.01 Purpose. This revenue procedure updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of § 401(a),  403(a),  403(b),  408(k), or  408(p) of the Internal Revenue Code (the “Code”), but that have not met these requirements for a period of time. This system, the Employee Plans Compliance Resolution System (“EPCRS”), permits plan sponsors to correct these failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“Audit CAP”).

.02 General principles underlying EPCRS. EPCRS is based on the following general principles:

.03 Overview. EPCRS includes the following basic elements:

.01 Effect on programs. This revenue procedure modifies and supersedes Rev. Proc. 2003-44, 2003-1 C.B. 1051, which was the prior consolidated statement of the correction programs under EPCRS. The modifications to Rev. Proc. 2003-44 that are reflected in this revenue procedure include:

.02 Future enhancements. (1) It is expected that the EPCRS revenue procedure will continue to be updated from time to time, including, as noted above, further improvements to EPCRS based on comments previously received. In addition, the Service and Treasury continue to invite further comments on how to improve EPCRS. Comments should be sent to:

(2) Comments are requested for certain specific issues under EPCRS. First, comments are requested regarding methods to correct a failure to provide an eligible employee the opportunity to make a catch-up contribution that is permitted under the terms of the plan and § 414(v). (See 6.02(7) and Appendix B 2.02.) Second, given that § 402A permits a § 401(a) or 403(b) plan to offer employees the opportunity to designate elective deferrals as Roth contributions for taxable years beginning after December 31, 2005, comments are requested regarding methods to correct a failure to provide an eligible employee with the opportunity to make elective deferrals for a plan that permits an eligible employee to designate elective deferrals as Roth contributions. Third, the correction mechanism in current §1.415-6(b)(6) of the Income Tax Regulations is not included in the regulations that were proposed under § 415 (70 FR 31214) and published on May 31, 2005. The preamble to the proposed regulations provides that the correction mechanism (for excess annual additions) will be included in EPCRS in the future. It is expected that correction mechanism will in any event continue to be available under EPCRS, including under SCP where correction of a significant operational failure is permitted. Accordingly, comments are requested regarding the applicable correction methods for this failure. Comments are also requested on whether the correction mechanisms provided for in current §1.415-6(b)(6), including the maintenance of suspense accounts, should be retained as options under EPCRS, or whether correction of excess annual additions should be treated as excess amounts under this revenue procedure (i.e., distributed or forfeited, as appropriate). Fourth, comments are requested regarding whether additional correction methods are needed in order for plans to take advantage of the fiduciary safe harbor recently issued by the Department of Labor for Orphan Plans (71 FR 20820) where the plan is subject to the requirements of §§ 401(a)(11) and 417 in light of the ability to satisfy those requirements by purchase of a commercial annuity contract.

.01 Effect of EPCRS on retirement plans. For a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, if the eligibility requirements of section 4 are satisfied and the Plan Sponsor corrects a failure in accordance with the applicable requirements of SCP in section 7, VCP in sections 10 and 11, or Audit CAP in section 13, the Service will not treat the retirement plan as failing to meet § 401(a), § 403(b), § 408(k), or § 408(p), as applicable. Thus, for example, if the Plan Sponsor corrects the failures in accordance with the requirements of this revenue procedure, the plan will be treated as satisfying § 401(a), § 403(b), § 408(k), or § 408(p), as applicable, for purposes of applying § 3121(a)(5) (FICA taxes) and § 3306(b)(5) (FUTA taxes).

.02 Compliance statement. If a Plan Sponsor or Eligible Organization receives a compliance statement under VCP, the compliance statement is binding upon the Service and the Plan Sponsor or Eligible Organization as provided in section 10.09.

.03 Other taxes and penalties. See section 6.09 for rules relating to other taxes and penalties.

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

.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 with respect to insignificant Operational Failures only.

(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.

(3) Audit CAP. 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.

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

.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 has been completed or substantially completed before the plan or Plan Sponsor is Under Examination, correction of significant Operational Failures can be completed under SCP.

