IRS MODIFIES AND EXTENDS VCR PROGRAM FOR PENSION PLAN SPONSORS.

Rev. Proc. 93-36

SECTION 1. PURPOSE

This revenue procedure modifies Revenue Procedure 92-89, 1992-46 I.R.B. 27, concerning the Voluntary Compliance Resolution (VCR) Program. The revenue procedure expands the types of defects that can be corrected under the VCR Program, gives additional guidance concerning the specificity of VCR compliance statement requests, provides a standardized correction procedure for certain defects, and extends the last day of the VCR Program.

SEC. 2. BACKGROUND

On November 16, 1992, the Service established the VCR Program as a temporary, experimental program ending on December 31, 1993. The VCR program permits plan sponsors to correct OPERATIONAL qualification defects, provided that the plan has received a determination letter that considered the Tax Equity and Fiscal Responsibility Act of 1982, the Tax Reform Act of 1984, and the Retirement Equity Act of 1984. A plan is not eligible for the VCR program if it is under examination. Plan sponsors pay a voluntary compliance fee based upon the size of the plan and are not required to pay a monetary sanction. Correction must be made for all years. In general, excise taxes are not waived under this program, and are applicable even if full correction is made.

SEC. 3. VCR ELIGIBILITY CRITERIA

.01 Under Revenue Procedure 92-89, certain plans are not eligible for the VCR Program, either because of the nature of the violations or because the plan is under examination. This section modifies the eligibility criteria, provides special treatment for certain plans that are not eligible for the VCR Program, and clarifies the treatment of plans with defects that are eligible for retroactive correction under the section 401(b) remedial amendment period.

.02 Under Section 3.03 of Revenue Procedure 92-89, a plan that is aggregated with a plan that is under examination is not eligible for the VCR program. This revenue procedure modifies the aggregation rule to permit an aggregated plan to request a VCR compliance statement with respect to a defect that is not related to provisions for which the plans are aggregated. Thus, for example, a plan aggregated with a plan that is under examination could request consideration under the VCR program for a defect arising under the spousal consent rules of section 417 of the Internal Revenue Code, or the vesting rules of 411 of the Code, but could not ask for consideration of a violation under provisions for which the plans are aggregated, including the nondiscrimination provisions (sections 401(a)(4), 410(b), etc.), section 415 of the Code or section 416 of the Code. 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 section 410(b)(5).

.03 Under Section 4.02 of Revenue Procedure 92-89, certain plans are not eligible because of the nature of the violations. Section 4.02 is deleted and replaced with the following: "4.02 Certain defects are not eligible for the VCR program. In general, defects are ineligible because they are not qualification defects or, if they are qualification defects, they involve issues that the Service deems inappropriate for the VCR Program. The Service intends to give taxpayers broad access to the VCR Program. However, the VCR Program will not be available for plans that fit within section 3.03(1) or (2) below.

(1) Plans in which the violations have been egregious. For example, where an employer has consistently and improperly covered only the highly compensated employees, or where a self employed individual had made a contribution to a defined contribution plan that is several times greater than the dollar limit set forth in section 415, the violation would be considered egregious.

(2) Plans in which there are exclusive benefit violations relating to the misuse or diversion of plan assets (cases in which the Department of Labor also has jurisdiction). If a plan requesting a VCR compliance statement is determined to have egregious violations, the request will be sent to the appropriate Key District Office for processing under the Closing Agreement Program (CAP). Under the CAP, the monetary sanction will be significantly reduced because the employer voluntarily came forward."

.04 The VCR Program is available for plans with operational qualification defects that cannot be corrected under the Code and related regulations. As a general rule, a defect arising from the failure to satisfy a qualification requirement that became effective on or after January 1, 1989 is not eligible for the VCR program because the section 401(b) remedial amendment period, as extended by Notice 92-36, 1992-2 C.B. 364, is still in effect. Thus, the violation may be retroactively amended without the VCR program. However, if a plan has been properly amended for these qualification requirements and the operational defect arises after the amendments have become effective, the defect is eligible for the VCR Program.

SEC. 4. VCR PROGRAM CORRECTION PRINCIPLES AND REQUIREMENTS

.01 Section 6.02 of Rev. Proc. 92-89 provides that the plan sponsor must send a cover letter with the request for a VCR compliance statement containing a description of the method for correcting the defect that the plan sponsor has implemented or proposes to implement. The following general principles should be used in suggesting acceptable corrections:

(1) The correction method should restore both active and former employees to the benefit levels they would have had if the defect had not occurred. Action must be taken to find former participants who are due additional benefits. Appropriate actions depend on the facts and circumstances of the case. Such actions might include, for example, a mailing to the last known address, notification in the largest local newspaper, and the use of the IRS letter forwarding service if the participants have not been found.

