the maximum matchable contributions permitted under the plan for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section.05(2)(g), still apply.

(2) The appropriate corrective contribution for the failure to make matching contributions for an employee because of the failure by the plan to implement an employee's election with respect to elective deferrals (including designated Roth contributions) or, where applicable, after-tax employee contributions for a portion of the plan year is equal to the matching contribution that would have been made for the employee if the employee made the elective deferral as determined under section 2.02(1)(a)(ii)(B)(2), or where applicable, the after-tax employee contribution determined under section 2.02(1)(a)(ii)(C)(2). This matching contribution is reduced to the extent that (i) the sum of this contribution and other matching contributions actually made on behalf of the employee for the plan year would exceed (ii) the maximum matching contribution permitted if the employee had made the maximum matchable contributions permitted under the plan for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section.05(5)(d), still apply.

(E) Use of Prorated Compensation. For purposes of this paragraph (1)(a)(ii), for administrative convenience, in lieu of using the employee's actual plan compensation for the portion of the year during which the employee was improperly excluded, a pro rata portion of the employee's plan compensation that would have been taken into account for the plan year, if the employee had not been improperly excluded, may be used.

(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax Employee Contributions. An Plan Sponsor is not required to make a corrective contribution with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and (C), but is required to make a corrective contribution with respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D), for an employee for a plan year if the employee has been provided the opportunity to make elective deferrals or after-tax employee contributions under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals or after-tax employee contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred. (See Examples 6 and 7.)

(b) Examples.

Example 3:

Employer B maintains a § 401(k) plan. The plan provides for matching contributions for eligible employees equal to 100% of elective deferrals that do not exceed 3% of an employee's compensation. The plan allows employees to make after-tax employee contributions up to a maximum of the lesser of 2% of compensation or $1,000. The after-tax employee contributions are not matched. The plan provides that employees who complete one year of service are eligible to participate in the plan on the next designated entry date. The entry dates are January 1, and July 1. In 2007, it is discovered that Employee V, an NHCE with compensation of $30,000, was excluded from the plan for the 2006 plan year even though she satisfied the plan's eligibility requirements as of January 1, 2006.

For the 2006 plan year, the relevant employee and contribution information is as follows:

	Compensation	Elective deferral	Match	After-Tax Employee Contribution
Highly Compensated Employees (HCEs):
R	$200,000	$6,000	$6,000	$0
S	$150,000	$12,000	$4,500	$1,000
Nonhighly Compensated Employees (NHCEs):
T	$80,000	$12,000	$2,400	$1,000
U	$50,000	$500	$500	$0

HCEs:

ADP — 5.5%

ACP — 3.33%

ACP attributable to matching contributions — 3%

ACP attributable to after-tax employee contributions — 0.33%

NHCEs:

ADP — 8%

ACP — 2.63%

ACP attributable to matching contributions — 2%

ACP attributable to after-tax employee contributions — 0.63%

Correction:

Employer B uses the correction method for a full year exclusion, described in Appendix A, section.05(2), to correct the failure to include Employee V in the plan for the full plan year beginning January 1, 2006. Employer B calculates the corrective QNEC to be made on behalf of Employee V as follows:

Elective deferrals: Employee V was eligible to, but was not provided with the opportunity to, elect and make elective deferrals in 2006. Thus, Employer B must make a QNEC to the plan on behalf of Employee V equal to the missed deferral opportunity for Employee V, which is 50% of Employee V's missed deferral. The QNEC is adjusted for Earnings. The missed deferral for Employee V is determined by using the ADP for NHCEs for 2006 and multiplying that percentage by Employee V's compensation for 2006. Accordingly, the missed deferral for Employee V on account of the employee's improper exclusion from the plan is $2,400 (8% x $30,000). The missed deferral opportunity is $1,200 (that is, 50% x $2,400). Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to make elective deferrals to the plan is $1,200 (plus Earnings). The corrective contribution is made to a pre-tax QNEC account for Employee V (not to a designated Roth contributions account even if the plan offers designated Roth contributions, as provided in section.05(3) of Appendix A).

Matching contributions: Employee V should have been eligible for, but did not receive, an allocation of employer matching contributions because Employee V was not provided the opportunity to make elective deferrals in 2006. Thus, Employer B must make a corrective employer nonelective contribution to the plan on behalf of Employee V that is equal to the matching contribution Employee V would have received had the missed deferral been made. The corrective employer nonelective contribution is adjusted for Earnings. Under the terms of the plan, if Employee V had made an elective deferral of $2,400 or 8% of compensation ($30,000), the employee would have been entitled to a matching contribution equal to 100% of the first 3% of Employee V's compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed employer matching contribution is $900 (plus Earnings).

After-tax employee contributions: Employee V was eligible to, but was not provided with the opportunity to, elect and make after-tax employee contributions in 2006. Employer B must make a QNEC to the plan equal to the missed opportunity for making after-tax employee contributions for Employee V, which is 40% of Employee V's missed after-tax employee contribution. The QNEC is adjusted for Earnings. The missed after-tax employee contribution for Employee V is estimated by using the ACP for NHCEs (to the extent that the ACP is attributable to after-tax employee contributions) for 2006 and multiplying that percentage by Employee V's compensation for 2006. Accordingly, the missed after-tax employee contribution for Employee V, on account of the employee's improper exclusion from the plan is $189 (0.63% x $30,000). The missed opportunity to make after-tax employee contributions to the plan is $76 (40% x $189). Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to make the $189 after-tax employee contribution to the plan is $76 (plus Earnings).

