Revenue Procedure 2008-50 - Employee Plans Compliance Resolution System (RP 2006-27)

b.

6.

What regulatory amendments,
if any, should be considered if
those costs are taken into account,
keeping in mind the interaction
of section 475 with other sections
of the Code and Income Tax Regulations (e.g., section 861 and
Treas. Reg. § 1.882–5)?
In what circumstances is section 475
relevant for other purposes of the
Code and in what circumstances do
the policies of other sections of the
Code and the Regulations that rely
on asset values determined under section 475 (including those determined
pursuant to an election under Treas.
Reg. § 1.475(a)–4(b)) require special
adjustment to the amount determined
under section 475?

7.

Should the definition of “eligible
method” go beyond the accounting
methods that the SEC has accepted?
If so, what is an appropriate (and
administrable) framework for evaluating whether such a method complies
with the basic criteria outlined above?

SECTION 4. INSTRUCTIONS
Comments should be submitted on or
before November 1, 2008, and should
include a reference to Notice 2008–71.
Send submissions to CC:PA:LPD:PR
(Notice 2008–71), Room 5203, Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, D.C.
20044. Submissions may be hand-delivered Monday through Friday between
the hours of 8:00 a.m. and 4:00 p.m.
to CC:PA:LPD:PR (Notice 2008–71),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC 20224, or sent electronically via the following email address:
[email protected].
Please include the notice number 2008–71
in the subject line of any electronic
communication. All materials submitted
will be available for public inspection and
copying.
DRAFTING INFORMATION
The principal author of this notice is
Sheila Ramaswamy of the Office of Associate Chief Counsel (International). For
further information regarding this notice, contact Sheila Ramaswamy at (202)
622–3870 (not a toll-free call).

26 CFR 601.202: Closing agreements.

Rev. Proc. 2008–50

TABLE OF CONTENTS
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 General principles underlying EPCRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Overview.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

468
468
468

SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Future enhancements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

468
469

PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01
.02
.03
.04

Effect of EPCRS on retirement plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compliance Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other taxes and penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

470
470
470
470

SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Effect of examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Favorable Letter requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Established practices and procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Correction by plan amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

471
471
471
471
471

2008–35 I.R.B.

464

September 2, 2008

.06
.07
.08
.09
.10
.11
.12
.13

Availability of correction of Employer Eligibility Failure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of correction of a terminated plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of correction of an Orphan Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of correction of § 457 plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission for a determination letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Egregious failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diversion or misuse of plan assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Abusive tax avoidance transactions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

472
472
472
472
472
472
472
472

PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY
SECTION 5. DEFINITIONS
.01 Definitions for Qualified Plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Definitions for 403(b) Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Definitions for Orphan Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 References to Rev. Proc. 2007–44. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 SEP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 SIMPLE IRA Plan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Under Examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

472
474
475
475
475
475
475

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY
.01 Correction principles; rules of general applicability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Correction principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Correction of an Employer Eligibility Failure.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Correction of a failure to obtain spousal consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Submission of a determination letter application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Special rules relating to Excess Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Rules relating to reporting plan loan failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.08 Correction under statute or regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.09 Matters subject to excise taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.10 Correction for SEPs and SIMPLE IRA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.11 Confidentiality and disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.12 No effect on other law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

476
476
478
478
478
480
481
481
481
482
483
483

PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Multiple failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

483
483
483
483

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Correction period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Correction by plan amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Substantial completion of correction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

484
484
484
484
484

PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Identification of failures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

September 2, 2008

465

485
485

2008–35 I.R.B.

.03
.04
.05
.06
.07
.08
.09
.10
.11
.12

Effect of VCP submission on examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No concurrent examination activity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Determination letter application for plan amendments related to a VCP submission. . . . . . . . . . . . . . . . . . . . . . . .
Determination letter applications not related to a VCP submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Processing of submission.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compliance statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of compliance statement on examination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special rules relating to Anonymous (John Doe) Submissions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special rules relating to Group Submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multiemployer and multiple employer plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

485
485
485
485
485
487
487
487
487
488

SECTION 11. APPLICATION PROCEDURES FOR VCP
.01 General rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Streamlined Application procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Submission requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Required documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Date fee due generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Additional fee due for SEPs, SIMPLE IRA Plans and Group Submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Signed submission.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.08 Power of attorney requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.09 Penalty of perjury statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.10 Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.11 Designation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.12 Acknowledgement letter.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.13 VCP mailing address. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.14 Maintenance of copies of submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.15 Assembling the submission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

488
489
489
490
491
491
491
491
491
491
491
491
491
491
491

SECTION 12. VCP FEES
.01 VCP fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 VCP fee for Qualified Plans and 403(b) Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 VCP fee for nonamender failures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 VCP fee for Group Submission.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 VCP fee for SEPs and SIMPLE IRA Plans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 VCP fee for egregious or intentional failures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Establishing the number of plan participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

492
492
492
493
493
493
493

PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
.01 Audit CAP requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Payment of sanction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Additional requirements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Failure to reach resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Effect of closing agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Other procedural rules.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Factors considered. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Transferred Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Fee for nonamenders discovered during the determination letter application process not related to a VCP
submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008–35 I.R.B.

466

493
493
493
493
493
493

493
494
494
494

September 2, 2008

PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2006–27 modified and superseded.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Section 3 of Rev. Proc. 2007–49 modified and superseded.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

495
495

SECTION 16. EFFECTIVE DATE
SECTION 17. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
APPENDIX A: OPERATIONAL FAILURES AND CORRECTION METHODS
.01 General rule.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-key employees. . . . . . . . . . . . . . .
.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). . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). . . . . . .
.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan
years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 Failure to timely pay the minimum distribution required under § 401(a)(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.08 Failure to satisfy the § 415 limits in a defined contribution plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.09 Abandoned Orphan Plans; orphan contracts and other abandoned plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .

495
495
495
496
496
498
498
498
499

APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES
.01 Purpose.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Assumptions for Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Designated Roth contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 Section references. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

499
499
500
500

SECTION 2. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Exclusion of Otherwise Eligible Employees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.03 Vesting Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.04 § 415 Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.05 Correction of Other Overpayment Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.06 § 401(a)(17) Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.07 Correction by Amendment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

500
501
508
509
511
511
511

SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings Adjustment Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.02 Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

512
513

APPENDIX C: VCP CHECKLIST
APPENDIX D: SAMPLE FORMAT FOR VCP SUBMISSIONS
APPENDIX E: ACKNOWLEDGEMENT LETTER
APPENDIX F: STREAMLINED VCP SUBMISSION
Schedule 1 — Interim and Certain Discretionary Nonamenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 2 — Nonamenders (other than those to which Schedule 1 applies) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

September 2, 2008

467

530
533

2008–35 I.R.B.

Schedule 3 — SEPs and SARSEPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 4 — SIMPLE IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 5 — Plan Loan Failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 6 — Employer Eligibility Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 7 — Failure to Distribute Elective Deferrals in Excess of the § 402(g) limit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 8 — Failure to Pay Required Minimum Distribution Timely under § 401(a)(9) . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule 9 — Correction by Plan Amendment (in accordance with Appendix B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECTION 1. PURPOSE AND
OVERVIEW
.01 Purpose. This revenue procedure
updates the comprehensive system of
correction programs for sponsors of retirement plans that are intended to satisfy the
requirements of § 401(a), 403(a), 403(b),
408(k), or 408(p) of the Internal Revenue
Code (the “Code”), but that have not met
these requirements for a period of time.
This system, the Employee Plans Compliance Resolution System (“EPCRS”),
permits Plan Sponsors to correct these
failures and thereby continue to provide
their employees with retirement benefits
on a tax-favored basis. The components
of EPCRS are the Self-Correction Program (“SCP”), the Voluntary Correction
Program (“VCP”), and the Audit Closing
Agreement Program (“Audit CAP”).
.02 General principles underlying
EPCRS. EPCRS is based on the following
general principles:

•

•
•

•

Sponsors and other administrators of
eligible plans should be encouraged to
establish administrative practices and
procedures that ensure that these plans
are operated properly in accordance
with the applicable requirements of
the Code.
Sponsors and other administrators of
eligible plans should satisfy the applicable plan document requirements of
the Code.
Sponsors and other administrators
should make voluntary and timely correction of any plan failures, whether
involving discrimination in favor of
highly compensated employees, plan
operations, the terms of the plan document, or adoption of a plan by an
ineligible employer. Timely and efficient correction protects participating
employees by providing them with
their expected retirement benefits, including favorable tax treatment.
Voluntary compliance is promoted by
providing for limited fees for voluntary corrections approved by the Ser-

2008–35 I.R.B.

vice, 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,
provided the SEP or SIMPLE IRA
Plan is established and maintained on
a document approved by the Service.
In addition, in the case of a Qualified
Plan that is the subject of a favorable
determination letter from the Service
or in the case of a 403(b) Plan, the Plan
Sponsor generally may correct even
significant Operational Failures without payment of any fee or sanction.
Voluntary correction with Service approval (VCP). A Plan Sponsor, at any
time before audit, may pay a limited
fee and receive the Service’s approval
for correction of a Qualified Plan,
403(b) Plan, SEP, or SIMPLE IRA
Plan. Under VCP, there are special
procedures for anonymous submissions and group submissions.
Correction on audit (Audit CAP). If a
failure (other than a failure corrected
through SCP or VCP) is identified on

468

535
542
548
553
554
556
558

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. 2006–27, 2006–1 C.B. 945 (as modified by Rev. Proc. 2007–49, 2007–30
I.R.B. 141), which was the prior consolidated statement of the correction programs
under EPCRS. The modifications to Rev.
Proc. 2006–27 that are reflected in this
revenue procedure include:

•

•

•

•

Expanding the definition of a plan
loan failure to include violations of
§ 72(p)(2), regardless of whether the
plan contains language relating to
§ 72(p). (sections 4.01 and 6.07)
Clarifying that in particular cases the
Service may decline to make available
one or more correction programs under
EPCRS in the interest of sound tax administration. (section 4.01(5))
Expanding the scope of the SCP by: (i)
liberalizing the requirements for determining whether there was substantial
completion of correction as of the first
date the plan or Plan Sponsor is considered to be Under Examination and (ii)
expanding the failures for which sample correction methods are provided.
(sections 4.05(2) and 9.04, Appendix
A .05, and Appendix B 2.02)
Expanding the correction method with
respect to elective deferrals to include
catch-up contributions under § 414(v)
and plans that provide the opportunity
for an employee to designate all or a
portion of elective deferrals as designated Roth contributions. (Appendix
A .05, and Appendix B 2.02)

September 2, 2008

•

•

•
•

•
•

Expanding the correction method for a
failure to include an eligible employee
in a § 401(k) plan to include a situation
in which elective deferral and after-tax
employee contribution elections are
not implemented by the employer or
are implemented in a manner inconsistent with the plan’s terms. (Appendix
A .05 and Appendix B 2.02)
Revising the requirements for submitting a determination letter application
when correcting certain Qualification
Failures by plan amendment. (sections
6.05, 10.08, and 11.01)
Clarifying the scope of a compliance
statement issued when correcting certain Qualification Failures by plan
amendment. (sections 6.05 and 10.08)
Updating the definition of Excess
Amounts and providing corrections
for Excess Amounts failures, including those resulting from the failure
to satisfy the requirements of § 415.
This update includes correction rules
largely similar to the corrections that
were at § 1.415–6(b)(6)(iii) of the Income Tax Regulations (as it appeared
in the April 1, 2007 edition of 26 CFR
part 1) prior to amendments made by
the recently finalized regulations under § 415, but with the amount placed
in an unallocated account to be reallocated in lieu of employer contributions
other than elective deferrals. (sections
5.01(3) and 6.06, and Appendix A .08)
Updating the definition of Favorable
Letter. (section 5.01(4))
Adding a factor to be considered in
the determination of whether a correction method is reasonable and appropriate. The factor requires consideration of corrections of violations that are
similar to the failure being addressed
by other government agencies. In appropriate cases, for a failure that results from either the employer having
ceased to exist, the employer no longer
maintaining the plan, or similar reasons, the permitted correction would
be 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 section 2578.1 of the
Department of Labor Regulations (relating to abandoned plans). (section
6.02(2)(e)(ii) and Appendix A .09)

September 2, 2008

•

•

•

•

•

•

•
•

Clarifying that the earnings adjustment
for corrective contributions or distributions is calculated from the date when
the qualification failure occurred without regard to any extensions provided
under the Code. (section 6.02(4)(e))
Clarifying that the earnings rate derived from the Department of Labor’s
VFCP Online calculator may be used
to determine the earnings adjustment
applied to corrective contributions,
distributions, allocations, and reallocations if it is not feasible to make a
reasonable estimate of what the actual
investment results would have been.
(section 6.02(5)(a))
Providing that 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. (section 6.02(5)(b))
Providing that if the Plan Sponsor attempts to use the IRS’ Letter Forwarding Program to locate participants and
the Service declines to implement the
letter forwarding request, then the Plan
Sponsor will use alternate means to
locate missing participants. (section
6.02(5)(d))
Clarifying that if a Plan Sponsor either (i) wants a participant’s deemed
distribution to be reported on Form
1099–R for the year of correction (instead of the year of the failure) or (ii)
wants relief from reporting a participant’s loan as a deemed distribution on
Form 1099–R, then it must specifically
request such relief. (sections 6.07(1)
and 6.07(2)(a))
Clarifying the treatment of amounts
improperly distributed to participants
and beneficiaries under the plan which
are rolled over to IRAs, with respect to
the excise tax under § 4973. (sections
6.03(4) and 6.09(5))
Clarifying the circumstances under
which a waiver of the excise tax under § 4974 would be considered under
Audit CAP. (section 6.09(2))
Expanding income and excise taxes
that the Service may exercise discretion to not pursue. (sections 6.09(5)
and 6.09(6))

469

•

Clarifying the scope of a compliance
statement issued with respect to certain
nonamender failures. (sections 6.05
and 10.08)
• Providing for new and expanded
streamlined application procedures for
interim nonamenders and the failure
to implement optional law changes
timely and other nonamenders, certain SEP, SARSEP and SIMPLE IRA
failures, certain plan loan failures, Employer Eligibility Failures, § 402(g)
failures, § 401(a)(9) failures, and failures that involve plan amendment in
accordance with Appendix B 2.07.
(section 11.02, Appendix F)
• Reducing the compliance fee under
certain circumstances for a plan where
the sole failure is the failure of participant loans to comply with the requirements of § 72(p)(2). (section 12.02(3))
• Clarifying that, in the case of a Qualification Failure that is intentional, the
compliance fee under VCP will be determined in accordance with section
12.06. (section 12.06)
• Providing that Audit CAP provisions
apply if the Service 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. (sections 13.01 and
14.01)
• Providing a sample application form
for VCP filings. (revised Appendix D)
.02 Future enhancements. (1) Future
updates. It is expected that the EPCRS
revenue procedure will continue to be
updated from time to time, including,
as noted above, further improvements to
EPCRS based on comments previously
received. Thus, the Service and Treasury continue to invite further comments
on how to improve EPCRS. Comments
should be sent to:
Internal Revenue Service
Attention: SE:T:EP:RA:VC
1111 Constitution Avenue, NW
Washington, D.C. 20224
(2) Section 401(k) automatic enrollment. Comments are requested for certain
specific issues under EPCRS. First, comments are requested regarding methods

2008–35 I.R.B.

to correct the failure to implement automatic enrollment with respect to elective
deferrals in a § 401(k) plan that has an
automatic enrollment provision, including
a § 401(k) plan that is designed to be a
qualified automatic contribution arrangement within the meaning of § 401(k)(13),
but no amounts were withheld from the
compensation of an employee who has
made no election. Second, comments are
requested regarding methods to correct
the failure to timely provide a safe harbor
notice under a plan designed to satisfy the
requirements of § 401(k)(12), 401(k)(13),
or 414(w).
(3) Designated Roth contributions.
Comments are also specifically requested
on special issues relating to designated
Roth contributions. For example, comments are requested on whether, if a plan
failed to implement a participant’s election
to have a designated Roth contribution
made on his or her behalf, but instead a
pre-tax elective deferral was made for the
participant with the participant’s compensation reduced accordingly, would it be
an appropriate correction of the failure
for the employer to ask the participant
whether correction should be made by a
transfer of the contribution (with earnings)
to a Roth account and inclusion of the
amount so transferred in the participant’s
compensation in the year of the transfer
(instead of either (i) a similar transfer with
a corrected W–2 for the year of the failure
and the participant having to complete an
amended return for the year of the failure
or (ii) a similar transfer and inclusion of
the amount so transferred in the participant’s compensation in the year of the
transfer, but with the employer to make a
grossup payment to the participant to make
the participant whole for the resulting income tax). Comments are also requested
regarding cases in which a plan fails to
notify an employee of his or her right to
elect designated Roth contributions, such
as whether the correction for the failure
described in the preceding sentence should
also be applied in this case or whether
some additional corrective contribution
should be required to reflect the possibility
that a participant’s decision to make an
elective deferral might be affected by the

availability of designated Roth contributions. See also section .05(3) of Appendix
A and Example 3 of Appendix B, section
2.02(1)(b), for an illustration of correction
for exclusion of otherwise eligible employees from being able to make elective
deferrals, which applies without regard
to whether the plan only permits pre-tax
elective deferrals or whether the plan also
permits designated Roth elective deferrals.
(4) Section 1101 of the Pension Protection Act of 2006. (a) Section 1101
of the Pension Protection Act of 2006
(PPA ’06), Public Law 109–280 (120
Stat. 780), grants the Secretary of the
Treasury the full authority to establish
and implement EPCRS and, among other
things, instructs the Secretary to continue
to update and improve EPCRS, giving
special attention to the following: (1)
increasing the awareness and knowledge
of small employers concerning the
availability and use of the program; (2)
taking into account special concerns and
circumstances that small employers face
with respect to compliance and correction
of compliance failures; (3) extending
the duration of the self-correction period
under SCP for significant compliance
failures; (4) expanding the availability to
correct insignificant compliance failures
under SCP during audit; and (5) assuring
that any tax, penalty, or sanction that is
imposed by reason of a compliance failure
is not excessive and bears a reasonable
relationship to the nature, extent, and
severity of the failure.
(b) EPCRS has historically been structured to achieve the general principles that
are described in section 1.02 of this revenue procedure. This revenue procedure,
like the many predecessor revenue procedures1 that addressed correction of qualification failures, continues to include modifications that are designed to make the
EPCRS programs more accessible, particularly with respect to small employers. For
example, Appendix F has been substantially expanded to add additional failures
that commonly occur in plans maintained
by small employers, and significantly reduces the burden and cost to an employer
of submitting under the VCP. Various other
changes have been made that will provide

assurance to small employers and other
Plan Sponsors, including expansion of the
standard corrections in Appendices A and
B (such as correction for abandoned plans
and orphan contracts and further expansion of standard correction for qualification failures involving the operational failure to extend elective deferrals to eligible employees). In addition, eligibility
under SCP has been expanded with respect to employers who discover failures
in their plans and have begun the correction process. See section 2.01 for a more
thorough list of changes made in this revenue procedure.
PART II. PROGRAM EFFECT AND
ELIGIBILITY
SECTION 3. EFFECT OF EPCRS;
RELIANCE
.01 Effect of EPCRS on retirement
plans. For a Qualified Plan, a 403(b)
Plan, a SEP, or a SIMPLE IRA Plan, if the
eligibility requirements of section 4 are
satisfied and the Plan Sponsor corrects a
failure in accordance with the applicable
requirements of SCP in section 7, VCP
in sections 10 and 11, or Audit CAP in
section 13, the Service will not treat the
plan as failing to meet § 401(a), § 403(b),
§ 408(k), or § 408(p), as applicable. Thus,
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
Service and the Plan Sponsor or Eligible
Organization as provided in section 10.09.
.03 Other taxes and penalties. See section 6.09 for rules relating to other taxes
and penalties.
.04 Reliance. Taxpayers may rely on
this revenue procedure, including the relief
described in section 3.01.

1 See: Rev. Proc. 92–89, 1992–2 C.B. 498; Rev. Proc. 93–36, 1993–2 C.B. 474; Rev. Proc. 94–16, 1994–1 C.B. 576 ; Rev. Proc. 94–62, 1994–2 C.B. 778; Rev. Proc. 95–24, 1995–1 C.B.
694; Rev. Proc. 96–29, 1996–1 C.B. 693; Rev. Proc. 96–50, 1996–2 C.B. 370; Rev. Proc. 98–22, 1998–1 C.B. 723; Rev. Proc. 99–13, 1999–1 C.B. 409; Rev. Proc. 99–31, 1999–2 C.B.
280; Rev. Proc. 2000–16, 2000–1 C.B. 518; Rev. Proc. 2001–17, 2001–1 C.B. 589; Rev. Proc. 2002–47, 2002–2 C.B. 133; Rev. Proc. 2003–44, 2003–1 C.B. 1051; Rev. Proc. 2006–27,
2006–1 C.B. 945; Rev. Proc. 2007–49, 2007–30 I.R.B. 141.

2008–35 I.R.B.

470

September 2, 2008

SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs. (1) SCP. SCP
is available only for Operational Failures.
Qualified Plans and 403(b) Plans are eligible for SCP with respect to significant and
insignificant Operational Failures. SEPs
and SIMPLE IRA Plans are eligible for
SCP only with respect to insignificant Operational Failures.
(2) VCP. Qualified Plans, 403(b) Plans,
SEPs, and SIMPLE IRA Plans are eligible
for VCP. VCP provides general procedures for correction of all Qualification
Failures: Operational, Plan Document,
Demographic, and Employer Eligibility.
VCP also provides general procedures
for the correction of participant loans that
did not comply with the requirements of
§ 72(p)(2).
(3) Audit CAP. Unless otherwise provided, Audit CAP is available for Qualified Plans, 403(b) Plans, SEPs, and
SIMPLE IRA Plans for correction of all
failures found on examination that have
not been corrected in accordance with
SCP or VCP. Audit CAP also provides
general procedures for the correction of
participant loans that did not comply with
the requirements of § 72(p)(2).
(4) Eligibility for other arrangements.
The Service may extend EPCRS to other
arrangements.
(5) Appropriate use of programs. In a
particular case, the Service may decline
to make available one or more correction
programs under EPCRS in the interest of
sound tax administration.
.02 Effect of examination. If the plan or
Plan Sponsor is Under Examination, VCP
is not available and SCP is only available
as follows: while the plan or Plan Sponsor
is Under Examination, insignificant Operational Failures can be corrected under
SCP; and, if correction of significant operational failures has been completed or substantially completed (as described in section 9.04) before the plan or Plan Sponsor
is Under Examination, correction of those
failures can be completed under SCP.
.03 Favorable Letter requirement. The
provisions of SCP relating to significant
Operational Failures (see section 9) are
available for a Qualified Plan only if the
plan is the subject of a Favorable Letter.
The provisions of SCP relating to insignificant Operational Failures (see section 8)
are available for a SEP but only if the

September 2, 2008

plan document consists of either (i) a valid
Model Form 5305–SEP or 5305A–SEP
adopted by an employer in accordance
with the instructions on the applicable
form (see Rev. Proc. 2002–10, 2002–1
C.B. 401) or (ii) a prototype SEP that has
a current favorable opinion letter which
has been amended in accordance with
the procedures set forth in Rev. Proc.
2002–10. The provisions of SCP relating
to insignificant Operational Failures (see
section 8) are available for a SIMPLE
IRA Plan but only if the plan document
consists of either (i) a valid Model Form
5305–SIMPLE or 5304–SIMPLE adopted
by an employer in accordance with the instructions on the applicable form (see Rev.
Proc. 2002–10) or (ii) a current favorable
opinion letter for a Plan Sponsor that has
adopted a prototype SIMPLE IRA Plan
which has been amended in accordance
with the procedures set forth in Rev. Proc.
2002–10.
.04 Established practices and procedures. In order to be eligible for SCP, the
Plan Sponsor or administrator of a plan
must have established practices and procedures (formal or informal) reasonably
designed to promote and facilitate overall compliance with applicable Code requirements. For example, the plan administrator of a Qualified Plan that may
be top-heavy under § 416 may include in
its plan operating manual a specific annual step to determine whether the plan
is top-heavy and, if so, to ensure that the
minimum contribution requirements of the
top-heavy rules are satisfied. A plan document alone does not constitute evidence of
established procedures. In order for a Plan
Sponsor or administrator to use SCP, these
established procedures must have been in
place and routinely followed, and an Operational Failure must have occurred through
an oversight or mistake in applying them.
In addition, SCP may also be used in situations where the Operational Failure occurred because the procedures that were
in place, while reasonable, were not sufficient to prevent the occurrence of the failure. In the case of a failure that relates to
Transferred Assets or to a plan assumed in
connection with a corporate merger, acquisition, or other similar employer transaction between the Plan Sponsor and sponsor of the transferor plan or the prior Plan
Sponsor of an assumed plan, the plan is
considered to have established practices

471

and procedures for the Transferred Assets
if such practices and procedures are in
effect for the Transferred Assets by the
end of the first plan year that begins after
the corporate merger, acquisition, or other
similar transaction.
.05 Correction by plan amendment. (1)
Availability of correction by plan amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a
Qualified Plan to correct Plan Document,
Demographic, and Operational Failures by
a plan amendment, including correcting an
Operational Failure by plan amendment to
conform the terms of the plan to the plan’s
prior operations, provided that the amendment complies with the requirements of
§ 401(a), including the requirements of
§§ 401(a)(4), 410(b), and 411(d)(6). In addition, a Plan Sponsor may adopt a plan
amendment to reflect the 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. Except as provided in section
6.05, the issuance of a compliance statement does not constitute a determination as
to the effect of any plan amendment on the
qualification of the plan.
(2) Availability of correction by plan
amendment in SCP. A Plan Sponsor may
use SCP for a Qualified Plan to correct an
Operational Failure by a plan amendment
in order to conform the terms of the plan to
the plan’s prior operations only to correct
Operational Failures listed in section 2.07
of Appendix B. These failures must be corrected in accordance with the correction
methods set forth in section 2.07 of Appendix B. Any plan amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4),
410(b), and 411(d)(6). If a Plan Sponsor
corrects an Operational Failure in accordance with the approved correction methods under Appendix A or Appendix B, it
may amend the plan to reflect the 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 makes qualified nonelective contributions not already provided for
under the plan, the plan may be amended
to provide for qualified nonelective contri-

2008–35 I.R.B.

butions. SCP is not otherwise available for
a Plan Sponsor to correct an Operational
Failure by a plan amendment.
.06 Availability of correction of Employer Eligibility Failure. SCP is not available for a Plan Sponsor to correct an Employer Eligibility Failure.
.07 Availability of correction of a terminated plan. Correction of Qualification
Failures in a terminated plan may be made
under VCP and Audit CAP, whether or not
the plan trust is still in existence.
.08 Availability of correction of an Orphan Plan. An Orphan Plan that is terminating may be corrected under VCP and
Audit CAP, provided that the party acting
on behalf of the plan is an Eligible Party,
as defined in section 5.03(2). See section
6.02(2)(e)(ii).
.09 Availability of correction of § 457
plans. Submissions relating to § 457(b) eligible governmental plans will be accepted
by the Service on a provisional basis outside of EPCRS through standards that are
similar to EPCRS.
.10 Submission for a determination letter. In any case in which correction of a
Qualification Failure includes correction
of a Plan Document Failure, Demographic
Failure, or Operational Failure by plan
amendment, a determination letter application may be required. See section 6.05.
.11 Egregious failures. SCP is not
available to correct Operational Failures
that are egregious. 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 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). VCP
is available to correct egregious failures.
However, egregious failures are subject to
the VCP fees described in section 12.06
and, for purposes of section 12.06, 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 Qualifica-

2008–35 I.R.B.

tion Failure and the failure either involves
a substantial number of participants or
beneficiaries or involves participants who
are predominantly highly compensated
employees. Audit CAP also is available to
correct egregious failures.
.12 Diversion or misuse of plan assets.
SCP, VCP, and Audit CAP are not available to correct failures relating to the diversion or misuse of plan assets.
.13 Abusive tax avoidance transactions.
(1) Effect on Programs. (a) SCP. With respect to SCP, in the event that the plan or
the Plan Sponsor has been a party to an
abusive tax avoidance transaction (as defined in section 4.13(2)), SCP is not available to correct any Operational Failure that
is directly or indirectly related to the abusive tax avoidance transaction.
(b) VCP. With respect to VCP, if the
Service determines that a plan or Plan
Sponsor was, or may have been, a party to
an abusive tax avoidance transaction (as
defined in section 4.13(2)), then the matter
will be referred to the Internal Revenue
Service’s Employee Plans’ Tax Shelter
Coordinator. Upon receiving a response
from the Tax Shelter Coordinator, the Service may determine that the plan or the
Plan Sponsor has been a party to an abusive tax avoidance transaction, and that
the failures addressed in the VCP submission are related to that transaction. In
those situations, the Service will conclude
the review of the submission without issuing a compliance statement and will
refer the case for examination. However,
if the Tax Shelter Coordinator determines
that the plan failures are unrelated to the
abusive tax avoidance transaction or that
no abusive tax avoidance transaction occurred, then the Service will continue to
address the failures identified in the VCP
submission, and may issue a compliance
statement with respect to those failures.
In no event may a compliance statement
be relied on for the purpose of concluding
that the plan or Plan Sponsor was not a
party to an abusive tax avoidance transaction. In addition, even if it is concluded
that the failures can be addressed pursuant
to a VCP submission, the Service reserves
the right to make a referral of the abusive
tax avoidance transaction matter for examination.
(c) Audit CAP and SCP (for plans
Under Examination). For plans Under Examination, if the Service determines that

472

the plan or Plan Sponsor was, or may have
been, a party to an abusive tax avoidance
transaction, the matter may be referred to
the Internal Revenue Service’s Employee
Plans’ Tax Shelter Coordinator. With
respect to plans Under Examination, an
abusive tax avoidance transaction includes
a transaction described in section 4.13(2)
and any other transaction that the Service
determines was designed to facilitate the
impermissible avoidance of tax. Upon
receiving a response from the Tax Shelter
Coordinator, (i) if the Service determines
that a failure is related to the abusive
tax avoidance transaction, the Service reserves the right to conclude that neither
Audit CAP nor SCP is available for that
failure and (ii) if the Service determines
that satisfactory corrective actions have
not been taken with regard to the transaction, the Service reserves the right to
conclude that neither Audit CAP nor SCP
is available to the plan.
(2) Abusive tax avoidance transaction
defined. For purposes of section 4.13(1)
(except to the extent otherwise provided in
section 4.13(1)(c)), an abusive tax avoidance transaction means any listed transaction under § 1.6011–4(b)(2) and any other
transaction identified as an abusive transaction in the IRS web site entitled “EP
Abusive Tax Transactions.”
PART III. DEFINITIONS,
CORRECTION PRINCIPLES,
AND RULES OF GENERAL
APPLICABILITY
SECTION 5. DEFINITIONS
The following definitions apply for purposes of this revenue procedure:
.01 Definitions for Qualified Plans. The
definitions in this section 5.01 apply to
Qualified Plans.
(1) Qualified Plan. The term “Qualified
Plan” means a plan intended to satisfy the
requirements of § 401(a) or § 403(a).
(2) Qualification Failure. The term
“Qualification Failure” means any failure
that adversely affects the qualification of a
plan. There are four types of Qualification
Failures: (a) Plan Document Failures; (b)
Operational Failures; (c) Demographic
Failures; and (d) Employer Eligibility
Failures.
(a) Plan Document Failure. The term
“Plan Document Failure” means a plan

September 2, 2008

provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or § 403(a). Thus,
for example, the failure of a plan to be
amended to reflect a new qualification requirement within the plan’s applicable remedial amendment period under § 401(b)
is a Plan Document Failure. In addition,
if a plan has not been timely or properly amended during an applicable remedial amendment period for adopting good
faith or interim amendments with respect
to disqualifying provisions, as described in
§1.401(b)–1(b)(1) of the Income Tax Regulations, the plan has a Plan Document
Failure. For purposes of this revenue procedure, a Plan Document Failure includes
any Qualification Failure that is a violation
of the requirements of § 401(a) or § 403(a)
and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.
(b) Operational Failure. The term “Operational Failure” means a Qualification
Failure (other than an Employer Eligibility
Failure) that arises solely from the failure
to follow plan provisions. A failure to follow the terms of the plan providing for the
satisfaction of the requirements of § 401(k)
and § 401(m) is considered to be an Operational Failure. A plan does not have
an Operational Failure to the extent the
plan is permitted to be amended retroactively to reflect the plan’s operations (e.g.,
pursuant to § 401(b)). In the situation
where a Plan Sponsor timely adopted a
good faith or interim amendment which is
not a disqualifying provision as described
in § 1.401(b)–1(b)(1), and the plan was not
operated in accordance with the terms of
such amendment, the plan is considered to
have an Operational Failure.
(c) Demographic Failure. The term
“Demographic Failure” means a failure
to satisfy the requirements of § 401(a)(4),
401(a)(26), or 410(b) that is not an Operational Failure or an Employer Eligibility
Failure. The correction of a Demographic
Failure generally requires a corrective
amendment to the plan adding more
benefits or increasing existing benefits
(cf. § 1.401(a)(4)–11(g)).
(d) Employer Eligibility Failure. The
term “Employer Eligibility Failure” means
the adoption of a plan intended to include
a qualified cash or deferred arrangement

