INCOME TAXRev. Rul. 2000–9, page 497.Federal rates; adjusted federal rates; adjusted federallong-term rate, and the long-term exempt rate. Forpurposes of section 1274, 1288, 382, and other sectionsof the Code, tables set forth the rates for February 2000.

T.D. 8862, page 466.Final regulations under section 367(b) of the Code relate tothe transactions involving certain foreign corporations andthe application of nonrecognition exchange provisions undersubchapter C of the Code.

T.D. 8863, page 488.REG–116048–99, page 584.Temporary and proposed regulations under section 367(b)of the Code relate to transactions involving certain foreigncorporations and the application of nonrecognition exchangeprovisions under subchapter C of the Code. A public hearingis scheduled for April 20, 2000.

T.D. 8866, page 495.Final regulations under section 1092 of the Code relate toequity options with flexible terms and qualified covered calls.

T.D. 8868, page 491.Final regulations under section 936 of the Code relate to thetermination of the Puerto Rico and possession tax credit.

T.D. 8869, page 498.Final regulations under section 1361 of the Code relate to thetreatment of corporate subsidiaries of S corporations and in-terpret the rules added to the Internal Revenue Code by sec-tion 1308 of the Small Business Job Protection Act of 1996.

EMPLOYEE PLANS

Rev. Proc. 2000–16, page 518.Administrative programs; closing agreements. Thisprocedure consolidates and expands upon the following cur-rent employee plans programs: the Administrative Policy Re-garding Self-Correction, the Walk-in Closing Agreement Pro-gram, the Closing Agreement Program, the VoluntaryCompliance Resolution Program, the Standardized VCR Pro-cedure, and the Tax-sheltered Voluntary Correction Program.Rev. Procs. 98–22, 99–13, and 99–31 modified and super-seded. Rev. Proc. 2000–8 modified.

Rev. Proc. 2000–20, page 553.Master and prototype plans. This procedure combinesprior revenue procedures pertaining to master and proto-type plans and regional prototype plans. It also provides thatmass submitters and sponsors may apply for opinion lettersthat reflect current law beginning April 7, 2000, and May 8,2000, respectively. Volume submitter practitioners mayapply for current law advisory letters begin-ning March 8, 2000. Rev. Procs. 89–9, 89–13, 90–21,91–66, 92–41, 93–9, 93–10, and 95–42 superseded. Rev.Procs. 2000–6 and 2000–8 modified. Announcement99–50 modified.

Notice 2000–11, page 572.Safe harbor explanation; certain qualified plan distrib-utions. This notice provides a “Safe Harbor Explanation”that plan administrators may provide to recipients of eligiblerollover distributions from qualified plans in order to satisfysection 402(f) of the Code. Notice 92–48 obsoleted.

Internal Revenue

bbuulllleettiinnBulletin No. 2000–6

February 7, 2000

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page ii.Index for January begins on page iv.

(Continued on the next page )

February 7, 2000 2000–6 I.R.B.

EMPLOYEE PLANS—continued

Announcement 2000–7, page 586.Mortality table; retirement plans. This announcementseeks public comments with respect to the mortality tablein effect under section 412(1)(7)(C) of the Code.

EXEMPT ORGANIZATIONSAnnouncement 2000–8, page 586.A list is given of organizations now classified as privatefoundations.

EMPLOYMENT TAX

Rev. Rul. 2000–6, page 512.Information reporting requirements applicable toelection workers. The requirements for information re-porting applicable to election workers whose compensa-tion is not subject to FICA tax are found under section6041(a) of the Code. As a result, reporting is generally not

required for election workers earning less than $600 annu-ally. Rev. Rul. 88–36 modified.

ADMINISTRATIVE

REG–208254–90, page 577.Proposed regulations under section 861 of the Code relateto the source of compensation for labor or personal ser-vices. A public hearing is scheduled for April 19, 2000.

REG–105089–99, page 580.Proposed regulations under section 356 of the Code relateto the treatment of nonqualified preferred stock and otherpreferred stock in certain exchanges and distributions. Apublic hearing is scheduled for May 31, 2000.

Rev. Proc. 2000–13, page 515.This prodedure provides guidance on the application of Arti-cles 10(2) and 23 of the United States-United Kingdom in-come tax treaty after the repeal of the U.K. advance corpo-ration tax (ACT) and reduction of the U.K. Shareholder taxcredit. Rev. Proc. 80–18 modified.

2000–6 I.R.B. February 7, 2000

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basis,and are published in the first Bulletin of the succeeding semi-annual period, respectively.

The IRS Mission

Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness toall.

Introduction

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

26 CFR 601.202: Closing agreements.

Rev. Proc. 2000–16

TABLE OF CONTENTS

PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

SECTION 1. PURPOSE AND OVERVIEW.01 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 520.02 Revisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 520.03 General principles underlying EPCRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 520.04 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 521.05 Future enhancements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 521

SECTION 2. EFFECT ON PROGRAMS.01 Effect on programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 521.02 Effect on specific programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 521

PART II. PROGRAM EFFECT AND ELIGIBILITY

SECTION 3. EFFECT OF EPCRS; RELIANCE.01 Effect of EPCRS on Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 521.02 Effect of EPCRS on 403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 521.03 Other taxes and penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.04 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522

SECTION 4. PROGRAM ELIGIBILITY.01 Program eligibility for Qualified Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.02 Program eligibility for 403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.03 Effect of examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.04 Favorable Letter requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.05 Established practices and procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.06 Qualified Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.07 Egregious failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522.08 Diversion or misuse of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 522

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

SECTION 5. DEFINITIONS.01 Definitions for Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 523.02 Definitions for 403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 523.03 Under Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 524

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY.01 Correction principles; rules of general applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 525.02 Correction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 525.03 Correction under statute or regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527.04 Matters subject to excise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527.05 Confidentiality and disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527.06 No effect on other law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527

February 7, 2000 518 2000–6 I.R.B.

payer claims foreign tax credits on an ac-crual or cash basis.

Thus, for taxpayers claiming foreign taxcredits on an accrual basis, the gross divi-dend is translated into U.S. dollars and in-cluded in income at the spot rate on thepayment date, but taxes withheld from thedividend are translated into U.S. dollars atthe average rate for the taxable year for for-eign tax credit purposes. A taxpayer claim-ing foreign tax credits on the cash basistranslates both the dividend and withhold-ing tax into U.S. dollars at the spot rate on

the date the dividend is paid.

SECTION 5. EFFECT ON OTHERDOCUMENTS

This revenue procedure modifies the rel-evant portions of sections 3.01 through3.07 of Rev. Proc. 80–18, 1980–1 C.B. 623(as modified by Rev. Proc. 81–58, 1981–2C.B. 678 and Rev. Proc. 84–60, 1984–2C.B. 504, and as clarified and amplified byRev. Proc. 90–61, 1990–2 C.B. 657).SECTION 6. EFFECTIVE DATE

This revenue procedure is effective on

the date of publication and applies to dis-tributions to U.S. shareholders made on orafter April 6, 1999 by corporations resi-dent in the United Kingdom.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Trina Dang of the Office ofAssociate Chief Counsel (International).For further information regarding thisrevenue procedure, contact Ms. Dang at(202) 622-3850 (not a toll-free call).

2000–6 I.R.B. 519 February 7, 2000

PART IV. SELF-CORRECTION (APRSC)

SECTION 7. IN GENERAL

SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES.01 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527.02 Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527.03 Multiple failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527.04 Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 527

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES.01 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 528.02 Correction period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 528.03 Substantial completion of correction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 528.04 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 528

PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCR, WALK-IN CAP AND TVC)

SECTION 10. VCR PROGRAM .01 VCR requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 528.02 Identification of failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 528.03 No concurrent examination activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.04 Insufficient information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.05 Initial processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.06 Processing of acceptable submission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.07 Failures discovered after initial submission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.08 Conference right. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.09 Failure to reach resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 529.10 Concurrent processing of determination letter applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530.11 Special rules relating to SVP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530.12 General description of compliance statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530.13 Compliance statement conditioned upon timely correction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530.14 Compliance statement for new plans conditioned upon timely amendment. . . . . . . . . . . . . . . . . . . . . p. 530.15 Acknowledgement letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530.16 Verification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530

SECTION 11. WALK-IN CAP AND TVC .01 Walk-in CAP requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 530.02 Failures discovered after initial submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531.03 Failure to reach resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531.04 Effect of closing agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531.05 TVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531

SECTION 12. APPLICATION PROCEDURES FOR VCR, WALK-IN CAP AND TVC.01 General rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531.02 Multiemployer and multiple employer plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531.03 Submission requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 531.04 Required documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.05 Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.06 Signed submission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.07 Power of attorney requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.08 Penalty of perjury statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.09 Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.10 Designation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.11 VCR/SVP mailing address. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.12 Walk-in CAP and TVC mailing address. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 532.13 Maintenance of copies of submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 533

SECTION 13. FEES.01 Rev. Proc. 2000–8 modified. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 533.02 VCR fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 533.03 Establishing number of plan participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 533.04 SVP fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 533

.05 Walk-in CAP compliance correction fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 533

.06 TVC fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 534

PART VI. CORRECTION ON AUDIT (AUDIT CAP)

SECTION 14. DESCRIPTION OF AUDIT CAP.01 Audit CAP requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.02 Payment of sanction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.03 Additional requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.04 Failure to reach resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.05 Effect of closing agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.06 Other procedural rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535

SECTION 15. AUDIT CAP SANCTION .01 Determination of sanction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.02 Factors considered. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535

PART VII. EFFECT ON OTHER DOCUMENTS AND EFFECTIVE DATE

SECTION 16. EFFECT ON OTHER DOCUMENTS.01 Revenue procedures modified and superseded. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535.02 Rev. Proc. 2000–8 modified . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535

SECTION 17. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535

SECTION 18. PAPERWORK REDUCTION ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 535

DRAFTING INFORMATION

APPENDIX A: OPERATIONAL FAILURES AND CORRECTIONS UNDER SVP . . . . . . . . . . . . . . . . . . . . . . . . . p. 536

APPENDIX B: CORRECTION METHODS AND EXAMPLES AND EARNINGS ADJUSTMENT METHODS AND EXAMPLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 537

APPENDIX C: VCR/SVP/WALK-IN CAP/TVC CHECKLIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 551

PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

February 7, 2000 520 2000–6 I.R.B.

SECTION 1. PURPOSE ANDOVERVIEW

.01 Purpose. This revenue procedureupdates and consolidates the comprehen-sive system of correction programs forsponsors of retirement plans that are in-tended to satisfy the requirements of §401(a), § 403(a) or § 403(b) of the InternalRevenue Code (the “Code”), but that havenot met these requirements for a period oftime. This system, the Employee PlansCompliance Resolution System(“EPCRS”), permits plan sponsors to cor-rect these Qualification or § 403(b) Fail-ures and thereby continue to provide theiremployees with retirement benefits on atax-favored basis. The components ofEPCRS are the Administrative Policy Re-garding Self-Correction (“APRSC”), theVoluntary Compliance Resolution(“VCR”) program, the Walk-in ClosingAgreement Program (“Walk-in CAP”), theAudit Closing Agreement Program (“AuditCAP”) and the Tax Sheltered Annuity Vol-untary Correction (“TVC”) program..02 Revisions. This revenue proceduremodifies Rev. Proc. 98– 22, 1998–12

I.R.B. 11, which consolidated the correc-tion programs into EPCRS. The modifi-cations to Rev. Proc. 98–22 include:

(1) incorporating Rev. Proc. 99–13,1999–5 I.R.B. 52, which applies EPCRSto 403(b) Plans;

(2) adding a new Appendix B whichincorporates the correction methods de-scribed and illustrated in Rev. Proc.99–31 1999–34 I.R.B. 280;

(3) redesignating Appendix B ofRev. Proc. 98–22 as Appendix C; and

(4) reflecting the new Tax Exemptand Government Entities Division(TE/GE) of the IRS.

.03 General principles underlyingEPCRS. EPCRS is based on the follow-ing general principles:• Sponsors of tax-qualified retirement

plans or 403(b) Plans should be en-couraged to establish administrativepractices and procedures that ensurethat plans are operated properly inaccordance with the tax qualificationor 403(b) requirements.

• Sponsors of tax-qualified retirementplans should maintain plan docu-

ments satisfying the tax qualificationrequirements.

• Plan sponsors should make volun-tary and timely correction of anyQualification or 403(b) Failures,whether involving discrimination infavor of highly compensated em-ployees, plan operations, or theterms of the plan document. Timelyand efficient correction protects par-ticipating employees by providingthem with their expected retirementbenefits, including favorable taxtreatment.

• Voluntary compliance is promotedby providing for limited fees for vol-untary corrections approved by theService, thereby reducing employ-ers’ uncertainty regarding their po-tential tax liability and participants’potential income tax liability.

• Sanctions for Qualification or 403(b)Failures identified on audit shouldbe reasonable in light of the nature,extent, and severity of the violation.

• Administration of EPCRS should beconsistent and uniform.

• Taxpayers should be able to rely onthe availability of EPCRS in takingcorrective actions to maintain thequalified or 403(b) status of theirplans.

.04 Overview. EPCRS includes thefollowing basic elements:• Self-correction. A plan sponsor that

has established compliance practicesand procedures may, at any time,correct insignificant OperationalFailures without paying any fee orsanction. In addition, in the case of aQualified Plan that is the subject of afavorable determination letter fromthe Service or of a 403(b) Plan, theplan sponsor generally may correcteven significant Operational Failureswithin a two-year period withoutpayment of any fee or sanction.(APRSC)

• Voluntary correction with Serviceapproval. In the case of any otherQualification or 403(b) Failure, aplan sponsor, at any time beforeaudit, may pay a limited fee and re-ceive the Service’s approval for thecorrection. (VCR, Walk-in CAP,and TVC)

• Correction on audit. If a Qualifica-tion or 403(b) Failure (other than afailure corrected as described above)is identified on audit and corrected,the sanction imposed will bear a rea-sonable relationship to the nature,extent and severity of the failure,taking into account the extent towhich correction occurred beforeaudit. (Audit CAP)

.05 Future enhancements. The pri-mary purpose of this revenue procedure isto consolidate in a single document, forease of use and reference, the guidancepreviously published with respect toEPCRS. Certain clarifications and revi-sions, discussed below, that do not in-volve significant substantive modificationof EPCRS and that generally reflect thecurrent practice under EPCRS, are in-cluded in this revenue procedure.

The Service and Treasury are activelyreviewing the comments that have beenreceived on EPCRS that are not reflectedin this revenue procedure. These addi-tional enhancements will be incorporatedinto upcoming guidance on EPCRS. Inaddition to that guidance, it is anticipatedthat the consolidated EPCRS revenue pro-

cedure will be updated on an annual basisto reflect changes published during thepreceding calendar year.

SECTION 2. EFFECT ON PROGRAMS

.01 Effect on programs. This revenueprocedure affects the programs as fol-lows:• consolidates and coordinates guid-

ance issued in 1998 and 1999 into aunified EPCRS procedure;

• clarifies the application of FICA andFUTA taxes (and correspondingwithholding obligations) to cor-rected Qualified Plans and 403(b)Plans; and

• clarifies that the statute of limita-tions for purposes of redeterminingtaxes for a closed taxable year willnot be reopened solely because ofcorrection of a failure that occurredin such year.

.02 Effect on specific programs. Thisrevenue procedure affects the specificprograms as follows:

(1) APRSC. APRSC enables a spon-sor of a Qualified Plan or a 403(b) Plan toself-correct Operational Failures it dis-covers in its plans. The provisions ofAPRSC are modified and restated to:• clarify and confirm, under the eligi-

bility requirements for APRSC, thatthe program is available to correctinsignificant defects in plans of allsizes.(2) VCR. The VCR program en-

ables a sponsor of a Qualified Plan to vol-untarily disclose to the Service Opera-tional Failures it has discovered in its planand to pay a fixed fee to the Service. Theprovisions of VCR are modified to:• grant, in appropriate cases, a waiver

of the excise tax under §4974 forminimum required distribution fail-ures that are corrected by the PlanSponsor under VCR;

• amplify the permissible correctionmethods under the StandardizedVCR Program (SVP) (see AppendixA and Appendix B of this revenueprocedure); and

• clarify that sponsors may use Walk-in CAP for interrelated VCR andWalk-in CAP failures.

(3) Walk-in CAP. Walk-in CAPenables a sponsor of a Qualified Plan tovoluntarily disclose to the Service Quali-fication Failures it has discovered in its

plan and to pay a compliance correctionfee. The provisions of Walk-in CAP aremodified to:• grant, in appropriate cases, a waiver

of the excise tax under § 4974 forminimum distribution failures thatare corrected by the Plan Sponsorunder Walk-in CAP.

(4) TVC. Similar to Walk-in CAP,TVC enables an employer that offers a403(b) Plan to voluntarily disclose to theService 403(b) Failures it has discoveredin its plan and to pay a compliance correc-tion fee. The provisions of TVC are mod-ified to:• grant, in appropriate cases, a waiver

of the excise tax under § 4974 forminimum distribution failures thatare corrected by the Plan Sponsorunder TVC.

• clarify the types of failures that maybe corrected under TVC.

PART II. PROGRAM EFFECT ANDELIGIBILITY

SECTION 3. EFFECT OF EPCRS;RELIANCE

.01 Effect of EPCRS on QualifiedPlans. If the eligibility requirements ofsection 4 are satisfied and the Plan Spon-sor corrects a Qualification Failure in ac-cordance with the requirements ofAPRSC in section 7, the VCR program insection 10, Walk-in CAP in section 11, orAudit CAP in section 14, the Service willnot treat the Qualified Plan as disqualifiedon account of the Qualification Failure. Ifthe Plan Sponsor corrects the failures inaccordance with the requirements of thisrevenue procedure the plan will be treatedas a qualified plan for purposes of apply-ing § 3121(a)(5) (FICA taxes) and forpurposes of applying § 3306(a)(5) (FUTAtaxes).

.02 Effect of EPCRS on 403(b) Plans.If the applicable eligibility requirementsare satisfied and the employer corrects afailure in accordance with the require-ments of APRSC, TVC, or Audit CAP for403(b) Plans, the Service will not pursueincome inclusion for affected participants,or liability for income tax withholding, onaccount of the failure. However, the cor-rection of a failure may result in incometax consequences to participants (for ex-ample, participants may be required to in-clude in gross income distributions of Ex-

2000–6 I.R.B. 521 February 7, 2000

cess Amounts in the year of distribution).In addition, if these requirements are metand correction is made under this revenueprocedure, the annuity contracts or custo-dial accounts under a 403(b) Plan will betreated as annuity contracts described in §403(b) for purposes of applying §3121(a)(5) (FICA taxes) and for purposesof applying § 3306(a)(5) (FUTA taxes).However, contributions or allocations ofExcess Amounts are generally treated aswages for purposes of FICA and FUTAtaxes.

.03 Other taxes and penalties. Seesection 6.04 for rules relating to othertaxes and penalties.

.04 Reliance. Taxpayers may rely onthis revenue procedure, including the re-lief described in sections 3.01 and 3.02.

SECTION 4. PROGRAMELIGIBILITY

.01 Program eligibility for QualifiedPlans. EPCRS includes three specificvoluntary correction programs and anaudit correction program for QualifiedPlans. The voluntary correction programsare APRSC and VCR, both of which areavailable for Operational Failures, andWalk-in CAP, which applies to Plan Doc-ument and Demographic Failures and toOperational Failures that are not eligiblefor APRSC and VCR. APRSC is a volun-tary employer-initiated procedure thatgenerally does not involve Service ap-proval, whereas VCR and Walk-in CAPare voluntary employer-initiated proce-dures that involve Service approval. Theaudit correction program is Audit CAP,which is available for all types of Qualifi-cation Failures found on examination thatcannot be corrected under APRSC.

.02 Program eligibility for 403(b)Plans. EPCRS includes two specific vol-untary correction programs and an auditcorrection program for 403(b) Plans. Thevoluntary correction programs areAPRSC and TVC. APRSC is availableonly for Operational Failures, and is notavailable to correct Eligibility or Demo-graphic Failures. APRSC is available tocorrect Excess Amounts using the methoddescribed in section 6.02(4)(b)(i) below,but not the method described in section6.02(4)(b)(ii) below. There is no require-ment that an employer obtain a privateletter ruling from the Service covering its403(b) Plan in order to be eligible for

APRSC. TVC is a voluntary programthat involves Service approval. TVC ap-plies to Eligibility, Demographic, and Op-erational Failures that are within the juris-diction of Employee Plans, includingPlans of Ineligible Employers. The auditcorrection program is Audit CAP, whichis also available for Eligibility, Demo-graphic, and Operational Failures foundon examination that cannot be correctedunder APRSC.

.03 Effect of examination. If the planor Plan Sponsor is Under Examination,the VCR, Walk-in CAP, and TVC pro-grams are not available; insignificant Op-erational Failures can be corrected underAPRSC; and significant Operational Fail-ures can be corrected under APRSC inlimited circumstances. See section 9.

.04 Favorable Letter requirement. TheVCR program and the provisions ofAPRSC relating to significant Opera-tional Failures (see section 9) of a Quali-fied Plan are available only for a plan thatis the subject of a Favorable Letter.

.05 Established practices and proce-dures. In order to be eligible for APRSC,the Plan Sponsor or administrator of aplan must have established practices andprocedures (formal or informal) reason-ably designed to promote and facilitateoverall compliance with the requirementsof § 401(a) or § 403(b). For example, theplan administrator of a Qualified Planmight use a check sheet for tracking allo-cations and indicate on that check sheetwhether a particular employee was a keyemployee for top-heavy purposes. A plandocument alone will not constitute evi-dence of established procedures. Theseestablished procedures must have been inplace and routinely followed, but throughan oversight or mistake in applying them,or because of an inadequacy in the proce-dures, an Operational Failure occurred. A403(b) plan document is neither necessarynor sufficient to demonstrate that the em-ployer, plan administrator, insurer or ac-count custodian has in place establishedpractices and procedures reasonably de-signed to facilitate overall compliance.