The total required corrective contribution, before adjustments for Earnings, on behalf of Employee V is $2,176 ($1,200 for the missed deferral opportunity plus $900 for the missed matching contribution plus $76 for the missed opportunity to make after-tax employee contributions). The required corrective contribution is further adjusted for Earnings. The corrective contribution for the missed deferral opportunity ($1,200), the missed opportunity for after-tax employee contributions ($76), and related Earnings must be made in the form of a QNEC.

Example 4:

Employer C maintains a § 401(k) plan. The plan provides for matching contributions for each payroll period that are equal to 100% of an employee's elective deferrals that do not exceed 2% of the eligible employee's plan compensation during the payroll period. The plan provides for after-tax employee contributions. The after-tax employee contribution cannot exceed $1,000 for the plan year. The plan provides that employees who complete one year of service are eligible to participate in the plan on the next January 1 or July 1 entry date. Employee X, a nonhighly compensated employee, who met the eligibility requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to elect to have elective contributions made on his behalf to the plan. In August of 2006, the error was discovered and Employer C offered Employee X the opportunity to make elective deferrals and after-tax employee contributions as of September 1, 2006. Employee X made elective deferrals equal to 4% of the employee's plan compensation for each payroll period from September 1, 2006 through December 31, 2006 (resulting in elective deferrals of $400). Employee X's plan compensation for 2006 was $36,000 ($26,000 for the first eight months and $10,000 for the last four months). Employer C made matching contributions equal to $200 on behalf of Employee X, which is 2% of Employee X's plan compensation for each payroll period from September 1, 2006 through December 31, 2006 ($10,000). After being allowed to participate in the plan, Employee X made $250 of after-tax employee contributions for the 2006 plan year. The ADP for nonhighly compensated employees for 2006 was 3% and the ACP for nonhighly compensated employees for 2006 was 2.3%. The ACP attributable to matching contributions for nonhighly compensated employees for 2006 was 1.8%. The ACP attributable to employee contributions for nonhighly compensated employees for 2006 was 0.5%.

Correction:

In accordance with section 2.02(1)(a)(ii), Employer C uses the correction method described in Appendix A, section.05, to correct for the failure to provide Employee X the opportunity to elect and make elective deferrals and after-tax employee contributions, and, as a result, the failure of Employee X to receive matching contributions for a portion of the plan year (January 1, 2006 through August 31, 2006). Thus, Employer C makes a corrective contribution on behalf of Employee X that satisfies the requirements of section 2.02(1)(a)(ii). Employer C elects to utilize the provisions of section 2.02(1)(a)(ii)(E) to determine Employee X's compensation for the portion of the year in which Employee X was not provided the opportunity to make elective deferrals and after-tax employee contributions. Thus, for administrative convenience, in lieu of using actual plan compensation of $26,000 for the period Employee X was excluded, Employee X's annual plan compensation is prorated for the 8-month period that the employee was excluded from participating in the plan. The corrective contribution is determined as follows:

(1) Corrective contribution for missed deferral: Employee X was eligible to, but was not provided with the opportunity to, elect and make elective deferrals from January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of Employee X equal to Employee X's missed deferral opportunity for that period, which is 50% of Employee X's missed deferral. The corrective contribution is adjusted for Earnings. Employee X's missed deferral is determined by multiplying the 3% ADP for nonhighly compensated employees by $24,000 (8/12ths of the employee's 2006 compensation of $36,000). Accordingly, the missed deferral is $720. The missed deferral is not reduced because when this amount is added to the amount already deferred, no plan limit (including § 402(g)) was exceeded. Accordingly, the required QNEC is $360 (that is, 50% multiplied by the missed deferral amount of $720). The required QNEC is adjusted for Earnings.

(2) Corrective contribution for missed matching contribution: Under the terms of the plan, if Employee X had made an elective deferral of $720 or 3% of compensation for the period of exclusion ($24,000), the employee would have been entitled to a matching contribution equal to 2% of $24,000 or $480. The missed matching contribution is not reduced because no plan limit is exceeded when this amount is added to the matching contribution already contributed for the 2006 plan year. Accordingly, the required corrective employer contribution is $480. The required corrective employer contribution is adjusted for Earnings.

(3) Corrective contribution for missed after-tax employee contribution: Employee X was eligible to, but was not provided with the opportunity to elect and make after-tax employee contributions from January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of Employee X equal to the missed opportunity to make after-tax employee contributions. The missed opportunity to make after-tax employee contributions is equal to 40% of Employee X's missed after-tax employee contributions. The QNEC is adjusted for Earnings. The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the employee's 2006 plan compensation of $36,000). Accordingly, the missed after-tax employee contribution amount is $120. The missed after-tax employee contribution is not reduced because the sum of $120 and the previously made after-tax employee contribution of $250 is less than the overall plan limit of $1,000. Therefore, the required QNEC is $48 (that is, 40% multiplied by the missed after-tax employee contribution of $120). The QNEC is adjusted for Earnings.

The total required corrective contribution, before adjustments for Earnings, on behalf of Employee X is $888 ( $360 for the missed deferral opportunity plus $480 for the missed matching contribution plus $48 for the missed opportunity to make after-tax employee contributions). The corrective contribution for the missed deferral opportunity ($360), the missed opportunity for after-tax employee contributions ($48), and related Earnings must be made in the form of a QNEC.

Example 5:

The facts (including the ADP and ACP results) are the same as in Example 4, except that it is now determined that Employee X, after being included in the plan in 2006, made after-tax employee contributions of $950.

