Rev Proc 2016-51

Rev. Proc. 2016-51
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
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs
.02 Modifications relating to changes in the determination letter
program
.03 Description of modifications relating to user fees
.04 Description of modifications
.05 Future enhancements
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01 Effect of EPCRS on retirement plans
.02 Compliance statement
.03 Excise and other taxes
.04 Reliance
SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs
.02 Effect of examination
.03 SCP eligibility requirements relating to plan documents
.04 Established practices and procedures
.05 Correction by plan amendment
.06 Availability of correction for Employer Eligibility Failure
.07 Availability of correction for a terminated plan
.08 Availability of correction for an Orphan Plan
.09 Availability of correction for § 457(b) plans
.10 Egregious failures
.11 Diversion or misuse of plan assets
.12 Abusive tax avoidance transactions
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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 Earnings
.05 IRA
.06 SEP
.07 SIMPLE IRA Plan
.08 Under Examination
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 Determination letter application not permitted
.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 or other taxes
.10 Correction for 403(b) Plans
.11 Correction for SEPs and SIMPLE IRA Plans
.12 Confidentiality and disclosure
.13 No effect on other law
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
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements
.02 Correction period
.03.Substantial completion of correction
.04 Examples
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PART V. VOLUNTARY CORRECTION PROGRAM WITH IRS APPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements
.02 Identification of failures
.03 Effect of VCP submission on examination
.04 No concurrent examination activity
.05 Determination letter applications not related to a VCP
submission
.06 Processing of submission
.07 Compliance statement
.08 Effect of compliance statement on examination
.09 Special rules relating to Anonymous Submissions
.10 Special rules relating to Group Submissions
.11 Multiemployer and multiple employer plans
SECTION 11. SUBMISSION PROCEDURES FOR VCP
.01 General rules
.02 Use of model forms
.03 Submission requirements
.04 Required documents
.05 Date user fee due generally
.06 Additional amount due for SEPs, SIMPLE IRA Plans and Group
Submissions
.07 Power of attorney requirements
.08 Penalty of perjury statement
.09 Procedural Requirements Checklist
.10 Orphan Plan
.11 Acknowledgement letter
.12 VCP mailing addresses
.13 Maintenance of copies of submissions
.14 Assembling the submission
SECTION 12. VCP USER FEES
.01 User fees
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
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.06 Other procedural rules
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction
.02 Factors considered
.03 Transferred Assets
.04 Sanction for Nonamender Failures discovered during the
determination letter application process
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK
REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
SECTION 16. EFFECTIVE DATE
SECTION 17. PUBLIC COMMENTS
SECTION 18. 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 Orphan Plans; orphan contracts and other assets
APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS
ADJUSTMENT METHODS AND EXAMPLES
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SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION
REFERENCES
.01 Purpose
.02 Assumptions for Examples
.03 Designated Roth contributions
.04 Section references
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
SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings Adjustment Methods
.02 Examples

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PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION
SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose. This revenue procedure updates the comprehensive system of
correction programs for sponsors of retirement plans that are intended to satisfy the
requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue
Code (the "Code"), but that have not met these requirements for a period of time. This
system, the Employee Plans Compliance Resolution System ("EPCRS"), permits Plan
Sponsors to correct these failures and thereby continue to provide their employees with
retirement benefits on a tax-favored basis. The components of EPCRS are the SelfCorrection 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:
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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.

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Sponsors and other administrators of eligible plans should satisfy the
applicable plan document requirements of the Code.

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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.

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

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

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

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

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

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

SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS
.01 Effect on programs. This revenue procedure modifies and supersedes Rev.
Proc. 2013-12, 2013-4 I.R.B. 313, the prior consolidated statement of the correction
programs under EPCRS. This revenue procedure also incorporates certain
modifications set forth in Rev. Proc. 2015-27, 2015-16 I.R.B. 914 (correction of
overpayments and certain other topics), and Rev. Proc. 2015-28, 2015-16 I.R.B. 920
(correction of failures with respect to automatic contribution features and encouraging
the early correction of employee elective deferral failures), two prior revenue procedures
modifying Rev. Proc. 2013-12. In addition, this revenue procedure incorporates
modifications to Rev. Proc. 2013-12 set forth in Rev. Proc. 2016-8, 2016-1 I.R.B. 243
(fees for VCP submissions generally moved to annual Employee Plans (EP) revenue
procedure on user fees).

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.02 Modifications relating to changes in the determination letter program. (1) In
general. Effective January 1, 2017, the staggered 5-year remedial amendment cycles
for individually designed plans will be eliminated, and the scope of the determination
letter program for individually designed plans will be limited to initial plan qualification,
qualification upon plan termination, and certain other circumstances. For further
information, see Rev. Proc. 2016-37, 2016-29 I.R.B. 136. EPCRS is being modified to
take into account the changes in the determination letter program. For information on
how to submit comments regarding changes made in EPCRS to take into account
changes in the determination letter program, see section 17.
(2) Changes to Audit CAP. Section 14 of Rev. Proc. 2013-12 sets forth
guidance on determining the sanction under Audit CAP. This revenue procedure
provides a revised approach for determining Audit CAP sanctions. Section 14.01 no
longer provides that the sanction will be a negotiated percentage of the Maximum
Payment Amount, but instead will be determined based on the facts and circumstances,
including the relevant factors described in section 14.02. The Maximum Payment
Amount is one such factor that may be considered. Section 14.01 also provides that, in
general, the sanction will not be less than the VCP user fee applicable to the plan.
Section 14.02(2) sets forth additional factors for Nonamender Failures discovered while
the plan is Under Examination, and section 14.04 significantly modifies the sanction for
Nonamender Failures discovered during the determination letter application process. In
section 14.04(3), the sanction for failing to timely adopt an amendment that is corrected
within three months after the expiration of the remedial amendment period has been
reduced to $750, regardless of the number of plan participants.
.03 Modifications relating to user fees. Prior to Rev. Proc. 2016-8, section 12 of
Rev. Proc. 2013-12 set forth the user fees for VCP submissions. Rev. Proc. 2016-8
modified Rev. Proc. 2013-12 by setting forth the general user fees for VCP submissions
in 2016. In addition, Rev. Proc. 2016-8 included cross-references to Rev. Proc. 201312 for special rules relating to determining the user fees for VCP submissions (such as
special user fees for Group Submissions and rules relating to establishing the number
of plan participants). Beginning in 2017, all user fees and rules relating to user fees for
VCP submissions will be published in the annual EP revenue procedure that sets forth
user fees, including VCP user fees. Accordingly, most of section 12 has been deleted.
In addition, rules relating to certain amounts that are not user fees have been moved
from section 12 to other sections in this revenue procedure (see the description of
modifications in section 2.04).
.04 Description of modifications. The modifications to Rev. Proc. 2013-12 that
are reflected in this revenue procedure include the following changes -•
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Revising section 4.03 to address modifications to the eligibility requirement for
SCP with regard to the Favorable Letter requirement.
Incorporating changes made by Rev. Proc. 2015-27, which revised section 4.04
to extend SCP eligibility so that repeated corrections of excess annual additions
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under § 415 will not prevent certain plans from satisfying the SCP requirement to
have established practices and procedures, as long as the plan corrects excess
annual additions through the return of elective deferrals to affected employees
within 9½ months after the end of the plan’s limitation year.
Revising section 4.08 to include a sentence providing that the user fee for a
terminating Orphan Plan may be waived at the discretion of the IRS and that the
request for a waiver should be made at the time of the submission.
Removing section 4.10 in Rev. Proc. 2013-12 relating to the submission of a
determination letter in light of the changes to the determination letter program.
Adding new section 4.10 relating to egregious failures to set forth the effect of
egregious failures on the various correction programs. In addition, section
4.10(3) provides that the IRS reserves the right to impose a sanction that may be
larger than the VCP user fee.
Revising section 5.01(2)(a) to clarify that the term Plan Document Failure
includes Good Faith Amendments, Interim Amendments, and Nonamender
Failures, and moving the definitions of those terms from section 6.05 to section
5.01(2)(a)(ii).
Revising section 5.01(2)(b) to reflect changes made by Rev. Proc. 2016-37.
Revising the definition of “Favorable Letter” in section 5.01(4) to provide that a
determination letter for an individually designed plan need not be current to be a
Favorable Letter.
Moving the concept that the Maximum Payment Amount includes the tax that the
IRS could collect for any plan loan that did not meet the requirements of
§72(p)(2) from section 14 to the definition of Maximum Payment Amount in
section 5.01(5).
Deleting a definition for References to Rev. Proc. 2007-44, previously in § 5.06 of
Rev. Proc. 2013-12.
Incorporating changes made in Rev. Proc. 2015-27 by revising section 6.02(5)(d)
to delete a reference to the Social Security letter forwarding program because
the Social Security Administration has announced that the program is no longer
available as a method for locating lost plan participants who are owed additional
retirement benefits.
Modifying section 6.05 to provide that determination letter applications may no
longer be submitted with VCP submissions and to clarify that the issuance of a
compliance statement with regard to a VCP submission that involves the
correction of a Plan Document Failure or an Operational Failure through a plan
amendment does not constitute a determination that the plan amendment
satisfies the qualification requirements.
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Incorporating changes made in Rev. Proc. 2015-27 by revising sections 6.06(3)
and 6.06(4) to clarify that that there is flexibility in correcting an Overpayment
under EPCRS. For example, depending on the nature of the Overpayment
failure (such as an Overpayment failure resulting from a benefit calculation error),
an appropriate correction method may include using rules similar to the
correction methods of sections 6.06(3) and 6.06(4) in Rev. Proc. 2013-12, but
having the employer or another person contribute the amount of the
Overpayment (with appropriate interest) to the plan instead of seeking
recoupment from plan participants and beneficiaries. Any correction method
used must be consistent with the correction principles in section 6.02 and any
applicable rules under EPCRS.
Revising section 6.11(5)(b) to clarify that a sanction, in addition to the user fee,
equal to 10% of the Excess Amount will apply when a failure involves an Excess
Amount under a SEP or a SIMPLE IRA Plan and the Plan Sponsor retains the
Excess Amount in the SEP or SIMPLE IRA Plan.
Deleting rules (previously in § 9.03 of Rev. Proc. 2013-12) relating to submitting
a determination letter application when correcting by plan amendment under
SCP.
Modifying section 10.01 to reflect that the user fees for EPCRS are now
published in an annual revenue procedure that sets forth user fees, including
VCP user fees.
Deleting rules (previously in § 10.05 of Rev. Proc. 2013-12) relating to the
procedure for filing a determination letter application as part of the VCP
submission to reflect changes to the determination letter program.
Revising renumbered section 10.06(7) to reflect that, in the case of the failure to
reach resolution with regard to an Anonymous Submission, the IRS will no longer
refund 50% of the applicable user fee.
Modifying renumbered section 10.06(9) to clarify that the correction of Interim
Amendment and Nonamender Failures must be made by the date of submission
and that corrective plan amendments required as part of a VCP submission must
be adopted no later than 150 days after the date of the compliance statement,
and to include special correction timing rules for governmental plans.
Adding section 10.07(2)(b) to clarify that a compliance statement issued with
regard to the correction of a Nonamender Failure is a determination that the
corrective amendment was timely adopted, and not a determination that the
corrective amendment as drafted complies with the qualification requirements or
conforms to the plan’s prior operation.
Adding section 10.07(2)(c) to clarify that the compliance statement issued with
regard to a corrective amendment made to correct an Operational Failure is a
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determination that the Operational Failure has been corrected, but is not a
determination that the plan, including the plan amendment, satisfies the
qualification requirements.
Revising renumbered section 10.09 to reflect that a determination letter
application should not be requested as part of an Anonymous Submission.
Reorganizing renumbered section 10.10 with regard to Group Submissions for
purposes of clarity.
Incorporating changes made in Rev. Proc. 2015-27 by revising section 11.02 to
provide that applicants may use model VCP submission documents by
submitting Form 14568, Model VCP Compliance Statement, and Forms 14568-A
through 14568-I. A link to the IRS website is provided in section 11.02(4) for the
most current versions of Form 14568 and Forms 14568-A through 14568-I.
Removing section 11.04(3) to delete a determination letter application as a
required document for a VCP submission in order to reflect changes made by
Rev. Proc. 2016-37.
Revising section 11.05 to delete procedures for the payment of the user fee for a
determination letter application filed as part of the VCP submission to reflect
changes made by Rev. Proc. 2016-37.
Revising section 11.06 to reflect that VCP user fees are no longer set forth in
section 12 but now are published in an annual revenue procedure that sets forth
user fees, including VCP user fees.
Revising section 11.11 to provide that an applicant wishing to obtain an
acknowledgement of receipt of a VCP submission must use IRS Letter 5265 and
attach it to the VCP submission.
Modifying section 11.14(1) to delete procedures for including a determination
letter application with a VCP submission in order to reflect the changes made by
Rev. Proc. 2016-37.
Modifying section 11.14(2)5 to reflect that the Model Compliance Statement and
Schedules previously provided in Appendix C are now Forms 14568 and Forms
14569-A through Form 14568-I.
Modifying section 11.14(2)6 to reflect that the Acknowledgement Letter
previously provided in Appendix D is now Letter 5265.
Modifying section 11.14(2)8 to delete procedures for including a determination
letter application with a VCP submission in order to reflect the changes made by
Rev. Proc. 2016-37.
Deleting section 11.14(2)10 to reflect the changes made by Rev. Proc. 2016-37.
Deleting most of section 12. For a description of the modifications, see section
2.03.
Moving section 12.06(2) to section 6.11(5)(b).
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Moving section 12.07 to section 4.10.
Modifying section 14 regarding sanctions under Audit CAP (including sanctions
for Nonamender Failures discovered Under Examination and during the
determination letter process). For a description of the modifications, see section
2.02(2).
Adding section .01(2) to Appendix A to clarify that a Plan Sponsor may choose
any correction method in the appendices to correct a failure, as long as the plan
can satisfy the eligibility requirements for that correction method.
Incorporating changes made in Rev. Proc. 2015-28 by revising section .05 of
Appendix A to add new section .05(8) to provide a safe harbor correction method
for certain Employee Elective Deferral Failures associated with missed elective
deferrals for eligible employees who are subject to an automatic contribution
feature in a § 401(k) plan or 403(b) Plan (including employees who made
affirmative elections in lieu of automatic contributions but whose elections were
not implemented correctly).
Incorporating changes made in Rev. Proc. 2015-28 by revising section .05 of
Appendix A to add new section .05(9) to provide two safe harbor correction
methods for certain Employee Elective Deferral Failures, one for failures that do
not exceed three months and a second for failures that exceed three months but
do not extend beyond the SCP correction period for significant failures. In
incorporating this change, the term “corrective contributions” was changed to
“corrective allocations” to reflect the correction principals described in section
6.02(4).
Incorporating changes made in Rev. Proc. 2015-28 by revising section .05 of
Appendix A to add a definition of Employee Elective Deferral Failures in new
section .05(10).
Incorporating changes made in Rev. Proc. 2015-27 by deleting Appendices C
and D.
Correcting various citations and cross references.
.05 Future enhancements.

(1) Future updates. It is expected that the IRS and the Department of the
Treasury (Treasury Department) will continue to update the EPCRS revenue procedure,
in whole or in part, from time to time, including further improvements to EPCRS based
on comments received. Accordingly, the IRS and Treasury Department continue to
invite further comments on how to improve EPCRS. For information on how to submit
comments, see section 17.
(2) Comments relating to the recoupment of Overpayments failures. Section
4.05 of Rev. Proc. 2015-27 modified §§ 6.06(3) and 6.06(4) of Rev. Proc. 2013-12 to
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clarify that there is flexibility in correcting an Overpayment under EPCRS in light of the
concern that some Plan Sponsors may be incorrectly interpreting the correction rules
under EPCRS as requiring a demand for recoupment from plan participants and
beneficiaries in all cases of Overpayment failures. Those clarifications are incorporated
in this revenue procedure. For a further description of the clarifications, see § 3.02 of
Rev. Proc. 2015-27. Section 3.02(4) of Rev. Proc. 2015-27 stated that the IRS intends
to make further revisions regarding the correction of Overpayments and solicited
comments from the public on revisions to EPCRS relating to the recoupment of
Overpayments. The Treasury Department and the IRS are in the process of reviewing
the comments received. Comments continue to be requested on this issue and will be
shared with the Department of Labor. For information on how to submit comments, see
section 17.

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 IRS will
not treat the plan as failing to meet the requirements of § 401(a), 403(b), 408(k), or
408(p), as applicable, because of the failure. 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 IRS
and the Plan Sponsor or Eligible Organization as provided in section 10.07.
.03 Excise and other taxes. See section 6.09 for rules relating to excise and
other taxes.
.04 Reliance. Taxpayers may rely on this revenue procedure, including the relief
described in section 3.01.
SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs. (1) SCP. SCP is available 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.
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(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 IRS may extend EPCRS to other
arrangements.
(5) Appropriate use of programs. In a particular case, the IRS may decline to
make available one or more correction programs under EPCRS in the interest of sound
tax administration.
.02 Effect of examination. If the plan or Plan Sponsor is Under Examination,
VCP is not available 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 9.03) before the plan or Plan Sponsor
is Under Examination, correction of those failures can be completed under SCP.
.03 SCP eligibility requirements relating to plan documents. (1) Requirements
for individually designed Qualified Plans. The provisions of SCP relating to significant
Operational Failures (see section 9) are available for a Qualified Plan that is an
individually designed plan only if, as of the date of correction, the plan is the subject of a
Favorable Letter.
(2) Requirements for qualified master or prototype or volume submitter plans,
and 403(b) Plans. The provisions of SCP relating to significant Operational Failures
(see section 9) are available for a Qualified Plan that is a master or prototype plan or
volume submitter plan and a 403(b) Plan (whether or not a 403(b) pre-approved plan as
described in Rev. Proc. 2013-22, 2013-18 I.R.B. 985)) only if such plan is the subject of
a Favorable Letter. (See section 6.10(2) for rules treating a 403(b) Plan as having a
Favorable Letter.)
(3) Requirements for SEPs and SIMPLE IRAs. The provisions of SCP relating
to insignificant Operational Failures (see section 8) are available for a SEP only if the
plan document consists of either (i) a valid Model Form 5305-SEP, Simplified Employee
Pension--Individual Retirement Accounts Contribution Agreement, or 5305A-SEP,
Salary Reduction Simplified Employee Pension--Individual Retirement Accounts
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Contribution Agreement, adopted by an employer in accordance with the instructions on
the applicable form (see Rev. Proc. 2002-10, 2002-1 C.B. 401) or (ii) a prototype SEP
that has a current favorable opinion letter and that has been amended in accordance
with the procedures set forth in Rev. Proc. 2002-10. The provisions of SCP relating to
insignificant Operational Failures are available for a SIMPLE IRA Plan only if the plan
document consists of either (i) a valid Model Form 5305-SIMPLE, Savings Incentive
Match Plan for Employees of Small Employers (SIMPLE)--for Use with a Designated
Financial Institution, or 5304-SIMPLE, Savings Incentive Match Plan for Employees of
Small Employers (SIMPLE)--Not for Use with a Designated Financial Institution,
adopted by an employer in accordance with the instructions on the applicable form (see
Rev. Proc. 2002-10) or (ii) a prototype SIMPLE IRA Plan that has a current favorable
opinion letter and that has been amended in accordance with the procedures set forth in
Rev. Proc. 2002-10.
.04 Established practices and procedures. To be eligible for SCP, the Plan
Sponsor or administrator of a plan must have established practices and procedures
(formal or informal) reasonably designed to promote and facilitate overall compliance in
form and operation with applicable Code requirements. For example, the plan
administrator of a Qualified Plan that may be top-heavy under § 416 may include in its
plan operating manual a specific annual step to determine whether the plan is top-heavy
and, if so, to ensure that the minimum contribution requirements of the top-heavy rules
are satisfied. A plan document alone does not constitute evidence of established
procedures. In order for a Plan Sponsor or administrator to use SCP, these established
procedures must have been in place and routinely followed, and an Operational Failure
must have occurred through an oversight or mistake in applying them. 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. A plan that provides for elective deferrals and nonelective employer
contributions that are not matching contributions is not treated as failing to have
established practices and procedures to prevent the occurrence of a § 415(c) violation
in the case of a plan under which excess annual additions under § 415(c) are regularly
corrected by return of elective deferrals to the affected employee within 9½ months
after the end of the plan’s limitation year. The correction, however, should not violate
another applicable Code requirement. In the case of a failure that relates to Transferred
Assets or to a plan assumed in connection with a corporate merger, acquisition, or other
similar employer transaction between the Plan Sponsor and the sponsor of the
transferor plan or the prior Plan Sponsor of an assumed plan, the plan is considered to
have established practices and procedures for the Transferred Assets if such practices
and procedures are in effect for the Transferred Assets by the end of the first plan year
that begins after the corporate merger, acquisition, or other similar transaction. (See
section 6.10(2) for special rules regarding established practices and procedures for
403(b) Plans.)
.05 Correction by plan amendment. (1) Availability of correction by plan
amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a
15

Qualified Plan or 403(b) Plan to correct Plan Document, Demographic, and Operational
Failures by a plan amendment, including correcting an Operational Failure by a plan
amendment to conform the terms of the plan to the plan’s prior operations, provided that
the amendment complies with the applicable Code requirements, including, for a
Qualified Plan, § 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. As explained further in
sections 6.05 and 10.07(2), the issuance of a compliance statement constitutes a
determination that the failure identified has been corrected, but does not constitute a
determination that the terms of the plan, including the corrective plan amendment,
satisfy the qualification requirements in form.
(2) Availability of correction by plan amendment in SCP. A Plan Sponsor may
use SCP for a Qualified Plan or 403(b) 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
with respect to 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), to the extent
applicable to the plan. If a Plan Sponsor corrects an Operational Failure in accordance
with the approved correction methods under Appendix B, it may amend the plan to
reflect the corrective action. For example, if the plan failed to satisfy the 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 contributions. SCP is not otherwise available for a Plan
Sponsor to correct an Operational Failure by a plan amendment.
.06 Availability of correction for Employer Eligibility Failure. SCP is not available
for a Plan Sponsor to correct an Employer Eligibility Failure.
.07 Availability of correction for a terminated plan. Correction of Qualification
Failures and 403(b) Failures in a terminated plan may be made under VCP and Audit
CAP, whether or not the plan trust or contract is still in existence.
.08 Availability of correction for an Orphan Plan. A failure in an Orphan Plan that
is terminating may only 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
generally section 6.02(2)(e)(i). SCP is not available for correcting failures in Orphan
Plans. In the case of a terminating Orphan Plan, the IRS may, in its discretion, waive
the user fee. In such a case, the submission must include a request for a waiver of the
user fee. See section 11.03(13).
16

.09 Availability of correction for § 457(b) plans. The IRS will accept submissions
relating to § 457(b) plans on a provisional basis outside of EPCRS through standards
that are similar to EPCRS. The availability of correction is generally limited to plans that
are sponsored by governmental entities described in § 457(e)(1)(A). In the case of a
§ 457(b) plan that is an unfunded deferred compensation plan established for the
benefit of top hat employees of a tax-exempt entity described in § 457(e)(1)(B), the IRS
generally will not enter into an agreement to address problems associated with such a
plan. However, the IRS may consider a submission where, for example, the plan was
erroneously established to benefit the entity’s nonhighly compensated employees and
the plan has been operated in a manner that is similar to a Qualified Plan.
.10 Egregious failures. (1) In general. Egregious failures include: (a) a plan that
has consistently and improperly covered only highly compensated employees; (b) a
plan that provides more favorable benefits for an owner of the employer based on a
purported collective bargaining agreement where there has in fact been no good faith
bargaining between bona fide employee representatives and the employer (see Notice
2003-24, 2003-1 C.B. 853, with respect to good faith bargaining and welfare benefit
funds); or (c) a defined contribution plan where a contribution is made on behalf of a
highly compensated employee that is several times greater than the dollar limit set forth
in § 415(c).
(2) SCP. SCP is not available to correct Operational Failures that are egregious.
(3) VCP. VCP is available to correct egregious failures. However, the IRS
reserves the right to impose a sanction that may be larger than the user fee described in
the annual revenue procedure that sets forth user fees, including VCP user fees. For
this purpose, an egregious failure would include any case in which the IRS concludes
that the parties controlling the plan recognized that the action taken would constitute a
failure and the failure either involves a substantial number of participants or
beneficiaries or involves participants who are predominantly highly compensated
employees.
(4) Audit CAP. Audit CAP also is available to correct egregious failures.
.11 Diversion or misuse of plan assets. SCP, VCP, and Audit CAP are not
available to correct failures relating to the diversion or misuse of plan assets.
.12 Abusive tax avoidance transactions. (1) Effect on Programs. (a) SCP. With
respect to SCP, in the event that the plan or the Plan Sponsor has been a party to an
abusive tax avoidance transaction (as defined in section 4.12(2)), SCP is not available
to correct any Operational Failure that is directly or indirectly related to the abusive tax
avoidance transaction.
(b) VCP. With respect to VCP, if the IRS determines that a plan or Plan Sponsor
was, or may have been, a party to an abusive tax avoidance transaction (as defined in
17

section 4.12(2)), then the matter will be referred to the IRS Employee Plans Tax Shelter
Coordinator. Upon receiving a response from the Tax Shelter Coordinator, the IRS may
determine that the plan or the Plan Sponsor has been a party to an abusive tax
avoidance transaction, and that the failures addressed in the VCP submission are
related to that transaction. In those situations, the IRS will conclude the review of the
submission without issuing a compliance statement and will refer the case for
examination. However, if the 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 IRS 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 IRS reserves the right to make a referral of the abusive tax avoidance
transaction matter for examination.
(c) Audit CAP and SCP (for plans Under Examination). For plans Under
Examination, if the IRS determines that the plan or Plan Sponsor was, or may have
been, a party to an abusive tax avoidance transaction, the matter may be referred to the
IRS Employee Plans Tax Shelter Coordinator. With respect to plans Under
Examination, an abusive tax avoidance transaction includes a transaction described in
section 4.12(2) and any other transaction that the IRS determines was designed to
facilitate the impermissible avoidance of tax. Upon receiving a response from the Tax
Shelter Coordinator, (i) if the IRS determines that a failure is related to the abusive tax
avoidance transaction, the IRS reserves the right to conclude that neither Audit CAP nor
SCP is available for that failure or (ii) if the IRS determines that satisfactory corrective
actions have not been taken with regard to the transaction, the IRS reserves the right to
conclude that neither Audit CAP nor SCP is available to the plan.
(2) Abusive tax avoidance transaction defined. For purposes of section 4.12(1)
(except to the extent otherwise provided in section 4.12(1)(c)), an abusive tax
avoidance transaction means any listed transaction under § 1.6011-4(b)(2) and any
other transaction identified as an abusive transaction on the IRS 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.
18

(1) Qualified Plan. The term "Qualified Plan" means a plan intended to satisfy the
requirements of § 401(a) or 403(a).
(2) Qualification Failure. The term “Qualification Failure” means any failure that
adversely affects the qualification of a plan. There are four types of Qualification
Failures: (a) Plan Document Failures; (b) Operational Failures; (c) Demographic
Failures; and (d) Employer Eligibility Failures.
(a) Plan Document Failure. (i) In general. The term "Plan Document Failure"
means a plan provision (or the absence of a plan provision) that, on its face, violates the
requirements of § 401(a) or 403(a). A Plan Document Failure includes any Qualification
Failure that is a violation of the requirements of § 401(a) or 403(a) and that is not an
Operational Failure, Demographic Failure, or Employer Eligibility Failure. This term
includes a Nonamender Failure, a failure to adopt Good Faith Amendments, and a
failure to adopt Interim Amendments. Failure to adopt a discretionary plan amendment
by the plan amendment deadline set forth in § 8.02 of Rev. Proc. 2016-37 (or § 5.05(2)
of Rev. Proc. 2007-44) is not considered a plan document failure.
(ii) Specific definitions relating to Plan Document Failures:
(A) “Good Faith Amendment” includes the EGTRRA good faith amendments
described in Notice 2001-42, 2001-2 C.B. 70, the amendment required for the plan to
comply with the final regulations under § 401(a)(9) of the Code (see Rev. Proc. 200229, 2002-1 C.B. 1176, as modified by Rev. Proc. 2003-10, 2003-1 C.B. 259), the
amendment updating the mortality table to reflect the guidance in Rev. Rul. 2001-62,
2001-2 C.B. 632, and the amendment updating the definition of compensation, for
purposes of § 415(c)(3), to include “deemed § 125 compensation” pursuant to Rev. Rul.
2002-27, 2002-1 C.B. 925. For rules relating to a failure to adopt a Good Faith
Amendment, see Rev. Proc. 2013-12.
(B) “Interim Amendment” means an amendment with respect to a disqualifying
provision that results in the failure of the plan to satisfy the qualification requirements of
the Code by reason of a change in those requirements that is effective after December
31, 2001, or that is integral to such disqualifying provision. See § 15.02 of Rev. Proc.
2016-37 for interim amendment requirements for preapproved plans. For interim
amendments required to be adopted in individually designed plans before January 1,
2017 (or before February 1, 2017 for Cycle A plans), see § 5.04 of Rev. Proc. 2007-44.
(C) “Nonamender Failure” means a failure to adopt an amendment that corrects
a disqualifying provision described in § 1.401(b)-1(b) within the applicable remedial
amendment period. In general, a disqualifying provision includes a provision in the plan
document that violates a qualification requirement of the Code or the absence of a
provision that causes the plan to fail to satisfy a qualification requirement of the Code.
A disqualifying provision also includes any provision designated by the Commissioner
as a disqualifying provision under § 1.401(b)-1(b)(3). See §§ 5 and 15 of Rev. Proc.
19