(2) The correction method should restore the plan to the position it would have been in had the defect not occurred.

(3) The correction method should not violate another section 401(a) qualification requirement (e.g., section 411(d)(6)).

(4) The correction method should, to the extent possible, resemble one already provided in the Code, regulations or other publications. For example, the correction methods set forth in Treasury Regulation section 1.415-6(b)(6) would be the typical means of correcting violations under section 415. Likewise, the correction method set forth in section 1.402(g)-1(e)(2) would be the typical means of correcting violations under section 402(g).

(5) The correction method should keep the assets in the plan, except to the extent the Code, regulations or other publications already provide for a distribution. For example, if an excess allocation (not in excess of the section 415 limits) is made, the excess should be used to increase benefits for employees or to reduce the employer contributions for the following year.

(6) Corrective allocations to a defined contribution plan must be adjusted for earnings and forfeitures that would have been allocated during the applicable period. In addition, increases in allocations that would have occurred due to changes in compensation must be taken into account.

(7) The corrective contributions should come only from employer contributions (including forfeitures, if the plan permits their use as employer contributions).

(8) A corrective contribution to a participant's account because of a failure to allocate the contribution in a prior limitation year will not be considered an annual addition with respect to the participant for the limitation year in which the correction is made. It will be considered as an annual addition for the limitation year to which it relates.

.02 A request for a VCR compliance statement must contain the specific information needed to support the suggested correction method. This includes, for example, the number of employees affected (and how this number was determined), the interest rate (and the method of determining the interest rate) that will apply to any corrective contributions to the plan, the years involved, and any calculations or assumptions the plan sponsor used to determine the amounts needed for correction. Where applicable, the request for a compliance statement should also provide the proposed method of locating and notifying former participants who may be entitled to an additional benefit.

SEC. 5. STANDARDIZED VCR PROCEDURE

.01 The VCR Program is modified to add a standardized VCR Procedure (SVP). Under this new procedure, certain operational violations of the qualification requirements under section 401(a) of the Code may be corrected under a simplified procedure. The plan sponsor must notify the Service of the proposed correction, and will receive a VCR compliance statement. The SVP will generally be available if the plan is eligible for the VCR program. If a plan sponsor uses the SVP, a voluntary compliance fee of $350 is applicable, regardless of the number of participants in the plan.

.02 The SVP is available if the defect or defects are listed in Section 7 of this revenue procedure and are corrected using the permitted correction method set forth in Section 7 of this revenue procedure.

.03 If the SVP is not available or the plan sponsor wishes to propose a correction method other than the one provided in Section 7, the plan sponsor may request a VCR compliance statement under the procedures set forth in Revenue Procedure 92-89 (as modified by sections 3 and 4 of this revenue procedure). A plan sponsor may request a VCR compliance statement under the procedures set forth in Revenue Procedure 92-89 (as modified by sections 3 and 4 of this revenue procedure), even if the SVP is available.

.04 If the plan sponsor intends to use the SVP, the plan sponsor must notify the Service under the Notification Letter procedures set forth in Section 8 of this revenue procedure.

.05 The Service may identify additional defects and permitted correction methods available for SVP at a later date, by publication in revenue procedures, notices or other guidance of general applicability.

SEC. 6. STANDARDIZED CORRECTION RULES

.01 The general rules listed in this section apply to all the permitted correction methods listed in Section 7 of this revenue procedure.

(1) Excise taxes, to the extent applicable, are not waived by the automatic correction of defects under the SVP. Thus, for example, amounts contributed in excess of the deduction limits set forth in section 404 of the Code for the tax year of the contribution may be subject to the tax set forth in section 4972 of the Code.

(2) Contributions to the plan must include any earnings that would have been applicable had the contribution been properly made. However, in no event should the contribution plus gains/losses be less than the employer contribution by itself. For example, if a missed contribution is $500, the interest in the first year is $10, and the loss in the second year is $30, the corrective contribution may not be less than $500.

(3) A plan sponsor may amend the plan to the extent necessary to effect one of the permitted correction methods. For example, if the plan failed to satisfy the ADP test and must make qualified nonelective contributions, the plan may be amended as part of the SVP Program to provide for qualified nonelective contributions. Permission under this revenue procedure to amend the plan as needed to implement a permitted correction method is not a determination as to the qualification of the plan or plan amendment.

(4) The general rules set forth in section 4 of this revenue procedure must be strictly followed.

SEC. 7. SVP DEFECTS AND CORRECTION

.01 FAILURE TO PROVIDE THE MINIMUM TOP HEAVY BENEFIT UNDER SECTION 416 OF THE CODE TO NON-KEY EMPLOYEES. In a defined contribution plan, the permitted correction method is to make contributions to the plan on behalf of the non-key employees to whom the contributions should have been made. In a defined benefit plan, the minimum required benefit must be provided.

.02 FAILURE TO SATISFY THE AVERAGE DEFERRED PERCENTAGE (ADP) TEST SET FORTH IN SECTION 401(k)(3) OF THE CODE, THE AVERAGE CONTRIBUTION PERCENTAGE (ACP) TEST SET FORTH IN SECTION 401(m)(2) OF THE CODE OR THE MULTIPLE USE TEST OF SECTION 401(m)(9) OF THE CODE. The permitted correction method for failure to satisfy the ADP test, the ACP test, or the multiple use test is to make qualified nonelective contributions or qualified matching contributions (as defined in 1.401(k)-1(g)(13)) on behalf of the nonhighly compensated employees to the extent necessary to raise the average deferral percentage or average contribution percentage of the nonhighly compensated employees to the percentage needed to pass the test or tests.

.03 FAILURE TO DISTRIBUTE ELECTIVE DEFERRALS IN EXCESS OF THE SECTION 402(g) LIMIT (IN CONTRAVENTION OF SECTION 401(a)(30) OF THE CODE). The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year distributed. In accordance with section 1.402(g)-1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test; a distribution to a nonhighly compensated employee is not included in the ADP test.

.04 EXCLUSION OF AN ELIGIBLE EMPLOYEE FROM PLAN PARTICIPATION. 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. If an employee was denied eligibility under a cash or deferred arrangement, the employer must make a qualified nonelective contribution to the plan on behalf of the employee that is equal to the average deferral percentage for the employee's compensation group (either highly compensated or nonhighly compensated).

SEC. 8. NOTIFICATION LETTER

.01 A plan sponsor that wishes to participate in the SVP must send an "SVP Notification Letter" to the Service, notifying the Service that the plan sponsor is planning to use the SVP. The SVP Notification Letter must contain the same material as required in Section 7 of Rev. Proc. 92-89, and must be as specific as required in section 4.02 of this revenue procedure, but in addition should include the following:

(1) A description of the permitted correction method set forth in Section 7 of the revenue procedure for correcting the defect(s), with a statement that the plan sponsor proposes to implement (or has implemented) the correction(s).

(2) The proposed time period of the correction. In general, the correction must be made within 90 days from the date of the SVP Notification Letter. If a slightly longer time frame is needed, it should be stated in the letter, with the reason that the longer period is necessary. If the correction cannot be completed within 120 days, the SVP is not available.

.02 The submission need not be accompanied by copies of the Form 5500.

.03 The submission must include the voluntary compliance fee described in section 5 of this revenue procedure.

SEC. 9. PROCESSING NOTIFICATION LETTERS

The National Office will review the SVP Notification Letter within 90 days of the date the letter is received and determined to be complete.

(1) If the National Office determines that the letter is acceptable, the Service will issue a VCR Compliance Statement on the plan sponsor's proposed correction.

(2) If the Service determines that the letter is deficient, the Service will contact the plan sponsor and ask for more information. In unusual circumstances, the Service may notify the employer that the SVP is not available and offer to process the case as a request for a VCR compliance statement, with payment of the appropriate voluntary correction fee (offset by the SVP fee already collected).

SEC. 10. EXTENSION OF VCR PROGRAM

Section 1.01 of Revenue Procedure 92-89 provides that the VCR Program will expire on December 31, 1993. In order to evaluate the effect of the modifications to the VCR Program contained in this revenue procedure, the VCR Program (including the SVP) is extended to December 31, 1994.

SEC. 11. EFFECTIVE DATE

This revenue procedure is effective immediately.

SEC. 12. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 92-89 is modified to the extent specifically provided in this revenue procedure.

DRAFTING INFORMATION

The principal author of this revenue procedure is Karen Field of the Employee Plans Technical and Actuarial Division. For more information concerning this revenue procedure, call the Employee Plans Technical and Actuarial Division VCR Telephone Number, (202) 622-8165 (not a toll-free number). Mrs. Field may be reached at (202) 622-6214 (also not a toll-free number).