Correction:

The correction is the same as in Example 4, except that the QNEC required to replace the missed after-tax employee contribution is re-calculated to take into account applicable plan limits in accordance with the provisions of section 2.02(1)(a)(ii)(C). The QNEC is determined as follows:

The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to after-tax employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the employee's 2006 plan compensation of $36,000). The missed after-tax employee contribution amount, based on this calculation, is $120. However, the sum of this amount ($120) and the previously made after-tax employee contribution ($950) is $1,070. Because the plan limit for after-tax employee contributions is $1,000, the missed after-tax employee contribution needs to be reduced by $70, to ensure that the total after-tax employee contributions comply with the plan limit. Accordingly, the missed after-tax employee contribution is $50 ($120 minus $70) and the required QNEC is $20 (that is, 40% multiplied by the missed after-tax employee contribution of $50). The QNEC is adjusted for Earnings.

Example 6:

Employer D sponsors a § 401(k) plan. The plan has a one year of service eligibility requirement and provides for January 1 and July 1 entry dates. Employee Y, who should have been provided the opportunity to elect and make elective deferrals for the plan year beginning on January 1, 2006, was not provided the opportunity to elect and make elective deferrals until July 1, 2006. Employee Y made $5,000 in elective deferrals to the plan in 2006. Employee Y was a highly compensated employee with compensation for 2006 of $200,000. Employee Y's compensation from January 1 through June 30, 2006 was $130,000. The ADP for highly compensated employees for 2006 was 10%. The ADP for nonhighly compensated employees for 2006 was 8%. The § 402(g) limit for deferrals made in 2006 was $15,000.

Correction:

QNEC for missed deferral: Employee Y's missed deferral is equal to the 10% ADP for highly compensated employees multiplied by $130,000 (compensation earned for the portion of the year in which Employee Y was erroneously excluded, that is, January 1, 2006 through June 30, 2006). The missed deferral amount, based on this calculation is $13,000. However, the sum of this amount ($13,000) and the previously made elective contribution ($5,000) is $18,000. The 2006 § 402(g) limit for elective deferrals is $15,000. In accordance with the provisions of section 2.02(1)(a)(ii)(B), the missed deferral needs to be reduced by $3,000 to ensure that the total elective contribution complies with the applicable §402(g) limit. Accordingly, the missed deferral is $10,000 ($13,000 minus $3,000) and the required QNEC is $5,000 (that is, 50% multiplied by the missed deferral of $10,000). The QNEC is 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, 2006, was not offered the opportunity to elect to have elective contributions made on his behalf to the plan. In March of 2006, the error was discovered and Employer E offered the employee an election opportunity as of April 1, 2006. Employee Z had the opportunity to make the maximum elective deferrals and/or after-tax employee contributions that could have been made under the terms of the plan for the entire 2006 plan year. The employee made elective deferrals equal to 3% of the employee's plan compensation for each payroll period from April 1, 2006 through December 31, 2006 (resulting in elective deferrals of $960). The employee's plan compensation for 2006 was $40,000 ($8,000 for the first three months and $32,000 for the last nine months). Employer E made matching contributions equal to $640 for the excluded employee, which is 2% of the employee's plan compensation for each payroll period from April 1, 2006 through December 31, 2006 ($32,000). After being allowed to participate in the plan, the employee made $500 in after-tax employee contributions. The ADP for nonhighly compensated employees for 2006 was 3% and the ACP for nonhighly compensated employees for 2006 was 2.3%. The portion of the ACP attributable to matching contributions for nonhighly compensated employees for 2006 was 1.8%. The portion of the ACP attributable to after-tax employee contributions for nonhighly compensated employees for 2006 was 0.5%.

Correction:

Employer E uses the correction method for partial year exclusions, pursuant to section 2.02(1)(a)(ii), to correct the failure to include an eligible employee in the plan. Because Employee Z was given an opportunity to make elective deferrals and after-tax employee contributions to the plan for at least the last 9 months of the plan year (and the amount of the elective deferrals or after-tax employee contributions that the employee had the opportunity to make was not less than the maximum elective deferrals or after-tax employee contributions that the employee could have made if the employee had been given the opportunity to make elective deferrals and after-tax employee contributions on January 1, 2006), under the special rule set forth in section 2.02(1)(a)(ii)(F), Employer E is not required to make a QNEC for the failure to provide the employee with the opportunity to make either elective deferrals or after-tax employee contributions. The employer only needs to make a corrective employer nonelective contribution for the failure to provide the employee with the opportunity to receive matching contributions on deferrals that could have been made during the first 3 months of the plan year. The calculation of the corrective employer contribution required to correct this failure is shown as follows:

The missed matching contribution is determined by calculating the matching contribution that the employee would have received had the employee been provided the opportunity to make elective deferrals during the period of exclusion, that is, January 1, 2006 through March 31, 2006. Assuming that the employee elected to defer an amount equal to 3% of compensation (which is the ADP for the nonhighly compensated employees for the plan year), then, under the terms of the plan, the employee would have been entitled to a matching contribution of 2% of compensation. Pursuant to the provisions of section 2.02(1)(a)(ii)(E), Employer E determines compensation by prorating Employee Z's annual compensation for the portion of the year that Employee Z was not given the opportunity to make elective deferrals or after-tax employee contributions. Accordingly, the missed matching contribution for the period of exclusion is obtained by multiplying 2% by Employee Z's compensation of $10,000 (3/12ths of the employee's 2006 plan compensation of $40,000). Based on this calculation, the missed matching contribution is $200. However, when this amount is added to the matching contribution already received ($640), the total ($840) exceeds the $750 plan limit on matching contributions by $90. Accordingly, pursuant to section 2.02(1)(a)(ii)(D), the missed matching contribution figure is reduced to $110 ( $200 minus $90). The required corrective employer contribution is $110. The corrective contribution is adjusted for Earnings.

Example 8:

Employer G maintains a safe harbor § 401(k) plan that requires matching contributions that satisfy the requirements of § 401(k)(12), which are equal to: 100% of elective deferrals that do not exceed 3% of an employee's compensation and 50% of elective deferrals that exceed 3% but do not exceed 5% of an employee's compensation. Employee M, a nonhighly compensated employee who met the eligibility requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to defer under the plan and was erroneously excluded for all of 2006. Employee M's compensation for 2006 was $20,000.