2016-37. For an individually designed plan, a Nonamender Failure includes the failure
to timely amend for provisions that appear on the Required Amendments List, as
described in Rev. Proc. 2016-37.
(b) Operational Failure. The term "Operational Failure" means a Qualification
Failure (other than an Employer Eligibility Failure) that arises solely from the failure to
follow plan provisions. A failure to follow the terms of the plan providing for the
satisfaction of the requirements of § 401(k) and (m) is considered to be an Operational
Failure. A plan does not have an Operational Failure to the extent the plan is permitted
to be amended retroactively to reflect the plan's operations (for example, pursuant to §
401(b)). In the situation where a Plan Sponsor timely adopted an amendment and the
plan was not operated in accordance with the terms of such amendment, the plan is
considered to have an Operational Failure.
(c) Demographic Failure. The term "Demographic Failure" means a failure to
satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b) that is not an Operational
Failure or an Employer Eligibility Failure. The correction of a Demographic Failure
generally requires a corrective amendment to the plan adding more benefits or
increasing existing benefits (see § 1.401(a)(4)-11(g)).
(d) Employer Eligibility Failure. The term “Employer Eligibility Failure” means the
adoption of a plan intended to include a qualified cash or deferred arrangement under
§ 401(k) by an employer that fails to meet the employer eligibility requirements to
establish a § 401(k) plan. An Employer Eligibility Failure is not a Plan Document,
Operational, or Demographic Failure.
(3) Excess Amount; Excess Allocations; Overpayment. (a) Excess Amount. The
term "Excess Amount" means a Qualification Failure due to a contribution, allocation, or
similar credit that is made on behalf of a participant or beneficiary to a plan in excess of
the maximum amount permitted to be contributed, allocated, or credited on behalf of the
participant or beneficiary under the terms of the plan or that exceeds a limitation on
contributions or allocations provided in the Code or regulations. Excess Amounts
include: (i) an elective deferral or after-tax employee contribution that is in excess of the
maximum contribution under the plan; (ii) an elective deferral or after-tax employee
contribution made in excess of the limitation under § 415; (iii) an elective deferral in
excess of the limitation of § 402(g); (iv) an excess contribution or excess aggregate
contribution under § 401(k) or (m); (v) an elective deferral or after-tax employee
contribution that is made with respect to compensation in excess of the limitation of
§ 401(a)(17); and (vi) any other employer contribution that exceeds a limitation under
§ 401(m) (but only with respect to the forfeiture of nonvested matching contributions that
are excess aggregate contributions), 411(a)(3)(G), or 415, or that is made with respect
to compensation in excess of the limitation under § 401(a)(17). However, an Excess
Amount does not include a contribution, allocation, or other credit that is made pursuant
to a correction method provided under this revenue procedure for a different
Qualification Failure. Excess Amounts are limited to contributions, allocations, or annual
20

additions under a defined contribution plan, after-tax employee contributions to a
defined benefit plan, and contributions or allocations that are to be made to a separate
account (with actual Earnings) under a defined benefit plan. See generally section 6.06
for the treatment and correction of certain Excess Amounts.
(b) Excess Allocation. The term "Excess Allocation" means an Excess Amount
for which the Code or regulations do not provide any corrective mechanism. Excess
Allocations include Excess Amounts as defined in section 5.01(3)(a) (i), (ii), (v), and (vi)
(except with respect to § 401(m) or 411(a)(3)(G) violations). Excess Allocations must be
corrected in accordance with section 6.06(2).
(c) Overpayment. The term "Overpayment" means a Qualification Failure due to
a payment being made to a participant or beneficiary that exceeds the amount payable
to the participant or beneficiary under the terms of the plan or that exceeds a limitation
provided in the Code or regulations. Overpayments include both payments from a
defined benefit plan and payments from a defined contribution plan (either not made
from the participant's or beneficiary's account under the plan or not permitted to be paid
under the Code, the regulations, or the terms of the plan). However, an Overpayment
does not include a payment that is made pursuant to a correction method provided
under this revenue procedure for a different Qualification Failure. Overpayments must
be corrected in accordance with section 6.06(3) for defined benefit plans and section
6.06(4) for defined contribution plans and 403(b) Plans.
(4) Favorable Letter. With respect to a particular Qualified Plan, the term
"Favorable Letter" is defined in the following manner.
(a) Favorable Letter for individually designed plans. In the case of an
individually designed plan, the term “Favorable Letter” means a determination letter
issued with respect to the plan.
(b) Favorable Letter for master or prototype plans and volume submitter plans.
In the case of a master or prototype plan, the term “Favorable Letter” means a current
favorable opinion letter with respect to the master or prototype plan (standardized or
nonstandardized) adopted by the Plan Sponsor. In the case of a volume submitter plan,
the term “Favorable Letter” means a current favorable advisory letter with respect to the
volume submitter plan adopted by the Plan Sponsor. For this purpose, a master or
prototype plan or a volume submitter plan has a current favorable opinion letter or
advisory letter if the letter considers the law changes incorporated during the most
recently expired six-year remedial amendment cycle under the provisions of Rev. Proc.
2016-37.
(c) Terminated plans. In the case of a master or prototype plan or a volume
submitter plan, the plan is treated as having a current favorable opinion letter or
advisory letter if the plan is terminated prior to the expiration of the plan’s current
remedial amendment cycle determined under the provisions of Rev. Proc. 2016-37, and
21

the plan was amended to reflect the qualification requirements that applied as of the
date of termination.
(5) Maximum Payment Amount. The term "Maximum Payment Amount" means a
monetary amount that is approximately equal to the tax the IRS could collect upon plan
disqualification and is the sum for the open taxable years of the:
(a) tax on the trust (Form 1041, U.S. Income Tax Return for Estates and Trusts)
(and any interest or penalties applicable to the trust return);
(b) additional income tax resulting from the loss of employer deductions for plan
contributions (and any interest or penalties applicable to the Plan Sponsor's return);
(c) additional income tax resulting from income inclusion for participants in the
plan (Form 1040, U.S. Individual Income Tax Return), including the tax on plan
distributions that have been rolled over to other qualified trusts (as defined in
§ 402(c)(8)(A)) or eligible retirement plans (as defined in § 402(c)(8)(B)) and any
interest or penalties applicable to the participants’ returns;
(d) in the case of any participant loan that did not comply with the requirements
of § 72(p)(2), the tax the IRS could collect as a result of the loan not being excluded
from gross income under § 72(p)(2); and
(e) any other tax that results from a Qualification Failure that would apply but for
correction under this revenue procedure.
(6) Plan Sponsor. The term "Plan Sponsor" means the employer that establishes
or maintains a Qualified Plan for its employees.
(7) Transferred Assets. The term “Transferred Assets” means plan assets that
were received, in connection with a corporate merger, acquisition, or other similar
employer transaction, by the plan in a transfer (including a merger or consolidation of
plan assets) under § 414(l) from a plan sponsored by an employer that was not a
member of the same controlled group as the Plan Sponsor immediately prior to the
corporate merger, acquisition, or other similar employer transaction. If a transfer of plan
assets related to the same employer transaction is accomplished through several
transfers, then the date of the transfer is the date of the first transfer.
.02 Definitions for 403(b) Plans. The definitions in this section 5.02 apply to
403(b) Plans. For 403(b) Plans, the definitions under Rev. Proc. 2008-50 apply to
failures that occurred in taxable years beginning before January 1, 2009.

(1) 403(b) Plan. The term "403(b) Plan" means a plan or program intended to
satisfy the requirements of § 403(b).
22

(2) 403(b) Failure. The term “403(b) Failure” means a failure that adversely affects the
exclusion from income provided by § 403(b). There are four types of 403(b) Failures: (a) Plan
Document Failures; (b) Operational Failures; (c) Demographic Failures; and (d) Employer Eligibility
Failures.
(a) Plan Document Failure. The term "Plan Document Failure" means a plan provision (or
the absence of a plan provision) that, on its face, violates the requirements of § 403(b). Thus, for
example, the failure of a plan to be adopted in written form or to be amended to reflect a new
requirement within the plan's applicable remedial amendment period is a Plan Document Failure. If
a plan has not been timely or properly amended during an applicable remedial amendment period
with respect to provisions required to maintain the status of the plan under § 403(b), the plan has a
Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes
any 403(b) Failure that adversely affects the status of the plan under § 403(b) and that is not an
Operational Failure, Demographic Failure, or Employer Eligibility Failure.
(b) Operational Failure. The term "Operational Failure" means a 403(b) Failure (other than an
Employer Eligibility Failure) that arises solely from the failure to follow plan provisions. A failure to
follow the terms of the plan providing for the satisfaction of the requirements of §§ 403(b)(12)(ii)
(relating to the availability of elective deferral contributions) and 401(m) (as applied to 403(b) Plans
pursuant to § 403(b)(12)(A)(i)) is an Operational Failure. A plan does not have an Operational
Failure to the extent the plan is permitted to be amended retroactively to reflect the plan's
operations.
(c) Demographic Failure. The term "Demographic Failure" means a failure to satisfy the
requirements of § 401(a)(4), 401(a)(26), or 410(b) (as applied to 403(b) Plans pursuant to
§ 403(b)(12)(A)(i)) that is not an Operational Failure or an Employer Eligibility Failure. The
correction of a Demographic Failure generally requires a corrective amendment to the plan adding
more benefits or increasing existing benefits (see § 1.401(a)(4)-11(g)).
(d) Employer Eligibility Failure. The term "Employer Eligibility Failure" means the adoption of
a plan intended to satisfy the requirements of § 403(b) by a Plan Sponsor that is not a tax-exempt
organization described in § 501(c)(3) or a public educational organization described in
§ 170(b)(1)(A)(ii). An Employer Eligibility Failure is not a Plan Document, Operational, or
Demographic Failure.
(3) Excess Amount. The term "Excess Amount" means a contribution or other credit that is
made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted
to be contributed or credited on behalf of the participant or beneficiary under the terms of the plan or
that exceeds a limitation on contributions provided in the Code or regulations. The term "Excess
Amount" includes any amount in excess of the amount permitted under the requirements of
§ 402(g), 401(m), or 415. A contribution in excess of the limitation of § 415(c) is not an Excess
Amount (or a 403(b) Failure) if that excess is maintained in a separate account in accordance with
the rules in the regulations under §§ 403(b) and 415. Such separate account is considered to be a
23

§ 403(c) annuity contract (or, if applicable, an amount to which § 61, 83, or 402(b) applies). A
contribution in excess of the limitation of § 415(c) that is not maintained in a separate account in
accordance with the rules set forth in regulations under §§ 403(b) and 415 is an Excess Amount.
Thus, the correction principles in section 6.06 apply.
(4) Overpayment. The term “Overpayment” means a 403(b) Failure due to a payment being
made to a participant or beneficiary that exceeds the amount payable to the participant or
beneficiary under the terms of the plan or that exceeds a limitation provided in the Code or
regulations. Overpayments include payments made from the participant’s or beneficiary’s 403(b)
custodial account or annuity contract under the plan that are not permitted to be paid under the
Code, the regulations, or the terms of the plan. However, an Overpayment does not include a
payment that is made pursuant to a correction method provided under this revenue procedure for a
different 403(b) Failure. Overpayments must be corrected in accordance with section 6.06(4).
(5) Favorable Letter. The term "Favorable Letter" means a Favorable Letter as
described in section 6.10(2).
(6) Maximum Payment Amount. The term "Maximum Payment Amount” means a
monetary amount that is approximately equal to the tax the IRS could collect as a result
of the 403(b) Failure and is the sum for the open taxable years of the:
(a) additional income tax resulting from income inclusion for employees or other
participants (Form 1040), including the tax on distributions that have been rolled over to
other qualified trusts (as defined in § 402(c)(8)(A)) or eligible retirement plans (as
defined in § 402(c)(8)(B)) and any interest or penalties applicable to the participants’
returns; and
(b) any other tax that results from a 403(b) Failure that would apply but for
correction under this revenue procedure.
(7) Plan Sponsor. The term "Plan Sponsor” means the employer that offers a
403(b) Plan to its employees.
.03 Definitions for Orphan Plans.
(1) Orphan Plan. With respect to VCP and Audit CAP, the term “Orphan Plan”
means any Qualified Plan, 403(b) Plan, or other plan with respect to which an “Eligible
Party” (defined in section 5.03(2)) has determined that the Plan Sponsor (a) no longer
exists, (b) cannot be located, or (c) is unable to maintain the plan. However, the term
“Orphan Plan” does not include any plan subject to Title I of the Employee Retirement
Income Security Act of 1974 (“ERISA”) that is terminated pursuant to 29 CFR 2578.1 of
the Department of Labor regulations governing the termination of abandoned individual
account plans.
(2) Eligible Party. The term “Eligible Party” means:
24

(a) A court appointed representative with authority to terminate the plan and
dispose of the plan’s assets;
(b) In the case of an Orphan Plan under investigation by the Department of
Labor, a person or entity determined by the Department of Labor to have accepted
responsibility for terminating the plan and distributing the plan's assets; or
(c) In the case of a Qualified Plan to which Title I of ERISA has never applied, a
surviving spouse who is the sole beneficiary of a plan that provided benefits to a
participant who was (i) the sole owner of the business that sponsored the plan and (ii)
the only participant in the plan.
.04 Earnings. The term “Earnings” refers to the adjustment of a principal amount
to reflect subsequent investment gains and losses, unless otherwise provided in a
specific section of this revenue procedure.
.05 IRA. The term “IRA” means an individual retirement account (as defined in
§ 408(a)) or an individual retirement annuity (as defined in § 408(b)).
.06 SEP. The term “SEP” means a plan intended to satisfy the requirements of
§ 408(k). For purposes of this revenue procedure, the term SEP also includes a salary
reduction SEP (“SARSEP”) described in § 408(k)(6), if applicable.
.07 SIMPLE IRA Plan. The term “SIMPLE IRA Plan” means a plan intended to
satisfy the requirements of § 408(p).
.08 Under Examination. (1) The term "Under Examination" means: (a) a plan
that is under an Employee Plans examination (that is, an examination of a Form 5500
series or other Employee Plans examination); (b) a Plan Sponsor that is under an
Exempt Organizations examination (that is, an examination of a Form 990 series or
other Exempt Organizations examination); or (c) a plan that is under investigation by the
Criminal Investigation Division of the IRS.
(2) A plan that is under an Employee Plans examination includes any plan for
which the Plan Sponsor, or 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 in Appeals or in litigation for issues raised
in an Employee Plans examination. A plan is considered to be Under Examination if it is
aggregated for purposes of satisfying the nondiscrimination requirements of § 401(a)(4),
the minimum participation requirements of § 401(a)(26), the minimum coverage
requirements of § 410(b), or the requirements of § 403(b)(12)(A)(i), with any plan that is
Under Examination. In addition, a plan is considered to be Under Examination with
respect to a failure of a qualification requirement (other than those described in the
25

preceding sentence) if the plan is aggregated with another plan for purposes of
satisfying that qualification requirement (for example, § 401(a)(30), 415, or 416) and
that other plan is Under Examination. For example, assume Plan A has a § 415 failure,
Plan A is aggregated with Plan B only for purposes of § 415, and Plan B is Under
Examination. In this case, Plan A is considered to be Under Examination with respect to
the § 415 failure. However, if Plan A has a failure relating to the spousal consent rules
under § 417 or the vesting rules of § 411, Plan A is not considered to be Under
Examination with respect to the § 417 or 411 failure. For purposes of this revenue
procedure, the term aggregation does not include consideration of benefits provided by
various plans for purposes of the average benefits test set forth in § 410(b)(2).
(3) An Employee Plans examination also includes a case in which a Plan
Sponsor has submitted any Form 5300 (Application for Determination for Employee
Benefit Plan), Form 5307 (Application for Determination for Adopters of Modified
Volume Submitter Plans), or Form 5310 (Application for Determination for Terminating
Plan) and the Employee Plans agent notifies the Plan Sponsor, or a representative, of
possible failures, whether or not the Plan Sponsor is officially notified of an
"examination." This would include a case where, for example, a Plan Sponsor has
applied for a determination letter on plan termination, and an Employee Plans agent
notifies the Plan Sponsor that there are partial termination concerns. In addition, if,
during the review process, the agent requests additional information that indicates the
existence of a failure not previously identified by the Plan Sponsor, the plan is
considered to be under an Employee Plans examination. If, in such a case, the
determination letter request under review is subsequently withdrawn, the plan is
nevertheless considered to be under an Employee Plans examination for purposes of
eligibility under SCP and VCP with respect to those issues raised by the agent
reviewing the determination letter application. The fact that a Plan Sponsor voluntarily
submits a determination letter application does not constitute a voluntary identification of
a failure to the IRS. In order to be eligible for VCP, the Plan Sponsor (or the authorized
representative) must identify each failure, in writing, to the reviewing agent before the
agent recognizes the existence of the failure or addresses the failure in communications
with the Plan Sponsor (or the authorized representative).
(4) A Plan Sponsor that is under an Exempt Organizations examination includes
any Plan Sponsor that has received (or whose representative has received) verbal or
written notification from Exempt Organizations of an impending Exempt Organizations
examination or of an impending referral for an Exempt Organizations examination and
also includes any Plan Sponsor that has been under an Exempt Organizations
examination and is now in Appeals or in litigation for issues raised in an Exempt
Organizations examination.
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL
APPLICABILITY

26

.01 Correction principles; rules of general applicability. The general correction
principles in section 6.02 and rules of general applicability in sections 6.03 through 6.13
apply for purposes of this revenue procedure.
.02 Correction principles. Generally, a failure is not corrected unless full
correction is made with respect to all participants and beneficiaries, and for all taxable
years (whether or not the taxable year is closed). Even if correction is made for a closed
taxable year, the tax liability associated with that year will not be redetermined because
of the correction. Correction is determined taking into account the terms of the plan at
the time of the failure. Correction should be accomplished taking into account the
following principles:
(1) Restoration of benefits. The correction method should restore the plan to the
position it would have been in had the failure not occurred, including restoration of
current and former participants and beneficiaries to the benefits and rights they would
have had if the failure had not occurred.
(2) Reasonable and appropriate correction. The correction should be reasonable
and appropriate for the failure. Depending on the nature of the failure, there may be
more than one reasonable and appropriate correction for the failure. For Qualified Plans
and 403(b) Plans, any correction method permitted under Appendix A or Appendix B is
deemed to be a reasonable and appropriate method of correcting the related failure.
Any correction method permitted under Appendix A or Appendix B applicable to a SEP,
or a SIMPLE IRA Plan is similarly deemed to be a reasonable and appropriate method
of correcting the related failure. If a plan has a different but analogous failure to one set
forth in Appendix A or B (such as the failure to provide a matching contribution by a
governmental plan that is not subject to § 401(m)), then the analogous correction
method under Appendix A or B is generally available to correct any failure. Whether any
other particular correction method is reasonable and appropriate is determined taking
into account the applicable facts and circumstances and the following principles:
(a) The correction method should, to the extent possible, resemble one already
provided for in the Code, regulations, or other guidance of general applicability. For
example, for Qualified Plans and 403(b) Plans, the correction method set forth in
§ 1.402(g)-1(e)(2) would be the typical means of correcting a failure under § 402(g).
(b) The correction method should keep plan assets in the plan, except to the
extent the Code, regulations, or other guidance of general applicability provide for
correction by distribution to participants or beneficiaries or return of assets to the
employer. For example, if an excess allocation (not in excess of the § 415 limits) made
under a Qualified Plan was made for a participant under a plan (other than a § 401(k)
plan), the excess should be reallocated to other participants or, depending on the facts
and circumstances, used to reduce future employer contributions.

27

(c) The correction method for failures relating to nondiscrimination should provide
benefits for nonhighly compensated employees. For example, for Qualified Plans, the
correction method set forth in § 1.401(a)(4)-11(g) (rather than methods making use of
the special testing provisions set forth in § 1.401(a)(4)-8 or 1.401(a)(4)-9) would be the
typical means of correcting a failure to satisfy nondiscrimination requirements. Similarly,
the correction of a failure to satisfy the requirements of § 401(k)(3) or 401(m)(2), or, for
plan years beginning on or before December 31, 2001, the multiple use test of
§ 401(m)(9) (relating to nondiscrimination), solely by distributing excess amounts to
highly compensated employees would not be the typical means of correcting such a
failure.
(d) The correction method should not violate another applicable specific
requirement of § 401(a) or 403(b) (for example, § 401(a)(4), 411(d)(6), or 403(b)(12), as
applicable), 408(k) for SEPs, or 408(p) for SIMPLE IRA Plans, or a parallel requirement
in Part 2 of Subtitle B of Title I of ERISA (for plans that are subject to Part 2 of Subtitle B
of Title I of ERISA). If an additional failure is nevertheless created as a result of the use
of a correction method in this revenue procedure, then that failure also must be
corrected in conjunction with the use of that correction method and in accordance with
the requirements of this revenue procedure.
(e) If a correction method is one that another government agency has authorized
with respect to a violation of legal requirements within its interpretive authority and that
correction relates to a violation for which there is a failure to which this revenue
procedure applies, then the IRS may take the correction method of the other
governmental agency into account for purposes of this revenue procedure. For
example:

(i) If the plan is subject to ERISA, for a failure that results from the employer
having ceased to exist, the employer no longer maintaining the plan, or similar reasons,
the permitted correction is to terminate the plan and distribute plan assets to
participants and beneficiaries in accordance with standards and procedures
substantially similar to those set forth in 29 CFR 2578.1 of the Department of Labor
regulations (relating to abandoned plans). This correction must satisfy four conditions.
First, the correction must comply with standards and procedures substantially similar to
those set forth in 29 CFR 2578.1. Second, the qualified termination administrator,
based on plan records located and updated in accordance with the Department of Labor
regulations, must have reasonably determined whether, and to what extent, the survivor
annuity requirements of §§ 401(a)(11) and 417 apply to any benefit payable under the
plan and must take reasonable steps to comply with those requirements (if applicable).
Third, each participant and beneficiary must have been provided a nonforfeitable right to
his or her accrued benefits as of the date of deemed termination under the Department
of Labor regulations, subject to Earnings between that date and the date of distribution.
Fourth, participants and beneficiaries must receive notification of their rights under
§ 402(f). In addition, notwithstanding correction under this revenue procedure, the IRS
reserves the right to pursue appropriate remedies under the Code against any party
who is responsible for the plan, such as the Plan Sponsor, plan administrator, or owner
28

of the business, even in its capacity as a participant or beneficiary under the plan. See
also section .09(1) of Appendix A for parallel rules for plans that are not subject to
ERISA.
(ii) In the case of a violation of the fiduciary standards imposed by Part 4 of
Subtitle B of Title I of ERISA, correction under the 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 and forfeitures that would have been allocated to the participant's account if
the failure had not occurred. However, a corrective allocation is not required to be
adjusted for losses. Accordingly, corrective allocations must include gains and may be
adjusted for losses. For additional information, see Appendix B section 3, Earnings
Adjustment Methods And Examples.
(b) A corrective allocation to a participant's account because of a failure to make
a required allocation in a prior limitation year is not considered an annual addition with
respect to the participant for the limitation year in which the correction is made, but is
considered an annual addition for the limitation year to which the corrective allocation
relates. However, the normal rules of § 404, regarding deductions, apply.
29

(c) Corrective allocations should come only from employer nonelective
contributions (including forfeitures if the plan permits their use to reduce employer
contributions). For purpose of correcting a failed ADP, actual contribution percentage
(ACP), or multiple use test, any amounts used to fund qualified nonelective
contributions (QNECs) must satisfy the definition of QNEC in § 1.401(k)-6.
(d) In the case of a defined benefit plan, a corrective distribution for an individual
should be increased to take into account the delayed payment, in accordance with the
plan’s provisions for actuarial equivalence (after considering the applicable
requirements of §§ 417(e)(3) and 415(b) or any other applicable provision) that were in
effect on the date that the distribution should have been made. A corrective distribution
is not subject to the requirements of § 417(e)(3) if it is made to make up for missed
payments with respect to a benefit that is not subject to the requirements of § 417(e)(3).
(e)(i) In the case of a single employer defined benefit plan, a payment of benefits
that fails to satisfy the requirements of § 436(b), (c), or (e) can be corrected by the Plan
Sponsor (including another person acting on behalf of the Plan Sponsor) making a
contribution to the plan equal to the following amount (with interest up to the date of the
contribution): (A) in the case of a failure to satisfy § 436(b) with respect to an
unpredictable contingent event benefit, the amount described in § 436(b)(2) with respect
to that benefit; (B) in the case of a failure to satisfy § 436(c) with respect to an
amendment, the amount described in § 436(c)(2) with respect to that amendment; and
(C) in the case of a failure to satisfy § 436(e), the amount described in § 436(e)(2) with
respect to that failure. See also section 6.06(3) for correction of an Overpayment
(including a payment of benefits that exceeds the limitations imposed by § 436(d) or
436(b), (c), or (e)).
(ii) A corrective distribution or a corrective amendment (where a correction is
accomplished through a plan amendment) is not subject to the requirements of § 436,
but, if the plan is subject to a restriction pursuant to § 436 at the time of the correction,
generally the Plan Sponsor must make a contribution to the plan at the time of the
correction in the following amount: (A) if a corrective distribution is made in a single-sum
payment or other prohibited payment (as defined in § 436(d)(5)) at a time when the plan
is subject to a restriction pursuant to § 436(d), the Plan Sponsor must generally
contribute to the plan the amount of that corrective distribution (but only half of the
corrective distribution must be contributed if the payment is made at a time when the
plan is subject to a restriction pursuant to § 436(d)(3)); and (B) if a corrective
amendment is made at a time when the plan is subject to a restriction pursuant to
§ 436(c), the Plan Sponsor must generally contribute to the plan an amount equal to the
increase in the funding target of the plan (as defined in § 430) attributable to that
amendment. No contribution is required to be made under this paragraph (e)(ii) if the
corrective distribution is made in a form that is not a prohibited payment (for example, if
the correction is made by actuarially increasing future payments that are made in a form
that is not a prohibited payment).
30

(iii) Any contribution made by the Plan Sponsor pursuant to this paragraph (e) is
treated in the same manner as a “section 436 contribution” (as defined in § 1.4361(j)(7)). Thus, the contribution is treated as separate from a minimum required
contribution under § 430 and is disregarded in determining the amount added to a
prefunding balance under § 430(f)(6). See § 1.436-1(f)(2) generally for rules relating to
§ 436 contributions.
(f) In the case of a defined contribution plan, a corrective contribution or
distribution should be adjusted for Earnings from the date of the failure (determined
without regard to any Code provision which permits a corrective contribution or
distribution to be made at a later date).
(5) Special exceptions to full correction. In general, a failure must be fully
corrected. Although the mere fact that correction is inconvenient or burdensome is not
enough to relieve a Plan Sponsor of the need to make full correction, full correction may
not be required in certain situations if it is unreasonable or not feasible. Even in these
situations, the correction method adopted must be one that does not have significant
adverse effects on participants and beneficiaries or the plan, and that does not
discriminate significantly in favor of highly compensated employees. The exceptions
described below specify those situations in which full correction is not required.
(a) Reasonable estimates. If either (i) it is possible to make a precise calculation
but the probable difference between the approximate and the precise restoration of a
participant's benefits is insignificant and the administrative cost of determining precise
restoration would significantly exceed the probable difference or (ii) it is not possible to
make a precise calculation (for example, where it is impossible to provide plan data),
reasonable estimates may be used in calculating appropriate correction. If it is not
feasible to make a reasonable estimate of what the actual investment results would
have been, a reasonable interest rate may be used. For this purpose, the interest rate
used by the Department of Labor’s Voluntary Fiduciary Correction Program Online
Calculator (“VFCP Online Calculator”) is deemed to be a reasonable interest rate. The
VFCP Online Calculator can be found on the internet at
http://www.dol.gov/ebsa/calculator.
(b) Delivery of small benefits. If the total corrective distribution due a participant
or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective
distribution if the reasonable direct costs of processing and delivering the distribution to
the participant or beneficiary would exceed the amount of the distribution. This section
6.02(5)(b) does not apply to corrective contributions. Corrective contributions are
required to be made with respect to a participant with an account under the plan.
(c) Recovery of small Overpayments. Generally, if the total amount of an
Overpayment to a participant or beneficiary is $100 or less, the Plan Sponsor is not
required to seek the return of the Overpayment from the participant or beneficiary. The
Plan Sponsor is not required to notify the participant or beneficiary that the
31

Overpayment is not eligible for favorable tax treatment accorded to distributions from
the plan (and, specifically, is not eligible for tax-free rollover).
(d) Locating lost participants. (i) Reasonable actions must be taken to find all
current and former participants and beneficiaries to whom additional benefits are due,
but who have not been located after a mailing to the last known address. In general,
such actions include, but are not limited to, a mailing to the individual’s last known
address using certified mail, and, if that is unsuccessful, an additional search method,
such as the use of a commercial locator service, a credit reporting agency, or Internet
search tools. Depending on the facts and circumstances, the use of more than one of
these additional search methods may be appropriate. A plan will not be considered to
have failed to correct a failure due to the inability to locate an individual if reasonable
actions to locate the individual have been undertaken in accordance with this
paragraph; provided that, if the individual is later located, the additional benefits are
provided to the individual at that time.
(ii) The IRS Letter Forwarding Program is no longer available as a means to
search for participants and beneficiaries to whom additional benefits under the plan are
due. Any request for locater services received by the IRS on or after August 31, 2012
will not be processed. See Rev. Proc. 2012-35, 2012-37 I.R.B. 341.
(iii) A Plan Sponsor described in (A) or (B) of this section 6.02(5)(d)(iii)) that is
correcting failures that require payment of additional benefits to participants and
beneficiaries will have until the earlier of: a) May 30, 2013, or b) if a request under the
IRS Letter Forwarding Program has been submitted on or after August 31, 2012, 150
days after the date of notification by the IRS that the request to locate missing
participants and beneficiaries will not be processed, to take other reasonable actions in
accordance with section 6.02(5)(d)(i) to locate participants and beneficiaries to whom
additional benefits are due. A Plan Sponsor is described in this section 6.02(5)(d)(iii) if
it:
(A)
(B)

received a VCP compliance statement for which the 150-day correction
period set forth in section 10.06(9) has not expired, or
is correcting failures under SCP and is within 150 days of the
expiration of the correction period set forth in section 9.02(1).