.06 Qualified Plan amendments. (1)Correction by plan amendment not per-mitted in APRSC or VCR. NeitherAPRSC nor the VCR program is availablefor a Plan Sponsor to correct an Opera-tional Failure by a plan amendment thatconforms the terms of the plan to the

plan’s prior operations. Thus, if loanswere made to participants, but the plandocument did not permit loans to be madeto participants, the failure cannot be cor-rected under VCR by retroactivelyamending the plan to provide for theloans. Nevertheless, if a Plan Sponsorcorrects under APRSC or VCR, it mayamend the plan to the extent necessary toreflect operational correction. For exam-ple, if the plan failed to satisfy the ADPtest required under § 401(k)(3) and theemployer must make qualified nonelec-tive contributions not already providedfor under the plan, the plan may beamended to provide for qualified nonelec-tive contributions. The issuance of acompliance statement does not constitutea determination as to the effect of anyplan amendment on the qualification ofthe plan.

(2) Availability of correction by planamendment in Walk-in CAP. A PlanSponsor may use Walk-in CAP for aQualified Plan to correct an OperationalFailure by a plan amendment to conformthe terms of the plan to the plan’s prioroperations, provided that the amendmentcomplies with the requirements of §401(a), including the requirements of §§401(a)(4), 410(b), and 411(d)(6).

.07 Egregious failures. NeitherAPRSC nor the VCR program is availableto correct Operational Failures that areegregious. For example, if an employerhas consistently and improperly coveredonly highly compensated employees or ifa contribution to a defined contributionplan for a highly compensated individualis several times greater than the dollarlimit set forth in § 415, the failure wouldbe considered egregious. Walk-In CAPand TVC are available to correct egre-gious failures; however, these failures aresubject to the fees described in sections13.05(3) and 13.06(6).

.08 Diversion or misuse of plan assets.The APRSC, VCR, Walk-in CAP, TVCand Audit CAP programs are not avail-able for correcting Qualification or 403(b)Failures relating to the diversion or mis-use of plan assets.

PART III. DEFINITIONS,CORRECTION PRINCIPLES, ANDRULES OF GENERALAPPLICABILITY

February 7, 2000 522 2000–6 I.R.B.

SECTION 5. DEFINITIONS

The following definitions apply forpurposes of this revenue procedure:.01 Definitions for Qualified Plans. Thedefinitions in this section 5.01 apply toQualified Plans.

(1) Qualified Plan. The term “Qual-ified Plan” means a plan intended to sat-isfy the requirements of § 401(a) or §403(a).

(2) Qualification Failure. A Quali-fication Failure is any failure that ad-versely affects the qualification of a plan.There are three types of QualificationFailures: (a) Plan Document Failures, (b)Operational Failures, and (c) Demo-graphic Failures.

(a) Plan Document Failure. Theterm “Plan Document Failure” means aplan provision (or the absence of a planprovision) that, on its face, violates the re-quirements of § 401(a) or § 403(a).Thus, for example, the failure of a plan tobe amended to reflect a new qualificationrequirement within the plan’s applicableremedial amendment period under §401(b) is a Plan Document Failure. Forpurposes of this revenue procedure, aPlan Document Failure includes anyQualification Failure that is a violation ofthe requirements of § 401(a) or § 403(a)and that is neither an Operational Failurenor a Demographic Failure.

(b) Operational Failure. Theterm “Operational Failure” means a Qual-ification Failure that arises solely fromthe failure to follow plan provisions.

A failure to follow the terms of the planproviding for the satisfaction of the re-quirements of § 401(k) and § 401(m) isconsidered to be an Operational Failure.A plan does not have an Operational Fail-ure to the extent the plan is permitted tobe amended retroactively pursuant to §401(b) or another statutory provision toreflect the plan’s operations. However, ifwithin an applicable remedial amendmentperiod under § 401(b), a plan has beenproperly amended for statutory or regula-tory changes, and, on or after the later ofthe date the amendment is effective or isadopted, the amended provisions are notfollowed, then the plan is considered tohave an Operational Failure.

(c) Demographic Failure. Theterm “Demographic Failure” means a fail-ure to satisfy the requirements of §401(a)(4), § 401(a)(26), or § 410(b) that is

not an Operational Failure.The correction of a Demographic Fail-

ure generally requires a substantive cor-rective amendment to the plan addingmore benefits or increasing existing bene-fits (cf., § 1.401(a)(4)–11(g) of the In-come Tax Regulations).

(3) Excess Amount. The term “Ex-cess 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 thelimitation of § 402(g) that is distributed,(d) an excess contribution or excess ag-gregate contribution that is distributed tosatisfy § 401(k) or § 401(m), or (e) anysimilar amount required to be distributedin order to maintain plan qualification.

(4) Favorable Letter. The term “Fa-vorable Letter” means a current favorabledetermination letter for an individuallydesigned plan (including a volume sub-mitter plan), a current favorable opinionletter for a Plan Sponsor that has adopteda master or prototype plan, or a current fa-vorable notification letter for a Plan Spon-sor that has adopted a regional prototypeplan. A plan has a current favorable de-termination letter, opinion letter, or notifi-cation letter if either (a), (b), or (c) belowis satisfied:

(a) The plan has a favorable deter-mination, opinion, or notification letterthat considers the Tax Reform Act of1986 (“TRA ‘86”).

(b) The plan is a governmentalplan or non-electing church plan de-scribed in Rev. Proc. 99–23, 1999–16I.R.B. 5, and has a favorable determina-tion, opinion, or notification letter thatconsiders the Tax Equity and Fiscal Re-sponsibility Act of 1982 (“TEFRA”), theDeficit Reduction Act of 1984(“DEFRA”), and the Retirement EquityAct of 1984 (“REA”), and the § 401(b)remedial amendment period for TRA ‘86has not yet expired.

(c) The plan is initially adopted oreffective after December 7, 1994, and thePlan Sponsor timely submits an applica-tion for a determination, opinion, or noti-fication letter within the plan’s remedialamendment period under § 401(b).

(5) Maximum Payment Amount.The term “Maximum Payment Amount”means a monetary amount that is approxi-mately equal to the tax the Service couldcollect 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 result-

ing from the loss of employer deductionsfor plan contributions (and any interest orpenalties applicable to the Plan Sponsor’sreturn), and

(c) additional income tax result-ing from income inclusion for participantsin the plan (Form 1040).

For purposes of determining the maxi-mum compliance correction fee applica-ble under section 13.05(3), relating toegregious failures under Walk-in CAP,paragraph (b) above is modified to ex-clude interest or penalties applicable tothe Plan Sponsor’s return, and paragraph(c) above is modified to include only theadditional income tax resulting from in-come inclusion for highly compensatedemployees, as defined in § 414(q).

(6) Overpayment. The term “Over-payment” means a distribution to an em-ployee or beneficiary that exceeds the em-ployee’s or beneficiary’s benefit under theterms of the plan because of a failure tocomply with plan terms that implement §401(a)(17), 401(m) (but only with respectto the forfeiture of nonvested matchingcontributions that are excess aggregatecontributions), 411(a)(3)(G), or 415. AnOverpayment does not include a distribu-tion of an Excess Amount described insection 5.01(3) (b), (c), (d), or (e).

(7) Plan Sponsor. The term “PlanSponsor” means the employer that estab-lishes or maintains a qualified retirementplan for its employees.

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

(1) 403(b) Plan. The term “403(b)Plan” means a plan or program intendedto satisfy the requirements of § 403(b), in-cluding a Plan of an Ineligible Employer.

(2) 403(b) Failure. A 403(b) Failureis any Operational, Eligibility or Demo-graphic Failure as defined below.

(a) Demographic Failure. Theterm “Demographic Failure” means a fail-ure to satisfy the requirements of §401(a)(4), § 401(a)(26), or § 410(b) (asapplied to 403(b) Plans pursuant to §403(b)(12)(A)(i)).

(b) Eligibility Failure. The term“Eligibility Failure” means any of the fol-lowing :

(i) A Plan of an Ineligible Em-

2000–6 I.R.B. 523 February 7, 2000

ployer;(ii) A failure to satisfy the non-

transferability requirement of § 401(g);(iii) A failure to initially establish

or maintain a custodial account as re-quired by § 403(b)(7); or

(iv) A failure to purchase (initiallyor subsequently) either an annuity con-tract from an insurance company (unlessgrandfathered under Rev. Rul. 82–102,1982–1 C.B. 62) or a custodial accountfrom a regulated investment company uti-lizing a bank or an approved non-banktrustee/custodian.

(c) Operational Failure. The term“Operational Failure” means, with respectto a 403(b) Plan, any of the following:

(i) A failure to satisfy the require-ments of § 403(b)(12)(A)(ii) (relating tothe availability of salary reduction contri-butions);

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

(iii) A failure to satisfy the re-quirements of § 401(a)(17) (as applied to403(b) Plans pursuant to §403(b)(12)(A)(i));

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

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

(vi) A failure to pay minimum re-quired distributions under § 403(b)(10);

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

(viii) A failure of the annuity con-tract or custodial agreement to provideparticipants with a right to elect a directrollover under §§ 403(b)(10) and401(a)(31);

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

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

(xi) A failure involving contribu-tions or allocations of Excess Amounts; or

(xii) Any other failure to satisfyapplicable requirements under § 403(b)that (i) results in the loss of § 403(b) sta-tus for the plan or the loss of § 403(b)status for one or more custodialaccount(s) or annuity contract(s) under

the plan and (ii) is not a DemographicFailure, an Eligibility Failure, or a failurerelated to the purchase of annuity con-tracts, or contributions to custodial ac-counts, on behalf of individuals who arenot employees of the employer.

(3) Excess Amount. The term “Ex-cess Amount” means, in the case of a403(b) Plan, any contributions or alloca-tions that are in excess of the limits under§ 415 or § 403(b)(2) (the exclusion al-lowance limit) for the year.

(4) Plan of an Ineligible Employer.The term “Plan of an Ineligible Em-ployer” means a plan intended to satisfythe requirements of § 403(b) but which isnot eligible for favorable tax treatmentunder § 403(b) because the employer isnot a tax-exempt organization describedin § 501(c)(3) or a public educational or-ganization described in §170(b)(1)(A)(ii).

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

(6) Total Sanction Amount. The term“Total Sanction Amount” means a mone-tary amount that is approximately equal tothe income tax the Service could collectas a result of the failure.

.03 Under Examination. This defini-t ion applies to Qualif ied Plans and403(b) Plans. The term “Under Exami-nation” means: (1) a plan that is under anEmployee Plans examination (that is, anexamination of a Form 5500 series orother Employee Plans examination), or(2) a Plan Sponsor that is under an Ex-empt Organizations examination (that is,an examination of a Form 990 series orother Exempt Organizations examina-tion).

A plan that is under an EmployeePlans examination includes any plan forwhich the Plan Sponsor, or a representa-tive, has received verbal or written noti-fication from Employee Plans of an im-pending Employee Plans examination, orof an impending referral for an Em-ployee Plans examination, and also in-cludes any plan that has been under anEmployee Plans examination and is nowin Appeals or in litigation for issuesraised in an Employee Plans examina-tion. A plan is considered to be UnderExamination if it is aggregated for pur-poses of satisfying the nondiscriminationrequirements of § 401(a)(4), the mini-

mum participation requirements of §401(a)(26), the minimum coverage re-quirements of § 410(b), or the require-ments of § 403(b)(12), with a plan(s) thatis Under Examination. In addition, aplan is considered to be Under Examina-tion with respect to a failure of a qualifi-cation requirement (other than those de-scribed in the preceding sentence) if theplan is aggregated with another plan forpurposes of satisfying that qualificationrequirement (for example, § 402(g), §415, or § 416) and that other plan isUnder Examination. For example, as-sume Plan A has a § 415 failure, Plan Ais aggregated with Plan B only for pur-poses of § 415, and Plan B is Under Ex-amination. In this case, Plan A is consid-ered to be Under Examination withrespect to the § 415 failure. However, ifPlan A has a failure relating to thespousal consent rules under § 417 or thevesting rules of § 411, Plan A is not con-sidered to be Under Examination withrespect to the § 417 or § 411 failure. Forpurposes of this revenue procedure, theterm aggregation does not include con-sideration of benefits provided by vari-ous plans for purposes of the averagebenefits test set forth in § 410(b)(2).

An Employee Plans examination alsoincludes a case in which a Plan Sponsorhas submitted a Form 5310, Applicationfor Determination of Qualification UponTermination, and the Employee Plansagent notifies the Plan Sponsor, or a rep-resentative, of possible Qualification Fail-ures, whether or not the Plan Sponsor isofficially notified of an “examination.”This would include a case where, for ex-ample, a Plan Sponsor has applied for adetermination letter on plan termination,and an Employee Plans agent notifies thePlan Sponsor that there are partial termi-nation concerns.

A Plan Sponsor that is under an ExemptOrganizations examination includes anyPlan Sponsor that has received (or whoserepresentative has received) verbal orwritten notification from Exempt Organi-zations of an impending Exempt Organi-zations examination or of an impendingreferral for an Exempt Organizations ex-amination and also includes any PlanSponsor that has been under an ExemptOrganizations examination and is now inAppeals or in litigation for issues raised inan Exempt Organizations examination.

February 7, 2000 524 2000–6 I.R.B.

SECTION 6. CORRECTIONPRINCIPLES AND RULES OFGENERAL APPLICABILITY

.01 Correction principles; rules ofgeneral applicability. The following gen-eral correction principles and rules ofgeneral applicability apply for purposesof this revenue procedure.

.02 Correction. Generally, a Qualifi-cation or 403(b) Failure is not correctedunless full correction is made with respectto all participants and beneficiaries, andfor all taxable years (whether or not thetaxable year is closed). Even if correc-tion is made for a closed taxable year, thetax liability associated with that year willnot be redetermined because of the cor-rection. In the case of a Qualified Planwith an Operational Failure, correction isdetermined taking into account the termsof the plan at the time of the failure. Cor-rection should be accomplished takinginto account the following principles:

(1) Restoration of benefits. The cor-rection method should restore the plan tothe position it would have been in had theQualification or 403(b) Failure not oc-curred, including restoration of currentand former participants and beneficiariesto the benefits and rights they would havehad if the Qualification or 403(b) Failurehad not occurred.

(2) Reasonable and appropriate cor-rection. The correction should be reason-able and appropriate for the Qualificationor 403(b) Failure. Depending on the na-ture of the Qualification or 403(b) Fail-ure, there may be more than one reason-able and appropriate correction for thefailure. Any correction method permittedunder Appendix A or Appendix B isdeemed to be a reasonable and appropri-ate method of correcting the related Qual-ification Failure. Any correction methodpermitted under Appendix A applicable toa 403(b) Plan is deemed to be a reason-able and appropriate method of correctingthe related 403(b) Failure. Whether anyother particular correction method is rea-sonable and appropriate is determinedtaking into account the applicable factsand circumstances and the following prin-ciples:

(a) The correction methodshould, to the extent possible, resembleone already provided for in the Code,Income Tax Regulations, or other guid-ance of general applicability. For exam-

ple, for Qualified Plans, the defined con-tribution plan correction methods setforth in § 1.415–6(b)(6) would be thetypical means of correcting a failureunder § 415. Likewise, the correctionmethod set forth in § 1.402(g)–1(e)(2)would be the typical means of correctinga failure under § 402(g).

(b) The correction method forQualification or 403(b) Failures relatingto nondiscrimination should provide ben-efits for nonhighly compensated employ-ees. For example, for Qualified Plans,the correction method set forth in §1.401(a)(4)–11(g) (rather than methodsmaking use of the special testing provi-sions set forth in § 1.401(a)(4)–8 or §1.401(a)(4)–9) would be the typicalmeans of correcting a failure to satisfynondiscrimination requirements. Simi-larly, the correction of a failure to satisfythe requirements of § 401(k)(3),401(m)(2), or 401(m)(9) (relating tonondiscrimination) solely by distributingexcess amounts to highly compensatedemployees would not be the typicalmeans of correcting such a failure.

(c) The correction method shouldkeep plan assets in the plan, except to theextent the Code, regulations, or otherguidance of general applicability providefor correction by distribution to partici-pants or beneficiaries or return of assets tothe employer or Plan Sponsor. For exam-ple, if an excess allocation (not in excessof the § 415 limits) made under a Quali-fied Plan was made for a participant undera plan (other than a cash or deferredarrangement), the excess should be reallo-cated to other participants or, dependingon the facts and circumstances, used to re-duce future employer contributions.

(d) The correction method shouldnot violate another applicable specific re-quirement of § 401(a) or § 403(b) (for ex-ample, § 401(a)(4), 411(d)(6) or403(b)(12), as applicable). If an addi-tional failure is created as a result of theuse of a correction method in this revenueprocedure, then that failure also must becorrected in conjunction with the use ofthat correction method and in accordancewith the requirements of this revenue pro-cedure.

(3) Consistency Requirement. Gen-erally, where more than one correctionmethod is available to correct a type ofOperational Failure for a plan year (or

where there are alternative ways to applya correction method), the correctionmethod (or one of the alternative ways toapply the correction method) should beapplied consistently in correcting all Op-erational Failures of that type for that planyear. Similarly, earnings adjustmentmethods generally should be applied con-sistently with respect to corrective contri-butions or allocations for a particular typeof Operational Failure for a plan year.

(4) Treatment of Excess Amounts.The following provisions apply for pur-poses of treating Excess Amounts underQualified Plans and 403(b) Plans.

(a) Treatment of Excess Amountsunder Qualified Plans. A distribution ofan Excess Amount is not eligible for thefavorable tax treatment accorded to distri-butions from Qualified Plans (such as eli-gibility for rollover under § 402(c)). Tothe extent that a current or prior distribu-tion was a distribution of an ExcessAmount, distribution of that ExcessAmount is not an eligible rollover distrib-ution. Thus, for example, if such a distri-bution was contributed to an individualretirement arrangement (“IRA”), the con-tribution is not a valid rollover contribu-tion for purposes of determining theamount of excess contributions (withinthe meaning of § 4973) to the individual’sIRAs. Where an Excess Amount has beendistributed the employer must notify therecipient that (i) the Excess Amount wasdistributed and (ii) the Excess Amountwas not eligible for favorable tax treat-ment accorded to distributions from Qual-ified Plans (and, specifically, was not eli-gible for tax-free rollover).

(b) Treatment of Excess Amountsunder 403(b) Plans. (i) Distribution ofExcess Amounts. Excess Amounts for ayear, adjusted for earnings through thedate of distribution, must be distributed toaffected participants and beneficiaries andare includible in their gross income in theyear of distribution. The distribution ofExcess Amounts is not an eligible rolloverdistribution within the meaning of §403(b)(8). A distribution of ExcessAmounts is generally treated in the man-ner described in section 3 of Rev. Proc.92–93, 1992–2 C.B. 505, relating to thecorrective disbursement of elective defer-rals. The distribution must be reported onForms 1099–R for the year of distributionwith respect to each participant or benefi-

2000–6 I.R.B. 525 February 7, 2000

ciary receiving such a distribution. In ad-dition, the employer must inform affectedparticipants and beneficiaries that the dis-tribution of Excess Amounts is not eligi-ble for rollover. Excess Amounts distrib-uted pursuant to this subparagraph(4)(b)(i) are not treated as amounts previ-ously excludable under § 403(b)(2)(A)(ii)for purposes of calculating the maximumexclusion allowance for the taxable yearof the distribution and for subsequent tax-able years.

(ii) Retention of Excess Amounts.Under TVC and Audit CAP, ExcessAmounts will be treated as corrected(even though the Excess Amounts are re-tained in the 403(b) Plan) if the followingrequirements are satisfied. ExcessAmounts arising from a § 415 failure, ad-justed for earnings through the date ofcorrection, must reduce affected partici-pants’ applicable § 415 limit for the yearfollowing the year of correction (or forthe year of correction if the employer sochooses), and subsequent years, until theexcess is eliminated. Excess Amounts(whether arising from a § 415 failure or a§ 403(b)(2) failure), adjusted for earningsthrough the date of correction, must alsoreduce participants’ exclusion allowancesby being treated as amounts previouslyexcludable under § 403(b)(2)(A)(ii) be-ginning with the year following the yearof correction (or the year of correction ifthe employer so chooses). This correctionmust generally be used for all participantswho have Excess Amounts.

(5) Principles regarding correctiveallocations and corrective distributions.The following principles apply where anappropriate correction method includesthe use of corrective allocations or correc-tive distributions. Corrective allocationsare generally not made with respect to a403(b) Plan.

(a) Corrective allocations under adefined contribution plan should be basedupon the terms of the plan and other ap-plicable information at the time of theQualification Failure (including the com-pensation that would have been usedunder the plan for the period with respectto which a corrective allocation is beingmade) and should be adjusted for earningsand forfeitures that would have been allo-cated to the participant’s account if thefailure had not occurred. The correctiveallocation need not be adjusted for losses.

For administrative convenience, in thecase of corrective allocations, if the planpermitted directed investments for theyears at issue, and thus had more than onefund, the plan would be permitted to usethe highest rate earned in the plan for theperiod of the failure as the rate used for allcorrective allocations, provided that mostof the employees receiving the correctiveallocations are nonhighly compensatedemployees.

(b) A corrective allocation to aparticipant’s account because of a failureto make a required allocation in a priorlimitation year will not be considered anannual addition with respect to the partici-pant for the limitation year in which thecorrection is made, but will be consideredan annual addition for the limitation yearto which the corrective allocation relates.However, the normal rules of § 404, re-garding deductions, apply.

(c) Corrective allocations shouldcome only from employer contributions(including forfeitures if the plan permitstheir use to reduce employer contribu-tions).

(d) In the case of a defined benefitplan, a corrective distribution for an indi-vidual should be increased to take into ac-count the delayed payment, consistentwith the plan’s actuarial adjustments.