Correction:

In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M's missed deferral on account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral is equal to 3% multiplied by $20,000, or $600. Accordingly, the required QNEC for Employee M's missed deferral opportunity in 2006 is $300, that is, 50% of $600. The missed matching contribution, based on the missed deferral of $600, is $600. The required corrective contribution for Employee M's missed matching contribution is $600. Since the matching contribution is required to satisfy the requirements of §401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before adjustments for Earnings, on behalf of Employee M is $900 (that is, $300 for the missed deferral opportunity, plus $600 for the missed matching contribution). The QNEC is adjusted for Earnings.

Example 9:

Same facts as Example 8, except that the plan provides for matching contributions equal to 100% of elective deferrals that do not exceed 4% of an employee's compensation.

Correction:

In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M's missed deferral on account of exclusion from the safe harbor § 401(k) plan is 4% of compensation. The missed deferral is 4% of compensation because the plan provides for a 100% match for deferrals up to that level of compensation. (See Appendix A, section.05(2)(d).) Therefore, in this case, Employee M's missed deferral is equal to 4% multiplied by $20,000, or $800. The QNEC for Employee M's missed deferral opportunity in 2006 is $400, that is, 50% multiplied by $800. The missed matching contribution, based on the missed deferral of $800, is $800. Thus, the required corrective contribution for Employee M's missed matching contribution is $800. Since the matching contribution is required to satisfy the requirements of §401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before adjustments for Earnings, on behalf of Employee M is $1,200 (that is, $400 for the missed deferral opportunity plus $800 for the missed matching contribution). The QNEC is adjusted for Earnings.

Example 10:

Same facts as Example 8, except that the plan uses a rate of nonelective contributions to satisfy the requirements of § 401(k)(12) and provides for a nonelective contribution equal to 3% of compensation.

Correction:

In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M's missed deferral on account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral is equal to 3% multiplied by $20,000, or $600. Thus, the QNEC for Employee M's missed deferral opportunity in 2006 is $300 (50% of $600). The required nonelective contribution, based on the plan's formula of 3% of compensation for nonelective contributions, is $600. Since the nonelective contribution is required to satisfy the requirements of § 401(k)(12), the corrective contribution is made in the form of a QNEC. The total required QNEC, before adjustments for Earnings, on behalf of Employee M is $900 (that is, $300 for the missed deferral opportunity, plus $600 for the missed nonelective contribution). The QNEC is adjusted for Earnings.

Example 11:

Employer H maintains a § 401(k) plan. The plan limit on deferrals is the lesser of the deferral limit under § 401(a)(30) or the limitation under § 415. The plan also provides that eligible participants (as defined in § 414(v)(5)) may make contributions in excess of the plan's deferral limits, up to the limitations on catch-up contributions for the year. The plan also provides for a 60% matching contribution on elective deferrals. The deferral limit under § 401(a)(30) for 2006 is $15,000. The limitation on catch-up contributions under the terms of the plan and § 414(v)(2)(B)(i) is $5,000. Employee R, age 55, was provided with the opportunity to make elective deferrals up to the plan limit, but was not provided the option to make catch-up contributions. Employee R is a nonhighly compensated employee who earned $60,000 in compensation and made elective deferrals totaling $15,000 in 2006.

Correction:

In accordance with the provisions of Appendix A, section.05(4), Employee R's missed deferral on account of the plan's failure to offer the opportunity to make catch-up contributions is $2,500 (or one half of the limitation on catch-up contributions for 2006). The missed deferral opportunity is $1,250 (or 50% of $2,500). Thus, the required QNEC for Employee R's missed deferral opportunity relating to catch-up contributions in 2006 is $1,250 adjusted for Earnings. In addition, Employee R was entitled to an additional matching contribution, under the terms of the plan, equal to 60% of the missed deferral that is attributable to the catch-up contribution that the employee would have made had the failure not occurred. In this case, the missed deferral is $2,500 and the corresponding matching contribution is $1,500 (that is, 60% of $2,500). Thus, the required corrective contribution for the additional matching contribution that should have been made on behalf of Employee R is $1,500 adjusted for Earnings.

Example 12:

Employer K maintains a § 401(k) plan. The plan provides for matching contributions for eligible employees equal to 100% of elective deferrals that do not exceed 3% of an employee's compensation. On January 1, 2006, Employee T made an election to contribute 10% of compensation for the 2006 plan year. However, Employee T's election was not processed, and the required amounts were not withheld from Employee T's salary in 2006. Employee T's salary was $30,000 in 2006.

Correction:

Employer K uses the correction method described in Appendix A, section.05(5), to correct the failure to implement Employee T's election to make elective deferrals under the plan for the full plan year beginning January 1, 2006. Employer K calculates the corrective QNEC to be made on behalf of Employee T as follows:

(1) Elective deferrals: Employee T's election to make elective deferrals, pursuant to an election, in 2006 was not implemented. Thus, pursuant to section.05(5)(a) of Appendix A, Employer K must make a QNEC to the plan on behalf of Employee T equal to the missed deferral opportunity for Employee T, which is 50% of Employee T's missed deferral. The QNEC is adjusted for Earnings. The missed deferral for Employee T is determined by using T's elected deferral percentage (10%) for 2006 and multiplying that percentage by Employee T's compensation for 2006 ($30,000). Accordingly, the missed deferral for Employee V, on account of the employee's improper exclusion from the plan is $3,000 (10% x $30,000). The missed deferral opportunity is $1,500 (that is, 50% x $3,000). Thus, the required QNEC for the failure to provide Employee V with the opportunity to make elective deferrals to the plan is $1,500 (adjusted for Earnings).