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

32

(f) Orphan Plans. The IRS retains the discretion to determine under VCP and
Audit CAP whether full correction will be required with respect to a terminating Orphan
Plan.
(6) Correction principle for 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 with respect to elective deferrals or
after-tax employee contributions. If a Qualified Plan or 403(b) Plan has an Operational
Failure that consists of excluding an employee that should have been eligible to make
an elective deferral or an after-tax employee contribution, the employer should
contribute to the plan on behalf of the excluded employee an amount that makes up for
the value of the lost opportunity for the employee to have a portion of his or her
compensation contributed to the plan accumulated with earnings tax deferred in the
future. This correction principle applies solely to this limited circumstance. It does not,
for example, extend to the correction of a failure to satisfy a nondiscrimination test, such
as, the ADP test pursuant to § 401(k)(3) and the ACP test pursuant to § 401(m)(2).
Specific methods and examples to correct this failure are provided in Appendix A,
section .05, and Appendix B, section 2.02. Similarly, the methods and examples
provided for correcting this failure do not extend to other failures. Thus, the correction
methods and the examples in Appendix A, section .05, and Appendix B, section 2.02,
cannot, for example, be used to correct ADP/ACP failures.
(8) Correction by plan amendment in VCP, Audit CAP, and SCP. For the
availability of correction by plan amendment, see section 4.05.
(9) Reporting. Any corrective distributions from the plan should be properly
reported.
.03 Correction of an Employer Eligibility Failure. (1) The permitted correction of
an Employer Eligibility Failure is the cessation of all contributions (including elective
deferrals and after-tax employee contributions). For VCP submissions, the cessation
must occur no later than the date the submission under VCP is filed. The assets in such
a plan are to remain in the trust, annuity contract, or custodial account and are to be
distributed no earlier than the occurrence of one of the applicable distribution events, for
example, for 403(b) Plans, an event described in § 403(b)(7) (to the extent the assets
are held in custodial accounts) or § 403(b)(11) (for those assets invested in annuity
contracts that would be subject to § 403(b)(11) restrictions if the employer were
eligible).
33

(2) Cessation of contributions is not required if continuation of contributions
would not be an Employer Eligibility Failure (for example, with respect to a tax-exempt
employer that may maintain a § 401(k) plan after 1996). In the case of a 403(b) Failure
which is an Employer Eligibility Failure, correction may include treating contributions as
not being excluded under § 403(b) (and thus the contributions would be treated as
having been contributed, for example, to an annuity contract to which § 403(c) applies).
(3) A plan that is corrected through VCP or Audit CAP is treated as subject to all
of the requirements and provisions of §§ 401(a) for a Qualified Plan, 403(b) for a 403(b)
Plan, 408(k) for a SEP, and 408(p) for a SIMPLE IRA Plan (including Code provisions
relating to rollovers). Therefore, the Plan Sponsor must also correct all other failures in
accordance with this revenue procedure.
(4) If correction is accomplished under VCP or Audit CAP in accordance with the
requirements of this section 6.03, then any rollovers made from the plan pursuant to a
distributable event are deemed to have been made from an eligible retirement plan
under § 402(c)(8)(B) for the purpose of determining whether the amounts qualify as an
eligible rollover distribution under § 402(c) or 403(b)(8) (including the determination of
excess contributions that are subject to the § 4973 excise tax).
.04 Correction of a failure to obtain spousal consent. (1) 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, section .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 (for
example, because the spouse chooses not to consent, the spouse does not respond to
the notice, or the spouse cannot be located), the spouse is entitled to a benefit under
the plan equal to the portion of the qualified joint and survivor annuity that would have
been payable to the spouse upon the death of the participant had a qualified joint and
survivor annuity been provided to the participant under the plan at the annuity starting
date for the prior distribution. Such spousal benefit must be provided if a claim is made
by the spouse.
(c) 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
34

that survivor annuity benefit (calculated using the applicable interest rate and mortality
table under § 417(e)(3)). Any such single-sum payment is treated in the same manner
as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or
other eligible retirement plan. In the event that the plan is subject to a restriction on the
payment of single sums pursuant to § 436(d) at the time the plan offers this choice to
the spouse and the spouse elects to receive a single-sum payment, the plan sponsor
must contribute to the plan the applicable amount under section 6.02(4)(e)(ii)(A).
.05 Determination letter application not permitted. (1) In general. A
determination letter application may not be submitted with a VCP submission.
(a) Issuance of compliance statement or closing agreement for Plan Document
Failures corrected through plan amendment under VCP or Audit CAP. The issuance of
a compliance statement or closing agreement for Plan Document Failures corrected
through plan amendment under VCP or Audit CAP does not constitute a determination
that the terms of the plan, including the corrective plan amendment, satisfy the
qualification requirements in form. See section 10.07(2)(a) and (b).
(b) Issuance of compliance statement or closing agreement for Operational
Failures corrected through plan amendment under VCP and Audit CAP. If a Plan
Sponsor submits a VCP filing correcting an Operational Failure through a plan
amendment or corrects such a failure under Audit CAP, and the plan amendment is
accepted as a proper correction, then the compliance statement under VCP or closing
agreement issued under Audit CAP constitutes a determination that the Operational
Failure has been corrected, but is not a determination that the terms of the plan,
including the corrective plan amendment, satisfy the qualification requirements in form.
See section 10.07(2)(c).
(2) Corrective amendments to pre-approved plans. (a) Effect of corrective
amendment. Generally, under VCP or Audit CAP, a Plan Sponsor that is an adopter of
a pre-approved plan (that is, a master or prototype, or volume submitter plan) is able to
amend its plan to correct a Qualification Failure (provided the amendment satisfies the
requirements of the Code). In some cases, the corrective amendment is not provided
for among plan provision options that were pre-approved when the opinion or advisory
letter was issued with respect to the plan. As a result, adopting such a corrective
amendment would cause the Plan Sponsor to lose reliance on the plan’s opinion or
advisory letter, except in the limited circumstances provided in section 6.05(2)(b).
(b) Exception for certain amendments. In the case of a pre-approved plan, the
adoption of a plan provision not provided for in the adoption agreement which is
required to correct a failure under VCP or Audit CAP will not cause the Plan Sponsor to
lose its reliance on the plan’s opinion or advisory letter, provided that: (i) the corrective
amendment would otherwise be permitted under the rules for pre-approved plans and
(ii) no other modification has been made to the plan that would cause the plan to lose its
reliance on the opinion or advisory letter. If these conditions are satisfied, the Plan
35

Sponsor will be allowed to continue to rely on the plan’s opinion or advisory letter. In
addition, the adoption of the corrective amendment will not cause the plan to lose its
eligibility to remain within the six-year remedial amendment cycle provided for in Rev.
Proc. 2016-37 on a continuing basis until the expiration of the next six-year remedial
amendment cycle described in section 18.01 of Rev. Proc. 2016-37.
.06 Special rules relating to Excess Amounts. (1) Treatment of Excess Amounts.
Except as otherwise provided in section 6.02(5)(c) with respect to recovery of small
Overpayments, a distribution of an Excess Amount is not eligible for the favorable tax
treatment accorded to distributions from Qualified Plans or 403(b) Plans (such as
eligibility for tax-free rollover). Thus, for example, if such a distribution was contributed
to an IRA, the contribution is not a valid rollover contribution for purposes of determining
the amount of excess contributions (within the meaning of § 4973) to the individual's
IRA. A distribution of an Excess Amount is generally treated in the manner described in
section 3 of Rev. Proc. 92-93, 1992-2 C.B. 505 (relating to the corrective disbursement
of elective deferrals). The distribution must be reported on Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., for the year of distribution with respect to each participant or beneficiary
receiving such a distribution. Except as otherwise provided in section 6.02(5)(c), where
an Excess Amount has been or is being distributed, the Plan Sponsor must notify the
recipient that (a) an Excess Amount has been or will be distributed and (b) an Excess
Amount is not eligible for favorable tax treatment accorded to distributions from an
eligible retirement plan under § 402(c)(8)(B) (and, specifically, is not eligible for
rollover).
(2) Correction of Excess Allocations. In general, an Excess Allocation is
corrected in accordance with the Reduction of Account Balance Correction Method set
forth in this paragraph. Under this method, the account balance of an employee who
received an Excess Allocation is reduced by the Excess Allocation (adjusted for
Earnings). If the Excess Allocation would have been allocated to other employees in the
year of the failure had the failure not occurred, then that amount (adjusted for Earnings)
is reallocated to those employees in accordance with the plan's allocation formula. If the
improperly allocated amount would not have been allocated to other employees absent
the failure, that amount (adjusted for Earnings) is placed in a separate account that is
not allocated on behalf of any participant or beneficiary (an unallocated account)
established for the purpose of holding Excess Allocations, adjusted for Earnings, to be
used to reduce employer contributions (other than elective deferrals) in the current year
or succeeding year. While such amounts remain in the unallocated account, the
employer is not permitted to make contributions to the plan other than elective deferrals.
Excess Allocations that are attributable to elective deferrals or after-tax employee
contributions (adjusted for Earnings) must be distributed to the participant. For
qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph
is disregarded for purposes of §§ 402(g) and 415, the ADP test of § 401(k)(3), and the
ACP test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415
consists of annual additions attributable to both employer contributions and elective
36

deferrals or after-tax employee contributions, then the correction of the Excess
Allocation is completed by first distributing the unmatched employee’s after-tax
contributions (adjusted for Earnings) and then the unmatched employee’s elective
deferrals (adjusted for Earnings). If any excess remains, and is attributable to either
elective deferrals or after-tax employee contributions that are matched, the excess is
apportioned first to after-tax employee contributions with the associated matching
employer contributions and then to elective deferrals with the associated matching
employer contributions. Any matching contribution or nonelective employer contribution
(adjusted for Earnings) which constitutes an Excess Allocation is then forfeited and
placed in an unallocated account established for the purpose of holding Excess
Allocations to be used to reduce employer contributions in the current year and
succeeding year. Such unallocated account is adjusted for Earnings. While such
amounts remain in the unallocated account, the employer is not permitted to make
contributions (other than elective deferrals) to the plan.
(3) Correction of Overpayment (defined benefit plans). An Overpayment from a
defined benefit plan is corrected in accordance with rules similar to the Return of
Overpayment and Adjustment of Future Payments correction methods described in
section 2.04(1) of Appendix B or any other appropriate correction method. Depending
on the nature of the Overpayment, an appropriate correction method may include using
rules similar to the correction method described in section 2.04(1) of Appendix B but
having the employer or another person contribute the amount of the Overpayment (with
appropriate interest) to the plan instead of seeking recoupment from a plan participant
or beneficiary. Another example of an appropriate correction method includes a Plan
Sponsor adopting a retroactive amendment to conform the plan document to the plan’s
operations (subject to the requirements of section 4.05). Any other correction method
used must satisfy the correction principles of section 6.02 and any other applicable rules
in this revenue procedure.
(4) Correction of Overpayment (defined contribution plans and 403(b) Plans). (a)
In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected
in accordance with the Return of Overpayment method set forth in this section 6.06(4).
Under this method, the employer takes reasonable steps to have the Overpayment,
adjusted for Earnings at the plan’s earnings rate from the date of the distribution to the
date of the correction of the Overpayment.
(b) Make-whole contribution. To the extent the amount of an Overpayment
adjusted for Earnings at the plan’s earnings rate is not repaid to the plan, the employer
or another person must contribute the difference to the plan. The preceding sentence
does not apply when the failure arose solely because a payment was made from the
plan to a participant or beneficiary in the absence of a distributable event (but was
otherwise determined in accordance with the terms of the plan (for example, an
impermissible in-service distribution)).

37

(c) Unallocated account. Except as provided in section 6.06(4)(d), a corrected
Overpayment, adjusted for Earnings at the plan's earnings rate to the date of the
repayment, is to be placed in an unallocated account, as described in section 6.06(2), to
be used to reduce employer contributions (other than elective deferrals) in the current
year and succeeding year(s) (or, if the amount would have been allocated to other
eligible employees who were in the plan for the year of the failure if the failure had not
occurred, then that amount is reallocated to the other eligible employees in accordance
with the plan's allocation formula).
(d) Repayment by the participant or beneficiary. To the extent an Overpayment
was solely considered a distribution in the absence of a distributable event but was
otherwise determined in accordance with the terms of the plan, any amount returned to
the plan by the participant or beneficiary is to be allocated to his or her account.
(e) Notification of employee. Except as provided in section 6.02(5)(c) with
respect to the recovery of small overpayments, the employer must notify the employee
that the Overpayment was not eligible for favorable tax treatment accorded to
distributions from an eligible retirement plan under § 402(c)(8)(B) (and, specifically, was
not eligible for tax-free rollover).
(f) Other correction methods. Other appropriate correction methods may be used
to correct Overpayment failures from a defined contribution plan. Depending on the
nature of the Overpayment, an appropriate correction method may include using rules
similar to the correction method in section 6.06(4)(a) but having the employer or another
person contribute the amount of the Overpayment (with appropriate interest) to the plan
instead of seeking recoupment from a plan participant or beneficiary. Another example
of an appropriate correction method includes a Plan Sponsor adopting a retroactive
amendment to conform the plan document to the plan’s operations (subject to the
requirements of section 4.05). Any other correction method used must satisfy the
correction principles of section 6.02 and any other applicable rules of this revenue
procedure.
.07 Rules relating to reporting plan loan failures. (1) General rules for loans.
Unless correction is made in accordance with 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 and Audit CAP, 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.

38

(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 or
Audit CAP. 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 IRS 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, 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.
39

(d) No requirement for plan provisions. This section 6.07 applies even if the plan
does not require loans to satisfy the requirements of § 72(p)(2). However, under the
Department of Labor’s Voluntary Fiduciary Correction Program, to correct the ERISA
fiduciary violations associated with the failures described in section 6.07(2)(b) and (c)
and section 6.07(3) of this revenue procedure, 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 single-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 or other taxes. (1) General rule. Except as provided
in this revenue procedure, the correction programs are not available for events for which
the Code provides tax consequences other than plan disqualification (such as the
imposition of an excise tax or additional income tax). For example, funding deficiencies
(failures to make the required contributions to a plan subject to § 412), prohibited
transactions, and failures to file the Form 5500 series cannot be corrected under this
revenue procedure.
(2) Section 4974. As part of VCP and Audit CAP, if a failure involves the failure
to satisfy the minimum required distribution requirements of § 401(a)(9), in appropriate
cases, the IRS will waive the excise tax under § 4974 applicable to plan participants or
beneficiaries. The waiver will be included in the compliance statement or in the closing
agreement in the case of Audit CAP. Under VCP, the Plan Sponsor, as part of the
submission, must request the waiver and, in cases where the participant subject to the
excise tax is either an owner-employee as defined in § 401(c)(3) or a 10% owner of a
corporation, the Plan Sponsor must also provide an explanation supporting the request.
Under Audit CAP, the Plan Sponsor must make a specific request for waiver of the
excise tax under § 4974. The Plan Sponsor should also provide an explanation
supporting the request for a waiver. Upon reviewing the request, the reasons for the
failure, and other facts or circumstances of the case under examination, the IRS will
40

determine whether it is appropriate to approve the waiver of the excise tax as part of the
closing agreement negotiated under Audit CAP.
(3) Section 4972. As part of VCP, if the failure involves a correction that requires
the Plan Sponsor to make a plan contribution that is not deductible, in appropriate
cases, the IRS will not pursue the excise tax under § 4972 on such nondeductible
contributions. The Plan Sponsor, as part of the submission must request the relief and
provide an explanation supporting the request.
(4) Section 4979. As part of VCP, if a failure results in excess contributions as
defined in § 4979(c) or excess aggregate contributions as defined in § 4979(d) under a
plan, in appropriate cases, the IRS will not pursue the excise tax under § 4979, for
example, where correction is made for any case in which the ADP test was timely
performed but, due to reliance on inaccurate data, resulted in an insufficient amount of
excess elective deferrals having been distributed to HCEs. The Plan Sponsor, as part of
the submission, must request the relief and provide an explanation supporting the
request.
(5) Section 4973. Subject to section 6.03(4), as part of VCP, in appropriate
cases, the IRS will not pursue the excise tax under § 4973 relating to excess
contributions made to a 403(b) Plan or IRA under any of the following circumstances:
(a) As part of the proposed correction for Overpayments, the participant or
beneficiary (“recipient”) removes the Overpayment (adjusted for Earnings) from the
recipient’s 403(b) Plan or IRA and returns that amount to the plan.
(b) As part of the proposed correction for Excess Amounts, the recipient removes
the Excess Amount (adjusted for Earnings) from the recipient’s 403(b) Plan or IRA and
reports that amount (reduced by any applicable after-tax employee contribution) as a
taxable distribution for the year in which the Excess Amount (adjusted for Earnings) is
removed from the recipient’s 403(b) Plan or IRA. The amount removed is generally
taxed in a manner that is similar to the manner in which the corrective disbursement of
elective deferrals is taxed, as described in section 3 of Rev. Proc. 92-93.
(c) The Plan Sponsor, as part of the submission, must request relief from the
§ 4973 excise tax and provide an explanation supporting the request.
(6) Section 72(t). As part of VCP, in appropriate cases, the IRS will not pursue
the 10% additional income tax under § 72(t) (or will pursue only a portion thereof) if, as
part of the proposed correction of an Overpayment that occurred solely because an
employee received a distribution from his or her vested account balance that was not a
distributable event, the participant or beneficiary (“recipient”) returns the improperly
distributed amount, adjusted for Earnings, to the plan. If the improperly distributed
amount was rolled over to the recipient’s IRA, then correction will include removing the
amount improperly distributed and rolled over (adjusted for Earnings) from the
41

recipient’s IRA and returning that amount to the plan. In appropriate cases, as a
condition for not pursuing all or a portion of the additional tax, the IRS may require the
Plan Sponsor to pay 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 403(b) Plans. (1) Correction for 403(b) Plans generally.
Except as provided in sections 6.03(2) and 6.10(2), the correction for a 403(b) Plan is
expected to be the same as the correction required for a Qualified Plan with the same
Failure (that is, Plan Document Failure, Operational Failure, Demographic Failure, and
Employer Eligibility Failure).
(2) Special correction principles. In general, a 403(b) Failure can be corrected
by treating a contract as a § 403(c) annuity contract (or, if applicable, as an amount to
which § 61, 83, or 402(b) applies), such as for purposes of correcting an Employer
Eligibility Failure, a failure to provide for full vesting (including a failure to maintain a
separate account), or an exchange made to a vendor which is not part of the plan (and
for which there is no information sharing agreement). In addition, for purposes of this
revenue procedure, pending additional guidance, a 403(b) Plan generally will be treated
as having a Favorable Letter if either (a) the employer is an eligible employer and, on or
before December 31, 2009 (or the date a 403(b) Plan is established, if later), the
employer has adopted a written 403(b) Plan that is intended to satisfy § 403(b)
(including the regulations thereunder) effective as of January 1, 2009 (or the first day of
the plan year in which a 403(b) Plan is established, if later), or (b) the employer has
failed to adopt a written 403(b) Plan timely and corrects the failure in accordance with
section 6.10(3) below. In addition, for purposes of section 4.04 (requiring that the Plan
Sponsor or administrator of the plan have established practices and procedures
reasonably designed to promote and facilitate overall compliance with applicable Code
requirements in order to be eligible for SCP to be available to correct Operational
Failures), the requirement to have established practices and procedures only applies for
failures during periods after December 31, 2009.
(3) Correction for failure to adopt a written 403(b) Plan timely. A failure to adopt
a written 403(b) Plan timely in accordance with the final regulations under § 403(b) and
Notice 2009-3 may be corrected under VCP and Audit CAP. The issuance of a
compliance statement or closing agreement for the failure to adopt a written 403(b) Plan
timely will result in the written 403(b) Plan being treated as if it had been adopted timely
for the purpose of making available the extended remedial amendment period set forth
in Announcement 2009-89. However, the issuance of a compliance statement or closing
agreement does not constitute a determination as to whether the written plan, as
drafted, complies with the applicable requirements of § 403(b) of the Code and the final
403(b) regulations.
.11 Correction for SEPs and SIMPLE IRA Plans. (1) Correction for SEPs and
SIMPLE IRA Plans generally. Generally, the correction for a SEP or a SIMPLE IRA Plan
42

is expected to be similar to the correction required for a Qualified Plan with a similar
Qualification Failure (that is, a Plan Document Failure, Operational Failure,
Demographic Failure, or Employer Eligibility Failure).
(2) Special correction for SEPs and SIMPLE IRA Plans. In any case in which
correction under section 6.11(1) is not feasible for a SEP or SIMPLE IRA Plan or in any
other case determined by the IRS in its discretion (including failures relating to § 402(g),
415, or 401(a)(17), failures relating to deferral percentages, discontinuance of
contributions to a SARSEP or SIMPLE IRA Plan, and retention of Excess Amounts for
cases in which there has been no violation of a statutory limitation with respect to a SEP
or SIMPLE IRA Plan), the IRS may provide for a different correction.
(3) Correction of failure to satisfy deferral percentage test. If the failure involves a
violation of the deferral percentage test under § 408(k)(6)(A)(iii) applicable to a
SARSEP, the failure may be corrected in either of the following ways:
(a) The Plan Sponsor may make contributions that are 100% vested to all eligible
nonhighly compensated employees (to the extent permitted by § 415) necessary to
raise the deferral percentage to an amount sufficient to pass the test. This amount may
be calculated as the same percentage of compensation (regardless of the terms of the
SEP).
(b) The Plan Sponsor may effect distribution of excess contributions, adjusted for
Earnings through the date of correction, to highly compensated employees to correct
the failure. The Plan Sponsor must also contribute to the SEP an amount equal to the
total amount distributed. This amount must be allocated to (i) current employees who
were nonhighly compensated employees in the year of the failure, (ii) current nonhighly
compensated employees who were nonhighly compensated employees in the year of
the failure, or (iii) employees (both current and former) who were nonhighly
compensated employees in the year of the failure.
(4) Treatment of undercontributions to a SEP or a SIMPLE IRA Plan. (a) Makeup contributions; Earnings. The Plan Sponsor should correct undercontributions to a
SEP or a SIMPLE IRA Plan by contributing make-up amounts that are fully vested,
adjusted for Earnings from the date of the failure to the date of correction.
(b) Earnings adjustment methods. Insofar as SEP and SIMPLE IRA Plan assets
are held in IRAs, there is no earnings rate under the SEP or SIMPLE IRA Plan as a
whole. If it is not feasible to make a reasonable estimate of what the actual investment
results would have been, a reasonable interest rate may be used.
(5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan. (a)
Distribution of Excess Amounts. For purposes of this section 6.11, an Excess Amount is
an amount contributed on behalf of an employee that is in excess of an employee’s
benefit under the plan, or an elective deferral in excess of the limitations of § 402(g) or
43

408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan
Sponsor may effect distribution of the Excess Amount, adjusted for Earnings through
the date of correction, to the affected participant. The amount distributed to the affected
participant is includible in gross income in the year of distribution. The distribution is
reported on Form 1099-R for the year of distribution with respect to each participant
receiving the distribution. In addition, the Plan Sponsor must inform affected participants
that the distribution of an Excess Amount is not eligible for favorable tax treatment
accorded to distributions from a SEP or a SIMPLE IRA Plan (and, specifically, is not
eligible for tax-free rollover). If the Excess Amount is attributable to employer
contributions, the Plan Sponsor may effect distribution of the employer Excess Amount,
adjusted for Earnings through the date of correction, to the Plan Sponsor. The amount
distributed to the Plan Sponsor is not includible in the gross income of the affected
participant. The Plan Sponsor is not entitled to a deduction for such employer Excess
Amount. The distribution is reported on Form 1099-R issued to the participant indicating
the taxable amount as zero.
(b) Retention of Excess Amounts. If the failure involves an Excess Amount
under a SEP or a SIMPLE IRA Plan and the Plan Sponsor retains the Excess Amount in
the SEP or SIMPLE IRA Plan, a sanction applies, in addition to the SEP or SIMPLE IRA
Plan user fee described in the annual revenue procedure that sets forth user fees,
including VCP user fees. A sanction equal to at least 10% of the Excess Amount with
no adjustment for Earnings is imposed. In addition, the Plan Sponsor is not entitled to a
deduction for an Excess Amount retained in the SEP or SIMPLE IRA Plan. In the case
of an Excess Amount retained in a SEP that is attributable to a § 415 failure, the Excess
Amount, adjusted for Earnings through the date of correction, must reduce an affected
participant’s applicable § 415 limit for the year following the year of correction (or for the
year of correction if the Plan Sponsor so chooses), and subsequent years, until the
excess is eliminated.
(c) De minimis Excess Amounts. If the total Excess Amount in a SEP or SIMPLE
IRA Plan, whether attributable to elective deferrals or employer contributions, is $100 or
less, the Plan Sponsor is not required to distribute the Excess Amount and the sanction
described in 6.11(5)(b) does not apply.
.12 Confidentiality and disclosure. Because each correction program relates
directly to the enforcement of Code requirements, the information received or generated
by the IRS under the program is subject to the confidentiality requirements of § 6103
and is not a written determination within the meaning of § 6110.
.13 No effect on other law. Correction under these programs has no effect on the
rights of any party under any other law, including title I of ERISA. The Department of
Labor maintains a 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
44

with the annual reporting requirements (Form 5500 series) under ERISA may be
corrected.
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
The requirements of this section 7 are satisfied with respect to an Operational
Failure if the Plan Sponsor of a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA
Plan satisfies the requirements of section 8 (relating to insignificant Operational
Failures) or, in the case of a Qualified Plan or a 403(b) Plan, section 9 (relating to
significant Operational Failures).
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. The requirements of this section 8 are satisfied with respect to
an Operational Failure if the Operational Failure is corrected and, given all the facts and
circumstances, the Operational Failure is insignificant. This section 8 is available for
correcting an insignificant Operational Failure even if the plan or Plan Sponsor is Under
Examination and even if the Operational Failure is discovered on examination.
.02 Factors. The factors to be considered in determining whether an Operational
Failure under a plan is insignificant include, but are not limited to: (1) whether other
failures occurred during the period being examined (for this purpose, a failure is not
considered to have occurred more than once merely because more than one participant
is affected by the failure); (2) the percentage of plan assets and contributions involved in
the failure; (3) the number of years the failure occurred; (4) the number of participants
affected relative to the total number of participants in the plan; (5) the number of
participants affected as a result of the failure relative to the number of participants who
could have been affected by the failure; (6) whether correction was made within a
reasonable time after discovery of the failure; and (7) the reason for the failure (for
example, data errors such as errors in the transcription of data, the transposition of
numbers, or minor arithmetic errors). No single factor is determinative. Additionally,
factors (2), (4), and (5) should not be interpreted to exclude small businesses.
.03 Multiple failures. In the case of a plan with more than one Operational Failure
in a single year, or Operational Failures that occur in more than one year, the
Operational Failures are eligible for correction under this section 8 only if all of the
Operational Failures are insignificant in the aggregate. Operational Failures that have
been corrected under SCP in section 9 and VCP in sections 10 and 11 are not taken
into account for purposes of determining if Operational Failures are insignificant in the
aggregate.
.04 Examples. 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
45

SCP (for example, the requirements of section 4.04 relating to established practices and
procedures) have been satisfied and that no Operational Failures occurred other than
the Operational Failures identified below.
Example 1: In 1991, Employer X established Plan A, a profit-sharing plan that satisfies the
requirements of § 401(a) in form. In 2005, the benefits of 50 of the 250 participants in Plan A were limited
by § 415(c). However, when the IRS examined Plan A in 2008, it discovered that, during the 2005
limitation year, the annual additions allocated to the accounts of 3 of these employees exceeded the
maximum limitations under § 415(c). Employer X contributed $3,500,000 to the plan for the plan year.
The amount of the excesses totaled $4,550. Under these facts, because the number of participants
affected by the failure relative to the total number of participants who could have been affected by the
failure, and the monetary amount of the failure relative to the total employer contribution to the plan for
the 2005 plan year, are insignificant, the § 415(c) failure in Plan A that occurred in 2005 would be eligible
for correction under this section 8.
Example 2: The facts are the same as in Example 1, except that the failure to satisfy § 415
occurred during each of the 2005 and 2007 limitation years. In addition, the three participants affected by
the § 415 failure were not identical each year. The fact that the § 415 failures occurred during more than
one limitation year does not cause the failures to be significant; accordingly, the failures are still eligible
for correction under this section 8.
Example 3: The facts are the same as in Example 1, except that the annual additions of 18 of the
50 employees whose benefits were limited by § 415(c) nevertheless exceeded the maximum limitations
under § 415(c) during the 2005 limitation year, and the amount of the excesses ranged from $1,000 to
$9,000, and totaled $150,000. Under these facts, taking into account the number of participants affected
by the failure relative to the total number of participants who could have been affected by the failure for
the 2005 limitation year (and the monetary amount of the failure relative to the total employer
contribution), the failure is significant. Accordingly, the § 415(c) failure in Plan A that occurred in 2005 is
ineligible for correction under this section 8 as an insignificant failure.
Example 4: Employer J maintains Plan C, a money purchase pension plan established in 1992.
The plan document satisfies the requirements of § 401(a). The formula under the plan provides for an
employer contribution equal to 10% of compensation, as defined in the plan. During its examination of the
plan for the 2005 plan year, the IRS discovered that the employee responsible for entering data into the
employer's computer made minor arithmetic errors in transcribing the compensation data with respect to 6
of the plan's 40 participants, resulting in excess allocations to those 6 participants' accounts. Under these
facts, the number of participants affected by the failure relative to the number of participants that could
have been affected is insignificant, and the failure is due to minor data errors. Thus, the failure occurring
in 2005 is insignificant and therefore eligible for correction under this section 8.
Example 5: Public School maintains for its 200 employees a salary reduction 403(b) Plan ("Plan
B") that is intended to satisfy the requirements of § 403(b). The business manager has primary
responsibility for administering Plan B, in addition to other administrative functions within Public School.
During the 2005 plan year, a former employee should have received an additional minimum required
distribution of $278 under § 403(b)(10). Another participant received an impermissible hardship
withdrawal of $2,500. Another participant made elective deferrals of which $1,000 was in excess of the
§ 402(g) limit. Under these facts, even though multiple failures occurred in a single plan year, the failures
are eligible for correction under this section 8 because in the aggregate the failures are insignificant.