.03 Favorable Letter requirement. The provisions of SCP relating to significant Operational Failures (see section 9) are available for a Qualified Plan only if the plan is the subject of a Favorable Letter. The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SEP but only if the plan document consists of either (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002-10, 2002-1 C.B. 401), or (ii) a prototype SEP that has a current favorable opinion letter which has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10. The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SIMPLE IRA Plan but only if the plan document consists of either (i) a valid Model Form 5305-SIMPLE or 5304-SIMPLE adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002-10), or (ii) a current favorable opinion letter for a Plan Sponsor that has adopted a prototype SIMPLE IRA Plan which has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10.

.04 Established practices and procedures. In order to be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with applicable Code requirements. For example, the plan administrator of a Qualified Plan that may be top-heavy under § 416 may include in its plan operating manual a specific annual step to determine whether the plan is top-heavy and, if so, to ensure that the minimum contribution requirements of the top-heavy rules are satisfied. A plan document alone does not constitute evidence of established procedures. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and an Operational Failure must have occurred through an oversight or mistake in applying them. In addition, SCP may also be used in situations where the operational failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure. In the case of a failure that relates to Transferred Assets or to a plan assumed in connection with a corporate merger, acquisition, or other similar employer transaction between the Plan Sponsor and sponsor of the transferor plan or the prior plan sponsor of an assumed plan, the plan is considered to have established practices and procedures for the Transferred Assets if such practices and procedures are in effect for the Transferred Assets by the end of the first plan year that begins after the corporate merger, acquisition, or other similar transaction.

.05 Correction by plan amendment. (1) Availability of correction by plan amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a Qualified Plan to correct Plan Document, Demographic, and Operational Failures by a plan amendment, including correcting an Operational Failure by plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6). In addition, a Plan Sponsor may correct an Operational Failure by plan amendment to amend the plan to the extent necessary to reflect the corrective action. For example, if the plan failed to satisfy the average deferral percentage (“ADP”) test required under § 401(k)(3) and the Plan Sponsor must make qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions. Except as provided in section 4.06, the issuance of a compliance statement does not constitute a determination as to the effect of any plan amendment on the qualification of the plan.

(2) Availability of correction by plan amendment in SCP. A Plan Sponsor may use SCP for a Qualified Plan to correct an Operational Failure by a plan amendment in order to conform the terms of the plan to the plan’s prior operations only to correct Operational Failures listed in section 2.07 of Appendix B. These failures must be corrected in accordance with the correction methods set forth in section 2.07 of Appendix B. SCP is not otherwise available for a Plan Sponsor to correct an Operational Failure by a plan amendment. Any plan amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6).

.06 Submission for a determination letter. (1) Under VCP and Audit CAP, a determination letter will be issued to correct a nonamender failure. In addition, a determination letter may be issued (a) to correct a failure in a plan that is either submitted under VCP or that is being examined during the last 12 months of the plan’s remedial amendment cycle, as defined in section 13 of Rev. Proc. 2005-66, 2005-37 I.R.B. 509 (an “on-cycle” filing), or (b) to correct a failure in either a VCP filing submitted for a terminating plan or a terminating plan under examination. For this purpose, the term “nonamender failure” means a failure to amend the plan to reflect a change in a qualification requirement within the plan’s applicable remedial amendment period, as set forth in Rev. Proc. 2005-66. A change in a qualification requirement includes a change arising from a statutory change, or a change in the requirements provided in regulations or other guidance published in the Internal Revenue Bulletin. A determination letter issued under VCP with respect to a nonamender failure will include only a determination on all applicable laws with respect to which the remedial amendment period has expired. Notwithstanding the above, a determination letter will not be issued with respect to a failure to amend a plan timely for (a) good faith plan amendments for the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 (EGTRRA), within the period described in Notice 2001-42, 2001-2 C.B. 70, including those changes listed in Notice 2005-5, 2005-3 I.R.B. 337, (b) plan amendments for the final and temporary regulations under §401(a)(9) as they appeared in the April 1, 2003, edition of 26 CFR Part 1 (the § 401(a)(9) final and temporary regulations) within the period described in Rev. Proc. 2002-29, 2002-1 C.B. 1176, as modified by Rev. Proc. 2003-10, 2003-1 C.B. 259, and (c) interim amendments as provided in section 5 of Rev. Proc. 2005-66. The preceding sentence is not applicable if (i) the failure is submitted in a VCP filing made during an on-cycle year, (ii) the plan is being examined during an on-cycle year, (iii) the failure is submitted in a VCP filing for a terminating plan, or (iv) the plan is a terminating plan Under Examination. Except as provided in section 10.08, in cases where a determination letter is not issued with respect to failures corrected through plan amendment, the issuance of a compliance statement or closing agreement will constitute a determination as to the effect of any plan amendment on the qualification of the plan. Notwithstanding any other provision of this section 4.06, the Service reserves the right to require the submission of a determination letter application with respect to any amendment proposed or adopted to correct any Qualification Failure under VCP or Audit CAP.