(2) Matching contributions: Employee T should have been eligible for but did not receive an allocation of employer matching contributions because no elective deferrals were made on behalf of Employee T in 2006. Thus, pursuant to section.05(5)(c) of Appendix A, Employer K must make a corrective employer nonelective contribution to the plan on behalf of Employee T that is equal to the matching contribution Employee T would have received had the missed deferral been made. The corrective employer nonelective contribution is adjusted for Earnings. Under the terms of the plan, if Employee T had made an elective deferral of $3,000 or 10% of compensation ($30,000), the employee would have been entitled to a matching contribution equal to 100% of the first 3% of Employee T's compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed employer matching contribution is $900 (adjusted for Earnings). The total required corrective contribution, before adjustments for Earnings, on behalf of Employee T is $2,400 ($1,500 for the missed deferral opportunity plus $900 for the missed matching contribution). The corrective contribution for the missed deferral opportunity ($1,500) and related Earnings must be made in the form of a QNEC.

(2) Exclusion of Eligible Employees In a Profit-Sharing Plan. (a) Correction Methods. (i) Appendix A Correction Method. Appendix A, section.05, sets forth the correction method for correcting the failure to make a contribution on behalf of the employees improperly excluded from a defined contribution plan or to provide benefit accruals for the employees improperly excluded from a defined benefit plan. In the case of a defined contribution plan, the correction method is to make a contribution on behalf of the excluded employee. section 2.02(2)(a)(ii) of this Appendix B clarifies the correction method in the case of a profit-sharing or stock bonus plan that provides for nonelective contributions (within the meaning of §1.401(k)-6).

(ii) Additional Requirements for Appendix A Correction Method as applied to Profit-Sharing Plans. To correct for the exclusion of an eligible employee from nonelective contributions in a profit-sharing or stock bonus plan under the Appendix A correction method, an allocation amount is determined for each excluded employee on the same basis as the allocation amounts were determined for the other employees under the plan's allocation formula (for example, the same ratio of allocation to compensation), taking into account all of the employee's relevant factors (for example, compensation) under that formula for that year. The Plan Sponsor 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 15.)

(iii) Reallocation Correction Method. (A) In General. Subject to the limitations set forth in section 2.02(2)(a)(iii)(F) below, in addition to the Appendix A correction method, the exclusion of an eligible employee for a plan year from a profit-sharing or stock bonus plan that provides for nonelective contributions may be corrected using the reallocation correction method set forth in this section 2.02(2)(a)(iii). Under the reallocation correction method, the account balance of the excluded employee is increased as provided in paragraph (2)(a)(iii)(B) below, the account balances of other employees are reduced as provided in paragraph (2)(a)(iii)(C) below, and the increases and reductions are reconciled, as necessary, as provided in paragraph (2)(a)(iii)(D) below. (See Examples 16 and 17.)

(B) Increase in Account Balance of Excluded Employee. The account balance of the excluded employee is increased by an amount that is equal to the allocation the employee would have received had the employee shared in the allocation of the nonelective contribution. The amount is adjusted for Earnings.

(C) Reduction in Account Balances of Other Employees. (1) The account balance of each employee who was an eligible employee who shared in the original allocation of the nonelective contribution is reduced by the excess, if any, of (I) the employee's allocation of that contribution over (II) the amount that would have been allocated to that employee's account had the failure not occurred. This amount is adjusted for Earnings taking into account the rules set forth in section 2.02(2)(a)(iii)(C)(2) and (3) below. The amount after adjustment for Earnings is limited in accordance with section 2.02(2)(a)(iii)(C)(4) below.

(2) This paragraph (2)(a)(iii)(C)(2) applies if most of the employees with account balances that are being reduced are nonhighly compensated employees. If there has been an overall gain for the period from the date of the original allocation of the contribution through the date of correction, no adjustment for Earnings is required to the amount determined under section 2.02(2)(a)(iii)(C)(1) for the employee. If the amount for the employee is being adjusted for Earnings and the plan permits investment of account balances in more than one investment fund, for administrative convenience, the reduction to the employee's account balance may be adjusted by the lowest rate of return of any fund for the period from the date of the original allocation of the contribution through the date of correction.

(3 ) If an employee's account balance is reduced and the original allocation was made to more than one investment fund or there was a subsequent distribution or transfer from the fund receiving the original allocation, then reasonable, consistent assumptions are used to determine the Earnings adjustment.

(4) The amount determined in section 2.02(2)(a)(iii)(C)(1) for an employee after the application of section 2.02(2)(a)(iii)(C)(2) and (3) may not exceed the account balance of the employee on the date of correction, and the employee is permitted to retain any distribution made prior to the date of correction.

(D) Reconciliation of Increases and Reductions. If the aggregate amount of the increases under section 2.02(2)(a)(iii)(B) exceeds the aggregate amount of the reductions under section 2.02(2)(a)(iii)(C), the Plan Sponsor makes a corrective contribution to the plan for the amount of the excess. If the aggregate amount of the reductions under section 2.02(2)(a)(iii)(C) exceeds the aggregate amount of the increases under section 2.02(2)(a)(iii)(B), then the amount by which each employee's account balance is reduced under section 2.02(2)(a)(iii)(C) is decreased on a pro rata basis.

(E) Reductions Among Multiple Investment Funds. If an employee's account balance is reduced and the employee's account balance is invested in more than one investment fund, then the reduction may be made from the investment funds selected in any reasonable manner.

(F) Limitations on Use of Reallocation Correction Method. If any employee would be permitted to retain any distribution pursuant to section 2.02(2)(a)(iii)(C)(4), then the reallocation correction method may not be used unless most of the employees who would be permitted to retain a distribution are nonhighly compensated employees.