(6) Special exceptions to full correc-tion. In general, a Qualification or 403(b)Failure must be fully corrected. Althoughthe mere fact that correction is inconve-nient or burdensome is not enough to re-lieve a Plan Sponsor of the need to makefull correction, full correction may not berequired in certain situations because it isunreasonable or not feasible. Even inthese situations, the correction methodadopted must be one that does not havesignificant adverse effects on participantsand beneficiaries or the plan, and thatdoes not discriminate significantly infavor of highly compensated employees.The exceptions described below specifythose situations in which full correction isnot required.

(a) Reasonable estimates. If it isnot possible to make a precise calculation,or the probable difference between the ap-proximate and the precise restoration of aparticipant’s benefits is insignificant andthe administrative cost of determiningprecise restoration would significantly ex-ceed the probable difference, reasonable

estimates may be used in calculating ap-propriate correction.

(b) Delivery of very small benefits.If the total corrective distribution due aparticipant or beneficiary is $20 or less,the Plan Sponsor is not required to makethe corrective distribution if the reason-able direct costs of processing and deliv-ering the distribution to the participant orbeneficiary would exceed the amount ofthe distribution.

(c) Locating lost participants.Reasonable actions must be taken to findall current and former participants andbeneficiaries to whom additional benefitsare due, but who have not been locatedafter a mailing to the last known address.In general, such actions include use of theInternal Revenue Service Letter Forward-ing Program (see Rev. Proc. 94–22,1994–1 C.B. 608) or the Social SecurityAdministration Reporting Service. A planwill not be considered to have failed tocorrect a failure due to the inability to lo-cate an individual if either of these pro-grams is used; provided that, if the indi-vidual is later located, the additionalbenefits must be provided to the individ-ual at that time.

(7) Correction of a Plan of an Ineli-gible Employer. The permitted correctionof a Plan of an Ineligible Employer underTVC is the cessation of all contributions(including salary reduction and after-taxcontributions) beginning no later than thedate the application under TVC is filed.Pursuant to TVC correction, the assets insuch a plan are to remain in the annuitycontract or custodial account and are to bedistributed no earlier than the occurrenceof one of the distribution events describedin § 403(b)(7)(to the extent the assets areheld in custodial accounts) or §403(b)(11) (for those assets invested inannuity contracts that would be subject to§ 403(b)(11) restrictions if the employerwere eligible). A Plan of an IneligibleEmployer that is corrected through TVCwill be treated as subject to all of the re-quirements and provisions of § 403(b),including the provisions of § 403(b)(8)(relating to rollovers). Because a Plan ofan Ineligible Employer will be treated assubject to all of the requirements of § 403(b), the plan must, as part of TVCcorrection, also correct all other Opera-tional, Demographic, and Eligibility Fail-ures in accordance with this revenue pro-

February 7, 2000 526 2000–6 I.R.B.

cedure. The correction of a Plan of an In-eligible Employer is subject to the fee de-scribed in section 13.06(4) below (or,with respect to the correction of multiplefailures, section 13.06(5)).

(8) Reporting. Any distributionsfrom the plan should be properly re-ported.

.03 Correction under statute or regula-tions. Generally, none of the correctionprograms are available to correct failuresthat can be corrected under the Code andrelated regulations. For example, as ageneral rule, a Plan Document Failurethat is a disqualifying provision for whichthe remedial amendment period under §401(b) has not expired can be correctedby operation of the Code through retroac-tive remedial amendment.

.04 Matters subject to excise taxes. (1)Except as provided in paragraph (3)below, excise taxes and additional taxes,to the extent applicable, are not waivedmerely because the underlying failure hasbeen corrected or because the taxes resultfrom the correction. Thus, for example,the excise tax on certain excess contribu-tions under § 4979 is not waived underthese correction programs.

(2) Except as provided in paragraph(3) below, for Qualified Plans, the correc-tion programs are not available for eventsfor which the Code provides tax conse-quences other than plan disqualification(such as the imposition of an excise tax oradditional income tax). For example,funding deficiencies (failures to make therequired contributions to a plan subject to§ 412), prohibited transactions, and fail-ures to file the Form 5500 cannot be cor-rected under the correction programs.However, if the event is also an Opera-tional Failure (for example, if the terms ofthe plan document relating to plan loansto participants were not followed andloans made under the plan did not satisfy§ 72(p)(2)), the correction programs willbe available to correct the OperationalFailure, even though the excise or incometaxes generally still will apply.

(3) For Qualified Plans and 403(b)Plans, as part of the VCR, Walk-in CAP,or TVC programs, if the failure involvesthe failure to satisfy the minimum re-quired distribution requirements of §401(a)(9), in appropriate cases, the Ser-vice will waive the excise tax under §4974 applicable to plan participants.

.05 Confidentiality and disclosure.Because each correction program relatesdirectly to the enforcement of the qualifi-cation or § 403(b) requirements, the infor-mation received or generated by the Ser-vice under the program is subject to theconfidentiality requirements of § 6103,and is not a written determination withinthe meaning of § 6110.

.06 No effect on other law. Correctionunder these programs has no effect on therights of any party under any other law,including Title I of the Employee Retire-ment Income Security Act of 1974.

PART IV. SELF-CORRECTION(APRSC)

SECTION 7. IN GENERAL

The requirements of this section aresatisfied with respect to an OperationalFailure if the Plan Sponsor satisfies therequirements of section 8 (relating to in-significant Operational Failures), or sec-tion 9 (relating to significant OperationalFailures).

SECTION 8. SELF-CORRECTION OFINSIGNIFICANT OPERATIONALFAILURES

.01 Requirements. The requirementsof this section are satisfied with respect toan Operational Failure if the OperationalFailure is corrected and, given all thefacts and circumstances, the OperationalFailure is insignificant. This section isavailable for correcting an insignificantOperational Failure even if the plan orPlan Sponsor is Under Examination.

.02 Factors. The factors to be consid-ered in determining whether or not an Op-erational Failure under a plan is insignifi-cant include, but are not limited to: (1)whether other failures occurred during theperiod being examined (for this purpose,a failure is not considered to have oc-curred more than once merely becausemore than one participant is affected bythe failure); (2) the percentage of plan as-sets and contributions involved in the fail-ure; (3) the number of years the failureoccurred; (4) the number of participantsaffected relative to the total number ofparticipants in the plan; (5) the number ofparticipants affected as a result of the fail-ure relative to the number of participantswho could have been affected by the fail-

ure; (6) whether correction was madewithin a reasonable time after discoveryof the failure; and (7) the reason for thefailure (for example, data errors such aserrors in the transcription of data, thetransposition of numbers, or minor arith-metic errors). No single factor is determi-native. Additionally, factors (4) and (5)should not be interpreted to exclude smallbusinesses.

.03 Multiple failures. In the case of aplan with more than one Operational Fail-ure in a single year, or Operational Fail-ures that occur in more than one year, theOperational Failures are eligible for cor-rection under this section only if all of theOperational Failures are insignificant inthe aggregate. Operational Failures thathave been corrected under APRSC in sec-tion 9, the VCR program in section 10,Walk-in CAP in section 11 or TVC in sec-tion 11 are not taken into account for pur-poses of determining if Operational Fail-ures are insignificant in the aggregate.

.04 Examples. The following exam-ples illustrate the application of this sec-tion. It is assumed, in each example, thatthe eligibility requirements of section 4relating to APRSC have been satisfiedand that no Operational Failures occurredother than the Operational Failures identi-fied below.

Example 1: In 1984, Employer X establishedPlan A, a profit-sharing plan that satisfies the re-quirements of § 401(a) in form. In 1999, the bene-fits of 50 of the 250 participants in Plan A were lim-ited by § 415(c). However, when the Serviceexamined Plan A in 2002, it discovered that, duringthe 1999 limitation year, the annual additions allo-cated to the accounts of 3 of these employees ex-ceeded the maximum limitations under § 415(c).Employer X contributed $3,500,000 to the plan forthe plan year. The amount of the excesses totaled$4,550. Under these facts, because the number ofparticipants affected by the failure relative to thetotal number of participants who could have been af-fected by the failure, and the monetary amount ofthe failure relative to the total employer contributionto the plan for the 1999 plan year, are insignificant,the § 415(c) failure in Plan A that occurred in 1999would be eligible for correction under this section.

Example 2: The facts are the same as in Example1, except that the failure to satisfy § 415 occurredduring each of the 1998, 1999, and 2000 limitationyears. In addition, the three participants affected bythe § 415 failure were not identical each year. Thefact that the § 415 failures occurred during morethan one limitation year did not cause the failures tobe significant; accordingly, the failures are still eligi-ble for correction under this section.

Example 3: The facts are the same as in Example1, except that the annual additions of 18 of the 50employees whose benefits were limited by § 415(c)nevertheless exceeded the maximum limitations

2000–6 I.R.B. 527 February 7, 2000

under § 415(c) during the 1999 limitation year, andthe amount of the excesses ranged from $1,000 to$9,000, and totaled $150,000. Under these facts,taking into account the number of participants af-fected by the failure relative to the total number ofparticipants who could have been affected by thefailure for the 1999 limitation year (and the mone-tary amount of the failure relative to the total em-ployer contribution), the failure is significant. Ac-cordingly, the § 415(c) failure in Plan A thatoccurred in 1999 is ineligible for correction underthis section as an insignificant failure.

Example 4: Employer J maintains Plan C, amoney purchase pension plan established in 1992.The plan document satisfies the requirements of §401(a) of the Code. The formula under the plan pro-vides for an employer contribution equal to 10% ofcompensation, as defined in the plan. During its ex-amination of the plan for the 1999 plan year, the Ser-vice discovered that the employee responsible forentering data into the employer’s computer mademinor arithmetic errors in transcribing the compen-sation data with respect to 6 of the plan’s 40 partici-pants, resulting in excess allocations to those 6 par-ticipants’ accounts. Under these facts, the number ofparticipants affected by the failure relative to thenumber of participants that could have been affectedis insignificant, and the failure is due to minor dataerrors. Thus, the failure occurring in 1999 would beinsignificant and therefore eligible for correctionunder this section.

Example 5: Public School maintains for its 200employees a salary reduction 403(b) plan (the“Plan”) which satisfies the requirements of § 403(b).The business manager has primary responsibility foradministering the Plan, in addition to other adminis-trative functions within Public School. During the1998 plan year, a former employee should have re-ceived an additional minimum required distributionof $278 under § 403(b)(10). Another participant re-ceived an impermissible hardship withdrawal of$2,500. Another participant made elective deferralsof $11,000, $1,000 of which was in excess of the §402(g) limit. Under these facts, even though multi-ple failures occurred in a single plan year, the fail-ures will be eligible for correction under this sectionbecause in the aggregate the failures are insignifi-cant.

SECTION 9. SELF-CORRECTION OFSIGNIFICANT OPERATIONALFAILURES

.01 Requirements. The requirementsof this section are satisfied with respect toan Operational Failure (even if signifi-cant) if the Operational Failure is cor-rected and the correction is either com-pleted or substantially completed (inaccordance with section 9.03) by the lastday of the correction period described insection 9.02.

.02 Correction period. The last day ofthe correction period for an OperationalFailure is the last day of the second planyear following the plan year for which thefailure occurred. However, in the case of

a failure to satisfy the requirements of §401(k)(3), 401(m)(2), or 401(m)(9), theplan year that includes the last day of theadditional period for correction permittedunder § 401(k)(8) or 401(m)(6) is treated,for this purpose, as the plan year forwhich the Operational Failure occurs.The correction period for an OperationalFailure that occurs for any plan year ends,in any event, on the first date the plan orPlan Sponsor is Under Examination forthat plan year (determined without regardto the exception in the preceding sen-tence). (But see section 9.03 for specialrules permitting completion of correctionafter the end of the correction period.) Ifa 403(b) Plan does not have a plan year,the calendar year is considered to be theplan year for purposes of this section..03 Substantial completion of correction.Correction of an Operational Failure issubstantially completed by the last day ofthe correction period only if the require-ments of either paragraph (1) or (2) aresatisfied.

(1) The requirements of this para-graph (1) are satisfied if:

(a) during the correction period,the Plan Sponsor is reasonably prompt inidentifying the Operational Failure, for-mulating a correction method, and initiat-ing correction in a manner that demon-strates a commitment to completingcorrection of the Operational Failure asexpeditiously as practicable, and

(b) within 90 days after the lastday of the correction period, the PlanSponsor completes correction of the Op-erational Failure.

(2) The requirements of this para-graph (2) are satisfied if:

(a) during the correction period,correction is completed with respect to85% of all participants affected by theOperational Failure, and

(b) thereafter, the Plan Sponsorcompletes correction of the OperationalFailure with respect to the remaining af-fected participants in a diligent manner.

.04 Example. The following exampleillustrates the application of this section.Assume that the eligibility requirementsof section 4 relating to APRSC have beenmet.

Employer Z established a qualified de-fined contribution plan in 1986 and re-ceived a favorable determination letter forTRA ‘86. During 1999, while doing a

self-audit of the operation of the plan forthe 1998 plan year, the plan administratordiscovered that, despite the practices andprocedures established by Employer Zwith respect to the plan, several employ-ees eligible to participate in the plan wereexcluded from participation. The admin-istrator also found that for 1998 the elec-tive deferrals of additional employees ex-ceeded the § 402(g) limit and discoveredOperational Failures in 1998 with respectto the top-heavy provisions of the plan.During the 1999 plan year, the Plan Spon-sor made corrective contributions on be-half of the excluded employees, distrib-uted the excess deferrals to the affectedparticipants, and made a top-heavy mini-mum contribution to all participants enti-tled to that contribution for the 1999 planyear. Each corrective contribution anddistribution was credited with earnings ata rate appropriate for the plan from thedate the corrective contribution or distrib-ution should have been made to the dateof correction. Under these facts, the PlanSponsor has corrected the OperationalFailures for the 1998 plan year within thecorrection period and thus satisfied the re-quirements of this section.

PART V. VOLUNTARYCORRECTION WITH SERVICEAPPROVAL (VCR, WALK-IN CAPAND TVC)

SECTION 10. VCR PROGRAM

.01 VCR requirements. The require-ments of this section are satisfied with re-spect to an Operational Failure if the sub-mission requirements of section 12 beloware satisfied and the Plan Sponsor correctsthe failures identified in accordance withthe compliance statement described insection 10.13.

.02 Identification of failures. TheVCR program is not based upon an exam-ination of the plan by the Service. TheService will not make any investigation orfinding under the VCR program concern-ing whether there are Operational Fail-ures. Only the Operational Failuresraised by the Plan Sponsor or OperationalFailures identified by the Service in pro-cessing the application will be addressedunder the program, and only those fail-ures will be covered by the program.However, because the VCR program doesnot arise out of an examination, consider-

February 7, 2000 528 2000–6 I.R.B.

ation under the VCR program does notpreclude or impede (under § 7605(b) orany administrative provisions adopted bythe Service) a subsequent examination ofthe Plan Sponsor or the plan by the Ser-vice with respect to the taxable year (oryears) involved with respect to mattersthat are outside the compliance statement.A Plan Sponsor’s statements describingOperational Failures are made only forpurposes of the VCR program and willnot be regarded by the Service as an ad-mission of a failure for purposes of anysubsequent examination. If the plan fail-ures include failures correctable underVCR and failures correctable under Walk-in CAP, (e.g., interrelated Operational andDocument Failures), the Plan Sponsormay include all such failures in a submis-sion under Walk-in CAP.

.03 No concurrent examination activ-ity. Except in unusual circumstances, aplan that has been properly submittedunder the VCR program will not be exam-ined while the submission is pending.This practice regarding concurrent exami-nations does not extend to other plans ofthe Plan Sponsor. Thus, any plan of thePlan Sponsor that is not pending under theVCR program could be subject to exami-nation.

.04 Insufficient information. Where itis not possible to obtain sufficient infor-mation to properly determine the natureor extent of a failure or there is insuffi-cient information to effect proper correc-tion, or in other special circumstanceswhere the application of the VCR pro-gram would be inappropriate or impracti-cal, the failure cannot be corrected underthe VCR program.

.05 Initial processing. (1) The Servicewill review whether the eligibility re-quirements of section 4 and the submis-sion requirements of section 12 are satis-fied.

(2) If the plan is not the subject of aFavorable Letter or the failure is not anOperational Failure, the compliance feewill be returned to the Plan Sponsor, andthe Plan Sponsor will be informed of theoption to voluntarily request considera-tion under Walk-in CAP.

(3) If a Plan Sponsor requests acompliance statement under the VCR pro-gram for a plan with egregious failuresdescribed in section 4.07, the compliancefee will be returned and the Plan Sponsor

will be given 60 days to voluntarily re-quest consideration under Walk-in CAP.If by the end of the 60-day period, a re-quest for consideration under Walk-inCAP has not been received, the VCR re-quest will be forwarded to EmployeePlans Examinations (see section 12.12 ofthis revenue procedure)for examinationconsideration.

(4) If the Service determines that asubmission is seriously deficient, the Ser-vice reserves the right to return the sub-mission and the compliance fee withoutcontacting the Plan Sponsor.

(5) If a request for considerationunder the VCR program is not describedin paragraph (2), (3), or (4) above, butnevertheless fails to comply with the pro-visions of this revenue procedure or if ad-ditional information is required, a Servicerepresentative will generally contact thePlan Sponsor or the Plan Sponsor’s repre-sentative and explain what is needed tocomplete the submission. The Plan Spon-sor will have 21 calendar days from thedate of this contact to provide the re-quested information. If the information isnot received within 21 days, the matterwill be closed, the compliance fee will notbe returned, and the case may be referredto Employee Plans Examinations in ac-cordance with section 10.05(3). Any re-quest for an extension of the 21-day timeperiod must be made in writing within the21-day time period and must be approvedby the Service.

.06 Processing of acceptable submis-sion. Once the Service determines that arequest for consideration under the VCRprogram is acceptable, the Service willconsult with the Plan Sponsor or the PlanSponsor’s representative to discuss theproposed corrections and the plan’s ad-ministrative procedures. If agreement isreached, the Service will issue a compli-ance statement with an enclosed acknowl-edgment letter for signature by the PlanSponsor. The case will not be closed fa-vorably until the Service has received thesigned acknowledgement letter from thePlan Sponsor. The Service will discussthe appropriateness of the plan’s existingadministrative procedures with the PlanSponsor. Where current procedures areinadequate for operating the plan in con-formance with the qualification require-ments of the Code, the compliance state-ment will be conditioned upon the

implementation of stated procedureswithin the stated time period. The Ser-vice may prescribe appropriate adminis-trative procedures in the compliancestatement.

.07 Failures discovered after initialsubmission.

(1) A Plan Sponsor that discoversadditional, unrelated Operational Failuresafter its initial submission may requestthat such failures be added to its submis-sion. The Service retains the discretion toreject the inclusion of such failures if therequest is not timely, for example, if thePlan Sponsor makes its request when pro-cessing of the VCR submission is sub-stantially complete.

(2) If the Service discovers an unre-lated Operational Failure while the re-quest is pending under the VCR program,the failure generally will be added to thefailures under consideration in the sub-mission. The Service retains the discre-tion to determine that a failure is outsidethe scope of the voluntary request for con-sideration because it was not voluntarilybrought forward by the Plan Sponsor. Inthis case, the plan may be forwarded toEmployee Plans Examinations for consid-eration on examination, but forwarding toEmployee Plans Examinations will occuronly in rare or unusual circumstances.

.08 Conference right. If the Serviceinitially determines that it cannot issue acompliance statement because the partiescannot agree upon correction or a changein administrative procedures, the PlanSponsor or the Plan Sponsor’s representa-tive will be contacted by the Service rep-resentative and offered a conference withthe Service. The conference can be heldeither in person or by telephone, and mustbe held within 21 calendar days of thedate of contact. The Plan Sponsor willhave 21 calendar days after the date of theconference to submit additional informa-tion in support of the submission. Any re-quest for an extension of the 21-day timeperiod must be made in writing within the21-day time period and must be approvedby the Service. Additional conferencesmay be held at the discretion of the Ser-vice.

.09 Failure to reach resolution. If res-olution cannot be reached (for example,where information is not timely providedto the Service or because agreement can-not be reached on correction or a change

2000–6 I.R.B. 529 February 7, 2000

in administrative procedures), the compli-ance fee will not be returned, and the casemay be referred to Employee Plans Ex-aminations for examination considera-tion.

.10 Concurrent processing of determi-nation letter applications. The Servicemay process a determination letter appli-cation (including an application requestedon Form 5310, Application for Determi-nation of Qualification Upon Termina-tion) concurrently with a VCR submis-sion for the same plan. However,issuance of the determination letter in re-sponse to an application made on a Form5310 will be suspended pending the clo-sure of the VCR submission.

.11 Special rules relating to SVP. (1)Under the VCR program, certain Opera-tional Failures may be corrected under theStandardized VCR Procedure (“SVP”)rules in this section. SVP is available ifthe plan’s only identified OperationalFailure or Failures are listed in AppendixA or Appendix B of this revenue proce-dure and the failures are corrected in ac-cordance with an applicable correctionmethod set forth in Appendix A or Appen-dix B. Appropriate correction must bemade for any Qualification Failure thatresults from the application of an SVPcorrection. The Plan Sponsor must re-quest an SVP compliance statement andpay the reduced compliance fee set forthin section 13.04.

(2) The correction methods set forthin Appendix A and Appendix B arestrictly construed and are the only accept-able correction methods for failures cor-rected under SVP. If the Plan Sponsorwishes to modify a correction methodprovided in Appendix A or Appendix B orto propose another method, the PlanSponsor may not use SVP, but may re-quest a compliance statement under theregular VCR procedures.

(3) SVP is not available if the PlanSponsor has identified more than twoSVP failures in a single SVP request. Ifthere are one or two failures that can becorrected under SVP and other failuresthat cannot be corrected under SVP, SVPis not available. The Service reserves theright to shift requests for considerationunder SVP into the regular VCR programif the Plan Sponsor submits a second SVPrequest with respect to the same planwhile the first SVP request is being con-

sidered or during the 12 months after thefirst SVP compliance statement is issued.Both SVP requests may be shifted into theregular VCR program if the first SVP re-quest is still being considered.