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES

46

.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
9.03) by the last day of the correction period described in section 9.02.
.02 Correction period. (1) End of correction period. The last day of the correction
period 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, for plan years beginning on or before
December 31, 2001, the multiple use test of § 401(m)(9), the correction period does not
end until the last day of the second plan year following the plan year that includes the
last day of the additional period for correction permitted under § 401(k)(8) or 401(m)(6).
If a 403(b) Plan does not have a designated plan year, the plan year is deemed to be
the calendar year for purposes of this section 9.02. See section 6.02(5)(d)(ii) for a
limited extension of the correction period set forth in this paragraph for Plan Sponsors
taking action to locate lost participants.
(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 9.03 for special rules permitting completion
of correction after the end of the correction period.)
.03 Substantial completion of correction. Correction of an Operational Failure is
substantially completed by the last day of the correction period only if the requirements
of either paragraph (1) or (2) of this section 9.03 are satisfied.
(1) The requirements of this paragraph (1) are satisfied if:
(a) during the correction period, the Plan Sponsor is reasonably prompt in
identifying the Operational Failure, formulating a correction method, and initiating
correction in a manner that demonstrates a commitment to completing correction of the
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.
47

(2) The requirements of this paragraph (2) are satisfied if:
(a) during the correction period, correction is completed with respect to 65% of all
participants affected by the Operational Failure; and
(b) thereafter, the Plan Sponsor completes correction of the Operational Failure
with respect to the remaining affected participants in a diligent manner.
.04 Examples. The following examples illustrate the application of this section 9.
It is assumed, in each example, that the eligibility requirements of section 4 relating to
SCP have been met.
Example 1: Employer Z established a qualified defined contribution plan in 2003 and received a
favorable determination letter. During 2007, while doing a self-audit of the operation of the plan for the
2006 plan year, the plan administrator discovered that, despite the practices and procedures established
by Employer Z with respect to the plan, several employees eligible to participate in the plan were
excluded from participation. The administrator also found that for 2006 Operational Failures occurred
because the elective deferrals of additional employees exceeded the § 402(g) limit and Employer Z failed
to make the required top-heavy minimum contribution. In addition, during the review of the administration
for the 2006 year, it was found that the plan administrator intended to implement correction for the failure
to satisfy the ADP test (as described in § 401(k)(3)) for the 2005 plan year. During the 2008 plan year, the
Plan Sponsor made QNECs on behalf of the excluded employees, distributed the excess deferrals to the
affected participants, and made a top-heavy minimum contribution to all participants entitled to that
contribution for the 2006 plan year. Each corrective contribution and distribution was credited with
Earnings at a rate appropriate for the plan from the date the corrective contribution or distribution should
have been made to the date of correction. The failed ADP test for 2005 was corrected by making
corrective contributions, adjusted for Earnings, on behalf of nonhighly compensated employees using the
method described in Appendix A, section .03 of this revenue procedure. Under these facts, the Plan
Sponsor has corrected the ADP test failure for the 2005 plan year and the Operational Failures for the
2006 plan year within the correction period and thus satisfied the requirements of this section 9.
Example 2: Employer A established a qualified defined contribution plan, Plan A, in 1993 and has
received a favorable determination letter for the applicable law changes. In April 2007, Employer A
purchased all of the stock of Employer B, a wholly-owned subsidiary of Employer C. Employees of
Employer B participated in Plan C, a qualified defined contribution plan sponsored by Employer C.
Following Employer A’s review of Plan C, Employer A and Employer C agreed that Plan A would accept a
transfer of plan assets from Plan C attributable to the account balances of the employees of Employer B
who had participated in Plan C. As part of this agreement, Employer C represented to Employer A that
Plan C was tax qualified. Employers A and C also agreed that such transfer would be in accordance with
§ 414(l) and § 1.414(l)-1 and addressed issues related to costs associated with the transfer. Following the
transaction, the employees of Employer B began participation in Plan A. Effective July 1, 2007, Plan A
accepted the transfer of plan assets from Plan C. After the transfer, Employer A determined that all the
participants in one division of Employer B had been incorrectly excluded from allocation of the profit
sharing contributions for the 2002 and 2003 plan years. During 2008, Employer A made corrective
contributions on behalf of the affected participants. The corrective contributions were credited with
Earnings at a rate appropriate for the plan from the date the corrective contributions should have been
made to the date of correction and Employer A otherwise complied with the requirements of SCP. Under
these facts, Employer A has, within the correction period, corrected the Operational Failures for the 2002
and 2003 plan years with respect to the assets transferred to Plan A, and thus satisfied the requirements
of this section 9.

PART V. VOLUNTARY CORRECTION PROGRAM WITH IRS APPROVAL (VCP)
48

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 user fee required under section 6.08 of Rev. Proc. 2016-8, or
any subsequent guidance that sets forth user fees for VCP submissions, and
implements the corrective actions and satisfies any other conditions in the compliance
statement described in section 10.07.
.02 Identification of failures. VCP is not based upon an examination of the plan
by the IRS. Only the failures raised by the Plan Sponsor or failures identified by the IRS
in processing the submission are addressed under VCP, and only those failures are
covered by a VCP compliance statement. The IRS will not make any investigation or
finding under VCP concerning whether there are failures.
.03 Effect of VCP submission on examination. Because VCP does not arise out
of an examination, consideration under VCP does not preclude or impede (under
§ 7605(b) or any administrative provisions adopted by the IRS) a subsequent
examination of the Plan Sponsor or the plan by the IRS with respect to the taxable year
(or years) involved with respect to matters that are outside the compliance statement.
However, a Plan Sponsor's statements describing failures are made only for purposes
of VCP and will not be regarded by the IRS as an admission of a failure for purposes of
any subsequent examination. See section 5.08 for the definition of Under Examination.
.04 No concurrent examination activity. Except in unusual circumstances, a plan
that has been properly submitted under VCP will not be examined while the submission
is pending. Notwithstanding the above, a plan that is eligible for a Group Submission
under section 10.10 may be examined while the Group Submission is pending with
respect to issues not identified in the Group Submission at the time such plan comes
Under Examination. 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 4.12(2)), the IRS 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 applications not related to a VCP submission. (1) The
IRS may process a determination letter application (including an application requested
on Form 5310) submitted under the determination letter program (as set forth in Rev.
Proc. 2016-6, and Rev. Proc. 2016-37, and any subsequent guidance issued in the
Internal Revenue Bulletin) while separately processing a VCP submission for the same
plan. Generally, issuance of the determination letter in response to an application made
on a Form 5310 will be suspended pending the closure of the VCP submission.
49

(2) A submission of a plan under the determination letter program does not
constitute a submission under VCP. If the Plan Sponsor discovers a failure, the failure
may not be corrected as part of the determination letter process. The Plan Sponsor may
use SCP and VCP instead, as applicable. If the IRS, in connection with a determination
letter application, discovers failures, the IRS may issue a closing agreement with
respect to the failures identified or, if appropriate, refer the case to Employee Plans
Examinations. In such a case, the VCP user fee does not apply. Except as provided in
section 10.05(3), the sanction in section 14.01 relating to Audit CAP applies. See
section 5.08 for a description of when a plan submitted for a determination letter is
considered to be Under Examination for purposes of EPCRS.
(3) If the IRS in connection with a determination letter application discovers the
plan has not been amended timely for tax legislation changes, the fee structure in
section 14.04 applies.
.06 Processing of submission.
(1) Screening of submission. Upon receipt of a VCP submission, the IRS will
review whether the eligibility requirements of section 4 and the submission requirements
of section 11 are satisfied, including whether completed Form 8950, Application for
Voluntary Correction Program (VCP) Submission Under the Employee Plans
Compliance Resolution System and Form 8951, User Fee for Application for Voluntary
Correction Program (VCP) Under the Employee Plans Compliance Resolution System,
have been included with the VCP submission.
(2) Eligibility of submission. If, at any stage of the review process the IRS
determines that a VCP submission is seriously deficient or that the application of VCP
would be inappropriate or impracticable, the IRS reserves the right to return the
submission without contacting the Plan Sponsor. A VCP submission that does not
include a Form 8950 or Form 8951 will be considered to be seriously deficient. If no
substantive processing of the case has occurred, the IRS will refund the user fee
submitted with the request.
(3) Review of submission. Once the IRS determines that the submission is
complete under VCP, the IRS 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, an IRS
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 user fee will not be returned, and the case may be referred to Employee
Plans Examinations. Any request for an extension of the 21-day time period must be
50

made in writing within the 21-day time period and must be approved by the IRS (by the
applicable group manager).
(5) Additional failures discovered after initial submission. (a) A Plan Sponsor that
discovers additional unrelated failures after its initial submission may request that such
failures be added to its submission. However, the IRS retains the discretion to reject the
inclusion of such failures if the request is not timely (for example, if the Plan Sponsor
makes its request when processing of the submission is substantially complete) or the
application of VCP would be inappropriate or impracticable.
(b) If the IRS discovers an unrelated failure while the request is pending, the
failure generally will be added to the failures under consideration. However, the IRS
retains the discretion to determine that a failure is outside the scope of the voluntary
request for consideration because the Plan Sponsor did not voluntarily bring this failure
forward. In this case, if the additional failure is significant, all aspects of the plan may be
examined and the rules pertaining to Audit CAP will apply.
(6) Conference right. If the IRS initially determines that it cannot issue a
compliance statement because the parties cannot agree upon correction or a change in
administrative procedures, the Plan Sponsor (generally through the Plan Sponsor's
representative) will be contacted by the IRS representative and offered a conference
with the IRS. The conference can be held either in person or by telephone and must be
held within 21 calendar days of the date of contact. The Plan Sponsor will have 21
calendar days after the date of the conference to submit additional information in
support of the submission. Any request for an extension of the 21-day time period must
be made in writing within the 21-day time period and must be approved by the IRS (by
the applicable group manager). Additional conferences may be held at the discretion of
the IRS.
(7) Failure to reach resolution. If the IRS and the Plan Sponsor cannot reach
agreement with respect to the submission, the matter will be closed, the user fee will not
be returned, and the case may be referred to Employee Plans Examinations.
(8) Issuance of compliance statement. (a) In general. If agreement has been
reached and all applicable user fees have been paid, the IRS will send to the Plan
Sponsor a compliance statement signed by the IRS specifying the corrective action
required. However, the IRS reserves the right to require the Plan Sponsor to sign the
compliance statement. In such a case, the IRS will send to the Plan Sponsor an
unsigned compliance statement. Within 30 calendar days of the date the compliance
statement is sent, the Plan Sponsor must sign and return the compliance statement
along with any outstanding user fee that may be required. The IRS will then issue a
signed copy of the compliance statement to the Plan Sponsor. If the Plan Sponsor does
not return the compliance statement (along with any outstanding user fee) within 30
calendar days, the VCP submission will be closed, and no further action will be taken
51

with respect to the submission. In appropriate circumstances, the plan may be referred
to Employee Plans Examinations.
(b) Model VCP Compliance Statement. If the Plan Sponsor included Form 14568
with its VCP submission, then the IRS will sign and send to the Plan Sponsor the
compliance statement specifying the corrective action required. The format and content
of the Form 14568 may not be modified or changed in any way. The IRS reserves the
right to issue an individually drafted compliance statement in appropriate circumstances.
(c) Modifications to VCP Submission. If a Plan Sponsor materially modifies a
VCP submission that was previously filed with the IRS, then, unless the Plan Sponsor
has submitted a penalty of perjury statement (see section 11.08(1)) with respect to such
subsequent modifications, the Plan Sponsor will be required to sign and return the
compliance statement under the general procedures described in section 10.06(8)(a).
(9) Timing of correction. (a) In general. The Plan Sponsor must implement the
specific corrections and administrative changes set forth in the compliance statement
within 150 days of the date of the compliance statement. Any request for an extension
of this time period must be made prior to the expiration of the correction period in writing
and must be approved by the IRS.
(b) Interim Amendments and Nonamender Failures. Correction of the failure to
timely adopt Interim Amendments or other required amendments, as described in
section 5.01(2)(a)(ii)(B) and (C), must be made by the date of the submission. Thus,
the submission must include the executed amendments that would correct this failure.
(c) Other plan amendments. If a corrective plan amendment is required as part
of a VCP submission, the corrective plan amendment must be adopted no later than
150 days after the date of the compliance statement. However, for a governmental plan
(within the meaning of § 414(d)), the corrective amendment must be adopted by the
later of 150 days after the date of the compliance statement or the close of the first
regular legislative session of the legislative body with the authority to amend the plan
that begins on or after 91 days after the date of the compliance statement.
(10) Modification of compliance statement. Once the compliance statement has
been issued (based on the information provided), the Plan Sponsor cannot request a
modification of the compliance terms except by a new request for a compliance
statement, accompanied by an additional user fee. However, if the requested
modification is minor and is postmarked within the correction period provided for in the
compliance statement, a reduced user fee will apply. For more information, see the
annual EP revenue procedure that sets forth the user fees for VCP submissions. The
request should be sent to the VCP mailing address provided for in section 11.12. The
request should include a letter explaining the modification, a copy of the original
compliance statement and related VCP submission, any other correspondence relating
52

to the issuance of the original compliance statement, and a check for the user fee
payable to the United States Treasury, along with completed Forms 8950 and 8951.
(11) Verification. Once the compliance statement has been issued, the IRS may
require verification that the plan has complied with the correction methods and that any
plan administrative procedures required by the compliance statement have been
implemented. This verification does not constitute an examination of the books and
records of the employer or the plan (within the meaning of § 7605(b)). If the IRS
determines that the Plan Sponsor did not implement the corrections and procedures
within the stated time period, the plan may be referred to Employee Plans
Examinations.
.07 Compliance statement. (1) General description of compliance statement.
The compliance statement issued for a VCP submission only addresses the failures
identified in the submission, the terms of correction (including any revision of
administrative procedures), and the time period within which proposed corrections must
be implemented (including any changes in administrative procedures). The compliance
statement also provides that the IRS will not treat the plan as failing to satisfy the
applicable requirements of the Code on account of the failures described in the
compliance statement if the conditions of the compliance statement are satisfied. The
reliance provided by a compliance statement is limited to the specific failures and years
specified and does not provide reliance for any other failure or year.
(2) Correction through plan amendment. (a) Interim Amendment Failures. With
respect to a failure to amend a plan timely for Interim Amendments, as described in
section 5.01(2)(a)(ii)(B) 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 remedial
amendment period in Rev. Proc. 2007-44 and Rev. Proc. 2016-37. However, the
issuance of such a compliance statement does not constitute a determination as to
whether the Interim Amendment, as drafted, complies with the change in qualification
requirement. The compliance statement does not constitute a determination that the
terms of the plan, including the corrective plan amendment, satisfy the qualification
requirements in form.
(b) Nonamender Failures. With respect to a failure to amend a plan timely for
disqualifying provisions or a failure to timely adopt applicable required amendments
provided on the Required Amendments List, as described in section 5.01(2)(a)(ii)(C)(the
definition of Nonamender Failure), the issuance of a compliance statement will result in
the corrective amendments being treated as if they had been timely adopted during the
applicable remedial amendment period. However, the issuance of such a compliance
statement does not constitute a determination as to whether the corrective plan
amendment as drafted complies with the change in qualification requirement. The
compliance statement does not constitute a determination as to whether the corrective
plan amendment conforms the terms of the plan to the plan’s prior operations or
53

whether the terms of the plan, including the corrective plan amendment, satisfy the
qualification requirements in form.
(c) Operational Failures. If a Plan Sponsor submits a VCP filing correcting an
Operational Failure through a plan amendment and the plan amendment is accepted as
a proper correction of the Operational Failure, then the compliance statement issued
under VCP constitutes a determination that the Operational Failure has been corrected,
but is not a determination that the terms of the plan, including the corrective plan
amendment, satisfy the qualification requirements in form.
(d) Failure to adopt 403(b) Plan timely. A failure to adopt a 403(b) Plan in
accordance with the final regulations under § 403(b) and Notice 2009-3 may be
corrected under VCP. The issuance of a compliance statement will result in the 403(b)
Plan being treated as if it had been adopted timely for the purpose of making available
the extended remedial amendment period set forth in Announcement 2009-89 and Rev.
Proc. 2013-22. However, the issuance of a compliance statement does not constitute a
determination as to whether the written plan, as drafted, complies with the applicable
requirements of § 403(b) and the final § 403(b) regulations.
(3) Administrative procedures required. Where current procedures are
inadequate for operating the plan in conformance with the applicable requirements of
the Code, the compliance statement will be conditioned upon the implementation of
stated administrative procedures. The IRS may prescribe appropriate administrative
procedures in the compliance statement.
(4) Compliance statement conditioned upon timely correction. The compliance
statement is conditioned on (i) there being no misstatement or omission of material facts
in connection with the submission and (ii) the implementation of the specific corrections
and satisfaction of any other conditions in the compliance statement.
(5) Authority delegated. Compliance statements (including relief from any excise
tax or other penalty as provided under section 6.09) are authorized to be signed by
managers within Employee Plans Rulings and Agreements, under the Tax Exempt and
Government Entities Operating Division of the IRS.
.08 Effect of compliance statement on examination. The compliance statement is
binding upon both the IRS and the Plan Sponsor or Eligible Organization (as defined in
section 10.10(1)) with respect to the specific tax matters identified therein for the
periods specified, but does not preclude or impede an examination of the plan by the
IRS relating to matters outside the compliance statement, even with respect to the same
taxable year or years to which the compliance statement relates.
.09 Special rules relating to Anonymous Submissions. (1) The Anonymous
Submission procedure in this section 10.09 permits submission of a Qualified Plan,
403(b) Plan, SEP, and SIMPLE IRA Plan under VCP without initially identifying the
54

applicable plan, the Plan Sponsor, or the Eligible Organization. The requirements of this
revenue procedure relating to VCP, including sections 10, 11, and 12, apply to these
submissions. Information identifying the plan or the Plan Sponsor may be redacted (and
the power of attorney statement and the penalty of perjury statement need not be
included with the initial submission). 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 must be unique to the submission and should not
be used with respect to any other Anonymous Submission of the Plan Sponsor or
representative. If the submission is made by an individual who represents the Plan
Sponsor, such individual must satisfy the power of attorney requirements described in
section 11.07. As part of the submission, the representative must, under penalty of
perjury, assert that the representative complies with the power of attorney requirements
described in section 11.07 and that the representative will submit an executed copy of a
Form 2848, Power of Attorney and Declaration of Representation, upon the disclosure
of the identity of the Plan Sponsor to the IRS. Once the IRS and the plan representative
reach agreement with respect to the submission, the IRS 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 from the date of the letter of agreement, the matter will be closed and the user fee
will not be returned.
(2) Notwithstanding section 10.04, until each plan and Plan Sponsor is identified
to the IRS, a submission under this subsection does not preclude or impede an
examination of the Plan Sponsor or its plan. Thus, a plan submitted under the
Anonymous Submission procedure that comes Under Examination prior to the date the
identifying materials of each plan and Plan Sponsor are received by the IRS will no
longer be eligible under VCP.
.10 Special rules relating to Group Submissions. (1) Eligible Organizations. For
purposes of a Group Submission, the term “Eligible Organization” means either (a) a
sponsor (as that term is defined in section 4.07 of Rev. Proc. 2015-36, 2015-27 I.R.B.
20) of a master or prototype plan, (b) a volume submitter practitioner, as that term is
defined in section 13.05 of Rev. Proc. 2015-36, (c) an insurance company or other
entity that has issued annuity contracts or provides services with respect to assets for
403(b) Plans, or (d) an entity that provides its clients with administrative services with
respect to Qualified Plans, 403(b) Plans, SEPs, or SIMPLE IRA Plans. An Eligible
Organization is not eligible to make a Group Submission unless the failures in the
submission result from a systemic error involving the Eligible Organization that affects at
least 20 plans and results in at least 20 plans implementing correction. If, at any time
before the IRS issues the compliance statement, the number of plans falls below 20, the
55

Eligible Organization must notify the IRS that it is no longer eligible to make a Group
Submission. Under these circumstances the user fee may be retained by the IRS.
(2) General rules. An Eligible Organization may submit a VCP request for a
Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan under a Group Submission
for Plan Document, Operational, and Employer Eligibility Failures. 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 user
fee must be submitted for each master or prototype plan. Similarly, if a volume
submitter practitioner submits failures with respect to more than one volume submitter
specimen plan, each plan will be treated as a separate submission and a separate user
fee must be submitted for each specimen plan. For this purpose, in the case of either
the master or prototype plan or volume submitter specimen plan, the number of plans is
determined with reference to the number of basic plan documents, not adoption
agreements.
(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 11.03(12) for a special submission requirement with respect to Group
Submissions.
(b) The Eligible Organization must provide notice to all Plan Sponsors of the
plans included in the Group Submission. The notice must be provided at least 90 days
before the Eligible Organization provides the IRS with the information required in
section 10.10(3)(c). The purpose of the notice is to provide each Plan Sponsor with
information relating to the Group Submission request. The notice should explain the
reason for the Group Submission and inform the Plan Sponsor that the Plan Sponsor’s
plan will be included in the Group Submission unless the Plan Sponsor responds within
the 90-day period requesting that the Plan Sponsor’s plan be excluded from the Group
Submission.
(c) When an Eligible Organization receives an unsigned compliance statement
on the proposed correction and agrees to the terms of the compliance statement, the
Eligible Organization must return to the IRS within 120 calendar days not only the
signed compliance statement and any additional user fee required under the annual
revenue procedure that sets forth user fees, including VCP user fees, but also a list
containing (i) the employer tax identification numbers for the Plan Sponsors of the plans
to which the compliance statement may be applicable, (ii) the plans by name, plan
number, type of plan, and number of plan participants, (iii) a certification that each Plan
Sponsor received notice of the Group Submission, and (iv) a certification that each Plan
Sponsor timely filed the Form 5500 series return for the most recent plan year for which
the Form 5500 series return was required to have been filed. This list can be submitted
at any stage of the submission process provided that the requirements of section
56

10.10(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 IRS at the request of the Eligible
Organization) will be covered by the compliance statement.
(d) Notwithstanding section 4.02, if a Plan Sponsor of a plan that is eligible to be
included in the Group Submission and has not requested to be excluded from the Group
Submission pursuant to section 10.10(3)(b) is notified of an impending Employee Plans
examination after the Eligible Organization filed the Group Submission with the IRS, the
Plan Sponsor’s plan will be included in the Group Submission. However, with respect to
such plan, the Group Submission will not preclude or impede an examination of the plan
with respect to any failures not identified in the Group Submission at the time the plan
comes Under Examination.
.11 Multiemployer and multiple employer plans. (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 user fee (described in the annual revenue
procedure that sets forth user fees, including VCP user fees) or the sanction (described
in section 14) calculated separately for each employer based on the participants
attributable to that employer, rather than having the user fee calculated based on the
participants of the entire plan. For example, the plan administrator may choose to apply
the provisions of this paragraph when 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 a failure attributable in whole
or in part to the failure of an employer to provide the plan administrator with full and
complete information).
SECTION 11. SUBMISSION PROCEDURES FOR VCP
.01 General rules. (1) A VCP submission must satisfy the requirements of this
section 11.
(2) A VCP submission must include completed Forms 8950 and 8951.
(3) A VCP submission must include a description of the failures, a description of
the proposed methods of correction, and other procedural items set forth in this section
11.
57

.02 Use of model forms. (1) Schedules 1 through 9 (Forms 14568-A through
14568-I) provide descriptions of common qualification failures and standardized
correction methods that may be submitted in lieu of individually drafted descriptions. For
applicants that do not choose to use the Form 14568, the schedules can be used to
satisfy certain requirements of this revenue procedure.
(2) Multiple schedules may be included in a single VCP submission.
(3) A schedule may be used only if its printed content applies without
modification to the applicant’s situation.
(4) Applicants may use the current versions of Form 14568 and Forms 14568-A
through 14568-I, which are available on the IRS website (https://www.irs.gov/retirementplans/correcting-plan-errors-fill-in-vcp-submission-documents). The IRS reserves the
right to modify the Form 14568 series to improve usability, reflect changes in law, or
create additional schedules by adding new forms to the Form 14568 series.

.03 Submission requirements. A VCP submission must include the following
information:
(1) Identification of failures. A complete description of the failures, the years in
which the failures occurred, including closed years (that is, years for which the statutory
period has expired), and the number of employees affected by each failure.
(2) Explanation. An explanation of how and why the failures arose, including a
description of the administrative procedures applicable to the failures in effect at the
time the failures occurred.
.
(3) Proposed method of correction. A detailed description of the method for
correcting the failures that the Plan Sponsor has implemented or proposes to
implement. Each step of the correction method must be described in narrative form. The
description must include the specific information needed to support the proposed
correction method. This information includes, for example, the number of employees
affected and the expected cost of correction (both of which may be approximated if the
exact number cannot be determined at the time of the request), the years involved, and
calculations or assumptions the Plan Sponsor used to determine the amounts needed
for correction.
(4) Earnings or actuarial adjustments. A description of the methodology that will
be used to calculate Earnings or actuarial adjustments on any corrective contributions
or distributions (indicating the computation periods and the basis for determining
Earnings or actuarial adjustments, in accordance with section 6.02(4)).

58

(5) Computations. Specific calculations for each affected employee or a
representative sample of affected employees. The sample calculations must be
sufficient to demonstrate each aspect of the correction method proposed. For example,
if a Plan Sponsor requests a compliance statement with respect to a failure to satisfy
the contribution limits of § 415(c) and proposes a correction method that involves
elective deferrals (whether matched or unmatched) and matching contributions, the
Plan Sponsor must submit calculations illustrating the correction method proposed with
respect to each type of contribution. As another example, with respect to a failure to
satisfy the ADP test in § 401(k)(3), the Plan Sponsor must submit the ADP test results
both before the correction and after the correction.
(6) Former employees or beneficiaries. The method(s) that will be used to locate
and notify former employees and beneficiaries, or an affirmative statement that no
former employees or beneficiaries were affected by the failures or will be affected by the
correction.
(7) Change in administrative procedures. A description of the measures that have
been or will be implemented to ensure that the same failures will not recur.
(8) Request for excise tax relief (§ 4972, 4973, 4974, or 4979) or additional tax
relief under §72(t). If excise tax or additional tax relief is sought, a specific request for
relief should be included in the submission, along with explanations, where applicable,
supporting such request.
(9) 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.
(10) 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).
(11) 403(b) Plans. In the case of a 403(b) Plan submission, a statement that the
Plan Sponsor has contacted all other entities involved with the plan and has been
assured of cooperation in implementing the applicable correction, to the extent
necessary. For example, if the plan’s failure is the failure to satisfy the requirements of
§ 403(b)(1)(E) regarding elective deferrals, the Plan Sponsor must, prior to making the
VCP submission, contact the insurance company or custodian with control over the
plan’s assets to assure cooperation in effecting a distribution of the excess deferrals
adjusted for Earnings thereon. A submission under VCP must also contain a statement
as to the type of employer (for example, a tax-exempt organization described in §
501(c)(3)) that is making the VCP submission.
59

(12) Group Submissions. 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).
(13) Orphan Plans. If the plan is an Orphan Plan, the applicant should indicate
whether relief from correction or from the user fee is being requested and the support
for such relief. See sections 4.08 and 6.02(5)(f).
.04 Required documents. A VCP submission must be accompanied by the
following documents:
(1) Forms 8950 and 8951. Forms 8950 and 8951 must be included with a VCP
submission.
(2) Plan document. A copy of the entire plan document or the relevant portions
of the plan document. For example, in a case involving an improper exclusion of eligible
employees from a profit-sharing plan with a cash or deferred arrangement, relevant
portions of the plan document include the eligibility, allocation, and cash or deferred
arrangement provisions of the basic plan document (and the adoption agreement, if
applicable), along with applicable definitions in the plan. In the case of a SEP and a
SIMPLE IRA Plan, the entire plan document should be submitted.
.05 Date user fee due generally. Except as provided in sections 4.08 and 11.06,
the user fee described under the annual revenue procedure that sets forth user fees
(including VCP user fees), must be included with the submission. The user fee must be
paid by check made payable to the United States Treasury. Include a photocopy of the
check with the submission. If the appropriate user fee is not included in the submission,
the submission may be returned.
.06 Additional amount 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 user fee (described in the annual revenue procedure that sets forth user fees,
including VCP user fees) must be included in the submission and any additional amount
is due at the time the compliance statement is signed by the Plan Sponsor and returned
to the IRS, or when agreement has been reached between the IRS and the Plan
Sponsor regarding correction of the failure(s).
.07 Power of attorney requirements. To appear before the IRS in connection with
the submission, the Plan Sponsor's representative must comply with the requirements
of section 9.02(11) and (12) of Rev. Proc. 2016-4, 2016-1 I.R.B. 142, as updated
annually, and submit Form 2848. A Form 2848 that designates a representative not
qualified to sign Part II of the Form 2848, for example, an unenrolled return preparer,
will not be accepted. However, a Plan Sponsor may authorize an individual, such as an
unenrolled return preparer, to inspect or receive confidential information using Form
60

8821, Tax Information Authorization. (See Form 8821 and Instructions) See section
10.09 for special rules relating to Anonymous Submissions.
.08 Penalty of perjury statement. (1) The Plan Sponsor must sign the penalty of
perjury statement on the Form 8950 as part of a VCP submission. In addition, the
following declaration must accompany any new factual information or change in the
VCP submission made 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.
(2) If the VCP submission is an Anonymous Submission made pursuant to
section 10.09, and the submission is made by an individual authorized to represent the
Plan Sponsor, the individual must submit the following statement: “Under penalties of
perjury, I declare that I am an authorized representative of the Plan Sponsor who
complies with the Power of Attorney requirements described in section 11.07 of
Revenue Procedure 2016-51. I will submit an executed Form 2848 upon the
disclosure of the identity of the Plan Sponsor to the IRS.”
.09 Procedural Requirements Checklist. The IRS will be able to respond more
quickly to a VCP submission if the submission is carefully prepared and complete. The
checklist provided on Form 8950 and the instructions to Forms 8950 and 8951 are
designed to assist Plan Sponsors and their representatives in preparing the information
and documents required under this revenue procedure.
.10 Orphan Plan. The VCP submission should indicate, if applicable, that it
concerns an Orphan Plan and should include information that establishes that the
applicant is an Eligible Party, as defined in section 5.03(2).
.11 Acknowledgement letter. The IRS will acknowledge receipt of a VCP
submission (or non-VCP submission for a § 457(b) plan, as permitted by section 4.09)
only if the Plan Sponsor or the Plan Sponsor’s representative completes IRS Letter
5265 and includes it in the submission. A separate Letter 5265 should be included for
each plan submitted.
.12 VCP mailing addresses. Use the following addresses for VCP submissions:
First class mail:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
Express mail or private delivery service:
Internal Revenue Service
61

201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011
.13 Maintenance of copies of submissions. Plan Sponsors and their
representatives should maintain copies of all correspondence submitted to the IRS with
respect to their VCP submissions.
.14 Assembling the submission. (1) The documents comprising a VCP
submission must be mailed to the IRS in a single package
(2) The IRS will be able to process a VCP submission more quickly if it is
assembled in the following order:
1. Form 8951, with the check for the user fee attached to the front of the form.
Include a photocopy of the check.
2. Signed Form 8950.
3. Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821)
attached to Form 8950.
4. The following narrative information:
• Description of the failures (if the failures relate to Transferred Assets,
include a description of the related employer transaction).
• An explanation of how and why the failures occurred.
• Description of the method for correcting failures, including Earnings
methodology (if applicable) and supporting computations (if
applicable).
• Description of the method(s) used to locate or notify former employees
or beneficiaries affected by the failures or corrections. If no former
employees or beneficiaries are affected by the failures or corrections,
then affirmatively state that 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.
62

•

If the plan is an Orphan Plan, whether relief from the user fee is being
requested on Form 8951, and the supporting rationale for such relief.

5. If the VCP submission includes either Form 14568 or any schedule (Forms
14568-A through 14568-I) include any required information and enclosures,
and any related schedules.
6. Letter 5265.
7. Copy of opinion, advisory or determination letter (if applicable).
8. Relevant plan document language or plan document (if applicable).
9. Any other items that may be relevant to the VCP submission.
SECTION 12. VCP USER FEES
.01 User fees. (1) In general. The general user fees for all submissions under
VCP are determined under section 6.08 of Rev. Proc. 2016-8. All user fees must be
paid upon filing the VCP submission (except as provided in sections 4.08 and 11.06).
(2) User fees to be published in annual revenue procedure. Beginning in 2017
and each year thereafter, the user fees for VCP submissions will be published as part of
an annual revenue procedure that sets forth user fees, including VCP user fees. Plan
Sponsors should refer to the annual revenue procedure in effect at the time they file
their submission with the IRS to determine the VCP user fee.
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 13. DESCRIPTION OF AUDIT CAP
.01 Audit CAP requirements. If the IRS identifies a Qualification or 403(b) Failure
(other than a failure that has been corrected in accordance with SCP or VCP) upon an
Employee Plans or Exempt Organizations examination of a Qualified Plan, 403(b) Plan,
SEP, or SIMPLE IRA Plan, the requirements of this section 13 are satisfied with respect
to the failure if the Plan Sponsor corrects the failure, pays a sanction in accordance with
section 14, satisfies any additional requirements of section 13.03, and enters into a
closing agreement with the IRS. This section 13 also applies if the IRS identifies a
participant loan that did not comply with the requirements of § 72(p)(2) (other than a
loan failure that is corrected in accordance with SCP or VCP) upon an Employee Plans
or Exempt Organizations examination of a Qualified Plan or 403(b) Plan.
.02 Payment of sanction. Payment of the sanction under section 14 generally is
required at the time the closing agreement is signed. All sanction amounts should be
submitted by certified check or cashier’s check made payable to the United States
63

Treasury. However, at the Plan Sponsor’s option, the sanction may be paid by credit or
debit card or directly from a checking or savings account through www.pay.gov.
.03 Additional requirements. Depending on the nature of the failure, the IRS will
discuss the appropriateness of the plan's existing administrative procedures with the
Plan Sponsor. If existing administrative procedures are inadequate for operating the
plan in conformance with the applicable requirements of the Code, the closing
agreement may be conditioned upon the implementation of stated procedures.
.04 Failure to reach resolution. If the IRS and the Plan Sponsor cannot reach an
agreement with respect to the correction of the failure(s) or the amount of the sanction
then the plan will be disqualified, the plan or contract will be treated as if it did not
comply with § 403(b), the SEP will be treated as if it did not comply with § 408(k), or the
SIMPLE IRA Plan will be treated as if it did not comply with § 408(p), as applicable.
.05 Effect of closing agreement. A closing agreement constitutes an agreement
between the IRS and the Plan Sponsor that is binding with respect to the tax matters
identified in the agreement for the periods specified.
.06 Other procedural rules. The procedural rules for Audit CAP are set forth in
Internal Revenue Manual ("IRM") 7.2.2. EPCRS.
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction. The sanction under Audit CAP is a negotiated

amount that is determined based on the facts and circumstances, including the relevant
factors described in section 14.02. Sanctions will not be excessive and will bear a
reasonable relationship to the nature, extent, and severity of the failures, based on the
factors below. The sanction generally will not be less than the VCP user fee applicable
to the plan. See section 14.04 for special rules relating to the sanction for Nonamender
Failures discovered during the determination letter application process.
.02 Factors considered. Factors include:
(1) For all plans (as appropriate):
(a) the steps taken by the Plan Sponsor to ensure that the plan had no failures;
(b) the steps taken by the Plan Sponsor to identify failures that may have
occurred;
(c) the extent to which correction had progressed before the examination was
initiated, including full correction;
(d) the number and type of employees affected by the failure;

64

(e) the number of nonhighly compensated employees who would be adversely
affected if the plan were not treated as qualified or as satisfying the requirements of
§ 403(b), 408(k), or 408(p);
(f) whether the failure is a failure to satisfy the requirements of § 401(a)(4),
401(a)(26), or 410(b), either directly or through § 403(b)(12);
(g) whether the failure is solely an Employer Eligibility Failure;
(h) the period over which the failure occurred (for example, the time that has
elapsed since the end of the applicable remedial amendment period under § 401(b) for
a Plan Document Failure);
(i) the reason for the failure (for example, data errors such as errors in
transcription of data, the transposition of numbers, or minor arithmetic errors), and
(j) the Maximum Payment Amount.
(2) Additional factors for Nonamender Failures in Qualified Plans. The factors
considered for Nonamender Failures in Qualified Plans also include:
(a) whether the plan is the subject of a Favorable Letter;
(b) the internal controls implemented by the Plan Sponsor to ensure the timely
adoption of required amendments;
(c) the extent to which the Plan Sponsor had adopted a timely plan amendment
which later is found not to satisfy the qualification requirements of the Code;
(d) the extent to which the Plan Sponsor had otherwise adopted applicable
amendments identified on the Required Amendments List described in § 9 of Rev. Proc.
2016-37 and published annually in the Internal Revenue Bulletin; and
(e) the extent to which the Plan Sponsor had reasonably determined that a
provision on the Required Amendments List described in § 9 of Rev. Proc. 2016-37 was
not applicable to the Plan Sponsor’s plan.
(3) Participant loan failure. An additional factor taken into account with respect to
a participant loan that did not comply with the requirements of § 72(p)(2) is the extent to
which the failure is a result solely of action (or inaction) of the employer or its agents (or
the extent to which the failure is a result of the employee’s or beneficiary’s actions or
inaction).
.03 Transferred Assets. If the examination involves a plan with Transferred
Assets and the IRS determines that no new incidents of the failures that relate to the
Transferred Assets occurred after the end of the second plan year that begins after the
corporate merger, acquisition, or other similar employer transaction, the sanction under
65

Audit CAP will not exceed the sanction that would apply if the Transferred Assets were
maintained as a separate plan.
.04 Sanction for Nonamender Failures discovered during the determination letter
application process. (1) Except as provided in section 14.04(2) and (3), if the only failure
identified by the IRS during the determination letter application process is a
Nonamender Failure that was not voluntarily identified by the Plan Sponsor:
(a) The sanction for an individually designed plan is determined as follows:
(i) 150% of the applicable VCP user fee described in § 6.08 of Rev. Proc. 2016-8
(or subsequent guidance that sets forth VCP user fees) if the Nonamender Failure
arose in connection with an amendment that was required to be adopted after the end
of the plan’s last remedial amendment cycle to which Rev. Proc. 2007-44 applied, and
(ii) 250% of the applicable VCP user fee described in § 6.08 of Rev. Proc. 20168 (or subsequent guidance that sets forth VCP user fees) if the Nonamender Failure
arose in connection with an amendment that was required to be adopted at any time
before the end of the plan’s last remedial amendment cycle to which Rev. Proc. 200744 applied.
(b) The sanction for a pre-approved plan is determined as follows:
(i) 150% of the applicable VCP user fee described in § 6.08 of Rev. Proc. 2016-8
(or subsequent guidance that sets forth VCP user fees) if the Nonamender Failure
arose in connection with an amendment that was required to be adopted after the end
of the plan’s second six-year remedial amendment cycle, and
(ii) 250% of the applicable VCP user fee described in § 6.08 of Rev. Proc. 20168 (or subsequent guidance that sets forth VCP user fees) if the Nonamender Failure
arose in connection with an amendment that was required to be adopted at any time
before the end of the plan’s second six-year remedial amendment cycle
(2) The sanction prescribed in section 14.04(1) may be reduced or increased in
the following circumstances:
(a) If a plan amendment was timely adopted in order to maintain the plan’s
qualified status but is found not to satisfy the qualification requirements of the Code, the
applicable sanction described in section 14.04(1) may be reduced based on the facts
and circumstances, including the factors described in section 14.02(2)(a), (b) and (c).
However, the sanction generally will not be less than the VCP user fee applicable to the
plan.
(b) If a Nonamender Failure is egregious, the sanction will be determined under
section 14.01. Whether a Nonamender Failure is egregious will be determined based on
the facts and circumstances, including:
66

(i) the number of plan amendments that were not timely adopted;
(ii) the number of years that had elapsed from the end of the remedial
amendment period until amendments were adopted (if at all); and
(iii) the extent to which the plan lacked internal controls to facilitate the timely
adoption of amendments.
(3) If the sole failure consists of a failure to timely adopt an amendment (upon
which a favorable determination letter was conditioned) within the applicable remedial
amendment period, the sanction is $750 regardless of the number of plan participants,
provided the required amendment is adopted within three months of the expiration of
the remedial amendment period for adopting the amendment.
PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK
REDUCTION ACT
SECTION 15. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2013-12, Rev. Proc. 2015-27, and Rev. Proc. 2015-28 are modified
and superseded by this revenue procedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is effective January 1, 2017.
SECTION 17. PUBLIC COMMENTS
The Treasury Department and the IRS invite comments on this revenue
procedure. Send submissions to CC:PA:LPD:PR, (Rev. Proc. 2016-51), Room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C.
20044. Comments may also be hand delivered Monday through Friday between the
hours of 8 a.m. and 4:00 p.m. to: Internal Revenue Service, CC:PA:LPD:PR, (Rev.
Proc. 2016-51), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue,
N.W., Washington DC. Alternatively, comments may be submitted via the Internet at
notice.comments@irscounsel.treas.gov (Rev. Proc. 2016-51). All comments will be
available for public inspection.
SECTION 18. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1673.

67

An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.
The collection of information in this revenue procedure is in sections 4.05,
6.02(5)(d), 6.09(5), 6.09(6), 10.01, 10.02, 10.05-.07, 10.09-10.11, 11.01-11.05, 11.0711.14, 13.01, sections .05(8)(c) and .05(9)(c) of Appendix A, and sections 2.01-2.07 of
Appendix B. This information is required to enable the Commissioner, Tax Exempt and
Government Entities Division of the IRS to consider the issuance of various types of
closing agreements and compliance statements. This information will be used to issue
closing agreements and compliance statements to allow individual plans to continue to
maintain their tax favored status. As a result, favorable tax treatment of the benefits of
the eligible employees is retained. The likely respondents are individuals, state or local
governments, businesses or other for-profit institutions, nonprofit institutions, and small
businesses or organizations.
The estimated total annual reporting or recordkeeping burden is 91,791 hours.
The estimated annual burden per respondent/recordkeeper varies from .5 to 45.5
hours, depending on individual circumstances, with an estimated average of 25.28
hours. The estimated number of respondents or recordkeepers is 5,375.
The estimated frequency of responses is occasional.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally tax returns and tax return information are confidential, as required by 26
U.S.C. § 6103.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Kathleen Herrmann and
Pamela R. Kinard of the Office of the Associate Chief Counsel (Tax Exempt and
Government Entities). For further information regarding this revenue procedure, please
contact the Employee Plans’ taxpayer assistance telephone service at 877-829-5500 (a
toll-free number) between the hours of 8:30 a.m. and 4:30 p.m. Eastern Time, Monday
through Friday.

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APPENDIX A
OPERATIONAL FAILURES AND CORRECTION METHODS
.01 General rule. (1) In general. This appendix sets forth Operational Failures
and Correction Methods relating to Qualified Plans. In each case, the method described
corrects the Operational Failure identified in the headings below. Corrective allocations
and distributions should reflect Earnings and actuarial adjustments in accordance with
section 6.02(4) of this revenue procedure. The correction methods in this appendix are
acceptable to correct Qualification Failures under VCP, and to correct Qualification
Failures under SCP that occurred notwithstanding that the plan has established
practices and procedures reasonably designed to promote and facilitate overall
compliance with the Code, as provided in section 4.04 of this revenue procedure. To the
extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a
SIMPLE IRA Plan, the correction method listed for such failure, such as the correction
method for an Employee Elective Deferral failure in section .05(9), may similarly be
used to correct the failure.
(2) Correction methods permitted in Appendix A and Appendix B are safe
harbors. Correction methods permitted in Appendix A and Appendix B are deemed to
be reasonable and appropriate methods of correcting a failure. Both Appendices set
forth various correction methods that may be used to correct a failure, depending on the
facts and circumstances. A Plan Sponsor may choose any correction method by which
the plan can satisfy the eligibility requirements. For example, a § 401(k) plan that
improperly excluded an employee may use the general correction method under .05(2).
However, if the § 401(k) plan has an automatic contribution feature, the plan may use
the correction method under .05(8), assuming the plan meets the eligibility requirements
in .05(8)(a). If the § 401(k) plan doesn’t have an automatic contribution feature but
corrects the failure within a specified time period, the plan may use the correction
method under .05(9)(a) or (b), assuming the plan meets the eligibility requirements in
.05(9)(a) or (b).
(3) Other reasonable correction methods permitted. As provided in section
6.02(2), there may be more than one reasonable and appropriate correction of a failure.
Any correction method used that is not described in Appendix A or Appendix B would
need to satisfy the correction principles of section 6.02. For example, the sponsor of a
403(b) Plan that failed to satisfy the universal availability requirement of
§ 403(b)(12)(A)(ii) might propose to determine the missed deferral for an excluded
employee using a percentage based on the average deferrals for all employees in the
plan instead of using the rule for calculating missed deferrals set out in .05(6)(b). In
doing so, the proposed correction method would fall outside Appendix A, and the Plan
Sponsor would need to satisfy the general correction principles of section 6.02 and
other applicable rules in this revenue procedure.

69

.02 Failure to properly provide the minimum top-heavy benefit under § 416 to
non-key employees. In a defined contribution plan, the permitted correction method is to
properly contribute and allocate the required top-heavy minimums to the plan in the
manner provided for in the plan on behalf of the non-key employees (and any other
employees required to receive top-heavy allocations under the plan). In a defined
benefit plan, the minimum required benefit must be accrued in the manner provided in
the plan.
.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth
in § 401(m)(2), or, for plan years beginning on or before December 31, 2001, the
multiple use test of § 401(m)(9). The permitted correction method is to make QNECs
(as defined in §1.401(k)-6) on behalf of the nonhighly compensated employees to the
extent necessary to raise the actual deferral percentage or actual contribution
percentage of the nonhighly compensated employees to the percentage needed to pass
the test or tests. For purposes of correcting a failed ADP, ACP, or multiple use test, any
amounts used to fund QNECs must satisfy the definition of QNEC in § 1.401(k)-6). The
contributions must be made on behalf of all eligible nonhighly compensated employees
(to the extent permitted under § 415) and must be the same percentage of
compensation. QNECs contributed to satisfy the ADP test need not be taken into
account for determining additional contributions (for example, a matching contribution),
if any. For purposes of this section .03, employees who would have received a matching
contribution had they made elective deferrals must be counted as eligible employees for
the ACP test, and the plan must satisfy the ACP test. Under this correction method, a
plan may not be treated as two separate plans, one covering otherwise excludable
employees and the other covering all other employees (as permitted in § 1.410(b)6(b)(3)), in order to reduce the number of employees eligible to receive QNECs.
Likewise, under this correction method, the plan may not be restructured into
component plans in order to reduce the number of employees eligible to receive
QNECs.
.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in
contravention of § 401(a)(30)). The permitted correction method is to distribute the
excess deferral to the employee and to report the amount as taxable in the year of
deferral and in the year distributed. The inclusion of the deferral and the distribution in
gross income applies whether or not any portion of the excess deferral is attributable to
a designated Roth contribution (see § 402A(d)(3)). In accordance with § 1.402(g)1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test
and a distribution to a nonhighly compensated employee is not included in the ADP test.
.05 Exclusion of an eligible employee from all contributions or accruals under the
plan for one or more plan years. (1) Improperly excluded employees: employer provided
contributions or benefits. For plans with employer provided contributions or benefits
(which are neither elective deferrals under a qualified cash or deferred arrangement
under § 401(k) nor matching or after-tax employee contributions that are subject to
§ 401(m)), the permitted correction method is to make a contribution to the plan on
70

behalf of the employees excluded from a defined contribution plan or to provide benefit
accruals for the employees excluded from a defined benefit plan.
(2) Improperly excluded employees: contributions subject to § 401(k) or 401(m).
(a) For plans providing benefits subject to § 401(k) or 401(m), the corrective contribution
for an improperly excluded employee is described in the following paragraphs of this
section .05(2). (See Examples 3 through 12 of Appendix B.)
(b) If the employee was not provided the opportunity to elect and make elective
deferrals (other than designated Roth contributions) to a § 401(k) plan that does not
satisfy § 401(k)(3) by applying the safe harbor contribution requirements of § 401(k)(12)
or 401(k)(13), the employer must make a QNEC to the plan on behalf of the employee
that replaces the “missed deferral opportunity.” The missed deferral opportunity is equal
to 50% of the employee’s “missed deferral.” The missed deferral is determined by
multiplying the actual deferral percentage for the year of exclusion (whether or not the
plan is using current or prior year testing) for the employee's group in the plan (either
highly compensated or nonhighly compensated) by the employee’s compensation for
that year. The employee’s missed deferral amount is reduced further to the extent
necessary to ensure that the missed deferral does not exceed applicable plan limits,
including the annual deferral limit under § 402(g) for the calendar year in which the
failure occurred. Under this correction method, a plan may not be treated as two
separate plans, one covering otherwise excludable employees and the other covering
all other employees (as permitted in § 1.410(b)-6(b)(3)) in order to reduce the applicable
ADP, the corresponding missed deferral, and the required QNEC. Likewise,
restructuring the plan into component plans is not permitted in order to reduce the
applicable ADP, the corresponding missed deferral, and the required QNEC. The QNEC
required for the employee for the missed deferral opportunity for the year of exclusion is
adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected
employee.
(c) If the employee should have been eligible for but did not receive an allocation
of employer matching contributions under a non-safe harbor plan because he or she
was not given the opportunity to make elective deferrals, the employer must make a
corrective employer nonelective contribution on behalf of the affected employee. The
corrective employer nonelective contribution is equal to the matching contribution the
employee would have received had the employee made a deferral equal to the missed
deferral determined under section .05(2)(b). The corrective employer nonelective
contribution must be adjusted for Earnings to the date the corrective contribution is
made on behalf of the affected employee.
(d)(i) If the employee was not provided the opportunity to elect and make elective
deferrals (other than designated Roth contributions) to a safe harbor § 401(k) plan that
uses a rate of matching contributions to satisfy the safe harbor requirements of §
401(k)(12), then the missed deferral is deemed equal to the greater of 3% of
compensation or the maximum deferral percentage for which the employer provides a
71

matching contribution rate that is at least as favorable as 100% of the elective deferral
made by the employee. If the employee was not provided the opportunity to elect and
make elective deferrals (other than Roth contributions) to a safe harbor § 401(k) plan
that uses nonelective contributions to satisfy the safe harbor requirements of §
401(k)(12), then the missed deferral is deemed equal to 3% of compensation. In either
event, this estimate of the missed deferral replaces the estimate based on the ADP test
in a traditional § 401(k) plan. The required QNEC on behalf of the excluded employee is
equal to (i) 50% of the missed deferral, plus (ii) either (A) an amount equal to the
contribution that would have been required as a matching contribution based on the
missed deferral in the case of a safe harbor § 401(k) plan that uses a rate of matching
contributions to satisfy the safe harbor requirements of § 401(k)(12) or (B) the
nonelective contribution that would have been made on behalf of the employee in the
case of a safe harbor § 401(k) plan that uses nonelective contributions to satisfy the
safe harbor requirements of § 401(k)(12). The QNEC required to replace the
employee’s missed deferral opportunity and the corresponding matching or nonelective
contribution is adjusted for Earnings to the date the corrective QNEC is made on behalf
of the employee.
(ii) If the employee was not provided the opportunity to make an affirmative
election with respect to elective deferrals (other than designated Roth contributions) to a
safe harbor § 401(k) plan that uses an automatic contribution arrangement to satisfy the
safe harbor requirements of § 401(k)(13) and the failure occurs for a period that does
not extend past the last day of the first plan year which begins after the date on which
the first deferral would have been made (but for the failure), then the missed deferral is
deemed to equal 3% of the employee’s compensation under the plan. If the failure
occurs for a plan year or plan years subsequent to the period described in the prior
sentence, then the missed deferral for each subsequent plan year is equal to the
qualified percentage specified in the plan document to comply with § 401(k)(13)(C)(iii).
The missed deferral determined in accordance with this section .05(2)(d)(ii) replaces the
estimate based on the ADP test in a traditional § 401(k) plan. The required corrective
employer contribution on behalf of the excluded employee is equal to (i) the missed
deferral opportunity, which is an amount equal to 50% of the missed deferral, plus (ii) an
amount equal to either the matching contribution that would apply under § 401(k)(13)
based on the missed deferral or the nonelective contribution that would have been
made on behalf of the employee under § 401(k)(13), whichever applies under the plan.
The employer contribution for the missed deferral opportunity must be a QNEC. The
corrective employer contribution consisting of the QNEC required to replace the
employee’s missed deferral opportunity and the corresponding matching or nonelective
contribution is adjusted for Earnings to the date the corrective employer contribution is
made on behalf of the employee.
(iii) In the case of a failure to make the required nonelective contribution for a
plan year under a safe harbor § 401(k) plan that uses the nonelective contribution under
§ 401(k)(12)(C) to satisfy the safe harbor requirements of § 401(k)(12) or that uses the
nonelective contribution under § 401(k)(13)(D)(i)(I) to satisfy the safe harbor
72

requirements of § 401(k)(13), the nonelective contribution (which must be a QNEC in
the case of a plan that uses § 401(k)(12) to satisfy ADP) required to be made on behalf
of the employee is equal to 3% of the employee’s compensation during the period of the
failure. For this purpose, the period of the failure for any plan year ends at the end of
the plan year or, if earlier, the later of June 18, 2009 or the date 30 days after notice
was provided to employees as required under applicable Treasury Regulations (see
§ 1.401(k)-3(g)(ii) of the proposed regulations, at 74 FR 23134).
(e) If the employee should have been eligible to elect and make after-tax
employee contributions (other than designated Roth contributions), the employer must
make a QNEC to the plan on behalf of the employee that is equal to the “missed
opportunity for making after-tax employee contributions.” The missed opportunity for
making after-tax employee contributions is equal to 40% of the employee’s “missed
after-tax contributions.” The employee’s missed after-tax contributions are equal to the
actual contribution percentage (ACP) for the employee’s group (either highly
compensated or nonhighly compensated) times the employee’s compensation, but with
the resulting amount not to exceed applicable plan limits. If the ACP consists of both
matching and after-tax employee contributions, then, in lieu of basing the employee’s
missed after-tax employee contributions on the ACP for the employee’s group, the
employer is permitted to determine separately the portion of the ACP that is attributable
to after-tax employee contributions for the employee’s group (either highly compensated
or nonhighly compensated), multiplied by the employee’s compensation for the year of
exclusion. The QNEC must be adjusted for Earnings to the date the corrective QNEC is
made on behalf of the affected employee.
(f) If the employee was improperly excluded from an allocation of employer
matching contributions because he or she was not given the opportunity to make aftertax employee contributions (other than designated Roth contributions), the employer
must make a corrective employer nonelective contribution on behalf of the affected
employee. The corrective employer nonelective contribution is equal to the matching
contribution the employee would have received had the employee made an after-tax
employee contribution equal to the missed after-tax employee contribution determined
under section .05(2)(e). The corrective employer nonelective contribution must be
adjusted for Earnings to the date the corrective contribution is made on behalf of the
affected employee.
(g) The methods for correcting the failures described in this section .05(2) do not
apply until after the correction of other qualification failures. Thus, for example, if, in
addition to the failure of excluding an eligible employee, the plan also failed the ADP or
ACP test, the correction methods described in section .05(2)(b) through (f) cannot be
used until after correction of the ADP or ACP test failures. For purposes of this section
.05(2), in order to determine whether the plan passed the ADP or ACP test, the plan
may rely on a test performed with respect to those eligible employees who were
provided with the opportunity to make elective deferrals or after-tax employee
contributions and receive an allocation of employer matching contributions, in
73

accordance with the terms of the plan, and may disregard the employees who were
improperly excluded.
(3) Improperly excluded employees: designated Roth contributions. For
employees who were improperly excluded from plans that (i) are subject to § 401(k) (as
described in section .05(2)) and (ii) provide for the optional treatment of elective
deferrals as designated Roth contributions, the correction is the same as described
under section .05(2). Thus, for example, the corrective employer contribution required to
replace the missed deferral opportunity is made in accordance with the method
described in section .05(2)(b) in the case of a § 401(k) plan that is not a safe harbor
§ 401(k) plan or .05(2)(d) in the case of a safe harbor § 401(k) plan. However, none of
the corrective contributions made by the employer may be treated as designated Roth
contributions (and may not be included in an employee’s gross income) and thus may
not be contributed or allocated to a Roth account (as described in § 402A(b)(2)). The
corrective employer contribution must be allocated to an account established for
receiving a QNEC or any other employer contribution in which the employee is fully
vested and subject to the withdrawal restrictions that apply to elective deferrals.
(4) Improperly excluded employees: catch-up contributions only. (a) Correction
for missed catch-up contributions. If an eligible employee was not provided the
opportunity to elect and make catch-up contributions to a § 401(k) plan, the employer
must make a QNEC to the plan on behalf of the employee that replaces the “missed
deferral opportunity” attributable to the failure to permit an eligible employee to make a
catch-up contribution pursuant to § 414(v). The missed deferral opportunity for catch-up
contributions is equal to 50% of the employee’s missed deferral attributable to catch-up
contributions. For this purpose, the missed deferral attributable to catch-up contributions
is one half of the applicable catch-up contribution limit for the year in which the
employee was improperly excluded. Thus, for example if an eligible employee was
improperly precluded from electing and making catch-up contributions in 2006, the
missed deferral attributable to catch-up contributions is $2,500, which is one half of
$5,000, the 2006 catch-up contribution limit for a § 401(k) plan. The eligible employee’s
missed deferral opportunity is $1,250 (that is, 50% of the missed deferral attributable to
catch-up contributions of $2,500). The QNEC required to replace the missed deferral
opportunity for the year of exclusion is adjusted for Earnings to the date the corrective
QNEC is made on behalf of the affected employee. For purposes of this correction, an
eligible employee, pursuant to § 414(v)(5), refers to any participant who (i) would have
attained age 50 by the end of the plan’s taxable year and (ii) in the absence of the
plan’s catch-up provision, could not make additional elective deferrals on account of the
plan or statutory limitations described in § 414(v)(3) and § 1.414(v)-1(b)(1).
(b) Correction for missed matching contributions on catch-up contributions. If an
employee was precluded from making catch-up contributions under this section .05(4),
the Plan Sponsor should ascertain whether the affected employee would have been
entitled to an additional matching contribution on account of the missed deferral. If the
employee would have been entitled to an additional matching contribution, then the
74

employer must make a corrective employer nonelective contribution for the matching
contribution on behalf of the affected employee. The corrective employer nonelective
contribution is equal to the additional matching contribution the employee would have
received had the employee made a deferral equal to the missed deferral determined
under paragraph (a) of this section .05(4). The corrective employer nonelective
contribution must be adjusted for Earnings to the date the corrective contribution is
made on behalf of the affected employee. If in addition to the failure to provide matching
contributions under this section .05(4)(b), the plan also failed the ACP test, the
correction methods described in this section cannot be used until after correction of the
ACP test failure. For purposes of this section, in order to determine whether the plan
passed the ACP test the plan may rely on a test performed with respect to those eligible
employees who were provided with the opportunity to make elective deferrals or aftertax employee contributions and receive an allocation of employer matching
contributions, in accordance with the terms of the plan, and may disregard any
employer matching contribution that was not made on account of the plan’s failure to
provide an eligible employee with the opportunity to make a catch-up contribution.
(5) Failure to implement an employee election. (a) Missed opportunity for elective
deferrals. For eligible employees who filed elections to make elective deferrals under
the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan
Sponsor must make a QNEC to the plan on behalf of the employee to replace the
“missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the
employee’s “missed deferral.” The missed deferral is determined by multiplying the
employee’s elected deferral percentage by the employee’s compensation. If the
employee elected a dollar amount for an elective deferral, the missed deferral would be
the specified dollar amount. The employee’s missed deferral amount is reduced further
to the extent necessary to ensure that the missed deferral does not exceed applicable
plan limits, including the annual deferral limit under § 402(g) for the calendar year in
which the failure occurred. The QNEC must be adjusted for Earnings to the date the
corrective QNEC is made on behalf of the affected employee.
(b) Missed opportunity for after-tax employee contributions. For eligible
employees who filed elections to make after-tax employee contributions under the Plan
which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must
make a QNEC to the plan on behalf of the employee to replace the employee’s missed
opportunity for after-tax employee contributions. The missed opportunity for making
after-tax employee contributions is equal to 40% of the employee’s “missed after-tax
contributions.” The missed after-tax employee contribution is determined by multiplying
the employee’s elected after-tax employee contribution percentage by the employee’s
compensation. The QNEC must be adjusted for Earnings to the date the corrective
QNEC is made on behalf of the affected employee.
(c) Missed opportunity affecting matching contributions. In the event of failure
described in paragraph (a) or (b) of this section .05(5), if the employee would have been
entitled to an additional matching contribution had either the missed deferral or after-tax
75

employee contribution been made, then the Plan Sponsor must make a corrective
employer nonelective contribution for the matching contribution on behalf of the affected
employee, or a corrective QNEC in the case of a safe harbor plan under § 401(k)(12).
The corrective employer nonelective contribution or QNEC is equal to the matching
contribution the employee would have received had the employee made a deferral
equal to the missed deferral determined under this paragraph. The corrective employer
nonelective contribution or QNEC must be adjusted for Earnings to the date the
corrective contribution or QNEC is made on behalf of the affected employee.
(d) Coordination with correction of other Qualification Failures. The method for
correcting the failures described in this section .05(5) does not apply until after the
correction of other qualification failures. Thus, for example, if in addition to the failure to
implement an employee’s election, the plan also failed the ADP test or ACP test, the
correction methods described in section .05(5)(a), (b), or (c) cannot be used until after
correction of the ADP or ACP test failures. For purposes of this section .05(5), in order
to determine whether the plan passed the ADP or ACP test the plan may rely on a test
performed with respect to those eligible employees who were not impacted by the Plan
Sponsor’s failure to implement employee elections and received allocations of employer
matching contributions, in accordance with the terms of the plan, and may disregard
employees whose elections were not properly implemented.
(6) Failure of a 403(b) Plan to satisfy the universal availability requirement of
§ 403(b)(12)(A)(ii). (a) Subject to the specific rules in this section .05(6), the correction
methods set forth in this section .05 (and section 2.02 of Appendix B) for a Qualified
Plan also apply to a 403(b) Plan that has a similar failure.
(b) If the employee was not provided the opportunity to elect and make elective
deferrals to a 403(b) Plan, then, in lieu of determining the missed deferral based on the
actual deferral percentage as described in section .05(2)(b), the missed deferral is
deemed equal to the greater of 3% of compensation or the maximum deferral
percentage for which the Plan Sponsor provides a matching contribution rate that is at
least as favorable as 100% of the elective deferral made by the employee.
(7) Improper exclusion of an eligible employee from a SIMPLE IRA plan subject
to the requirements of § 408(p). (a) Subject to the specific rules in this section .05(7),
the correction methods set forth in this section .05 for a Qualified Plan also apply to a
SIMPLE IRA plan that has a similar failure.
(b) If the employee was not provided the opportunity to elect and make elective
deferrals to a SIMPLE IRA plan, then, in lieu of determining the missed deferral based
on the actual deferral percentage as described in section .05(2)(b), the missed deferral
is deemed to be 3% of compensation.
(8) Special safe harbor correction method for failures related to automatic
contribution features in a § 401(k) plan or a 403(b) Plan. (a) Eligibility to use safe
76

harbor correction method. This safe harbor correction method is available for certain
Employee Elective Deferral Failures (as defined in section .05(10) of this appendix
associated with missed elective deferrals for eligible employees who are subject to an
automatic contribution feature in a § 401(k) plan or 403(b) Plan (including employees
who made affirmative elections in lieu of automatic contributions but whose elections
were not implemented correctly). If the failure to implement an automatic contribution
feature for an affected eligible employee or the failure to implement an affirmative
election of an eligible employee who is otherwise subject to an automatic contribution
feature does not extend beyond the end of the 9½-month period after the end of the
plan year of the failure (which is generally the filing deadline of the Form 5500 series
return, including automatic extensions), no QNEC for the missed elective deferrals is
required, provided that the following conditions are satisfied:
(i) Correct deferrals begin no later than the earlier of the first payment of
compensation made on or after the last day of the 9½-month period after the end of the
plan year in which the failure first occurred for the affected eligible employee or, if the
Plan Sponsor was notified of the failure by the affected eligible employee, the first
payment of compensation made on or after the end of the month after the month of
notification;
(ii) Notice of the failure that satisfies the content requirements of section .05(8)(c)
of this appendix is given to the affected eligible employee not later than 45 days after
the date on which correct deferrals begin; and
(iii) If the eligible employee would have been entitled to additional matching
contributions had the missed deferrals been made, the Plan Sponsor makes a
corrective allocation (adjusted for Earnings) on behalf of the employee equal to the
matching contributions that would have been required under the terms of the plan as if
the missed deferrals had been contributed to the plan in accordance with timing
requirements under SCP for significant operational failures (described in section 9.02).
(b) Calculation of Earnings for certain failures to implement automatic
contribution features. This correction method provides an alternative safe harbor
method for calculating Earnings for Employee Elective Deferral Failures under § 401(k)
plans or 403(b) Plans that have automatic contribution features and that are corrected in
accordance with the procedures in this section .05(8). If an affected eligible employee
has not affirmatively designated an investment alternative, missed Earnings may be
calculated based on the plan’s default investment alternative, provided that, with respect
to a correction made in accordance with the procedures in this section .05(8), any
cumulative losses reflected in the Earnings calculation will not result in a reduction in
the required corrective contributions relating to any matching contributions. The Plan
Sponsor may also use the Earnings adjustment methods set forth in section 3 of
Appendix B.

77

(c) Content of notice requirement. The notice required under section .05(8)(a)(ii)
of this appendix must include the following information:
(i) General information relating to the failure, such as the percentage of
eligible compensation that should have been deferred and the approximate date that the
compensation should have begun to be deferred. The general information need not
include a statement of the dollar amounts that should have been deferred.
(ii) A statement that appropriate amounts have begun to be deducted from
compensation and contributed to the plan (or that appropriate deductions and
contributions will begin shortly).
(iii) A statement that corrective allocations relating to missed matching
contributions have been made (or that corrective allocations will be made). Information
relating to the date and the amount of corrective allocations need not be provided.
(iv) An explanation that the affected participant may increase his or her
deferral percentage in order to make up for the missed deferral opportunity, subject to
applicable limits under § 402(g).
(v) The name of the plan and plan contact information (including name,
street address, e-mail address, and telephone number of a plan contact).
(d) Sunset of safe harbor correction method. The safe harbor correction method
described in this section .05(8) of this appendix is available for plans only with respect
to failures that begin on or before December 31, 2020.

(9) Safe harbor correction methods for Employee Elective Deferral Failures in
§ 401(k) plans or 403(b) Plans. (a) Safe harbor correction method for Employee Elective
Deferral Failures that do not exceed three months. Under this safe harbor correction
method, an Employee Elective Deferral Failure (as defined in section .05(10) of this
appendix ) can be corrected without a QNEC for missed elective deferrals if the
following conditions are satisfied:
(i) Correct deferrals begin no later than the earlier of the first payment of
compensation made on or after the last day of the three-month period that begins when
the failure first occurred for the affected eligible employee or, if the Plan Sponsor was
notified of the failure by the affected eligible employee, the first payment of
compensation made on or after the end of the month after the month of notification;
(ii) Notice of the failure that satisfies the content requirements of section
.05(9)(c) of this appendix is given to the affected eligible employee not later than 45
days after the date on which correct deferrals begin; and
78

(iii) If the eligible employee would have been entitled to additional
matching contributions had the missed deferrals been made, the Plan Sponsor makes a
corrective allocation (adjusted for Earnings, which may be calculated as described in
section .05(8)(b) of this appendix) on behalf of the employee equal to the matching
contributions that would have been required under the terms of the plan as if the missed
deferrals had been contributed to the plan in accordance with the timing requirements
under SCP for significant operational failures (described in section 9.02).
(b) Safe harbor correction method for Employee Elective Deferral Failures that
extend beyond three months but do not extend beyond the SCP correction period for
significant failures. This safe harbor correction is for failures that exceed three months
(or the conditions for the safe harbor correction method described in section .05(8) or
.05(9)(a) of this appendix are not met by the Plan Sponsor). Under this safe harbor
correction, the required corrective employer contribution is equal to 25% of the missed
deferrals (25% QNEC) in lieu of the higher QNEC required in sections .05(2)(b) and
.05(5)(a) of this appendix. In order to use this safe harbor correction method, the Plan
Sponsor must satisfy the following conditions:
(i) Correct deferrals begin no later than the earlier of the first payment of
compensation made on or after the last day of the second plan year following the plan
year in which the failure occurred or, if the Plan Sponsor was notified of the failure by
the affected eligible employee, the first payment of compensation made on or after the
end of the month after the month of notification;
(ii) Notice of the failure that satisfies the content requirements of section .05(9)(c)
of this Appendix A is given to an affected participant not later than 45 days after the
date on which correct deferrals begin; and
(iii) Corrective allocations, as described in section 6.02(4) of this revenue
procedure (including the 25% QNEC and employer contributions to make up for any
missed matching contributions), are made in accordance with timing requirements
under SCP for significant operational failures (described in section 9.02 of this revenue
procedure), including adjustments for Earnings, which may be calculated as described
in section .05(8)(b) of this appendix.
(c) Content of notice requirement. The notice required under section .05(9)(a)(ii)
and section .05(9)(b)(ii) of this appendix must include the following information:
(i) General information relating to the failure, such as the percentage of eligible
compensation that should have been deferred and the approximate date that the
compensation should have begun to be deferred. The general information need not
include a statement of the dollar amounts that should have been deferred.

79

(ii) A statement that appropriate amounts have begun to be deducted from
compensation and contributed to the plan (or that appropriate deductions and
contributions will begin shortly).
(iii) A statement that corrective allocations have been made (or that corrective
allocations will be made). Information relating to the date and the amount of corrective
allocations need not be provided.
(iv) An explanation that the affected participant may increase his or her deferral
percentage in order to make up for the missed deferral opportunity, subject to applicable
limits under § 402(g).
(v) The name of the plan and plan contact information (including name, street
address, e-mail address, and telephone number of a plan contact).

(10) Employee Elective Deferral Failure. For purposes of sections .05(8) and
.05(9) of this appendix, an “Employee Elective Deferral Failure” is a failure to implement
elective deferrals correctly in a § 401(k) plan or 403(b) Plan, including elective deferrals
pursuant to an affirmative election or pursuant to an automatic contribution feature
under a § 401(k) plan or 403(b) Plan, and a failure to afford an employee the
opportunity to make an affirmative election because the employee was improperly
excluded from the plan. Automatic contribution features include automatic enrollment
and automatic escalation features (including automatic escalation features that were
affirmatively elected).
.06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a
defined contribution plan, the permitted correction method is to distribute the required
minimum distributions (with Earnings from the date of the failure to the date of the
distribution). The amount required to be distributed for each year in which the initial
failure occurred should be determined by dividing the adjusted account balance on the
applicable valuation date by the applicable distribution period. For this purpose,
adjusted account balance means the actual account balance, determined in accordance
with § 1.401(a)(9)-5, Q&A-3, reduced by the amount of the total missed minimum
distributions for prior years. In a defined benefit plan, the permitted correction method is
to distribute the required minimum distributions, plus an interest payment based on the
plan’s actuarial equivalence factors in effect on the date that the distribution should
have been made. See section 6.02(4)(d) of this revenue procedure. If this correction is
made at the time the plan is subject to a restriction on single-sum payments pursuant to
§ 436(d), the Plan Sponsor must contribute to the plan the applicable amount under
section 6.02(4)(e)(ii)(A) as part of the correction.
.07 Failure to obtain participant or spousal consent for a distribution subject to
the participant and spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417. (1)
The permitted correction method is to give each affected participant a choice between
80

providing informed consent for the distribution actually made or receiving a qualified
joint and survivor annuity. In the event that participant or spousal consent is required but
cannot be obtained, the participant must receive a qualified joint and survivor annuity
based on the monthly amount that would have been provided under the plan at his or
her retirement date. This annuity may be actuarially reduced to take into account
distributions already received by the participant. However, the portion of the qualified
joint and survivor annuity payable to the spouse upon the death of the participant may
not be actuarially reduced to take into account prior distributions to the participant.
Thus, for example, if, in accordance with the automatic qualified joint and survivor
annuity option under a plan, a married participant who retired would have received a
qualified joint and survivor annuity of $600 per month payable for life with $300 per
month payable to the spouse for the spouse’s life beginning upon the participant’s
death, but instead received a single-sum distribution equal to the actuarial present value
of the participant’s accrued benefit under the plan, then the $600 monthly annuity
payable during the participant’s lifetime may be actuarially reduced to take the singlesum distribution into account. However, the spouse must be entitled to receive an
annuity of $300 per month payable for life beginning at the participant’s death.
(2) An alternative permitted correction method is to give each affected participant
a choice between (i) providing informed consent for the distribution actually made, (ii)
receiving a qualified joint and survivor annuity (both (i) and (ii) of this section .07(2) are
described in section .07(1) of this Appendix A), or (iii) a single-sum payment to the
participant’s spouse equal to the actuarial present value of that survivor annuity benefit
(calculated using the applicable interest rate and mortality table under § 417(e)(3)). For
example, assuming the actuarial present value of a $300 per month annuity payable to
the spouse for the spouse’s life beginning upon the participant’s death was $7,837
(calculated using the applicable interest rate and applicable mortality table under §
417(e)(3)), the single-sum payment to the spouse under clause (iii) of this section .07(2)
is equal to $7,837. If the single-sum payment is made to the spouse, then the payment
is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling
over the payment to an IRA or other eligible retirement plan. If correction is made at the
time the plan is subject to a restriction on single-sum payments pursuant to § 436(d),
then the alternative permitted correction in this section .07(2) is available only if the Plan
Sponsor (or other person) contributes to the plan the applicable amount under section
6.02(4)(e)(ii)(A) as part of the correction.
.08 Failure to satisfy the § 415 limits in a defined contribution plan. For limitation
years beginning before January 1, 2009, the permitted correction for failure to limit
annual additions (other than elective deferrals and after-tax employee contributions)
allocated to participants in a defined contribution plan as required in § 415 (even if the
excess did not result from the allocation of forfeitures or from a reasonable error in
estimating compensation) is to place the excess annual additions into an unallocated
account, similar to the suspense account described in § 1.415-6(b)(6)(iii) (as it appeared
in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final
regulations under § 415, to be used as an employer contribution, other than elective
81

deferrals, in the succeeding year(s). While such amounts remain in the unallocated
account, the Plan Sponsor is not permitted to make additional contributions to the plan.
The permitted correction for failure to limit annual additions that are elective deferrals or
after-tax employee contributions (even if the excess did not result from a reasonable
error in determining compensation, the amount of elective deferrals or after-tax
employee contributions that could be made with respect to an individual under the § 415
limits) is to distribute the elective deferrals or after-tax employee contributions using a
method similar to that described under § 1.415-6(b)(6)(iv) (as it appeared in the April 1,
2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under
§ 415. Elective deferrals and after-tax employee contributions that are matched may be
returned to the employee, provided that the matching contributions relating to such
contributions are forfeited (which will also reduce excess annual additions for the
affected individuals). The forfeited matching contributions are to be placed into an
unallocated account to be used as an employer contribution, other than elective
deferrals, in succeeding periods. For limitation years beginning on or after January 1,
2009, the failure to limit annual additions allocated to participants in a defined
contribution plan as required in § 415 is corrected in accordance with section 6.06(2)
and (4).
.09 Orphan Plans; orphan contracts and other assets. (1) Orphan Plans. If (a) a
plan has one or more failures (whether a Qualification Failure or a 403(b) Failure) that
result from the Plan Sponsor having ceased to exist, the Plan Sponsor no longer
maintaining the plan, or similar reasons and (b) the plan is an Orphan Plan, as defined
in section 5.03, the permitted correction is to terminate the plan and distribute plan
assets to participants and beneficiaries (in accordance with title IV of ERISA, if
applicable). This correction must satisfy four conditions. First, the correction must
comply with conditions, standards, and procedures substantially similar to those set
forth in section 2578.1 of the Department of Labor regulations (relating to abandoned
plans). Second, the qualified termination administrator, as defined in 2578.1(g) of the
Department of Labor regulations, based on plan records located and updated in
accordance with the Department of Labor regulations, must have reasonably
determined whether, and to what extent, the survivor annuity requirements of §§
401(a)(11) and 417 apply to any benefit payable under the plan and take reasonable
steps to comply with those requirements (if applicable). Third, each participant and
beneficiary must have been provided a nonforfeitable right to his or her accrued benefits
as of the date of deemed termination under the Department of Labor regulations,
subject to income, expenses, gains, and losses between that date and the date of
distribution. Fourth, participants and beneficiaries must receive notification of their rights
under § 402(f). In addition, notwithstanding correction under this revenue procedure, the
IRS reserves the right to pursue appropriate remedies under the Code against any party
who is responsible for the plan, such as the Plan Sponsor, plan administrator, or owner
of the business, even in its capacity as a participant or beneficiary under the plan.
However, with respect to the first through third conditions above, notice need not be
furnished to the Department of Labor, and notices furnished to the Plan Sponsor,
82

participants, or beneficiaries need not indicate that the procedures followed or notices
furnished actually comply with, or are required under, Department of Labor regulations.
(2) 403(b) Failures for orphan contracts or other assets. (a) Former employees
or beneficiaries. In any case in which a 403(b) Failure results from the Plan Sponsor
having ceased involvement with respect to specific assets (including an insurance
annuity contract) held under a defined contribution plan on behalf of a participant who is
a former employee or on behalf of a beneficiary, a permitted correction is to distribute
those plan assets to the participant or beneficiary. Compliance with the distribution rules
of section 2578.1(d)(2)(vii) of the Department of Labor regulations satisfies this
paragraph .09(2))
(b) Failures Relating to Information Sharing Agreements. In any case in which a
403(b) Failure results from a contract issued in an exchange not being part of a 403(b)
Plan due to the failure to have an information sharing agreement pursuant to § 1.403(b)10(b)(2)(i)(C), a permitted correction is for the assets held under the contract to be
transferred to another vendor to which contributions are being made under the plan in
order to become a contract which is held under the plan without regard to the special
rules in § 1.403(b)-10(b).

83

APPENDIX B
CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS
AND EXAMPLES
SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION
REFERENCES
.01 Purpose. (1) This appendix sets forth correction methods relating to
Operational Failures under Qualified Plans. This appendix also sets forth Earnings
adjustment methods. In each case, the method described corrects the Operational
Failure identified in the headings below. Corrective allocations and distributions should
reflect Earnings and actuarial adjustments in accordance with section 6.02(4) of this
revenue procedure. The correction methods in this appendix are acceptable to correct
Qualification Failures under VCP, and to correct Qualification Failures under SCP that
occurred notwithstanding that the plan has established practices and procedures
reasonably designed to promote and facilitate overall compliance with the Code, as
provided in section 4.04 of this revenue procedure.
(2) To the extent a failure listed in this appendix could occur under a 403(b) Plan,
SEP, or SIMPLE IRA Plan, the correction method listed for such failure may similarly be
used to correct the failure.
.02 Assumptions for Examples. Unless otherwise specified, for ease of
presentation, the examples assume that:
(1) the plan year and the § 415 limitation year are the calendar year;
(2) the Plan Sponsor maintains a single plan intended to satisfy § 401(a) and has
never maintained any other plan;
(3) in a defined contribution plan, the plan provides that forfeitures are used to
reduce future employer contributions;
(4) the Qualification Failures are Operational Failures and the eligibility and other
requirements for SCP, VCP, or Audit CAP, whichever applies, are satisfied; and
(5) there are no Qualification Failures other than the described Operational
Failures, and if a corrective action would result in any additional Qualification Failure,
appropriate corrective action is taken for that additional Qualification Failure in
accordance with EPCRS.
.03 Designated Roth contributions. The examples in this Appendix B generally do
not identify whether the plan offers designated Roth contributions. The results in the
84

examples, including corrective contributions, would be the same whether or not the plan
offered designated Roth contributions.
.04 Section references. References to section 2 and section 3 are references to
section 2 and 3 in this appendix.
SECTION 2. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures. (1) Correction Methods. (a) Appendix A Correction
Method. Appendix A.03 sets forth a correction method for a failure to satisfy the actual
deferral percentage ("ADP"), actual contribution percentage ("ACP"), or, for plan years
beginning on or before December 31, 2001, multiple use test set forth in §§ 401(k)(3),
401(m)(2), and 401(m)(9), respectively.
(b) One-to-One Correction Method. (i) General. In addition to the correction
method in Appendix A, a failure to satisfy the ADP test or ACP test may be corrected by
using the one-to-one correction method set forth in this section 2.01(1)(b). Under the
one-to-one correction method, an excess contribution amount is determined and
assigned to highly compensated employees as provided in paragraph (1)(b)(ii) below.
That excess contribution amount (adjusted for Earnings) is either distributed to the
highly compensated employees or forfeited from the highly compensated employees'
accounts as provided in paragraph (1)(b)(iii) below. That same dollar amount (that is,
the excess contribution amount, adjusted for Earnings) is contributed to the plan and
allocated to nonhighly compensated employees as provided in paragraph (1)(b)(iv)
below. Under this correction method, a plan may not be treated as two separate plans,
one covering otherwise excludable employees and the other covering all other
employees (as permitted in § 1.410(b)- 6(b)(3)). Likewise, restructuring the plan into
component plans is not permitted. This correction method may also be used to correct a
failure to satisfy the multiple use test for plan years beginning on or before December
31, 2001.
(ii) Determination of the Excess Contribution Amount. The excess contribution
amount for the year is equal to the excess of (A) the sum of the excess contributions (as
defined in § 401(k)(8)(B)), the excess aggregate contributions (as defined in
§ 401(m)(6)(B)), and for plan years beginning on or before December 31, 2001 the
amount treated as excess contributions or excess aggregate contributions under the
multiple use test for the year, as assigned to each highly compensated employee in
accordance with §§ 401(k)(8)(C) and 401(m)(6)(C), over (B) previous corrections that
complied with §§ 401(k)(8) and 401(m)(6), and, for plan years beginning on or before
December 31, 2001, the multiple use test.
(iii) Distributions and Forfeitures of the Excess Contribution Amount. (A) The
portion of the excess contribution amount assigned to a particular highly compensated
employee under paragraph (1)(b)(ii) is adjusted for Earnings from the end of the plan
year of the year of the failure through the date of correction. The amount assigned to a
85

particular highly compensated employee, as adjusted, is distributed or, to the extent the
amount was forfeitable as of the close of the plan year of the failure, is forfeited. If the
amount is forfeited, it is used in accordance with the plan provisions relating to
forfeitures that were in effect for the year of the failure. If the amount so assigned to a
particular highly compensated employee has been previously distributed, the amount is
an Excess Amount within the meaning of section 5.01(3) of this revenue procedure.
Thus, pursuant to section 6.06 of this revenue procedure, the Plan Sponsor must notify
the employee that the Excess Amount is not eligible for favorable tax treatment
accorded to distributions from qualified plans (and, specifically, is not eligible for tax-free
rollover).
(B) If any matching contributions (adjusted for Earnings) are forfeited in
accordance with § 411(a)(3)(G), the forfeited amount is used in accordance with the
plan provisions relating to forfeitures that were in effect for the year of the failure.
(C) If a payment was made to an employee and that payment is a forfeitable
match described in either paragraph (1)(b)(iii)(A) or (B), then it is an Overpayment
defined in section 5.01(3)(c) of this revenue procedure that must be corrected (see
sections 2.04 and 2.05 below).
(iv) Contribution and Allocation of Equivalent Amount. (A) The Plan Sponsor
makes a contribution to the plan that is equal to the aggregate amounts distributed and
forfeited under paragraph (1)(b)(iii)(A) (that is, the excess contribution amount adjusted
for Earnings, as provided in paragraph (1)(b)(iii)(A), which does not include any
matching contributions forfeited in accordance with § 411(a)(3)(G) as provided in
paragraph (1)(b)(iii)(B)). The contribution must be a QNEC as defined in § 1.401(k)-6.
(B)(1) This paragraph (1)(b)(iv)(B)(1) applies to a plan that uses the current year
testing method described in §§ 1.401(k)-2(a)(2), 1.401(m)-2(a)(2), and, for periods prior
to the effective date of those regulations, Notice 98-1, 1998-1 C.B. 327. The contribution
made under paragraph (1)(b)(iv)(A) is allocated to the account balances of those
individuals who were either (I) the eligible employees for the year of the failure who
were nonhighly compensated employees for that year or (II) the eligible employees for
the year of the failure who were nonhighly compensated employees for that year and
who also are nonhighly compensated employees for the year of correction.
Alternatively, the contribution is allocated to account balances of eligible employees
described in (I) or (II) of the preceding sentence, except that the allocation is made only
to the account balances of those employees who are employees on a date during the
year of the correction that is no later than the date of correction. Regardless of which of
these four options (described in the two preceding sentences) the Plan Sponsor selects,
eligible employees must receive a uniform allocation (as a percentage of compensation)
of the contribution. (See Examples 1 and 2.) Under the one-to-one correction method,
the amount allocated to the account balance of an employee (that is, the employee's
share of the total amount contributed under paragraph (1)(b)(iv)(A)) is not further
86

adjusted for Earnings and is treated as an annual addition under § 415 for the year of
the failure for the employee for whom it is allocated.
(2) This paragraph (1)(b)(iv)(B)(2) applies to a plan that uses the prior year
testing method described in §§ 1.401(k)-2(a)(2) and 1.401(m)-2(a)(2) and, for periods
prior to the effective date of those regulations, Notice 98-1. Paragraph (1)(b)(iv)(B)(1) is
applied by substituting "the year prior to the year of the failure" for "the year of the
failure."
(2) Examples.
Example 1:
Employer A maintains a profit-sharing plan with a cash or deferred arrangement that is intended
to satisfy § 401(k) using the current year testing method. The plan does not provide for matching
contributions or after-tax employee contributions. In 2007, it was discovered that the ADP test for 2005
was not performed correctly. When the ADP test was performed correctly, the test was not satisfied for
2005. For 2005, the ADP for highly compensated employees was 9% and the ADP for nonhighly
compensated employees was 4%. Accordingly, the ADP for highly compensated employees exceeded
the ADP for nonhighly compensated employees by more than two percentage points (in violation of
§ 401(k)(3)). There were two highly compensated employees eligible under the § 401(k) plan during
2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which is equal to
10% of Employee P's compensation of $100,000 for 2005. Employee Q made elective deferrals of
$9,500, which is equal to 8% of Employee Q's compensation of $118,750 for 2005.
Correction:
On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to
satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess
contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The
amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the
excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with
§ 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and
$2,937.50 to Employee Q. It is determined that the Earnings on the assigned amounts through June 30,
2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the Earnings
are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687)
and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A
makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed
to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to
the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their
compensation for 2005 (subject to § 415 for 2005).

Example 2:
The facts are the same as in Example 1, except that for 2005 the plan also provides for (1) aftertax 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

87

service vesting schedule and that matching contributions are forfeited and used to reduce employer
contributions if associated elective deferrals or after-tax employee contributions are distributed to correct
an ADP or ACP test failure. For 2005, nonhighly compensated employees made after-tax employee
contributions and no highly compensated employee made any after-tax employee contributions.
Employee P received a matching contribution of $5,000 (50% of $10,000) and Employee Q received a
matching contribution of $4,750 (50% of $9,500). Employees P and Q were 100% vested in 2005. It was
determined that the plan satisfied the requirements of the ACP test for 2005.
Correction:
The same corrective actions are taken as in Example 1. In addition, in accordance with the plan's
terms, corrective action is taken to forfeit Employee P's and Employee Q's matching contributions
associated with their distributed excess contributions. Employee P's distributed excess contributions and
associated matching contributions are $3,437.50 and $1,718.75, respectively. Employee Q's distributed
excess contributions and associated matching contributions are $2,937.50 and $1,468.75, respectively.
Thus, $1,718.75 is forfeited from Employee P's account and $1,468.75 is forfeited from Employee Q's
account. In addition, the Earnings on the forfeited amounts are also forfeited. It is determined that the
respective Earnings on the forfeited amount for Employee P is $250 and for Employee Q is $220. The
total amount of the forfeitures of $3,657.50 (Employee P's $1,718.75 + $250 and Employee Q's $1,468.75
+ $220) is used to reduce contributions for 2007 and subsequent years.

.02 Exclusion of Otherwise Eligible Employees. (1) Exclusion of Eligible
Employees in a § 401(k) or (m) Plan. (a) Correction Method. (i) Appendix A Correction
Method for Full Year Exclusion. Appendix A, section .05(2) sets forth the correction
method for the exclusion of an eligible employee from electing and making elective
deferrals (other than designated Roth contributions) and after-tax employee
contributions to a plan that provides benefits that are subject to the requirements of
§ 401(k) or 401(m) for one or more full plan years. (See Example 3.) Appendix A,
section .05(2) also specifies the method for determining missed elective deferrals and
the corrective contributions for employees who were improperly excluded from electing
and making elective deferrals to a safe harbor § 401(k) plan for one or more full plan
years. (See Examples 8, 9, and 10.) Appendix A, section .05(3) sets forth the correction
method for the exclusion of an eligible employee from electing and making elective
deferrals in a plan that (i) is subject to § 401(k) and (ii) provides employees with the
opportunity to make designated Roth contributions. Appendix A, section .05(4) sets forth
the correction method for the situation where an eligible employee was permitted to
make an elective deferral, but was not provided with the opportunity to make catch-up
contributions under the terms of the plan and § 414(v), and correction is being made by
making a QNEC on behalf of the excluded employee. (See Example 11.) Appendix A,
section .05(5) sets forth the correction method for the failure by a plan to implement an
employee’s election with respect to elective deferrals (including designated Roth
contributions) or after-tax employee contributions. (See Example 12.) In section
2.02(1)(a)(ii) below, the correction methods for (I) the exclusion of an eligible employee
from all contributions (including designated Roth contributions) under a § 401(k) or (m)
plan for a full year, as described in Appendix A, sections .05(2) and .05(3), (II) the
exclusion of an eligible employee who was permitted to make elective deferrals, but was
not permitted to make catch-up contributions for a full plan year as described in
Appendix A, section .05(4), and (III) the exclusion of an eligible employee on account of
the failure to implement an employee’s election to make elective deferrals or after-tax
88

employee contributions to the plan as described in Appendix A, section .05(5) are
expanded to include correction for the exclusion from these contributions (including
designated Roth contributions) under a § 401(k) or (m) plan for a partial plan year. This
correction for a partial year exclusion may be used in conjunction with the correction for
a full year exclusion.
(ii) Expansion of Correction Method to Partial Year Exclusion. (A) In General. The
correction method in Appendix A, section .05, is expanded to cover an employee who
was improperly excluded from electing and making elective deferrals (including
designated Roth contributions) or after-tax employee contributions for a portion of a plan
year or from receiving matching contributions (on either elective deferrals or after-tax
employee contributions) for a portion of a plan year. In such a case, a permitted
correction method for the failure is for the Plan Sponsor to satisfy this section
2.02(1)(a)(ii). The Plan Sponsor makes a QNEC on behalf of the excluded employee.
The method and examples described to correct the failure to include otherwise eligible
employees do not apply until after correction of other qualification failures. Thus, for
example, in the case of a § 401(k) plan that does not apply the safe harbor contribution
requirements of § 401(k)(12) or 401(k)(13) the correction for improperly excluding an
employee from making elective deferrals, as described in the narrative and the
examples in this section cannot be used until after correction of the ADP test failure.
(See Appendix A, section .05(2)(g).)
(B) Elective Deferral Failures. (1) The appropriate QNEC for the failure to allow
an employee to elect and make elective deferrals (including designated Roth
contributions) for a portion of the plan year is equal to the missed deferral opportunity
which is an amount equal to 50% of the employee’s missed deferral. The employee’s
missed deferral is determined by multiplying the ADP of the employee's group (either
highly or nonhighly compensated), determined prior to correction under this section
2.02(1)(a)(ii), by the employee's plan compensation for the portion of the year during
which the employee was improperly excluded. In a safe harbor § 401(k) plan, the
employee’s missed deferral is determined by multiplying 3% (or, if greater, whatever
percentage of the participant’s compensation which, if contributed as an elective
deferral, would have been matched at a rate of 100% or more) by the employee’s plan
compensation for the portion of the year during which the employee was improperly
excluded. The missed deferral for the portion of the plan year during which the
employee was improperly excluded from being eligible to make elective deferrals is
reduced to the extent that (i) the sum of the missed deferral (as determined in the
preceding two sentences of this paragraph) and any elective deferrals actually made by
the employee for that year would exceed (ii) the maximum elective deferrals permitted
under the plan for the employee for that plan year (including the § 402(g) limit). The
corrective contribution is adjusted for Earnings. For purposes of correcting other failures
under this revenue procedure (including determination of any required matching
contribution) after correction has occurred under this section 2.02(1)(a)(ii)(B), the
employee is treated as having made pre-tax elective deferrals equal to the employee’s
89

missed deferral for the portion of the year during which the employee was improperly
excluded. (See Examples 4 and 5.)
(2) The appropriate corrective contribution for the plan’s failure to implement an
employee’s election with respect to elective deferrals is equal to the missed deferral
opportunity which is an amount equal to 50% of the employee’s missed deferral.
Corrective contributions are adjusted for Earnings. The missed deferral is determined by
multiplying the employee’s deferral percentage by the employee's plan compensation
for the portion of the year during which the employee was improperly excluded. If the
employee elected a fixed dollar amount that can be attributed to the period of exclusion,
then the flat dollar amount for the period of exclusion may be used for this purpose. If
the employee elected a fixed dollar amount to be deferred for the entire plan year, then
that dollar amount is multiplied by a fraction. The fraction is equal to the number of
months, including partial months where applicable, during which the eligible employee
was excluded from making elective deferral contributions divided by 12. The missed
deferral for the portion of the plan year during which the eligible employee was
improperly excluded from making elective deferrals is reduced to the extent that (i) the
sum of the missed deferral (as determined in the preceding three sentences) and any
elective deferrals actually made by the employee for that year would exceed (ii) the
maximum elective deferrals permitted under the plan for the employee for that plan year
(including the § 402(g) limit). The corrective contribution is adjusted for Earnings. The
requirements relating to the passage of the ADP test before this correction method can
be used, as described in Appendix A, section .05(5)(d), still apply.
(C) After-Tax Employee Contribution Failures. (1) The appropriate corrective
contribution for the failure to allow employees to elect and make after-tax employee
contributions for a portion of the plan year is equal to the missed after-tax employee
contributions opportunity, which is an amount equal to 40% of the employee’s missed
after-tax employee contributions. The employee’s missed after-tax employee
contributions are determined by multiplying the ACP of the employee's group (either
highly or nonhighly compensated), determined prior to correction under this section
2.02(1)(a)(ii)(C), by the employee's plan compensation for the portion of the year during
which the employee was improperly excluded. If the ACP consists of both matching and
after-tax employee contributions, then, for purposes of the preceding sentence, in lieu of
basing the missed after-tax employee contributions on the ACP for the employee's
group (either highly compensated or nonhighly compensated), the Plan Sponsor is
permitted to determine separately the portions of the ACP that are attributable to
matching contributions and after-tax employee contributions and base the missed aftertax 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
90

relating to the passage of the ACP test before this correction method can be used, as
described in Appendix A, section .05(2)(g), still apply.
(2) The appropriate corrective contribution for the plan’s failure to implement an
employee’s election with respect to after-tax employee contributions for a portion of the
plan year is equal to the missed after-tax employee contributions opportunity, which is
an amount equal to 40% of the employee’s missed after-tax employee contributions.
Corrective contributions are adjusted for Earnings. The missed after-tax employee
contribution is determined by multiplying the employee’s elected after-tax employee
contribution percentage by the employee's plan compensation for the portion of the year
during which the employee was improperly excluded. If the employee elected a flat
dollar amount that can be attributed to the period of exclusion, then the flat dollar
amount for the period of exclusion may be used for this purpose. If the employee
elected a flat dollar amount to be contributed for the entire plan year, then that dollar
amount is multiplied by a fraction. The fraction is equal to the number of months,
including partial months where applicable, during which the eligible employee was
excluded from making after-tax employee contributions divided by 12. The missed aftertax employee contribution is reduced to the extent that (i) the sum of that contribution
and the actual total after-tax employee contributions made by the employee for the plan
year would exceed (ii) the sum of the maximum after-tax employee contributions
permitted under the plan for the employee for the plan year. The requirements relating
to the passage of the ACP test before this correction method can be used, as described
in Appendix A, section .05(5)(d), still apply.
(D) Matching Contribution Failures. (1) The appropriate corrective contribution for
the failure to make matching contributions for an employee because the employee was
precluded from making elective deferrals (including designated Roth contributions) or
after-tax employee contributions for a portion of the plan year is equal to the matching
contribution that would have been made for the employee if (1) the employee’s elective
deferrals for that portion of the plan year had equaled the employee’s missed deferrals
(determined under section 2.02(1)(a)(i)(B)) or (2) the employee’s after-tax contribution
for that portion of the plan year had equaled the employee’s missed after-tax employee
contribution (determined under section 2.02(1)(a)(ii)(C)). This matching contribution is
reduced to the extent that (i) the sum of this contribution and other matching
contributions actually made on behalf of the employee for the plan year would exceed
(ii) the maximum matching contribution permitted if the employee had made the
maximum matchable contributions permitted under the plan for the plan year. The
corrective contribution is adjusted for Earnings. The requirements relating to the
passage of the ACP test before this correction method can be used, as described in
Appendix A, section .05(2)(g), still apply.
(2) The appropriate corrective contribution for the failure to make matching
contributions for an employee because of the failure by the plan to implement an
employee’s election with respect to elective deferrals (including designated Roth
contributions) or, where applicable, after-tax employee contributions for a portion of the
91

plan year is equal to the matching contribution that would have been made for the
employee if the employee made the elective deferral as determined under section
2.02(1)(a)(ii)(B)(2), or where applicable, the after-tax employee contribution determined
under section 2.02(1)(a)(ii)(C)(2). This matching contribution is reduced to the extent
that (i) the sum of this contribution and other matching contributions actually made on
behalf of the employee for the plan year would exceed (ii) the maximum matching
contribution permitted if the employee had made the maximum matchable contributions
permitted under the plan for the plan year. The corrective contribution is adjusted for
Earnings. The requirements relating to the passage of the ACP test before this
correction method can be used, as described in Appendix A, section .05(5)(d), still
apply.
(E) Use of Prorated Compensation. For purposes of this paragraph (1)(a)(ii), for
administrative convenience, in lieu of using the employee's actual plan compensation
for the portion of the year during which the employee was improperly excluded, a pro
rata portion of the employee's plan compensation that would have been taken into
account for the plan year, if the employee had not been improperly excluded, may be
used.
(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax
Employee Contributions. An Plan Sponsor is not required to make a corrective
contribution with respect to elective deferrals (including designated Roth contributions)
or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and (C), but
is required to make a corrective contribution with respect to any matching contributions,
as provided in section 2.02(1)(a)(ii)(D), for an employee for a plan year if the employee
has been provided the opportunity to make elective deferrals or after-tax employee
contributions under the plan for a period of at least the last 9 months in that plan year
and during that period the employee had the opportunity to make elective deferrals or
after-tax employee contributions in an amount not less than the maximum amount that
would have been permitted if no failure had occurred. (See Examples 6 and 7.)
(b) Examples.
Example 3:
Employer B maintains a § 401(k) plan. The plan provides for matching contributions for eligible
employees equal to 100% of elective deferrals that do not exceed 3% of an employee's compensation.
The plan allows employees to make after-tax employee contributions up to a maximum of the lesser of
2% of compensation or $1,000. The after-tax employee contributions are not matched. The plan provides
that employees who complete one year of service are eligible to participate in the plan on the next
designated entry date. The entry dates are January 1, and July 1. In 2007, it is discovered that Employee
V, an NHCE with compensation of $30,000, was excluded from the plan for the 2006 plan year even
though she satisfied the plan’s eligibility requirements as of January 1, 2006.
For the 2006 plan year, the relevant employee and contribution information is as follows:
Compensation Elective deferral

Match

92

After-Tax Employee
Contribution

Highly Compensated Employees (HCEs):
R
S

$200,000
$150,000

$ 6,000
$12,000

$6,000
$4,500

$0
$1,000

Nonhighly Compensated Employees (NHCEs):
T
U

$80,000
$50,000

$12,000
$ 500

$2,400
$ 500

$1,000
$0

HCEs:
ADP - 5.5%
ACP - 3.33%
ACP attributable to matching contributions - 3%
ACP attributable to after-tax employee contributions - 0.33%
NHCEs:
ADP - 8%
ACP -2.63%
ACP attributable to matching contributions - 2%
ACP attributable to after-tax employee contributions - 0.63%

Correction:
Employer B uses the correction method for a full year exclusion, described in Appendix A, section
.05(2), to correct the failure to include Employee V in the plan for the full plan year beginning January 1,
2006. Employer B calculates the corrective QNEC to be made on behalf of Employee V as follows:
Elective deferrals: Employee V was eligible to, but was not provided with the opportunity to, elect
and make elective deferrals in 2006. Thus, Employer B must make a QNEC to the plan on behalf of
Employee V equal to the missed deferral opportunity for Employee V, which is 50% of Employee V’s
missed deferral. The QNEC is adjusted for Earnings. The missed deferral for Employee V is determined
by using the ADP for NHCEs for 2006 and multiplying that percentage by Employee V’s compensation for
2006. Accordingly, the missed deferral for Employee V on account of the employee’s improper exclusion
from the plan is $2,400 (8% x $30,000). The missed deferral opportunity is $1,200 (that is, 50% x $2,400).
Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to
make elective deferrals to the plan is $1,200 (plus Earnings). The corrective contribution is made to a pretax QNEC account for Employee V (not to a designated Roth contributions account even if the plan offers
designated Roth contributions, as provided in section .05(3) of Appendix A).
Matching contributions: Employee V should have been eligible for, but did not receive, an
allocation of employer matching contributions because Employee V was not provided the opportunity to
make elective deferrals in 2006. Thus, Employer B must make a corrective employer nonelective
contribution to the plan on behalf of Employee V that is equal to the matching contribution Employee V
would have received had the missed deferral been made. The corrective employer nonelective
contribution is adjusted for Earnings. Under the terms of the plan, if Employee V had made an elective
deferral of $2,400 or 8% of compensation ($30,000), the employee would have been entitled to a
matching contribution equal to 100% of the first 3% of Employee V’s compensation ($30,000) or $900.
Accordingly, the contribution required to replace the missed employer matching contribution is $900 (plus
Earnings).

93

After-tax employee contributions: Employee V was eligible to, but was not provided with the
opportunity to, elect and make after-tax employee contributions in 2006. Employer B must make a QNEC
to the plan equal to the missed opportunity for making after-tax employee contributions for Employee V,
which is 40% of Employee V’s missed after-tax employee contribution. The QNEC is adjusted for
Earnings. The missed after-tax employee contribution for Employee V is estimated by using the ACP for
NHCEs (to the extent that the ACP is attributable to after-tax employee contributions) for 2006 and
multiplying that percentage by Employee V’s compensation for 2006. Accordingly, the missed after-tax
employee contribution for Employee V, on account of the employee’s improper exclusion from the plan is
$189 (0.63% x $30,000). The missed opportunity to make after-tax employee contributions to the plan is
$76 (40% x $189). Thus, the required corrective contribution for the failure to provide Employee V with
the opportunity to make the $189 after-tax employee contribution to the plan is $76 (plus Earnings).
The total required corrective contribution, before adjustments for Earnings, on behalf of Employee
V is $2,176 ($1,200 for the missed deferral opportunity plus $900 for the missed matching contribution
plus $76 for the missed opportunity to make after-tax employee contributions). The required corrective
contribution is further adjusted for Earnings. The corrective contribution for the missed deferral
opportunity ($1,200), the missed opportunity for after-tax employee contributions ($76), and related
Earnings must be made in the form of a QNEC.
Example 4:
Employer C maintains a § 401(k) plan. The plan provides for matching contributions for each
payroll period that are equal to 100% of an employee's elective deferrals that do not exceed 2% of the
eligible employee’s plan compensation during the payroll period. The plan provides for after-tax employee
contributions. The after-tax employee contribution cannot exceed $1,000 for the plan year. The plan
provides that employees who complete one year of service are eligible to participate in the plan on the
next January 1 or July 1 entry date. Employee X, a nonhighly compensated employee, who met the
eligibility requirements and should have entered the plan on January 1, 2006, was not offered the
opportunity to elect to have elective contributions made on his behalf to the plan. In August of 2006, the
error was discovered and Employer C offered Employee X the opportunity to make elective deferrals and
after-tax employee contributions as of September 1, 2006. Employee X made elective deferrals equal to
4% of the employee's plan compensation for each payroll period from September 1, 2006 through
December 31, 2006 (resulting in elective deferrals of $400). Employee X’s plan compensation for 2006
was $36,000 ($26,000 for the first eight months and $10,000 for the last four months). Employer C made
matching contributions equal to $200 on behalf of Employee X, which is 2% of Employee X’s plan
compensation for each payroll period from September 1, 2006 through December 31, 2006 ($10,000).
After being allowed to participate in the plan, Employee X made $250 of after-tax employee contributions
for the 2006 plan year. The ADP for nonhighly compensated employees for 2006 was 3% and the ACP
for nonhighly compensated employees for 2006 was 2.3%. The ACP attributable to matching
contributions for nonhighly compensated employees for 2006 was 1.8%. The ACP attributable to
employee contributions for nonhighly compensated employees for 2006 was 0.5%.
Correction:
In accordance with section 2.02(1)(a)(ii), Employer C uses the correction method described in
Appendix A, section .05, to correct for the failure to provide Employee X the opportunity to elect and make
elective deferrals and after-tax employee contributions, and, as a result, the failure of Employee X to
receive matching contributions for a portion of the plan year (January 1, 2006 through August 31, 2006).
Thus, Employer C makes a corrective contribution on behalf of Employee X that satisfies the
requirements of section 2.02(1)(a)(ii). Employer C elects to utilize the provisions of section
2.02(1)(a)(ii)(E) to determine Employee X’s compensation for the portion of the year in which Employee X
was not provided the opportunity to make elective deferrals and after-tax employee contributions. Thus,
for administrative convenience, in lieu of using actual plan compensation of $26,000 for the period
Employee X was excluded, Employee X’s annual plan compensation is prorated for the 8-month period

94

that the employee was excluded from participating in the plan. The corrective contribution is determined
as follows:
(1) Corrective contribution for missed deferral: Employee X was eligible to, but was not provided
with the opportunity to, elect and make elective deferrals from January 1 through August 31 of 2006.
Employer C must make a QNEC to the plan on behalf of Employee X equal to Employee X’s missed
deferral opportunity for that period, which is 50% of Employee X’s missed deferral. The corrective
contribution is adjusted for Earnings. Employee X’s missed deferral is determined by multiplying the 3%
ADP for nonhighly compensated employees by $24,000 (8/12ths of the employee’s 2006 compensation
of $36,000). Accordingly, the missed deferral is $720. The missed deferral is not reduced because when
this amount is added to the amount already deferred, no plan limit (including § 402(g)) was exceeded.
Accordingly, the required QNEC is $360 (that is 50% multiplied by the missed deferral amount of $720).
The required QNEC is adjusted for Earnings.
(2) Corrective contribution for missed matching contribution: Under the terms of the plan, if
Employee X had made an elective deferral of $720 or 3% of compensation for the period of exclusion
($24,000), the employee would have been entitled to a matching contribution equal to 2% of $24,000 or
$480. The missed matching contribution is not reduced because no plan limit is exceeded when this
amount is added to the matching contribution already contributed for the 2006 plan year. Accordingly, the
required corrective employer contribution is $480. The required corrective employer contribution is
adjusted for Earnings.
(3) Corrective contribution for missed after-tax employee contribution: Employee X was eligible to,
but was not provided with the opportunity to elect and make after-tax employee contributions from
January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of Employee
X equal to the missed opportunity to make after-tax employee contributions. The missed opportunity to
make after-tax employee contributions is equal to 40% of Employee X’s missed after-tax employee
contributions. The QNEC is adjusted for Earnings. The missed after-tax employee contribution amount is
equal to the 0.5% ACP attributable to employee contributions for nonhighly compensated employees
multiplied by $24,000 (8/12ths of the employee’s 2006 plan compensation of $36,000). Accordingly, the
missed after-tax employee contribution amount is $120. The missed after-tax employee contribution is not
reduced because the sum of $120 and the previously made after-tax employee contribution of $250 is
less than the overall plan limit of $1,000. Therefore, the required QNEC is $48 (that is, 40% multiplied by
the missed after-tax employee contribution of $120). The QNEC is adjusted for Earnings.
The total required corrective contribution, before adjustments for Earnings, on behalf of Employee
X is $888 ($360 for the missed deferral opportunity plus $480 for the missed matching contribution plus
$48 for the missed opportunity to make after-tax employee contributions). The corrective contribution for
the missed deferral opportunity ($360), the missed opportunity for after-tax employee contributions ($48),
and related Earnings must be made in the form of a QNEC.
Example 5:
The facts (including the ADP and ACP results) are the same as in Example 4, except that it is
now determined that Employee X, after being included in the plan in 2006, made after-tax employee
contributions of $950.
Correction:
The correction is the same as in Example 4, except that the QNEC required to replace the missed
after-tax employee contribution is re-calculated to take into account applicable plan limits in accordance
with the provisions of section 2.02(1)(a)(ii)(C). The QNEC is determined as follows:
The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to after-tax
employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the

95

employee’s 2006 plan compensation of $36,000). The missed after-tax employee contribution amount,
based on this calculation, is $120. However, the sum of this amount ($120) and the previously made
after-tax employee contribution ($950) is $1,070. Because the plan limit for after-tax employee
contributions is $1,000, the missed after-tax employee contribution needs to be reduced by $70, to
ensure that the total after-tax employee contributions comply with the plan limit. Accordingly, the missed
after-tax employee contribution is $50 ($120 minus $70) and the required QNEC is $20 (that is, 40%
multiplied by the missed after-tax employee contribution of $50). The QNEC is adjusted for Earnings.
Example 6:
Employer D sponsors a § 401(k) plan. The plan has a one year of service eligibility requirement
and provides for January 1 and July 1 entry dates. Employee Y, who should have been provided the
opportunity to elect and make elective deferrals for the plan year beginning on January 1, 2006, was not
provided the opportunity to elect and make elective deferrals until July 1, 2006. Employee Y made $5,000
in elective deferrals to the plan in 2006. Employee Y was a highly compensated employee with
compensation for 2006 of $200,000. Employee Y’s compensation from January 1 through June 30, 2006
was $130,000. The ADP for highly compensated employees for 2006 was 10%. The ADP for nonhighly
compensated employees for 2006 was 8%. The § 402(g) limit for deferrals made in 2006 was $15,000.
Correction:
QNEC for missed deferral: Employee Y’s missed deferral is equal to the 10% ADP for highly
compensated employees multiplied by $130,000 (compensation earned for the portion of the year in
which Employee Y was erroneously excluded, that is, January 1, 2006 through June 30, 2006). The
missed deferral amount, based on this calculation is $13,000. However, the sum of this amount ($13,000)
and the previously made elective contribution ($5,000) is $18,000. The 2006 § 402(g) limit for elective
deferrals is $15,000. In accordance with the provisions of section 2.02(1)(a)(ii)(B), the missed deferral
needs to be reduced by $3,000 to ensure that the total elective contribution complies with the applicable §
402(g) limit. Accordingly, the missed deferral is $10,000 ($13,000 minus $3,000) and the required QNEC
is $5,000 (that is, 50% multiplied by the missed deferral of $10,000). The QNEC is adjusted for Earnings.
Example 7:
Employer E maintains a § 401(k) plan. The plan provides for matching contributions for each
payroll period that are equal to 100% of an employee's elective deferrals that do not exceed 2% of the
eligible employee’s plan compensation during the payroll period. The plan also provides that the annual
limit on matching contributions is $750. The plan provides for after-tax employee contributions. The aftertax employee contribution cannot exceed $1,000 during a plan year. The plan provides that employees
who complete one year of service are eligible to participate in the plan on the next January 1 or July 1
entry date. Employee Z, a nonhighly compensated employee who met the eligibility requirements and
should have entered the plan on January 1, 2006, was not offered the opportunity to elect to have elective
contributions made on his behalf to the plan. In March of 2006, the error was discovered and Employer E
offered the employee an election opportunity as of April 1, 2006. Employee Z had the opportunity to make
the maximum elective deferrals and/or after-tax employee contributions that could have been made under
the terms of the plan for the entire 2006 plan year. The employee made elective deferrals equal to 3% of
the employee's plan compensation for each payroll period from April 1, 2006 through December 31, 2006
(resulting in elective deferrals of $960). The employee's plan compensation for 2006 was $40,000 ($8,000
for the first three months and $32,000 for the last nine months). Employer E made matching contributions
equal to $640 for the excluded employee, which is 2% of the employee's plan compensation for each
payroll period from April 1, 2006 through December 31, 2006 ($32,000). After being allowed to participate
in the plan, the employee made $500 in after-tax employee contributions. The ADP for nonhighly
compensated employees for 2006 was 3% and the ACP for nonhighly compensated employees for 2006
was 2.3%. The portion of the ACP attributable to matching contributions for nonhighly compensated
employees for 2006 was 1.8%. The portion of the ACP attributable to after-tax employee contributions for
nonhighly compensated employees for 2006 was 0.5%.

96

Correction:
Employer E uses the correction method for partial year exclusions, pursuant to section
2.02(1)(a)(ii), to correct the failure to include an eligible employee in the plan. Because Employee Z was
given an opportunity to make elective deferrals and after-tax employee contributions to the plan for at
least the last 9 months of the plan year (and the amount of the elective deferrals or after-tax employee
contributions that the employee had the opportunity to make was not less than the maximum elective
deferrals or after-tax employee contributions that the employee could have made if the employee had
been given the opportunity to make elective deferrals and after-tax employee contributions on January 1,
2006), under the special rule set forth in section 2.02(1)(a)(ii)(F), Employer E is not required to make a
QNEC for the failure to provide the employee with the opportunity to make either elective deferrals or
after-tax employee contributions. The employer only needs to make a corrective employer nonelective
contribution for the failure to provide the employee with the opportunity to receive matching contributions
on deferrals that could have been made during the first 3 months of the plan year. The calculation of the
corrective employer contribution required to correct this failure is shown as follows:
The missed matching contribution is determined by calculating the matching contribution that the
employee would have received had the employee been provided the opportunity to make elective
deferrals during the period of exclusion, that is, January 1, 2006 through March 31, 2006. Assuming that
the employee elected to defer an amount equal to 3% of compensation (which is the ADP for the
nonhighly compensated employees for the plan year), then, under the terms of the plan, the employee
would have been entitled to a matching contribution of 2% of compensation. Pursuant to the provisions of
section 2.02(1)(a)(ii)(E), Employer E determines compensation by prorating Employee Z’s annual
compensation for the portion of the year that Employee Z was not given the opportunity to make elective
deferrals or after-tax employee contributions. Accordingly, the missed matching contribution for the period
of exclusion is obtained by multiplying 2% by Employee Z’s compensation of $10,000 (3/12ths of the
employee’s 2006 plan compensation of $40,000). Based on this calculation, the missed matching
contribution is $200. However, when this amount is added to the matching contribution already received
($640), the total ($840) exceeds the $750 plan limit on matching contributions by $90. Accordingly,
pursuant to section 2.02(1)(a)(ii)(D), the missed matching contribution figure is reduced to $110 ($200
minus $90). The required corrective employer contribution is $110. The corrective contribution is adjusted
for Earnings.
Example 8:
Employer G maintains a safe harbor § 401(k) plan that requires matching contributions that
satisfy the requirements of § 401(k)(12), which are equal to: 100% of elective deferrals that do not exceed
3% of an employee's compensation and 50% of elective deferrals that exceed 3% but do not exceed 5%
of an employee’s compensation. Employee M, a nonhighly compensated employee who met the eligibility
requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to
defer under the plan and was erroneously excluded for all of 2006. Employee M's compensation for 2006
was $20,000.
Correction:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral
is equal to 3% multiplied by $20,000, or $600. Accordingly, the required QNEC for Employee M’s missed
deferral opportunity in 2006 is $300, that is, 50% of $600. The missed matching contribution, based on
the missed deferral of $600, is $600. The required corrective contribution for Employee M’s missed
matching contribution is $600. Since the matching contribution is required to satisfy the requirements of
§ 401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before
adjustments for Earnings, on behalf of Employee M is $900 (that is, $300 for the missed deferral
opportunity, plus $600 for the missed matching contribution). The QNEC is adjusted for Earnings.

97

Example 9:
Same facts as Example 8, except that the plan provides for matching contributions equal to 100% of
elective deferrals that do not exceed 4% of an employee’s compensation.
Correction:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor § 401(k) plan is 4% of compensation. The missed deferral is
4% of compensation because the plan provides for a 100% match for deferrals up to that level of
compensation. (See Appendix A, section .05(2)(d).) Therefore, in this case, Employee M’s missed
deferral is equal to 4% multiplied by $20,000, or $800. The QNEC for Employee M’s missed deferral
opportunity in 2006 is $400, that is, 50% multiplied by $800. The missed matching contribution, based on
the missed deferral of $800, is $800. Thus, the required corrective contribution for Employee M’s missed
matching contribution is $800. Since the matching contribution is required to satisfy the requirements of
§ 401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before
adjustments for Earnings, on behalf of Employee M is $1,200 (that is, $400 for the missed deferral
opportunity plus $800 for the missed matching contribution). The QNEC is adjusted for Earnings.
Example 10:
Same facts as Example 8, except that the plan uses a rate of nonelective contributions to satisfy
the requirements of § 401(k)(12) and provides for a nonelective contribution equal to 3% of
compensation.
Correction:
In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on
account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral
is equal to 3% multiplied by $20,000, or $600. Thus, the QNEC for Employee M’s missed deferral
opportunity in 2006 is $300 (50% of $600). The required nonelective contribution, based on the plan’s
formula of 3% of compensation for nonelective contributions, is $600. Since the nonelective contribution
is required to satisfy the requirements of § 401(k)(12), the corrective contribution is made in the form of a
QNEC. The total required QNEC, before adjustments for Earnings, on behalf of Employee M is $900
(that is, $300 for the missed deferral opportunity, plus $600 for the missed nonelective contribution). The
QNEC is adjusted for Earnings.
Example 11:
Employer H maintains a § 401(k) plan. The plan limit on deferrals is the lesser of the deferral limit
under § 401(a)(30) or the limitation under § 415. The plan also provides that eligible participants (as
defined in § 414(v)(5)) may make contributions in excess of the plan’s deferral limits, up to the limitations
on catch-up contributions for the year. The plan also provides for a 60% matching contribution on elective
deferrals. The deferral limit under § 401(a)(30) for 2006 is $15,000. The limitation on catch-up
contributions under the terms of the plan and § 414(v)(2)(B)(i) is $5,000. Employee R, age 55, was
provided with the opportunity to make elective deferrals up to the plan limit, but was not provided the
option to make catch-up contributions. Employee R is a nonhighly compensated employee who earned
$60,000 in compensation and made elective deferrals totaling $15,000 in 2006.
Correction:
In accordance with the provisions of Appendix A, section .05(4), Employee R’s missed deferral on
account of the plan’s failure to offer the opportunity to make catch-up contributions is $2,500 (or one half
of the limitation on catch-up contributions for 2006). The missed deferral opportunity is $1,250 (or 50% of

98

$2,500). Thus, the required QNEC for Employee R’s missed deferral opportunity relating to catch-up
contributions in 2006 is $1,250 adjusted for Earnings. In addition, Employee R was entitled to an
additional matching contribution, under the terms of the plan, equal to 60% of the missed deferral that is
attributable to the catch-up contribution that the employee would have made had the failure not occurred.
In this case, the missed deferral is $2,500 and the corresponding matching contribution is $1,500 (that is,
60% of $2,500). Thus, the required corrective contribution for the additional matching contribution that
should have been made on behalf of Employee R is $1,500 adjusted for Earnings.
Example 12:
Employer K maintains a § 401(k) plan. The plan provides for matching contributions for eligible
employees equal to 100% of elective deferrals that do not exceed 3% of an employee's compensation.
On January 1, 2006, Employee T made an election to contribute 10% of compensation for the 2006 plan
year. However, Employee T’s election was not processed, and the required amounts were not withheld
from Employee T’s salary in 2006. Employee T’s salary was $30,000 in 2006.
Correction:
Employer K uses the correction method described in Appendix A, section .05(5), to correct the
failure to implement Employee T’s election to make elective deferrals under the plan for the full plan year
beginning January 1, 2006. Employer K calculates the corrective QNEC to be made on behalf of
Employee T as follows:
(1) Elective deferrals: Employee T’s election to make elective deferrals, pursuant to an election, in
2006 was not implemented. Thus, pursuant to section .05(5)(a) of Appendix A, Employer K must make a
QNEC to the plan on behalf of Employee T equal to the missed deferral opportunity for Employee T,
which is 50% of Employee T’s missed deferral. The QNEC is adjusted for Earnings. The missed deferral
for Employee T is determined by using T’s elected deferral percentage (10%) for 2006 and multiplying
that percentage by Employee T’s compensation for 2006 ($30,000). Accordingly, the missed deferral for
Employee V, on account of the employee’s improper exclusion from the plan is $3,000 (10% x $30,000).
The missed deferral opportunity is $1,500 (that is, 50% x $3,000). Thus, the required QNEC for the failure
to provide Employee V with the opportunity to make elective deferrals to the plan is $1,500 (adjusted for
Earnings).
(2) Matching contributions: Employee T should have been eligible for but did not receive an
allocation of employer matching contributions because no elective deferrals were made on behalf of
Employee T in 2006. Thus, pursuant to section .05(5)(c) of Appendix A, Employer K must make a
corrective employer nonelective contribution to the plan on behalf of Employee T that is equal to the
matching contribution Employee T would have received had the missed deferral been made. The
corrective employer nonelective contribution is adjusted for Earnings. Under the terms of the plan, if
Employee T had made an elective deferral of $3,000 or 10% of compensation ($30,000), the employee
would have been entitled to a matching contribution equal to 100% of the first 3% of Employee T’s
compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed employer
matching contribution is $900 (adjusted for Earnings).
The total required corrective contribution, before adjustments for Earnings, on behalf of Employee
T is $2,400 ($1,500 for the missed deferral opportunity plus $900 for the missed matching contribution).
The corrective contribution for the missed deferral opportunity ($1,500) and related Earnings must be
made in the form of a QNEC.