(b) Examples.

Example 13:

Employer D maintains a profit-sharing plan that provides for discretionary nonelective employer contributions. The plan provides that the employer's contributions are allocated to account balances in the ratio that each eligible employee's compensation for the plan year bears to the compensation of all eligible employees for the plan year and, therefore, the only relevant factor for determining an allocation is the employee's compensation. The plan provides for self-directed investments among four investment funds and daily valuations of account balances. For the 2006 plan year, Employer D made a contribution to the plan of a fixed dollar amount. However, five employees who met the eligibility requirements were inadvertently excluded from participating in the plan. The contribution resulted in an allocation on behalf of each of the eligible employees, other than the excluded employees, equal to 10% of compensation. Most of the employees who received allocations under the plan for the year of the failure were nonhighly compensated employees. No distributions have been made from the plan since 2006. If the five excluded employees had shared in the original allocation, the allocation made on behalf of each employee would have equaled 9% of compensation. The excluded employees began participating in the plan in the 2007 plan year.

Correction:

Employer D uses the Appendix A correction method to correct the failure to include the five eligible employees. Thus, Employer D makes a corrective contribution to the plan. The amount of the corrective contribution on behalf of the five excluded employees for the 2006 plan year is equal to 10% of compensation of each excluded employee, the same allocation that was made for other eligible employees, adjusted for Earnings. The excluded employees receive an allocation equal to 10% of compensation (adjusted for Earnings) even though, had the excluded employees originally shared in the allocation for the 2006 contribution, their account balances, as well as those of the other eligible employees, would have received an allocation equal to only 9% of compensation.

Example 14:

The facts are the same as in Example 13.

Correction:

Employer D uses the reallocation correction method to correct the failure to include the five eligible employees. Thus, the account balances are adjusted to reflect what would have resulted from the correct allocation of the employer contribution for the 2006 plan year among all eligible employees, including the five excluded employees. The inclusion of the excluded employees in the allocation of that contribution would have resulted in each eligible employee, including each excluded employee, receiving an allocation equal to 9% of compensation. Accordingly, the account balance of each excluded employee is increased by 9% of the employee's 2006 compensation, adjusted for Earnings. The account balance of each of the eligible employees other than the excluded employees is reduced by 1% of the employee's 2006 compensation, adjusted for Earnings. Employer D determines the adjustment for Earnings using the rate of return of each eligible employee's excess allocation (using reasonable, consistent assumptions). Accordingly, for an employee who shared in the original allocation and directed the investment of the allocation into more than one investment fund or who subsequently transferred a portion of a fund that had been credited with a portion of the 2006 allocation to another fund, reasonable, consistent assumptions are followed to determine the adjustment for Earnings. It is determined that the total of the initially determined reductions in account balances exceeds the total of the required increases in account balances. Accordingly, these initially determined reductions are decreased pro rata so that the total of the actual reductions in account balances equals the total of the increases in the account balances, and Employer D does not make any corrective contribution. The reductions from the account balances are made on a pro rata basis among all of the funds in which each employee's account balance is invested.

Example 15:

The facts are the same as in Example 13.

Correction:

The correction is the same as in Example 14, except that, because most of the employees whose account balances are being reduced are nonhighly compensated employees, for administrative convenience, Employer D uses the rate of return of the fund with the lowest rate of return for the period of the failure to adjust the reduction to each account balance. It is determined that the aggregate amount (adjusted for Earnings) by which the account balances of the excluded employees is increased exceeds the aggregate amount (adjusted for Earnings) by which the other employees' account balances are reduced. Accordingly, Employer D makes a contribution to the plan in an amount equal to the excess. The reduction from account balances is made on a pro rata basis among all of the funds in which each employee's account balance is invested.

.03 Vesting Failures. (1) Correction Methods. (a) Contribution Correction Method. A failure in a defined contribution plan to apply the proper vesting percentage to an employee's account balance that results in forfeiture of too large a portion of the employee's account balance may be corrected using the contribution correction method set forth in this paragraph. The Plan Sponsor makes a corrective contribution on behalf of the employee whose account balance was improperly forfeited in an amount equal to the improper forfeiture. The corrective contribution is adjusted for Earnings. If, as a result of the improper forfeiture, an amount was improperly allocated to the account balance of another employee, no reduction is made to the account balance of that employee. (See Example 16.)

(b) Reallocation Correction Method. In lieu of the contribution correction method, in a defined contribution plan under which forfeitures of account balances are reallocated among the account balances of the other eligible employees in the plan, a failure to apply the proper vesting percentage to an employee's account balance which results in forfeiture of too large a portion of the employee's account balance may be corrected under the reallocation correction method set forth in this paragraph. A corrective reallocation is made in accordance with the reallocation correction method set forth in section 2.02(2)(a)(iii), subject to the limitations set forth in section 2.02(2)(a)(iii)(F). In applying section 2.02(2)(a)(iii)(B), the account balance of the employee who incurred the improper forfeiture is increased by an amount equal to the amount of the improper forfeiture and the amount is adjusted for Earnings. In applying section 2.02(2)(a)(iii)(C)(1 ), the account balance of each employee who shared in the allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that was allocated to that employee's account. The Earnings adjustments for the account balances that are being reduced are determined in accordance with sections 2. 02(2)(a)(iii)(C)(2) and (3) and the reductions after adjustments for Earnings are limited in accordance with section 2.02(2)(a)(iii)(C)(4). In accordance with section 2.02(2)(a)(iii)(D), if the aggregate amount of the increases exceeds the aggregate amount of the reductions, the Plan Sponsor makes a corrective contribution to the plan for the amount of the excess. In accordance with section 2.02(2)(a)(iii)(D), if the aggregate amount of the reductions exceeds the aggregate amount of the increases, then the amount by which each employee's account balance is reduced is decreased on a pro rata basis. (See Example 17.)