(4) The Service will review an SVPrequest within 120 days of the date thesubmission is received and determined tobe complete. If the Service determinesthat the request is acceptable, the Servicewill issue a compliance statement on thePlan Sponsor’s proposed correction.

.12 General description of compliancestatement. Under the VCR program, aPlan Sponsor receives a compliance state-ment from the Service. The compliancestatement addresses the failures identi-fied, the terms of correction, and any revi-sion of administrative procedures, andprovides that the Service will not treat theplan as disqualified on account of the Op-erational Failures described in the compli-ance statement. In addition, the time pe-riod within which proposed correctionsand changes in administrative proceduresmust be implemented are set forth in thecompliance statement. The compliancestatement is conditioned on the accuracyand acceptability of any calculations orother material submitted in connectionwith the request.

.13 Compliance statement conditionedupon timely correction. The compliancestatement is conditioned upon the imple-mentation of the specific corrections andadministrative changes set forth in thecompliance statement within 150 days ofthe date of the compliance statement.Any request for an extension of this timeperiod must be made in advance and inwriting and must be approved by the Ser-vice.

.14 Compliance statement for newplans conditioned upon timely amend-ment. Reliance on any compliance state-ment issued for a plan initially adopted oreffective after December 7, 1994, otherthan an adoption of a master or prototypeor regional prototype plan, is conditionedupon the plan being timely submitted fora determination letter within the plan’s re-medial amendment period under § 401(b).

.15 Acknowledgement letter. Within30 calendar days after the compliancestatement is issued, a Plan Sponsor thatwishes to agree to the terms of the com-pliance statement must send a signed ac-knowledgement letter to the Service,

agreeing to the terms of the compliancestatement. If the Plan Sponsor does notsend the Service a signed acknowledge-ment letter within 30 calendar days, theplan may be referred to Employee PlansExaminations for examination considera-tion. Once the compliance statement hasbeen issued (based on the informationprovided), the Plan Sponsor cannot re-quest a modification of the complianceterms except by a new request for a com-pliance statement. However, if the re-quested modification is minor and is post-marked no later than 30 days after thecompliance statement is issued, the VCRcompliance fee for the modification willbe the lesser of the original compliancefee or $1,250.

.16 Verification. Once the compliancestatement has been issued, the Servicemay require verification that the correc-tions have been made and that any planadministrative procedures required by thestatement have been implemented. Thisverification does not constitute an exami-nation of the books and records of the em-ployer or the plan (within the meaning of§ 7605(b)). If the Service determines thatthe Plan Sponsor did not implement thecorrections and procedures within thestated time period, the Service may con-sider the issues in an examination.

SECTION 11. WALK-IN CAP ANDTVC

.01 Walk-in CAP requirements. (1)The requirements of this section are satis-fied with respect to a Plan Document, Op-erational, or a Demographic Failure if thesubmission requirements of section 12 aresatisfied, the Plan Sponsor pays the com-pliance correction fee, and the Plan Spon-sor corrects the failures identified in ac-cordance with a closing agreemententered into by the Service and the PlanSponsor. Payment of the compliance cor-rection fee is generally required at thetime the closing agreement is signed.

(2) A determination letter applica-tion does not satisfy the submission re-quirements under Walk-in CAP.

(3) Depending on the nature of thefailure, the Service will discuss the appro-priateness of the plan’s existing adminis-trative procedures with the Plan Sponsor.Where current administrative proceduresare inadequate for operating the plan inconformance with the qualification re-

February 7, 2000 530 2000–6 I.R.B.

quirements of the Code, the closingagreement may be conditioned upon theimplementation of stated administrativeprocedures.

(4) In addition, the Plan Sponsor isrequired to obtain a Favorable Letter be-fore the closing agreement is signed un-less the Service determines that it is un-necessary based on the facts andcircumstances (for example, because theplan already has a Favorable Letter andno significant amendments are adopted).If a Favorable Letter is required, the PlanSponsor would be required to pay the ap-plicable user fee for obtaining the letter.

.02 Failures discovered after initialsubmission. (1) A Plan Sponsor that dis-covers additional, unrelated failures afterits initial submission may request thatsuch failures be added to its submission.However, the Service retains the discre-tion to reject the inclusion of such failuresif the request is not timely, for example, ifthe Plan Sponsor makes its request whenprocessing of the submission is substan-tially complete.

(2) If the Service discovers an unre-lated plan failure while the request ispending, the failure generally will beadded to the failures under consideration.However, the Service retains the discre-tion to determine that a failure is outsidethe scope of the voluntary request for con-sideration because it was not voluntarilybrought forward by the Plan Sponsor. Inthis case, if the additional failure is signif-icant, all aspects of the plan will be exam-ined, and the rules pertaining to AuditCAP will apply.

.03 Failure to reach resolution. If theService and the Plan Sponsor cannotreach agreement with respect to the sub-mission, all aspects of the plan may be ex-amined, and the rules pertaining to AuditCAP will apply.

.04 Effect of closing agreement. Theclosing agreement is binding upon boththe Service and the Plan Sponsor with re-spect to the specific tax matters identifiedtherein for the periods specified, but doesnot preclude or impede an examination ofthe plan by the Service relating to mattersoutside the closing agreement, even withrespect to the same taxable year or yearsto which the closing agreement relates.

.05 TVC. The provisions in section11.01 through .04 above apply to TVC ex-cept that TVC applies to Operational, De-

mographic, and Eligibility Failures withrespect to a 403(b) Plan. In addition, thereis no requirement that the employer ob-tain a private letter ruling from the Ser-vice covering its 403(b) Plan.

SECTION 12. APPLICATIONPROCEDURES FOR VCR, WALK-INCAP AND TVC

.01 General rules. This section setsforth the procedures for requesting a com-pliance statement from the Service underthe VCR program (including SVP) andfor requesting a closing agreement underWalk-in CAP and TVC. In general, a re-quest under the VCR program, Walk-inCAP or TVC consists of a letter from thePlan Sponsor or the Plan Sponsor’s repre-sentative to the Service that contains a de-scription of the failures, a description ofthe proposed methods of correction, andother procedural items, and includes sup-porting information and documentation asdescribed below.

.02 Multiemployer and multiple em-ployer plans. In the case of a multiem-ployer or multiple employer plan, the planadministrator (rather than any contribut-ing or adopting employer) must requestconsideration of the plan under the pro-grams. The request must be with respectto the plan, rather than a portion of theplan affecting any particular employer.

.03 Submission requirements. The let-ter from the Plan Sponsor or the PlanSponsor’s representative must contain thefollowing:

(1) A complete description of thefailures and the years in which the failuresoccurred, including closed years (that is,years for which the statutory period hasexpired).

(2) A description of the administra-tive procedures in effect at the time thefailures occurred.

(3) An explanation of how and whythe failures arose.

(4) A detailed description of themethod for correcting the failures that thePlan Sponsor has implemented or pro-poses to implement. Each step of the cor-rection method must be described in nar-rative form. The description must includethe specific information needed to supportthe suggested correction method. This in-formation includes, for example, the num-ber of employees affected and the ex-pected cost of correction (both of which

may be approximated if the exact numbercannot be determined at the time of the re-quest), the years involved, and calcula-tions or assumptions the Plan Sponsorused to determine the amounts needed forcorrection. See section 10.11 for specialprocedures regarding SVP.

(5) A description of the methodol-ogy that will be used to calculate earningsor actuarial adjustments on any correctivecontributions or distributions (indicatingthe computation periods and the basis fordetermining earnings or actuarial adjust-ments, in accordance with section6.02(5)).

(6) Specific calculations for each af-fected employee or a representative sam-ple of affected employees. The samplecalculations must be sufficient to demon-strate each aspect of the correctionmethod proposed. For example, if a PlanSponsor requests a compliance statementwith respect to a failure to satisfy the con-tribution limits of § 415(c) and proposes acorrection method that involves electivecontributions (both matched and un-matched) and matching contributions, thePlan Sponsor must submit calculations il-lustrating the correction method proposedwith respect to each type of contribution.As another example, with respect to afailure to satisfy the actual deferral per-centage (“ADP”) test in § 401(k)(3), thePlan Sponsor must submit the ADP testresults both before the correction andafter the correction.

(7) The method that will be used tolocate and notify former employees andbeneficiaries, or an affirmative statementthat no former employees or beneficiarieswere affected by the failures.

(8) A description of the measuresthat have been or will be implemented toensure that the same failures will notrecur.

(9) A statement that, to the best ofthe Plan Sponsor’s knowledge, neither theplan nor the Plan Sponsor is Under Exam-ination.

(10) In the case of a VCR submis-sion, a statement (if applicable) that theplan is currently being considered in a de-termination letter application. If the re-quest for a determination letter is madewhile a request for consideration underVCR is pending, the Plan Sponsor mustupdate the VCR request to add this infor-mation.

2000–6 I.R.B. 531 February 7, 2000

(11) In the case of an SVP submis-sion, a statement that it is an SVP request,a description of the applicable correctionin accordance with Appendix A or Appen-dix B, and a statement that the Plan Spon-sor proposes to implement (or has imple-mented) the correction(s).

(12) In the case of a TVC submis-sion, an application under TVC must con-tain a statement that the employer hascontacted all other entities involved withthe plan and has been assured of coopera-tion in implementing the applicable cor-rection, to the extent necessary. For ex-ample, if the plan’s failure is the failure tosatisfy the requirements of § 403(b)(1)(E)on elective deferrals, the employer must,prior to making the TVC application, con-tact the insurance company or custodianwith control over the plans’s assets to as-sure cooperation in effecting a distribu-tion of the excess deferrals and the earn-ings thereon.

.04 Required documents. The submis-sion must be accompanied by the follow-ing documents:

(1) In the case of a VCR submis-sion, a copy of the first page and a copy ofthe page containing employee census in-formation (currently, line 7f of the 1998Form 5500) and a copy of the page con-taining the total amount of plan assets(currently, line 31f of the 1998 Form5500) of the most recently filed Form5500 series return, or in the case of aWalk-in CAP submission, a copy of themost recently filed Form 5500 series re-turn.

(2) Under TVC, the first two pagesof the most recently filed Form 5500, or ifinapplicable, the information generallyincluded on the first two pages, includingthe name and number of the plan, and theemployer ’s Employer IdentificationNumber.

(3) A copy of the relevant portionsof the plan document. For example, in acase involving improper exclusion of eli-gible employees from a profit-sharingplan with a cash or deferred arrangement,

relevant portions of the plan document in-clude the eligibility, allocation, and cashor deferred arrangement provisions of thebasic plan document (and the adoptionagreement, if applicable), along with ap-plicable definitions in the plan. If theplan is a 403(b) Plan and a plan documentis not available, written descriptions ofthe plan, and sample salary reductionagreements if relevant.

(4) In the case of a VCR submis-sion, a copy of the determination letter,opinion letter, or notification letter thatconsidered TRA ‘86, except:

(a) a governmental plan, or a non-electing church plan described in Rev. Proc.99–23 for which the TRA ‘86 remedialamendment period has not yet expiredshould submit a copy of the determination,opinion, or notification letter that consid-ered TEFRA, DEFRA, and REA and astatement that explains the reason why theperiod has not yet expired, and

(b) plans initially adopted or ef-fective after December 7, 1994, shouldsubmit a statement that the plan will besubmitted timely for a determination,opinion, or notification letter within theplan’s remedial amendment period under§ 401(b).

(5) In the case of a TVC submission,a statement as to the type of employer(e.g., a tax-exempt organization describedin § 501(c)(3)) submitting the TVC appli-cation.

.05 Fee. The VCR submission mustinclude the appropriate fee described insection 13.02 or 13.04 below. The Walk-in CAP or TVC compliance correction feedescribed in section 13.05 or 13.06 belowis due at the time the closing agreement issigned.

.06 Signed submission. The submis-sion must be signed by the Plan Sponsoror the sponsor’s representative.

.07 Power of attorney requirements.To sign the submission or to appear be-fore the Service in connection with thesubmission, the Plan Sponsor’s represen-tative must comply with the requirements

of section 9.02(11) and (12) of Rev. Proc.2000–4, 2000–1 I.R.B. 115.

.08 Penalty of perjury statement. Thefollowing declaration must accompany arequest and any factual information orchange in the submission at a later time:“Under penalties of perjury, I declarethat I have examined this submission,including accompanying documents,and, to the best of my knowledge andbelief, the facts presented in support ofthis submission are true, correct, andcomplete.” The declaration must besigned by the Plan Sponsor, not the PlanSponsor’s representative.

.09 Checklist.The Service will be ableto respond more quickly to a VCR, Walk-in CAP or TVC request if the request iscarefully prepared and complete. Thechecklist in Appendix C is designed to as-sist Plan Sponsors and their representa-tives in preparing a submission that con-tains the information and documentsrequired under this revenue procedure.The checklist in Appendix C must becompleted, signed, and dated by the PlanSponsor or the Plan Sponsor’s representa-tive, and should be placed on top of thesubmission. A photocopy of this checklistmay be used.

.10 Designation. The letter to the Ser-vice should be designated “VCR PRO-GRAM,” “SVP/VCR PROGRAM,”“WALK-IN CAP PROGRAM,” or “TVCPROGRAM” as appropriate, in the upperright hand corner of the letter.

.11 VCR/SVP mailing address.VCR/SVP submissions should be mailedto:

Internal Revenue ServiceAttention: T:EP:RA:VCP.O. Box 14073Ben Franklin Station Washington, D.C. 20044

.12 Walk-in CAP and TVC mailing ad-dress. Walk-in CAP and TVC submis-sions should be mailed to the appropriateClosing Agreement Coordinator at the ad-dress provided below:

February 7, 2000 532 2000–6 I.R.B.

If the entity is in: Walk-in CAP and TVC applications should be sent to:

Connecticut, Maine, Employee Plans Walk-in CAPMassachusetts, Michigan, Internal Revenue ServiceNew Hampshire, New Jersey, 10 Metro Tech CenterNew York, Ohio, Pennsylvania, 625 Fulton StreetRhode Island, Vermont Brooklyn, NY 11201

Phone (718) 488-2372FAX (718) 488-2405

Alabama, Delaware, District of Employee Plans Walk-in CAPColumbia, Florida, Georgia, Internal Revenue ServiceIndiana, Kentucky, Louisiana, Room 1550Maryland, Mississippi, North P.O. Box 13163Carolina, South Carolina, Baltimore, MD 21203Tennessee, Virginia, West Phone (410) 962-3499Virginia, any U.S. possession FAX (410) 962-0882or foreign country

Arkansas, Illinois, Iowa, Employee Plans Walk-in CAPKansas, Minnesota, Missouri, Internal Revenue ServiceNebraska, North Dakota, 230 S. DearbornOklahoma, South Dakota, Texas, MC 4913 ChiWisconsin Chicago, IL 60604

Phone (312) 886-1277FAX (312) 886-2386

Alaska, Arizona, California, Employee Plans Walk-in CAPColorado, Hawaii, Idaho, Internal Revenue Service Montana, Nevada, New Mexico, 2 Cupania CircleOregon, Utah, Washington, Monterey Park, CA 91755-7431Wyoming Phone (323) 869-3905

FAX (323) 869-3949

2000–6 I.R.B. 533 February 7, 2000

.13 Maintenance of copies of submis-sions. Plan Sponsors and their represen-tatives should maintain copies of all cor-respondence submitted to the Servicewith respect to their VCR, Walk-in CAPand TVC requests.

SECTION 13. FEES

.01 Rev. Proc. 2000–8 modified. TheVCR compliance fee is processed underthe user fee program described in Rev.Proc. 2000–8, 2000–1 I.R.B. 230.

.02 VCR fee. Unless SVP is applica-ble, the VCR compliance fee depends onthe assets of the plan and the number ofplan participants.

(1) The fee for a plan with assets ofless than $500,000, and no more than1,000 plan participants, is $500.

(2) The fee for a plan with assets of

at least $500,000, and no more than 1,000plan participants, is $1,250.

(3) The fee for a plan with morethan 1,000 plan participants but less than10,000 plan participants is $5,000.

(4) The fee for a plan with 10,000 ormore plan participants is $10,000.

.03 Establishing number of plan par-ticipants. The compliance fee is calcu-lated by the Plan Sponsor using the num-bers from the most recently filed Form5500 series to establish the fee. Thus,with respect to the 1998 Form 5500, thePlan Sponsor would use the numbershown on line 7(f) (or the equivalent lineon the Form 5500 C/R or EZ) to establishthe number of plan participants and woulduse line 31(f) (or the equivalent line onthe Form 5500 C/R or EZ) to establish theamount of plan assets.

.04 SVP fee. The SVP compliance fee

is $350..05 Walk-in CAP compliance correc-

tion fee. (1) Compliance correction feechart. The compliance correction fee fora Walk-in CAP application is determinedin accordance with the chart below. Thechart contains a graduated range of feesbased on the size of the plan (with thenumber of participants determined as pro-vided in section 13.03). Each range in-cludes a minimum amount, a maximumamount, and a presumptive amount. Ineach case, the minimum amount is the ap-plicable VCR fee in section 13.02. It isexpected that in most instances the com-pliance correction fee imposed will be ator near the presumptive amount in eachrange; however, the fee may be a higheror lower amount within the range, de-pending on the factors in paragraph (2)below.

WALK-IN CAP COMPLIANCE CORRECTION FEES

# of participants Fee range Presumptive Amount

10 or fewer VCR fee* to $4,000 $2,000

11 to 50 VCR fee* to $8,000 $4,000

51 to 100 VCR fee* to $12,000 $6,000

101 to 300 VCR fee* to $16,000 $8,000

301 to 1,000 VCR fee* to $30,000 $15,000

over 1,000 VCR fee* to $70,000 $35,000

February 7, 2000 534 2000–6 I.R.B.

* Items marked by asterisk refer to the VCR compliance fee that would apply under section 13.02 if the plan had been submittedunder the VCR program.

(2) Factors considered. Considera-tion of whether the compliance correctionfee should be equal to, greater than, orless than the presumptive amount will de-pend on factors relating to the nature, ex-tent, and severity of the failure. Thesefactors include: (a) whether the failure is afailure to satisfy the requirements of §401(a)(4), § 401(a)(26), or § 410(b), (b)whether the plan has both Operational andPlan Document Failures, (c) the periodover which the violation occurred (for ex-ample, the time that has elapsed since theend of the applicable remedial amend-ment period under § 401(b) for a PlanDocument Failure), and (d) whether theplan has a Favorable Letter.

(3) Egregious failures. In cases in-volving failures that are egregious (as de-scribed in section 4.07), (a) the maximumcompliance correction fee applicable tothe plan under the chart in 13.05(1) is in-creased to 40 percent of the MaximumPayment Amount, and (b) no presumptiveamount applies.

.06 TVC fee. (1) TVC Compliance cor-rection fee. The applicable TVC compli-ance correction fee depends on the type offailure and, generally, the number of em-ployees of the employer.

(2) Fee for Operational Failures.

Subject to section 13.06(5) below, thecompliance correction fees for Opera-tional Failures are as follows:

(a) The fee for an employer withfewer than 25 employees is $500.

(b) The fee for an employer withat least 25 and no more than 1,000 em-ployees is $1,250.

(c) The fee for an employer withmore than 1,000 employees but less than10,000 is $5,000.

(d) The fee for an employer with10,000 or more employees is $10,000.

(3) Fee for certain Excess Amounts.Subject to section 13.06(5) below, the com-pliance correction fee for Excess Amountsthat are corrected pursuant to section6.02(4)(b)(i) above is equal to the sum of(1) the applicable fee described in section13.06(2) above and (2) two percent of theExcess Amounts, adjusted for earningsthrough the date of the TVC application,contributed or allocated in the calendar yearof the TVC application and in the three cal-endar years prior thereto. For purposes ofdetermining the fee described in this sec-tion 13.06(3), where there is a failure to sat-isfy both the § 403(b)(2) and § 415 limitswith respect to a single employee for a year,the fee will take into account only thegreater Excess Amount.

(4) Fee for Demographic and Eligi-bility Failures. (a) Subject to section13.06(5) below, the compliance correctionfee for a 403(b) Plan with failures that in-clude Demographic or Eligibility Failuresis determined in accordance with the tableset forth above in section 13.05 with re-spect to Walk-In CAP, except that (i) thereference to the “VCR fee” is changed torefer to the TVC compliance correction feefor Operational Failures set forth in section13.06(2) above, and (ii) the fee is deter-mined with reference to the number of em-ployees rather than participants.

(b) Factors considered in deter-mining the compliance correction fee forfailures that include Demographic and El-igibility Failures under TVC include: (i)whether the failure is a DemographicFailure; (ii) whether the plan is a Plan ofan Ineligible Employer; (iii) whether the403(b) Plan has a combination of Opera-tional, Demographic, and Eligibility fail-ures; and (iv) the period of time overwhich the failure occurred.

(5) Fee for multiple failures.If cor-rection is requested for multiple failures,the compliance correction fee will be de-termined in accordance with the table setforth below.

Multiple Operational Failures Fee described in section 13.06(2)

Multiple Demographic/Eligibility Fee described in section 13.06(4)Failures

Combination of Operational and Fee described in section 13.06(4)Demographic/Eligibility Failures

Operational Failure(s) with section Fee described in section 13.06(3)6.02(4)(b)(i) correction of Excess Amounts

Demographic/Eligibility Failures and Operational Fee described in section 13.06(3),Failures including section 6.02(4)(b)(i) correction of substituting section 13.06(4) fee for Excess Amounts section 13.06(2) fee

(6) Fee for egregious failures.In casesinvolving failures that are egregious, themaximum compliance correction fee ap-plicable to the plan is increased to 40 per-cent of the Total Sanction Amount and nopresumptive amount applies.

PART VI. CORRECTION ON AUDIT(AUDIT CAP)

SECTION 14. DESCRIPTION OFAUDIT CAP

.01 Audit CAP requirements. In theevent the Service identifies a Qualifica-tion or 403(b)Failure (other than a failurethat is not treated as resulting in disquali-fication of the plan under APRSC, VCR,Walk-in CAP, or TVC) upon an EmployeePlans or Exempt Organizations examina-tion of a Qualified Plan or a 403(b) Plan,the requirements of this section are satis-fied with respect to the failure if the PlanSponsor corrects the failure, pays a sanc-tion in accordance with section 14.02, sat-isfies any additional requirements of sec-tion 14.03, and enters into a closingagreement with the Service.

.02 Payment of sanction. Under AuditCAP, the Plan Sponsor is subject to asanction determined in accordance withsection 15. Payment of the sanction gen-erally will be required at the time the clos-ing agreement is signed.

.03 Additional requirements. Depend-ing on the nature of the failure, the Ser-vice will discuss the appropriateness ofthe plan’s existing administrative proce-dures with the Plan Sponsor. Where ex-isting administrative procedures are inad-equate for operating the plan inconformance with the qualification re-quirements of the Code, the closingagreement may be conditioned upon theimplementation of stated procedures. Inaddition, for Qualified Plans, the PlanSponsor may be required to obtain a Fa-vorable Letter before the closing agree-ment is signed unless the Service deter-mines that it is unnecessary based on thefacts and circumstances (for example, be-cause the plan already has a FavorableLetter and no significant amendments areadopted). If a Favorable Letter is re-quired, the Plan Sponsor would be re-quired to pay the applicable user fee forobtaining the letter.

.04 Failure to reach resolution. If theService and the Plan Sponsor cannot

reach an agreement with respect to thecorrection of the failure(s) or the amountof the sanction, the plan will be disquali-fied or, in the case of a 403(b) Plan,would not have reliance on this revenueprocedure.

.05 Effect of closing agreement. Aclosing agreement constitutes an agree-ment between the Service and the PlanSponsor that is binding with respect tothe tax matters identified therein for theperiods specified.

.06 Other procedural rules.The pro-cedural rules for Audit CAP are set forthin Internal Revenue Manual (“IRM”)7.9.2, EPCRS.

SECTION 15. AUDIT CAPSANCTION

.01 Determination of sanction. Thesanction under Audit CAP is a negotiatedpercentage of the Maximum PaymentAmount. For 403(b) Plans, the sanction isa negotiated percentage of the TotalSanction Amount. Sanctions will not beexcessive and will bear a reasonable rela-tionship to the nature, extent, and sever-ity of the failures.

.02 Factors considered. The amountof the sanction will depend on factors re-lating to the nature, extent, and severityof the failures, including the extent towhich correction had progressed beforethe examination was initiated. For bothQualified Plans and 403(b) Plans, otherfactors relating to the nature, extent, andseverity of the failures include: (1) thenumber and type of employees affectedby the failure, (2) the number of non-highly compensated employees whowould be adversely affected if the planwas not treated as qualified or as satisfy-ing the requirements of § 403(b), (3)whether the failure is a failure to satisfythe requirements of § 401(a)(4), §401(a)(26), or § 410(b), either directly orthrough § 403(b)(12), (4) the period overwhich the failure occurred (for example,the time that has elapsed since the end ofthe applicable remedial amendment pe-riod under § 410(b) for a Plan DocumentFailure), and (5) the reason for the failure(for example, data errors such as errors intranscription of data, the transposition ofnumbers, or minor arithmetic errors).Factors relating to Qualified Plans alsoinclude: (1) whether the plan is the sub-ject of a Favorable Letter, and (2)

whether the plan has both Operationaland Plan Document Failures. Additionalfactors relating to 403(b) Plans include:(1) whether the plan has a combination ofOperational, Demographic, or EligibilityFailures, (2) the extent to which the fail-ure relates to Excess Amounts, and (3)whether the plan is a Plan of an IneligibleEmployer.

PART VII. EFFECT ON OTHERDOCUMENTS AND EFFECTIVEDATE

SECTION 16. EFFECT ON OTHERDOCUMENTS

.01 Revenue procedures modified andsuperseded.Rev. Procs. 98– 22, 99–13,and 99–31 are modified and supersededby this revenue procedure.

.02 Rev. Proc. 2000–8 modified. Rev.Proc. 2000–8 is modified as provided insection 12.

SECTION 17. EFFECTIVE DATE

This revenue procedure is generally ef-fective May 1, 2000. In addition, em-ployers are permitted, at their option, toapply the provisions of this revenue pro-cedure on or after March 9, 1998 (the re-lease date of Rev. Proc. 98–22). Unlessan employer applies this revenue proce-dure earlier, this revenue procedure is ef-fective:

(1) with respect to VCR, Walk-inCAP and TVC, for applications submit-ted on or after May 1, 2000;

(2) with respect to Audit CAP, forexaminations begun on or after May 1,2000; and

(3) with respect to APRSC, for fail-ures for which correction is not completebefore May 1, 2000.

SECTION 18. PAPERWORKREDUCTION ACT

The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number1545-1673.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less the collection of information

2000–6 I.R.B. 535 February 7, 2000

displays a valid control number. The collection of information in this

revenue procedure is in sections 4.06,6.02(4), 6.02(6)(c), 10.01, 10.02,10.05–10.08, 10.11, 10.15, 11.01–11.03,11.05, 12.01–12.04, 12.06–12.12, 14.01,section 2.01–2.07 of Appendix B, andAppendix C. This information is re-quired to enable the Commissioner, TaxExempt and Government Entities Divi-sion of the Internal Revenue Service tomake determinations regarding the is-suance of various types of closing agree-ments and compliance statements. Thisinformation will be used to issue closingagreements and compliance statements toallow individual plans to continue tomaintain their tax qualified and tax-de-ferred status. As a result, favorable taxtreatment of the benefits of the eligibleemployees is retained. The likely respon-dents are individuals, state or local gov-ernments, business or other for-profit in-stitutions, nonprofit institutions, andsmall businesses or organizations.

The estimated total annual reportingand/or recordkeeping burden is 61,697hours.

The estimated annual burden per re-spondent/recordkeeper varies from .5 to42.5 hours, depending on individual cir-cumstances, with an estimated average of14.54 hours. The estimated number of re-spondents and/or recordkeepers is 4,242.

The estimated frequency of responsesis occasionally.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. § 6103.

DRAFTING INFORMATION

The principal authors of this revenueprocedure are Maxine Terry and CarltonWatkins of the Tax Exempt and Govern-ment Entities Division. For further infor-mation concerning this revenue proce-dure, please contact Employee Plans’taxpayer assistance telephone service be-tween 1:30 and 3:30 p.m., Eastern Time,Monday through Thursday at (202) 622-6074/6075. (These telephone numbersare not toll-free numbers.) Ms. Terry andMr. Watkins may be reached at (202)622-6214 (also not a toll-free number).

APPENDIX A

OPERATIONAL FAILURES ANDCORRECTIONS UNDER SVP

.01 General rule. This appendix setsforth Operational Failures relating toQualified Plans and corrections underSVP in accordance with section 10.11. Ineach case, the method described correctsthe Operational Failure identified in theheadings below. Corrective allocationsand distributions should reflect earningsand actuarial adjustments in accordancewith section 6.02(5)(a). The correctionmethods in this appendix are acceptableunder APRSC. Additionally, the correc-tion methods (other than correction byplan amendment under Walk-in CAP) andthe earnings adjustment methods in Ap-pendix B are acceptable under SVP.

.02 Failure to properly provide theminimum top-heavy benefit under § 416of the Code to non-key employees. In adefined contribution plan, the permittedcorrection method is to properly con-tribute and allocate the required top-heavy minimums to the plan in the man-ner provided for in the plan on behalf ofthe non-key employees (and any otheremployees required to receive top-heavyallocations under the plan). In a definedbenefit plan, the minimum required bene-fit must be accrued in the manner pro-vided in the plan.

.03 Failure to satisfy the ADP test setforth in § 401(k)(3), the ACP test set forthin § 401(m)(2), or the multiple use test of§ 401(m)(9). The permitted correctionmethod is to make qualified nonelectivecontributions (QNCs) (as defined in §1.401(k)–1(g)(13)(ii)) on behalf of thenonhighly compensated employees to theextent necessary to raise the actual defer-ral percentage or actual contribution per-centage of the nonhighly compensatedemployees to the percentage needed topass the test or tests. The contributionsmust be made on behalf of all eligiblenonhighly compensated employees (to theextent permitted under § 415) and musteither be the same flat dollar amount orthe same percentage of compensation.QNCs contributed to satisfy the ADP testneed not be matched. Employees whowould have been eligible for a matchingcontribution had they made elective con-tributions must be counted as eligible em-

ployees for the ACP test, and the planmust satisfy the ACP test. Under thisSVP correction method, a plan may not betreated as two separate plans, one cover-ing otherwise excludable employees andthe other covering all other employees (aspermitted in § 1.410(b)–6(b)(3)) in orderto reduce the number of employees eligi-ble to receive QNCs. Likewise, underthis SVP correction method, the plan maynot be restructured into component plans(as permitted in § 1.401(k)–1(h)(3)(iii)for plan years before January 1, 1992) inorder to reduce the number of employeeseligible to receive QNCs.

.04 Failure to distribute elective defer-rals in excess of the § 402(g) limit (incontravention of § 401(a)(30)). The per-mitted correction method is to distributethe excess deferral to the employee and toreport the amount as taxable in the year ofdeferral and in the year distributed. In ac-cordance with § 1.402(g)–1(e)(1)(ii), adistribution to a highly compensated em-ployee is included in the ADP test; a dis-tribution to a nonhighly compensated em-ployee is not included in the ADP test.

.05 Exclusion of an eligible employeefrom all contributions or accruals underthe plan for one or more plan years. Thepermitted correction method is to make acontribution to the plan on behalf of theemployees excluded from a defined contri-bution plan or to provide benefit accrualsfor the employees excluded from a definedbenefit plan. If the employee should havebeen eligible to make an elective contribu-tion under a cash or deferred arrangement,the employer must make a QNC to the planon behalf of the employee that is equal tothe actual deferral percentage for the em-ployee’s group (either highly compensatedor nonhighly compensated). If the em-ployee should have been eligible to makeemployee contributions or for matchingcontributions (on either elective contribu-tions or employee contributions), the em-ployer must make a QNC to the plan onbehalf of the employee that is equal to theactual contribution percentage for the em-ployee’s group (either highly compensatedor nonhighly compensated). Contributingthe actual deferral or contribution percent-age for such employees eliminates theneed to rerun the ADP or ACP test to ac-count for the previously excluded employ-ees. Under this SVP correction method, aplan may not be treated as two separate

February 7, 2000 536 2000–6 I.R.B.

plans, one covering otherwise excludableemployees and the other covering all otheremployees (as permitted in §1.410(b)–6(b)(3)) in order to reduce theamount of QNCs. Likewise, restructuringthe plan into component plans under §1.401(k)–1(h)(3)(iii) is not permitted inorder to reduce the amount of QNCs.

.06 Failure to timely pay the minimumdistribution required under § 401(a)(9). Ina defined contribution plan, the permittedcorrection method is to distribute the re-quired minimum distributions. Theamount to be distributed for each year inwhich the failure occurred should be deter-mined by dividing the adjusted accountbalance on the applicable valuation date bythe applicable divisor. For this purpose,adjusted account balance means the actualaccount balance, determined in accordancewith § 1.401(a)(9)–1 Q&A F–5 of the pro-posed regulations, reduced by the amountof the total missed minimum distributionsfor prior years. In a defined benefit plan,the permitted correction method is to dis-tribute the required minimum distributions,plus an interest payment representing theloss of use of such amounts.

.07 Failure to obtain participantand/or spousal consent for a distributionsubject to the participant and spousalconsent rules under §§ 401(a)(11),411(a)(11) and 417. The permitted cor-rection method is to give each affectedparticipant a choice between providing in-formed consent for the distribution actu-ally made or receiving a qualified jointand survivor annuity. In order to use thisSVP correction method, the Plan Sponsormust have contacted each affected partici-pant and spouse (to whom the participantwas married at the annuity starting date)and received responses from each such in-dividual before requesting considerationunder SVP. In the event that participantand/or spousal consent is required butcannot be obtained, the participant mustreceive a qualified joint and survivor an-nuity based on the monthly amount thatwould have been provided under the planat his or her retirement date. This annuitymay be actuarially reduced to take intoaccount distributions already received bythe participant. However, the portion ofthe qualified joint and survivor annuitypayable to the spouse upon the death ofthe participant may not be actuarially re-duced to take into account prior distribu-

tions to the participant. Thus, for exam-ple, if in accordance with the automaticqualified joint and survivor annuity op-tion under a plan, a married participantwho retired would have received a quali-fied joint and survivor annuity of $600per month payable for life with $300 permonth payable to the spouse upon the par-ticipant’s death but instead received a sin-gle-sum distribution equal to the actuarialpresent value of the participant’s accruedbenefit under the plan, then the $600monthly annuity payable during the par-ticipant’s lifetime may be actuarially re-duced to take the single-sum distributioninto account. However, the spouse mustbe entitled to receive an annuity of $300per month payable for life beginning atthe participant’s death.

.08 Failure to satisfy the § 415 limits ina defined contribution plan. The permit-ted correction for failure to limit annualadditions (other than elective deferralsand employee contributions) allocated toparticipants in a defined contribution planas required in § 415 (even if the excessdid not result from the allocation of for-feitures or from a reasonable error in esti-mating compensation) is to place the ex-cess annual additions into an unallocatedaccount, similar to the suspense accountdescribed in § 1.415–6(b)(6)(iii), to beused as an employer contribution in thesucceeding year(s). While such amountsremain in the unallocated account, theemployer is not permitted to make addi-tional contributions to the plan. The per-mitted SVP correction for failure to limitannual additions that are elective deferralsor employee contributions (even if the ex-cess did not result from a reasonable errorin determining the amount of elective de-ferrals or employee contributions thatcould be made with respect to an individ-ual under the § 415 limits) is to distributethe elective deferrals or employee contri-butions using a method similar to that de-scribed under § 1.415–6(b)(6)(iv). Elec-tive deferrals and employee contributionsthat are matched may be returned, pro-vided that the matching contributions re-lating to such contributions are forfeited(which will also reduce excess annual ad-ditions for the affected individuals). Theforfeited matching contributions are to beplaced into an unallocated account to beused as an employer contribution in suc-ceeding periods.

APPENDIX B

CORRECTION METHODS ANDEXAMPLES

ANDEARNINGS ADJUSTMENT

METHODS AND EXAMPLES

SECTION 1. PURPOSE,ASSUMPTIONS FOR EXAMPLESAND SECTION REFERENCES

.01 Purpose. (1) This appendix setsforth correction methods relating to Oper-ational Failures under Qualified Plans.This appendix also sets forth earnings ad-justment methods. The correction meth-ods and earnings adjustment methods de-scribed in this appendix are acceptableunder SVP and APRSC.

(2) This appendix does not apply to403(b) Plans. Accordingly, sponsors of403(b) Plans cannot rely on the correctionmethods and the earnings adjustmentmethods.

.02 Assumptions for Examples. Unlessotherwise specified, for ease of presenta-tion, the examples assume that:

(1) the plan year and the § 415 limi-tation year are the calendar year;

(2) the employer maintains a singleplan intended to satisfy § 401(a) and hasnever maintained any other plan;

(3) in a defined contribution plan,the plan provides that forfeitures are usedto reduce future employer contributions;

(4) the Qualification Failures areOperational Failures and the eligibilityand other requirements for APRSC, VCR,Walk-in CAP, or Audit CAP, whicheverapplies, are satisfied; and

(5) there are no Qualification Fail-ures other than the described OperationalFailures, and if a corrective action wouldresult in any additional Qualification Fail-ure, appropriate corrective action is takenfor that additional Qualification Failure inaccordance with EPCRS.

.03 Section References. References tosection 2 and section 3 are references tothe section 2 and 3 of this appendix.

SECTION 2. CORRECTIONMETHODS AND EXAMPLES

.01 ADP/ACP Failures.(1) Correction Methods. (a) SVP Cor-

rection Method. Appendix A, section .03sets forth the SVP correction method for a

2000–6 I.R.B. 537 February 7, 2000

failure to satisfy the actual deferral per-centage (“ADP”), actual contribution per-centage (“ACP”), or multiple use test setforth in §§ 401(k)(3), 401(m)(2), and401(m)(9), respectively.

(b) One-to-One Correction Method.(i) General. In addition to the SVP cor-rection method, a failure to satisfy theADP, ACP, or multiple use test may becorrected using the one-to-one correctionmethod set forth in this section 2.01(1)(b).Under the one-to-one correction method,an excess contribution amount is deter-mined and assigned to highly compen-sated employees as provided in paragraph(1)(b)(ii) below. That excess contributionamount (adjusted for earnings) is eitherdistributed to the highly compensated em-ployees or forfeited from the highly com-pensated employees’ accounts as pro-vided in paragraph (1)(b)(iii) below. Thatsame dollar amount (i.e., the excess con-tribution amount, adjusted for earnings) iscontributed to the plan and allocated tononhighly compensated employees asprovided in paragraph (1)(b)(iv) below.

(ii) Determination of the Excess Con-tribution Amount. The excess contribu-tion amount for the year is equal to the ex-cess of (A) the sum of the excesscontributions (as defined in §401(k)(8)(B)), the excess aggregate con-tributions (as defined in § 401(m)(6)(B)),and the amount treated as excess contri-butions or excess aggregate contributionsunder the multiple use test pursuant to §401(m)(9) and § 1.401(m)–2(c) of the In-come Tax Regulations for the year, as as-signed to each highly compensated em-ployee in accordance with § 401(k)(8)(C)and (m)(6)(C), over (B) previous correc-tions that complied with § 401(k)(8),(m)(6), and (m)(9). See Notice 97–2,1997–1 C.B. 348.

(iii) Distributions and Forfeitures ofthe Excess Contribution Amount. (A) Theportion of the excess contribution amountassigned to a particular highly compen-sated employee under paragraph (1)(b)(ii)is adjusted for earnings through the dateof correction. The amount assigned to aparticular highly compensated employee,as adjusted, is distributed or, to the extentthe amount was forfeitable as of the closeof the plan year of the failure, is forfeited.If the amount is forfeited, it is used in ac-cordance with the plan provisions relatingto forfeitures that were in effect for the

year of the failure. If the amount so as-signed to a particular highly compensatedemployee has been previously distributed,the amount is an Excess Amount withinthe meaning of section 5.01(3). Thus,pursuant to section 6.02(4)(a), the em-ployer must notify the employee that theExcess Amount was not eligible for favor-able tax treatment accorded to distribu-tions from qualified plans (and, specifi-cally, was not eligible for tax-freerollover).

(B) If any matching contributions (ad-justed for earnings) are forfeited in accor-dance with § 411(a)(3)(G), the forfeitedamount is used in accordance with theplan provisions relating to forfeitures thatwere in effect for the year of the failure.

(C) If a payment was made to an em-ployee and that payment is a forfeitablematch described in either paragraph(1)(b)(iii)(A) or (B), then it is an Over-payment defined in section 2.05(2) thatmust be corrected (see section 2.05(1)).

(iv) Contribution and Allocation ofEquivalent Amount. (A) The employermakes a contribution to the plan that isequal to the aggregate amounts distrib-uted and forfeited under paragraph(1)(b)(iii)(A) (i.e., the excess contributionamount adjusted for earnings, as providedin paragraph (1)(b)(iii)(A), which doesnot include any matching contributionsforfeited in accordance with §411(a)(3)(G) as provided in paragraph(1)(b)(iii)(B)). The contribution must sat-isfy the vesting requirements and distribu-tion limitations of § 401(k)(2)(B) and (C).

(B)(1) This paragraph (1)(b)(iv)(B)(1)applies to a plan that uses the current yeartesting method described in Notice 98–1,1998–3 I.R.B. 42. The contribution madeunder paragraph (1)(b)(iv)(A) is allocatedto the account balances of those individu-als who were either (I) the eligible em-ployees for the year of the failure whowere not highly compensated employeesfor that year or (II) the eligible employeesfor the year of the failure who were nothighly compensated employees for thatyear and who also are not highly compen-sated employees for the year of correc-tion. Alternatively, the contribution is al-located to account balances of eligibleemployees described in (I) or (II) of thepreceding sentence, except that the allo-cation is made only to the account bal-ances of those employees who are em-

ployees on a date during the year of thecorrection that is no later than the date ofcorrection. Regardless of which of thesefour options (described in the two preced-ing sentences) the employer selects, thecontribution is allocated to each such em-ployee either as the same percentage ofthe employee’s compensation for the yearof the failure or as the same dollar amountfor each employee. (See Examples 1, 2and 3.) Under the one-to-one correctionmethod, the amount allocated to the ac-count balance of an employee (i.e, theemployee’s share of the total amount con-tributed under paragraph (1)(b)(iv)(A)) isnot further adjusted for earnings and istreated as an annual addition under § 415for the year of the failure for the em-ployee for whom it is allocated.

(2) This paragraph (1)(b)(iv)(B)(2) ap-plies to a plan that uses the prior year test-ing method described in Notice 98–1.Paragraph (1)(b)(iv)(B)(1) is applied bysubstituting “the year prior to the year ofthe failure” for “the year of the failure.”

(2) Examples.Example 1: Employer A maintains a profit-sharingplan with a cash or deferred arrangement that is in-tended to satisfy § 401(k) (“401(k) plan”) using thecurrent year testing method described in Notice98–1. The plan does not provide for matching con-tributions or employee after-tax contributions. In1999, it was discovered that the ADP test for 1997was not performed correctly. When the ADP testwas performed correctly, the test was not satisfiedfor 1997. For 1997, the ADP for highly compen-sated employees was 9% and the ADP for nonhighlycompensated employees was 4%. Accordingly, theADP for highly compensated employees exceededthe ADP for nonhighly compensated employees bymore than two percentage points (in violation of §401(k)(3)). (The ADP for nonhighly compensatedemployees for 1996 also was 4%, so the ADP testfor 1997 would not have been satisfied even if theplan had used the prior year testing method de-scribed in Notice 98–1.) There were two highlycompensated employees eligible under the 401(k)plan during 1997, Employee P and Employee Q.Employee P made elective deferrals of $8,000,which is equal to 10% of Employee P’s compensa-tion of $80,000 for 1997. Employee Q made elec-tive deferrals of $9,500, which is equal to 8% ofEmployee Q’s compensation of $118,750 for 1997.

Correction: On June 30, 1999, Employer A uses theone-to-one correction method to correct the failureto satisfy the ADP test for 1997. Accordingly, Em-ployer A calculates the dollar amount of the excesscontributions for the two highly compensated em-ployees in the manner described in § 401(k)(8)(B).The amount of the excess contribution for EmployeeP is $3,200 (4% of $80,000) and the amount of theexcess contribution for Employee Q is $2,375 (2%of $118,750), or a total of $5,575. In accordancewith § 401(k)(8)(C), $5,575, the excess contributionamount, is assigned $2,037.50 to Employee P and

February 7, 2000 538 2000–6 I.R.B.

$3,537.50 to Employee Q. It is determined that theearnings on the assigned amounts through June 30,1999 are $407 and $707 for Employees P and Q, re-spectively. The assigned amounts and the earningsare distributed to Employees P and Q. Therefore,Employee P receives $2,444.50 ($2,037.50 + $407)and Employee Q receives $4,244.50 ($3,537.50 +$707). In addition, on the same date, a correctivecontribution is made to the 401(k) plan equal to$6,689 (the sum of the $2,444.50 distributed to Em-ployee P and the $4,244.50 distributed to EmployeeQ). The corrective contribution is allocated to theaccount balances of eligible nonhighly compensatedemployees for 1997, pro rata based on their compen-sation for 1997 (subject to § 415 for 1997).

Example 2: The facts are the same as in Example 1.

Correction: The correction is the same as in Exam-ple 1, except that the corrective contribution of$6,689 is allocated in an equal dollar amount to theaccount balances of eligible nonhighly compensatedemployees for 1997 who are employees on June 30,1999 and who are nonhighly compensated employ-ees for 1999 (subject to § 415 for 1997).

Example 3: The facts are the same as in Example 1,except that for 1997 the plan also provides (1) for em-ployee after-tax contributions and (2) for matchingcontributions equal to 50% of the sum of an em-ployee’s elective deferrals and employee after-tax con-tributions that do not exceed 10% of the employee’scompensation. The plan provides that matching con-tributions are subject to the plan’s 5-year graded vest-ing schedule and that matching contributions are for-feited and used to reduce employer contributions ifassociated elective deferrals or employee after-taxcontributions are distributed to correct an ADP, ACPor multiple use test failure. For 1997, nonhighly com-pensated employees made employee after-tax contri-butions and no highly compensated employee madeany employee after-tax contributions. Employee P re-ceived a matching contribution of $4,000 (50% of$8,000) and Employee Q received a matching contri-bution of $4,750 (50% of $9,500). Employees P andQ were 100% vested in 1997. It is determined that,for 1997, the ACP for highly compensated employeeswas not more than 125% of the ACP for nonhighlycompensated employees, so that the ACP and multipleuse tests would have been satisfied for 1997 withoutany corrective action.

Correction: The same corrective actions aretaken as in Example 1. In addition, in accordancewith the plan’s terms, corrective action is taken toforfeit Employee P’s and Employee Q’s matchingcontributions associated with their distributed ex-cess contributions. Employee P’s distributed excesscontributions and associated matching contributionsare $2,037.50 and $1,018.75, respectively. Em-ployee Q’s distributed excess contributions and as-sociated matching contributions are $3,537.50 and$1,768.75, respectively. Thus, $1,018.75 is forfeitedfrom Employee P’s account and $1,768.75 is for-feited from Employee Q’s account. In addition, theearnings on the forfeited amounts are also forfeited.It is determined that the respective earnings on theforfeited amount for Employee P is $150 and forEmployee Q is $204. The total amount of the forfei-tures of $3,141.50 (Employee P’s $1,018.75 + $150and Employee Q’s $1,768.75 + $204) is used to re-duce contributions for 1999 and subsequent years.

.02 Exclusion of Eligible Employees.

(1) Exclusion of Eligible Employeesin a 401(k) or (m) Plan. (a) CorrectionMethod. (i) SVP Correction Method forFull Year Exclusion. Appendix A, section.05 sets forth the SVP correction methodfor the exclusion of an eligible employeefrom all contributions under a 401(k) or(m) plan for one or more full plan years.(See Example 4.) In section 2.02(1)(a)(ii)below, the SVP correction method for theexclusion of an eligible employee from allcontributions under a 401(k) or (m) planfor a full year is expanded to include cor-rection for the exclusion of an eligibleemployee from all contributions under a401(k) or (m) plan for a partial plan year.This correction for a partial year exclu-sion may be used in conjunction with thecorrection for a full year exclusion.

(ii) Expansion of SVP CorrectionMethod to Partial Year Exclusion. (A) InGeneral. The correction method in Ap-pendix A, section .05 is expanded to coveran employee who was improperly ex-cluded from making elective deferrals oremployee after-tax contributions for aportion of a plan year or from receivingmatching contributions (on either electivedeferrals or employee after-tax contribu-tions) for a portion of a plan year. In suchcase, a permitted correction method forthe failure is for the employer to satisfythis section 2.02(1)(a)(ii). The employermakes a corrective contribution on behalfof the excluded employee that satisfiesthe vesting requirements and distributionlimitations of § 401(k)(2)(B) and (C).

(B) Elective Deferral Failures. The ap-propriate corrective contribution for thefailure to allow employees to make elec-tive deferrals for a portion of the plan yearis equal to the ADP of the employee’sgroup (either highly or nonhighly com-pensated), determined prior to correctionunder this section 2.02(1)(a)(ii), multi-plied by the employee’s plan compensa-tion for the portion of the year duringwhich the employee was improperly ex-cluded. The corrective contribution forthe portion of the plan year during whichthe employee was improperly excludedfrom being eligible to make elective de-ferrals is reduced to the extent that (1) thesum of that contribution and any electivedeferrals actually made by the employeefor that year would exceed (2) the maxi-mum elective deferrals permitted under

the plan for the employee for that planyear (including the § 402(g) limit). Thecorrective contribution is adjusted forearnings. (See Examples 5 and 6.)

(C) Employee After-tax and MatchingContribution Failures.

The appropriate corrective contributionfor the failure to allow employees to makeemployee after-tax contributions or to re-ceive matching contributions because theemployee was precluded from makingemployee after-tax contributions or elec-tive deferrals for a portion of the plan yearis equal to the ACP of the employee’sgroup (either highly or nonhighly com-pensated), determined prior to correctionunder this section 2.02(1)(a)(ii), multi-plied by the employee’s plan compensa-tion for the portion of the year duringwhich the employee was improperly ex-cluded. The corrective contribution is re-duced to the extent that (1) the sum of thatcontribution and the actual total employeeafter-tax and matching contributionsmade by and for the employee for the planyear would exceed (2) the sum of themaximum employee after-tax contribu-tions permitted under the plan for the em-ployee for the plan year and the matchingcontributions that would have been madeif the employee had made the maximummatchable contributions permitted underthe plan for the employee for that planyear. The corrective contribution is ad-justed for earnings.

(D) Use of Prorated Compensation.For purposes of this paragraph (1)(a)(ii),for administrative convenience, in lieu ofusing the employee’s actual plan compen-sation for the portion of the year duringwhich the employee was improperly ex-cluded, a pro rata portion of the em-ployee’s plan compensation that wouldhave been taken into account for the planyear, if the employee had not been im-properly excluded, may be used.

(E) Special Rule for Brief Exclusionfrom Elective Deferrals. An employer isnot required to make a corrective contri-bution with respect to elective deferrals,as provided in section 2.02(1)(a)(ii)(B),(but is required to make a corrective con-tribution with respect to any employeeafter-tax and matching contributions, asprovided in section 2.02(1)(a)(ii)(C)) foran employee for a plan year if the em-ployee has been provided the opportunityto make elective deferrals under the plan

2000–6 I.R.B. 539 February 7, 2000

for a period of at least the last 9 months inthat plan year and during that period theemployee had the opportunity to makeelective deferrals in an amount not lessthan the maximum amount that wouldhave been permitted if no failure had oc-curred. (See Example 7.)

(b) Examples.Example 4: Employer B maintains a 401(k) plan.The plan provides for matching contributions for eli-gible employees equal to 100% of elective deferralsthat do not exceed 3% of an employee’s compensa-tion. The plan provides that employees who com-plete one year of service are eligible to participate inthe plan on the next January 1 or July 1 entry date.Twelve employees (8 nonhighly compensated em-ployees and 4 highly compensated employees) whohad met the one year eligibility requirement afterJuly 1, 1995 and before January 1, 1996 were inad-vertently excluded from participating in the plan be-ginning on January 1, 1996. These employees wereoffered the opportunity to begin participating in theplan on January 1, 1997. For 1996, the ADP for thehighly compensated employees was 8% and theADP for the nonhighly compensated employees was6%. In addition, for 1996, the ACP for the highlycompensated employees was 2.5% and the ACP forthe nonhighly compensated employees was 2%.The failure to include the 12 employees was discov-ered during 1998.

Correction: Employer B uses the SVP correctionmethod for full year exclusions to correct the failureto include the 12 eligible employees in the plan forthe full plan year beginning January 1, 1996. Thus,Employer B makes a corrective contribution (thatsatisfies the vesting requirements and distributionlimitations of § 401(k)(2)(B) and (C)) for each of theexcluded employees. The contribution for each ofthe improperly excluded highly compensated em-ployees is 10.5% (the highly compensated employ-ees’ ADP of 8% plus ACP of 2.5%) of the em-ployee’s plan compensation for the 1996 plan year(adjusted for earnings). The contribution for each ofthe improperly excluded nonhighly compensatedemployees is 8% (the nonhighly compensated em-ployee’s ADP of 6% plus ACP of 2%) of the em-ployee’s plan compensation for the 1996 plan year(adjusted for earnings).Example 5: Employer C maintains a 401(k) plan.The plan provides for matching contributions foreach payroll period that are equal to 100% of an em-ployee’s elective deferrals that do not exceed 2% ofthe eligible employee’s plan compensation duringthe payroll period. The plan does not provide foremployee after-tax contributions. The plan providesthat employees who complete one year of serviceare eligible to participate in the plan on the next Jan-uary 1 or July 1 entry date. A nonhighly compen-sated employee who met the eligibility requirementsand should have entered the plan on January 1, 1996was not offered the opportunity to participate in theplan. In August of 1996, the error was discoveredand Employer C offered the employee an electionopportunity as of September 1, 1996. The employeemade elective deferrals equal to 4% of the em-ployee’s plan compensation for each payroll periodfrom September 1, 1996 through December 31,1996 (resulting in elective deferrals of $500). The

employee’s plan compensation for 1996 was$36,000 ($23,500 for the first eight months and$12,500 for the last four months). Employer Cmade matching contributions equal to $250 for theexcluded employee, which is 2% of the employee’splan compensation for each payroll period fromSeptember 1, 1996 through December 31, 1996($12,500). The ADP for nonhighly compensatedemployees for 1996 was 3% and the ACP for non-highly compensated employees for 1996 was 1.8%.

Correction: Employer C uses the SVP correctionmethod for partial year exclusions to correct the fail-ure to include the eligible employee in the plan.Thus, Employer C makes a corrective contribution(that satisfies the vesting requirements and distribu-tion limitations of § 401(k)(2)(B) and (C)) for theexcluded employee. In determining the amount ofcorrective contributions (both for the elective defer-ral and for the matching contribution), for adminis-trative convenience, in lieu of using actual plancompensation of $23,500 for the period the em-ployee was excluded, the employee’s annual plancompensation is pro rated for the eight-month periodthat the employee was excluded from participatingin the plan. The failure to provide the excluded em-ployee the right to make elective deferrals is cor-rected by the employer making a corrective contri-bution on behalf of the employee that is equal to$720 (the 3% ADP percentage for nonhighly com-pensated employees multiplied by $24,000, which is8/12ths of the employee’s 1996 plan compensationof $36,000), adjusted for earnings. In addition, tocorrect for the failure to receive the plan’s matchingcontribution, a corrective contribution is made onbehalf of the employee that is equal to $432 (the1.8% ACP for the nonhighly compensated groupmultiplied by $24,000, which is 8/12ths of the em-ployee’s 1996 plan compensation of $36,000), ad-justed for earnings. Employer C determines that$682, the sum of the actual matching contributionreceived by the employee for the plan year ($250)and the corrective contribution to correct the match-ing contribution failure ($432), does not exceed$720, the maximum matching contribution availableto the employee under the plan (2% of $36,000) de-termined as if the employee had made the maximummatchable contributions. In addition to correctingthe failure to include the eligible employee in theplan, Employer C reruns the ADP and ACP tests for1996 (taking into account the corrective contributionand plan compensation for 1996 for the excludedemployee) and determines that the tests were satis-fied.Example 6: The facts are the same as in Example 5,except that the plan provides for matching contribu-tions that are equal to 100% of an eligible em-ployee’s elective deferrals that do not exceed 2% ofthe employee’s plan compensation for the plan year.Accordingly, the actual matching contribution madeby Employer C for the excluded employee for thelast four months of 1996 is $500 (which is equal to100% of the $500 of elective deferrals made by theemployee for the last four months of 1996).

Correction: The correction is the same as in Ex-ample 5, except that the corrective contributionmade for the first 8 months of 1996 to correct thefailure to make matching contributions is equal to$220 (adjusted for earnings), instead of the $432(adjusted for earnings) in Example 5, because thecorrective contribution is limited to the maximum

matching contributions available under the plan forthe employee for the plan year, $720 (2% of$36,000), reduced by the actual matching contribu-tions made for the employee for the plan year, $500.Example 7: The facts are the same as in Example 5,except that the error is discovered in March of 1996and the employee was given the opportunity to makeelective deferrals beginning on April 1, 1996. Theamount of elective deferrals that the employee wasgiven the opportunity to make during 1996 was notless than the maximum elective deferrals that theemployee could have made if the employee hadbeen given the opportunity to make elective defer-rals beginning on January 1, 1996. The employeemade elective deferrals equal to 4% of the em-ployee’s plan compensation for each payroll periodfrom April 1, 1996 through December 31, 1996 of$28,000 (resulting in elective deferrals of $1,120).Employer C made a matching contribution equal to$560, which is 2% of the employee’s plan compen-sation for each payroll period from April 1, 1996through December 31, 1996 ($28,000). The em-ployee’s plan compensation for 1996 was $36,000($8,000 for the first three months and $28,000 forthe last nine months).

Correction: Employer C uses the SVP correctionmethod for partial year exclusions to correct the fail-ure to include an eligible employee in the plan. Be-cause the employee was given an opportunity tomake elective deferrals to the plan for at least thelast 9 months of the plan year (and the amount of theelective deferrals that the employee had the opportu-nity to make was not less than the maximum electivedeferrals that the employee could have made if theemployee had been given the opportunity to makeelective deferrals beginning on January 1, 1996),under the special rule set forth in section2.02(1)(a)(ii)(E), Employer C is not required tomake a corrective contribution for the failure toallow the employee to make elective deferrals. Indetermining the amount of corrective contributionwith respect to the failure to allow the employee toreceive matching contributions, in lieu of using ac-tual plan compensation of $8,000 for the period theemployee was excluded, the employee’s annual plancompensation is pro rated for the three-month periodthat the employee was excluded from participatingin the plan. Accordingly, a corrective contribution ismade on behalf of the employee that is equal to$160, which is the lesser of (i) $162 (a matchingcontribution of 1.8% of $9,000, which is 3/12ths ofthe employee’s 1996 plan compensation of$36,000), and (ii) $160 (the excess of the maximummatching contribution for the entire plan year, whichis equal to 2% of $36,000, or $720, over the match-ing contributions made after March 31, 1996, $560).The contribution is adjusted for earnings.

(2) Exclusion of Eligible Employees Ina Profit-Sharing Plan.

(a) Correction Methods. (i) SVP Cor-rection Method. Appendix A, section .05sets forth the SVP correction method forcorrecting the exclusion of an eligible em-ployee. In the case of a defined contribu-tion plan, the SVP correction method is tomake a contribution on behalf of the ex-cluded employee. Section 2.02(2)(a)(ii)below clarifies the SVP correction

February 7, 2000 540 2000–6 I.R.B.

method in the case of a profit-sharing orstock bonus plan that provides for non-elective contributions (within the mean-ing of § 1.401(k)–1(g)(10)).

(ii) Clarification of SVP CorrectionMethod for Profit-Sharing Plans. To cor-rect for the exclusion of an eligible em-ployee from nonelective contributions ina profit-sharing or stock bonus plan underthe SVP correction method, an allocationamount is determined for each excludedemployee on the same basis as the alloca-tion amounts were determined for theother employees under the plan’s alloca-tion formula (e.g., the same ratio of allo-cation to compensation), taking into ac-count all of the employee’s relevantfactors (e.g., compensation) under thatformula for that year. The employermakes a corrective contribution on behalfof the excluded employee that is equal tothe allocation amount for the excludedemployee. The corrective contribution isadjusted for earnings. If, as a result of ex-cluding an employee, an amount was im-properly allocated to the account balanceof an eligible employee who shared in theoriginal allocation of the nonelective con-tribution, no reduction is made to the ac-count balance of the employee whoshared in the original allocation on ac-count of the improper allocation. (SeeExample 8.)

(iii) Reallocation Correction Method.(A) In General. Subject to the limitationsset forth in section 2.02(2)(a)(iii)(F)below, in addition to the SVP correctionmethod, the exclusion of an eligible em-ployee for a plan year from a profit-shar-ing or stock bonus plan that provides fornonelective contributions may be cor-rected using the reallocation correctionmethod set forth in this section2.02(2)(a)(iii). Under the reallocationcorrection method, the account balance ofthe excluded employee is increased asprovided in paragraph (2)(a)(iii)(B)below, the account balances of other em-ployees are reduced as provided in para-graph (2)(a)(iii)(C) below, and the in-creases and reductions are reconciled, asnecessary, as provided in paragraph(2)(a)(iii)(D) below. (See Examples 9and 10.)

(B) Increase in Account Balance ofExcluded Employee. The account bal-ance of the excluded employee is in-creased by an amount that is equal to the

allocation the employee would have re-ceived had the employee shared in the al-location of the nonelective contribution.The amount is adjusted for earnings.

(C) Reduction in Account Balances ofOther Employees. (1) The account bal-ance of each employee who was an eligi-ble employee who shared in the originalallocation of the nonelective contributionis reduced by the excess, if any, of (I) theemployee’s allocation of that contributionover (II) the amount that would have beenallocated to that employee had the failurenot occurred. This amount is adjusted forearnings taking into account the rules setforth in section 2.02(2)(a)(iii)(C)(2) and(3) below. The amount after adjustmentfor earnings is limited in accordance withsection 2.02(2)(a)(iii)(C)(4) below.

(2) This paragraph (2)(a)(iii)(C)(2) ap-plies if most of the employees with ac-count balances that are being reduced arenonhighly compensated employees. Ifthere has been an overall gain for the pe-riod from the date of the original alloca-tion of the contribution through the dateof correction, no adjustment for earningsis required to the amount determinedunder section 2.02(2)(a)(iii)(C)(1) for theemployee. If the amount for the em-ployee is being adjusted for earnings andthe plan permits investment of accountbalances in more than one investmentfund, for administrative convenience, thereduction to the employee’s account bal-ance may be adjusted by the lowest earn-ings rate of any fund for the period fromthe date of the original allocation of thecontribution through the date of correc-tion.

(3) If an employee’s account balanceis reduced and the original allocation wasmade to more than one investment fund orthere was a subsequent distribution ortransfer from the fund receiving the origi-nal allocation, then reasonable, consistentassumptions are used to determine theearnings adjustment.(4) The amount determined in section2.02(2)(a)(iii)(C)(1) for an employeeafter the application of section2.02(2)(a)(iii)(C)(2) and (3) may notexceed the account balance of theemployee on the date of correction, andthe employee is permitted to retain anydistribution made prior to the date of cor-rection.

(D) Reconciliation of Increases and

Reductions. If the aggregate amount ofthe increases under section2.02(2)(a)(iii)(B) exceeds the aggregateamount of the reductions under section2.02(2)(a)(iii)(C), the employer makes acorrective contribution to the plan for theamount of the excess. If the aggregateamount of the reductions under section2.02(2)(a)(iii)(C) exceeds the aggregateamount of the increases under section2.02(2)(a)(iii)(B), then the amount bywhich each employee’s account balance isreduced under section 2.02(2)(a)(iii)(C) isdecreased on a pro rata basis.

(E) Reductions Among Multiple In-vestment Funds. If an employee’s ac-count balance is reduced and the em-ployee’s account balance is invested inmore than one investment fund, then thereduction may be made from the invest-ment funds selected in any reasonablemanner.

(F) Limitations on Use of ReallocationCorrection Method. If any employeewould be permitted to retain any distribu-tion pursuant to section2.02(2)(a)(iii)(C)(4), then the reallocationcorrection method may not be used unlessmost of the employees who would be per-mitted to retain a distribution are non-highly compensated employees.(b) Examples.

Example 8: Employer D maintains a profit-shar-ing plan that provides for discretionary nonelectiveemployer contributions. The plan provides that theemployer’s contributions are allocated to accountbalances in the ratio that each eligible employee’scompensation for the plan year bears to the compen-sation of all eligible employees for the plan yearand, therefore, the only relevant factor for determin-ing an allocation is the employee’s compensation.The plan provides for self-directed investmentsamong four investment funds and daily valuations ofaccount balances. For the 1997 plan year, EmployerD made a contribution to the plan of a fixed dollaramount. However, five employees who met the eli-gibility requirements were inadvertently excludedfrom participating in the plan. The contribution re-sulted in an allocation on behalf of each of the eligi-ble employees, other than the excluded employees,equal to 10% of compensation. Most of the employ-ees who received allocations under the plan for theyear of the failure were nonhighly compensated em-ployees. No distributions have been made from theplan since 1997. If the five excluded employees hadshared in the original allocation, the allocation madeon behalf of each employee would have equaled 9%of compensation. The excluded employees beganparticipating in the plan in the 1998 plan year.