(2) Exclusion of Eligible Employees In a Profit-Sharing Plan. (a) Correction
Methods. (i) Appendix A Correction Method. Appendix A, section .05, sets forth the
correction method for correcting the failure to make a contribution on behalf of the
99

employees improperly excluded from a defined contribution plan or to provide benefit
accruals for the employees improperly excluded from a defined benefit plan. In the case
of a defined contribution plan, the correction method is to make a contribution on behalf
of the excluded employee. Section 2.02(2)(a)(ii) of this Appendix B clarifies the
correction method in the case of a profit-sharing or stock bonus plan that provides for
nonelective contributions (within the meaning of §1.401(k)-6).
(ii) Additional Requirements for Appendix A Correction Method as applied to
Profit-Sharing Plans. To correct for the exclusion of an eligible employee from
nonelective contributions in a profit-sharing or stock bonus plan under the Appendix A
correction method, an allocation amount is determined for each excluded employee on
the same basis as the allocation amounts were determined for the other employees
under the plan's allocation formula (for example, the same ratio of allocation to
compensation), taking into account all of the employee's relevant factors (for example,
compensation) under that formula for that year. The Plan Sponsor makes a corrective
contribution on behalf of the excluded employee that is equal to the allocation amount
for the excluded employee. The corrective contribution is adjusted for Earnings. If, as a
result of excluding an employee, an amount was improperly allocated to the account
balance of an eligible employee who shared in the original allocation of the nonelective
contribution, no reduction is made to the account balance of the employee who shared
in the original allocation on account of the improper allocation. (See Example 15.)
(iii) Reallocation Correction Method. (A) In General. Subject to the limitations set
forth in section 2.02(2)(a)(iii)(F) below, in addition to the Appendix A correction method,
the exclusion of an eligible employee for a plan year from a profit-sharing or stock
bonus plan that provides for nonelective contributions may be corrected using the
reallocation correction method set forth in this section 2.02(2)(a)(iii). Under the
reallocation correction method, the account balance of the excluded employee is
increased as provided in paragraph (2)(a)(iii)(B) below, the account balances of other
employees are reduced as provided in paragraph (2)(a)(iii)(C) below, and the increases
and reductions are reconciled, as necessary, as provided in paragraph (2)(a)(iii)(D)
below. (See Examples 16 and 17.)
(B) Increase in Account Balance of Excluded Employee. The account balance of
the excluded employee is increased by an amount that is equal to the allocation the
employee would have received had the employee shared in the allocation of the
nonelective contribution. The amount is adjusted for Earnings.
(C) Reduction in Account Balances of Other Employees. (1) The account balance
of each employee who was an eligible employee who shared in the original allocation of
the nonelective contribution is reduced by the excess, if any, of (I) the employee's
allocation of that contribution over (II) the amount that would have been allocated to that
employee’s account had the failure not occurred. This amount is adjusted for Earnings
taking into account the rules set forth in section 2.02(2)(a)(iii)(C)(2) and (3) below. The
100

amount after adjustment for Earnings is limited in accordance with section
2.02(2)(a)(iii)(C)(4) below.
(2) This paragraph (2)(a)(iii)(C)(2) applies if most of the employees with account
balances that are being reduced are nonhighly compensated employees. If there has
been an overall gain for the period from the date of the original allocation of the
contribution through the date of correction, no adjustment for Earnings is required to the
amount determined under section 2.02(2)(a)(iii)(C)(1) for the employee. If the amount
for the employee is being adjusted for Earnings and the plan permits investment of
account balances in more than one investment fund, for administrative convenience, the
reduction to the employee's account balance may be adjusted by the lowest rate of
return of any fund for the period from the date of the original allocation of the
contribution through the date of correction.
(3) If an employee's account balance is reduced and the original allocation was
made to more than one investment fund or there was a subsequent distribution or
transfer from the fund receiving the original allocation, then reasonable, consistent
assumptions are used to determine the Earnings adjustment.
(4) The amount determined in section 2.02(2)(a)(iii)(C)(1) for an employee after
the application of section 2.02(2)(a)(iii)(C)(2) and (3) may not exceed the account
balance of the employee on the date of correction, and the employee is permitted to
retain any distribution made prior to the date of correction.
(D) Reconciliation of Increases and Reductions. If the aggregate amount of the
increases under section 2.02(2)(a)(iii)(B) exceeds the aggregate amount of the
reductions under section 2.02(2)(a)(iii)(C), the Plan Sponsor makes a corrective
contribution to the plan for the amount of the excess. If the aggregate amount of the
reductions under section 2.02(2)(a)(iii)(C) exceeds the aggregate amount of the
increases under section 2.02(2)(a)(iii)(B), then the amount by which each employee's
account balance is reduced under section 2.02(2)(a)(iii)(C) is decreased on a pro rata
basis.
(E) Reductions Among Multiple Investment Funds. If an employee's account
balance is reduced and the employee's account balance is invested in more than one
investment fund, then the reduction may be made from the investment funds selected in
any reasonable manner.
(F) Limitations on Use of Reallocation Correction Method. If any employee would
be permitted to retain any distribution pursuant to section 2.02(2)(a)(iii)(C)(4), then the
reallocation correction method may not be used unless most of the employees who
would be permitted to retain a distribution are nonhighly compensated employees.
(b) Examples.
Example 13:

101

Employer D maintains a profit-sharing plan that provides for discretionary nonelective employer
contributions. The plan provides that the employer's contributions are allocated to account balances in the
ratio that each eligible employee's compensation for the plan year bears to the compensation of all
eligible employees for the plan year and, therefore, the only relevant factor for determining an allocation is
the employee's compensation. The plan provides for self-directed investments among four investment
funds and daily valuations of account balances. For the 2006 plan year, Employer D made a contribution
to the plan of a fixed dollar amount. However, five employees who met the eligibility requirements were
inadvertently excluded from participating in the plan. The contribution resulted in an allocation on behalf
of each of the eligible employees, other than the excluded employees, equal to 10% of compensation.
Most of the employees who received allocations under the plan for the year of the failure were nonhighly
compensated employees. No distributions have been made from the plan since 2006. If the five excluded
employees had shared in the original allocation, the allocation made on behalf of each employee would
have equaled 9% of compensation. The excluded employees began participating in the plan in the 2007
plan year.
Correction:
Employer D uses the Appendix A correction method to correct the failure to include the five
eligible employees. Thus, Employer D makes a corrective contribution to the plan. The amount of the
corrective contribution on behalf of the five excluded employees for the 2006 plan year is equal to 10% of
compensation of each excluded employee, the same allocation that was made for other eligible
employees, adjusted for Earnings. The excluded employees receive an allocation equal to 10% of
compensation (adjusted for Earnings) even though, had the excluded employees originally shared in the
allocation for the 2006 contribution, their account balances, as well as those of the other eligible
employees, would have received an allocation equal to only 9% of compensation.
Example 14:
The facts are the same as in Example 13.
Correction:
Employer D uses the reallocation correction method to correct the failure to include the five
eligible employees. Thus, the account balances are adjusted to reflect what would have resulted from the
correct allocation of the employer contribution for the 2006 plan year among all eligible employees,
including the five excluded employees. The inclusion of the excluded employees in the allocation of that
contribution would have resulted in each eligible employee, including each excluded employee, receiving
an allocation equal to 9% of compensation. Accordingly, the account balance of each excluded employee
is increased by 9% of the employee's 2006 compensation, adjusted for Earnings. The account balance of
each of the eligible employees other than the excluded employees is reduced by 1% of the employee's
2006 compensation, adjusted for Earnings. Employer D determines the adjustment for Earnings using the
rate of return of each eligible employee's excess allocation (using reasonable, consistent assumptions).
Accordingly, for an employee who shared in the original allocation and directed the investment of the
allocation into more than one investment fund or who subsequently transferred a portion of a fund that
had been credited with a portion of the 2006 allocation to another fund, reasonable, consistent
assumptions are followed to determine the adjustment for Earnings. It is determined that the total of the
initially determined reductions in account balances exceeds the total of the required increases in account
balances. Accordingly, these initially determined reductions are decreased pro rata so that the total of the
actual reductions in account balances equals the total of the increases in the account balances, and
Employer D does not make any corrective contribution. The reductions from the account balances are
made on a pro rata basis among all of the funds in which each employee's account balance is invested.
Example 15:

102

The facts are the same as in Example 13.
Correction:
The correction is the same as in Example 14, except that, because most of the employees whose
account balances are being reduced are nonhighly compensated employees, for administrative
convenience, Employer D uses the rate of return of the fund with the lowest rate of return for the period of
the failure to adjust the reduction to each account balance. It is determined that the aggregate amount
(adjusted for Earnings) by which the account balances of the excluded employees is increased exceeds
the aggregate amount (adjusted for Earnings) by which the other employees' account balances are
reduced. Accordingly, Employer D makes a contribution to the plan in an amount equal to the excess.
The reduction from account balances is made on a pro rata basis among all of the funds in which each
employee's account balance is invested.

.03 Vesting Failures. (1) Correction Methods. (a) Contribution Correction Method.
A failure in a defined contribution plan to apply the proper vesting percentage to an
employee's account balance that results in forfeiture of too large a portion of the
employee's account balance may be corrected using the contribution correction method
set forth in this paragraph. The Plan Sponsor makes a corrective contribution on behalf
of the employee whose account balance was improperly forfeited in an amount equal to
the improper forfeiture. The corrective contribution is adjusted for Earnings. If, as a
result of the improper forfeiture, an amount was improperly allocated to the account
balance of another employee, no reduction is made to the account balance of that
employee. (See Example 16.)
(b) Reallocation Correction Method. In lieu of the contribution correction method,
in a defined contribution plan under which forfeitures of account balances are
reallocated among the account balances of the other eligible employees in the plan, a
failure to apply the proper vesting percentage to an employee's account balance which
results in forfeiture of too large a portion of the employee's account balance may be
corrected under the reallocation correction method set forth in this paragraph. A
corrective reallocation is made in accordance with the reallocation correction method
set forth in section 2.02(2)(a)(iii), subject to the limitations set forth in section
2.02(2)(a)(iii)(F). In applying section 2.02(2)(a)(iii)(B), the account balance of the
employee who incurred the improper forfeiture is increased by an amount equal to the
amount of the improper forfeiture and the amount is adjusted for Earnings. In applying
section 2.02(2)(a)(iii)(C)(1), the account balance of each employee who shared in the
allocation of the improper forfeiture is reduced by the amount of the improper forfeiture
that was allocated to that employee's account. The Earnings adjustments for the
account balances that are being reduced are determined in accordance with sections
2.02(2)(a)(iii)(C)(2) and (3) and the reductions after adjustments for Earnings are limited
in accordance with section 2.02(2)(a)(iii)(C)(4). In accordance with section
2.02(2)(a)(iii)(D), if the aggregate amount of the increases exceeds the aggregate
amount of the reductions, the Plan Sponsor makes a corrective contribution to the plan
for the amount of the excess. In accordance with section 2.02(2)(a)(iii)(D), if the
aggregate amount of the reductions exceeds the aggregate amount of the increases,
then the amount by which each employee's account balance is reduced is decreased on
a pro rata basis. (See Example 17.)
103

(2) Examples.
Example 16:
Employer E maintains a profit-sharing plan that provides for nonelective contributions. The plan
provides for self-directed investments among four investment funds and daily valuation of account
balances. The plan provides that forfeitures of account balances are reallocated among the account
balances of other eligible employees on the basis of compensation. During the 2006 plan year, Employee
R terminated employment with Employer E and elected and received a single-sum distribution of the
vested portion of his account balance. No other distributions have been made since 2006. However, an
incorrect determination of Employee R's vested percentage was made resulting in Employee R receiving
a distribution of less than the amount to which he was entitled under the plan. The remaining portion of
Employee R's account balance was forfeited and reallocated (and these reallocations were not affected
by the limitations of § 415). Most of the employees who received allocations of the improper forfeiture
were nonhighly compensated employees.
Correction:
Employer E uses the contribution correction method to correct the improper forfeiture. Thus,
Employer E makes a contribution on behalf of Employee R equal to the incorrectly forfeited amount
(adjusted for Earnings) and Employee R's account balance is increased accordingly and subsequently
distributed to Employee R. No reduction is made from the account balances of the employees who
received an allocation of the improper forfeiture.
Example 17:
The facts are the same as in Example 16.
Correction:
Employer E uses the reallocation correction method to correct the improper forfeiture. Thus,
Employee R's account balance is increased by the amount that was improperly forfeited (adjusted for
Earnings) and such increase will be distributed to Employee R. The account of each employee who
shared in the allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that
was allocated to that employee's account (adjusted for Earnings). Because most of the employees whose
account balances are being reduced are nonhighly compensated employees, for administrative
convenience, Employer E uses the rate of return of the fund with the lowest rate of return for the period of
the failure to adjust the reduction to each account balance. It is determined that the amount (adjusted for
Earnings) by which the account balance of Employee R is increased exceeds the aggregate amount
(adjusted for Earnings) by which the other employees' account balances are reduced. Accordingly,
Employer E makes a contribution to the plan in an amount equal to the excess. The reduction from the
account balances is made on a pro rata basis among all of the funds in which each employee's account
balance is invested.

.04 § 415 Failures. (1) Failures Relating to a § 415(b) Excess. (a) Correction
Methods. (i) Return of Overpayment Correction Method. Overpayments as a result of
amounts being paid in excess of the limits of § 415(b) may be corrected using the return
of Overpayment correction method set forth in this paragraph (1)(a)(i). The Plan
Sponsor takes reasonable steps to have the Overpayment (with appropriate interest)
returned by the recipient to the plan and reduces future benefit payments (if any) due to
the employee to reflect § 415(b). To the extent the amount returned by the recipient is
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less than the Overpayment, adjusted for Earnings at the plan's earnings rate, then the
Plan Sponsor or another person contributes the difference to the plan. In addition, in
accordance with section 6.06 of this revenue procedure, the Plan Sponsor must notify
the recipient that the Overpayment was not eligible for favorable tax treatment accorded
to distributions from qualified plans (and, specifically, was not eligible for tax-free
rollover). (See Examples 20 and 21.)
(ii) Adjustment of Future Payments Correction Method. (A) In General. In addition
to the return of overpayment correction method, in the case of plan benefits that are
being distributed in the form of periodic payments, Overpayments as a result of
amounts being paid in excess of the limits in § 415(b) may be corrected by using the
adjustment of future payments correction method set forth in this paragraph (1)(a)(ii).
Future payments to the recipient are reduced so that they do not exceed the § 415(b)
maximum limit and an additional reduction is made to recoup the Overpayment (over a
period not longer than the remaining payment period) so that the actuarial present value
of the additional reduction is equal to the Overpayment plus interest at the interest rate
used by the plan to determine actuarial equivalence. (See Examples 18 and 19.)
(B) Joint and Survivor Annuity Payments. If the employee is receiving payments
in the form of a joint and survivor annuity, with the employee's spouse to receive a life
annuity upon the employee's death equal to a percentage (for example, 75%) of the
amount being paid to the employee, the reduction of future annuity payments to reflect §
415(b) reduces the amount of benefits payable during the lives of both the employee
and spouse, but any reduction to recoup Overpayments made to the employee does not
reduce the amount of the spouse's survivor benefit. Thus, the spouse's benefit will be
based on the previous specified percentage (for example, 75%) of the maximum
permitted under § 415(b), instead of the reduced annual periodic amount payable to the
employee.
(C) Overpayment Not Treated as an Excess Amount. An Overpayment corrected
under this adjustment of future payment correction method is not treated as an Excess
Amount as defined in section 5.01(3) of this revenue procedure.
(b) Examples.
Example 18:
Employer F maintains a defined benefit plan funded solely through employer contributions. The
plan provides that the benefits of employees are limited to the maximum amount permitted under
§ 415(b), disregarding cost-of-living adjustments under § 415(d) after benefit payments have
commenced. At the beginning of the 2006 plan year, Employee S retired and started receiving an annual
straight life annuity of $185,000 from the plan. Due to an administrative error, the annual amount received
by Employee S for 2006 included an Overpayment of $10,000 (because the § 415(b)(1)(A) limit for 2006
was $175,000). This error was discovered at the beginning of 2007.
Correction:

105

Employer F uses the adjustment of future payments correction method to correct the failure to
satisfy the limit in § 415(b). Future annuity benefit payments to Employee S are reduced so that they do
not exceed the § 415(b) maximum limit, and, in addition, Employee S's future benefit payments from the
plan are actuarially reduced to recoup the Overpayment. Accordingly, Employee S's future benefit
payments from the plan are reduced to $175,000 and further reduced by $1,000 annually for life,
beginning in 2007. The annual benefit amount is reduced by $1,000 annually for life because, for
Employee S, the actuarial present value of a benefit of $1,000 annually for life commencing in 2007 is
equal to the sum of $10,000 and interest at the rate used by the plan to determine actuarial equivalence
beginning with the date of the first Overpayment and ending with the date the reduced annuity payment
begins. Thus, Employee S's remaining benefit payments are reduced so that Employee S receives
$174,000 for 2007, and for each year thereafter.
Example 19:
The facts are the same as in Example 18.
Correction:
Employer F uses the adjustments of future payments correction method to correct the § 415(b)
failure, by recouping the entire excess payment made in 2006 from Employee S's remaining benefit
payments for 2007. Thus, Employee S's annual annuity benefit for 2007 is reduced to $164,400 to reflect
the excess benefit amounts (increased by interest) that were paid from the plan to Employee S during the
2006 plan year. Beginning in 2008, Employee S begins to receive annual benefit payments of $175,000.
Example 20:
The facts are the same as in Example 18, except that the benefit was paid to Employee S in the
form of a single-sum distribution in 2006, which exceeded the maximum § 415(b) limits by $110,000.
Correction:
Employer F uses the return of overpayment correction method to correct the § 415(b) failure.
Thus, Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not
eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was
not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment (with interest
at the rate used by the plan to calculate the single-sum payment) is owed to the plan. Employer F takes
reasonable steps to have the Overpayment (with interest at the rate used by the plan to calculate the
single-sum payment) paid to the plan. Employee S pays the $110,000 (plus the requested interest) to the
plan. It is determined that the plan's rate of return for the relevant period was 2 percentage points more
than the rate used by the plan to calculate the single-sum payment. Accordingly, Employer F contributes
the difference to the plan.
Example 21:
The facts are the same as in Example 20.
Correction:
Employer F uses the return of overpayment correction method to correct the § 415(b) failure.
Thus, Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not
eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was
not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment (with interest
at the rate used by the plan to calculate the single-sum payment) is owed to the plan. Employer F takes
reasonable steps to have the Overpayment (with interest at the rate used by the plan to calculate the
single-sum payment) paid to the plan. As a result of Employer F's recovery efforts, some, but not all, of

106

the Overpayment (with interest) is recovered from Employee S. It is determined that the amount returned
by Employee S to the plan is less than the Overpayment adjusted for Earnings at the plan’s rate of return.
Accordingly, Employer F contributes the difference to the plan.

(2) Failures Relating to a § 415(c) Excess. (a) Correction Methods. (i) Appendix
A Correction Method. Appendix A, section .08, sets forth the correction method for
correcting the failure to satisfy the § 415(c) limits on annual additions.
(ii) Forfeiture Correction Method. In addition to the Appendix A correction
method, the failure to satisfy § 415(c) with respect to a nonhighly compensated
employee (A) who in the limitation year of the failure had annual additions consisting of
both (I) either elective deferrals or after-tax employee contributions or both and (II)
either matching or nonelective contributions or both, (B) for whom the matching and
nonelective contributions equal or exceed the portion of the employee's annual addition
that exceeds the limits under § 415(c) ("§ 415(c) excess") for the limitation year, and (C)
who has terminated with no vested interest in the matching and nonelective
contributions (and has not been reemployed at the time of the correction), may be
corrected by using the forfeiture correction method set forth in this paragraph. The
§ 415(c) excess is deemed to consist solely of the matching and nonelective
contributions. If the employee's § 415(c) excess (adjusted for Earnings) has previously
been forfeited, the § 415(c) failure is deemed to be corrected. If the § 415(c) excess
(adjusted for Earnings) has not been forfeited, that amount is placed in an unallocated
account, as described in section 6.06(2) of this revenue procedure, to be used to reduce
employer nonelective contributions in succeeding year(s) (or if the amount would have
been allocated to other employees who were in the plan for the year of the failure if the
failure had not occurred, then that amount is reallocated to the other employees in
accordance with the plan's allocation formula). Note that while this correction method
will permit more favorable tax treatment of elective deferrals for the employee than the
Appendix A correction method, this correction method could be less favorable to the
employee in certain cases, for example, if the employee is subsequently reemployed
and becomes vested. (See Examples 22 and 23.)
(iii) Return of Overpayment Correction Method. A failure to satisfy § 415(c) that
includes a distribution of the § 415(c) excess attributable to nonelective contributions
and matching contributions may be corrected using the return of Overpayment
correction method set forth in section 6.06(3) of this revenue procedure.
(b) Examples.
Example 22:
Employer G maintains a § 401(k) plan. The plan provides for nonelective employer contributions,
elective deferrals, and after-tax employee contributions. The plan provides that the nonelective
contributions vest under a 5-year cliff vesting schedule. The plan provides that when an employee
terminates employment, the employee's nonvested account balance is forfeited five years after a
distribution of the employee's vested account balance and that forfeitures are used to reduce employer
contributions. For the 1998 limitation year, the annual additions made on behalf of two nonhighly

107

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 (that is, $3,000). Thus, a distribution of plan assets (and corresponding reduction of the
account balance) consisting of $500 (adjusted for 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
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.
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 (that is, $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.

108

.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.
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) Section 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, a Plan Sponsor 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 Plan Sponsor 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, and amends 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.
109

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 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 the 2005 and 2006 plan years, creating an Operational Failure. The failure was discovered in
2007.
Correction:

110

Employer K corrects the failure under VCP by adopting a plan amendment in 2007, 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 2007 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. For a defined
benefit plan, a contribution may have to be made to the plan for a correction that is
accomplished through a plan amendment if the plan is subject to the requirements of
§ 436(c) at the time of the amendment, as described in section 6.02(4)(e)(ii).

(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 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 IRS for a determination letter.

SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
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.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 a Plan Sponsor 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).
(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
112

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)(f) 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 (for example, elective deferrals, matching contributions, or
discretionary nonelective employer contributions) were made for other employees for
the year of the failure. In the case of an exclusion of an eligible employee from an
allocation of a forfeiture, the beginning of the period of the failure is the date on which
forfeitures were allocated to other employees for the year of the failure.
(ii) Exclusion from a § 401(k) or (m) Plan. For administrative convenience, for
purposes of calculating the Earnings rate for corrective contributions for a plan year (or
the portion of the plan year) during which an employee was improperly excluded from
making periodic elective deferrals or after-tax employee contributions, or from receiving
periodic matching contributions, the Plan Sponsor 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
Plan Sponsor 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 rate of return 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 rate of return under the plan as a whole (that is, 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).

113

(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 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
114

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

115

Earnings Adjustment on the Corrective Contribution:
The $5,000 corrective contribution on behalf of Employee X is adjusted to reflect an earnings
amount based on the Earnings rates for the period of the failure (March 31, 1998 through June 1, 2000)
and the earnings amount is allocated using the plan allocation method. Employer L determines that a pro
rata simplifying assumption may be used to determine the Earnings rate for the period from March 31,
1998 to December 31, 1998, because that rate does not significantly understate or overstate the actual
investment return for that period. Accordingly, Employer L determines that the Earnings rate for that
period is 15% (9/12 of the plan's 20% Earnings rate for the year). Thus, applicable Earnings rates under
the plan during the period of the failure are:
Time Periods
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)

Earnings Rate
+15%
+10%
+12%

If the $5,000 corrective contribution had been contributed for Employee X on March 31, 1998, (1)
Earnings for 1998 would have been increased by the amount of the Earnings on the additional $5,000
contribution from March 31, 1998 through December 31, 1998 and would have been allocated as 1998
Earnings in proportion to the prior year (December 31, 1997) account balances, (2) Employee X's account
balance as of December 31, 1998 would have been increased by the additional $5,000 contribution, (3)
Earnings for 1999 would have been increased by the 1999 Earnings on the additional $5,000 contribution
(including 1998 Earnings thereon) allocated in proportion to the prior year (December 31, 1998) account
balances along with other 1999 Earnings, and (4) Earnings for 2000 would have been increased by the
Earnings on the additional $5,000 (including 1998 and 1999 Earnings thereon) from January 1 to June 1,
2000 and would be allocated in proportion to the prior year (December 31, 1999) account balances along
with other 2000 Earnings. Accordingly, the $5,000 corrective contribution is adjusted to reflect an
Earnings amount of $2,084 ($5,000[(1.15)(1.10)(1.12)-1]) and the earnings amount is allocated to the
account balances under the plan allocation method as follows:
(a) Each account balance that shared in the allocation of Earnings for 1998 is increased, as of
December 31, 1998, by its appropriate share of the Earnings amount for 1998, $750 ($5,000(.15)).
(b) Employee X's account balance is increased, as of December 31, 1998, by $5,000.
(c) The resulting December 31, 1998 account balances will share in the 1999 Earnings, including
the $575 for 1999 Earnings included in the corrective contribution ($5,750(.10)), to determine the account
balances as of December 31, 1999. However, each account balance other than Employee X's account
balance has already shared in the 1999 Earnings, excluding the $575. Accordingly, Employee X's
account balance as of December 31, 1999 will include $500 of the 1999 portion of the earnings amount
based on the $5,000 corrective contribution allocated to Employee X's account balance as of December
31, 1998 ($5,000(.10)). Then each account balance that originally shared in the allocation of Earnings for
1999 (that is, 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.)

116

TABLE 1
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Amount
Allocated to
Corrective
Contribution
First Partial Valuation
Period Earnings
1999 Earnings

Second Partial
Valuation Period
Earnings

$5,000

Employee X

15%

$7501

10%

$5752

12%

$7593

All 12/31/1997
Account Balances4
Employee X ($500)/
All 12/31/1998
Account Balances
($75)4
All 12/31/1999
Account Balances
(including Employee
X's $5,500)4

Total Amount
Contributed
1$5,000

$7,084

x 15%

2$5,750($5,000

+$750) x 10%
+$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.
3$6,325($5,000

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 28, but the
earnings amount is allocated using the specific employee allocation method. Thus, the entire earnings
amount for all periods through June 1, 2000 (that is, $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

117

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Amount
Allocated to:
Corrective Contribution
$5,000
Employee X
First Partial Valuation Period 15%
$7501
Employee X
Earnings
1999 Earnings
10%
$5752
Employee X
Second Partial Valuation
12%
$7593
Employee X
Period Earnings
Total Amount Contributed
$7,084
1$5,000

x 15%

2$5,750($5,000
3$6,325($5,000

+$750) x 10%
+$750 + $575) x 12%

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 28, but the
earnings amount is allocated using the bifurcated allocation method. Thus, the Earnings for the first
partial valuation period (March 31, 1998 to December 31, 1998) and the Earnings for 1999 are allocated
to Employee X. Accordingly, Employer L makes a contribution on June 1, 2000 to the plan of $7,084
($5,000(1.15)(1.10)(1.12)). Employee X's account balance as of December 31, 1999 is increased by
$6,325 ($5,000(1.15)(1.10)); and the December 31, 1999 account balances of employees (including
Employee X's increased account balance) will share in estimated January 1, 2000 to June 1, 2000
Earnings on the corrective contribution equal to $759 ($6,325(.12)). (See, Table 3.)
TABLE 3
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate
Amount
Allocated to:
Corrective Contribution
$5,000
Employee X
First Partial Valuation Period 15%
$7501
Employee X
Earnings
1999 Earnings
10%
$5752
Employee X
Second Partial Valuation
12%
$7593
12/31/99 Account Balances
Period Earnings
(including Employee X's
$6,325)4
Total Amount Contributed
$7,084
1$5,000

x 15%

2$5,750($5,000

+ $750) x 10%
+$750 +$575) x 12%
4After reduction for distributions during the 2000 year but without regard to contributions received during
the 2000 year.
.
Example 31:
3$6,325($5,000

The facts are the same as in Example 28.

118

Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the same as in Example 28, 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
Amount
Allocated to:
Corrective Contribution
$5,000
Employee X
First Partial Valuation Period 15%
$7501
12/31/99 Account
Earnings
Balances (including
Employee X's $5,575)4
1999 Earnings
10%
$5752
Employee X
Second Partial Valuation
12%
$7593
12/31/99 Account Balances
Period Earnings
(including Employee X's
$5,575)4
Total Amount Contributed
$7,084
1$5,000

x 15%
($5,000 +$750) x 10%
3$6,325 ($5,000 +$750 +$575) x 12%
4After 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$5,750

119