(2) Examples.

Example 16:

Employer E maintains a profit-sharing plan that provides for nonelective contributions. The plan provides for self-directed investments among four investment funds and daily valuation of account balances. The plan provides that forfeitures of account balances are reallocated among the account balances of other eligible employees on the basis of compensation. During the 2006 plan year, Employee R terminated employment with Employer E and elected and received a single-sum distribution of the vested portion of his account balance. No other distributions have been made since 2006. However, an incorrect determination of Employee R's vested percentage was made resulting in Employee R receiving a distribution of less than the amount to which he was entitled under the plan. The remaining portion of Employee R's account balance was forfeited and reallocated (and these reallocations were not affected by the limitations of § 415). Most of the employees who received allocations of the improper forfeiture were nonhighly compensated employees.

Correction:

Employer E uses the contribution correction method to correct the improper forfeiture. Thus, Employer E makes a contribution on behalf of Employee R equal to the incorrectly forfeited amount (adjusted for Earnings) and Employee R's account balance is increased accordingly and subsequently distributed to Employee R. No reduction is made from the account balances of the employees who received an allocation of the improper forfeiture.

Example 17:

The facts are the same as in Example 16.

Correction:

Employer E uses the reallocation correction method to correct the improper forfeiture. Thus, Employee R's account balance is increased by the amount that was improperly forfeited (adjusted for Earnings) and such increase will be distributed to Employee R. The account of each employee who shared in the allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that was allocated to that employee's account (adjusted for Earnings). Because most of the employees whose account balances are being reduced are nonhighly compensated employees, for administrative convenience, Employer E uses the rate of return of the fund with the lowest rate of return for the period of the failure to adjust the reduction to each account balance. It is determined that the amount (adjusted for Earnings) by which the account balance of Employee R is increased exceeds the aggregate amount (adjusted for Earnings) by which the other employees' account balances are reduced. Accordingly, Employer E makes a contribution to the plan in an amount equal to the excess. The reduction from the account balances is made on a pro rata basis among all of the funds in which each employee's account balance is invested.

.04 § 415 Failures. (1) Failures Relating to a § 415(b) Excess. (a) Correction Methods. (i) Return of Overpayment Correction Method. Overpayments as a result of amounts being paid in excess of the limits of § 415(b) may be corrected using the return of Overpayment correction method set forth in this paragraph (1)(a)(i). The Plan Sponsor takes reasonable steps to have the Overpayment (with appropriate interest) returned by the recipient to the plan and reduces future benefit payments (if any) due to the employee to reflect § 415(b). To the extent the amount returned by the recipient is less than the Overpayment, adjusted for Earnings at the plan's earnings rate, then the Plan Sponsor or another person contributes the difference to the plan. In addition, in accordance with section 6.06 of this revenue procedure, the Plan Sponsor must notify the recipient that the Overpayment was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). (See Examples 20 and 21.)

(ii) Adjustment of Future Payments Correction Method. (A) In General. In addition to the return of overpayment correction method, in the case of plan benefits that are being distributed in the form of periodic payments, Overpayments as a result of amounts being paid in excess of the limits in § 415(b) may be corrected by using the adjustment of future payments correction method set forth in this paragraph (1)(a)(ii). Future payments to the recipient are reduced so that they do not exceed the § 415(b) maximum limit and an additional reduction is made to recoup the Overpayment (over a period not longer than the remaining payment period) so that the actuarial present value of the additional reduction is equal to the Overpayment plus interest at the interest rate used by the plan to determine actuarial equivalence. (See Examples 18 and 19.)

(B) Joint and Survivor Annuity Payments. If the employee is receiving payments in the form of a joint and survivor annuity, with the employee's spouse to receive a life annuity upon the employee's death equal to a percentage (for example, 75%) of the amount being paid to the employee, the reduction of future annuity payments to reflect §415(b) reduces the amount of benefits payable during the lives of both the employee and spouse, but any reduction to recoup Overpayments made to the employee does not reduce the amount of the spouse's survivor benefit. Thus, the spouse's benefit will be based on the previous specified percentage (for example, 75%) of the maximum permitted under § 415(b), instead of the reduced annual periodic amount payable to the employee.

(C) Overpayment Not Treated as an Excess Amount. An Overpayment corrected under this adjustment of future payment correction method is not treated as an Excess Amount as defined in section 5.01(3) of this revenue procedure.

(b) Examples.

Example 18:

Employer F maintains a defined benefit plan funded solely through employer contributions. The plan provides that the benefits of employees are limited to the maximum amount permitted under §415(b), disregarding cost-of-living adjustments under § 415(d) after benefit payments have commenced. At the beginning of the 2006 plan year, Employee S retired and started receiving an annual straight life annuity of $185,000 from the plan. Due to an administrative error, the annual amount received by Employee S for 2006 included an Overpayment of $10,000 (because the § 415(b)(1)(A) limit for 2006 was $175,000). This error was discovered at the beginning of 2007.

Correction:

Employer F uses the adjustment of future payments correction method to correct the failure to satisfy the limit in § 415(b). Future annuity benefit payments to Employee S are reduced so that they do not exceed the § 415(b) maximum limit, and, in addition, Employee S's future benefit payments from the plan are actuarially reduced to recoup the Overpayment. Accordingly, Employee S's future benefit payments from the plan are reduced to $175,000 and further reduced by $1,000 annually for life, beginning in 2007. The annual benefit amount is reduced by $1,000 annually for life because, for Employee S, the actuarial present value of a benefit of $1,000 annually for life commencing in 2007 is equal to the sum of $10,000 and interest at the rate used by the plan to determine actuarial equivalence beginning with the date of the first Overpayment and ending with the date the reduced annuity payment begins. Thus, Employee S's remaining benefit payments are reduced so that Employee S receives $174,000 for 2007, and for each year thereafter.