Correction: Employer D uses the SVP correctionmethod to correct the failure to include the five eli-gible employees. Thus, Employer D makes a cor-rective contribution to the plan. The amount of thecorrective contribution on behalf of the five ex-

2000–6 I.R.B. 541 February 7, 2000

cluded employees for the 1997 plan year is equal to10% of compensation of each excluded employee,the same allocation that was made for other eligibleemployees, adjusted for earnings. The excluded em-ployees receive an allocation equal to 10% of com-pensation (adjusted for earnings) even though, hadthe excluded employees originally shared in the al-location for the 1997 contribution, their account bal-ances, as well as those of the other eligible employ-ees, would have received an allocation equal to only9% of compensation.Example 9: The facts are the same as in Example 8.

Correction: Employer D uses the reallocationcorrection method to correct the failure to includethe five eligible employees. Thus, the account bal-ances are adjusted to reflect what would have re-sulted from the correct allocation of the employercontribution for the 1997 plan year among all eligi-ble employees, including the five excluded employ-ees. The inclusion of the excluded employees in theallocation of that contribution would have resultedin each eligible employee, including each excludedemployee, receiving an allocation equal to 9% ofcompensation. Accordingly, the account balance ofeach excluded employee is increased by 9% of theemployee’s 1997 compensation, adjusted for earn-ings. The account balance of each of the eligibleemployees other than the excluded employees is re-duced by 1% of the employee’s 1997 compensation,adjusted for earnings. Employer D determines theadjustment for earnings using the earnings rate ofeach eligible employee’s excess allocation (usingreasonable, consistent assumptions). Accordingly,for an employee who shared in the original alloca-tion and directed the investment of the allocationinto more than one investment fund or who subse-quently transferred a portion of a fund that had beencredited with a portion of the 1997 allocation to an-other fund, reasonable, consistent assumptions arefollowed to determine the adjustment for earnings.It is determined that the total of the initially deter-mined reductions in account balances exceeds thetotal of the required increases in account balances.Accordingly, these initially determined reductionsare decreased pro rata so that the total of the actualreductions in account balances equals the total of theincreases in the account balances, and Employer Ddoes not make any corrective contribution. The re-duction from the account balances are made on a prorata basis among all of the funds in which each em-ployee’s account balance is invested.Example 10: The facts are the same as in Example 8.

Correction: The correction is the same as in Ex-ample 9, except that, because most of the employeeswhose account balances are being reduced are non-highly compensated employees, for administrativeconvenience, Employer D uses the earnings rate ofthe fund with the lowest earnings rate for the periodof the failure to adjust the reduction to each accountbalance. It is determined that the aggregate amount(adjusted for earnings) by which the account bal-ances of the excluded employees is increased ex-ceeds the aggregate amount (adjusted for earnings)by which the other employees’ account balances arereduced. Accordingly, Employer D makes a contri-bution to the plan in an amount equal to the excess.The reduction from account balances is made on apro rata basis among all of the funds in which eachemployee’s account balance is invested.

.03 Vesting Failures.

(1) Correction Methods. (a) Contri-bution Correction Method. A failure ina defined contribution plan to apply theproper vesting percentage to an em-ployee’s account balance that results inforfeiture of too large a portion of theemployee’s account balance may be cor-rected using the contribution correctionmethod set forth in this paragraph. Theemployer makes a corrective contribu-tion on behalf of the employee whoseaccount balance was improperly for-feited in an amount equal to the im-proper forfeiture. The corrective contri-bution is adjusted for earnings. If, as aresult of the improper forfeiture, anamount was improperly allocated to theaccount balance of another employee,no reduction is made to the account bal-ance of that employee. (See Example11.)

(b) Reallocation Correction Method. Inaddition to the contribution correctionmethod, in a defined contribution planunder which forfeitures of account balancesare reallocated among the account balancesof the other eligible employees in the plan,a failure to apply the proper vesting per-centage to an employee’s account balancewhich results in forfeiture of too large aportion of the employee’s account balancemay be corrected under the reallocationcorrection method set forth in this para-graph. A corrective reallocation is made inaccordance with the reallocation correctionmethod set forth in section 2.02(2)(a)(iii),subject to the limitations set forth in section2.02(2)(a)(iii)(F). In applying section2.02(2)(a)(iii)(B), the account balance ofthe employee who incurred the improperforfeiture is increased by an amount equalto the amount of the improper forfeitureand the amount is adjusted for earnings. Inapplying section 2.02(2)(a)(iii)(C)(1), theaccount balance of each employee whoshared in the allocation of the improper for-feiture is reduced by the amount of the im-proper forfeiture that was allocated to thatemployee’s account. The earnings adjust-ments for the account balances that arebeing reduced are determined in accor-dance with sections 2.02(2)(a)(iii)(C)(2)and (3) and the reductions after adjustmentsfor earnings are limited in accordance withsection 2.02(2)(a)(iii)(C)(4). In accordancewith section 2.02(2)(a)(iii)(D), if the aggre-gate amount of the increases exceeds theaggregate amount of the reductions, the

employer makes a corrective contributionto the plan for the amount of the excess. Inaccordance with section 2.02(2)(a)(iii)(D),if the aggregate amount of the reductionsexceeds the aggregate amount of the in-creases, then the amount by which eachemployee’s account balance is reduced isdecreased on a pro rata basis. (See Exam-ple 12.)

(2) Examples.Example 11: Employer E maintains a profit-sharingplan that provides for nonelective contributions.The plan provides for self-directed investmentsamong four investment funds and daily valuation ofaccount balances. The plan provides that forfeituresof account balances are reallocated among the ac-count balances of other eligible employees on thebasis of compensation. During the 1997 plan year,Employee R terminated employment with EmployerE and elected and received a single-sum distributionof the vested portion of his account balance. Noother distributions have been made since 1997.However, an incorrect determination of EmployeeR’s vested percentage was made resulting in Em-ployee R receiving a distribution of less than theamount to which he was entitled under the plan. Theremaining portion of Employee R’s account balancewas forfeited and reallocated (and these realloca-tions were not affected by the limitations of § 415).Most of the employees who received allocations ofthe improper forfeiture were nonhighly compen-sated employees.

Correction: Employer E uses the contributioncorrection method to correct the improper forfeiture.Thus, Employer E makes a contribution on behalf ofEmployee R equal to the incorrectly forfeitedamount (adjusted for earnings) and Employee R’saccount balance is increased accordingly. No reduc-tion is made from the account balances of the em-ployees who received an allocation of the improperforfeiture.Example 12: The facts are the same as in Example11.

Correction: Employer E uses the reallocationcorrection method to correct the improper forfeiture.Thus, Employee R’s account balance is increased bythe amount that was improperly forfeited (adjustedfor earnings). The account of each employee whoshared in the allocation of the improper forfeiture isreduced by the amount of the improper forfeiturethat was allocated to that employee’s account (ad-justed for earnings). Because most of the employeeswhose account balances are being reduced are non-highly compensated employees, for administrativeconvenience, Employer E uses the earnings rate ofthe fund with the lowest earnings rate for the periodof the failure to adjust the reduction to each accountbalance. It is determined that the amount (adjustedfor earnings) by which the account balance of Em-ployee R is increased exceeds the aggregate amount(adjusted for earnings) by which the other employ-ees’ account balances are reduced. Accordingly,Employer E makes a contribution to the plan in anamount equal to the excess. The reduction from theaccount balances is made on a pro rata basis amongall of the funds in which each employee’s accountbalance is invested.

.04 § 415 Failures.

February 7, 2000 542 2000–6 I.R.B.

(1) Failures Relating to a § 415(b) Ex-cess.

(a) Correction Methods. (i) Return ofOverpayment Correction Method. Over-payments as a result of amounts being paidin excess of the limits of § 415(b) may becorrected using the return of overpaymentcorrection method set forth in this para-graph (1)(a)(i). The employer takes rea-sonable steps to have the Overpayment(with appropriate interest) returned by therecipient to the plan and reduces futurebenefit payments (if any) due to the em-ployee to reflect § 415(b). To the extentthe amount returned by the recipient is lessthan the Overpayment, adjusted for earn-ings at the plan’s earnings rate, then theemployer or another person contributes thedifference to the plan. In addition, in ac-cordance with section 6.02(4)(a), the em-ployer must notify the recipient that theOverpayment was not eligible for favor-able tax treatment accorded to distributionsfrom qualified plans (and, specifically, wasnot eligible for tax-free rollover). (See Ex-amples 15 and 16.)

(ii) Adjustment of Future PaymentsCorrection Method. (A) In General. Inaddition to the return of overpayment cor-rection method, in the case of plan bene-fits that are being distributed in the formof periodic payments, Overpayments as aresult of amounts being paid in excess ofthe limits in § 415(b) may be corrected byusing the adjustment of future paymentscorrection method set forth in this para-graph (1)(a)(ii). Future payments to therecipient are reduced so that they do notexceed the § 415(b) maximum limit andan additional reduction is made to recoupthe Overpayment (over a period notlonger than the remaining payment pe-riod) so that the actuarial present value ofthe additional reduction is equal to theOverpayment plus interest at the interestrate used by the plan to determine actuar-ial equivalence. (See Examples 13 and14.)

(B) Joint and Survivor Annuity Pay-ments. If the employee is receiving pay-ments in the form of a joint and survivorannuity, with the employee’s spouse to re-ceive a life annuity upon the employee’sdeath equal to a percentage (e.g., 75%) ofthe amount being paid to the employee,the reduction of future annuity paymentsto reflect § 415(b) reduces the amount ofbenefits payable during the lives of both

the employee and spouse, but any reduc-tion to recoup Overpayments made to theemployee does not reduce the amount ofthe spouse’s survivor benefit. Thus, thespouse’s benefit will be based on the pre-vious specified percentage (e.g., 75%) ofthe maximum permitted under § 415(b),instead of the reduced annual periodicamount payable to the employee.

(C) Overpayment Not Treated as anExcess Amount. An Overpayment cor-rected under this adjustment of futurepayment correction method, is not treatedas an Excess Amount as defined in section5.01(3).

(b) Examples.Example 13: Employer F maintains a defined benefitplan funded solely through employer contributions.The plan provides that the benefits of employees arelimited to the maximum amount permitted under §415(b), disregarding cost-of-living adjustmentsunder § 415(d) after benefit payments have com-menced. At the beginning of the 1998 plan year,Employee S retired and started receiving an annualstraight life annuity of $140,000 from the plan. Dueto an administrative error, the annual amount re-ceived by Employee S for 1998 included an Over-payment of $10,000 (because the § 415(b)(1)(A)limit for 1998 was $130,000). This error was dis-covered at the beginning of 1999.

Correction: Employer F uses the adjustment offuture payments correction method to correct thefailure to satisfy the limit in § 415(b). Future annu-ity benefit payments to Employee S are reduced sothat they do not exceed the § 415(b) maximum limit,and, in addition, Employee S’s future benefit pay-ments from the plan are actuarially reduced to re-coup the Overpayment. Accordingly, Employee S’sfuture benefit payments from the plan are reduced to$130,000 and further reduced by $1,000 annuallyfor life, beginning in 1999. The annual benefitamount is reduced by $1,000 annually for life be-cause, for Employee S, the actuarial present value ofa benefit of $1,000 annually for life commencing in1999 is equal to the sum of $10,000 and interest atthe rate used by the plan to determine actuarialequivalence beginning with the date of the firstOverpayment and ending with the date the reducedannuity payment begins. Thus, Employee S’s re-maining benefit payments are reduced so that Em-ployee S receives $129,000 for 1999, and for eachyear thereafter.Example 14: The facts are the same as in Example13.

Correction: Employer F uses the adjustments offuture payments correction method to correct the §415(b) failure, by recouping the entire excess pay-ment made in 1998 from Employee S’s remainingbenefit payments for 1999. Thus, Employee S’s an-nual annuity benefit for 1999 is reduced to $119,400to reflect the excess benefit amounts (increased byinterest) that were paid from the plan to Employee Sduring the 1998 plan year. Beginning in 2000, Em-ployee S begins to receive annual benefit paymentsof $130,000.Example 15: The facts are the same as in Example13, except that the benefit was paid to Employee S

in the form of a single-sum distribution in 1998,which exceeded the maximum § 415(b) limits by$110,000.

Correction: Employer F uses the return of over-payment correction method to correct the § 415 (b)failure. Thus, Employer F notifies Employee S ofthe $110,000 Overpayment and that the Overpay-ment was not eligible for favorable tax treatment ac-corded to distributions from qualified plans (and,specifically, was not eligible for tax-free rollover).The notice also informs Employee S that the Over-payment (with interest at the rate used by the plan tocalculate the single-sum payment) is owed to theplan. Employer F takes reasonable steps to have theOverpayment (with interest at the rate used by theplan to calculate the single-sum payment) paid to theplan. Employee S pays the $110,000 (plus the re-quested interest) to the plan. It is determined thatthe plan’s earnings rate for the relevant period was 2percentage points more than the rate used by theplan to calculate the single-sum payment. Accord-ingly, Employer F contributes the difference to theplan.Example 16: The facts are the same as in Example15.

Correction: Employer F uses the return of over-payment correction method to correct the § 415(b)failure. Thus, Employer F notifies Employee S ofthe $110,000 Overpayment and that the Overpay-ment was not eligible for favorable tax treatment ac-corded to distributions from qualified plans (and,specifically, was not eligible for tax-free rollover).The notice also informs Employee S that the Over-payment (with interest at the rate used by the plan tocalculate the single-sum payment) is owed to theplan. Employer F takes reasonable steps to have theOverpayment (with interest at the rate used by theplan to calculate the single-sum payment) paid to theplan. As a result of Employer F’s recovery efforts,some, but not all, of the Overpayment (with interest)is recovered from Employee S. It is determined thatthe amount returned by Employee S to the plan isless than the Overpayment adjusted for earnings atthe plan’s earnings rate. Accordingly, Employer Fcontributes the difference to the plan.

(2) Failures Relating to a § 415(c)Excess.

(a) Correction Methods. (i) SVPCorrection Method. Appendix A, sec-tion .08 sets forth the SVP correctionmethod for correcting the failure to sat-isfy the § 415(c) limits on annual addi-tions.

(ii) Forfeiture Correction Method. Inaddition to the SVP correction method, thefailure to satisfy § 415(c) with respect to anonhighly compensated employee (A)who in the limitation year of the failure hadannual additions consisting of both (I) ei-ther elective deferrals or employee after-tax contributions or both and (II) eithermatching or nonelective contributions orboth, (B) for whom the matching and non-elective contributions equal or exceed theportion of the employee’s annual additionthat exceeds the limits under § 415(c) (“§

2000–6 I.R.B. 543 February 7, 2000

415(c) excess”) for the limitation year, and(C) who has terminated with no vested in-terest in the matching and nonelective con-tributions (and has not been reemployed atthe time of the correction), may be cor-rected by using the forfeiture correctionmethod set forth in this paragraph. The §415(c) excess is deemed to consist solelyof the matching and nonelective contribu-tions. If the employee’s § 415(c) excess(adjusted for earnings) has previously beenforfeited, the § 415(c) failure is deemed tobe corrected. If the § 415(c) excess (ad-justed for earnings) has not been forfeited,that amount is placed in an unallocated ac-count, similar to the suspense account de-scribed in § 1.415–6(b)(6)(iii), to be usedto reduce employer contributions in suc-ceeding year(s) (or if the amount wouldhave been allocated to other employeeswho were in the plan for the year of thefailure if the failure had not occurred, thenthat amount is reallocated to the other em-ployees in accordance with the plan’s allo-cation formula). Note that while this cor-rection method will permit more favorabletax treatment of elective deferrals for theemployee than the SVP correction method,this correction method could be less favor-able to the employee in certain cases, forexample, if the employee is subsequentlyreemployed and becomes vested. (See Ex-amples 17 and 18.)

(iii) Return of Overpayment Correc-tion Method. A failure to satisfy §415(c) that includes a distribution of the§ 415(c) excess attributable to nonelec-tive contributions and matching contri-butions may be corrected using the re-turn of overpayment correction methodset forth in this paragraph. The em-ployer takes reasonable steps to have theOverpayment (i.e., the distribution ofthe § 415(c) excess adjusted for earningsto the date of the distribution), plus ap-propriate interest from the date of thedistribution to the date of the repayment,returned by the employee to the plan.To the extent the amount returned by theemployee is less than the Overpaymentadjusted for earnings at the plan’s earn-ings rate, then the employer or anotherperson contributes the difference to theplan. The Overpayment, adjusted forearnings at the plan’s earnings rate tothe date of the repayment, is to beplaced in an unallocated account, simi-lar to the suspense account described in§ 1.415–6(b)(6)(iii), to be used to reduceemployer contributions in succeedingyear(s) (or if the amount would havebeen allocated to other eligible employ-ees who were in the plan for the year ofthe failure if the failure had not oc-curred, then that amount is reallocatedto the other eligible employees in accor-

dance with the plan’s allocation for-mula). In addition, the employer mustnotify the employee that the Overpay-ment was not eligible for favorable taxtreatment accorded to distributions fromqualified plans (and, specifically, wasnot eligible for tax-free rollover).

(b) Examples.

Example 17: Employer G maintains a 401(k) plan.The plan provides for nonelective employer contri-butions, elective deferrals, and employee after-taxcontributions. The plan provides that the nonelec-tive contributions vest under a 5-year cliff vestingschedule. The plan provides that when an employeeterminates employment, the employee’s nonvestedaccount balance is forfeited five years after a distrib-ution of the employee’s vested account balance andthat forfeitures are used to reduce employer contri-butions. For the 1998 limitation year, the annual ad-ditions made on behalf of two nonhighly compen-sated employees in the plan, Employees T and U,exceeded the limit in § 415(c). For the 1998 limita-tion year, Employee T had § 415 compensation of$60,000, and, accordingly, a § 415(c)(1)(B) limit of$15,000. Employee T made elective deferrals andemployee after-tax contributions. For the 1998 limi-tation year, Employee U had § 415 compensation of$40,000, and, accordingly, a § 415(c)(1)(B) limit of$10,000. Employee U made elective deferrals.Also, on January 1, 1999, Employee U, who hadthree years of service with Employer G, terminatedhis employment and received his entire vested ac-count balance (which consisted of his elective defer-rals). The annual additions for Employees T and Uconsisted of:

February 7, 2000 544 2000–6 I.R.B.

T U

Nonelective $7,500 $4,500Contributions

Elective 10,000 5,800Deferrals

After-tax 500 0 Contributions ________ _________

Total Contributions $18,000 $10,300§ 415(c) Limit $15,000 $10,000§ 415(c) Excess $3,000 $300

Correction: Employer G uses the SVP correctionmethod to correct the § 415(c) excess with respect toEmployee T (i.e., $3,000). Thus, a distribution ofplan assets (and corresponding reduction of the ac-count balance) consisting of $500 (adjusted for earn-ings) of employee after-tax contributions and $2,500(adjusted for earnings) of elective deferrals is madeto Employee T. Employer G uses the forfeiture cor-rection method to correct the § 415(c) excess withrespect to Employee U. Thus, the § 415(c) excess isdeemed to consist solely of the nonelective contri-butions. Accordingly, Employee U’s nonvested ac-count balance is reduced by $300 (adjusted for earn-ings) which is placed in an unallocated account,

similar to the suspense account described in §1.415–6(b)(6)(iii), to be used to reduce employercontributions in succeeding year(s). After correc-tion, it is determined that the ADP and ACP tests for1998 were satisfied. Example 18: Employer H maintains a 401(k) plan.The plan provides for nonelective employer contri-butions, matching contributions and elective defer-rals. The plan provides for matching contributionsthat are equal to 100% of an employee’s elective de-ferrals that do not exceed 8% of the employee’s plancompensation for the plan year. For the 1998 limita-tion year, Employee V had § 415 compensation of$50,000, and, accordingly, a § 415(c)(1)(B) limit of

$12,500. During that limitation year, the annual ad-ditions for Employee V totaled $15,000, consistingof $5,000 in elective deferrals, a $4,000 matchingcontribution (8% of $50,000), and a $6,000 nonelec-tive employer contribution. Thus, the annual addi-tions for Employee V exceeded the § 415(c) limit by$2,500.

Correction: Employer H uses the SVP correctionmethod to correct the § 415(c) excess with respect toEmployee V (i.e., $2,500). Accordingly, $1,000 ofthe unmatched elective deferrals (adjusted for earn-ings) are distributed to Employee V. The remaining$1,500 excess is apportioned equally between theelective deferrals and the associated matching em-

ployer contributions, so Employee V’s account bal-ance is further reduced by distributing to EmployeeV $750 (adjusted for earnings) of the elective defer-rals and forfeiting $750 (adjusted for earnings) ofthe associated employer matching contributions.The forfeited matching contributions are placed inan unallocated account, similar to the suspense ac-count described in § 1.415–6(b)(6)(iii), to be used toreduce employer contributions in succeedingyear(s). After correction, it is determined that theADP and ACP tests for 1998 were satisfied.

.05 Correction of Other OverpaymentFailures.An Overpayment, other than onedescribed in section 2.04(1) (relating to a§ 415(b) excess) or section 2.04(2) (relat-ing to a § 415(c) excess), may be correct-ed in accordance with this section 2.05.An Overpayment from a defined benefitplan is corrected in accordance with therules in section 2.04(1). AnOverpayment from a defined contribu-tion plan is corrected in accordance withthe rules in section 2.04(2)(a)(iii).