September 2, 2008

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 § 401(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(a)(17), § 401(m) (but only
with respect to the forfeiture of nonvested
matching contributions that are excess aggregate contributions), § 411(a)(3)(G), or
§ 415. 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

473

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 either under the
terms of the plan or under the Code or
regulations). 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).
(4) Favorable Letter. The term “Favorable Letter” means, in the case of a Qualified Plan, a current favorable determination letter for an individually designed plan
(including a volume submitter plan that is
not identical to an approved volume submitter plan), a current favorable opinion
letter for a Plan Sponsor that has adopted
a master or prototype plan, (standardized
or nonstandardized), or a current favorable advisory letter and certification that
the Plan Sponsor has adopted a plan that is
identical to an approved volume submitter
plan. A plan has a current favorable determination letter, opinion letter, or advisory
letter if (a), (b), (c), or (d) below is satisfied:
(a) The plan has a favorable determination letter, opinion letter, or advisory letter that considers the law changes incorporated in the Plan Sponsor’s most recently
expired remedial amendment cycle determined under the provisions of Rev. Proc.
2007–44.
(b) For plans with respect to whom the
initial remedial amendment cycle under
Rev. Proc. 2007–44 has not expired,
the favorable determination letter, opin-

2008–35 I.R.B.

ion letter, or advisory letter that considers
GUST.2
(c) The plan is initially adopted or effective after December 31, 2001, and the
Plan Sponsor timely submits an application for a determination letter or adopts an
approved master or prototype plan or volume submitter plan within the plan’s remedial amendment period under § 401(b).
(d) The plan is terminated prior to the
expiration of the plan’s applicable remedial amendment cycle, determined under
the provisions of Rev. Proc. 2007–44 and
the plan was amended to reflect the provisions of any legislation that was in effect
when the plan was terminated.
(5) Maximum Payment Amount. The
term “Maximum Payment Amount”
means a monetary amount that is approximately equal to the tax the Service could
collect upon plan disqualification and is
the sum for the open taxable years of the:
(a) tax on the trust (Form 1041) (and
any interest or penalties applicable to the
trust return),
(b) additional income tax resulting from
the loss of employer deductions for plan
contributions (and any interest or penalties
applicable to the Plan Sponsor’s return),
(c) additional income tax resulting from
income inclusion for participants in the
plan (Form 1040), including the tax on
plan distributions that have been rolled
over to other qualified trusts (as defined
in § 402(c)(8)(A)) or eligible retirement
plans (as defined in § 402(c)(8)(B)) and
any interest or penalties applicable to the
participants’ returns, and
(d) any other tax that results from a
Qualification Failure that would apply but
for correction under this revenue procedure.
(6) Plan Sponsor; Employer. The terms
“Plan Sponsor” and “Employer” mean 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.
.02 Definitions for 403(b) Plans. The
definitions in this section 5.02 apply to
403(b) Plans.
(1) 403(b) Plan. The term “403(b)
Plan” means a plan or program intended
to satisfy the requirements of § 403(b).
(2) 403(b) Failure. The term “403(b)
Failure” means any Operational, Demographic, or Employer Eligibility Failure as
defined below.
(a) Operational Failure. The term “Operational Failure” means any of the following:
(i) A failure to satisfy the requirements
of § 403(b)(12)(A)(ii) (relating to the
availability of salary reduction contributions);
(ii) A failure to satisfy the requirements
of § 401(m) (as applied to 403(b) Plans
pursuant to § 403(b)(12)(A)(i));
(iii) A failure to satisfy the requirements
of § 401(a)(17) (as applied to 403(b) Plans
pursuant to § 403(b)(12)(A)(i));
(iv) A failure to satisfy the distribution
restrictions of § 403(b)(7) or § 403(b)(11);
(v) A failure to satisfy the incidental
death benefit rules of § 403(b)(10);
(vi) A failure to pay minimum required
distributions under § 403(b)(10);
(vii) A failure to give employees the
right to elect a direct rollover under
§ 403(b)(10), including the failure to give
meaningful notice of such right;
(viii) A failure of the annuity contract
or custodial agreement to provide participants with a right to elect a direct rollover
under §§ 403(b)(10) and 401(a)(31);
(ix) A failure to satisfy the limit on elective deferrals under § 403(b)(1)(E);
(x) A failure of the annuity contract or
custodial agreement to provide the limit
on elective deferrals under §§ 403(b)(1)(E)
and 401(a)(30);
(xi) A failure involving contributions or
allocations of Excess Amounts; or
(xii) Any other failure to satisfy applicable requirements under § 403(b) that (A)
results in the loss of § 403(b) status for the

plan or the loss of § 403(b) status for one or
more custodial account(s) or annuity contract(s) under the plan and (B) is not a Demographic Failure, an Employer Eligibility Failure, or a failure related to contributions on behalf of individuals who are not
employees of the employer.
(b) Demographic Failure.
The
term “Demographic Failure” means a
failure to satisfy the requirements of
§ 401(a)(4), § 401(a)(26), or § 410(b)
(as applied to 403(b) Plans pursuant to
§ 403(b)(12)(A)(i)).
(c) Employer Eligibility Failure. The
term “Employer Eligibility Failure” means
any of the following:
(i) The adoption of a plan intended to
satisfy the requirements of § 403(b) by a
Plan Sponsor that is not a tax-exempt organization described in § 501(c)(3) or a
public educational organization described
in § 170(b)(1)(A)(ii);
(ii) A failure to satisfy the nontransferability requirement of § 401(g);
(iii) A failure to initially establish or
maintain a custodial account as required by
§ 403(b)(7); or
(iv) A failure to purchase (initially or
subsequently) either an annuity contract
from an insurance company (unless grandfathered under Rev. Rul. 82–102, 1982–1
C.B. 62) or a custodial account from a
regulated investment company utilizing a
bank or an approved non-bank trustee/custodian.
(3) Excess Amount. The term “Excess
Amount” means any amount returned to
ensure that the plan satisfies the requirements of §§ 401(a)(30), 415, or 403(b)(2)
(for plan years prior to January 1, 2002).
In addition, the term “Excess Amount” includes (for all plan years) any distributions required to ensure that the plan complies with the applicable requirements of
§ 403(b).
(4) Maximum Payment Amount. The
term “Maximum Payment Amount”
means a monetary amount that is approximately equal to the tax the Service could
collect as a result of the 403(b) Failure and
is the sum for the open taxable years of
the:
(a) additional income tax resulting from
income inclusion for employees or other
participants (Form 1040), including the

2 GUST is an acronym for the Uruguay Round Agreements Act (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the Small Business Job
Protection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA ’97), the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA ’98), and the Community Renewal
Tax Relief Act of 2000 (CRA).

2008–35 I.R.B.

474

September 2, 2008

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.
(5) Plan Sponsor; Employer. The terms
“Plan Sponsor” and “Employer” mean the
employer that offers a 403(b) Plan to its
employees.
.03 Definitions for Orphan Plans. (1)
Orphan Plan. With respect to VCP and
Audit CAP, the term “Orphan Plan” means
any Qualified 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
which is subject to Title I of the Employee
Retirement Income Security Act of 1974
(“ERISA”) terminated pursuant to section
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 who the Department
of Labor determined has accepted responsibility for terminating the plan and distributing the plan’s assets; or
(c) In the case of a Qualified Plan to
which Title I of 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 References to Rev. Proc. 2007–44.
References in sections 5.01(4), 6.05,
10.05, and 10.08 of this revenue procedure
to Rev. Proc. 2007–44, 2007–28 I.R.B.
54, include any successor revenue procedure (and references to any section thereof
if such references refer to the successor
section in any successor revenue procedure).
.05 SEP. The term “SEP” means a plan
intended to satisfy the requirements of

September 2, 2008

§ 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.
.06 SIMPLE IRA Plan. The term
“SIMPLE IRA Plan” means a plan
intended to satisfy the requirements of
§ 408(p).
.07 Under Examination. (1) The term
“Under Examination” means: (a) a plan
that is under an Employee Plans examination (that is, an examination of a Form
5500 series or other Employee Plans examination); (b) a Plan Sponsor that is under an Exempt Organizations examination
(that is, an examination of a Form 990 series or other Exempt Organizations examination); or (c) a plan that is under investigation by the Criminal Investigation Division of the Internal Revenue Service.
(2) A plan that is under an Employee
Plans examination includes any plan for
which the Plan Sponsor, or a representative, has received verbal or written
notification from Employee Plans of an
impending Employee Plans examination, or of an impending referral for an
Employee Plans examination, and also
includes any plan that has been under an
Employee Plans examination and is now
in Appeals or in litigation for issues raised
in an Employee Plans examination. A plan
is considered to be Under Examination
if it is aggregated for purposes of satisfying the nondiscrimination requirements
of § 401(a)(4), the minimum participation
requirements of § 401(a)(26), the minimum coverage requirements of § 410(b),
or the requirements of § 403(b)(12), with
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

475

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, 5307
or 5310 and the Employee Plans agent
notifies the Plan Sponsor, or a representative, of possible Qualification Failures,
whether or not the Plan Sponsor is officially notified of an “examination.” This
would include a case where, for example,
a Plan Sponsor has applied for a determination letter on plan termination, and an
Employee Plans agent notifies the Plan
Sponsor that there are partial termination
concerns. In addition, if, during the review process, the agent requests additional
information that indicates the existence of
a Qualification Failure(s) not previously
identified by the Plan Sponsor, the plan
is considered to be under an Employee
Plans examination. If, in such a case,
the determination letter request under review is subsequently withdrawn, the plan
is nevertheless considered to be under
an Employee Plans examination for purposes of eligibility under SCP and VCP
with respect to those issues raised by the
agent reviewing the determination letter
application. The fact that a Plan Sponsor voluntarily submits a determination
letter application does not constitute a
voluntary identification of Qualification
Failures to the Service. In order to be
eligible to perfect a determination letter
application into a VCP submission, the
Plan Sponsor (or the authorized representative) must identify each Qualification
Failure, in writing, to the reviewing agent
before the agent recognizes the existence
of the Qualification Failure(s) or addresses
the Qualification Failure(s) in communications with the Plan Sponsor (or the
authorized representative).
(4) A Plan Sponsor that is under an Exempt Organizations examination includes
any Plan Sponsor that has received (or
whose representative has received) verbal
or written notification from Exempt Organizations of an impending Exempt Organizations examination or of an impending referral for an Exempt Organizations examination and also includes any Plan Sponsor
that has been under an Exempt Organiza-

2008–35 I.R.B.

tions 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
6.11 apply for purposes of this revenue
procedure.
.02 Correction principles. Generally, a
failure is not corrected unless full correction is made with respect to all participants
and beneficiaries, and for all taxable years
(whether or not the taxable year is closed).
Even if correction is made for a closed taxable year, the tax liability associated with
that year will not be redetermined because
of the correction. Correction is determined
taking into account the terms of the plan at
the time of the failure. Correction should
be accomplished taking into account the
following principles:
(1) Restoration of benefits. The correction method should restore the plan to the
position it would have been in had the failure not occurred, including restoration of
current and former participants and beneficiaries to the benefits and rights they
would have had if the failure had not occurred.
(2) Reasonable and appropriate correction. The correction should be reasonable
and appropriate for the failure. Depending on the nature of the failure, there may
be more than one reasonable and appropriate correction for the failure. For Qualified Plans, any correction method permitted under Appendix A or Appendix B is
deemed to be a reasonable and appropriate method of correcting the related Qualification Failure. Any correction method
permitted under Appendix A or Appendix
B applicable to a 403(b) Plan, a SEP, or
a SIMPLE IRA Plan is 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 fail-

2008–35 I.R.B.

ure. Whether any other particular correction method is reasonable and appropriate
is determined taking into account the applicable facts and circumstances and the
following principles:
(a) The correction method should, to the
extent possible, resemble one already provided for in the Code, regulations thereunder, or other guidance of general applicability. For example, for Qualified Plans
and 403(b) Plans, the correction method
set forth in § 1.402(g)–1(e)(2) would be the
typical means of correcting a failure under
§ 402(g).
(b) The correction method 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),
§ 401(m)(2), or § 401(m)(9) (relating to
nondiscrimination), solely by distributing
excess amounts to highly compensated
employees would not be the typical means
of correcting such a failure.
(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

476

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)(i) If a correction method is one
which 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 Service may take the correction
method of the other governmental agency
into account for purposes of this revenue
procedure.
(ii) Thus, if the plan is subject to
ERISA, for a failure that results from either 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 section 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 section 2578.1 of the Department of Labor Regulations (relating to
abandoned plans). 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 takes 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 Service
reserves the right to pursue appropriate
remedies under the Internal Revenue Code
against any party who is responsible for
the plan, such as the Plan Sponsor, plan

September 2, 2008

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.
(iii) Similarly, in the case of a violation
of the fiduciary standards imposed by Part
4 of Subtitle B of Title I of ERISA, correction under the Voluntary Fiduciary Correction Program established by the Department of Labor (at 71 FR 20262) for a fiduciary violation for which there is a similar 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 Voluntary Fiduciary Correction
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, where more than one correction
method is available to correct a type of
Operational Failure for a plan year (or
where there are alternative ways to apply a
correction method), the correction method
(or one of the alternative ways to apply
the correction method) should be applied
consistently in correcting all Operational
Failures of that type for that plan year.
Similarly, earnings adjustment methods
generally should be applied consistently
with respect to corrective contributions or
allocations for a particular type of Operational Failure for a plan year. In the case
of a Group Submission, the consistency
requirement applies on a plan by plan basis.
(4) Principles regarding corrective allocations and corrective distributions. The
following principles apply where an appropriate correction method includes the
use of corrective allocations or corrective
distributions:
(a) Corrective allocations under a defined contribution plan should be based
upon the terms of the plan and other applicable information at the time of the failure
(including the compensation that would
have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for earnings (including losses) and
forfeitures that would have been allocated

September 2, 2008

to the participant’s account if the failure
had not occurred. However, a corrective
allocation is not required to be adjusted
for losses. See section 3 of Appendix B
for additional information on calculation
of earnings for corrective allocations.
(b) A corrective allocation to a participant’s account because of a failure to make
a required allocation in a prior limitation
year 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).
(d) In the case of a defined benefit plan,
a corrective distribution for an individual
should be increased to take into account
the delayed payment, consistent with the
plan’s actuarial adjustments.
(e) In the case of a defined contribution
plan, a corrective contribution or distribution should be adjusted for earnings (including losses) 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 because it is unreasonable or not feasible. Even in these situations, the correction method adopted must be one that does
not have significant adverse effects on participants and beneficiaries or the plan, and
that does not discriminate significantly in
favor of highly compensated employees.
The exceptions described below specify
those situations in which full correction is
not required.
(a) Reasonable estimates. If either (i)
it is possible to make a precise calculation but the probable difference between
the approximate and the precise restoration of a participant’s benefits is insignificant and the administrative cost of deter-

477

mining 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 (“VFCP Online Calculator”) is deemed
to be a reasonable interest rate. The VFCP
Online Calculator can be found on the web
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.
(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
Qualified Plans (and, specifically, is not eligible for tax-free rollover).
(d) Locating lost participants. Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due,
but who have not been located after a mailing to the last known address. In general,
such actions include use of the Internal
Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B.
608) or the Social Security Administration
Employer Reporting Service. A plan will
not be considered to have failed to correct
a failure due to the inability to locate an individual if either of these programs is used;
provided that, if the individual is later located, the additional benefits are provided
to the individual at that time. The Internal
Revenue Service Letter Forwarding Program may not be used to locate participants

2008–35 I.R.B.

in order to collect amounts owed to the
plan. On occasion, the Internal Revenue
Service may decline to perform the letter
forwarding request, even if additional benefits are due to participants. In such a situation, it is expected that the Plan Sponsor will take other reasonable actions to locate participants to whom additional benefits 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 earnings, is not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, is not eligible
for tax-free rollover). See section 6.06(1)
for such notice requirements.
(f) Orphan Plans. The Service retains
the discretion to determine under VCP and
Audit CAP whether full correction will be
required in a terminating Orphan Plan.
(6) Correction principle for loan failures. In the case of a loan failure corrected
in accordance with section 6.07(2)(b) or
(c) and section 6.07(3), the participant is
generally responsible for paying the corrective payment. However, with respect
to the failure listed in section 6.07(3), the
employer should pay a portion of the correction payment on behalf of the participant equal to the interest that accumulates
as a result of such failure — generally determined at a rate equal to the greater of the
plan loan interest rate or the rate of return
under the plan.
(7) Correction for exclusion of employees for elective deferrals or after-tax employee contributions. If a Qualified Plan
has an Operational Failure that consists of
excluding an employee that should have
been eligible to make an elective deferral
under a cash or deferred arrangement or an
after-tax employee contribution, the employer should contribute to the plan on behalf of the excluded employee an amount
that makes up for the value of the lost opportunity to the employee to have a portion of his or her compensation contributed
to the plan accumulated with earnings tax
free in the future. This correction principle applies solely to this limited circumstance. It does not, for example, extend

2008–35 I.R.B.

to the correction of a failure to satisfy a
nondiscrimination test, e.g., the ADP test
pursuant to § 401(k)(3) and the ACP test
pursuant to § 401(m)(2). Specific methods and examples to correct this failure are
provided in Appendix A .05 and Appendix
B 2.02. Similarly, the methods and examples provided for correcting this failure do
not extend to other failures. Thus, the correction methods and the examples in Appendix A .05 and Appendix B 2.02 cannot,
for example, be used to correct ADP/ACP
failures.
(8) Reporting. Any corrective distributions from the plan should be properly reported.
.03 Correction of an Employer Eligibility Failure. (1) The permitted correction of
an Employer Eligibility Failure is the cessation of all contributions (including elective deferrals and after-tax employee contributions) beginning no later than the date
the application under VCP is filed. Pursuant to VCP correction, the assets in such
a plan are to remain in the trust, annuity
contract, or custodial account and are to be
distributed no earlier than the occurrence
of one of the applicable distribution events,
e.g., for 403(b) Plans, 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).
(3) A plan that is corrected through
VCP is treated as subject to all of the requirements and provisions of § 401(a) for
a Qualified Plan, § 403(b) for a 403(b)
Plan, § 408(k) for a SEP, and § 408(p)
for a SIMPLE IRA Plan (including Code
provisions relating to rollovers). Therefore, the Plan Sponsor must also correct
all other failures in accordance with this
revenue procedure.
(4) If correction is accomplished under
VCP 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 a qualified trust for the purpose of determining whether the amounts
qualify as an eligible rollover distribution

478

under § 402(c) or an annuity contract that
satisfies the requirements of § 403(b)(1)
for the purpose of determining whether
the amounts qualify as an eligible rollover
amount under § 403(b)(8), including the
determination of excess contributions that
are subject to the § 4973 excise tax.
.04 Correction of a failure to obtain
spousal consent. (1) Normally, the correction method under VCP for a failure to obtain spousal consent for a distribution that
is subject to the spousal consent rules under §§ 401(a)(11) and 417 is similar to the
correction method described in Appendix
A .07. The Plan Sponsor must notify the
affected participant and spouse (to whom
the participant was married at the time of
the distribution), so that the spouse can
provide spousal consent to the distribution
actually made or the participant may repay the distribution and receive a qualified
joint and survivor annuity.
(2)(a) As alternatives to the correction
method in section 6.04(1), correction for
a failure to obtain spousal consent may
be made under either section 6.04(2)(b) or
section 6.04(2)(c).
(b) In the event that spousal consent to
the prior distribution is not obtained (e.g.,
because the spouse chooses not to consent, the spouse does not respond to the
notice, or the spouse cannot be located),
the spouse is entitled to a benefit under the
plan equal to the portion of the qualified
joint and survivor annuity that would have
been payable to the spouse upon the death
of the participant had a qualified joint and
survivor annuity been provided to the participant under the plan at the annuity starting date for the prior distribution. Such
spousal benefit must be provided if a claim
is made by the spouse.
(c) In the event that spousal consent
to the prior distribution is not obtained,
the plan may offer the spouse the choice
between (i) the survivor annuity benefit
described in section 6.04(2)(b) or (ii) a
single-sum payment equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under
§ 417(e)(3)). Any such single-sum payment is treated in the same manner as a distribution under § 402(c)(9) for purposes of
rolling over the payment to an IRA or other
eligible retirement plan.
.05 Submission of a determination letter application. (1) In general. This sec-

September 2, 2008

tion 6.05 sets forth the situations in which a
determination letter application is required
to be submitted as part of the correction
of a Qualification Failure if the correction
includes a plan amendment. If a determination letter is required under this section
6.05, then, unless otherwise specified in
this revenue procedure, the provisions of
Rev. Proc. 2007–44 will apply. Thus,
for example, in the case of an ongoing individually designed plan, a determination
letter application will be reviewed with respect to all items of the Cumulative List
(as defined in Rev. Proc. 2007–44) that
would apply to the remedial amendment
cycle during which the determination letter is filed. Notwithstanding any other part
of this section 6.05, a determination letter is not required if the correction by plan
amendment is achieved through the adoption of an amendment that is designated as
a model amendment by the Service or the
adoption of a prototype or volume submitter plan with an opinion or advisory letter
as provided in Rev. Proc. 2008–6, 2008–1
I.R.B. 192, on which the Plan Sponsor has
reliance.
(2) Determination letter application required. (a) VCP and Audit CAP. (i) A determination letter application is required
for a determination of whether the plan
document, including the corrective amendment, complies with the qualification requirements of § 401(a) if the Plan Sponsor submits the failure under VCP or corrects the failure under Audit CAP during
an on-cycle year or in connection with
a plan termination. An “on-cycle year”
means the last 12 months of the plan’s remedial amendment cycle set forth in Rev.
Proc. 2007–44.
(ii) A determination letter application
is required to correct a nonamender failure under VCP or Audit CAP, whether
or not the plan is submitted under VCP
or corrected under Audit CAP during an
on-cycle year. For this purpose, the term
“nonamender failure” means a failure to
amend the plan to correct 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

September 2, 2008

includes any provision designated by the
Commissioner as a disqualifying provision under §1.401(b)–1(b)(3).
(b) SCP. In the case of any correction
of an Operational Failure through plan
amendment under SCP that is permitted
under section 4.05(2) of this revenue procedure, a Plan Sponsor must submit a determination letter application for the plan,
including the corrective plan amendment,
by the end of the plan’s next on-cycle year,
or if earlier, in connection with the plan’s
termination. The determination letter application should be mailed to the address
provided in the instructions of the applicable Form 5300, 5307 or 5310. As part
of the determination letter submission, the
cover letter must identify the amendment
as a corrective amendment under SCP. In
addition, the Plan Sponsor must include
in the cover letter to the application: (1) a
statement that neither the plan nor the Plan
Sponsor has been a party to an abusive tax
avoidance transaction (as defined in section 4.13(2) of this revenue procedure); or
(2) a brief identification of any abusive tax
avoidance transaction to which the plan or
the Plan Sponsor has been a party.
(3) Determination Letter application
not required. (a) Failure to adopt timely
interim amendments or amendments required to implement optional law changes.
If on any date during an off-cycle year
that is prior to the plan’s on-cycle year,
a Plan Sponsor submits a failure under
VCP or corrects a failure under Audit CAP
to adopt timely interim amendments or
timely amendments to the plan to implement optional law changes, then a determination letter application is not required
and should not be submitted with the VCP
submission or as part of the correction of
the failure under Audit CAP. For purposes
of this revenue procedure, interim amendments are interim amendments within the
meaning of section 5.01 of Rev. Proc.
2007–44. For purposes of this revenue
procedure, an optional law change refers
to a law change implemented at the Plan
Sponsor’s discretion. An example of an
optional law provision is § 414(v) of the
Code, which sets forth the provisions
relating to catch-up contributions. The
issuance of a compliance statement or
closing agreement results in the corrective
amendments being treated as if they had
been adopted timely for the purpose of determining the availability of the extended

479

remedial amendment period described in
Rev. Proc. 2007–44. However, the issuance of such a compliance statement
or closing agreement does not constitute
a determination as to whether the plan
amendment complies with the change in
qualification requirement. Thus, in order
to ensure that the corrective amendment
adopted for this failure complies with the
change in qualification requirement, the
Plan Sponsor should include the corrective
amendment along with the compliance
statement or closing agreement, with its
application for a determination letter during the plan’s on-cycle year or if earlier,
in connection with the plan’s termination.
The provisions of this section 6.05(3)(a)
are applicable only if the VCP application
setting forth the interim or optional law
change failure is submitted, or the Audit
CAP correction is made, prior to the plan’s
first on-cycle year following the date by
which the amendment for the interim or
optional law change should have been
adopted pursuant to section 5.05 of Rev.
Proc. 2007–44.
(b) Operational or Demographic Failures corrected through plan amendment
under VCP and Audit CAP. If, during an
off-cycle year, a Plan Sponsor submits an
Operational or Demographic Failure under
VCP or corrects such a failure under Audit
CAP, then a determination letter application is not required and should not be submitted with the VCP submission or as part
of the correction of the failure under Audit CAP. If the plan amendment is accepted
as a proper correction for either an Operational Failure or a Demographic Failure, the compliance statement under VCP
or closing agreement issued under Audit
CAP constitutes a determination on the effect of the plan amendment on the qualification of the plan; however, the compliance statement issued under VCP is subject to the condition that the amendment
be submitted as part of a separate determination letter submission during the plan’s
next on-cycle year, or if earlier, in connection with the plan’s termination, and that
a favorable determination letter be issued
with respect to the plan. The determination letter application should be mailed to
the address listed in the instructions of the
applicable Form 5300, 5307 or 5310 and
should include a copy of the related compliance statement or closing agreement. A
Plan Sponsor that corrects an Operational

2008–35 I.R.B.

Failure or Demographic Failure through
a plan amendment under Audit CAP during an off-cycle year should also include a
copy of the closing agreement when submitting a determination letter application
during the plan’s next on-cycle year, or if
earlier, in connection with the plan’s termination.
(4) Determination letter applications
optional under EPCRS. A Plan Sponsor
may submit a determination letter application with respect to the correction of
failures through plan amendment prior to
the plan’s on-cycle year if the plan would
be given the same priority as an on-cycle
filing pursuant to sections 14.02 and 14.03
of Rev. Proc. 2007–44, relating to certain
new plans, terminating plans, and off-cycle applications submitted in accordance
with published guidance issued by the Service specifying such submission, and in
the case of urgent business need. Determination letter requests submitted pursuant
to this section 6.05(4) must contain a written justification as to the eligibility of the
plan under section 14.02 or 14.03 of Rev.
Proc. 2007–44 and this section 6.05(4).
In the case of urgent business need, the
Service will consider such requests based
on the facts and circumstances.
(5) Internal Revenue Service discretion. Notwithstanding any other provision
of section 6.05 of this revenue procedure,
the Service reserves the right to require
the submission of a determination letter
application with respect to any amendment proposed or adopted to correct any
Qualification Failure under VCP or Audit
CAP.
.06 Special rules relating to Excess Amounts. (1) Treatment of Excess
Amounts. Except as otherwise provided
in section 6.02(5)(c), a distribution of
an Excess Amount is not eligible for the
favorable tax treatment accorded to distributions from Qualified Plans (such as
eligibility for tax-free rollover). Thus,
for example, if such a distribution was
contributed to an individual retirement
arrangement (IRA), the contribution is not
a valid rollover contribution for purposes
of determining the amount of excess contributions (within the meaning of § 4973)
to the individual’s IRA. A distribution of
an Excess Amount is generally treated
in the manner described in section 3 of
Rev. Proc. 92–93, 1992–2 C.B. 505, relating to the corrective disbursement of

2008–35 I.R.B.

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 Qualified
Plans (and, specifically, is not eligible for
rollover).
(2) Correction of Excess Allocations.
In general, an Excess Allocation, as defined in section 5.01(3)(a) of this revenue
procedure, 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(s). 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, (along
with earnings attributable thereto) 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),
§ 415, the actual deferral percentage test
of § 401(k)(3), and the actual contribution
percentage 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

480

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(s).
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 failures.
An Overpayment from a defined benefit
plan is corrected in accordance with the
rules in section 2.04(1) of Appendix B. An
Overpayment from a defined contribution
plan is corrected in accordance with the
Return of Overpayment method set forth
in this paragraph. Under this method, the
employer takes reasonable steps to have
the Overpayment, plus appropriate interest
from the date of the distribution to the date
of the repayment, returned by the participant or beneficiary to the plan. To the extent the amount returned to a defined contribution plan is less than the Overpayment
adjusted for earnings at the plan’s earnings
rate, then the employer or another person
must contribute the difference to the plan.
The Overpayment, adjusted for earnings at
the plan’s earnings rate to the date of the repayment, is to be placed in an unallocated
account, 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 employ-

September 2, 2008

ees in accordance with the plan’s allocation formula). In addition, the employer
must notify the employee that the Overpayment was not eligible for favorable tax
treatment accorded to distributions from
Qualified Plans (and, specifically, was not
eligible for tax-free rollover).
.07 Rules relating to reporting plan
loan failures. (1) General rule for loans.
Unless correction is made in accordance
with this section 6.07(2) or (3), a deemed
distribution under § 72(p)(1) in connection with a failure relating to a loan to
a participant made from a plan must be
reported on Form 1099–R with respect to
the affected participant and any applicable
income tax withholding amount that was
required to be paid in connection with the
failure (see § 1.72(p)–1, Q&A–15) must
be paid by the employer. As part of VCP,
the deemed distribution may be reported
on Form 1099–R with respect to the affected participant for the year of correction
(instead of the year of the failure. The
relief of reporting the participant’s loan as
a deemed distribution on Form 1099–R
in the year of correction, as described in
the preceding sentence, applies only if the
Plan Sponsor specifically requests such
relief.
(2) Special rules for loans. (a) In general. The correction methods set forth
in section 6.07(2)(b) and (c) and section
6.07(3) are available for plan loans that do
not comply with one or more requirements
of § 72(p)(2) and are corrected through
VCP. The correction methods described
in section 6.07(2)(b) and (c) and section
6.07(3) are not available if the maximum
period for repayment of the loan pursuant
to § 72(p)(2)(B) has expired. The Service
reserves the right to limit the use of the correction methods listed in section 6.07(2)(b)
and (c) and section 6.07(3) to situations
that it considers appropriate; for example,
where the loan failure is caused by employer action. A deemed distribution corrected under section 6.07(2)(b) or (c) or
under section 6.07(3) is not required to be
reported on Form 1099–R and repayments
made by correction under sections 6.07(2)
and 6.07(3) do not result in the affected
participant having additional basis in the
plan for purposes of determining the tax
treatment of subsequent distributions from
the plan to the affected participant. The
relief from reporting the participant’s loan
as a deemed distribution on Form 1099–R,

September 2, 2008

as described in the preceding sentence, applies only if the Plan Sponsor specifically
requests such relief and provides an explanation supporting the request.
(b) Loans in excess of § 72(p)(2)(A).
A failure to comply with plan provisions requiring that loans comply with
§ 72(p)(2)(A) may be corrected by a corrective repayment to the plan based on the
excess of the loan amount over the maximum loan amount under § 72(p)(2)(A).
In the event that loan repayments were
made in accordance with the amortization
schedule for the loan before correction,
such prior repayments may be applied (i)
solely to reduce the portion of the loan that
did not exceed the maximum loan amount
under § 72(p)(2)(A) (so that the corrective repayment would equal the original
loan excess plus interest thereon), (ii) to
reduce the loan excess to the extent of the
interest thereon, with the remainder of the
repayments applied to reduce the portion
of the loan that did not exceed the maximum loan amount under § 72(p)(2)(A) (so
that the corrective repayment would equal
the original loan excess), or (iii) pro rata
against the loan excess and the maximum
loan amount under § 72(p)(2)(A) (so that
the corrective repayment would equal the
outstanding balance remaining on the original loan excess on the date that corrective
repayment is made). After the corrective payment is made, the loan may be
reformed to amortize the remaining principal balance as of the date of repayment
over the remaining period of the original
loan. This is permissible as long as the
recalculated payments over the remaining
period would not cause the loan to violate
the maximum duration permitted under
§ 72(p)(2)(B). The maximum duration is
determined from the date the original loan
was made. In addition, the amortization
payments determined for the remaining
period must comply with the level amortization requirements of § 72(p)(2)(C).
(c) Loan terms that do not satisfy
§ 72(p)(2)(B) or (C). For a failure of
loan repayment terms to provide for a
repayment schedule that complies with
§ 72(p)(2)(B) or (C), the failure may be
corrected by a reamortization of the loan
balance in accordance with § 72(p)(2)(C)
over the remaining period that is the
maximum period that complies with
§ 72(p)(2)(B) measured from the original
date of the loan.

481

(d) No requirement for plan provisions.
This section 6.07 also applies even if the
plan does not require loans to satisfy the
requirements of § 72(p)(2). However, to
correct the ERISA fiduciary violations
associated with the failures described in
section 6.07(2)(b), (c) and section 6.07(3)
under the Department of Labor’s Voluntary Fiduciary Correction Program, the
plan must contain plan provisions requiring that loans comply with § 72(p)(2)(A),
(B) and (C).
(3) Defaulted loans. A failure to repay the loan in accordance with the loan
terms where the terms satisfy § 72(p)(2)
may be corrected by (i) a lump sum repayment equal to the additional repayments
that the affected participant would have
made to the plan if there had been no failure to repay the plan, plus interest accrued
on the missed repayments, (ii) reamortizing the outstanding balance of the loan, including accrued interest, over the remaining payment schedule of the original term
of the loan or the period remaining had the
loan been amortized over the maximum
period that complies with § 72(p)(2)(B),
measured from the original date of the
loan, or (iii) any combination of (i) or (ii).
.08 Correction under statute or regulations. Generally, none of the correction
programs are available to correct failures
that can be corrected under the Code and
related regulations. For example, as a general rule, a Plan Document Failure that is
a disqualifying provision for which the remedial amendment period under § 401(b)
has not expired can be corrected under provisions of the Code through retroactive remedial amendment.
.09 Matters subject to excise taxes or
other penalties. (1) Except as provided
in this revenue procedure, the correction
programs are not available for events for
which the Code provides tax consequences
other than plan disqualification (such as
the imposition of an excise tax or additional income tax). For example, funding
deficiencies (failures to make the required
contributions to a plan subject to § 412),
prohibited transactions, and failures to file
the Form 5500 series cannot be corrected
under this revenue procedure.
(2) 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 Service will waive the excise

2008–35 I.R.B.

tax under § 4974 applicable to plan participants. The waiver will be included in
the compliance statement or in the closing
agreement in the case of 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. See section 12.02(2) relating to
the applicable compliance fee for certain
§ 401(a)(9) failures. 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 Service 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) As part of VCP, if the failure involves a correction that requires the Plan
Sponsor to make a plan contribution that
is not deductible, in appropriate cases, the
Service will not pursue the excise tax under § 4972 on such nondeductible contributions. The Plan Sponsor, as part of the
submission must request the relief and provide an explanation supporting the request.
(4) As part of VCP, if a failure results in excess contributions as defined in
§ 4979(c) or excess aggregate contributions as defined in § 4979(d) under a plan,
the Service will not pursue the excise tax
under § 4979 in appropriate cases, e.g.,
where correction is made for any case in
which the ADP test was timely performed
but, due to reliance on inaccurate data, resulted in an insufficient amount of excess
elective 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) Subject to section 6.03(4), as part of
VCP, in appropriate cases, the Service will
not pursue the excise tax under § 4973 relating to excess contributions made to IRA
(including either an individual retirement
account (as defined in § 408(a)) or an individual retirement annuity (as defined in
§ 408(b)) under any of the following circumstances:

2008–35 I.R.B.

(a) As part of the proposed correction
for Overpayments, the participant or beneficiary (“recipient”) removes the Overpayment (plus earnings) from the recipient’s
IRA and returns that amount to the plan;
(b) As part of the proposed correction
for Excess Amounts, the recipient removes
the Excess Amount (plus earnings) from
the recipient’s 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 (plus earnings) is removed from
the recipient’s IRA. The amount removed
will generally be 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; or
(c) In the case of an Overpayment that
was not made pursuant to a distributable
event, the Plan Sponsor, as part of the
submission, must request relief from the
§ 4973 excise tax and provide an explanation supporting the request.
(6) As part of VCP, in appropriate
cases, the Service 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 for Overpayments that were not made pursuant
to a distributable event, the participant
or beneficiary (“recipient”) removes the
amount improperly distributed and rolled
over (plus earnings) from the recipient’s
IRA and returns that amount to the plan.
In appropriate cases, as a condition for
not pursuing all or a portion of the additional tax, the Service may require
the Plan Sponsor to pay an additional
fee under VCP 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 SEPs and SIMPLE
IRA Plans. (1) Correction for SEPs and
SIMPLE IRA Plans generally. Generally,
the correction for a SEP or a SIMPLE
IRA Plan is expected to be similar to the
correction required for a Qualified Plan
with a similar Qualification Failure (i.e.,
Plan Document Failure, Operational Failure, Demographic Failure and Employer
Eligibility Failure).
(2) Special correction for SEPs and
SIMPLE IRA Plans. In any case in which
correction under section 6.10(1) is not fea-

482

sible for a SEP or SIMPLE IRA Plan or in
any other case determined by the Service
in its discretion (including failures relating
to §§ 402(g), 415, and 401(a)(17), failures
relating to deferral percentages, discontinuance of contributions to a SARSEP
or SIMPLE IRA Plan, and retention of
Excess Amounts for cases in which there
has been no violation of a statutory limitation with respect to a SEP or SIMPLE
IRA Plan), the Service may provide for a
different correction. See section 12.05(2)
for a special fee that may apply in such a
case.
(3) Correction of failure to satisfy deferral percentage test. If the failure involves
a violation of the deferral percentage test
under § 408(k)(6)(A)(iii) applicable to a
SARSEP, the failure may be corrected in
either one of the following ways:
(a) The Plan Sponsor may make contributions that are 100% vested to all eligible nonhighly compensated employees (to
the extent permitted by § 415) necessary
to raise the deferral percentage needed to
pass the test. This amount may be calculated as the same percentage of compensation (regardless of the terms of the SEP).
(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 invest-

September 2, 2008

ment results would have been, a reasonable
interest rate may be used.
(5) Treatment of Excess Amounts under
a SEP or a SIMPLE IRA Plan. (a) Distribution of Excess Amounts. For purposes
of section 6.10, an Excess Amount is an
amount contributed on behalf of an employee that is in excess of an employee’s
benefit under the plan, or an elective deferral in excess of the limitations of §§ 402(g)
or 408(k)(6)(A)(iii). If an Excess Amount
is attributable to elective deferrals, the
Plan Sponsor may effect distribution of
the Excess Amount, adjusted for earnings
through the date of correction, to the affected participant. The amount distributed
to the affected participant is includible
in gross income in the year of distribution. The distribution is reported on Form
1099–R for the year of distribution with
respect to each participant receiving the
distribution. In addition, the Plan Sponsor must inform affected participants that
the distribution of an Excess Amount is
not eligible for favorable tax treatment
accorded to distributions from a SEP or
a SIMPLE IRA Plan (and, specifically, is
not eligible for tax-free rollover). If the
Excess Amount is attributable to employer
contributions, the Plan Sponsor may effect distribution of the employer Excess
Amount, adjusted for earnings through the
date of correction, to the Plan Sponsor.
The amount distributed to the Plan Sponsor is not includible in the gross income of
the affected participant. The Plan Sponsor
is not entitled to a deduction for such employer Excess Amount. The distribution
is reported on Form 1099–R issued to the
participant indicating the taxable amount
as zero.
(b) Retention of Excess Amounts. If an
Excess Amount is retained in the SEP or
SIMPLE IRA Plan under section 6.10(5), a
special fee, in addition to the VCP submission fee, will apply. See section 12.05(2)
for the special fee. The Plan Sponsor is
not entitled to a deduction for an Excess
Amount retained in the SEP or SIMPLE
IRA Plan. In the case of an Excess Amount
retained in a SEP that is attributable to a
§ 415 failure, the Excess Amount, adjusted
for earnings through the date of correction,
must reduce affected participants’ applicable § 415 limit for the year following the
year of correction (or for the year of correction if the Plan Sponsor so chooses),

September 2, 2008

and subsequent years, until the excess is
eliminated.
(c) De minimis Excess Amounts. If the
total Excess Amount in a SEP or SIMPLE
IRA Plan, whether attributable to elective deferrals or employer contributions,
is $100 or less, the Plan Sponsor is not
required to distribute the Excess Amount
and the special fee described in section
12.05(2) does not apply.
.11 Confidentiality and disclosure. Because each correction program relates directly to the enforcement of the Code qualification requirements, the information received or generated by the Service under
the program is subject to the confidentiality requirements of § 6103 and is not a
written determination within the meaning
of § 6110.
.12 No effect on other law. Correction
under these programs has no effect on the
rights of any party under any other law, including Title I of ERISA. The Department
of Labor maintains a Voluntary Fiduciary
Correction Program under which certain
ERISA fiduciary violations may be corrected. The Department of Labor also
maintains a Delinquent Filer Voluntary
Compliance Program under which certain
failures to comply with the annual reporting requirements (Form 5500 series) under
ERISA may be corrected.
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
The requirements of this section 7 are
satisfied with respect to an Operational
Failure if the Plan Sponsor of a Qualified
Plan, a 403(b) Plan, a SEP, or a SIMPLE
IRA Plan satisfies the requirements of section 8 (relating to insignificant Operational
Failures) or, in the case of a Qualified Plan
or a 403(b) Plan, section 9 (relating to significant Operational Failures).
SECTION 8. SELF-CORRECTION
OF INSIGNIFICANT OPERATIONAL
FAILURES
.01 Requirements. The requirements of
this section 8 are satisfied with respect to
an Operational Failure if the Operational
Failure is corrected and, given all the facts
and circumstances, the Operational Failure
is insignificant. This section 8 is available
for correcting an insignificant Operational

483

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 or not an Operational Failure under a plan is insignificant include, but are not limited to: (1)
whether other failures occurred during the
period being examined (for this purpose, a
failure is not considered to have occurred
more than once merely because more than
one participant is affected by the failure);
(2) the percentage of plan assets and contributions involved in the failure; (3) the
number of years the failure occurred; (4)
the number of participants affected relative to the total number of participants in
the plan; (5) the number of participants affected as a result of the failure relative to
the number of participants who could have
been affected by the failure; (6) whether
correction was made within a reasonable
time after discovery of the failure; and (7)
the reason for the failure (for example, data
errors such as errors in the transcription
of data, the transposition of numbers, or
minor arithmetic errors). No single factor
is determinative. Additionally, factors (2),
(4), and (5) should not be interpreted to exclude small businesses.
.03 Multiple failures. In the case of a
plan with more than one Operational Failure in a single year, or Operational Failures
that occur in more than one year, the Operational Failures are eligible for correction
under this section 8 only if all of the Operational Failures are insignificant in the
aggregate. Operational Failures that have
been corrected under SCP in section 9 and
VCP in sections 10 and 11 are not taken
into account for purposes of determining
if Operational Failures are insignificant in
the aggregate.
.04 Examples. The following examples
illustrate the application of this section 8.
It is assumed, in each example, that the eligibility requirements of section 4 relating
to SCP (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).

2008–35 I.R.B.

However, when the Service 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 did not cause the failures to be significant;
accordingly, the failures are still eligible for correction under this section 8.
Example 3: The facts are the same as in Example 1, except that the annual additions of 18 of the 50
employees whose benefits were limited by § 415(c)
nevertheless exceeded the maximum limitations under § 415(c) during the 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 Service discovered that the employee responsible for entering data
into the employer’s computer made minor arithmetic
errors in transcribing the compensation data with
respect to 6 of the plan’s 40 participants, resulting in
excess allocations to those 6 participants’ accounts.
Under these facts, the number of participants affected
by the failure relative to the number of participants
that could have been affected is insignificant, and
the failure is due to minor data errors. Thus, the
failure occurring in 2005 would be insignificant and
therefore eligible for correction under this section 8.
Example 5: Public School maintains for its 200
employees a salary reduction 403(b) Plan (the “Plan”)
that satisfies the requirements of § 403(b). The business manager has primary responsibility for administering the Plan, in addition to other administrative
functions within Public School. During the 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

2008–35 I.R.B.

was in excess of the § 402(g) limit. Under these
facts, even though multiple failures occurred in a single plan year, the failures will be eligible for correction under this section 8 because in the aggregate the
failures are insignificant.

SECTION 9. SELF-CORRECTION
OF SIGNIFICANT OPERATIONAL
FAILURES
.01 Requirements. The requirements of
this section 9 are satisfied with respect to
an Operational Failure (even if significant)
if the Operational Failure is corrected and
the correction is either completed or substantially completed (in accordance with
section 9.04) by the last day of the correction period described in section 9.02.
.02 Correction period. (1) End of correction period. The last day of the correction period for an Operational Failure
is the last day of the second plan year following the plan year for which the failure
occurred. However, in the case of a failure
to satisfy the requirements of §§ 401(k)(3),
401(m)(2), or 401(m)(9), the correction
period does not end until the last day of
the second plan year following the plan
year that includes the last day of the additional period for correction permitted under §§ 401(k)(8) or 401(m)(6). If a 403(b)
Plan does not have a 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 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 that
occurs for any plan year ends, in any event,
on the first date the plan or Plan Sponsor
is Under Examination for that plan year
(determined without regard to the second
sentence of section 9.02). (But see section
9.04 for special rules permitting completion of correction after the end of the correction period.)
.03 Correction by plan amendment.
In order to complete correction by plan

484

amendment (as permitted under section
4.05), the appropriate determination letter application must be submitted before
the end of the plan’s applicable remedial
amendment period described in Rev. Proc.
2007–44.
.04 Substantial completion of correction. Correction of an Operational Failure
is substantially completed by the last day
of the correction period only if the requirements of either paragraph (1) or (2) are satisfied.
(1) The requirements of this paragraph
(1) are satisfied if:
(a) during the correction period, the
Plan Sponsor is reasonably prompt in
identifying the Operational Failure, formulating a correction method, and initiating
correction in a manner that demonstrates
a commitment to completing correction of
the Operational Failure as expeditiously
as practicable, and
(b) within 120 days after the last day
of the correction period, the Plan Sponsor
completes correction of the Operational
Failure.
(2) The requirements of this paragraph
(2) are satisfied if:
(a) during the correction period, 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.
.05 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

September 2, 2008

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 .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 whollyowned 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
is tax qualified. Employers A and C also agreed that
such transfer would be in accordance with § 414(l)
and § 1.414(l)–1 and addressed issues related to costs
associated with the transfer. Following the transaction, the employees of Employer B began participation in Plan A. Effective July 1, 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 contribution should have been made to the date of
correction and Employer A otherwise complied with
the requirements of SCP. Under these facts, Employer
A has, within the correction period, corrected the Operational Failures for the 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 SERVICE
APPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements. The requirements of this section 10 are satisfied with
respect to failures submitted in accordance
with the requirements of this section 10
if the Plan Sponsor pays the compliance
fee required under section 12 and implements the corrective actions and satisfies

September 2, 2008

any other conditions in the compliance
statement described in section 10.08.
.02 Identification of failures. VCP is
not based upon an examination of the plan
by the Service. Only the failures raised by
the Plan Sponsor or failures identified by
the Service in processing the application
are addressed under VCP, and only those
failures are covered by a VCP compliance
statement. The Service will not make any
investigation or finding under VCP concerning whether there are failures.
.03 Effect of VCP submission on examination. Because VCP does not arise out
of an examination, consideration under
VCP does not preclude or impede (under
§ 7605(b) or any administrative provisions
adopted by the Service) a subsequent examination of the Plan Sponsor or the plan
by the Service with respect to the taxable
year (or years) involved with respect to
matters that are outside the compliance
statement. However, a Plan Sponsor’s
statements describing failures are made
only for purposes of VCP and will not be
regarded by the Service as an admission
of a failure for purposes of any subsequent
examination. See section 5.07 for the definition of Under Examination.
.04 No concurrent examination activity.
Except in unusual circumstances, a plan
that has been properly submitted under
VCP will not be examined while the submission is pending. Notwithstanding the
above, a plan that is eligible for a Group
Submission under section 10.11 may be
examined while the Group Submission is
pending with respect to issues not identified in the Group Submission at the time
such plan comes Under Examination. In
addition, if it is determined that either
the plan or the Plan Sponsor was, or may
have been a party to an abusive tax avoidance transaction (as defined under section
4.13(2)), the Service may authorize the
examination of the plan, even if a submission pursuant to VCP is pending. This
practice regarding concurrent examinations does not extend to other plans of the
Plan Sponsor. Thus, any plan of the Plan
Sponsor that is not pending under VCP
could be subject to examination.
.05 Determination letter application for
plan amendments related to a VCP submission. In any case in which a determination letter may be submitted pursuant to
section 6.05, the Plan Sponsor must submit a copy of the amendment, the appropri-

485

ate determination letter application form
(i.e., Form 5300, 5307 or 5310) , and the
appropriate user fee concurrently and to
the same address as the VCP submission.
Pursuant to section 12.03 of Rev. Proc.
2007–44, in the case of individually designed plans, a restated plan generally will
be required. The user fee for the determination letter application and the fee for
the VCP submission must be submitted on
separate checks made payable to the U.S.
Treasury. See section 11.13 for the VCP
mailing address.
.06 Determination letter applications
not related to a VCP submission. (1)
The Service may process a determination letter application submitted under the
determination letter program (including
an application requested on Form 5310)
concurrently with a VCP submission for
the same plan. However, issuance of the
determination letter in response to an application made on a Form 5310 will be
suspended pending the closure of the VCP
submission.
(2) A submission of a plan under the determination letter program does not constitute a submission under VCP. If the Plan
Sponsor discovers a Qualification Failure,
the Qualification Failure may not be corrected as part of the determination letter
process. The Plan Sponsor may use SCP
and VCP instead, as applicable. If the Service in connection with a determination
letter application discovers a Qualification
Failure, the Service may issue a closing
agreement with respect to the failures identified or, if appropriate, refer the case to
Employee Plans Examinations. In either
case, the fee structure in section 12 relating to VCP, will not apply. Except as provided in section 10.06(3), the sanction in
section 14.01 relating to Audit CAP will
apply. See section 5.07(3) for a description of when a plan submitted for a determination letter is considered to be Under
Examination.
(3) If the Service in connection with a
determination letter application discovers
the plan has not been amended timely for
tax legislation changes, the fee structure in
section 14.04 will apply.
.07 Processing of submission.
(1)
Screening of submission. Upon receipt
of a submission under VCP, the Service
will review whether the eligibility requirements of section 4 and the submission
requirements of section 11 are satisfied.

2008–35 I.R.B.

(2) Eligibility of submission. If, at any
stage of the review process, the Service
determines that a VCP submission is seriously deficient or that the application of
VCP would be inappropriate or impracticable, the Service reserves the right to return the submission without contacting the
Plan Sponsor. If no substantive processing
of the case has occurred, the Service will
refund the compliance fee submitted with
the request.
(3) Review of submission. Once the
Service determines that the submission is
complete under VCP, the Service will contact the Plan Sponsor or the Plan Sponsor’s
representative to discuss the proposed corrections and the plan’s administrative procedures.
(4) Additional information required. If
additional information is required, a Service representative will generally contact
the Plan Sponsor or the Plan Sponsor’s
representative and explain what is needed
to complete the submission. The Plan
Sponsor will have 21 calendar days from
the date of this contact to provide the requested information. If the information is
not received within 21 days, the matter will
be closed, the compliance fee will not be
returned, and the case may be referred to
Employee Plans Examinations. Any request for an extension of the 21-day time
period must be made in writing within the
21-day time period and must be approved
by the Service (by the applicable group
manager).
(5) Additional failures discovered after
initial submission. (a) A Plan Sponsor that
discovers additional unrelated Qualification or 403(b) Failures after its initial submission may request that such failures be
added to its submission. However, the Service retains the discretion to reject the inclusion of such failures if the request is
not timely (for example, if the Plan Sponsor makes its request when processing of
the submission is substantially complete)
or the application of VCP would be inappropriate or impracticable.
(b) If the Service discovers an unrelated
Qualification or 403(b) Failure while the
request is pending, the failure generally
will be added to the failures under consideration. However, the Service retains
the discretion to determine that a failure is
outside the scope of the voluntary request
for consideration because the Plan Sponsor did not voluntarily bring it forward. In

2008–35 I.R.B.

this case, if the additional failure is significant, all aspects of the plan may be examined and the rules pertaining to Audit CAP
will apply.
(6) Conference right. If the Service initially determines that it cannot issue a compliance statement because the parties cannot agree upon correction or a change in
administrative procedures, the Plan Sponsor (generally through the Plan Sponsor’s
representative) will be contacted by the
Service representative and offered a conference with the Service. The conference
can be held either in person or by telephone
and must be held within 21 calendar days
of the date of contact. The Plan Sponsor
will have 21 calendar days after the date of
the conference to submit additional information in support of the submission. Any
request for an extension of the 21-day time
period must be made in writing within the
21-day time period and must be approved
by the Service (by the applicable group
manager). Additional conferences may be
held at the discretion of the Service.
(7) Failure to reach resolution. If the
Service and the Plan Sponsor cannot reach
agreement with respect to the submission,
the matter will be closed, the compliance
fee will not be returned, and the case may
be referred to Employee Plans Examinations. In the case of an Anonymous Submission that fails to reach resolution under
this revenue procedure, the Service will refund 50% of the applicable VCP fee. See
section 12 for the VCP fee.
(8) Issuance of compliance statement.
If agreement is reached, the Service will
send to the Plan Sponsor a compliance
statement specifying the corrective action
required. If the original submission is
subsequently materially modified, then,
unless the Plan Sponsor has submitted a
penalty of perjury statement with respect
to such subsequent modifications, the
Plan Sponsor will be required to sign the
compliance statement. In such case, the
Service will send to the Plan Sponsor an
unsigned compliance statement specifying
the corrective action required. Within 30
calendar days of the date the compliance
statement is sent, a Plan Sponsor must sign
the compliance statement and return it and
any compliance fee required to be paid at
the time that the compliance statement is
signed (see section 11.05). The Service
will then issue a signed copy of the compliance statement to the Plan Sponsor. If the

486

Plan Sponsor does not sign the compliance
statement and send it to the Service (with
a compliance fee, if applicable) within 30
calendar days, the plan may be referred to
Employee Plans Examinations.
(9) Timing of correction. The Plan
Sponsor must implement the specific corrections and administrative changes set
forth in the compliance statement within
150 days of the date of the compliance
statement. Any request for an extension
of this time period must be made prior
to the expiration of the correction period
in writing and must be approved by the
Service. Correction of the failure to adopt
timely interim amendments or amendments relating to the implementation of
optional law changes, as described in section 6.05(3)(a), must be made by the date
of the submission. That is, the application
should include the executed amendments
that would correct this failure.
(10) Modification of compliance statement. Once the compliance statement has
been issued (based on the information provided), the Plan Sponsor cannot request a
modification of the compliance terms except by a new request for a compliance
statement. However, if the requested modification is minor and is postmarked within
the correction period provided for in the
compliance statement, the compliance fee
will be equal to the lesser of one-half of
the original compliance fee or $1,500. The
request should be sent to the VCP mailing address provided for in section 11.13.
The request should include a letter explaining the modification, a copy of the original
compliance statement, a copy of the original application and if applicable any other
pertinent correspondence relating to the issuance of the original compliance statement, and a check for the compliance fee
payable to the U.S. Treasury.
(11) Verification. Once the compliance
statement has been issued, the Service
may require verification that the correction methods have been complied with and
that any plan administrative procedures
required by the compliance statement have
been implemented. This verification does
not constitute an examination of the books
and records of the employer or the plan
(within the meaning of § 7605(b)). If the
Service determines that the Plan Sponsor
did not implement the corrections and procedures within the stated time period, the

September 2, 2008

plan may be referred to Employee Plans
Examinations.
.08 Compliance statement. (1) General
description of compliance statement. The
compliance statement issued for a VCP
submission addresses the failures identified, the terms of correction, including
any revision of administrative procedures,
and the time period within which proposed corrections must be implemented,
including any changes in administrative
procedures. The compliance statement
also provides that the Service will not treat
the plan as failing to satisfy the applicable requirements of the Code on account
of the failures described in the compliance statement if the conditions of the
compliance statement are satisfied. With
respect to a failure to amend a plan timely
for interim amendments, or optional law
changes, as described in section 6.05(3)
of this revenue procedure, 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 extended remedial amendment
period currently described in Rev. Proc.
2007–44. However, the issuance of such a
compliance statement does not constitute
a determination as to whether the interim
amendment or other corrective amendment to reflect the implementation of
optional law changes, as drafted, complies
with the change in qualification requirement. The compliance statement will not
make any determination on whether the
corrective amendment conforms the terms
of the plan to the plan’s prior operations,
and whether the amendment complies
with the requirements of § 401(a), including the requirements of §§ 401(a)(4),
410(b), and 411(d)(6). Where current procedures are inadequate for operating the
plan in conformance with the applicable
requirements of the Code, the compliance
statement will be conditioned upon the
implementation of stated administrative
procedures. The Service may prescribe
appropriate administrative procedures in
the compliance statement.
(2) Compliance statement conditioned
upon timely correction. The compliance
statement is conditioned on (i) there being
no misstatement or omission of material
facts in connection with the submission
and (ii) the implementation of the specific

September 2, 2008

corrections and satisfaction of any other
conditions in the compliance statement.
(3) 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 Service.
.09 Effect of compliance statement on
examination. The compliance statement is
binding upon both the Service and the Plan
Sponsor or Eligible Organization (as defined in section 10.11(2)) with respect to
the specific tax matters identified therein
for the periods specified, but does not preclude or impede an examination of the plan
by the Service relating to matters outside
the compliance statement, even with respect to the same taxable year or years to
which the compliance statement relates.
.10 Special rules relating to Anonymous (John Doe) Submissions. (1) The
Anonymous Submission procedure in
this section 10.10 permits submission
of Qualified Plans, 403(b) Plans, SEPs,
and SIMPLE IRA Plans under VCP
without initially identifying the applicable
plan(s), the Plan Sponsor(s), or the
Eligible Organization. The requirements
of this revenue procedure relating to VCP,
including sections 10, 11, and 12, apply to
these submissions. However, information
identifying the plan or the Plan Sponsor
may be redacted (and the power of attorney
statement and the penalty of perjury
statement need not be included with the
initial submission). In addition, if a
determination letter application will be
requested as part of the submission, the
determination letter application should not
be submitted until the time all identifying
information is provided to the Service. For
purposes of processing the submission, the
state of the Plan Sponsor must be identified
in the initial submission. All anonymous
submissions must be numbered or labeled
on the first page of the VCP submission
by the Plan Sponsor or its representative
to facilitate identification and tracking of
the submission. The identification number
should be unique to the submission
and should not be used with respect to
any other anonymous submission of the
Plan Sponsor or representative. Once
the Service and the plan representative
reach agreement with respect to the

487

submission, the Service will contact the
plan representative in writing indicating
the terms of the agreement. The Plan
Sponsor will have 21 calendar days from
the date of the letter of agreement to
identify the plan and Plan Sponsor. If
the Plan Sponsor does not submit the
identifying material (including the power
of attorney statement and the penalty of
perjury statement) within 21 calendar days
of the letter of agreement, the matter will
be closed and the compliance fee will not
be returned.
(2) Notwithstanding section 10.04, until the plan(s) and Plan Sponsor(s) are identified to the Service, a submission under
this subsection does not preclude or impede an examination of the Plan Sponsor
or its plan(s). Thus, a plan submitted under the Anonymous Submission procedure
that comes Under Examination prior to the
date the plan(s) and Plan Sponsor(s) identifying materials are received by the Service
will no longer be eligible under VCP.
.11 Special rules relating to Group Submissions. (1) General rules. An Eligible
Organization may submit a VCP request
for a Qualified Plan, a 403(b) Plan, a SEP,
or a SIMPLE IRA Plan under a Group Submission for Plan Document, Operational
and Employer Eligibility Failures. If a
sponsor of a master or prototype plan submits failures with respect to more than one
master or prototype plan, each plan will be
treated as a separate submission and a separate fee must be submitted for each prototype plan. Similarly, if a Volume Submitter practitioner submits failures with respect to more than one Volume Submitter
plan, each plan will be treated as a separate submission and a separate fee must be
submitted for each specimen plan.
(2) Eligible Organizations. For purposes of a Group Submission, the term
“Eligible Organization” means either (a)
a Sponsor (as that term is defined in section 4.07 of Rev. Proc. 2005–16, 2005–1
C.B. 674) of a master or prototype plan,
(b) a Volume Submitter practitioner, as
that term is defined in section 13.04 of
Rev. Proc. 2005–16, (c) an insurance
company or other entity that has issued
annuity contracts or provides services
with respect to assets for 403(b) Plans,
or (d) an entity that provides its clients
with administrative services with respect
to Qualified Plans, 403(b) Plans, SEPs,
or SIMPLE IRA Plans. An Eligible

2008–35 I.R.B.

Organization is not eligible to make a
Group Submission unless the failures in
their submission result from a systemic
error involving the Eligible Organization
that affects at least 20 plans and that
result in at least 20 plans implementing
correction. If, at any time before the
Service issues the compliance statement,
the number of plans falls below 20, the
Eligible Organization must notify the
Service that it is no longer eligible to make
a Group Submission (and the compliance
fee may be retained).
(3) Special Group Submission procedures. (a) In general, a Group Submission
is subject to the same procedures as any
VCP submission in accordance with sections 10 and 11, except that the Eligible
Organization is responsible for performing the procedural obligations imposed on
the Plan Sponsor under sections 10 and 11.
See section 11.02(15) for a special submission requirement with respect to Group
Submissions.
(b) The Eligible Organization must provide notice to all Plan Sponsors of the
plans included in the Group Submission.
The notice must be provided at least 90
days before the Eligible Organization provides the Service with the information required in section 10.11(3)(c). The purpose
of the notice is to provide each Plan Sponsor with information relating to the Group
Submission request. The notice should explain the reason for the Group Submission and inform the Plan Sponsor that the
Plan Sponsor’s plan will be included in the
Group Submission unless the Plan Sponsor responds within the 90-day period to
exclude the Plan Sponsor’s plan from the
Group Submission.
(c) When an Eligible Organization receives an unsigned compliance statement
on the proposed correction and agrees to
the terms of the compliance statement, the
Eligible Organization must return to the
Service within 120 calendar days not only
the signed compliance statement and any
additional compliance fee under section
12.05, but also a list containing (i) the employers’ tax identification numbers for the
Plan Sponsors of the plans to which the
compliance statement may be applicable,
(ii) the plans by name, plan number, type
of plan, and number of plan participants,
(iii) a certification that each Plan Sponsor
received notice of the Group Submission,

2008–35 I.R.B.

and (iv) a certification that each Plan Sponsor timely filed the Form 5500 series return for each plan. This list can be submitted at any stage of the submission process
provided that the requirements of section
10.11(3)(b) have been satisfied. Applicants are encouraged to submit the list on
a computer disk in Microsoft Word. Only
those plans for which correction is actually made within 240 calendar days of the
date of the signed compliance statement
(or within such longer period as may be
agreed to by the Service at the request of
the Eligible Organization) will be covered
by the compliance statement.
(d) Notwithstanding section 4.02, if
a Plan Sponsor of a plan that is eligible
to be included in the Group Submission
and has not elected to be excluded from
the Group Submission pursuant to section
10.11(3)(b) is notified of an impending
Employee Plans examination after the
Eligible Organization filed the Group Submission application, the Plan Sponsor’s
plan will be included in the Group Submission. However, with respect to such plan,
the Group Submission will not preclude
or impede an examination of the plan with
respect to any failures not identified in the
Group Submission application at the time
the plan comes Under Examination.
.12 Multiemployer and multiple employer plans. (1) In the case of a multiemployer or multiple employer plan, the plan
administrator (rather than any contributing or adopting employer) must request
consideration of the plan under VCP. The
request must be with respect to the plan,
rather than a portion of the plan affecting
any particular employer.
(2) If a VCP submission for a multiemployer or multiple employer plan has
failures that apply to fewer than all of the
employers under the plan, the plan administrator may choose to have the compliance fee (in section 12) or sanction (in section 14) calculated separately for each employer based on the assets attributable to
that employer, rather than being attributable to the assets of the entire plan. Thus,
the plan administrator may choose to apply the provisions of this paragraph where
the failure is attributable in whole or in part
to data, information, actions, or inactions
that are within the control of the employers rather than the multiemployer or multiple employer plan (such as attribution in

488

whole or in part to the failure of a employer
to provide the plan administrator with full
and complete information).
SECTION 11. APPLICATION
PROCEDURES FOR VCP
.01 General rules. The requirements of
this section 11 are satisfied if the request
for a compliance statement from the Service under VCP satisfies the informational
and other requirements of this section 11.
In general, a request under VCP consists of
a letter from the Plan Sponsor (which may
be a letter from the Plan Sponsor’s representative) or Eligible Organization (or representative) to the Service that contains a
description of the failures, a description of
the proposed methods of correction, and
other procedural items set forth in this section 11. Appendix D and Appendix F of
this revenue procedure are provided to assist the applicant in satisfying these requirements. Applicants are encouraged to
use Appendix D or Appendix F, as applicable. If the Streamlined Application procedures described in section 11.02 are used,
the applicant should use Appendix F and
related schedules; otherwise, the application should be made in accordance with the
provisions of section 11.03, using the format outlined in Appendix D.
The Appendix D and Appendix F formats for the application should not be
modified. Also, since the application may
form part of a document that is executed
by the Service, the application itself (as
distinguished from any cover letter or
other supplemental letters that the applicant may provide) should not be submitted
under the letterhead of the Plan Sponsor
or the Plan Sponsor’s authorized representative. The application also contains an
Enforcement Resolution section (Part VII
of Appendix D and Part IV of Appendix
F). The applicant should complete only
Parts I through VI, and Parts I through
III, of Appendix D and Appendix F, respectively. The Enforcement Resolution
(Part VII of Appendix D and Part IV of
Appendix F) may only be completed by
the Service. The application must include
the Enforcement Resolution section. If
the application is acceptable as submitted,
the Service may execute the Enforcement
Resolution page to indicate its approval
of the submission. In such a situation, the
executed Enforcement Resolution will be

September 2, 2008

made part of the compliance statement for
the submission.
.02 Streamlined Application procedures. (1) If all of the Qualification
Failures the Plan Sponsor proposes to correct through VCP are described in section
11.02(3) and the Plan Sponsor proposes
to correct such failures using a correction
method provided in the Appendix F schedules, then the submission should be made
pursuant to those streamlined procedures.
A Streamlined Application pursuant to
this section consists of the Appendix F, the
appropriate schedule(s) for the failure(s)
(as described in section 11.02(3)), and
all other documents required as indicated
on the applicable schedule. The Service
reserves the right to request additional
information in connection with its processing of the Streamlined Application.
The failure to provide the information required in the format provided in Appendix
F may result in a delay in the processing
of the submission. If only certain failures
contained in the submission are described
in section 11.02(3) (or one or more of the
proposed corrections is not a method set
forth in the Appendix F schedules), then
the submission may be made pursuant to
the Streamlined Application Procedures,
to the extent applicable, and using the general rules of this section 11 to the extent
the Streamlined Application procedures
are not applicable.
(2) The Streamlined Application procedure in Appendix F should not be used if
any of its provisions (including the failure, correction of the failure, or the Plan
Sponsor’s representation) do not apply to
the Plan or Plan Sponsor. In such circumstance, a VCP submission should be made
in accordance with the provisions of section 11.03 and Appendix D of this revenue
procedure.
(3) The failures eligible for the Streamlined Application procedure and the applicable Appendix F schedules are described
as follows:
(a) Schedule 1: If the Plan Sponsor
failed to adopt timely (i) interim amendments described in section 6.05(2) or
(ii) amendments required to reflect the
changed operation of the plan on account
of the Plan Sponsor’s decision to implement optional law changes described in
section 6.05(3)(b) of this revenue procedure, the Plan Sponsor should submit
Appendix F, Schedule 1.

September 2, 2008

(b) Schedule 2: If the Plan Sponsor
failed to timely adopt amendments to comply with required legislative or regulatory
changes (other than those described in
(3)(a)), the Plan Sponsor should submit
Appendix F, Schedule 2.
(c) Schedule 3: If the Plan is a SEP or a
SARSEP and experienced one or more of
the failures shown on Appendix F, Schedule 3, and if the Plan Sponsor proposes
to correct such failure(s) by using the
method(s) provided on such schedule, the
Plan Sponsor should submit Appendix F,
Schedule 3.
(d) Schedule 4: If the Plan is a SIMPLE
IRA and experienced one or more of the
failures shown on Appendix F, Schedule 4,
and if the Plan Sponsor proposes to correct
such failure(s) by using the method(s) provided on such schedule, the Plan Sponsor
should submit Appendix F, Schedule 4.
(e) Schedule 5: If the Plan Sponsor
failed to administer the loans in accordance with the provisions of § 72(p)(2),
the failure solely relates to employees who
are neither key employees (as defined in
§ 416(i)(1)) nor self-employed individuals (as defined in § 401(c)(1)(B)), the
Plan Sponsor should submit Appendix F,
Schedule 5.
(f) Schedule 6: If the Plan Sponsor
failed to satisfy the criteria for an employer to sponsor either a 403(b) Plan, or
a § 401(k) plan, the Plan Sponsor should
submit Appendix F, Schedule 6.
(g) Schedule 7: If the plan failed to distribute elective deferrals made in excess of
the § 402(g) limit, and the Plan Sponsor
proposes to correct such failure using the
method described in Appendix A, section
.04, the Plan Sponsor should submit Appendix F, Schedule 7.
(h) Schedule 8: If the plan failed to
make required minimum distributions
pursuant to § 401(a)(9), and proposes to
correct such failure using the method described in Appendix A, section .06, then
the Plan Sponsor should submit Appendix
F, Schedule 8.
(i) Schedule 9: The Plan Sponsor
should submit Appendix F, Schedule 9 if
the Plan experienced one or more of the
following failures:
1. § 401(a)(17) failure being corrected
using the method described in Appendix B,
section 2.07(1)(a);

489

2. Hardship distribution failure being
corrected using the method described in
Appendix B, section 2.07(2)(a);
3. Loans permitted in operation but
not permitted by Plan document being corrected using the method described in Appendix B, section 2.07(2)(a); or
4. Early inclusion of otherwise eligible employee(s) being corrected using the
method described in Appendix B, section
2.07(3)(a).
(4) An applicant may prepare a submission that includes one or more of the schedules in Appendix F. The inclusion of multiple schedules set forth in Appendix F does
not affect the fee for the submission, as determined in accordance with section 12.02.
.03 Submission requirements. If the application includes failures and corrections
that are not addressed in Appendix F, then
the submission should be made in accordance with the format provided in Appendix D. The application should include the
following:
(1) Identifying information for the applicant. This would include, the name and
Employer Identification Number (EIN)
of the applicant. (Note: Social Security
Numbers are not acceptable. An applicant can obtain an EIN by calling (800)
829–4933. An application for an EIN
can also be made online by accessing
www.irs.gov and typing “How to Apply
for an EIN” in its search engine.)
(2) Identifying information for the
Plan. A statement identifying the type
of plan submitted (e.g., Qualified Plan,
403(b) Plan, SEP, or SIMPLE IRA Plan).
In addition, if the submission involves a
Qualified Plan, the statement should also
identify the type of Qualified Plan being
submitted (e.g., Defined Benefit, Money
Purchase, Profit Sharing, or Stock Bonus,
and 401(k) or ESOP).
(3) Plan Data. Information relating to
the number of plan participants determined
in accordance with section 12.07 and the
total amount of plan assets as of the most
recent 5500 filing (or, if not filed, the most
recent data available to the Plan Sponsor)
prior to the filing of this VCP submission.
(4) Type of Submission. Where applicable, the application should identify
whether the submission is a Group Submission, an Anonymous Submission, a
nonamender submission, a multiemployer
or multiple employer plan submission, or
an Orphan Plan submission.

2008–35 I.R.B.

(5) 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.
(6) 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.
(7) 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 the specific information needed to support the suggested
correction method. This information includes, for example, the number of employees affected and the expected cost of
correction (both of which may be approximated if the exact number cannot be determined at the time of the request), the years
involved, and calculations or assumptions
the Plan Sponsor used to determine the
amounts needed for correction.
(8) 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)).
(9) 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.
(10) Former employees or beneficiaries. The method that will be used to lo-

2008–35 I.R.B.

cate 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.
(11) 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.
(12) Request for excise relief (§§ 4972,
4973, 4974 or 4979) or income tax relief
under §72(t). If relief is sought, a specific
request for relief should be included in
the submission, along with explanations,
where applicable, supporting such request.
(13) Loan failures and income tax reporting relief. A specific request for relief needs to be made if the applicant either 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.
(14) Under Examination statement. A
statement that, to the best of the Plan Sponsor’s knowledge, neither the plan nor the
Plan Sponsor is Under Examination.
(15) Abusive tax avoidance transaction
statement. A statement that neither the
plan nor the Plan Sponsor has been a party
to an abusive tax avoidance transaction
(as defined in section 4.13(2)) or a brief
identification of any abusive tax avoidance
transaction to which the plan or the Plan
Sponsor has been a party.
(16) 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).
(17) Unrelated determination letter application requests. A statement (if applicable) that the plan is currently being considered in a determination letter application
that is not related to the VCP application.
If the request for a determination letter is
made while a request for consideration under VCP is pending, the Plan Sponsor must
update the VCP request to add this information.
(18) 403(b) Plans only. 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

490

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 application, contact the insurance company or custodian with control over the plan’s assets to assure cooperation in effecting a distribution of the
excess deferrals and the earnings thereon.
An application under VCP must also contain a statement as to the type of employer
(e.g., a tax-exempt organization described
in § 501(c)(3)) submitting the VCP application.
(19) Group Submissions only. A Group
Submission must be signed by the Eligible Organization or the Eligible Organization’s authorized representative and accompanied by a copy of the relevant portions of the plan document(s). In addition, a Group Submission must include a
separate page for each affected Plan Sponsor that provides the Plan Sponsor’s name,
EIN, plan name, and failure(s).
(20) Orphan Plans only. If the plan is
an Orphan Plan, whether relief from the
VCP application fee or correction is being
requested, and the supporting rationale for
such relief.
.04 Required documents. A VCP submission must be accompanied by the following documents:
(1) Plan document. A copy of the entire
plan document or the relevant portions of
the plan document. For example, in a case
involving an improper exclusion of eligible employees from a profit-sharing plan
with a cash or deferred arrangement, relevant portions of the plan document include
the eligibility, allocation, and cash or deferred arrangement provisions of the basic plan document (and the adoption agreement, if applicable), along with applicable definitions in the plan. If the plan is
a 403(b) Plan and a plan document is not
available, a written description of the plan
should be submitted, with sample salary
reduction agreements if relevant. In the
case of a SEP and a SIMPLE IRA Plan, the
entire plan document should be submitted.
(2) Determination letter application. In
any case in which correction of a Qualification Failure is made by plan amendment,
as permitted under section 4.05, other than
the adoption of an amendment designated
by the Service as a model amendment or
the adoption of a prototype or volume submitter plan for which the Plan Sponsor has

September 2, 2008

reliance on the plan’s opinion or advisory
letter as provided in Rev. Proc. 2008–6,
2008–1 I.R.B. 192, and the Plan Sponsor is submitting a determination letter request as permitted under section 6.05, the
Plan Sponsor must submit a copy of the
plan document in restated form, the appropriate application form (i.e., Form 5300,
5307 or 5310), the appropriate user fee
concurrently and to the same address as the
VCP submission, and the most recent version of the Form 8717, User Fee for Employee Plan Determination, Opinion, and
Advisory Letter Request. Pursuant to section 12.04 of Rev. Proc. 2007–44, effective as of July 9, 2007, Form 6406,
Short Form Application for Determination
for Minor Amendment of Employee Benefit
Plan, may not be used to apply for a determination letter. An application submitted
with this form will no longer be accepted
by the Service. The user fee for the determination letter application and the fee for
the VCP submission must be submitted on
separate checks made payable to the U.S.
Treasury. See section 11.13 for the VCP
mailing address.
.05 Date fee due generally. Except as
provided in sections 11.06 and 12.02(4),
the VCP fee under section 12 and, if applicable, the determination letter user fee
must be included with the submission. The
VCP fee and the determination letter user
fee must be submitted on separate checks
made payable to the U.S. Treasury. If
the appropriate fees are not included in
the submission, the submission will be returned.
.06 Additional fee due for SEPs,
SIMPLE IRA Plans,
and Group
Submissions.
In the case of a SEP,
a SIMPLE IRA Plan, or a Group
Submission, the initial fee described
in section 12.02, 12.04, or 12.05 must
be included in the submission and any
additional fee is due at the time the
compliance statement is signed by the
Plan Sponsor and returned to the Service,
or when agreement has been reached
between the Service and the Plan Sponsor
regarding correction of the failure(s).
.07 Signed submission. The submission
must be signed by the Plan Sponsor or the
Plan Sponsor’s authorized representative.
.08 Power of attorney requirements. To
sign the submission or to appear before
the Service in connection with the submission, the Plan Sponsor’s representa-

September 2, 2008

tive must comply with the requirements of
section 9.02(11) and (12) of Rev. Proc.
2008–4, 2008–1 I.R.B. 121, and submit
Form 2848, Power of Attorney and Declaration of Representative. A Form 2848
that designates a representative not qualified to sign Part II of the Form 2848, e.g.,
an unenrolled return preparer, will not be
accepted. A Plan Sponsor may authorize
an individual, such as an unenrolled return
preparer, to inspect or receive confidential information using Form 8821, Tax Information Authorization. (See Form 8821
and Instructions.) However, see section
10.10 for special rules relating to Anonymous Submissions.
.09 Penalty of perjury statement. The
following declaration must accompany
a request and any factual information or
change in the submission at a later time:
“Under penalties of perjury, I declare
that I have examined this submission,
including accompanying documents,
and, to the best of my knowledge and
belief, the facts presented in support
of this submission are true, correct,
and complete.” The declaration must be
signed by the Plan Sponsor, not the Plan
Sponsor’s representative.
.10 Checklist. The Service will be able
to respond more quickly to a VCP request
if the request is carefully prepared and
complete. The checklist in Appendix C is
designed to assist Plan Sponsors and their
representatives in preparing a submission
that contains the information and documents required under this revenue procedure. Except as otherwise provided in
the checklist, the checklist in Appendix C
must be completed, signed, and dated by
the Plan Sponsor or the Plan Sponsor’s representative. A photocopy of this checklist
may be used.
.11 Designation. The letter to the Service should indicate in the upper right hand
corner of the letter the type of plan submitted under VCP–a Qualified Plan, 403(b)
Plan, SEP, or SIMPLE IRA Plan. In addition, if the submission is a Group Submission, an Anonymous Submission, a nonamender submission, a multiemployer or
multiple employer plan submission, or an
Orphan Plan submission, the letter should
so indicate.
.12 Acknowledgement letter. The Service will acknowledge receipt of a VCP
submission if the Plan Sponsor or the Plan
Sponsor’s representative completes the

491

Acknowledgement Form in Appendix E
and includes it in the submission. A separate Appendix E Acknowledgement Form
should be included for each plan submitted. A photocopy of Appendix E may be
used.
.13 VCP mailing address. All VCP
submissions and accompanying determination applications, if applicable, should
be mailed to:
Internal Revenue Service
Attention: SE:T:EP:RA:VC
P.O. Box 27063
Washington, D.C. 20038–7063
.14 Maintenance of copies of submissions. Plan Sponsors and their representatives should maintain copies of all correspondence submitted to the Service with
respect to their VCP requests.
.15 Assembling the submission. The
Service will be able to process a submission more quickly if the submission package contains all of the items required by the
Appendix C checklist and is assembled in
the following order:
1. If applicable, Form 8717, User Fee
for Employee Plan Determination, Opinion, and Advisory Letter Request, and the
check for the determination letter user fee
made payable to the U.S. Treasury.
2. Determination letter application (i.e.,
Form 5300, 5307, or 5310), if applicable.
3. Completed and signed Appendix C
checklist.
4. A submission signed by the Plan
Sponsor or Plan Sponsor’s authorized
representative, with a check for the VCP
fee made payable to the U.S. Treasury
attached to the front of the submission
letter. The submission should include the
following information (see section 11.15,
paragraph 5, for instructions relating to
applications submitted in the Appendix D
or Appendix F format):

•
•
•
•

Type of plan (or group of plans) being
submitted.
Description of the failures (if the failures relate to Transferred Assets, include a description of the related employer transaction).
An explanation of how and why the
failures arose.
Description of the method for correcting failures, including earnings
methodology (if applicable) and supporting computations (if applicable).

2008–35 I.R.B.

•

•
•

•

Description of the method 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 the letter
should affirmatively state that position
when addressing this issue.
Description of the administrative procedures that have been or will be implemented to ensure that the failures do
not recur.
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.
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.

•

If the plan is an Orphan Plan, whether
relief from the VCP application fee is
being requested, and the supporting rationale for such relief.
• A statement specifying whether the
plan is being considered in an unrelated determination letter application
(if applicable).
• A statement that the plan is not Under
Examination.
• A statement that the Plan Sponsor is
not under an Exempt Organizations examination.
• A statement that neither the plan nor
the Plan Sponsor has been a party to an
abusive tax avoidance transaction (as
defined in section 4.13(2)) or a brief
identification of any abusive tax avoidance transaction to which the plan or
the Plan Sponsor has been a party.
• Penalty of perjury statement.
5. If the VCP application is submitted
using either the Appendix F or the Appendix D format, the application should include a completed Appendix F or Appendix D, and any information/enclosures, including any related schedules. In addition,
the application should include a separate
Enforcement Resolution page.

20 or fewer

$

21 to 50

$ 1,000

51 to 100

$ 2,500

101 to 500

$ 5,000

501 to 1,000

$ 8,000

1,001 to 5,000

$15,000

5,001 to 10,000

$20,000

Over 10,000

$25,000

2008–35 I.R.B.

SECTION 12. VCP FEES
.01 VCP fees. The compliance fees for
all submissions under VCP are determined
under this section 12. All fees must be submitted by check made payable to the U.S.
Treasury and, except for the special fees
described in sections 12.04 and 12.05(2),
must be included with the initial submission.
.02 VCP fee for Qualified Plans and
403(b) Plans. (1) Except as otherwise provided in this section 12, the compliance fee
for a submission under VCP for Qualified
Plans and 403(b) Plans (including Anonymous Submissions) is determined in accordance with the following chart.

Fee

Number of Participants

(2) If (a) a VCP submission involves
the failure to satisfy the minimum distribution requirements of § 401(a)(9) for 50
or fewer participants, (b) such failure is the
only failure of the submission, and (c) the
failure would result in the imposition of the
excise tax under § 4974, the compliance
fee is $500.
(3) If (a) a VCP submission involves the
failure of participant loans to comply with
the requirements of § 72(p)(2), (b) the failure does not affect more than 25% of the
Plan Sponsor’s participants in any of the

6. Appendix E acknowledgement letter.
7. Power of Attorney (Form 2848)
or Tax Information Authorization (Form
8821), if applicable.
8. Copy of opinion or determination
letter (if applicable).
9. Relevant plan document language or
plan document (if applicable).
10. Any other items that may be relevant to the submission.

750

year(s) in which the failure occurred, and
(c) the failure is the only failure of the submission, the applicable fee for a VCP submission determined under the provisions
of section 12.02(1) is reduced by 50%.
(4) At the discretion of the Service, the
VCP fee may be waived in the case of a
terminating Orphan Plan. In such cases,
the submission must include a request for
a waiver of the VCP fee.
.03 VCP fee for nonamender failures.
In general, the compliance fee for plans
with a nonamender failure, as described

492

in section 6.05, is determined in accordance with the chart in section 12.02(1).
The applicable fee for a VCP submission
that contains only nonamender failures is
reduced by 50% if it is submitted within
a one-year period following the expiration of the plan’s remedial amendment
period for complying with such changes.
Notwithstanding the above, the compliance fee for a submission that contains
only a failure to adopt timely interim
amendments or amendments required to

September 2, 2008

implement optional law changes, as described in section 6.05(3)(a), is $375.
.04 VCP fee for Group Submission. The
compliance fee for a Group Submission is
based on the number of plans affected by
the failure as described in the compliance
statement. With respect to pre-approved
plans, the fee is determined based on the
number of basic plan documents submitted, irrespective of the number of accompanying adoption agreements. The initial
fee for the first 20 plans is $10,000. An
additional fee is due equal to the product of the number of plans in excess of
20 multiplied by $250. The maximum
compliance fee for a Group Submission is
$50,000. If additional plans are added following the Group Submission, the additional fee is paid subject to the $50,000
maximum compliance fee. If more than
one master or prototype plan is submitted as a Group Submission, each master
or prototype plan is considered a separate Group Submission for purposes of the
compliance fee.
.05 VCP fee for SEPs and SIMPLE IRA
Plans. (1) In general, the compliance fee
for a SEP or a SIMPLE IRA Plan submission (including an Anonymous Submission) is $250. Notwithstanding the preceding sentence, the Service reserves the right
to impose the fee schedule under section
12.02 or section 12.06 in appropriate circumstances.
(2) In any case in which a SEP or
SIMPLE IRA Plan correction is not
similar to a correction for a similar
Qualification Failure (as provided under
section 6.10(1)), the Service may impose
an additional fee. If the failure involves
an Excess Amount to a SEP or a SIMPLE
IRA Plan and the Plan Sponsor retains the
Excess Amount in the SEP or SIMPLE
IRA Plan, a fee equal to at least 10% of the
Excess Amount excluding earnings will
be imposed. This is in addition to the SEP
or SIMPLE IRA Plan compliance fee set
forth in section 12.05(1).
.06 VCP fee for egregious or intentional
failures. Notwithstanding the preceding
provisions of this section 12, in cases involving failures that are egregious (as described in section 4.11) or where the failure is not inadvertent (i.e., is not a result of
an oversight or mistake), the compliance
fee for Qualified Plans, 403(b) Plans, SEPs
and SIMPLE IRA Plans is the greater of
(1) the fee that would be determined un-

September 2, 2008

der the preceding provisions of this section 12, or (2) an amount equal to a negotiated percentage of the Maximum Payment
Amount, with such percentage not to exceed 40%.
.07 Establishing the number of plan
participants. Compliance fees under this
section 12 are determined based on the
total number of plan participants. For a
description of participant, see the Instructions for Form 5500, lines 6 and 7. For
new plans and ongoing plans, the number
of plan participants is determined from
the most recently filed Form 5500 series.
Thus, with respect to the 2007 Form 5500,
the Plan Sponsor would use the number
shown in item 7f (or the equivalent item
on the Form 5500 C/R or EZ) to establish
the total number of plan participants. In
the case of a terminated plan, the Form
5500 used to determine the number of
plan participants must be the one filed for
the plan year prior to the plan year for
which the Final Form 5500 return was
filed. If the submission involves a plan
with Transferred Assets and no new incidents of the failure occurred after the
end of the second plan year that begins
after the corporate merger, acquisition,
or other similar employer transaction, the
Plan Sponsor may calculate the number of
plan participants based on the Form 5500
information that would have been filed
by the Plan Sponsor for the plan year that
includes the employer transaction if the
Transferred Assets were maintained as a
separate plan.
PART VI. CORRECTION ON AUDIT
(AUDIT CAP)
SECTION 13. DESCRIPTION OF
AUDIT CAP
.01 Audit CAP requirements. If the Service identifies a Qualification or 403(b)
Failure (other than a failure that has been
corrected in accordance with SCP or VCP)
upon an Employee Plans or Exempt Organizations examination of a Qualified Plan,
403(b) Plan, SEP, or SIMPLE IRA Plan,
the requirements of this section 13 are satisfied with respect to the failure if the Plan
Sponsor corrects the failure, pays a sanction in accordance with section 14, satisfies any additional requirements of section
13.03, and enters into a closing agreement
with the Service. This section 13 also ap-

493

plies if the Service 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 U.S. Treasury.
.03 Additional requirements. Depending on the nature of the failure, the Service will discuss the appropriateness of
the plan’s existing administrative procedures with the Plan Sponsor. If existing
administrative procedures are inadequate
for operating the plan in conformance with
the applicable requirements of the Code,
the closing agreement may be conditioned
upon the implementation of stated procedures. In addition, for Qualified Plans,
pursuant to section 6.05, the Plan Sponsor
may be required to obtain a Favorable Letter before the closing agreement is signed.
If a Favorable Letter is required, the Plan
Sponsor is required to pay the applicable
user fee for obtaining the letter.
.04 Failure to reach resolution. If the
Service and the Plan Sponsor cannot reach
an agreement with respect to the correction of the failure(s) or the amount of the
sanction, the plan will be disqualified or, in
the case of a 403(b) Plan, SEP, or SIMPLE
IRA Plan will not have reliance on this revenue procedure.
.05 Effect of closing agreement. A closing agreement constitutes an agreement
between the Service and the Plan Sponsor that is binding with respect to the tax
matters identified therein for the periods
specified.
.06 Other procedural rules. The procedural rules for Audit CAP are set forth in
Internal Revenue Manual (“IRM”) 7.2.2,
EPCRS.
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction. Except as otherwise provided in section
14.04, the sanction under Audit CAP is
a negotiated percentage of the Maximum
Payment Amount. Sanctions will not be
excessive and will bear a reasonable relationship to the nature, extent, and severity

2008–35 I.R.B.

of the failures, based on the factors below. In the case of any participant loan
that did not comply with the requirements
of § 72(p)(2), the Maximum Payment
Amount will include the tax the Service
could collect as a result of the loan not
being excluded from gross income under
§ 72(p)(2).
.02 Factors considered. Factors include: (1) the steps taken by the Plan
Sponsor to ensure that the plan had no failures; (2) the steps taken to identify failures
that may have occurred; (3) the extent to
which correction had progressed before
the examination was initiated, including
full correction; (4) the number and type of
employees affected by the failure; (5) the
number of nonhighly compensated employees who would be adversely affected
if the plan were not treated as qualified or
as satisfying the requirements of § 403(b),
§ 408(k) or § 408(p); (6) whether the failure is a failure to satisfy the requirements
of § 401(a)(4), § 401(a)(26), or § 410(b),
either directly or through § 403(b)(12); (7)
whether the failure is solely an Employer
Eligibility Failure; (8) the period over
which the failure(s) occurred (for example,
the time that has elapsed since the end of
the applicable remedial amendment period
under § 401(b) for a Plan Document Failure); and (9) the reason for the failure(s)
(for example, data errors such as errors in
transcription of data, the transposition of
numbers, or minor arithmetic errors). Factors relating only to Qualified Plans also

include: (1) whether the plan is the subject
of a Favorable Letter; and (2) whether
the failure(s) were discovered during the
determination letter process. If one of the
failures discovered during an Employee
Plans examination includes the failure to
amend the plan timely for relevant legislation, it is expected that the sanction will be
greater than the applicable fee described in
section 14.04. 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
to 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 Service determines that no
new incidents of the failures that relate to
the Transferred Assets occur after the end
of the second plan year that begins after
the corporate merger, acquisition, or other
similar employer transaction, the sanction
under Audit CAP will not exceed the sanction that would apply if the Transferred Assets were maintained as a separate plan.
.04 Fee for nonamenders discovered
during the determination letter application
process not related to a VCP submission.
(1) The compliance fee for nonamenders
(as defined in section 6.05(2)(a)(ii)) not
voluntarily identified by the Plan Sponsor,
but instead discovered by the Service in

connection with the determination letter
application process as described in section
5.03(3) is determined in accordance with
the chart below. This fee schedule applies
if the only failure in the submission is the
nonamender failure.
(2) The acronyms listed in the chart refer to the following laws:
(a) Employee Retirement Income Security Act of 1974 (ERISA),
(b) Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA); Deficit Reduction Act of 1984 (DEFRA); and Retirement Equity Act of 1984 (REA) together
(T/D/R),
(c) Tax Reform Act of 1986 (TRA
’86),
(d) Unemployment Compensation Act
of 1992 (UCA); Omnibus Budget and Reconciliation Act of 1993 (OBRA ’93),
(e) The Uruguay Round Agreements
Act; the Uniformed Services Employment
and Reemployment Rights Act of 1994;
the Small Business Job Protection Act of
1996; the Taxpayer Relief Act of 1997;
the Internal Revenue Service Restructuring and Reform Act of 1998; and the Community Renewal Tax Relief Act of 2000
(collectively known as “GUST”),
(f) Final and temporary regulations
under § 401(a)(9), 74 FR 18987, published
on April 17, 2002 (“401(a)(9) Regs”),
(g) The Economic Growth and
Tax Relief Reconciliation Act of 2001
(“EGTRRA”).

Number of
Participants

EGTRRA/
subsequent
legislation

GUST/
401(a)(9) Regs

UCA/
OBRA ’93

TRA ’86

T/D/R

ERISA

20 or fewer

$ 2,500

$ 3,000

$ 3,500

$ 4,000

$ 4,500

$ 5,000

21–50

$ 5,000

$ 6,000

$ 7,000

$ 8,000

$ 9,000

$10,000

51–100

$ 7,500

$ 9,000

$10,500

$12,000

$13,500

$15,000

101–500

$12,500

$15,000

$17,500

$20,000

$22,500

$25,000

501–1,000

$17,500

$21,000

$24,500

$28,000

$31,500

$35,000

1,001–5,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

5,001 – 10,000

$32,500

$39,000

$45,500

$52,000

$58,500

$65,000

Over 10,000

$40,000

$48,000

$56,000

$64,000

$72,000

$80,000

2008–35 I.R.B.

494

September 2, 2008

PART VII. EFFECT ON OTHER
DOCUMENTS; EFFECTIVE DATE;
PAPERWORK REDUCTION ACT
SECTION 15. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 2006–27 modified and
superseded. Rev. Proc. 2006–27 is modified and superseded by this revenue procedure.
.02 Section 3 of Rev. Proc. 2007–49
modified and superseded. Section 3 of
Rev. Proc. 2007–49, 2007–30 I.R.B. 141,
is modified and superseded by this revenue
procedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is generally effective January 1, 2009. However, Plan
Sponsors are permitted, at their option, to
apply the provisions of this revenue procedure on or after September 2, 2008.
SECTION 17. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1673.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in
this revenue procedure is in sections
4.05, 6.02(5)(d), 6.05, 6.09(5), 6.09(6),
10.01, 10.02, 10.05–10.07, 10.10–10.12,
11.02–11.05, 11.07–11.15, 13.01, section
2.01–2.07 of Appendix B, Appendix C,
Appendix D, Appendix E, and Appendix
F. This information is required to enable
the Commissioner, Tax Exempt and Government Entities Division of the Internal
Revenue Service to make determinations
regarding the issuance of various types of
closing agreements and compliance statements. This information will be used to
issue closing agreements and compliance
statements to allow individual plans to
continue to maintain their tax qualified
and tax-deferred status. As a result, fa-

September 2, 2008

vorable tax treatment of the benefits of
the eligible employees is retained. The
likely respondents are individuals, state
or local governments, businesses or other
for-profit institutions, nonprofit institutions, and small businesses or organizations.
The estimated total annual reporting or
recordkeeping burden is 76,222 hours.
The estimated annual burden per respondent/recordkeeper varies from .5 to
45.5 hours, depending on individual circumstances, with an estimated average of
20.4 hours. The estimated number of respondents or recordkeepers is 3,745.
The estimated frequency of responses is
occasional.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. § 6103.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Avaneesh Bhagat
and Maxine Terry of the Employee
Plans, Tax Exempt and Government
Entities Division. 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.
Alternatively, you
can direct your questions to either
Mr. Bhagat or Ms. Terry by sending
a question via electronic mail to
[email protected].
APPENDIX A
OPERATIONAL FAILURES AND
CORRECTION METHODS
.01 General rule. This appendix sets
forth Operational Failures and Correction
Methods relating to Qualified Plans. In
each case, the method described corrects
the Operational Failure identified in the
headings below. Corrective allocations
and distributions should reflect earnings
and actuarial adjustments in accordance
with section 6.02(4) of this revenue pro-

495

cedure. 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
may similarly be used to correct the failure.
.02 Failure to properly provide the minimum top-heavy benefit under § 416 to
non-key employees. In a defined contribution plan, the permitted correction method
is to properly contribute and allocate the
required top-heavy minimums to the plan
in the manner provided for in the plan
on behalf of the non-key employees (and
any other employees required to receive
top-heavy allocations under the plan). In
a defined benefit plan, the minimum required benefit must be accrued in the manner provided in the plan.
.03 Failure to satisfy the ADP test set
forth in § 401(k)(3), the ACP test set forth
in § 401(m)(2), or, for plan years beginning on or before December 31, 2001, the
multiple use test of § 401(m)(9). The permitted correction method is to make qualified nonelective contributions (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. 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 (e.g.,
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

2008–35 I.R.B.

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 (for both the excess deferral and earnings) 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

2008–35 I.R.B.

§ 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
should make a QNEC on behalf of the
affected employee. The 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 section .05(2)(b).
The QNEC must be adjusted for earnings
to the date the corrective QNEC is made
on behalf of the affected employee.
(d) 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 require-

496

ments of § 401(k)(12), then the missed deferral is deemed equal to the greater of 3%
of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is
at least as favorable as 100% of the elective deferral made by the employee. This
estimate of the missed deferral replaces
the estimate based on the ADP test in a
traditional § 401(k) plan. The required
QNEC on behalf of the excluded employee
is equal to (i) the missed deferral opportunity, which is an amount equal to 50%
of the missed deferral, plus (ii) the matching contribution that would apply based on
the missed deferral. If an employee was
not provided the opportunity to elect and
make elective deferrals to a safe harbor
§ 401(k) plan that uses nonelective contributions to satisfy the safe harbor requirements of § 401(k)(12), then the missed deferral is deemed equal to 3% of compensation. The required QNEC on behalf of
the excluded employee is equal to (i) 50%
of the missed deferral, plus (ii) the nonelective contribution required to be made
on behalf of the employee. The 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 affected employee.
(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 con-

September 2, 2008

tributions 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 QNEC on behalf
of the affected employee. The QNEC 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 QNEC must be
adjusted for earnings to the date the corrective QNEC 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

September 2, 2008

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 designated Roth account (as
described in § 402A(b)(2)). The corrective
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 (i.e., 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

497

the plan or statutory limitations described
in § 414(v)(3) and § 1.414(v)–1(b)(1).
(b) Correction for missed matching
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 QNEC for the
matching contribution on behalf of the
affected employee. The QNEC 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 QNEC
must be adjusted for earnings to the date
the corrective QNEC 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

2008–35 I.R.B.

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.
(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.
(c) Missed opportunity affecting matching contributions. In the event of failure
described in section (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 employer must make
a QNEC for the matching contribution
on behalf of the affected employee. The
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 QNEC must be adjusted
for earnings to the date the corrective
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 deter-

2008–35 I.R.B.

mine 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.
.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 representing the loss
of use of such amounts.
.07 Failure to obtain participant or
spousal consent for a distribution subject
to the participant and spousal consent
rules under §§ 401(a)(11), 411(a)(11),
and 417. (1) The permitted correction
method is to give each affected participant a choice between providing informed
consent for the distribution actually made
or receiving a qualified joint and survivor
annuity. In the event that participant or
spousal consent is required but cannot be
obtained, the participant must receive a
qualified joint and survivor annuity based
on the monthly amount that would have
been provided under the plan at his or
her retirement date. This annuity may be
actuarially reduced to take into account
distributions already received by the participant. However, the portion of the qualified joint and survivor annuity payable
to the spouse upon the death of the participant may not be actuarially reduced to
take into account prior distributions to the
participant. Thus, for example, if, in accordance with the automatic qualified joint
and survivor annuity option under a plan,

498

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 were $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.
.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

September 2, 2008

26 CFR part 1) prior to amendments made
by the recently finalized 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 employer is not permitted to make additional
contributions to the plan. The permitted
correction for failure to limit annual additions that are elective deferrals or 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 recently
finalized 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 (3).
.09 Abandoned Orphan Plans; orphan
contracts and other abandoned plan assets. (1) Abandoned plans. If (a) a plan has
one or more failures (whether a Qualification Failure or a 403(b) Failure) that result
from either the employer having ceased to
exist, the employer no longer maintaining
the plan, or similar reasons and (b) the plan
is an Orphan Plan, as defined in section
5.03 (i.e., is not a plan to which ERISA
applies), 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 substan-

September 2, 2008

tially similar to those set forth in section
2578.1 of the Department of Labor Regulations (relating to abandoned plans). 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 takes 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 Service reserves the
right to pursue appropriate remedies under the Internal Revenue 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) Orphan contracts or other assets.
In any case in which a 403(b) Failure results from the employer 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).

499

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 a 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 employer maintains a single plan
intended to satisfy § 401(a) and has never
maintained any other plan;
(3) in a defined contribution plan, the
plan provides that forfeitures are used to
reduce future employer contributions;
(4) the Qualification Failures are Operational Failures and the eligibility and
other requirements for SCP, VCP or Audit
CAP, whichever applies, are satisfied; and
(5) there are no Qualification Failures
other than the described Operational Failures, and if a corrective action would result
in any additional Qualification Failure, appropriate corrective action is taken for that

2008–35 I.R.B.

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 the
section 2 and 3 in this appendix.
SECTION 2. CORRECTION METHODS
AND EXAMPLES
.01 ADP/ACP Failures.
(1) Correction Methods. (a) Appendix
A Correction Method. Appendix A, section .03 sets forth a correction method for
a failure to satisfy the actual deferral percentage (“ADP”), actual contribution percentage (“ACP”), or, for plan years beginning on or before December 31, 2001,
multiple use test set forth in §§ 401(k)(3),
401(m)(2), and 401(m)(9), respectively.
(b) One-to-One Correction Method.
(i) General. In addition to the correction
method in Appendix A, a failure to satisfy the ADP test, ACP test, or, for plan
years beginning on or before December
31, 2001, the multiple use test may be corrected by using the one-to-one correction
method set forth in this section 2.01(1)(b).
Under the one-to-one correction method,
an excess contribution amount is determined and assigned to highly compensated employees as provided in paragraph
(1)(b)(ii) below. That excess contribution
amount (adjusted for earnings) is either
distributed to the highly compensated
employees or forfeited from the highly
compensated employees’ accounts as provided in paragraph (1)(b)(iii) below. That
same dollar amount (i.e., the excess contribution amount, adjusted for earnings)
is contributed to the plan and allocated
to nonhighly compensated employees as
provided in paragraph (1)(b)(iv) below.
Under this correction method, a plan may
not be treated as two separate plans, one
covering otherwise excludable employees
and the other covering all other employees (as permitted in § 1.410(b)–6(b)(3)).
Likewise, restructuring the plan into component plans is not permitted.

2008–35 I.R.B.

(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),
§ 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 employer
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(6) of this
revenue procedure that must be corrected
(see sections 2.04 and 2.05 below).

500

(iv) Contribution and Allocation of
Equivalent Amount. (A) The employer
makes a contribution to the plan that
is equal to the aggregate amounts distributed and forfeited under paragraph
(1)(b)(iii)(A) (i.e., the excess contribution
amount adjusted for earnings, as provided
in paragraph (1)(b)(iii)(A), which does not
include any matching contributions forfeited in accordance with § 411(a)(3)(G)
as provided in paragraph (1)(b)(iii)(B)).
The contribution must satisfy the vesting
requirements and distribution limitations
of § 401(k)(2)(B) and (C).
(B)(1) This paragraph (1)(b)(iv)(B)(1)
applies to a plan that uses the current year testing method described in
§1.401(k)–2(a)(2),
§1.401(m)–2(a)(2)
and, for periods prior to the effective date
of those regulations, Notice 98–1, 1998–1
C.B. 327. The contribution made under
paragraph (1)(b)(iv)(A) is allocated to the
account balances of those individuals who
were either (I) the eligible employees for
the year of the failure who were 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 employer selects,
eligible employees must receive a uniform
allocation (as a percentage of compensation) of the contribution. (See Examples
1 and 2.) Under the one-to-one correction method, the amount allocated to the
account balance of an employee (i.e., the
employee’s share of the total amount contributed under paragraph (1)(b)(iv)(A)) is
not further adjusted for earnings and is
treated as an annual addition under § 415
for the year of the failure for the employee
for whom it is allocated.
(2) This paragraph (1)(b)(iv)(B)(2) applies to a plan that uses the prior year testing method described in §1.401(k)–2(a)(2)
and §1.401(m)–2(a)(2) and, for periods prior to the effective date of those

September 2, 2008

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”.
(3) 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-toone 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

September 2, 2008

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

501

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
case, a permitted correction method for
the failure is for the Employer to satisfy
this section 2.02(1)(a)(ii). The Employer
makes a QNEC on behalf of the excluded
employee. The method and examples described to correct the failure to include

2008–35 I.R.B.

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

2008–35 I.R.B.

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 catch-up 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 is determined by multiplying the ACP of the employee’s group (either highly or nonhighly

502

compensated), determined prior to correction under this section 2.02(1)(a)(ii)(C),
by the employee’s plan compensation for
the portion of the year during which the
employee was improperly excluded. If
the ACP consists of both matching and
after-tax employee contributions, then for
purposes of the preceding sentence, in lieu
of basing the missed after-tax employee
contributions on the ACP for the employee’s group (either highly compensated
or nonhighly compensated), the Employer
is permitted to determine separately the
portions of the ACP that are attributable to
matching contributions and after-tax employee contributions and base the missed
after-tax employee contributions on the
portion of the ACP that is attributable
to after-tax employee contributions. The
missed after-tax employee contribution
is reduced to the extent that (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

September 2, 2008

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

September 2, 2008

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.

503

(F) Special Rule for Brief Exclusion
from Elective Deferrals and After-Tax
Employee Contributions. An employer is
not required to make a corrective contribution with respect to elective deferrals
(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, a 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:

2008–35 I.R.B.

Compensation

Elective deferral

Match

After-Tax Employee
Contribution

$ 6,000
$12,000

$6,000
$4,500

0
$1,000

$12,000
$ 500

$2,400
$ 500

$1,000
0

Highly Compensated Employees (HCEs):
R
S

$200,000
$150,000

Nonhighly Compensated Employees (NHCEs):
T
U

$80,000
$50,000

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 (i.e., 50% x $2,400).
Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to
make elective deferrals to the plan is $1,200 (plus
earnings). 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 QNEC 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 QNEC is adjusted for earnings. Under the terms of the plan, if Employee V had
made an elective deferral of $2,400 or 8% of compensation ($30,000), the employee would have been
entitled to a matching contribution equal to 100% of
first 3% of Employee V’s compensation ($30,000)
or $900. Accordingly, the contribution required to

2008–35 I.R.B.

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 QNEC, 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
QNEC is further adjusted for earnings.
Example 4:
Employer C maintains a § 401(k) plan. The plan
provides for matching contributions for each payroll
period that are equal to 100% of an employee’s elective deferrals that do not exceed 2% of the eligible
employee’s plan compensation during the payroll period. The plan provides for after-tax employee contributions. The after-tax employee contribution cannot
exceed $1,000 for the plan year. The plan provides
that employees who complete one year of service are
eligible to participate in the plan on the next January 1
or July 1 entry date. Employee X, a nonhighly com-

504

pensated employee, who met the eligibility requirements and should have entered the plan on January 1,
2006, was not offered the opportunity to participate
in 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 2003 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, not receiving 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

September 2, 2008

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 corrective contribution 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. From January 1 through August 31, 2006.
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
corrective contribution is $360 (i.e., 50% multiplied
by the missed deferral amount of $720). The required
corrective contribution is adjusted for earnings.
(2) Corrective contribution for missed matching contribution: Under the terms of the plan, if
Employee X had made an elective deferral of $720
or 3% of compensation for the period of exclusion
($24,000), the employee would have been entitled
to a matching contribution equal to 2% of $24,000
or $480. The missed matching contribution is not
reduced because no plan limit is exceeded when
this amount is added to the matching contribution
already contributed for the 2006 plan year. Accordingly, the required corrective contribution is $480.
The required corrective contribution is adjusted for
earnings.
(3) Corrective contribution for missed after-tax
employee contribution: Employee X was eligible to,
but was not provided with the opportunity to elect
and make after-tax employee contributions from
January 1 through August 31 of 2006. Employer C
must make a corrective contribution to the plan on
behalf of Employee X equal to the missed opportunity to make after-tax employee contributions. The
missed opportunity to make after-tax employee contributions is equal to 40% of Employee X’s missed
after-tax employee contributions. The corrective
contribution is adjusted for earnings. The missed
after-tax employee contribution amount is equal to
the 0.5% ACP attributable to employee contributions
for nonhighly compensated employees multiplied
by $24,000 (8/12ths of the employee’s 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 corrective contribution is $48 (i.e., 40%
multiplied by the missed after-tax employee contribution of $120). The corrective contribution is
adjusted for earnings.
The total required QNEC on behalf of the employee is $888 ($360 for the missed deferral opportu-

September 2, 2008

nity plus $480 for the missed matching contribution
plus $48 for the missed opportunity to make after-tax
employee contributions).
Example 5:
The facts (including the ADP and ACP 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 corrective contribution 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 required corrective contribution is determined as follows:
Corrective contribution for missed after-tax
employee contribution: The missed after-tax employee contribution amount is equal to the 0.5%
ACP attributable to after-tax employee contributions
for nonhighly compensated employees multiplied
by $24,000 (8/12ths of the employee’s 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
corrective contribution is $20 (i.e., 40% multiplied
by the missed after-tax employee contribution of
$50). The corrective contribution is adjusted for
earnings.
Example 6:
Employer D sponsors a § 401(k) plan. The plan
has a one year of service eligibility requirement and
provides for January 1 and July 1 entry dates. Employee Y, who should have been provided the opportunity to elect and make elective deferrals on January 1, 2006, was not provided the opportunity to
elect and make elective deferrals until July 1, 2006.
The employee made $5,000 in elective deferrals to
the plan in 2006. The employee 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:
Corrective contribution for missed deferral: Employee W’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 W was erroneously
excluded, i.e., January 1 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 contribu-

505

tion ($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 $7,000 ($10,000 minus $3,000) and the
required corrective contribution is $3,500 (i.e., 50%
multiplied by the missed deferral of $7,000). The
corrective contribution is adjusted for earnings.
Example 7:
Employer E maintains a § 401(k) plan. The plan
provides for matching contributions for each payroll
period that are equal to 100% of an employee’s elective deferrals that do not exceed 2% of the eligible
employee’s plan compensation during the payroll period. The plan also provides that the annual limit on
matching contributions is $750. The plan provides
for after-tax employee contributions. The after-tax
employee contribution cannot exceed $1,000 during
a plan year. The plan provides that employees who
complete one year of service are eligible to participate in the plan on the next January 1 or July 1
entry date. Employee Z, a nonhighly compensated
employee who met the eligibility requirements and
should have entered the plan on January 1, 2006
was not offered the opportunity to participate in 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

2008–35 I.R.B.

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 corrective contribution for the failure to provide the employee with the opportunity to
make either elective deferrals or after-tax employee
contributions. The employer only needs to make a
corrective contribution for the failure to provide the
employee with the opportunity to receive matching
contributions on deferrals that could have been made
during the first 3 months of the plan year. The calculation of the corrective contribution required to correct this failure is shown as follows:
The missed matching contribution is determined
by calculating the matching contribution that the
employee would have received had the employee
been provided the opportunity to make elective deferrals during the period of exclusion, i.e., January
1, 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
required matching contribution for the period of exclusion is obtained by multiplying 2% by Employee
Z’s compensation of $10,000 (3/12ths of the employee’s 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 contribution is $110.
The corrective contribution is adjusted for earnings.

based on the missed deferral of $600, is $600. The
required corrective contribution for Employee M’s
missed matching contribution is $600. The total
required corrective contribution, before adjustments
for earnings, on behalf of Employee M is $900 (i.e.,
$300 for the missed deferral opportunity, plus $600
for the missed matching contribution). The corrective contribution is adjusted for earnings.
Example 9:
Same facts as Example 8, except that the plan provides for matching contributions equal to 100% of
elective deferrals that do not exceed 4% of an employee’s compensation.
Correction:
In accordance with the provisions of section
2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor § 401(k)
plan is 4% of compensation. The missed deferral
is 4% of compensation because the plan provides
for a 100% match for deferrals up to that level of
compensation. (See Appendix A section .05(2)(d).)
Therefore, in this case, Employee M’s missed deferral is equal to 4% multiplied by $20,000, or $800.
The required corrective contribution for Employee
M’s missed deferral opportunity in 2006 is $400,
i.e., 50% multiplied by $800. The required matching
contribution, based on the missed deferral of $800, is
$800. Thus, the required corrective contribution for
Employee M’s missed matching contribution is $800.
The total required corrective contribution, before adjustments for earnings, on behalf of Employee M is
$1,200 (i.e., $400 for the missed deferral opportunity
plus $800 for the missed matching contribution).
The corrective contribution is adjusted for earnings.
Example 10:
Same facts as Example 8, except that the plan uses
a rate of nonelective contributions to satisfy the requirements of §401(k)(12) and provides for a QNEC
equal to 3% of compensation.

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. Thus, the required corrective contribution 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.
The total required QNEC, before adjustments for
earnings, on behalf of Employee M is $900 (i.e., $300
for the missed deferral opportunity, plus $600 for
the missed nonelective contribution). The corrective
contribution is adjusted for earnings.

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, i.e.,
50% of $600. The required matching contribution,

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

2008–35 I.R.B.

506

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 (i.e., 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 5% 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 oppor-

September 2, 2008

tunity is $1,500 (i.e., 50% x $3,000). Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to make elective deferrals to the plan is $1,500 (plus 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 QNEC 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 QNEC 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 first 3% of Employee
T’s compensation ($30,000) or $900. Accordingly,
the contribution required to replace the missed employer matching contribution is $900 (plus earnings).
The total required corrective QNEC, 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).

(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 (e.g., the same ratio of allocation to compensation), taking into account all of the employee’s relevant factors (e.g., compensation) under that formula for that year. The Employer makes
a corrective contribution on behalf of the
excluded employee that is equal to the allo-

September 2, 2008

cation 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 non-

507

highly compensated employees. If there
has been an overall gain for the period
from the date of the original allocation of
the contribution through the date of correction, no adjustment for earnings is required
to the amount determined under section
2.02(2)(a)(iii)(C)(1) for the employee. If
the amount for the employee is being adjusted for earnings and the plan permits
investment of account balances in more
than one investment fund, for administrative convenience, the reduction to the employee’s account balance may be adjusted
by the lowest earnings rate of any fund
for the period from the date of the original allocation of the contribution through
the date of correction.
(3) If an employee’s account balance
is reduced and the original allocation was
made to more than one investment fund
or there was a subsequent distribution or
transfer from the fund receiving the original allocation, then reasonable, consistent assumptions are used to determine the
earnings adjustment.
(4) The amount determined in section 2.02(2)(a)(iii)(C)(1) for an employee after the application of section
2.02(2)(a)(iii)(C)(2) and (3) may not exceed the account balance of the employee
on the date of correction, and the employee
is permitted to retain any distribution made
prior to the date of correction.
(D) Reconciliation of Increases and
Reductions. If the aggregate amount of the
increases under section 2.02(2)(a)(iii)(B)
exceeds the aggregate amount of the reductions under section 2.02(2)(a)(iii)(C),
the Employer makes a corrective contribution to the plan for the amount of the
excess. If the aggregate amount of the
reductions under section 2.02(2)(a)(iii)(C)
exceeds the aggregate amount of the increases under section 2.02(2)(a)(iii)(B),
then the amount by which each employee’s
account balance is reduced under section
2.02(2)(a)(iii)(C) is decreased on a pro
rata basis.
(E) Reductions Among Multiple Investment Funds. If an employee’s account balance is reduced and the employee’s account balance is invested in more than one
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

2008–35 I.R.B.

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 eligi-

2008–35 I.R.B.

ble 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 earnings rate of each eligible
employee’s excess allocation (using reasonable, consistent assumptions). Accordingly, for an employee
who shared in the original allocation and directed
the investment of the allocation into more than one
investment fund or who subsequently transferred a
portion of a fund that had been credited with a portion
of the 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 earnings rate of the fund with
the lowest earnings rate for the period of the failure
to adjust the reduction to each account balance. It is
determined that the aggregate amount (adjusted for
earnings) by which the account balances of the excluded employees is increased exceeds the aggregate
amount (adjusted for earnings) by which the other
employees’ account balances are reduced. Accordingly, Employer D makes a contribution to the plan
in an amount equal to the excess. The reduction from
account balances is made on a pro rata basis among
all of the funds in which each employee’s account balance is invested.

.03 Vesting Failures.
(1) Correction Methods. (a) Contribution Correction Method. A failure in a defined contribution plan to apply the proper
vesting percentage to an employee’s account balance that results in forfeiture of
too large a portion of the employee’s account balance may be corrected using the
contribution correction method set forth
in this paragraph. The Employer makes
a corrective contribution on behalf of the
employee whose account balance was improperly forfeited in an amount equal to
the improper forfeiture. The corrective

508

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 Employer makes a corrective contribution to the plan for the amount
of the excess. In accordance with section
2.02(2)(a)(iii)(D), if the aggregate amount
of the reductions exceeds the aggregate
amount of the increases, then the amount
by which each employee’s account balance
is reduced is decreased on a pro rata basis.
(See Example 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 bal-

September 2, 2008

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

.04 § 415 Failures.
(1) Failures Relating to a § 415(b) Excess.
(a) Correction Methods. (i) Return of
Overpayment Correction Method. Overpayments as a result of amounts being paid
in excess of the limits of § 415(b) may
be corrected using the return of Overpayment correction method set forth in this
paragraph (1)(a)(i). The Employer takes
reasonable steps to have the Overpayment

September 2, 2008

(with appropriate interest) returned by the
recipient to the plan and reduces future
benefit payments (if any) due to the employee to reflect § 415(b). To the extent the amount returned by the recipient is less than the Overpayment, adjusted
for earnings at the plan’s earnings rate,
then the Employer or another person contributes the difference to the plan. In addition, in accordance with section 6.05 of
this revenue procedure, the Employer must
notify the recipient that the Overpayment
was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). (See Examples
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 (e.g., 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 (e.g., 75%) of the maximum
permitted under § 415(b), instead of the reduced annual periodic amount payable to
the employee.

509

(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 1998 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.

2008–35 I.R.B.

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

(2) Failures Relating to a § 415(c) Excess.
(a) Correction Methods. (i) Appendix
A Correction Method. Appendix A, sec-

tion .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:

Nonelective Contributions
Elective Deferrals
After-tax Contributions

T
$ 7,500
10,000
500

U
$ 4,500
5,800
0

Total Contributions
§ 415(c) Limit
§ 415(c) Excess

$18,000
$15,000
$ 3,000

$10,300
$10,000
$ 300

Correction:
Employer G uses the Appendix A correction
method to correct the § 415(c) excess with respect
to Employee T (i.e., $3,000). Thus, a distribution
of plan assets (and corresponding reduction of the
account balance) consisting of $500 (adjusted for

2008–35 I.R.B.

earnings) of after-tax employee contributions and
$2,500 (adjusted for earnings) of elective deferrals is
made to Employee T. Employer G uses the forfeiture
correction method to correct the § 415(c) excess with
respect to Employee U. Thus, the § 415(c) excess
is deemed to consist solely of the nonelective contributions. Accordingly, Employee U’s nonvested

510

account balance is reduced by $300 (adjusted for
earnings) which is placed in an unallocated account,
as described in section 6.06(2) of this revenue procedure, to be used to reduce employer contributions in
succeeding year(s). After correction, it is determined
that the ADP and ACP tests for 1998 were satisfied.

September 2, 2008

Example 23:
Employer H maintains a § 401(k) plan. The
plan provides for nonelective employer contributions, matching contributions and elective deferrals.
The plan provides for matching contributions that
are equal to 100% of an employee’s elective deferrals that do not exceed 8% of the employee’s
plan compensation for the plan year. For the 1998
limitation year, Employee V had § 415 compensation of $50,000, and, accordingly, a § 415(c)(1)(B)
limit of $12,500. During that limitation year, the
annual additions for Employee V totaled $15,000,
consisting of $5,000 in elective deferrals, a $4,000
matching contribution (8% of $50,000), and a $6,000
nonelective employer contribution. Thus, the annual
additions for Employee V exceeded the § 415(c)
limit by $2,500.
Correction:
Employer H uses the Appendix A correction
method to correct the § 415(c) excess with respect
to Employee V (i.e., $2,500). Accordingly, $1,000
of the unmatched elective deferrals (adjusted for
earnings) are distributed to Employee V. The remaining $1,500 excess is apportioned equally between
the elective deferrals and the associated matching
employer contributions, so Employee V’s account
balance is further reduced by distributing to Employee V $750 (adjusted for earnings) of the elective
deferrals and forfeiting $750 (adjusted for earnings)
of the associated employer matching contributions.
The forfeited matching contributions are placed in an
unallocated account, as described in section 6.06(2)
of this revenue procedure, to be used to reduce employer contributions in succeeding year(s). After
correction, it is determined that the ADP and ACP
tests for 1998 were satisfied.

.05 Correction of Other Overpayment
Failures.
An Overpayment, other than one described in section 2.04(1) (relating to a
§ 415(b) excess) or section 2.04(2) (relating to a § 415(c) excess), may be corrected in accordance with this section 2.05.
An Overpayment from a defined benefit
plan is corrected in accordance with the
rules in section 2.04(1). An Overpayment
from a defined contribution plan is corrected in accordance with the rules in section 2.04(2)(a)(iii).
.06 § 401(a)(17) Failures.
(1) Reduction of Account Balance Correction Method. The allocation of contributions or forfeitures under a defined contribution plan for a plan year on the basis of
compensation in excess of the limit under
§ 401(a)(17) for the plan year may be corrected using the reduction of account balance correction method set forth in section
6.06(2) of this revenue procedure.
(2) Example.

September 2, 2008

Example 24:
Employer J maintains a money purchase pension
plan. Under the plan, an eligible employee is entitled
to an employer contribution of 8% of the employee’s
compensation up to the § 401(a)(17) limit ($220,000
for 2006). During the 2006 plan year, an eligible
employee, Employee W, inadvertently was credited
with a contribution based on compensation above the
§ 401(a)(17) limit. Employee W’s compensation for
2006 was $250,000. Employee W received a contribution of $20,000 for 2006 (8% of $250,000), rather
than the contribution of $17,600 (8% of $220,000)
provided by the plan for that year, resulting in an improper allocation of $2,400.
Correction:
The § 401(a)(17) failure is corrected using the reduction of account balance method by reducing Employee W’s account balance by $2,400 (adjusted for
earnings) and crediting that amount to an unallocated
account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer contributions in succeeding year(s).

.07 Correction by Amendment.
(1) § 401(a)(17) Failures. (a) Contribution Correction Method. In addition to the
reduction of account balance correction
method under section 6.06(2) of this revenue procedure, an employer may correct
a § 401(a)(17) failure for a plan year under
a defined contribution plan by using the
contribution correction method set forth in
this paragraph. The Employer contributes
an additional amount on behalf of each of
the other employees (excluding each employee for whom there was a § 401(a)(17)
failure) who received an allocation for the
year of the failure, amending the plan (as
necessary) to provide for the additional
allocation. The amount contributed for an
employee is equal to the employee’s plan
compensation for the year of the failure
multiplied by a fraction, the numerator of
which is the improperly allocated amount
made on behalf of the employee with the
largest improperly allocated amount, and
the denominator of which is the limit under § 401(a)(17) applicable to the year
of the failure. The resulting additional
amount for each of the other employees is
adjusted for earnings. (See Example 25.)
(b) Example.
Example 25:
The facts are the same as in Example 24.
Correction:
Employer J corrects the failure under VCP using
the contribution correction method by (1) amending the plan to increase the contribution percentage
for all eligible employees (other than Employee
W) for the 2003 plan year and (2) contributing an

511

additional amount (adjusted for earnings) for those
employees for that plan year. To determine the
increase in the plan’s contribution percentage (and
the additional amount contributed on behalf of each
eligible employee), the improperly allocated amount
($2,400) is divided by the § 401(a)(17) limit for 2006
($220,000). Accordingly, the plan is amended to
increase the contribution percentage by 1.09 percentage points ($2,400/$220,000) from 8% to 9.09%. In
addition, each eligible employee for the 2006 plan
year (other than Employee W) receives an additional
contribution of 1.09% multiplied by that employee’s
plan compensation for 2006. This additional contribution is adjusted for earnings.

(2) Hardship Distribution Failures and
Plan Loan Failures. (a) Plan Amendment Correction Method. The Operational
Failure of making hardship distributions
to employees under a plan that does not
provide for hardship distributions may
be corrected using the plan amendment
correction method set forth in this paragraph. The plan is amended retroactively
to provide for the hardship distributions
that were made available. This paragraph
does not apply unless (i) the amendment
satisfies § 401(a), and (ii) the plan as
amended would have satisfied the qualification requirements of § 401(a) (including
the requirements applicable to hardship
distributions under § 401(k), if applicable)
had the amendment been adopted when
hardship distributions were first made
available. (See Example 26.) The Plan
Amendment Correction Method is also
available for the Operational Failure of
permitting plan loans to employees under a plan that does not provide for plan
loans. The plan is amended retroactively
to provide for the plan loans that were
made available. This paragraph does not
apply unless (i) the amendment satisfies
§ 401(a), and (ii) the plan as amended
would have satisfied the qualification
requirements of § 401(a) (and the requirements applicable to plan loans under
§ 72(p)) had the amendment been adopted
when plan loans were first made available.
(b) Example.
Example 26:
Employer K, a for-profit corporation, maintains
a § 401(k) plan. Although plan provisions in 2005
did not provide for hardship distributions, beginning
in 2005 hardship distributions of amounts allowed to
be distributed under § 401(k) were made currently
and effectively available to all employees (within the
meaning of § l.401(a)(4)–4). The standard used to determine hardship satisfied the deemed hardship distribution standards in § 1.401(k)–1(d). Hardship distributions were made to a number of employees during

2008–35 I.R.B.

the 2005 and 2006 plan years, creating an Operational
Failure. The failure was discovered in 2007.
Correction:
Employer K corrects the failure under VCP by
adopting a plan amendment, effective January 1,
2005, to provide a hardship distribution option that
satisfies the rules applicable to hardship distributions
in § 1.401(k)–1(d). The amendment provides that
the hardship distribution option is available to all
employees. Thus, the amendment satisfies § 401(a),
and the plan as amended in 2005 would have satisfied § 401(a) (including § 1.401(a)(4)–4 and the
requirements applicable to hardship distributions
under § 401(k)) if the amendment had been adopted
in 2005.

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment Correction Method. The Operational
Failure of including an otherwise eligible
employee in the plan who either (i) has
not completed the plan’s minimum age
or service requirements, or (ii) has completed the plan’s minimum age or service
requirements but became a participant in
the plan on a date earlier than the applicable plan entry date, may be corrected
by using the plan amendment correction
method set forth in this paragraph. The
plan is amended retroactively to change
the eligibility or entry date provisions to
provide for the inclusion of the ineligible
employee to reflect the plan’s actual operations. The amendment may change the
eligibility or entry date provisions with
respect to only those ineligible employees
that were wrongly included, and only to
those ineligible employees, provided (i)
the amendment satisfies § 401(a) at the
time it is adopted, (ii) the amendment
would have satisfied § 401(a) had the
amendment been adopted at the earlier
time when it is effective, and (iii) the employees affected by the amendment are
predominantly nonhighly compensated
employees.
(b) Example.
Example 27:
Employer L maintains a § 401(k) plan applicable
to all of its employees who have at least six months
of service. The plan is a calendar year plan. The
plan provides that Employer L will make matching
contributions based upon an employee’s salary reduction contributions. In 2007, it is discovered that all
four employees who were hired by Employer L in
2006 were permitted to make salary reduction contributions to the plan effective with the first weekly
paycheck after they were employed. Three of the four
employees are nonhighly compensated. Employer L
matched these employees’ salary reduction contributions in accordance with the plan’s matching contribution formula. Employer L calculates the ADP and

2008–35 I.R.B.

ACP tests for 2006 (taking into account the salary reduction and matching contributions that were made
for these employees) and determines that the tests
were satisfied.
Correction:
Employer L corrects the failure under SCP by
adopting a plan amendment, effective for employees
hired on or after January 1, 2006, to provide that there
is no service eligibility requirement under the plan
and submitting the amendment to the Service for a
determination letter.

SECTION 3. EARNINGS
ADJUSTMENT METHODS AND
EXAMPLES
.01 Earnings Adjustment Methods. (1)
In general. (a) Under section 6.02(4)(a)
of this revenue procedure, whenever the
appropriate correction method for an Operational Failure in a defined contribution
plan includes a corrective contribution or
allocation that increases one or more employees’ account balances (now or in the
future), the contribution or allocation is
adjusted for earnings and forfeitures. This
section 3 provides earnings adjustment
methods (but not forfeiture adjustment
methods) that may be used by an employer to adjust a corrective contribution
or allocation for earnings in a defined
contribution plan. Consequently, these
earnings adjustment methods may be used
to determine the earnings adjustments
for corrective contributions or allocations
made under the correction methods in section 2 and under the correction methods
in Appendix A. If an earnings adjustment
method in this section 3 is used to adjust
a corrective contribution or allocation,
that adjustment is treated as satisfying the
earnings adjustment requirement of section 6.02(4)(a) of this revenue procedure.
Other earnings adjustment methods, different from those illustrated in this section
3, may also be appropriate for adjusting
corrective contributions or allocations to
reflect earnings.
(b) Under the earnings adjustment
methods of this section 3, a corrective
contribution or allocation that increases an
employee’s account balance is adjusted to
reflect an “earnings amount” that is based
on the earnings rate(s) (determined under
section 3.01(3)) for the period of the failure (determined under section 3.01(2)).
The earnings amount is allocated in accordance with section 3.01(4).

512

(c) The rule in section 6.02(5)(a) of this
revenue procedure permitting reasonable
estimates in certain circumstances applies
for purposes of this section 3. For this purpose, a determination of earnings made in
accordance with the rules of administrative convenience set forth in this section
3 is treated as a precise determination of
earnings. Thus, if the probable difference
between an approximate determination of
earnings and a determination of earnings
under this section 3 is insignificant and the
administrative cost of a precise determination would significantly exceed the probable difference, reasonable estimates may
be used in calculating the appropriate earnings.
(d) This section 3 does not apply to
corrective distributions or corrective reductions in account balances. Thus, for
example, while this section 3 applies in
increasing the account balance of an improperly excluded employee to correct
the exclusion of the employee under the
reallocation correction method described
in section 2.02(2)(a)(iii)(B), this section
3 does not apply in reducing the account
balances of other employees under the reallocation correction method. (See section
2.02(2)(a)(iii)(C) for rules that apply to
the earnings adjustments for such reductions.) In addition, this section 3 does not
apply in determining earnings adjustments
under the one-to-one correction method
described in section 2.01(1)(b)(iii).
(2) Period of the Failure. (a) General
Rule. For purposes of this section 3, the
“period of the failure” is the period from
the date that the failure began through the
date of correction. For example, in the case
of an improper forfeiture of an employee’s
account balance, the beginning of the period of the failure is the date as of which the
account balance was improperly reduced.
See section 6.02(4)(e) of this revenue procedure.
(b) Rules for Beginning Date for Exclusion of Eligible Employees from Plan.
(i) General Rule. In the case of an exclusion of an eligible employee from a plan
contribution, the beginning of the period
of the failure is the date on which contributions of the same type (e.g., elective
deferrals, matching contributions, or discretionary nonelective employer contributions) were made for other employees for
the year of the failure. In the case of an
exclusion of an eligible employee from an

September 2, 2008

allocation of a forfeiture, the beginning
of the period of the failure is the date on
which forfeitures were allocated to other
employees for the year of the failure.
(ii) Exclusion from a 401(k) or (m)
Plan. For administrative convenience,
for purposes of calculating the earnings
rate for corrective contributions for a plan
year (or the portion of the plan year) during which an employee was improperly
excluded from making periodic elective
deferrals or after-tax employee contributions, or from receiving periodic matching
contributions, the Employer may treat the
date on which the contributions would
have been made as the midpoint of the plan
year (or the midpoint of the portion of the
plan year) for which the failure occurred.
Alternatively, in this case, the Employer
may treat the date on which the contributions would have been made as the first
date of the plan year (or the portion of
the plan year) during which an employee
was excluded, provided that the earnings
rate used is one half of the earnings rate
applicable under section 3.01(3) for the
plan year (or the portion of the plan year)
for which the failure occurred.
(3) Earnings Rate. (a) General Rule.
For purposes of this section 3, the earnings rate generally is based on the investment results that would have applied to the
corrective contribution or allocation if the
failure had not occurred.
(b) Multiple Investment Funds. If a
plan permits employees to direct the investment of account balances into more
than one investment fund, the earnings rate
is based on the rate applicable to the employee’s investment choices for the period
of the failure. For administrative convenience, if most of the employees for whom
the corrective contribution or allocation is
made are nonhighly compensated employees, the rate of return of the fund with the
highest earnings rate under the plan for the
period of the failure may be used to determine the earnings rate for all corrective
contributions or allocations. If the employee had not made any applicable investment choices, the earnings rate may be
based on the earnings rate under the plan
as a whole (i.e., the average of the rates
earned by all of the funds in the valuation periods during the period of the failure
weighted by the portion of the plan assets
invested in the various funds during the period of the failure).

September 2, 2008

(c) Other Simplifying Assumptions. For
administrative convenience, the earnings
rate applicable to the corrective contribution or allocation for a valuation period
with respect to any investment fund may
be assumed to be the actual earnings rate
for the plan’s investments in that fund during that valuation period. For example,
the earnings rate may be determined without regard to any special investment provisions that vary according to the size of the
fund. Further, the earnings rate applicable
to the corrective contribution or allocation
for a portion of a valuation period may be
a pro rata portion of the earnings rate for
the entire valuation period, unless the application of this rule would result in either
a significant understatement or overstatement of the actual earnings during that portion of the valuation period.
(4) Allocation Methods. (a) In General.
For purposes of this section 3, the earnings
amount generally may be allocated in accordance with any of the methods set forth
in this paragraph (4). The methods under
paragraph (4)(c), (d), and (e) are intended
to be particularly helpful where corrective
contributions are made at dates between
the plan’s valuation dates.
(b) Plan Allocation Method. Under
the plan allocation method, the earnings
amount is allocated to account balances
under the plan in accordance with the
plan’s method for allocating earnings as if
the failure had not occurred. (See, Example 28.)
(c) Specific Employee Allocation
Method. Under the specific employee
allocation method, the entire earnings
amount is allocated solely to the account
balance of the employee on whose behalf
the corrective contribution or allocation
is made (regardless of whether the plan’s
allocation method would have allocated
the earnings solely to that employee). In
determining the allocation of plan earnings for the valuation period during which
the corrective contribution or allocation is
made, the corrective contribution or allocation (including the earnings amount) is
treated in the same manner as any other
contribution under the plan on behalf of
the employee during that valuation period.
Alternatively, where the plan’s allocation
method does not allocate plan earnings
for a valuation period to a contribution
made during that valuation period, plan
earnings for the valuation period during

513

which the corrective contribution or allocation is made may be allocated as if
that employee’s account balance had been
increased as of the last day of the prior
valuation period by the corrective contribution or allocation, including only that
portion of the earnings amount attributable to earnings through the last day of the
prior valuation period. The employee’s
account balance is then further increased
as of the last day of the valuation period
during which the corrective contribution
or allocation is made by that portion of the
earnings amount attributable to earnings
after the last day of the prior valuation
period. (See Example 29.)
(d) Bifurcated Allocation Method. Under the bifurcated allocation method, the
entire earnings amount for the valuation
periods ending before the date the corrective contribution or allocation is made is
allocated solely to the account balance of
the employee on whose behalf the corrective contribution or allocation is made.
The earnings amount for the valuation period during which the corrective contribution or allocation is made is allocated in accordance with the plan’s method for allocating other earnings for that valuation period in accordance with section 3.01(4)(b).
(See Example 30.)
(e) Current Period Allocation Method.
Under the current period allocation
method, the portion of the earnings amount
attributable to the valuation period during which the period of the failure begins
(“first partial valuation period”) is allocated in the same manner as earnings for
the valuation period during which the corrective contribution or allocation is made
in accordance section 3.01(4)(b). The
earnings for the subsequent full valuation
periods ending before the beginning of
the valuation period during which the corrective contribution or allocation is made
are allocated solely to the employee for
whom the required contribution should
have been made. The earnings amount
for the valuation period during which the
corrective contribution or allocation is
made (“second partial valuation period”)
is allocated in accordance with the plan’s
method for allocating other earnings for
that valuation period in accordance with
section 3.01(4)(b). (See Example 31.)
.02 Examples.

2008–35 I.R.B.

Example 28:
Employer L maintains a profit-sharing plan that
provides only for nonelective contributions. The plan
has a single investment fund. Under the plan, assets
are valued annually (the last day of the plan year) and
earnings for the year are allocated in proportion to account balances as of the last day of the prior year, after
reduction for distributions during the current year but
without regard to contributions received during the
current year (the “prior year account balance”). Plan
contributions for 1997 were made on March 31, 1998.
On April 20, 2000 Employer L determines that an operational failure occurred for 1997 because Employee
X was improperly excluded from the plan. Employer
L decides to correct the failure by using the Appendix A correction method for the exclusion of an el-

igible employee from nonelective contributions in a
profit-sharing plan. Under this method, Employer L
determines that this failure is corrected by making a
contribution on behalf of Employee X of $5,000 (adjusted for earnings). The earnings rate under the plan
for 1998 was +20%. The earnings rate under the plan
for 1999 was +10%. On May 15, 2000, when Employer L determines that a contribution to correct for
the failure will be made on June 1, 2000, a reasonable
estimate of the earnings rate under the plan from January 1, 2000 to June 1, 2000 is +12%.
Earnings Adjustment on the Corrective Contribution:
The $5,000 corrective contribution on behalf of
Employee X is adjusted to reflect an earnings amount

Time Periods
3/31/98 — 12/31/98 (First Partial Valuation Period)
1/1/99 — 12/31/99
1/1/00 — 6/1/00 (Second Partial Valuation Period)
If the $5,000 corrective contribution had been
contributed for Employee X on March 31, 1998, (1)
earnings for 1998 would have been increased by the
amount of the earnings on the additional $5,000 contribution from March 31, 1998 through December 31,
1998 and would have been allocated as 1998 earnings
in proportion to the prior year (December 31, 1997)
account balances, (2) Employee X’s account balance
as of December 31, 1998 would have been increased
by the additional $5,000 contribution, (3) earnings for
1999 would have been increased by the 1999 earnings on the additional $5,000 contribution (including
1998 earnings thereon) allocated in proportion to the
prior year (December 31, 1998) account balances
along with other 1999 earnings, and (4) earnings
for 2000 would have been increased by the earnings
on the additional $5,000 (including 1998 and 1999
earnings thereon) from January 1 to June 1, 2000 and
would be allocated in proportion to the prior year

2008–35 I.R.B.

based on the earnings rates for the period of the failure (March 31, 1998 through June 1, 2000) and the
earnings amount is allocated using the plan allocation method. Employer L determines that a pro rata
simplifying assumption may be used to determine the
earnings rate for the period from March 31, 1998 to
December 31, 1998, because that rate does not significantly understate or overstate the actual earnings
for that period. Accordingly, Employer L determines
that the earnings rate for that period is 15% (9/12 of
the plan’s 20% earnings rate for the year). Thus, applicable earnings rates under the plan during the period of the failure are:

Earnings Rate
+15%
+10%
+12%

(December 31, 1999) account balances along with
other 2000 earnings. Accordingly, the $5,000 corrective contribution is adjusted to reflect an earnings
amount of $2,084 ($5,000[(1.15)(1.10)(1.12)–1])
and the earnings amount is allocated to the account
balances under the plan allocation method as follows:
(a) Each account balance that shared in the allocation of earnings for 1998 is increased, as of December 31, 1998, by its appropriate share of the earnings
amount for 1998, $750 ($5,000(.15)).
(b) Employee X’s account balance is increased, as
of December 31, 1998, by $5,000.
(c) The resulting December 31, 1998 account
balances will share in the 1999 earnings, including
the $575 for 1999 earnings included in the corrective
contribution ($5,750(.10)), to determine the account
balances as of December 31, 1999. However, each
account balance other than Employee X’s account
balance has already shared in the 1999 earnings,

514

excluding the $575. Accordingly, Employee X’s account balance as of December 31, 1999 will include
$500 of the 1999 portion of the earnings amount
based on the $5,000 corrective contribution allocated
to Employee X’s account balance as of December
31, 1998 ($5,000(.10)). Then each account balance
that originally shared in the allocation of earnings
for 1999 (i.e., excluding the $5,500 additions to
Employee X’s account balance) is increased by its
appropriate share of the remaining 1999 portion of
the earnings amount, $75.
(d) The resulting December 31, 1999 account balances (including the $5,500 additions to Employee
X’s account balance) will share in the 2000 portion
of the earnings amount based on the estimated January 1, 2000 to June 1, 2000 earnings included in the
corrective contribution equal to $759 ($6,325(.12)).
(See Table 1.)

September 2, 2008

TABLE 1
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Corrective Contribution

Amount

Allocated to:

$5,000

Employee X

First Partial Valuation Period Earnings

15%

750

1

1999 Earnings

10%

575

2

Second Partial Valuation Period
Earnings

12%

759

3

Total Amount Contributed

All 12/31/1997 Account Balances

4

Employee X ($500)/All 12/31/1998
4
Account Balances ($75)
All 12/31/1999 Account Balances
4
(including Employee X’s $5,500)

$7,084

1

$5,000 x 15%
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
4
After reduction for distributions during the year for which earning are being determined but without regard to contributions received during the year for
which earnings are being determined.
2

Example 29:
The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the same as in Example 30, but the earnings
amount is allocated using the specific employee al-

location method. Thus, the entire earnings amount
for all periods through June 1, 2000 (i.e., $750 for
March 31, 1998 to December 31, 1998, $575 for
1999, and $759 for January 1, 2000 to June 1, 2000)
is allocated to Employee X. Accordingly, Employer
L makes a contribution on June 1, 2000 to the plan
of $7,084 ($5,000(1.15)(1.10)(1.12)). Employee X’s

account balance as of December 31, 2000 is increased
by $7,084. Alternatively, Employee X’s account balance as of December 31, 1999 is increased by $6,325
($5,000(1.15)(1.10)), which shares in the allocation
of earnings for 2000, and Employee X’s account balance as of December 31, 2000 is increased by the remaining $759. (See Table 2.)

TABLE 2
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Corrective Contribution
First Partial Valuation Period Earnings
1999 Earnings
Second Partial Valuation Period
Earnings

Amount

Allocated to:

$5,000

Employee X

15%
10%
12%

Total Amount Contributed

750

1

Employee X

575

2

Employee X

759

3

Employee X

$7,084

1

$5,000 x 15%
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
2

Example 30:
The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the same as in Example 23, but the earnings

September 2, 2008

amount is allocated using the bifurcated allocation
method. Thus, the earnings for the first partial valuation period (March 31, 1998 to December 31,
1998) and the earnings for 1999 are allocated to
Employee X. Accordingly, Employer L makes a
contribution on June 1, 2000 to the plan of $7,084

515

($5,000(1.15)(1.10)(1.12)). Employee X’s account
balance as of December 31, 1999 is increased by
$6,325 ($5,000(1.15)(1.10)); and the December 31,
1999 account balances of employees (including Employee X’s increased account balance) will share
in estimated January 1, 2000 to June 1, 2000 earn-

2008–35 I.R.B.

ings on the corrective contribution equal to $759
($6,325(.12)). (See Table 3.)

TABLE 3
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Corrective Contribution
First Partial Valuation Period Earnings

Amount

Allocated to:

$5,000

Employee X

15%

750

1

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

1999 Earnings

10%

575

2

Second Partial Valuation Period
Earnings

12%

759

3

Total Amount Contributed

$7,084

1

$5,000 x 15%
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
4
After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year.
2

Example 31:
The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the same as in Example 23, but the earnings
amount is allocated using the current period allocation method. Thus, the earnings for the first partial
valuation period (March 31, 1998 to December 31,
1998) are allocated as 2000 earnings. Accordingly,

Employer L makes a contribution on June 1, 2000 to
the plan of $7,084 ($5,000 (1.15)(1.10)(1.12)). Employee X’s account balance as of December 31, 1999
is increased by the sum of $5,500 ($5,000(1.10)) and
the remaining 1999 earnings on the corrective contribution equal to $75 ($5,000(.15)(.10)). Further, both
(1) the estimated March 31, 1998 to December 31,
1998 earnings on the corrective contribution equal
to $750 ($5,000(.15)) and (2) the estimated January
1, 2000 to June 1, 2000 earnings on the corrective

contribution equal to $759 ($6,325(.12)) are treated
in the same manner as 2000 earnings by allocating
these amounts to the December 31, 2000 account balances of employees in proportion to account balances
as of December 31, 1999 (including Employee X’s increased account balance). (See Table 4.) Thus, Employee X is allocated the earnings for the full valuation period during the period of the failure.

TABLE 4
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Corrective Contribution

Amount

Allocated to:

$5,000

Employee X

First Partial Valuation Period Earnings

15%

750

1

1999 Earnings

10%

575

2

Employee X

759

3

12/31/99 Account Balances (including
4
Employee X’s $5,575)

Second Partial Valuation Period
Earnings
Total Amount Contributed

12%

12/31/99 Account Balances (including
4
Employee X’s $5,575)

$7,084

1

$5,000 x 15%
$5,750($5,000 +750) x 10%
3
$6,325($5,000 +750 +575) x 12%
4
After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year for
which earnings are being determined.
2

2008–35 I.R.B.

516

September 2, 2008

APPENDIX C
VCP CHECKLIST
EIN:

Plan Name:

Plan #:

INSTRUCTIONS
NOTE: If you are submitting a Streamlined Application under VCP using Appendix F in accordance with section 11.02 of this
revenue procedure, this Appendix C does not need to be completed. If you are submitting a VCP submission using Appendix D,
then Part I of this Appendix C does not need to be completed.
The Service will be able to respond more quickly to your VCP request if it is carefully prepared and complete. To ensure that your
request is in order, use this checklist. Sign and date the checklist (as plan sponsor or authorized representative) and include it in
the submission as provided in section 11.10 of Rev. Proc. 2008–50. (Hereafter, all section references are to Rev. Proc. 2008–50)
You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request,
substantive consideration of your submission will be deferred until a completed checklist is received.

PART I – PLAN INFORMATION
1. APPLICANT’S NAME
2. APPLICANT’S ADDRESS

3. APPLICANT’S TELEPHONE NO.

4. FAX NO.
(optional)

(optional)

5. APPLICANT’S EIN

6. PLAN NO.
(do not use a Social Security Number)

7. PLAN NAME
8. TYPE OF SUBMISSION

□
□
□
□
□

REGULAR SUBMISSION
REGULAR SUBMISSION — ANONYMOUS
REGULAR SUBMISSION — MULTI-EMPLOYER PLAN
REGULAR SUBMISSION — MULTIPLE EMPLOYER PLAN
GROUP SUBMISSION

September 2, 2008

517

2008–35 I.R.B.

9. TYPE OF PLAN (CHECK ONE ONLY):

□
□
□
□
□
□
□
□

01

PROFIT SHARING

02

401(k)

03

MONEY PURCHASE

04

DEFINED BENEFIT

05

ESOP

06

TARGET BENEFIT

07

403(b)

08

457

□
□
□
□
□
□
□
□

09

CASH BALANCE

10

GOVERNMENTAL PLAN (§ 414(d))

11

SEP

12

SARSEP

13

SIMPLE

14

STOCK BONUS

15

KSOP

16

OTHER (specify):

10. DATE (month and day) ON WHICH PLAN YEAR ENDS

.

11. NUMBER OF PARTICIPANTS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES
(See Rev. Proc. 2008–50, section 12.07.):
12. ASSETS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES (ROUND TO
NEAREST DOLLAR): $
See Rev. Proc. 2008–50, section 12.07.
If the Applicant is being represented by someone in connection with this matter or wishes to authorize someone to
receive information from us in connection with this matter, submit a completed Form 2848 or Form 8821 and complete
items 13 through 18.
13. NAME OF APPLICANT’S REPRESENTATIVE
14. NAME OF REPRESENTATIVE’S FIRM (if applicable)
15. REPRESENTATIVE’S ADDRESS

16. REPRESENTATIVE’S PHONE NO.

17. FAX NO.

18. REPRESENTATIVE’S E-MAIL ADDRESS
(optional)

PART II – SUBMISSION REQUIREMENTS
Answer each question by answering “Yes” or “N/A” as appropriate

Yes

N/A

Question
1. Have you included an explanation of how and why the failure(s) arose,
including a description of the applicable administrative procedures for the
plan in effect at the time the failure(s) occurred?

2008–35 I.R.B.

518

Reference
(Rev. Proc.
section)
11.03(6)

September 2, 2008

Yes

Question

Reference
(Rev. Proc.
section)

2. Have you included a detailed description of the method for correcting
the failure(s) identified in your submission? This description must include,
for example, the number of employees affected and the expected cost of
correction (both of which may be approximated if the exact number cannot
be determined at the time of the request), the years involved, and calculations
or assumptions the Plan Sponsor used to determine the amounts needed for
correction. Note that each step of the correction method must be described
in narrative form.

11.03(7)

3. If you are you requesting that participant loans being corrected under
this revenue procedure not be treated as distributions pursuant to § 72(p),
have you included the request and a detailed description of the failure?
Alternatively, if you are requesting that participant loans being corrected
under this revenue procedure be recognized as distributions in the year of
correction instead of the year that the deemed distribution occurred under
§ 72(p), have you included the request and a detailed description of the
failure?

11.03(13)

4. Have you described the earnings or interest methodology (indicating
computation period and basis for determining earnings or interest rates) that
will be used to calculate earnings or interest on any corrective contributions
or distributions? (As a general rule, the interest rate (or rates) earned by
the plan during the applicable period(s) should be used in determining the
earnings for corrective contributions or distributions.)

11.03(8)

5. Have you submitted specific calculations for either all affected employees
or a representative sample of affected employees? In lieu of providing
correction calculations with respect to each employee affected by a failure,
you may submit calculations with respect to a representative sample of
affected employees. However, the representative sample calculations must
be sufficient to demonstrate each aspect of the correction method proposed.

11.03(9)

6. If you are requesting a waiver of the excise tax under § 4974 of the Code,
have you included the request, and, if applicable, an explanation supporting
the request for any affected owner-employee or 10 percent owner?

11.03(12)

7. If you are requesting relief of the excise tax under §§ 4972, 4973, or 4979,
have you included the request and a detailed description of the failure?

11.03(12)

8. Have you described the method that will be used to locate and notify
former employees or, if there are no former employees affected by the
failure(s) or the correction(s), provided an affirmative statement to that
effect?

11.03(10)

9. Have you provided a description of the administrative measures that have
been or will be implemented to ensure that the same failure(s) do not recur?

11.03(11)

10. Have you included a statement that, to the best of the Plan Sponsor’s
knowledge, the plan is not currently under an Employee Plans examination?

11.03(14)

11. Have you included a statement that, to the best of the Plan Sponsor’s
knowledge, the Plan Sponsor is not under an Exempt Organizations
examination?

11.03(14)

12. Have you included a statement that neither the plan nor the Plan Sponsor
has been a party to an abusive tax avoidance transaction? Alternatively, have
you provided a statement identifying the abusive tax avoidance transaction(s)
to which the plan or the Plan Sponsor has been a party?

11.03(15)

N/A

September 2, 2008

519

2008–35 I.R.B.

Yes

Question

Reference
(Rev. Proc.
section)

13. If the submission includes a failure related to Transferred Assets, have
you included a description of the related employer transaction, including the
date of the employer transaction and the date the assets were transferred
to the plan?

11.03(16)

14. Have you included a copy of the portions of the plan document (and
adoption agreement, if applicable) relevant to the failure(s) and method(s) of
correction?

11.04(1)

15. Have you included the original signature of the sponsor or the sponsor’s
authorized representative?

11.07

16. Have you included a Power of Attorney (Form 2848) or Tax Information
Authorization (Form 8821)? Note: Authorization to represent a plan sponsor
before the Service using Form 2848 is limited to attorneys, certified public
accountants, enrolled agents, enrolled retirement plan agents, and enrolled
actuaries.

11.08

17. Have you included a Penalty of Perjury Statement signed (original
signature only) and dated by the Plan Sponsor?

11.09

18. Have you submitted the Appendix E acknowledgement letter?

11.12

N/A

19. Where applicable, have you submitted an application for a determination
letter and Form 8717 together with a check for the user fee made payable
to the U.S. Treasury?
20. If the plan is currently being considered in an unrelated determination
letter application, have you included a statement to that effect?
21. Have you included a check for the VCP compliance fee, and, if
applicable, a separate check for the determination letter fee, each made
payable to the U. S. Treasury?
22. If your submission is for a terminating Orphan Plan, have you included a
request for a waiver of the VCP fee?
23. Have you assembled your submission as described in section 11.15?

10.05 and 11.04(2)

11.03(17)

11.04 and 11.05

11.03(22)
11.15

If you inserted “N/A” for any item, enter an explanation here:

Signature

Date

Title or Authority
Typed or printed name of person signing checklist

2008–35 I.R.B.

520

September 2, 2008

APPENDIX D
VCP SUBMISSION
Plan Name:
EIN:
(Please include the plan name, EIN, and plan number information on each page of the submission.)

Plan #:

PART I – PLAN INFORMATION
1. APPLICANT’S NAME
2. APPLICANT’S ADDRESS

3. APPLICANT’S TELEPHONE NO.

4. FAX NO.
(optional)

(optional)

5. APPLICANT’S EIN

6. PLAN NO.
(do not use a Social Security Number)

7. PLAN NAME
8. TYPE OF SUBMISSION

□
□
□
□
□

REGULAR SUBMISSION
REGULAR SUBMISSION — ANONYMOUS
REGULAR SUBMISSION — MULTI-EMPLOYER PLAN
REGULAR SUBMISSION — MULTIPLE EMPLOYER PLAN
GROUP SUBMISSION

9. TYPE OF PLAN (CHECK ONE ONLY):

□
□
□
□
□
□
□
□

01

PROFIT SHARING

02

401(k)

03

MONEY PURCHASE

04

DEFINED BENEFIT

05

ESOP

06

TARGET BENEFIT

07

403(b)

08

457

□
□
□
□
□
□
□
□

10. DATE (month and day) ON WHICH PLAN YEAR ENDS

09

CASH BALANCE

10

GOVERNMENTAL PLAN (§ 414(d))

11

SEP

12

SARSEP

13

SIMPLE

14

STOCK BONUS

15

KSOP

16

OTHER (specify):
.

11. NUMBER OF PARTICIPANTS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES
(See Rev. Proc. 2008–50, section 12.07.):
12. ASSETS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES (ROUND TO
NEAREST DOLLAR): $
(See Rev. Proc. 2008–50, section 12.07)
If the Applicant is being represented by someone in connection with this matter or wishes to authorize someone to
receive information from us in connection with this matter, submit a completed Form 2848 or Form 8821, and complete
items 13 through 18.

September 2, 2008

521

2008–35 I.R.B.

13. NAME OF APPLICANT’S REPRESENTATIVE
14. NAME OF REPRESENTATIVE’S FIRM
15. REPRESENTATIVE’S ADDRESS:

16. REPRESENTATIVE’S PHONE NO.

17. FAX NO.

18. REPRESENTATIVE’S E-MAIL ADDRESS
(optional)

PART II. APPLICANT’S DESCRIPTION OF FAILURES
Attach additional pages, as needed. Label attachment “PART II. APPLICAN’TS DESCRIPTION OF FAILURES.” List and
number each failure separately.

PART III. APPLICANT’S DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
Attach additional pages, as needed. Label attachment “PART III. APPLICAN’TS DESCRIPTION OF THE PROPOSED
METHOD OF CORRECTION.” Describe the correction method applicable to each failure listed in Part II.

PART IV. APPLICANT’S PROPOSED REVISION TO ADMINISTRATIVE PROCEDURES
Attach additional pages, as needed. Label attachment “PART IV. APPLICAN’TS PROPOSED REVISION TO
ADMINISTRATIVE PROCEDURES.” Please include an explanation of how and why the failures arose and a description of the
measures that will be implemented to ensure that the same failures will not occur.

PART V. REQUESTS RELATED TO EXCISE TAXES, ADDITIONAL TAX, AND TAX REPORTING

□ The Applicant requests that the Service not pursue the following taxes under the Internal Revenue Code (attach supporting
rationale as required by Section 6.09), labeled “PART V. REQUESTS RELATED TO EXCISE TAX, ADDITIONAL TAX,
AND TAX REPORTING.”)

□
□
□
□
□

Excise tax under § 4972 with respect to failure(s) #

.

Excise tax under § 4973 with respect to failure(s) #

.

Excise tax under § 4974 with respect to failure(s) #

.

Excise tax under § 4979 with respect to failure(s) #

.

Imposition of additional tax under § 72(t) with respect to failure(s) #

.

□ The Applicant requests that the Service grant the following with respect to plan loan failures as described in section 6.07 of
Rev. Proc. 2008–50:

□
□

With respect to failure(s) #
, that a deemed distribution corrected pursuant to this VCP submission
not be required to be reported on Form 1099–R and that repayments made by such correction 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.
With respect to failure(s) #
, that a deemed distribution be reported on Form 1099–R with respect to
affected participant(s) for the year of correction instead of the year of the failure.

PART VI. APPLICANT’S REPRESENTATIONS
(Note: Since the representations include the penalty of perjury statement, the representations under Part VI of this Appendix D
must be signed by the Plan Sponsor, not the plan representative.)

2008–35 I.R.B.

522

September 2, 2008

A.

Under Examination
To the best of my knowledge:
1) The subject plan is not currently under examination of either an Employee Plans Form 5500 series return or other
Employee Plans examination,
2) The Plan Sponsor is not under an Exempt Organizations examination (that is, an examination of a Form 990 series
return or other Exempt Organizations examination),
3) Neither the Plan Sponsor nor any of its representatives has received verbal or written notification from the Tax Exempt
and Government Entities Division of the Internal Revenue Service of an impending examination or of any impending
referral for such examination, nor is the plan in Appeals or litigation for any issues raised in such an examination, and
4) The subject plan is not currently under investigation by the Criminal Investigation Division of the Internal Revenue
Service.

B.

Abusive tax avoidance transaction (check box that applies)

□
□
C.

Neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction as defined in section
4.13(2) of Rev. Proc. 2008–50.
The plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction. Details of the transaction(s) are
provided in a separate statement which has been included with the submission.

Compliance Fee
The Applicant will neither attempt to amortize, deduct, or recover from the Internal Revenue Service any compliance
fee paid in connection with this compliance statement nor receive any Federal tax benefit on account of payment of
such compliance fee.

D.

Penalties of Perjury
Under penalties of perjury, I declare that I have examined this submission, including accompanying documents and
representations. To the best of my knowledge and belief, the facts and information presented in support of this submission
are true, correct, and complete.

Signed:

Date:

Name (printed):

Title:

PART VII. ENFORCEMENT RESOLUTION (to be completed by IRS only)
The Service will not pursue the sanction of revoking the tax-favored status of the plan under §§ 401(a), 403(b), 408(k) or 408(p)
on account of the failure(s) described in this submission. This compliance statement considers only the acceptability of the
correction method(s) and the revision(s) of administrative procedures described in the submission and does not express an opinion
as to the accuracy or acceptability of any calculations or other material submitted with the application. In no event may this
compliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor (as defined in Rev. Proc. 2008–50)
was not a party to an abusive tax avoidance transaction. The compliance statement should not be construed as affecting the rights
of any party under any other law, including Title I of the Employee Retirement Income Security Act of 1974.
This compliance statement is conditioned on (1) there being no misstatement or omission of material facts in connection
with the submission and (2) the completion of all corrections described within one hundred fifty (150) days of the date of
the compliance statement.

□

□

The Service will treat the failure to adopt interim amendments or amendments for optional law changes, as described
in section 6.05(3)(a) of Rev. Proc. 2008–50 as if they had been adopted timely for the purpose of making available
the extended remedial amendment period currently set forth in Revenue Procedure 2007–44, 2007–28 I.R.B. 54, or
its successors. However, this compliance statement does not constitute a determination as to whether any such plan
amendments, as drafted, comply with the applicable changes in qualification requirements.
The Service will not pursue the following on account of the qualification failure(s) described in this submission:

□
□

Excise tax under § 4972.
Excise tax under § 4973.

September 2, 2008

523

2008–35 I.R.B.

□

□
□

Excise tax under § 4979.

With respect to the loan failure(s) described in this submission:

□
□

□

Excise tax under § 4974.

The Service will not require deemed distributions under § 72(p) to be reported on Forms 1099–R with respect to the
participant(s) affected by the failure(s), and repayments made pursuant to the correction of such loan(s) will not result
in an affected participant having additional basis in the plan for the purpose of determining the tax treatment of
subsequent distributions from the plan to such participant(s).
The Service will require deemed distributions under § 72(p) to be reported on Form 1099–R with respect to the
participant(s) affected by the failure(s). However, the plan will be permitted to report deemed distributions on Form
1099–R in the year of correction, instead of the year of the failure.

With respect to the Overpayment failures described in this submission that were corrected by removing improper
distributions from the IRA(s) of the affected participant(s) and returning those distributions to the plan, the Service will not
pursue
% of the 10% additional income tax under § 72(t).
Approved:
Joyce Kahn, Manager
Employee Plans Voluntary Compliance
Tax Exempt and Government Entities Division
Date:

2008–35 I.R.B.

524

September 2, 2008

APPENDIX E
ACKNOWLEDGEMENT LETTER

[

]

[

]

[

]

[

]

[INSERT NAME AND
ADDRESS OF PLAN
SPONSOR OR
AUTHORIZED REPRESENTATIVE
AT LEFT]

Applicant’s Name:
Plan Name:
[insert plan name]

Plan No.
[insert plan number]

Control No.:
(to be completed by IRS)

Received Date:
(to be completed by IRS)

The Internal Revenue Service, Employee Plans Voluntary Compliance, has received your VCP submission for the above-captioned
plan. Your request has been assigned the control number listed above. This number should be referred to in any communication
to us concerning your submission.
You will be contacted when the case is assigned to an agent. If you need to inquire about the status of your case prior to that date,
please call (626) 312–4921 (not a toll-free number). Please leave a message with the name of the plan, the Control Number,
your name, and a phone number where you can be reached.
Thank you.

September 2, 2008

525

2008–35 I.R.B.

APPENDIX F
STREAMLINED VCP SUBMISSION
Plan Name:
EIN:
(Please include the plan name, EIN, and plan number information on each page of the submission.)

Plan #:

PART I – PLAN INFORMATION
1. APPLICANT’S NAME
2. APPLICANT’S ADDRESS
3. APPLICANT’S TELEPHONE NO.

4. FAX NO.
(optional)

(optional)

5. APPLICANT’S EIN

6. PLAN NO.
(do not use a Social Security Number)

7. PLAN NAME
8. TYPE OF SUBMISSION

□
□
□
□
□

REGULAR SUBMISSION
REGULAR SUBMISSION — ANONYMOUS
REGULAR SUBMISSION — MULTI-EMPLOYER PLAN
REGULAR SUBMISSION — MULTIPLE EMPLOYER PLAN
GROUP SUBMISSION

9. TYPE OF PLAN (CHECK ONE ONLY):

□
□
□
□
□
□
□
□

01

PROFIT SHARING

02

401(k)

03

MONEY PURCHASE

04

DEFINED BENEFIT

05

ESOP

06

TARGET BENEFIT

07

403(b)

08

457

□
□
□
□
□
□
□
□

10. DATE (month and day) ON WHICH PLAN YEAR ENDS

09

CASH BALANCE

10

GOVERNMENTAL PLAN (§ 414(d))

11

SEP

12

SARSEP

13

SIMPLE

14

STOCK BONUS

15

KSOP

16

OTHER (specify):
.

11. NUMBER OF PARTICIPANTS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES
(See Rev. Proc. 2008–50, section 12.07.):
12. ASSETS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES (ROUND TO
NEAREST DOLLAR): $
See Rev. Proc. 2008–50, section 12.07.
If the Applicant is being represented by someone in connection with this matter or wishes to authorize someone to
receive information from us in connection with this matter, submit a completed Form 2848 or Form 8821, and complete
items 13 through 18.
13. NAME OF APPLICANT’S REPRESENTATIVE

2008–35 I.R.B.

526

September 2, 2008

14. NAME OF REPRESENTATIVE’S FIRM
15. REPRESENTATIVE’S ADDRESS:
16. REPRESENTATIVE’S PHONE NO.

17. FAX NO.

18. REPRESENTATIVE’S E-MAIL ADDRESS
(optional)

PART II. APPLICANT’S ENCLOSURES
The Applicant encloses the following documents with this submission:

□
□
□
□
□
□

□

VCP fee of $
made payable to the U.S. Treasury (required). (If the fee is determined on the basis of treating
Transferred Assets as a separate plan, pursuant to section 12.07 of Rev. Proc. 2008–50, please enclose a description of
the related employer transaction, including the date of the employer transaction and the date the assets were transferred
to the plan.)
A written request if the application is made for a terminating Orphan Plan and the Applicant is applying for a waiver of
the VCP fee.
Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable.
If the plan is being considered for an unrelated determination letter application, a statement to that effect.
Appendix E (optional)
Completed Appendix F schedule(s). (Check the schedules that apply)

□
□
□
□
□
□
□
□
□

Schedule 1 — Interim and Certain Discretionary Nonamender Failures
Schedule 2 — Nonamender Failures (other than those to which Schedule 1 applies)
Schedule 3 — SEPs and SARSEPs
Schedule 4 — SIMPLE IRAs
Schedule 5 — Plan Loan Failures
Schedule 6 — Employer Eligibility Failure
Schedule 7 — Failure to Distribute Elective Deferrals in Excess of the § 402(g) Limit
Schedule 8 — Failure to Pay Required Minimum Distributions Timely under § 401(a)(9)
Schedule 9 — Correction by Plan Amendment (in accordance with Appendix B)

Information required by each schedule, as set forth in each applicable Part entitled “Enclosures.”.

PART III. APPLICANT’S REPRESENTATIONS
A.

Under Examination
To the best of my knowledge:
1)

The subject plan is not currently under examination of either an Employee Plans Form 5500 series return or other
Employee Plans examination,

2)

The Plan Sponsor is not under an Exempt Organizations examination (that is, an examination of a Form 990 series
return or other Exempt Organizations examination),

3)

Neither the Plan Sponsor nor any of its representatives has received verbal or written notification from the Tax
Exempt and Government Entities Division of the Internal Revenue Service (“Service”) of an impending examination
or of any impending referral for such examination nor is the plan in Appeals or litigation for any issues raised in
such an examination, and

4)

The subject plan is not currently under investigation by the Criminal Investigation Division of the Internal Revenue
Service.

September 2, 2008

527

2008–35 I.R.B.

B.

Abusive tax avoidance transaction (check box that applies)

□
□
C.

Neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction as defined in section
4.13(2) of Rev. Proc. 2008–50.
The plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction. Details of the transaction(s)
are provided in a separate statement which has been included with the submission.

Compliance Fee
The Applicant will neither attempt to amortize, deduct, or recover from the Internal Revenue Service any compliance
fee paid in connection with this compliance statement nor receive any Federal tax benefit on account of payment of
such compliance fee.

D.

Penalties of Perjury
Under penalties of perjury, I declare that I have examined this submission, including accompanying documents and
representations. To the best of my knowledge and belief, the facts and information presented in support of this submission
are true, correct, and complete.

Signed:

Date:

Name (printed):
Title:

PART IV: ENFORCEMENT RESOLUTION (to be completed by IRS only)
The Internal Revenue Service will not pursue the sanction of revoking the tax-favored status of the plan under §§ 401(a), 403(b),
408(k), or 408(p) of the Internal Revenue Code on account of the failure(s) described in the schedules submitted pursuant to
this Appendix F. This compliance statement considers only the acceptability of the correction method(s) and the revision(s) of
administrative procedures described in the schedules submitted pursuant to this Appendix F submission and does not express an
opinion as to the accuracy or acceptability of any calculations or other material submitted with the application. In no event may
this compliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor (as defined in Rev. Proc.
2008–50) was not a party to an abusive tax avoidance transaction. The compliance statement should not be construed as affecting
the rights of any party under any other law, including Title I of the Employee Retirement Income Security Act of 1974.
This compliance statement is conditioned on (1) there being no misstatement or omission of material facts in connection with the
submission and (2) the completion of all corrections described in the applicable schedule(s) to this Appendix F submission within
one hundred fifty (150) days of the date of the compliance statement.
In addition:
(paragraph applies only if checked by the Service)

□
□
□
□
□

For failure(s) described in Schedule 1 of Appendix F, the Service will treat the amendments as if they had been adopted
timely for the purpose of making available the extended remedial amendment period set forth in Revenue Procedure
2007–44, 2007–28 I.R.B. 54, or its successors. However, this compliance statement does not constitute a determination as
to whether any such plan amendment, as drafted, complies with the applicable change in qualification requirements.
For failure(s) described in Schedule 3 of Appendix F, the Service will not pursue the following:

□
□

Excise tax under § 4972.
Excise tax under § 4979.

For failure(s) described in Schedule 4 of Appendix F, the Service will not pursue excise tax under § 4972.
For loan failure(s) described in section
of Schedule 5 of Appendix F, the Service will not require the deemed
distributions to be reported on Form 1099–R with respect to the participant(s) affected by the failure(s). The repayments
made pursuant to the correction of such loan(s) will not result in an affected participant having additional basis in the plan
for the purpose of determining the tax treatment of subsequent distributions from the plan to such participant(s).
For loan failure(s) described in section
of Schedule 5 of Appendix F, the Service will require the deemed distributions
to be reported on Form 1099–R with respect to the participant(s) affected by the failure(s). However, the plan will be
permitted to report deemed distributions on Form 1099–R in the year of correction instead of the year of the failure.

2008–35 I.R.B.

528

September 2, 2008

□

For minimum distribution failure(s) described in Schedule 8 of Appendix F, the Service will waive the excise tax under
§ 4974.
Approved:
Joyce Kahn, Manager
Employee Plans Voluntary Compliance
Tax Exempt and Government Entities Division
Date:

September 2, 2008

529

2008–35 I.R.B.

APPENDIX F, SCHEDULE 1
Interim and Certain Discretionary Nonamender Failures
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURES
A.

Interim Amendments

The plan identified above was not amended timely for (check all failures that apply)

□

Good faith amendments under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) required
under Notice 2001–42 (for details see Notice 2001–57). If the Plan Sponsor failed to timely adopt one or more good faith
amendments required for the plan to comply with EGTRRA, then check the box on the left and check the applicable
amendments below:

□
□
□
□
□
□
□
□
□
□
□

Modification of top heavy rules under § 416 (applies to both defined benefit and defined contribution plans)
Vesting requirements for employer matching contributions under § 411 (applies to plans that provided for employer
matching contributions that do not vest as rapidly as any of the schedules provided for under § 411(a)(12))
Modification of rules relating to eligible rollover distributions under §§ 401(a)(31)(A), 401(a)(31)(C), 402(c)(4), and
402(c)(8) (applies to both defined benefit and defined contribution plans)
Repeal of the multiple use test under Treasury Regulations § 1.401 (m)–2 (applies to § 401(k) plans that were
formerly subject to the multiple use test)
Suspension period following hardship distribution (required for plans subject to the safe harbor requirements of
§ 401(k)(12) or § 401(m)(11))
Plan provisions prohibiting loans to any owner-employee or shareholder-employee (required for plans that provide
loans to participants but prohibit the making of loans to owner-employees or Subchapter S shareholder-employees)

The automatic rollover provision under § 401(a)(31)(B), as described in Notice 2005–5 (applies to both defined benefit and
defined contribution plans)
The final and temporary regulations under § 401(a)(9) (interim amendment required for defined contribution plans;
defined benefit plans have until the end of the extended EGTRRA remedial amendment period to amend. See Rev.
Procs. 2002–29 and 2003–10.)
Guidance relating to the prescribed mortality table under § 415(b)(2)(E)(v) or the applicable mortality table under
§ 417(e)(3)(A)(ii)(I), as described in Rev. Rul. 2001–62 (applies to defined benefit plans.)
Interim amendments, as described in Rev. Proc. 2007–44 or its successors. If the plan failed to adopt one or more
amendments required for the plan to comply with a law change, then check the box on the left and check the applicable
amendments below:

□
□
□
□
□

The increased limit on annual additions under § 415(c) (applies to defined contribution plans that do not incorporate
§ 415(c) by reference)

□

Final §§ 401(k) and 401(m) regulations (plans with 401(k) and 401(m) provisions must comply with the regulations
for plan years beginning on or after January 1, 2006)
Prohibited allocation of securities in an ESOP maintained by a S-Corp. pursuant to § 409(p)
Retroactive annuity starting date provisions pursuant to Treasury Regulations § 1.417(e)–1 (required for plans that
provide for retroactive annuity starting dates)
Final regulations regarding low normal retirement age (§ 1.401(a)–1(b)(2))

Amendments to § 1.411(d)–3 of the final regulations
Final regulations under § 415

2008–35 I.R.B.

530

September 2, 2008

□

Other (i.e., any other interim amendment that complies with the requirements in Rev. Proc. 2007–44 or its successors).
Please list:

B. Implementation of Applicable Optional Law Changes (defined in section 6.05(3) of Rev. Proc. 2008–50)
The plan identified above was not amended timely for (check all failures that apply)

□

Optional good faith EGTRRA amendments under Notice 2001–42 (for details, see Notice 2001–57). If the Plan Sponsor
implemented any of the optional law changes and failed to adopt good faith amendments timely to conform the plan to its
operation, then check the box on the left and check the applicable amendments below:

□
□
□
□

□
□
□
□
□

□
□
□

Increasing the limit on compensation (under § 401(a)(17)) that is taken into account for the purpose of determining
allocations in a defined contribution plan or benefits in a defined benefit plan
Disregarding amounts attributable to rollovers in determining the value of an employee’s vested accrued benefit
subject to involuntary distribution pursuant to § 411(a)(11)(D).
Increasing the contribution limit for elective deferrals on account of the increased limitation under § 402(g) or, in the
case of a SIMPLE 401(k) plan, § 408(p)(2)
Adding types of rollovers accepted by the plan pursuant to EGTRRA §§ 641, 642, and 643 (available for rollovers
accepted after December 31, 2001)
Providing for catch-up contributions pursuant to § 414(v)
Adding “severance from employment” as a distributable event pursuant to §§ 401(k)(2) and 401(k)(10)
Increasing the limit on a participant’s benefit pursuant to § 415(b)

Final §§ 401(k) and 401(m) regulations (optional for plan years beginning before January 1, 2006, the earliest possible plan
year in which regulations could be effective: plan year ending after December 29, 2004)
Permitting participants to designate elective deferrals as Roth contributions pursuant to § 402A
Permitting deemed individual retirement accounts pursuant to § 408(q)
Final regulations under § 409(p) regarding ESOPs holding S-Corp stock
Other amendments relating to implementation of optional law changes. Please list

PART II. DESCRIPTION OF METHOD OF CORRECTION
The Plan Sponsor has adopted amendments that satisfy the requirements of all of the items checked in Part I of this Appendix F,
Schedule 1 retroactively to the effective dates of the specific provisions contained in the amendments. The executed amendments
have been enclosed with this submission.

September 2, 2008

531

2008–35 I.R.B.

PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
The Applicant has taken the following step(s) to ensure that the failure(s) will not recur:

PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses copies of the signed and dated
amendments used to correct the failure(s) identified in Part I of this Appendix F, Schedule 1.

2008–35 I.R.B.

532

September 2, 2008

APPENDIX F, SCHEDULE 2
Nonamender Failures (other than those to which Schedule 1 applies)
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURES
The plan identified above was not amended to comply with the applicable provisions of the following legislative and regulatory
requirements by the applicable deadlines in accordance with § 401(b) and the regulations thereunder:

□
□
□
□
□
□
□
□
□
□
□
□

The Employee Retirement Income Security Act of 1974 (ERISA)
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
The Deficit Reduction Act of 1984 (DEFRA)
The Retirement Equity Act of 1984 (REA)
The Tax Reform Act of 1986 (TRA ’86)
The Unemployment Compensation Amendments of 1992 (UCA)
The Omnibus Budget Reconciliation Act of 1993 (OBRA)
GUST (includes The Uruguay Round Agreements Act, the Uniformed Services Employment and Reemployment Rights
Act of 1994, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Internal Revenue Service
Restructuring and Reform Act of 1998, and the Community Renewal Tax Relief Act of 2000)
The changes required by the 2005 Cumulative List (Notice 2005–101, 2005–2 C.B. 1219)
The changes required by the 2006 Cumulative List (Notice 2007–3, 2007–1 C. B. 255)
The changes required by the 2007 Cumulative List (Notice 2007–94, 2007–2 C.B. 1179)
Other (specify the legal requirement and applicable Cumulative List):

PART II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
The Plan Sponsor has adopted (or will adopt) amendments that satisfy the requirements of all of the items checked in Part I of
this Appendix F, Schedule 2 retroactively to the effective dates of the specific provisions contained in the amendments. The
amendments and restated plan documents (where applicable) are enclosed with this submission.

PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
The Plan Sponsor has taken the following step(s) to ensure that the failure(s) will not recur:

September 2, 2008

533

2008–35 I.R.B.

PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•
•
•
•

Copies of all amendments used to correct the failure(s), either as adopted or in proposed form,
A copy of the plan document in effect prior to any of the amendments used to correct the failure(s),
A copy of the most recent determination letter issued with respect to the plan (if applicable), and
A determination letter application (Form 5300, 5307, or 5310 along with Form 8717 and the applicable user fee payment made
payable to the U.S. Treasury).

2008–35 I.R.B.

534

September 2, 2008

APPENDIX F, SCHEDULE 3
SEPs and SARSEPs
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)
Instructions: This Schedule 3 is available for Simplified Employee Pension plans (SEPs), including SEPs that include
salary reduction arrangements (i.e., Salary Reduction Simplified Employee Pension plans (SARSEPs).)
PART I. IDENTIFICATION OF FAILURE(S) AND PROPOSED METHOD(S) OF CORRECTION
The following failure(s) occurred with respect to the plan identified above. Check the failure(s) that apply. Within each failure,
check applicable boxes, and provide the information requested:

□

A. Employer Eligibility Failure (SARSEPs only)

□
□

The Plan Sponsor was not eligible to sponsor a SARSEP because the plan was established on
not permitted to establish SARSEPs after December 31, 1996.)

. (Plan Sponsors were

The plan was adopted by a Plan Sponsor who was (or subsequently became) ineligible to sponsor a SARSEP under the
requirements of § 408(k)(6) because the Plan Sponsor (and, if applicable, its related controlled group or affiliated service
group employers) had more than 25 employees (including leased employees, if applicable) during the following plan
year(s):
The plan was adopted by a Plan Sponsor that became ineligible to sponsor a SARSEP under the requirements of
§ 408(k)(6) because, in one or more plan year(s), fewer than 50% of the employees eligible to participate in the plan elected
to make salary reduction contributions. The failure occurred during the following plan year(s):
Description of Proposed Method of Correction
(insert date beginning no later than the date this application is filed under
All contributions ceased as of
VCP). The Plan Sponsor will not permit any new salary reduction contributions to the plan.

□

B. Failure to satisfy the deferral percentage test (SARSEPs only)
At least one highly compensated employee (“HCE”) deferred an amount which, as a percentage of compensation, was
more than 125% of the average deferral percentage (“ADP”) for all nonhighly compensated employees (“NHCEs”)
eligible to participate in the plan (§ 408(k)(6)(A)(iii)).
The total excess deferrals for each affected plan year were as follows:
Year

September 2, 2008

Excess Deferrals

535

2008–35 I.R.B.

Description of the Proposed Method of Correction
The Plan Sponsor has made (or will make) nonforfeitable contributions on behalf of all eligible NHCEs. Each eligible
NHCE will receive a contribution equal to a uniform percentage of compensation. The uniform percentage is equal to
the difference between the (1) ADP that would have been required for a HCE’s deferral percentage to have passed the
nondiscrimination test and (2) the actual ADP for NHCEs. (Example: In a particular plan year, an HCE defers 10% of
compensation. The ADP for NHCEs for the same plan year is 5% of compensation. However, in order for the plan to pass
the nondiscrimination test, the ADP should have been 8% of compensation. The corrective contribution on behalf of each
eligible NHCE will be equal to 3% of compensation.) The corrective contribution made on behalf of each NHCE will also
be adjusted for earnings. Earnings will be calculated from the last day of the plan year for which the failure occurred
through the date of the corrective contribution. The corrective contribution (adjusted for earnings) will be made to each
affected NHCE’s SARSEP IRA account. If an affected employee does not have a SARSEP IRA account, a SARSEP
IRA account will be established for that employee. Earnings will be calculated for an affected NHCE’s account on
the basis of one of the following methods (check one):

□
□
□

Actual investment results of the affected NHCE’s SARSEP IRA account.
The interest rate incorporated in the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator
(“VFCP Online Calculator”) (http://www.dol.gov/ebsa/calculator/main.html), since the actual earnings of the affected
NHCE’s SARSEP IRA account cannot be ascertained
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculator
for years in which the actual earnings of the affected NHCE’s SARSEP IRA account cannot be ascertained. The VFCP
Online Calculator was or will be used for the following years:

The total corrective contribution (before adjusting for earnings) on behalf of the affected NHCEs for each plan year
is as follows:
Year

Corrective contribution

Former employees affected by the failure (check one):

□
□

□

There are no former employees affected by the failure.
Affected former employees will be contacted, and corrective contributions will be made to their SARSEP IRA
accounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s
last known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the
use of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the
Social Security Administration Employer Reporting Service. After such actions are taken, if an affected employee
is not found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the
affected employee’s SARSEP IRA account at that time.

C. Failure to Make Required Employer Contributions (SEPs or SARSEPs)
The Plan Sponsor failed to make employer contributions on behalf of eligible employees as required under the terms
of the plan.

□
□

The failure occurred on account of the erroneous exclusion of eligible employees.
Other (describe):

The failure occurred for the following plan years:

2008–35 I.R.B.

.

536

September 2, 2008

Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.
For each affected employee, the corrective contribution will be determined by calculating the contribution the employee
would have been entitled to under the terms of the plan and subtracting any contributions already made on behalf of the
participant for the plan year. The required contribution made on behalf of an affected participant will be adjusted for
earnings. Earnings will be calculated from the last day of the plan year for which the failure occurred through the date of
the corrective contribution. The corrective contribution (adjusted for earnings) will be made to each affected employee’s
SEP (or SARSEP, if applicable) IRA account. If an affected employee does not have a SEP (or SARSEP, if applicable)
IRA account, a SEP (or SARSEP, if applicable) account will be established for that employee.
The total corrective contribution (before adjusting for earnings) for each year is:
Year

Corrective Contribution

Earnings will be calculated for an affected employee on the basis of the following method(s) (check one):

□
□

Actual investment results of the affected employee’s SEP or SARSEP IRA account.
The interest rate incorporated in the VFCP Online Calculator, since the actual earnings of the affected employee’s IRA
account cannot be ascertained.

□

Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online
Calculator for years in which the actual earnings of the affected employee’s IRA cannot be ascertained. The VFCP
Online Calculator was or will be used for the following years:

Former employees affected by the failure (check one):

□
□

□

There are no former employees affected by the failure.
Affected former employees will be contacted, and corrective contributions will be made to their SEP or SARSEP IRA
accounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s last
known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the use of
the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the Social
Security Administration Employer Reporting Service. After such actions are taken, if an affected employee is not
found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the affected
employee’s SEP or SARSEP IRA account at that time.

D. Failure to provide eligible employees with the opportunity to make elective deferrals (SARSEPs only)
The plan did not provide employee(s) who satisfied the applicable eligibility requirements with the opportunity to make
elective deferrals to the SARSEP. The failure occurred for the following plan years:
Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.
The corrective contribution will be made to compensate the affected employee(s) for the missed deferral opportunity.
The corrective contribution on behalf of each affected employee is equal to 50% of what the employee’s deferral might
have been had he or she been provided with the opportunity to make elective deferrals to the plan. Since the employee’s
deferral decision is not known, the deferral amount is estimated by determining the average of the deferral percentages
for the employee’s group (highly compensated or nonhighly compensated). (Example: N, an NHCE, was erroneously
excluded from the plan. During the year of exclusion, N made $10,000 in compensation. The average of the deferral
percentages for other NHCEs who were provided with the opportunity to make elective deferrals was 5%. N’s missed
deferral is estimated to be: 5% times $10,000 or $500. The required corrective contribution on behalf of N, before
adjusting for earnings, is 50% of $500 or $250.)

September 2, 2008

537

2008–35 I.R.B.

The total corrective contribution (before adjusting for earnings) on behalf of the affected NHCEs for each plan year
is as follows:
Year

Corrective contribution

The corrective contribution made on behalf of each affected employee will also be adjusted for earnings. Earnings will be
calculated from the date(s) that the contribution(s) should have been made through the date of the corrective contribution.
The corrective contribution (adjusted for earnings) will be made to each affected employee’s SARSEP IRA account. If an
affected employee does not have a SARSEP IRA account, a SARSEP IRA account will be established for that employee.
Earnings will be calculated on the basis of one of the following methods (check one):

□
□
□

Actual investment results of the affected employee’s SARSEP IRA account.
The interest rate incorporated in the VFCP Online Calculator, since the actual earnings of the affected employee’s IRA
account cannot be ascertained.
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculator
for years in which the actual earnings of the affected employee’s IRA account cannot be ascertained. The VFCP
Online Calculator was or will be used for the following years:

Former employees affected by the failure (check one):

□
□

□

There are no former employees affected by the failure.
Affected former employees will be contacted, and corrective contributions will be made to their SARSEP IRA
accounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s last
known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the use of
the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the Social
Security Administration Employer Reporting Service. After such actions are taken, if an affected employee is not
found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the affected
employee’s SEP or SARSEP IRA account at that time.

E. Excess Amounts Contributed

□

The Plan Sponsor contributed Excess Amounts to the Plan on behalf of participants as follows:
(check boxes that apply)

□
□

Amounts were contributed in excess of the benefit the participants were entitled to under the plan.
SARSEP only: Elective deferrals were contributed to the SARSEP in excess of the limitation under the terms
of the SARSEP (e.g., the lesser of 25% of compensation or the applicable limit under § 402(g)).

The total of the Excess Amounts for each affected plan year was as follows:

Year

2008–35 I.R.B.

Excess Amounts

538

Number of
Participants
Affected

September 2, 2008

Description of the Proposed Method of Correction
(check all correction methods that apply)

□

Distribution of Excess Elective Deferrals (SARSEPs only)
The Plan Sponsor has effected (or will effect) a corrective distribution of the Excess Amounts, adjusted for earnings
through the date of correction, to the affected participant(s). The earnings adjustment will be based on the actual
rates of return of the participant’s SARSEP IRA account from the date(s) that the excess deferrals were made
through the date of correction.
Affected participants were (or will be) informed that the corrective distribution of an Excess Amount is not eligible for
favorable tax treatment accorded to distributions from a SARSEP and, specifically, is not eligible for tax-free rollover.
The total corrective distribution (before adjusting for earnings) for each affected year is as follows:

Year

□

Corrective Distribution

Number of
Participants
Affected

Distribution of Excess Employer Contributions
The Plan Sponsor has effected (or will effect) the return of excess employer contributions, adjusted for earnings
through the date of correction, to the Plan Sponsor. The earnings adjustment will be based on the actual rates of return
of the SEP or SARSEP from the date(s) that the excess employer contributions were made through the date of
correction. The amount returned to the Plan Sponsor is not includible in the gross income of the affected participant(s).
The Plan Sponsor is not entitled to a deduction for such excess employer contributions. The amount returned is
reported on Form 1099–R as a distribution issued to the affected participant(s), indicating the taxable amount as zero.
The amount to be returned to the Plan Sponsor (before adjusting for earnings) for each affected year is as follows:

Year

□

Return of Excess
Employer Contributions

Number of
Participants
Affected

Retention of Excess Amounts
Note: If this correction method is selected, an additional VCP fee is required. (See section 12.05(2) of Rev. Proc.
2008–50.)

September 2, 2008

539

2008–35 I.R.B.

□

The Excess Amounts (including earnings) were retained in the SARSEP or SEP IRA accounts of the affected
participants as follows:
Excess
Amounts
Retained

Year

Number of
Participants
Affected

The earnings adjustment will be based on the actual rates of return of the SEP or SARSEP from the date(s) that the
excess employer contributions were made through the date of correction.

□

Excess Amounts of $100 or less (See section 6.02(5)(e) of Rev. Proc. 2008–50.)
For one or more participants, the total Excess Amount (employer contributions and/or elective deferrals before
adjusting for earnings) is $100 or less. The Excess Amount will not be distributed.

PART II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implemented
to ensure that the same failures will not occur.

PART III. REQUEST(S) FOR EXCISE TAX RELIEF
(check applicable boxes)

□
□

Excise tax pursuant to § 4979. The Applicant requests that the Service not pursue the excise tax under § 4979. (This applies
only to failures to satisfy the nondiscrimination test for elective deferrals. See section 6.09(4) of Rev. Proc. 2008–50 for an
example of a situation where a request for relief under § 4979 would be considered. Please enclose a written explanation in
support of your request for relief from this excise tax.)
Excise tax pursuant to § 4972. The Applicant requests that the Service not pursue the excise tax under § 4972. (This applies
to situations where corrective contributions made in accordance with this submission would be nondeductible contributions
for the year of correction and thus would be subject to the excise tax under § 4972. See section 6.09(3) of Rev. Proc.
2008–50. Please enclose a written explanation in support of your request for relief from this excise tax.)

2008–35 I.R.B.

540

September 2, 2008

PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•
•
•

The applicable plan document. (This could be an IRS form document, such as a Form 5305–SEP or 5305A–SEP, or a prototype
plan document developed by a financial institution. If a prototype plan document is used, please send a copy of the most recent
favorable opinion letter issued for such plan document).
A written explanation of how and why the failure(s) described in this submission occurred, including a description of the administrative procedures applicable to the failure(s) in effect at the time the failure(s) occurred.
For failures that involve corrective contributions or corrective distributions, a description of assumptions and supporting calculations used to determine the amounts needed for correction:
1) For failures to satisfy the nondiscrimination test for elective deferrals, computations in support of the proposed correction,
including:
a) The determination of HCEs and NHCEs,
b) The deferral percentages of individual employees and the applicable ADP calculations,
c) The determination of corrective contributions on behalf of NHCEs to correct the ADP test, and,
d) Calculations showing how the earnings adjustment and the ultimate corrective contribution on behalf of affected
employees will be determined. (Please use estimates, including an estimated correction date, if corrective distributions
have not been made yet.)
2) For failures to make required employer contributions and for failures to provide eligible employees with the opportunity
to make elective deferrals:
a) Computations in support of the corrective contribution amounts attributable to each participant. In the case of a failure
to provide eligible employees with the opportunity to make elective deferrals, please include computations showing
how the average deferral percentage, missed deferral, and corrective contribution amount was determined.
b) Calculations showing how the earnings adjustment and the ultimate corrective contribution on behalf of affected
employees will be determined.
3) For failures involving the contribution of Excess Amounts:
a) Computations in support of the excess contribution amounts attributable to each participant;
b) Calculations showing how the earnings adjustment and the ultimate corrective distribution amounts are determined.
(Please use estimates, including an estimated correction date, if corrective distributions have not been made yet.)

•
•

Explanations in support of requests for excise tax relief.
Any other information that would be useful for the purpose of understanding the proposals made under the submission.

September 2, 2008

541

2008–35 I.R.B.

APPENDIX F, SCHEDULE 4
SIMPLE IRAs
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE(S) AND CORRECTION METHODS
The following failure(s) occurred with respect to the SIMPLE IRA Plan identified above:
(Check failure(s) that apply. Within each failure, check applicable boxes, and provide the information requested.)

□

A. Employer Eligibility Failure

□

□

The plan was adopted by a Plan Sponsor who was (or subsequently became) ineligible to sponsor a SIMPLE IRA
Plan under the requirements of § 408(p) because the Plan Sponsor (and, if applicable, its related controlled group or
affiliated service group employers) had more than 100 employees (including leased employees, if applicable) who
earned $5,000 or more in compensation during the following plan year(s):
The plan was adopted by a Plan Sponsor who was not eligible to sponsor a SIMPLE IRA Plan under the requirements
of § 408(p) because the Plan Sponsor established or maintained a Qualified Plan with respect to which contributions
were made (or under which benefits were accrued) during any plan year of the SIMPLE IRA Plan. The failure
occurred during the following plan year(s):
Description of the Proposed Method of Correction
(insert a date no later than the date this application is filed under
All contributions to the plan ceased as of
VCP). The Plan Sponsor will not permit any new employer or salary reduction contributions to be made to the plan.

□

B. Failure to Make Required Employer Contributions
The Plan Sponsor failed to make employer contributions on behalf of eligible employees as required under the terms
of the plan.

□
□

The failure occurred on account of the erroneous exclusion of eligible employees
Other (describe):

The failure occurred for the following plan years:
For the applicable plan years, the provisions of the plan document required the Plan Sponsor to make employer
contributions based on the following formula:

□
□
□

2% nonelective contribution on behalf of each eligible employee who earned at least $5,000 in compensation for
the year.
Matching contribution on behalf of each eligible employee equal to deferrals up to 3% of compensation.
Grace period applied. The plan provided for a matching contribution on behalf of each eligible employee equal to
deferrals up to ____% of compensation.

(Note: If the failure occurred for multiple plan years and different employer contribution criteria applied during those
years, check the applicable box, and indicate the plan years for which the formula applied).

2008–35 I.R.B.

542

September 2, 2008

Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.
For each affected employee, the corrective contribution will be determined by calculating the contribution the employee
would have been entitled to receive under the terms of the plan and subtracting any contributions already made on behalf
of the employee for the plan year. The corrective contribution made on behalf of an affected employee will be adjusted
for earnings. Earnings will be calculated from the last day of the plan year for which the failure occurred through the
date of the corrective contribution. The corrective contribution (adjusted for earnings) will be made to each affected
employee’s SIMPLE IRA account. If an affected employee does not have a SIMPLE IRA account, an account will
be established for that employee.
If the plan did not provide eligible employees with the opportunity to make elective deferrals and the plan provides for
matching contributions, the corrective matching contribution will be based on the assumption that the eligible employee
would have made an elective deferral equal to 3% of compensation.
The total corrective contribution (before adjusting for earnings) for each plan year is:
Year

Corrective contribution

The earnings calculation for an affected employee will be based on one of the following method(s) (check one):

□
□
□

Actual investment results of the affected employee’s SIMPLE IRA account.
The interest rate incorporated in the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator
(“VFCP Online Calculator”) (http://www.dol.gov/ebsa/calculator/main.html), since the actual earnings of the affected
employee’s IRA account cannot be ascertained.
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculator
for years in which the actual earnings of the affected employee’s IRA account cannot be ascertained. The VFCP
Online Calculator was or will be used for the following years:

Former employees affected by the failure (check one):

□
□

□

There are no former employees affected by the failure.
Affected former employees will be contacted, and corrective contributions will be made to their SIMPLE IRA
accounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s
last known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the
use of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the
Social Security Administration Employer Reporting Service. After such actions are taken, if an affected employee
is not found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the
affected employee’s SIMPLE IRA account at that time.

C. Failure to provide eligible employees with the opportunity to make elective deferrals
The plan did not provide employee(s) who satisfied the applicable eligibility requirements with the opportunity to make
elective deferrals to the SIMPLE IRA plan. The failure occurred for the following plan years:

September 2, 2008

543

2008–35 I.R.B.

Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.
The corrective contribution will be made to compensate the affected employee(s) for the missed deferral opportunity.
The corrective contribution on behalf of each affected employee is equal to 50% of what the employee’s deferral might
have been had he or she been provided with the opportunity to make elective deferrals to the plan. Since the employee’s
deferral decision is not known, the deferral amount is estimated by assuming that the excluded employee would have
made an elective deferral equal to 3% of his or her compensation. (Example: N, a nonhighly compensated employee
was erroneously excluded from the plan. During the year of exclusion, N made $10,000 in compensation. N’s missed
deferral is estimated to be: 3% times $10,000 or $300. The required corrective contribution on behalf of N, before
adjusting for earnings, is 50% of $300 or $150). Thus, the required corrective contribution for an employee who was
erroneously excluded from making elective deferrals from a SIMPLE IRA Plan is equal to 1.5% of compensation
(adjusted for earnings).
The total corrective contribution (before adjusting for earnings) on behalf of the affected employees for each plan
year is as follows:
Year

Corrective contribution

The corrective contribution made on behalf of each affected employee will also be adjusted for earnings. Earnings will be
calculated from the date(s) that the contribution(s) should have been made through the date of the corrective contribution.
The corrective contribution (adjusted for earnings) will be made to each affected employee’s SIMPLE IRA account. If an
affected employee does not have a SIMPLE IRA account, a SIMPLE IRA account will be established for that employee.
Earnings will be calculated on the basis of one of the following methods (check one):

□
□
□

Actual investment results of the affected employee’s SIMPLE IRA account.
The interest rate incorporated in the VFCP Online Calculator, since the actual earnings of the affected employee’s IRA
account cannot be ascertained.
Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculator
for years in which the actual earnings of the affected employee’s IRA account cannot be ascertained. The VFCP
Online Calculator was or will be used for the following years:

Former employees affected by the failure (check one):

□
□

□

There are no former employees affected by the failure.
Affected former employees will be contacted, and corrective contributions will be made to their SIMPLE IRA
accounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s
last known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the
use of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the
Social Security Administration Employer Reporting Service. After such actions are taken, if an affected employee is
not found but is subsequently located on a later date, the Plan Sponsor will make a corrective contribution to the
affected employee’s SIMPLE IRA account at that time.

D. Excess Amounts Contributed
The Plan Sponsor contributed Excess Amounts to the plan on behalf of participants as follows:
(check boxes that apply)

□
□

Amounts were contributed in excess of the benefit the participants were entitled to under the plan.
Elective deferrals were made to the SIMPLE IRA in excess of the limitation under the terms of the SIMPLE IRA
(e.g., the applicable limit under § 408(p)(2)(E)).

2008–35 I.R.B.

544

September 2, 2008

The total of the Excess Amounts for each affected plan year was as follows:

Year

Excess
Amounts

Number of
Participants
Affected

Description of the Proposed Method of Correction
(check all correction methods that apply)

□

Distribution of Excess Elective Deferrals
The Plan Sponsor has effected (or will effect) a distribution of the Excess Amounts, adjusted for earnings through
the date of correction, to the affected participant(s). The earnings adjustment will be based on the actual rates of
return of the participant’s SARSEP IRA account from the date(s) that the excess deferrals were made through the
date of correction.
Affected participants were (or will be) informed that the distribution of an Excess Amount is not eligible for favorable
tax treatment accorded to distributions from a SIMPLE IRA and, specifically, is not eligible for tax-free rollover.
The total corrective distribution (before adjusting for earnings) for each affected plan year is as follows:

Year

□

Corrective
Distribution

Number of
Participants
Affected

Distribution of Excess Employer Contributions
The Plan Sponsor has effected (or will effect) the return of excess employer contributions, adjusted for earnings
through the date of correction, to the Plan Sponsor. The earnings adjustment will be based on the actual rates of return
on the affected participants’ SIMPLE IRA accounts from the date(s) that the excess employer contributions were
made through the date of correction. The amount returned to the Plan Sponsor is not includible in the gross income of
the affected participant(s). The Plan Sponsor is not entitled to a deduction for such excess employer contributions.
The amount returned is reported on Form 1099–R as a distribution issued to the affected participant(s), indicating the
taxable amount as zero.

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2008–35 I.R.B.

The return of the excess employer contributions (before adjusting for earnings) for each affected plan year is as follows:

Year

□

Return of Excess
Employer Contributions

Number of
Participants
Affected

Retention of Excess Amounts

Note: If this correction method is selected, an additional VCP fee is required.
(See section 12.05(2) of Rev. Proc. 2008–50.)

□

The Excess Amounts (including earnings) were retained in the SIMPLE IRA accounts of the affected participants
as follows.

Year

Excess
Amounts
Retained

Number of
Participants
Affected

The earnings adjustment will be based on the actual rates of return of the SEP or SARSEP from the date(s) that the
excess employer contributions were made through the date of correction.

□

Excess Amounts of $100 or less (See section 6.02(5)(e) of Rev. Proc. 2008–50.)
For one or more participants, the total Excess Amount (employer contributions and/or elective deferrals before
adjusting for earnings) is $100 or less. The Excess Amount will not be distributed.

Former employees affected by the Excess Amounts failure (check one):

□
□

There are no former employees affected by the failure.
Affected former employees will be contacted, and corrective contributions will be made to their SIMPLE IRA
accounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s
last known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the
use of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the
Social Security Administration Employer Reporting Service. After such actions are taken, if an affected employee
is not found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the
affected employee’s SIMPLE IRA account at that time.

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September 2, 2008

PART II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implemented
to ensure that the same failures will not occur.

PART III. REQUEST(S) FOR EXCISE TAX RELIEF
(check if applicable)

□

Excise tax pursuant to § 4972. The Plan Sponsor requests that the Service not pursue the excise tax under § 4972. (This
applies to situations where corrective contributions made in accordance with this submission would be nondeductible
contributions for the year of correction and subject to the excise tax under § 4972. See section 6.09(3) of Rev. Proc.
2008–50. Please enclose a written explanation in support of your request for relief from this excise tax.)

PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•
•
•

The applicable plan document. (This could be an IRS form document, such as a 5305–SIMPLE or 5304–SIMPLE, or a prototype
document developed by a financial institution. If a prototype plan document is used, please send a copy of the most recent
opinion letter issued with respect to such plan document.)
A written explanation of how and why the failure(s) described in this submission occurred, including a description of the administrative procedures applicable to the failure(s) in effect at the time the failure(s) occurred.
For failures that involve corrective contributions or corrective distributions, a description of assumptions and supporting calculations used to determine the amount needed for correction:
1) For failures to make required Employer Contributions and for failures to provide eligible employees with the opportunity
to make elective deferrals:
a) Computations in support of the corrective contribution amounts attributable to each participant. In the case of a failure
to provide eligible employees with the opportunity to make elective deferrals, please include computations showing
how the average deferral percentage, missed deferral, and corrective contribution amount was determined.
b) Calculations showing how the earnings adjustment and the ultimate corrective contribution on behalf of affected
employees will be determined. (Please use estimates, including an estimated correction date, if corrective
contributions have not been made yet.)
2) For failures involving the contribution of Excess Amounts:
a) Computations in support of the excess contribution amounts attributable to each participant.
b) Calculations showing how the earnings adjustment and the ultimate corrective distribution amounts are determined.
(Please use estimates, including an estimated correction date, if corrective distributions have not been made yet.)

•
•

Explanations in support of requests for excise tax relief.
Any other information that would be useful for the purpose of understanding the proposals made under the submission.

September 2, 2008

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2008–35 I.R.B.

APPENDIX F, SCHEDULE 5
Plan Loan Failures
(Qualified Plans and 403(b) Plans)
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)

PART I. IDENTIFICATION OF FAILURE
The plan identified above did not comply with the requirements of § 72(p)(2) of the Internal Revenue Code. (Note: The conditions
of § 72(p)(2) must be satisfied for a participant loan to be exempt from being treated as a distribution to the participant under
§ 72(p)(1).) The failure occurred for the following reason(s) (check applicable boxes and provide the information requested):

□

A. The loan(s) exceeded the limit under § 72(p)(2)(A)

Plan Year

□

Total number of loans
issued that
violated § 72(p)(2)(A)

B. Loan terms did not satisfy the limits on the duration of the loan under § 72(p)(2)(B)

Plan Year

□

Number of
participants
affected

Number of
participants
affected

Total number of loans
issued that
violated § 72(p)(2)(B)

C. Loan terms did not satisfy § 72(p)(2)(C) relating to the frequency and amortization of payments

Plan Year

2008–35 I.R.B.

Number of
participants
affected

548

Total number of loans
issued that
violated § 72(p)(2)(C)

September 2, 2008

□

D. Defaulted loan(s) (where the loan terms satisfied the requirements of § 72(p)(2), but default(s) occurred because loan
payments were not made in accordance with the terms of the loan)

Plan Year
of loan defaults

Number of
participants
affected

Total number of
loans in default

PART II. ELIGIBILITY FOR USE OF APPENDIX F, SCHEDULE 5
A.

Yes

No

□

□

Is any affected participant either a key employee (as defined in § 416(i)(1)) or an owner-employee (as defined in
§ 401(c)(3))?
If ”Yes,” proceed to Part II B.
If ”No,” skip Part II B and proceed to Part II C.

B.

□

□

Is the purpose of this request limited to permitting the Plan Sponsor to report the loan as a deemed distribution in
the year of correction instead of the year of the failure?
If ”Yes,” complete part III and then proceed directly to part IV D. (Parts IV A, B, and C do not apply.)
If ”No,” STOP — do NOT use this schedule. Any request for relief should be made by filing an application
using the format described in Appendix D.

C.

□

□

Will correction be completed before the maximum period for repayment of the loan (pursuant to § 72(p)(2)(B))
has expired? (Note: The maximum period is determined from the original date of the loan. Generally, this period
is five years from the original date of the loan, except for home loans as described in § 72(p)(2)(B)(ii).) If ”Yes,”
and the Plan Sponsor wants relief from reporting the loan as a deemed distribution, complete Part III and then
answer applicable questions in Parts IV A through IV C. If ”No,” complete Part III and then proceed to Part IV D.

PART III. EXPLANATION OF HOW AND WHY THE PLAN LOAN FAILURES OCCURRED

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549

2008–35 I.R.B.

PART IV. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
If the Plan Sponsor is requesting relief from reporting loans as deemed distributions, then complete Parts IV A, B,
or C, as applicable.
If the Plan Sponsor is only requesting postponement of reporting loans as deemed distributions on Form 1099–R, then
proceed directly to Part IV D.
A. Correction for Loans in Excess of § 72(p)(2)(A)
Any participant affected by this failure will make a corrective repayment to the plan. After repaying the excess of the loan
amount over the maximum loan amount under § 72(p)(2)(A) (the “excess loan amount”), the remaining balance of the
loan will be paid over the remaining period of the original loan (not beyond the period permitted under § 72(p)(2)(B),
determined from the original date of the loan) in a manner that complies with the frequency and level payment requirements
of § 72(p)(2)(C). The excess loan amount that will be repaid by the participant is determined based on how previously made
payments have been applied to the loan. The previous loan payments were applied as follows (check applicable box, and
complete necessary information)

□

Prior loan payments were made in accordance with an amortization schedule that complied with the requirements of
§ 72(p)(2)(B) relating to the terms of the loan and § 72(p)(2)(C) relating to frequency, and level loan payments. For the
purpose of determining the excess loan amount and the remaining outstanding amount of the loan to be repaid over the
remaining period of the loan, the previously made loan payments will be applied as follows (check box that applies)

□
□
□
□

1. Solely to reduce the portion of the loan that did not exceed the maximum loan amount under § 72(p)(2)(A) of the
Code. Result: The corrective repayment would equal the excess loan amount plus interest thereon.
2. To reduce the excess loan amount 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). Result: The
corrective repayment would equal the excess loan amount.
3. Pro rata against the excess loan amount and the maximum loan amount under § 72(p)(2)(A). Result: The corrective
repayment would equal the outstanding balance remaining on the excess loan amount on the date that corrective
repayment is made.

Prior loan payments were not made in accordance with an amortization schedule that complied with the requirements of
§72(p)(2)(B) or (C):
Methodology for determining the excess loan amount that will be repaid and the remaining outstanding balance of the
loan that will be amortized over the remaining period of the loan:

After the corrective repayment is made:
(Check one of the two options listed below)

□
□

Option 1: The remaining loan balance will be repaid according to the original amortization schedule. (This option is
available only if the original amortization schedule would result in the loan being paid within the maximum period
permitted under §72(p)(2)(B) determined from the original date of the loan.)
Option 2: The loan will be reformed to amortize the remaining principal balance as of the date of repayment over the
remaining period of the original loan, provided that the recalculated payments over the remaining period comply with
the requirements of § 72(p)(2)(B) determined from the original date of the loan.

2008–35 I.R.B.

550

September 2, 2008

B. Correction for loans with terms that: (i) provided for a repayment period that exceeded the period permitted under
§ 72(p)(2)(B) and/or (ii) provided for payments that did not provide for substantially level amortization with payments not
less frequently than quarterly, as provided under § 72(p)(2)(C).

□
□

1. The loan balance will be reamortized with payments made on a substantially level basis (per § 72(p)(2)(C)), made
at least quarterly.
2. The reamortized loan balance will be paid over a remaining period that does not extend beyond five years from the
date of the original loan (per § 72(p)(2)(B)).

C. Correction for defaulted loans with terms that complied with the requirements of § 72(p)(2)(A), (B), and (C): (check
the box that applies)

□
□
□

1. A lump sum repayment will be made to the plan in an amount equal to the additional repayments that the affected
participant would have made to the plan if there had been no failure to repay the plan, plus interest accrued on
the missed repayments.
2. The outstanding balance of the loan, including accrued interest, will be reamortized over a remaining period that does
not extend beyond five years from the date of the original loan.
3. The Applicant will use a combination of the methods described in #1 and #2 above, as follows:

Determination of Interest Accrued on Missed Repayments: (check the box that applies)

□
□

Plan loan rate

[insert rate]

Rate of return of investments under plan

[insert rate]

Note: “Rate of return of investments” option may only be used if the rate of investment return under the plan equals or
exceeds the plan loan rate.
Actual Interest Rate used

[insert rate]

The interest rate for missed payments was determined as follows:

The additional unpaid interest (will be / has been (circle one)) paid by the: (check the box that applies)

□
□

Plan Sponsor
Affected participants
(Note: Irrespective of the Plan Sponsor’s election to have the affected participants pay the unpaid interest, in
accordance with section 6.02(6) of Rev. Proc. 2008–50, the Service may, based on the facts and circumstances,
determine that the Plan Sponsor should pay all or a portion of the additional unpaid interest. If the Service makes this
determination, the Plan Sponsor will be requested to revise this submission.)

September 2, 2008

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2008–35 I.R.B.

D. Correction for Deemed Distributions (check if applicable)

□

The Plan Sponsor is not eligible to or will not correct in accordance with Parts IV A through IV C of this Appendix F,
Schedule 5. The Plan Sponsor proposes that the loans be reported as deemed distributions (using Form 1099 R) for the
year of correction instead of the year of the failure. The Plan Sponsor shall pay any applicable income tax withholding
amount that was required to be paid in connection with the failure. (See Income Tax Regulations § 1.72(p)–1, Q&A–15.)

PART V. DESCRIPTION OF STEPS TAKEN TO ENSURE THAT THE FAILURE DOES NOT RECUR

PART VI. REQUEST FOR RELIEF
Yes

No

□
□

□
□

The Plan Sponsor requests relief from reporting participant loans as deemed distributions.
The Plan Sponsor requests that the plan be permitted to report the participant loans as deemed distributions in the
year of correction instead of the year of the failure.

PART VII. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•
•

Loan amortization schedules for affected participants (A sample representation may be provided if there are multiple participants
affected.)
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 (e.g., for a failure with respect to a loan that exceeds
the maximum amount permitted by § 72(p)(2)(A), the calculations must include the amounts of the excess loan amounts that will
be repaid to the plan, determination of the outstanding loan balance, and the proposed method of repayment of the outstanding
loan balance; for the correction of a defaulted loan, the enclosure should set forth the periods of such loan defaults.))

2008–35 I.R.B.

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September 2, 2008

APPENDIX F, SCHEDULE 6
Employer Eligibility Failure (401(k) and 403(b) Plans only)
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)

PART I. IDENTIFICATION OF FAILURE
The following failure occurred with respect to the plan identified above (check failure that applies)

□

403(b) Plans
The plan was intended to satisfy the requirements of § 403(b) but was adopted by a Plan Sponsor that was not a tax-exempt
organization described in § 501(c)(3) or a public educational organization described in § 170(b)(1)(A)(ii). The type of
.
organization sponsoring the Plan during the period of the failure was:
.

The failure occurred during the following plan years:

□

Section 401(k) Plans
The plan intended to include a qualified cash or deferred arrangement and satisfy the requirements of §§ 401(a) and 401(k)
but was adopted by an employer that failed to meet the eligibility requirements to establish a § 401(k) Plan.
Describe why the employer was ineligible to maintain the 401(k) plan:

PART II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION

□

□

Section 403(b) Plans
. (Insert date beginning no later than the date the

1.

All contributions under the plan ceased as of
application under VCP was filed.)

2.

No new employee or employer contributions will be permitted in the future.

3.

The assets in the plan will remain in the trust, annuity contract, or custodial account and will be distributed no earlier
than the occurrence of one of the permitted events under § 403(b)(7) or § 403(b)(11).

Section 401(k) Plans
. (Insert date beginning no later than the date the

1.

All contributions under the plan ceased as of
application under VCP was filed.)

2.

No new employee or employer contributions will be permitted in the future.

3.

The assets in the plan will remain in the trust, annuity contract, or custodial account and will be distributed no earlier
than the occurrence of one of the permitted events under § 401(k).

PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implemented
to ensure that the same failures will not occur.

September 2, 2008

553

2008–35 I.R.B.

APPENDIX F, SCHEDULE 7
Failure to Distribute Elective Deferrals in Excess of the § 402(g) Limit
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)

PART I. IDENTIFICATION OF FAILURE

Calendar Years
(Year of Deferral)

Number of
Affected
Participants

Amount of Excess Deferrals
Distributed (excluding
earnings)

PART II. DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
The plan will distribute the excess deferral to the employee(s) and report the amount as taxable in the year of deferral and in the
year distributed. In accordance with Income Tax Regulations § 1.402(g)–1(e)(1)(ii), a distribution to a highly compensated
employee is included in the Average Deferral Percentage (ADP) test; however, a distribution to a nonhighly compensated
employee is not included in the ADP test.
For any distributions attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as
taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral.
The excess deferral to be distributed will also be adjusted for earnings. Earnings will be determined from the end of the year in
which the failure occurred through the year of correction. Earnings will be included in the distribution amount that is to be
reported as taxable in the year of distribution.

PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implemented
to ensure that the same failures will not occur.

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554

September 2, 2008

PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•

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.)

September 2, 2008

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2008–35 I.R.B.

APPENDIX F, SCHEDULE 8
Failure to Pay Required Minimum Distributions Timely under § 401(a)(9)
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)

PART I. IDENTIFICATION OF FAILURE

Calendar Years

Number of Affected
Participants

Total Amount of Missed
Required Minimum
Distributions

PART II. DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION

□

□

Defined Contribution plan only — The plan will distribute the required minimum distributions to affected participants.
For each affected participant, the amount to be distributed for each year in which the failure occurred will be determined
by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this
purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)–5
Q&A–3 of the Income Tax Regulations, reduced by the amount of the total missed minimum distributions for prior years.
Defined Benefit plan only — The plan will distribute the required minimum distributions plus an interest payment
representing the loss of use of such amounts. The interest adjustment is determined as follows:

PART III. REQUEST FOR RELIEF
A.

□

Yes

No

□

□

The Applicant requests relief with regard to excise taxes under § 4974

At least one affected participant is either an owner-employee (see § 401(c)(3)), or, if the Plan Sponsor is a
corporation, a 10 percent owner of such corporation

2008–35 I.R.B.

556

September 2, 2008

If “Yes,” the Applicant submits the following explanation for its request for relief from the § 4974 excise tax:

PART IV. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implemented
to ensure that the same failures will not occur.

PART V. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•

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 a defined benefit plan, these specific
calculations must illustrate the interest rate used to represent the loss of the use of the missed required minimum distributions.)

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557

2008–35 I.R.B.

APPENDIX F, SCHEDULE 9
Correction by Plan Amendment (in accordance with Appendix B)
Plan Name:

EIN:

Plan #:

(Please include the plan name, EIN, and plan number information on each page of the submission.)

PART I. IDENTIFICATION OF FAILURE(S) AND CORRECTION METHOD(S) AS SET FORTH IN REV. PROC.
2008–50, APPENDIX B, SECTION .07
The following failure(s) occurred with respect to the plan identified above (check failure(s) that apply)

□

A. § 401(a)(17) Failure in a Defined Contribution Plan
(check as applicable)

□
□

Contributions
Forfeitures

were allocated on the basis of compensation in excess of the limit under § 401(a)(17) as provided below:
(Enter the plan years in which the failure occurred, the amount of the allocations in excess of § 401(a)(17) made for each
plan year (including earnings), and the number of participants affected by the failure for each plan year:)

Plan Year

Amounts Allocated in
Excess of § 401(a)(17)

Number of
Participants
Affected

Description of Proposed Method of Correction:
An additional amount has been (or will be) contributed to the plan on behalf of each of the employees who received an
allocation for the year of the failure (excluding each employee for whom there was a § 401(a)(17) failure). The amount
contributed for an employee is equal to the employee’s plan compensation for the year of the failure multiplied by a
fraction, the numerator of which is the improperly allocated amount made on behalf of the employee with the largest
improperly allocated amount, and the denominator of which is the limit under § 401(a)(17) applicable to the year of the
failure. In addition, the plan will be retroactively amended to reflect the increased contribution and allocation percentages
for the plan’s participants.

2008–35 I.R.B.

558

September 2, 2008

(Enter the plan years in which the failure occurred, the fraction used to determine the additional amount allocated to
employees other than those for whom there was a § 401(a)(17) failure, and the total required contribution (before adjusting
for earnings) for each plan year in which the failure occurred:)

Plan Year

Fraction Used to
Determine the
Additional Amount
Allocated

Total Required
Contribution (before
adjusting for
earnings)

The resulting additional amount will be adjusted for earnings from the end of the plan year in which the failure occurred
through the date of the corrective contribution. The method for determining the earnings adjustment is as follows:

Former employees affected by the failure (check one)

□
□

□

There are no former employees affected by the failure.
Affected former employees will be contacted and contributions will be made to the plan on their behalf. To the
extent that an affected former employee cannot be located following a mailing to the employee’s last known
address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the use of
the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the Social
Security Administration Employer Reporting Service. After such actions are taken, if an affected employee is not
found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions on behalf of the
affected employee at that time.

B. Hardship Distribution Failure
Hardship distributions were made to participants under the plan. All plan participants were entitled to request hardship
distributions, and all requests were evaluated in accordance with uniform eligibility standards, as described below:

September 2, 2008

559

2008–35 I.R.B.

(Enter the plan years in which the failure occurred, the number of hardship distributions made for each plan year, and
the number and amount of distributions made to highly compensated employees (HCEs) and nonhighly compensated
employees (NHCEs) respectively, affected by the failure for each plan year.)

Plan Year

Number of
Hardship
Distributions
Made During the
Plan Year

Number of
Hardship
Distributions Made
to NHCEs

Amount
of Distributions

Number of
Hardship
Distributions Made
to HCEs

Amount of
Distribution

Description of the Proposed Method of Correction:
The failure was (or will be) corrected by retroactively amending the plan to provide for the hardship distributions that
were made available. The effective date of the corrective amendment is: ________________________.

□

C. Plan Loan Failure
Plan loans were made to participants under the plan. All plan participants were entitled to request plan loans under
uniform standards of eligibility, and all plan loans made satisfied the requirements of § 72(p).
(Enter the plan years in which the failure occurred, the number of participant plan loans made for each plan year, and the
number and amount of plan loans made to highly compensated employees (HCEs) and nonhighly compensated employees
(NHCEs) respectively, affected by the failure for each plan year.)

Plan Year

Number of Plan
Loans Made
During the Plan
Year

Number of Plan
Loans Made to
NHCEs

Amount of
Plan Loans

Number of Plan
Loans Made to
HCEs

Amount of
Plan Loans

Description of the Proposed Method of Correction:
The failure was (or will be) corrected by retroactively amending the plan to provide for the plan loans that were made
available. The effective date of the corrective amendment is: ________________________.

□

D. Early Inclusion of Otherwise Eligible Employee Failure
Employees:
(check the applicable box(es))

□
□

Who had not satisfied the plan’s minimum age or service requirements were treated as eligible participants on a date
prior to their being eligible under the plan and were entitled to the same benefits under the plan to which they would
have been entitled had they completed the minimum age or service requirements of the plan.
Who had completed the plan’s minimum age or service requirements were treated as eligible participants prior to
the applicable plan entry date and were entitled to the same benefits under the plan to which they would have been
entitled had they entered the plan timely.

2008–35 I.R.B.

560

September 2, 2008

The plan’s minimum age or service requirements and plan entry date, as applicable, for the years of the failure were as
follows:

(Enter the plan years in which the failure occurred and the number of participants affected by the failure, broken down by
type of employee (highly compensated employee (HCE) or nonhighly compensated employees (NHCE) respectively, for
each plan year.)

Plan Year

Number of NHCEs
Affected by the
Failure During the
Plan Year

Number of HCEs
Affected by the
Failure During the
Plan Year

Description of the Proposed Correction Method:
The failure was (or will be) corrected by retroactively amending the plan to provide for the inclusion of the ineligible
employees. The effective date of the corrective amendment is:
.

PART II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implemented
to ensure that the same failures will not occur.

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2008–35 I.R.B.

PART III. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:

•
•
•

Copies of all amendments used to correct the failure(s), either as adopted or in proposed form (required)
A copy of the plan document in effect prior to any of the amendments used to correct the failure(s) (required)
For a § 401(a)(17) failure in a defined contribution plan, 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, the determination of the fraction used to determine the additional amount to be allocated to each employee (other than those for whom there was a § 401(a)(17) failure) must be demonstrated.)

26 CFR 601.601: Rules and regulations.
(Also Part I, § 163.)

Rev. Proc. 2008–51
SECTION 1. PURPOSE
This revenue procedure describes circumstances in which the Internal Revenue
Service (“Service”) will not treat a debt instrument as an applicable high yield discount obligation (“AHYDO”) for purposes
of §§ 163(e)(5) and 163(i) of the Internal
Revenue Code.
This revenue procedure provides certainty with respect to certain potential tax
issues that may be implicated by the issuance of a debt instrument (including a
deemed issuance of a debt instrument under § 1.1001–3 of the Income Tax Regulations) in the circumstances described below. No inference should be drawn about
whether similar consequences would obtain if a debt instrument falls outside the
limited scope of this revenue procedure.
Furthermore, there should be no inference
that, in the absence of this revenue procedure, a debt instrument within its scope
would be an AHYDO.
SECTION 2. BACKGROUND
.01 Corporations frequently obtain
financing commitments (“Financing
Commitments”) from potential lenders
(“Lenders”) in advance of borrowing
money. These Financing Commitments
ensure that the corporation will have sufficient debt financing at a future date, within
certain parameters (for example, the total
amount to be borrowed, an interest rate
not to exceed a certain level, and the term
of the loan).
.02 In some cases, the Financing Commitments are not ultimately called upon by

2008–35 I.R.B.

the corporation, and the corporation obtains debt financing from other sources (or
doesn’t borrow at all).
.03 In other cases, the Financing Commitments are called upon by the corporation, and the Lender extends credit pursuant to terms negotiated earlier, as part
of the Financing Commitment. In some of
these situations, the corporation will borrow on terms that were generally established in the Financing Commitment, and
which generally remain fixed (or “permanent”) over the term of the resulting debt
instrument. (The “permanent” nature of
the terms frequently allows the debt to be
quickly sold by the Lender to other holders.) Alternatively, the corporation will
borrow on terms that are temporary (for
example, in effect for a year or less) but
that change to different, more “permanent”
terms (that is, terms that will last for the
remaining term of the financing arrangement) after this temporary period. (The
corporation may attempt to refinance the
loan during the temporary, or “bridge,” period on terms that are more favorable than
the “permanent” terms embedded in the
loan extended pursuant to the Financing
Commitment.)
.04 As recent events have demonstrated, market conditions can worsen, in
an unanticipated fashion, between the time
a binding Financing Commitment is obtained by the corporation and the time the
corporation calls upon the Lender to perform pursuant to the Financing Commitment. This can have a number of collateral
economic consequences, which can potentially result in situations in which the issue
price of a debt instrument is significantly
less than the amount of money actually
received by the corporation, viewing the
transactions as a whole. For example:
(1) In situations in which a corporation
issues debt with “permanent” terms previously established in the Financing Com-

562

mitment (that is, debt without temporary,
or “bridge,” terms), the Lender may be unable to sell the debt to third parties for
a price equal to (or near) the amount of
money provided to the corporation pursuant to the Financing Commitment. In
these situations, the issue price of the debt
may be significantly less than the amount
of money advanced to the corporation. For
example, this result could occur, in certain
circumstances, if the Lender sells a substantial amount of the debt to third parties
in its capacity as an underwriter within the
meaning of § 1.1273–2(e).
(2) In situations in which a corporation
issues debt with temporary, or “bridge,”
terms previously established in the Financing Commitment, the corporation
may be unable to refinance the debt in
the capital markets with new, alternative,
“permanent” debt financing with terms
that are more (or equally) favorable than
the “permanent” terms embedded in the
debt issued pursuant to the Financing
Commitment. Thus, in order to allow
the Lender to sell the debt to third parties
(whether as part of a separately negotiated
transaction or because the corporation is
required to do so by contract), the parties
may amend the terms of the debt to make it
more marketable. Depending on the facts
of a given case, such amendments may
constitute a “significant modification”
within the meaning of § 1.1001–3. In this
situation, the issue price of the new debt,
deemed to have been issued to retire the
old debt, may be significantly less than the
amount of money initially advanced to the
corporation. For example, this result could
occur, in certain circumstances, if the new
debt is traded on an established market
within the meaning of § 1.1273–2(f).
.05 The issuance of a debt instrument
pursuant to a Financing Commitment (or
pursuant to the significant modification
of a debt instrument originally issued

September 2, 2008