Example 19:

The facts are the same as in Example 18.

Correction:

Employer F uses the adjustments of future payments correction method to correct the § 415(b) failure, by recouping the entire excess payment made in 2006 from Employee S's remaining benefit payments for 2007. Thus, Employee S's annual annuity benefit for 2007 is reduced to $164,400 to reflect the excess benefit amounts (increased by interest) that were paid from the plan to Employee S during the 2006 plan year. Beginning in 2008, Employee S begins to receive annual benefit payments of $175,000.

Example 20:

The facts are the same as in Example 18, except that the benefit was paid to Employee S in the form of a single-sum distribution in 2006, which exceeded the maximum § 415(b) limits by $110,000.

Correction:

Employer F uses the return of overpayment correction method to correct the § 415(b) failure. Thus, Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment (with interest at the rate used by the plan to calculate the single-sum payment) is owed to the plan. Employer F takes reasonable steps to have the Overpayment (with interest at the rate used by the plan to calculate the single-sum payment) paid to the plan. Employee S pays the $110,000 (plus the requested interest) to the plan. It is determined that the plan's rate of return for the relevant period was 2 percentage points more than the rate used by the plan to calculate the single-sum payment. Accordingly, Employer F contributes the difference to the plan.

Example 21:

The facts are the same as in Example 20.

Correction:

Employer F uses the return of overpayment correction method to correct the § 415(b) failure. Thus, Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment (with interest at the rate used by the plan to calculate the single-sum payment) is owed to the plan. Employer F takes reasonable steps to have the Overpayment (with interest at the rate used by the plan to calculate the single-sum payment) paid to the plan. As a result of Employer F's recovery efforts, some, but not all, of the Overpayment (with interest) is recovered from Employee S. It is determined that the amount returned by Employee S to the plan is less than the Overpayment adjusted for Earnings at the plan's rate of return. Accordingly, Employer F contributes the difference to the plan.

(2) Failures Relating to a § 415(c) Excess. (a) Correction Methods. (i) Appendix A Correction Method. Appendix A, section.08, sets forth the correction method for correcting the failure to satisfy the § 415(c) limits on annual additions.

(ii) Forfeiture Correction Method. In addition to the Appendix A correction method, the failure to satisfy § 415(c) with respect to a nonhighly compensated employee (A) who in the limitation year of the failure had annual additions consisting of both (I) either elective deferrals or after-tax employee contributions or both and (II) either matching or nonelective contributions or both, (B) for whom the matching and nonelective contributions equal or exceed the portion of the employee's annual addition that exceeds the limits under § 415(c) ("§ 415(c) excess") for the limitation year, and (C) who has terminated with no vested interest in the matching and nonelective contributions (and has not been reemployed at the time of the correction), may be corrected by using the forfeiture correction method set forth in this paragraph. The §415(c) excess is deemed to consist solely of the matching and nonelective contributions. If the employee's § 415(c) excess (adjusted for Earnings) has previously been forfeited, the § 415(c) failure is deemed to be corrected. If the § 415(c) excess (adjusted for Earnings) has not been forfeited, that amount is placed in an unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer nonelective contributions in succeeding year(s) (or if the amount would have been allocated to other employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other employees in accordance with the plan's allocation formula). Note that while this correction method will permit more favorable tax treatment of elective deferrals for the employee than the Appendix A correction method, this correction method could be less favorable to the employee in certain cases, for example, if the employee is subsequently reemployed and becomes vested. (See Examples 22 and 23.)

(iii) Return of Overpayment Correction Method. A failure to satisfy § 415(c) that includes a distribution of the § 415(c) excess attributable to nonelective contributions and matching contributions may be corrected using the return of Overpayment correction method set forth in section 6.06(3) of this revenue procedure.

(b) Examples.

Example 22:

Employer G maintains a § 401(k) plan. The plan provides for nonelective employer contributions, elective deferrals, and after-tax employee contributions. The plan provides that the nonelective contributions vest under a 5-year cliff vesting schedule. The plan provides that when an employee terminates employment, the employee's nonvested account balance is forfeited five years after a distribution of the employee's vested account balance and that forfeitures are used to reduce employer contributions. For the 1998 limitation year, the annual additions made on behalf of two nonhighly compensated employees in the plan, Employees T and U, exceeded the limit in § 415(c). For the 1998 limitation year, Employee T had § 415 compensation of $60,000, and, accordingly, a § 415(c)(1)(B) limit of $15,000. Employee T made elective deferrals and after-tax employee contributions. For the 1998 limitation year, Employee U had § 415 compensation of $40,000, and, accordingly, a § 415(c)(1)(B) limit of $10,000. Employee U made elective deferrals. Also, on January 1, 1999, Employee U, who had three years of service with Employer G, terminated his employment and received his entire vested account balance (which consisted of his elective deferrals). The annual additions for Employees T and U consisted of:

TABLE 2
CALCULATION AND ALLOCATION OF THE CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

	Earnings Rate	Amount	Allocated to:
Corrective Contribution		$5,000	Employee X
First Partial Valuation Period Earnings	15%	$7501	Employee X
1999 Earnings	10%	$5752	Employee X
Second Partial Valuation Period Earnings	12%	$7593	Employee X
Total Amount Contributed		$7,084
1 $5,000 x 15% 2 $5,750($5,000 +$750) x 10% 3 $6,325($5,000 +$750 + $575) x 12%

Example 30: