Editor's Note: This revenue procedure has been modified by Rev. Proc. 2002-35 (click) with respect to GUST non-amenders who file by September 3, 2002.

Revenue Procedure 2001-17

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Other parts of this Revenue Procedure:
Table of Contents 1 2 3 4 5 6 7 a b c

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PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY

SECTION 5. DEFINITIONS

The following definitions apply for purposes of this revenue procedure:

.01 Definitions for Qualified Plans. The definitions in this section 5.01 apply to Qualified Plans.

(1) Qualified Plan. The term Qualified Plan means a plan intended to satisfy the requirements of section 401(a) or section 403(a).

(2) Qualification Failure. The term Qualification Failure means any failure that adversely affects the qualification of a plan. There are four types of Qualification Failures: (a) Plan Document Failures, (b) Operational Failures, (c) Demographic Failures, and (d) Employer Eligibility Failures.

(a) Plan Document Failure. The term Plan Document Failure means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of section 401(a) or section 403(a). Thus, for example, the failure of a plan to be amended to reflect a new qualification requirement within the plan's applicable remedial amendment period under section 401(b) is a Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes any Qualification Failure that is a violation of the requirements of section 401(a) or section 403(a) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.

(b) Operational Failure. The term Operational Failure means a Qualification Failure (other than an Employer Eligibility Failure) that arises solely from the failure to follow plan provisions. A failure to follow the terms of the plan providing for the satisfaction of the requirements of section 401(k) and section 401(m) is considered to be an Operational Failure. A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively pursuant to section 401(b) or another statutory provision to reflect the plan's operations. However, if within an applicable remedial amendment period under section 401(b), a plan has been properly amended for statutory or regulatory changes and, on or after the later of the date the amendment is effective or is adopted, the amended provisions are not followed, then the plan is considered to have an Operational Failure.

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

(d) Employer Eligibility Failure. The term Employer Eligibility Failure means the adoption of a cash or deferred arrangement (as defined in regulations under section 401(k)) intended to satisfy the requirements of section 401(k) for one or more years between 1987 and 1996 (inclusive) by an employer that was a tax-exempt organization prohibited from adopting a section 401(k) plan during that period. An Employer Eligibility Failure is not a Plan Document, Operational, or Demographic Failure.

(3) Excess Amount. The term Excess Amount means (a) an Overpayment, (b) an elective deferral or employee after-tax contribution returned to satisfy section 415, (c) an elective deferral in excess of the limitation of section 402(g) that is distributed, (d) an excess contribution or excess aggregate contribution that is distributed to satisfy section 401(k) or section 401(m), (e) an amount contributed on behalf of an employee that is in excess of the employee's benefit provided under a SEP, (f) an excess contribution that is distributed to satisfy section 408(k)(6)(A)(iii), (g) an elective deferral that is distributed to satisfy the limitation of section 401(a)(17), or (h) any similar amount that is required to be distributed in order to maintain plan qualification.

(4) Favorable Letter. The term Favorable Letter means, in the case of a Qualified Plan, a current favorable determination letter for an individually designed plan (including a volume submitter plan), a current favorable opinion letter for a Plan Sponsor that has adopted a master or prototype plan, or a current favorable notification letter for a Plan Sponsor that has adopted a regional prototype plan. A plan has a current favorable determination letter, opinion letter, or notification letter if either (a), (b), (c), or (d) below is satisfied:

(a) The plan has a favorable determination letter, opinion letter, or notification letter that considers the Tax Reform Act of 1986 (TRA '86).

(b) The plan is a governmental plan or non-electing church plan described in Rev. Proc. 99-23, 1999-16 I.R.B. 5, and has a favorable determination, opinion, or notification letter that considers the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Deficit Reduction Act of 1984 (DEFRA), and the Retirement Equity Act of 1984 (REA), and the section 401(b) remedial amendment period for TRA '86 has not yet expired.

(c) The plan is initially adopted or effective after December 7, 1994, and the Plan Sponsor timely submits an application for a determination letter within the plan's remedial amendment period under section 401(b).

(d) The plan is terminated prior to the expiration of the applicable GUST remedial amendment period under section 401(b) and the plan was amended to reflect the provisions of GUST. (GUST is an acronym for the Uruguay Round Agreements Act (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the Small Business Job Protection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA '97), and the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA '98).)

(e) In the case of a SEP, the term Favorable Letter means (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by an employer in accordance with the instructions on the applicable Form, (ii) a current favorable opinion letter for a Plan Sponsor that has adopted a prototype SEP which has been amended in accordance with procedures set forth in Rev. Proc. 94-13, 1994-1 C.B. 566, to take into account any applicable changes in the law since the issuance of the opinion letter, or (iii) in the case of an individually designed SEP, a private letter ruling that has been issued for the SEP.

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

(a) tax on the trust (Form 1041),

(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), and

(c) additional income tax resulting from income inclusion for participants in the plan (Form 1040).

(6) Overpayment. The term Overpayment means a distribution to an employee or beneficiary that exceeds the employee's or beneficiary's benefit under the terms of the plan because of a failure to comply with plan terms that implement section 401(a)(17), section 401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), section 411(a)(3)(G), or section 415. An Overpayment does not include a distribution of any Excess Amount described in section 5.01(4)(b) through (h).

(7) Plan Sponsor. The term Plan Sponsor means the employer that establishes or maintains a qualified retirement plan for its employees.

(8) 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 section 414(l) from a plan sponsored by an employer that was not a member of the same controlled group as the Plan Sponsor. If a transfer of plan assets related to the same employer transaction is accomplished through several transfers, then the date of the transfer is the date of the first transfer.

.02 Definitions for 403(b) Plans. The definitions in this section 5.02 apply to 403(b) Plans.

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

(2) 403(b) Failure. A 403(b) Failure is any Operational, Demographic, or Employer Eligibility Failure as defined below.

(a) Operational Failure. The term Operational Failure means any of the following: (i) A failure to satisfy the requirements of section 403(b)(12)(A)(ii) (relating to the availability of salary reduction contributions); (ii) A failure to satisfy the requirements of section 401(m) (as applied to 403(b) Plans pursuant to section 403(b)(12)(A)(i)); (iii) A failure to satisfy the requirements of section 401(a)(17) (as applied to 403(b) Plans pursuant to section 403(b)(12)(A)(i)); (iv) A failure to satisfy the distribution restrictions of section 403(b)(7) or section 403(b)(11); (v) A failure to satisfy the incidental death benefit rules of section 403(b)(10); (vi) A failure to pay minimum required distributions under section 403(b)(10); (vii) A failure to give employees the right to elect a direct rollover under section 403(b)(10), including the failure to give meaningful notice of such right; (viii) A failure of the annuity contract or custodial agreement to provide participants with a right to elect a direct rollover under section 403(b)(10) and 401(a)(31); (ix) A failure to satisfy the limit on elective deferrals under section 403(b)(1)(E); (x) A failure of the annuity contract or custodial agreement to provide the limit on elective deferrals under section 403(b)(1)(E) and 401(a)(30); (xi) A failure involving contributions or allocations of Excess Amounts; or (xii) Any other failure to satisfy applicable requirements under section 403(b) that (A) results in the loss of section 403(b) status for the plan or the loss of section 403(b) status for one or more custodial account(s) or annuity contract(s) under the plan and (B) is not a Demographic Failures, an Employer Eligibility Failure, or a failure related to the purchase of annuity contracts, or contributions to custodial accounts, on behalf of individuals who are not employees of the employer.

(b) Demographic Failure. The term Demographic Failure means a failure to satisfy the requirements of section 401(a)(4), section 401(a)(26), or section 410(b) (as applied to 403(b) Plans pursuant to section 403(b)(12)(A)(i)).

(c) Employer Eligibility Failure. The term Employer Eligibility Failure means any of the following: (i) The adoption of a plan intended to satisfy the requirements of section 403(b) by an employer that is not a tax-exempt organization described in section 501(c)(3) or a public educational organization described in section 170(b)(1)(A)(ii); (ii) A failure to satisfy the nontransferability requirement of section 401(g); (iii) A failure to initially establish or maintain a custodial account as required by section 403(b)(7); or (iv) A failure to purchase (initially or subsequently) either an annuity contract from an insurance company (unless grandfathered under Rev. Rul. 82-102, 1982-1 C.B. 62) or a custodial account from a regulated investment company utilizing a bank or an approved non-bank trustee/custodian.

(3) Excess Amount. The term Excess Amount means any contributions or allocations that are in excess of the limits under section 415 or section 403(b)(2)(the exclusion allowance limit) for the year.

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

(5) Total Sanction Amount. The term Total Sanction Amount means a monetary amount that is approximately equal to the income tax the Service could collect as a result of the failure.

.03 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), or (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).

(2) A plan that is under an Employee Plans examination includes any plan for which the Plan Sponsor, or a representative, has received verbal or written notification from Employee Plans of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination, and also includes any plan that has been under an Employee Plans examination and is now in Appeals or in litigation for issues raised in an Employee Plans examination. A plan is considered to be Under Examination if it is aggregated for purposes of satisfying the nondiscrimination requirements of section 401(a)(4), the minimum participation requirements of section 401(a)(26), the minimum coverage requirements of section 410(b), or the requirements of section 403(b)(12), with a plan(s) that is Under Examination. In addition, a plan is considered to be Under Examination with respect to a failure of a qualification requirement (other than those described in the preceding sentence) if the plan is aggregated with another plan for purposes of satisfying that qualification requirement (for example, section 402(g), section 415, or section 416) and that other plan is Under Examination. For example, assume Plan A has a section 415 failure, Plan A is aggregated with Plan B only for purposes of section 415, and Plan B is Under Examination. In this case, Plan A is considered to be Under Examination with respect to the section 415 failure. However, if Plan A has a failure relating to the spousal consent rules under section 417 or the vesting rules of section 411, Plan A is not considered to be Under Examination with respect to the section 417 or section 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 section 410(b)(2).

(3) An Employee Plans examination also includes a case in which a Plan Sponsor has submitted a Form 5310 and the Employee Plans agent notifies the Plan Sponsor, or a representative, of possible Qualification Failures, whether or not the Plan Sponsor is officially notified of an examination. This would include a case where, for example, a Plan Sponsor has applied for a determination letter on plan termination, and an Employee Plans agent notifies the Plan Sponsor that there are partial termination concerns.

(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.

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

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of general applicability. The general correction principles in section 6.02 and rules of general applicability in sections 6.03 through 6.10 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. In the case of a Qualified Plan with an Operational Failure, correction is determined taking into account the terms of the plan at the time of the failure. Correction should be accomplished taking into account the following principles:

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

(2) Reasonable and appropriate correction. The correction should be reasonable and appropriate for the failure. Depending on the nature of the failure, there may be more than one reasonable and appropriate correction for the failure. For Qualified Plans, any correction method permitted under Appendix A or Appendix B is deemed to be a reasonable and appropriate method of correcting the related Qualification Failure. Any correction method permitted under Appendix A applicable to a 403(b) Plan is deemed to be a reasonable and appropriate method of correcting the related 403(b) 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 thereunder, or other guidance of general applicability. For example, for Qualified Plans, the defined contribution plan correction methods set forth in section 1.415-6(b)(6) would be the typical means of correcting a failure under section 415. Likewise, the correction method set forth in section 1.402(g)-1(e)(2) would be the typical means of correcting a failure under section 402(g).

(b) 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 section 1.401(a)(4)-11(g) (rather than methods making use of the special testing provisions set forth in section 1.401(a)(4)-8 or section 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 section 401(k)(3), section 401(m)(2), or section 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.

(c) 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 or Plan Sponsor. For example, if an excess allocation (not in excess of the section 415 limits) made under a Qualified Plan was made for a participant under a plan (other than a cash or deferred arrangement), the excess should be reallocated to other participants or, depending on the facts and circumstances, used to reduce future employer contributions.

(d) The correction method should not violate another applicable specific requirement of section 401(a) or section 403(b) (for example, section 401(a)(4), section 411(d)(6), or section 403(b)(12), as applicable), or section 408(k) for SEPs. If an additional failure is 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.

(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.

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

(a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for earnings (including losses) and forfeitures that would have been allocated to the participant's account if the failure had not occurred. The corrective allocation need not be adjusted for losses. See section 3 of Appendix B for additional information on calculation of earnings for corrective allocations.

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

(c) Corrective allocations should come only from employer contributions (including forfeitures if the plan permits their use to reduce employer contributions).

(d) In the case of a defined benefit plan, a corrective distribution for an individual should be increased to take into account the delayed payment, consistent with the plan's actuarial adjustments.

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

(a) Reasonable estimates. If it is not possible to make a precise calculation, or 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, reasonable estimates may be used in calculating appropriate correction.

(b) Delivery of very small benefits. If the total corrective distribution due a participant or beneficiary is $20 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.

(c) Locating lost participants. Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address. In general, such actions include use of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94-22, 1994-1 C.B. 608) or the Social Security Administration Reporting Service. A plan will not be considered to have failed to correct a failure due to the inability to locate an individual if either of these programs is used; provided that, if the individual is later located, the additional benefits must be provided to the individual at that time.

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

.03 Correction of an Employer Eligibility Failure (only available under VCP general procedures, VCT, and VCSEP). (1) The permitted correction of an Employer Eligibility Failure is the cessation of all contributions (including salary reduction and after-tax contributions) beginning no later than the date the application under VCP is filed. Pursuant to VCP correction, the assets in such a plan are to remain in the trust, annuity contract, or custodial account and are to be distributed no earlier than the occurrence of one of the applicable distribution events, e.g., for 403(b) Plans, the events described in section 403(b)(7)(to the extent the assets are held in custodial accounts) or section 403(b)(11) (for those assets invested in annuity contracts that would be subject to section 403(b)(11) restrictions if the employer were eligible). A Plan that is corrected through VCP will be treated as subject to all of the requirements and provisions of section 401(a) for a Qualified Plan, section 403(b) for a 403(b) Plan, and section 408(k) for a SEP (including Code provisions relating to rollovers).

(2) Cessation of contributions is not required if continuation of contributions would not be an Employer Eligibility Failure (for example, a tax-exempt employer may maintain a section 401(k) plan after 1996).

(3) Because a plan with an Employer Eligibility Failure will be treated as subject to all of the applicable Code qualification requirements, the Plan Sponsor must also correct all other failures in accordance with this revenue procedure.

.04 Correction by plan amendment. In any case in which correction of a Qualified Plan failure includes correction of a Plan Document Failure or correction of an Operational Failure by plan amendment as permitted under section 4.06, other than adoption of a model amendment or a standardized or prototype plan, the amendment must be submitted to the Service for approval under the appropriate application form (i.e., Form 5300 series or Form 6406) to ensure that the amendment satisfies applicable qualification requirements.

.05 Special rules relating to Excess Amounts. (1) Treatment of Excess Amounts under Qualified Plans. A distribution of an Excess Amount is not eligible for the favorable tax treatment accorded to distributions from Qualified Plans (such as eligibility for rollover under section 402(c)). To the extent that a current or prior distribution was a distribution of an Excess Amount, distribution of that Excess Amount is not an eligible rollover distribution. Thus, for example, if such a distribution was contributed to an individual retirement arrangement (IRA), the contribution is not a valid rollover contribution for purposes of determining the amount of excess contributions (within the meaning of section 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 Forms 1099-R for the year of distribution with respect to each participant or beneficiary receiving such a distribution. Where an Excess Amount has been distributed the Plan Sponsor must notify the recipient that (a) the Excess Amount was distributed and (b) the Excess Amount was not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, was not eligible for tax-free rollover).

(2) Treatment of Excess Amounts under 403(b) Plans.

(a) Distribution of Excess Amounts. Excess Amounts for a year, adjusted for earnings through the date of distribution, must be distributed to affected participants and beneficiaries and are includible in their gross income in the year of distribution. The distribution of Excess Amounts is not an eligible rollover distribution within the meaning of section 403(b)(8). A distribution of Excess Amounts 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 Forms 1099-R for the year of distribution with respect to each participant or beneficiary receiving such a distribution. In addition, the Plan Sponsor must inform affected participants and beneficiaries that the distribution of Excess Amounts is not eligible for rollover. Excess Amounts distributed pursuant to this subparagraph (2)(a) are not treated as amounts previously excludable under section 403(b)(2)(A)(ii) for purposes of calculating the maximum exclusion allowance for the taxable year of the distribution and for subsequent taxable years.

(b) Retention of Excess Amounts. Under VCT and Audit CAP, Excess Amounts will be treated as corrected (even though the Excess Amounts are retained in the 403(b) Plan) if the following requirements are satisfied. Excess Amounts arising from a section 415 failure, adjusted for earnings through the date of correction, must reduce affected participants' applicable section 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. Excess Amounts (whether arising from a section 415 failure or a section 403(b)(2) failure), adjusted for earnings through the date of correction, must also reduce participants' exclusion allowances by being treated as amounts previously excludable under section 403(b)(2)(A)(ii) beginning with the year following the year of correction (or the year of correction if the Plan Sponsor so chooses). If this correction method is used, it must generally be used for all participants who have Excess Amounts.

.06 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 section 401(b) has not expired can be corrected by operation of the Code through retroactive remedial amendment.

.07 Matters subject to excise taxes. (1) Except as provided in paragraph (3) of this subsection, excise taxes and additional taxes, to the extent applicable, are not waived merely because the underlying failure has been corrected or because the taxes result from the correction. Thus, for example, the excise tax on certain excess contributions under section 4979 is not waived under these correction programs.

(2) Except as provided in paragraph (3) of this section, 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 section 412), prohibited transactions, and failures to file the Form 5500 cannot be corrected under the correction programs. However, if the event is also an Operational Failure (for example, if the terms of the plan document relating to plan loans to participants were not followed and loans made under the plan did not satisfy section 72(p)(2)), the correction programs will be available to correct the Operational Failure, even though the excise or income taxes generally still will apply.

(3) As part of VCP, if the failure involves the failure to satisfy the minimum required distribution requirements of section 401(a)(9), in appropriate cases, the Service will waive the excise tax under section 4974 applicable to plan participants. The waiver will be included in the compliance statement. The Plan Sponsor, as part of the submission, must request the waiver and in cases where the participant subject to the excise tax is an owner-employee, as defined in section 401(c)(3), or a 10 percent owner of a corporation, the Plan Sponsor must also provide an explanation supporting the request.

.08 Correction for SEPs. (1) Correction for SEPs generally. Generally, the correction for a SEP is expected to be similar to the correction required for a Qualified Plan with a similar Qualification Failure.

(2) Special correction for SEPs. Under VCSEP, in any case in which correction under section 6.08(1) is not feasible for a SEP or in any other case determined by the Service in its discretion (including failures relating to sections 402(g), 415, and 401(a)(17), failures relating to deferral percentages, discontinuance of contributions to a SARSEP, and retention of overcontributions for cases in which there has been no violation of a statutory limitation), the Service may provide for a different correction. See section 12.07 for a special fee that may apply in such a case.

(3) Correction of failure to satisfy deferral percentage test. If the failure involves a violation of the deferral percentage test under section 408(k)(6)(A)(iii) applicable to a SARSEP, there are several methods to correct the failure, similar to the methods used in VCS and VCO. This failure may be corrected in one of the following ways:

(a) The Plan Sponsor may make contributions that are 100% vested to all eligible nonhighly compensated employees (to the extent permitted by section 415) necessary to raise the deferral percentage needed to pass the test. This amount may be calculated as either the same percentage of compensation or the same flat dollar amount (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.

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

(b) Earnings adjustment methods.

(i) The earnings rate generally is based on the investment results that would have applied to the corrective contribution if the failure had not occurred.

(ii) Insofar as SEP assets are held in IRAs, there is no earnings rate under the SEP as a whole. If the Plan Sponsor is unable to determine what the actual investment results would have been, a reasonable interest rate may be used.

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

.10 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 the Employee Retirement Income Security Act of 1974 (ERISA).

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Other parts of this Revenue Procedure:
Table of Contents 1 2 3 4 5 6 7 a b c