(2) In the case of any correction of an Operational Failure through plan amendment under SCP, as permitted under section 4.05(2), a Plan Sponsor must submit a determination letter application. The determination letter application must be submitted before the end of the plan’s applicable remedial amendment period described in Rev. Proc. 2005-66. As part of the determination letter submission, the amendment under SCP must be identified as such in the cover letter.

.07 Availability of correction of Employer Eligibility Failure. SCP is not available for a Plan Sponsor to correct an Employer Eligibility Failure.

.08 Availability of correction of a terminated plan. Correction of Qualification Failures in a terminated plan may be made under VCP and Audit CAP, whether or not the plan trust is still in existence.

.09 Availability of correction of an Orphan Plan. An Orphan Plan that is terminating may be corrected under VCP and Audit CAP, provided that the party acting on behalf of the plan is an Eligible Party, as defined in section 5.06(2).

.10 Availability of correction of § 457 plans. Submissions relating to § 457(b) eligible governmental plans will be accepted by the Service on a provisional basis outside of EPCRS through standards that are similar to EPCRS.

.11 Egregious failures. SCP is not available to correct Operational Failures that are egregious. For example, any of the following would be considered egregious: (a) a plan has consistently and improperly covered only highly compensated employees; (b) a plan provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003-24, 2003-1 C.B. 853, with respect to welfare benefit funds); or (c) a contribution to a defined contribution plan for a highly compensated employee is several times greater than the dollar limit set forth in § 415. VCP is available to correct egregious failures; however, these failures are subject to the fees described in section 12.06. Audit CAP also is available to correct egregious failures.

.12 Diversion or misuse of plan assets. SCP, VCP, and Audit CAP are not available to correct failures relating to the diversion or misuse of plan assets.

.13 Abusive tax avoidance transactions. (1) Effect on Programs. (a) SCP. With respect to SCP, in the event that the plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction (as defined in section 4.13(2)), SCP is not available to correct any Operational Failure that is directly or indirectly related to the abusive tax avoidance transaction.

(b) VCP. With respect to VCP, if the Service determines that a plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as defined in section 4.13(2)), then the matter will be referred to the Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. Upon receiving a response from the Tax Shelter Coordinator, the Service may determine that the plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction, and that the failures addressed in the VCP submission are related to that transaction. In those situations, the Service will conclude the review of the submission without issuing a compliance statement and will refer the case for examination. However, if the Tax Shelter Coordinator determines that the plan failures are unrelated to the abusive tax avoidance transaction or that no abusive tax avoidance transaction occurred, then the Service will continue to address the failures identified in the VCP submission, and may issue a compliance statement with respect to those failures. In no event may a compliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor was not a party to an abusive tax avoidance transaction. In addition, even if it is concluded that the failures can be addressed pursuant to a VCP submission, the Service reserves the right to make a referral of the abusive tax avoidance transaction matter for examination.

(c) Audit CAP and SCP (for plans Under Examination). For plans Under Examination, if the Service determines that the plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction, the matter may be referred to the Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. With respect to plans Under Examination, an abusive tax avoidance transaction includes a transaction described in section 4.13(2) and any other transaction that the Service determines was designed to facilitate the impermissible avoidance of tax. Upon receiving a response from the Tax Shelter Coordinator, (i) if the Service determines that a failure is related to the abusive tax avoidance transaction, the Service reserves the right to conclude that neither Audit CAP nor SCP is available for that failure and (ii) if the Service determines that satisfactory corrective actions have not been taken with regard to the transaction, the Service reserves the right to conclude that neither Audit CAP nor SCP is available to the plan.

(2) Definition. For purposes of section 4.13(1) (except to the extent otherwise provided in section 4.13(1)(c)), an abusive tax avoidance transaction means any listed transaction under § 1.6011-4(b)(2) and any other transaction identified as an abusive transaction in the IRS website entitled “EP Abusive Tax Transactions.”

The following definitions apply for purposes of this revenue procedure:

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

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

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

(a) Plan Document Failure. The term “Plan Document Failure” means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or § 403(a). Thus, for example, the failure of a plan to be amended to reflect a new qualification requirement within the plan’s applicable remedial amendment period under § 401(b) is a Plan Document Failure. In addition, if a plan has not been timely or properly amended during an applicable remedial amendment period for adopting good faith or interim amendments with respect to disqualifying provisions, as described in §1.401(b)-1(b)(1), the plan is considered to have a Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes any Qualification Failure that is a violation of the requirements of § 401(a) or § 403(a) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.

(b) Operational Failure. The term “Operational Failure” means a Qualification Failure (other than an Employer Eligibility Failure) that arises solely from the failure to follow plan provisions. A failure to follow the terms of the plan providing for the satisfaction of the requirements of § 401(k) and § 401(m) is considered to be an Operational Failure. A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively to reflect the plan’s operations (e.g., pursuant to § 401(b)). In the situation where a Plan Sponsor timely adopted a good faith or interim amendment which is not a disqualifying provision as described in § 1.401(b)-1(b)(1), and the plan was not operated in accordance with the terms of such amendment, the plan is considered to have an Operational Failure.

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

(d) Employer Eligibility Failure. The term “Employer Eligibility Failure” means the adoption of a plan intended to include a qualified cash or deferred arrangement and satisfy the requirements of § 401(a) or §403(a) 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. The term “Excess Amount” means (a) an Overpayment, (b) an elective deferral or employee after-tax contribution returned to satisfy § 415, (c) an elective deferral in excess of the limitation of § 402(g) that is distributed, (d) an excess contribution or excess aggregate contribution that is distributed to satisfy § 401(k) or § 401(m), (e) an elective deferral that is distributed to satisfy the limitation of § 401(a)(17), or (f) 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 that is not identical to an approved volume submitter plan), a current favorable opinion letter for a Plan Sponsor that has adopted a master or prototype plan, (standardized or nonstandardized), or a current favorable advisory letter and certification that the Plan Sponsor has adopted a plan that is identical to an approved volume submitter plan. A plan has a current favorable determination letter, opinion letter, or advisory letter if (a), (b), (c), or (d) below is satisfied:

(a) The plan has a favorable determination letter, opinion letter, or advisory letter/certification that considers 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), the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA ’98), and the Community Renewal Tax Relief Act of 2000 (CRA).)

(b) The plan is initially adopted or effective after December 31, 2001, and the Plan Sponsor timely submits an application for a determination letter or adopts an approved master or prototype plan or volume submitter plan within the plan’s remedial amendment period under § 401(b).

(c) The plan is terminated prior to the expiration of the applicable GUST remedial amendment period under § 401(b) and the plan was amended to reflect the provisions of GUST (including § 415, as provided in Rev. Rul. 2002-27, 2002-1 C.B. 925, in the case of defined contribution plans), the provisions of the 401(a)(9) final and temporary regulations, and in the case of defined benefit plans, the 1994 Group Annuity Reserving Table (94 GAR) (see Rev. Rul. 2001-62, 2001-2 C.B. 632).

(d) The plan is terminated prior to the expiration of the applicable Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) remedial amendment period under § 401(b) and the plan was amended to reflect the provisions of EGTRRA and any other legislation that was in effect when the plan was terminated.

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

(a) tax on the trust (Form 1041) (and any interest or penalties applicable to the trust return),

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

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

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

(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, including a distribution that results from a failure to comply with plan terms that implement § 401(a)(17), § 401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), § 411(a)(3)(G), or § 415. An Overpayment does not include a distribution of any Excess Amount described in section 5.01(3)(b) through (f).

(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 § 414(l) from a plan sponsored by an employer that was not a member of the same controlled group as the Plan Sponsor immediately prior to the corporate merger, acquisition, or other similar employer transaction. If a transfer of plan assets related to the same employer transaction is accomplished through several transfers, then the date of the transfer is the date of the first transfer.

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

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

(2) 403(b) Failure. 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 § 403(b)(12)(A)(ii) (relating to the availability of salary reduction contributions);

(ii) A failure to satisfy the requirements of § 401(m) (as applied to 403(b) Plans pursuant to § 403(b)(12)(A)(i));

(iii) A failure to satisfy the requirements of § 401(a)(17) (as applied to 403(b) Plans pursuant to § 403(b)(12)(A)(i));

(iv) A failure to satisfy the distribution restrictions of § 403(b)(7) or § 403(b)(11);

(v) A failure to satisfy the incidental death benefit rules of § 403(b)(10);

(vi) A failure to pay minimum required distributions under § 403(b)(10);

(vii) A failure to give employees the right to elect a direct rollover under § 403(b)(10), including the failure to give meaningful notice of such right;

(viii) A failure of the annuity contract or custodial agreement to provide participants with a right to elect a direct rollover under §§ 403(b)(10) and 401(a)(31);

(ix) A failure to satisfy the limit on elective deferrals under § 403(b)(1)(E);

(x) A failure of the annuity contract or custodial agreement to provide the limit on elective deferrals under §§ 403(b)(1)(E) and 401(a)(30);

(xi) A failure involving contributions or allocations of Excess Amounts; or

(xii) Any other failure to satisfy applicable requirements under § 403(b) that (A) results in the loss of § 403(b) status for the plan or the loss of § 403(b) status for one or more custodial account(s) or annuity contract(s) under the plan and (B) is not a Demographic Failure, an Employer Eligibility Failure, or a failure related to contributions on behalf of individuals who are not employees of the employer.

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

(c) Employer Eligibility Failure. The term “Employer Eligibility Failure” means any of the following:

(i) The adoption of a plan intended to satisfy the requirements of § 403(b) by a Plan Sponsor that is not a tax-exempt organization described in § 501(c)(3) or a public educational organization described in § 170(b)(1)(A)(ii);

(ii) A failure to satisfy the nontransferability requirement of § 401(g);

(iii) A failure to initially establish or maintain a custodial account as required by § 403(b)(7); or

(iv) A failure to purchase (initially or subsequently) either an annuity contract from an insurance company (unless grandfathered under Rev. Rul. 82-102, 1982-1 C.B. 62) or a custodial account from a regulated investment company utilizing a bank or an approved non-bank trustee/custodian.

(3) Excess Amount. The term “Excess Amount” means any amount returned to ensure that the plan satisfies the requirements of § 401(a)(30), 415, or 403(b)(2) (for plan years prior to January 1, 2002). In addition, the term “Excess Amount” includes (for all plan years) any distributions required to ensure that the plan complies with the applicable requirements of § 403(b).

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

(a) additional income tax resulting from income inclusion for employees or other participants (Form 1040), including the 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 the correction under this revenue procedure.

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

.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); (b) a Plan Sponsor that is under an Exempt Organizations examination (that is, an examination of a Form 990 series or other Exempt Organizations examination); or (c) a plan that is under investigation by the Criminal Investigation Division of the Internal Revenue Service.

(2) A plan that is under an Employee Plans examination includes any plan for which the Plan Sponsor, or a representative, has received verbal or written notification from Employee Plans of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination, and also includes any plan that has been under an Employee Plans examination and is now in Appeals or in litigation for issues raised in an Employee Plans examination. A plan is considered to be Under Examination if it is aggregated for purposes of satisfying the nondiscrimination requirements of § 401(a)(4), the minimum participation requirements of § 401(a)(26), the minimum coverage requirements of § 410(b), or the requirements of § 403(b)(12), with 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, § 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 series form and the Employee Plans agent notifies the Plan Sponsor, or a representative, of possible Qualification Failures, whether or not the Plan Sponsor is officially notified of an “examination.” This would include a case where, for example, a Plan Sponsor has applied for a determination letter on plan termination, and an Employee Plans agent notifies the Plan Sponsor that there are partial termination concerns. In addition, if, during the review process, the agent requests additional information that indicates the existence of a Qualification Failure(s) not previously identified by the Plan Sponsor, the plan is considered to be under an Employee Plans examination. If, in such a case, the determination letter request under review is subsequently withdrawn, the plan is nevertheless considered to be under an Employee Plans examination for purposes of eligibility under SCP and VCP with respect to those issues raised by the agent reviewing the determination letter application. The fact that a Plan Sponsor voluntarily submits a determination letter application does not constitute a voluntary identification of Qualification Failures to the Service. In order to be eligible to perfect a determination letter application into a VCP submission, the Plan Sponsor (or the authorized representative) must identify each Qualification Failure, in writing, to the reviewing agent before the agent recognizes the existence of the Qualification Failure(s) or addresses the Qualification Failure(s) in communications with the Plan Sponsor (or the authorized representative).

(4) A Plan Sponsor that is under an Exempt Organizations examination includes any Plan Sponsor that has received (or whose representative has received) verbal or written notification from Exempt Organizations of an impending Exempt Organizations examination or of an impending referral for an Exempt Organizations examination and also includes any Plan Sponsor that has been under an Exempt 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 § 408(k). For purposes of this revenue procedure, the term SEP also includes a salary reduction SEP (“SARSEP”) described in § 408(k)(6), when applicable.

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

.06 Definitions for Orphan Plans. (1) Orphan Plan. With respect to VCP and Audit CAP, the term “Orphan Plan” means any Qualified Plan with respect to which an “Eligible Party” (defined in section 5.06(2)) has determined that the Plan Sponsor (a) no longer exists, (b) cannot be located, (c) is unable to maintain the plan, or (d) has abandoned the plan pursuant to regulations issued by the Department of Labor. However, the term “Orphan Plan” does not include any plan terminated pursuant to Department of Labor regulations governing the termination of abandoned individual account plans.

(2) Eligible Party. For purposes of section 5.06(1), the term “Eligible Party” means:

.01 Correction principles; rules of general applicability. The general correction principles in section 6.02 and rules of general applicability in sections 6.03 through 6.11 apply for purposes of this revenue procedure.

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

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

(2) Reasonable and appropriate correction. The correction should be reasonable and appropriate for the failure. Depending on the nature of the failure, there may be more than one reasonable and appropriate correction for the failure. For Qualified Plans, any correction method permitted under Appendix A or Appendix B is deemed to be a reasonable and appropriate method of correcting the related Qualification Failure. Any correction method permitted under Appendix A or Appendix B applicable to a 403(b) Plan, a SEP, or a SIMPLE IRA Plan is deemed to be a reasonable and appropriate method of correcting the related 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 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 for failures relating to nondiscrimination should provide benefits for nonhighly compensated employees. For example, for Qualified Plans, the correction method set forth in § 1.401(a)(4)-11(g) (rather than methods making use of the special testing provisions set forth in § 1.401(a)(4)-8 or § 1.401(a)(4)-9) would be the typical means of correcting a failure to satisfy nondiscrimination requirements. Similarly, the correction of a failure to satisfy the requirements of § 401(k)(3), § 401(m)(2), or § 401(m)(9) (relating to nondiscrimination), solely by distributing excess amounts to highly compensated employees would not be the typical means of correcting such a failure.

(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 § 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 § 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 Subtitle B of Part 2 of Title I of ERISA). 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. In the case of a Group Submission, the consistency requirement applies on a plan by plan basis.

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

(a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for earnings (including losses) and forfeitures that would have been allocated to the participant’s account if the failure had not occurred. However, 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 § 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 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.

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $50 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions.

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

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

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

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

(6) Correction principle for loan failures. In the case of a loan failure corrected in accordance with section 6.07(2)(b) or (c) and section 6.07(3), the participant is generally responsible for paying the corrective payment. However, with respect to the failure listed in section 6.07(3), the employer should pay a portion of the correction payment on behalf of the participant equal to the interest that accumulates as a result of such failure — generally determined at a rate equal to the greater of the plan loan rate or the rate of return under the plan.

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

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

.03 Correction of an Employer Eligibility Failure. (1) The permitted correction of an Employer Eligibility Failure is the cessation of all contributions (including 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 § 403(b)(7) (to the extent the assets are held in custodial accounts) or § 403(b)(11) (for those assets invested in annuity contracts that would be subject to § 403(b)(11) restrictions if the employer were eligible).

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

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

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

(2)(a) As alternatives to the correction method in section 6.04(1), correction for a failure to obtain spousal consent may be made under either section 6.04(2)(b) or section 6.04(2)(c).

(b) In the event that spousal consent to the prior distribution is not obtained (e.g., because the spouse chooses not to consent, the spouse does not respond to the notice, or the spouse cannot be located), the spouse is entitled to a benefit under the plan equal to the portion of the qualified joint and survivor annuity that would have been payable to the spouse upon the death of the participant had a qualified joint and survivor annuity been provided to the participant under the plan at the annuity starting date for the prior distribution. Such spousal benefit must be provided if a claim is made by the spouse.

(c) In the event that spousal consent to the prior distribution is not obtained, the plan may offer the spouse the choice between (i) the survivor annuity benefit described in section 6.04(2)(b) or (ii) a single-sum payment equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under § 417(e)(3)). Any such single-sum payment is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or other eligible retirement plan.

.05 Correction by plan amendment. In a case in which correction of a Qualification Failure includes correction of a Plan Document Failure, Demographic Failure, or Operational Failure by plan amendment, a determination letter application may be required. See section 4.06.

.06 Special rules relating to Excess Amounts. (1) Treatment of Excess Amounts under Qualified Plans. Except as otherwise provided in section 6.02(5)(c), a distribution of an Excess Amount is not eligible for the favorable tax treatment accorded to distributions from Qualified Plans (such as eligibility for rollover under § 402(c)). Thus, for example, if such a distribution was contributed to an individual retirement arrangement (“IRA”), the contribution is not a valid rollover contribution for purposes of determining the amount of excess contributions (within the meaning of § 4973) to the individual’s IRA. A distribution of an Excess Amount is generally treated in the manner described in section 3 of Rev. Proc. 92-93, 1992-2 C.B. 505, relating to the corrective disbursement of 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. Except as otherwise provided in section 6.02(5)(c), where an Excess Amount has been or is being distributed, the Plan Sponsor must notify the recipient that (a) an Excess Amount has been or will be distributed and (b) an Excess Amount is not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, is not eligible for tax-free rollover).

(2) Treatment of Excess Amounts under 403(b) Plans. The distribution of Excess Amounts is not an eligible rollover distribution within the meaning of § 403(b)(8). A distribution of Excess Amounts is generally treated in the manner described in section 3 of Rev. Proc. 92-93 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. Except as otherwise provided in section 6.02(5)(c), where an Excess Amount has been or is being distributed, the Plan Sponsor must notify the recipient that (a) an Excess Amount has been or will be distributed and (b) an Excess Amount is not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, is not eligible for tax-free rollover).

.07 Rules relating to reporting plan loan failures. (1) General rule for loans. Unless correction is made in accordance with this section 6.07(2) or (3), a deemed distribution under § 72(p)(1) in connection with a failure relating to a loan to a participant made from a Qualified Plan or a 403(b) Plan must be reported on Form 1099-R with respect to the affected participant and any applicable income tax withholding amount that was required to be paid in connection with the failure (see § 1.72(p)-1, Q&A-15) must be paid by the employer. As part of VCP, the deemed distribution may be reported on Form 1099-R with respect to the affected participant for the year of correction (instead of the year of the failure).

(2) Special rules for loans. (a) In general. The correction methods set forth in this section 6.07(2) (b) and (c) and section 6.07(3) are only available for plan loan failures that are corrected through VCP. The correction methods described in section 6.07(2) (b) and (c) and section 6.07(3) are not available if the maximum period for repayment of the loan pursuant to § 72(p)(2)(B) has expired. The Service reserves the right to limit the use of the correction methods listed in section 6.07(2) (b) and (c) and section 6.07(3) to situations that it considers appropriate; for example, where the loan failure is caused by employer action. A deemed distribution corrected under section 6.07(2) (b) or (c) or under section 6.07(3) is not required to be reported on Form 1099-R and repayments made by correction under sections 6.07(2) and 6.07(3) do not result in the affected participant having additional basis in the plan for purposes of determining the tax treatment of subsequent distributions from the plan to the affected participant.

(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.

(3) Defaulted loans. A failure to repay the loan in accordance with the loan terms where the terms satisfy § 72(p)(2) may be corrected by (i) a lump sum repayment equal to the additional repayments that the affected participant would have made to the plan if there had been no failure to repay the plan, plus interest accrued on the missed repayments, (ii) reamortizing the outstanding balance of the loan, including accrued interest, over the remaining payment schedule of the original term of the loan, or (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 by operation of the Code through retroactive remedial amendment.

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

(2) As part of VCP and Audit CAP, if the failure involves the failure to satisfy the minimum required distribution requirements of § 401(a)(9), in appropriate cases, the Service will waive the excise tax under § 4974 applicable to plan participants. The waiver will be included in the compliance statement or in the closing agreement in the case of Audit CAP. 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 § 401(c)(3), or a 10 percent owner of a corporation, the Plan Sponsor must also provide an explanation supporting the request. See section 12.02(2) relating to the applicable compliance fee for certain § 401(a)(9) failures.

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

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

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

(2) Special correction for SEPs and SIMPLE IRA Plans. In any case in which correction under section 6.10(1) is not feasible for a SEP or SIMPLE IRA Plan or in any other case determined by the Service in its discretion (including failures relating to §§ 402(g), 415, and 401(a)(17), failures relating to deferral percentages, discontinuance of contributions to a SARSEP or SIMPLE IRA Plan, and retention of Excess Amounts for cases in which there has been no violation of a statutory limitation with respect to a SEP or SIMPLE IRA Plan), the Service may provide for a different correction. See section 12.06(2) for a special fee that may apply in such a case.

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

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

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

(4) Treatment of undercontributions to a SEP or a SIMPLE IRA Plan. (a) Make-up contributions; earnings. The Plan Sponsor should correct undercontributions to a SEP or a SIMPLE IRA Plan by contributing make-up amounts that are fully vested, adjusted for earnings credited 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 section 6.10, an Excess Amount is an amount contributed on behalf of an employee that is in excess of an employee’s benefit under the plan, or an elective deferral in excess of the limitations of §§ 402(g) or 408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan Sponsor may effect distribution of the Excess Amount, adjusted for earnings through the date of correction, to the affected participant. The amount distributed to the affected participant is includible in gross income in the year of distribution. The distribution is reported on Form 1099-R for the year of distribution with respect to each participant receiving the distribution. In addition, the Plan Sponsor must inform affected participants that the distribution of an Excess Amount is not eligible for favorable tax treatment accorded to distributions from a SEP or a SIMPLE IRA Plan (and,