.06 § 401(a)(17) Failures.(1) Reduction of Account Balance Cor-

rection Method. The allocation of contri-butions or forfeitures under a defined con-tribution plan for a plan year on the basisof compensation in excess of the limitunder § 401(a)(17) for the plan year maybe corrected using the reduction of ac-count balance correction method set forthin this paragraph. The account balance ofan employee who received an allocationon the basis of compensation in excess ofthe § 401(a)(17) limit is reduced by thisimproperly allocated amount (adjusted forearnings). If the improperly allocatedamount would have been allocated toother employees in the year of the failureif the failure had not occurred, then thatamount (adjusted for earnings) is reallo-cated to those employees in accordancewith the plan’s allocation formula. If theimproperly allocated amount would nothave been allocated to other employeesabsent the failure, that amount (adjustedfor earnings) is placed in an unallocatedaccount, similar to the suspense accountdescribed in § 1.415–6(b)(6)(iii), to beused to reduce employer contributions insucceeding year(s). For example, if aplan provides for a fixed level of em-ployer contributions for each eligible em-ployee, and the plan provides that forfei-tures are used to reduce future employercontributions, the improperly allocatedamount (adjusted for earnings) would beused to reduce future employer contribu-

tions. (See Example 19.) If a paymentwas made to an employee and that pay-ment was attributable to an improperly al-located amount, then it is an Overpay-ment defined in section 2.05(2) that mustbe corrected (see section 2.05(1)).

(2) Example.Example 19: Employer J maintains a money pur-chase pension plan. Under the plan, an eligibleemployee is entitled to an employer contributionof 8% of the employee’s compensation up to the §401(a)(17) limit ($160,000 for 1998). During the1998 plan year, an eligible employee, EmployeeW, inadvertently was credited with a contributionbased on compensation above the § 401(a)(17)limit. Employee W’s compensation for 1998 was$220,000. Employee W received a contribution of$17,600 for 1998 (8% of $220,000), rather thanthe contribution of $12,800 (8% of $160,000) pro-vided by the plan for that year, resulting in an im-proper allocation of $4,800.

Correction: The § 401(a)(17) failure is cor-rected using the reduction of account balancemethod by reducing Employee W’s account bal-ance by $4,800 (adjusted for earnings) and credit-ing that amount to an unallocated account, similarto the suspense account described in §1.415–6(b)(6)(iii), to be used to reduce employercontributions in succeeding year(s).

.07 Correction by Amendment UnderWalk-in CAP.

(1) § 401(a)(17) Failures. (a) Contri-bution Correction Method. In additionto the reduction of account balance cor-rection method under section 2.06 ofthis Appendix B, an employer may cor-rect a § 401(a)(17) failure for a planyear under a defined contribution planunder the Walk-in Closing AgreementProgram (“Walk-in CAP”) (in accor-dance with the requirements of section11) by using the contribution correctionmethod set forth in this paragraph. Theemployer contributes an additionalamount on behalf of each of the otheremployees (excluding each employeefor whom there was a § 401(a)(17) fail-ure) who received an allocation for theyear of the failure, amending the plan(as necessary) to provide for the addi-tional allocation. The amount con-tributed for an employee is equal to theemployee’s plan compensation for theyear of the failure multiplied by a frac-tion, the numerator of which is the im-properly allocated amount made on be-half of the employee with the largestimproperly allocated amount, and thedenominator of which is the limit under§ 401(a)(17) applicable to the year ofthe failure. The resulting additionalamount for each of the other employees

is adjusted for earnings. (See Example20.)

(b) Examples.Example 20: The facts are the same as in Example19.

Correction: Employer J corrects the failureunder Walk-in CAP using the contribution correc-tion method by (1) amending the plan to increasethe contribution percentage for all eligible em-ployees (other than Employee W) for the 1998plan year and (2) contributing an additionalamount (adjusted for earnings) for those employ-ees for that plan year. To determine the increase inthe plan’s contribution percentage (and the addi-tional amount contributed on behalf of each eligi-ble employee), the improperly allocated amount($4,800) is divided by the § 401(a)(17) limit for1998 ($160,000). Accordingly, the plan isamended to increase the contribution percentageby 3 percentage points ($4,800/$160,000) from8% to 11%. In addition, each eligible employee forthe 1998 plan year (other than Employee W) re-ceives an additional contribution of 3% multipliedby that employee’s plan compensation for 1998.This additional contribution is adjusted for earn-ings.

(2) Hardship Distribution Failures.(a) Plan Amendment CorrectionMethod. The Operational Failure ofmaking hardship distributions to em-ployees under a plan that does not pro-vide for hardship distributions may becorrected under Walk-in CAP (in accor-dance with the requirements of section11) using the plan amendment correc-tion method set forth in this paragraph.The plan is amended retroactively toprovide for the hardship distributionsthat were made available. This para-graph does not apply unless (i) theamendment satisfies § 401(a), and (ii)the plan as amended would have satis-fied the qualification requirements of §401(a)(including the requirements ap-plicable to hardship distributions under§ 401(k), if applicable) had the amend-ment been adopted when hardship distri-butions were first made available. (SeeExample 21.)

(b) Example.Example 21: Employer K, a for-profit corporation,maintains a 401(k) plan. Although plan provisionsin 1998 did not provide for hardship distributions,beginning in 1998 hardship distributions of amountsallowed to be distributed under § 401(k) were madecurrently and effectively available to all employees(within the meaning of § l.401(a)(4)–4). The stan-dard used to determine hardship satisfied thedeemed hardship distribution standards in §1.401(k)–1(d)(2). Hardship distributions were madeto a number of employees during the 1998 and 1999plan years, creating an Operational Failure. Thefailure was discovered in 2000.

Correction: Employer K corrects the failurethrough Walk-in CAP by adopting a plan amend-

2000–6 I.R.B. 545 February 7, 2000

ment, effective January 1, 1998, to provide a hard-ship distribution option that satisfies the rules ap-plicable to hardship distributions in §1.401(k)–1(d)(2). The amendment provides that thehardship distribution option is available to all em-ployees. Thus, the amendment satisfies § 401(a),and the plan as amended in 2000 would have satis-fied § 401(a) (including § 1.401(a)(4)–4 and the re-quirements applicable to hardship distributionsunder § 401(k)) if the amendment had been adoptedin 1998.

SECTION 3. EARNINGSADJUSTMENT METHODS ANDEXAMPLES

.01 Earnings Adjustment Methods. (1)In general. (a) Under section 6.02(5)(a),whenever the appropriate correctionmethod for an Operational Failure in a de-fined contribution plan includes a correc-tive contribution or allocation that in-creases one or more employees’ accountbalances (now or in the future), the contri-bution or allocation is adjusted for earn-ings and forfeitures. This section 3 pro-vides earnings adjustment methods (butnot forfeiture adjustment methods) thatmay be used by an employer to adjust acorrective contribution or allocation forearnings in a defined contribution plan.Consequently, these earnings adjustmentmethods may be used to determine theearnings adjustments for corrective con-tributions or allocations made under thecorrection methods in section 2 and underthe SVP correction methods in AppendixA. If an earnings adjustment method inthis section 3 is used to adjust a correctivecontribution or allocation, that adjustmentis treated as satisfying the earnings adjust-ment requirement of section 6.02(5)(a).Other earnings adjustment methods, dif-ferent from those illustrated in this section3, may also be appropriate for adjustingcorrective contributions or allocations toreflect earnings.

(b) Under the earnings adjustmentmethods of this section 3, a correctivecontribution or allocation that increasesan employee’s account balance is adjustedto reflect an “earnings amount” that isbased on the earnings rate(s) (determinedunder section 3.01(3)) for the period ofthe failure (determined under section3.01(2)). The earnings amount is allo-cated in accordance with section 3.01(4).

(c) The rule in section 6.02(6)(a) permit-ting reasonable estimates in certain circum-stances applies for purposes of this section3. For this purpose, a determination of

earnings made in accordance with the rulesof administrative convenience set forth inthis section 3 is treated as a precise determi-nation of earnings. Thus, if the probabledifference between an approximate deter-mination of earnings and a determination ofearnings under this section 3 is insignificantand the administrative cost of a precise de-termination would significantly exceed theprobable difference, reasonable estimatesmay be used in calculating the appropriateearnings.

(d) This section 3 does not apply to cor-rective distributions or corrective reduc-tions in account balances. Thus, for exam-ple, while this section 3 applies inincreasing the account balance of an im-properly excluded employee to correct theexclusion of the employee under the reallo-cation correction method described in sec-tion 2.02(2)(a)(iii)(B), this section 3 doesnot apply in reducing the account balancesof other employees under the reallocationcorrection method. (See section2.02(2)(a)(iii)(C) for rules that apply to theearnings adjustments for such reductions.)In addition, this section 3 does not apply indetermining earnings adjustments under theone-to-one correction method described insection 2.01(1)(b)(iii).

(2) Period of the Failure. (a) GeneralRule. For purposes of this section 3, the“period of the failure” is the period fromthe date that the failure began through thedate of correction. For example, in thecase of an improper forfeiture of an em-ployee’s account balance, the beginningof the period of the failure is the date as ofwhich the account balance was improp-erly reduced.

(b) Rules for Beginning Date for Exclu-sion of Eligible Employees from Plan. (i)General Rule. In the case of an exclusionof an eligible employee from a plan contri-bution, the beginning of the period of thefailure is the date on which contributions ofthe same type (e.g., elective deferrals,matching contributions, or discretionarynonelective employer contributions) weremade for other employees for the year ofthe failure. In the case of an exclusion ofan eligible employee from an allocation ofa forfeiture, the beginning of the period ofthe failure is the date on which forfeitureswere allocated to other employees for theyear of the failure.

(ii) Exclusion from a 401(k) or (m)Plan. For administrative convenience, for

purposes of calculating the earnings ratefor corrective contributions for a planyear (or the portion of the plan year) dur-ing which an employee was improperlyexcluded from making periodic electivedeferrals or employee after-tax contribu-tions, or from receiving periodic match-ing contributions, the employer may treatthe date on which the contributions wouldhave been made as the midpoint of theplan year (or the midpoint of the portionof the plan year) for which the failure oc-curred. Alternatively, in this case, the em-ployer may treat the date on which thecontributions would have been made asthe first date of the plan year (or the por-tion of the plan year) during which an em-ployee was excluded, provided that theearnings rate used is one half of the earn-ings rate applicable under section 3.01(3)for the plan year (or the portion of theplan year) for which the failure occurred.

(3) Earnings Rate. (a) General Rule.For purposes of this section 3, the earn-ings rate generally is based on the invest-ment results that would have applied tothe corrective contribution or allocation ifthe failure had not occurred.

(b) Multiple Investment Funds. If aplan permits employees to direct the in-vestment of account balances into morethan one investment fund, the earningsrate is based on the rate applicable to theemployee’s investment choices for the pe-riod of the failure. In accordance withsection 6.02(5)(a), for administrative con-venience, if most of the employees forwhom the corrective contribution or allo-cation is made are nonhighly compen-sated employees, the rate of return of thefund with the highest earnings rate underthe plan for the period of the failure maybe used to determine the earnings rate forall corrective contributions or allocations.If the employee had not made any applic-able investment choices, the earnings ratemay be based on the earnings rate underthe plan as a whole (i.e., the average ofthe rates earned by all of the funds in thevaluation periods during the period of thefailure weighted by the portion of the planassets invested in the various funds duringthe period of the failure).

(c) Other Simplifying Assumptions. Foradministrative convenience, the earningsrate applicable to the corrective contribu-tion or allocation for a valuation periodwith respect to any investment fund may

February 7, 2000 546 2000–6 I.R.B.

be assumed to be the actual earnings ratefor the plan’s investments in that fund dur-ing that valuation period. For example, theearnings rate may be determined withoutregard to any special investment provi-sions that vary according to the size of thefund. Further, the earnings rate applicableto the corrective contribution or allocationfor a portion of a valuation period may be apro rata portion of the earnings rate for theentire valuation period, unless the applica-tion of this rule would result in either a sig-nificant understatement or overstatementof the actual earnings during that portion ofthe valuation period.

(4) Allocation Methods. (a) In General.For purposes of this section 3, the earn-ings amount generally may be allocated inaccordance with any of the methods setforth in this paragraph (4). The methodsunder paragraph (4)(c), (d), and (e) are in-tended to be particularly helpful wherecorrective contributions are made at datesbetween the plan’s valuation dates.

(b) Plan Allocation Method. Under theplan allocation method, the earningsamount is allocated to account balancesunder the plan in accordance with theplan’s method for allocating earnings as ifthe failure had not occurred. (See Exam-ple 22.)

(c) Specific Employee AllocationMethod. Under the specific employee al-location method, the entire earningsamount is allocated solely to the accountbalance of the employee on whose behalfthe corrective contribution or allocation ismade (regardless of whether the plan’s al-location method would have allocated theearnings solely to that employee). In de-termining the allocation of plan earningsfor the valuation period during which thecorrective contribution or allocation ismade, the corrective contribution or alloca-tion (including the earnings amount) istreated in the same manner as any othercontribution under the plan on behalf ofthe employee during that valuation period.Alternatively, where the plan’s allocation

method does not allocate plan earnings fora valuation period to a contribution madeduring that valuation period, plan earningsfor the valuation period during which thecorrective contribution or allocation ismade may be allocated as if that em-ployee’s account balance had been in-creased as of the last day of the prior valua-tion period by the corrective contributionor allocation, including only that portion ofthe earnings amount attributable to earn-ings through the last day of the prior valua-tion period. The employee’s account bal-ance is then further increased as of the lastday of the valuation period during whichthe corrective contribution or allocation ismade by that portion of the earningsamount attributable to earnings after thelast day of the prior valuation period. (SeeExample 23.)

(d) Bifurcated Allocation Method.Under the bifurcated allocation method,the entire earnings amount for the valua-tion periods ending before the date thecorrective contribution or allocation ismade is allocated solely to the accountbalance of the employee on whose behalfthe corrective contribution or allocation ismade. The earnings amount for the valua-tion period during which the correctivecontribution or allocation is made is allo-cated in accordance with the plan’smethod for allocating other earnings forthat valuation period in accordance withsection 3.01(4)(b). (See Example 24.)

(e) Current Period Allocation Method.Under the current period allocationmethod, the portion of the earnings amountattributable to the valuation period duringwhich the period of the failure begins(“first partial valuation period”) is allo-cated in the same manner as earnings forthe valuation period during which the cor-rective contribution or allocation is madein accordance section 3.01(4)(b). Theearnings for the subsequent full valuationperiods ending before the beginning of thevaluation period during which the correc-tive contribution or allocation is made are

allocated solely to the employee for whomthe required contribution should have beenmade. The earnings amount for the valua-tion period during which the correctivecontribution or allocation is made (“secondpartial valuation period”) is allocated in ac-cordance with the plan’s method for allo-cating other earnings for that valuation pe-riod in accordance with section 3.01(4)(b).(See Example 25.)

.02 Examples.Example 22: Employer L maintains a profit-sharingplan that provides only for nonelective contribu-tions. The plan has a single investment fund. Underthe plan, assets are valued annually (the last day ofthe plan year) and earnings for the year are allocatedin proportion to account balances as of the last dayof the prior year, after reduction for distributionsduring the current year but without regard to contri-butions received during the current year (the “prioryear account balance”). Plan contributions for 1997were made on March 31, 1998. On April 20, 2000Employer L determines that an operational failureoccurred for 1997 because Employee X was improp-erly excluded from the plan. Employer L decides tocorrect the failure by using the SVP correctionmethod for the exclusion of an eligible employeefrom nonelective contributions in a profit-sharingplan. Under this method, Employer L determinesthat this failure is corrected by making a contribu-tion on behalf of Employee X of $5,000 (adjustedfor earnings). The earnings rate under the plan for1998 was +20%. The earnings rate under the planfor 1999 was +10%. On May 15, 2000, when Em-ployer L determines that a contribution to correct forthe failure will be made on June 1, 2000, a reason-able estimate of the earnings rate under the planfrom January 1, 2000 to June 1, 2000 is +12%. Earnings Adjustment on the Corrective Contribu-tion:The $5,000 corrective contribution on behalf of Em-ployee X is adjusted to reflect an earnings amountbased on the earnings rates for the period of the fail-ure (March 31, 1998 through June 1, 2000) and theearnings amount is allocated using the plan alloca-tion method. Employer L determines that a pro ratasimplifying assumption may be used to determinethe earnings rate for the period from March 31, 1998to December 31, 1998, because that rate does notsignificantly understate or overstate the actual earn-ings for that period. Accordingly, Employer L deter-mines that the earnings rate for that period is 15%(9/12 of the plan’s 20% earnings rate for the year).Thus, applicable earnings rates under the plan dur-ing the period of the failure are:

2000–6 I.R.B. 547 February 7, 2000

Time Periods Earnings Rate

3/31/98 - 12/31/98 (First Partial Valuation Period) +15%

1/1/99 - 12/31/99 +10%

1/1/00 - 6/1/00 (Second Partial Valuation Period) +12%

If the $5,000 corrective contribution had beencontributed for Employee X on March 31, 1998, (1)earnings for 1998 would have been increased by theamount of the earnings on the additional $5,000 con-tribution from March 31, 1998 through December31, 1998 and would have been allocated as 1998earnings in proportion to the prior year (December31, 1997) account balances, (2) Employee X’s ac-count balance as of December 31, 1998 would havebeen increased by the additional $5,000 contribu-tion, (3) earnings for 1999 would have been in-creased by the 1999 earnings on the additional$5,000 contribution (including 1998 earningsthereon) allocated in proportion to the prior year(December 31, 1998) account balances along withother 1999 earnings, and (4) earnings for 2000would have been increased by the earnings on theadditional $5,000 (including 1998 and 1999 earn-ings thereon) from January 1 to June 1, 2000 and

would be allocated in proportion to the prior year(December 31, 1999) account balances along withother 2000 earnings. Accordingly, the $5,000 cor-rective contribution is adjusted to reflect an earningsamount of $2,084 ($5,000[(1.15)(1.10)(1.12)–1])and the earnings amount is allocated to the accountbalances under the plan allocation method as fol-lows:(a) Each account balance that shared in the alloca-tion of earnings for 1998 is increased, as of Decem-ber 31, 1998, by its appropriate share of the earningsamount for 1998, $750 ($5,000(.15)).(b) Employee X’s account balance is increased, as ofDecember 31, 1998, by $5,000.(c) The resulting December 31, 1998 account balanceswill share in the 1999 earnings, including the $575 for1999 earnings included in the corrective contribution($5,750(.10)), to determine the account balances as ofDecember 31, 1999. However, each account balance

other than Employee X’s account balance has alreadyshared in the 1999 earnings, excluding the $575. Ac-cordingly, Employee X’s account balance as of De-cember 31, 1999 will include $500 of the 1999 por-tion of the earnings amount based on the $5,000corrective contribution allocated to Employee X’s ac-count balance as of December 31, 1998 ($5,000(.10)).Then each account balance that originally shared inthe allocation of earnings for 1999 (i.e., excluding the$5,500 additions to Employee X’s account balance) isincreased by its appropriate share of the remaining1999 portion of the earnings amount, $75.(d) The resulting December 31, 1999 account bal-

ances (including the $5,500 additions to EmployeeX’s account balance) will share in the 2000 portionof the earnings amount based on the estimated Janu-ary 1, 2000 to June 1, 2000 earnings included in thecorrective contribution equal to $759 ($6,325(.12)).(See Table 1.)

February 7, 2000 548 2000–6 I.R.B.

TABLE 1

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation 15% 7501 All 12/31/1997

Period Earnings Account Balances4

1999 Earnings 10% 5752 Employee X ($500)/ All

12/31/1998 Account

Balances ($75)4

Second Partial 12% 7593 All 12/31/1999 Account Valuation

Period Earnings Balances(including Employee

X’s $5,500)4

Total Amount Contributed $7,084

1$5,000 x 15%2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12%4 After reduction for distributions during the year for which earning are being determined but without regard to contributions received during the year for which

earnings are being determined.

Example 23: The facts are the same as in Example22.Earnings Adjustment on the Corrective Contribution:The earnings amount on the corrective contribution isthe same as in Example 22, but the earnings amount isallocated using the specific employee allocationmethod. Thus, the entire earnings amount for all peri-

ods through June 1, 2000 (i.e., $750 for March 31,1998 to December 31, 1998, $575 for 1999, and $759for January 1, 2000 to June 1, 2000) is allocated toEmployee X. Accordingly, Employer L makes a con-tribution on June 1, 2000 to the plan of $7,084($5,000(1.15)(1.10)(1.12)). Employee X’s accountbalance as of December 31, 2000 is increased by

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

2000–6 I.R.B. 549 February 7, 2000

TABLE 2

CALCULATION AND ALLOCATION OF THE

ADJUSTED CORRECTIVE AMOUNT FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation 15% 7501 Employee XPeriod Earnings

1999 Earnings 10% 5752 Employee X

Second Partial Valuation 12% 7593 Employee XPeriod Earnings

Total Amount Contributed $7,084

1$5,000 x 15%2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12%

Example 24: The facts are the same as in Example22.Earnings Adjustment on the Corrective Contribu-tion:The earnings amount on the corrective contributionis the same as in Example 22, but the earningsamount is allocated using the bifurcated allocation

method. Thus, the earnings for the first partial valu-ation period (March 31, 1998 to December 31,1998) and the earnings for 1999 are allocated to Em-ployee X. Accordingly, Employer L makes a contri-bution on June 1, 2000 to the plan of $7,084($5,000(1.15)(1.10)(1.12)). Employee X’s accountbalance as of December 31, 1999 is increased by

$6,325 ($5,000(1.15)(1.10)); and the December 31,1999 account balances of employees (including Em-ployee X’s increased account balance) will share inestimated January 1, 2000 to June 1, 2000 earningson the corrective contribution equal to $759($6,325(.12)). (See Table 3.)

TABLE 3

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation 15% 7501 Employee XPeriod Earnings

1999 Earnings 10% 5752 Employee X

Second Partial Valuation 12% 7593 12/31/99 Account BalancesPeriod Earnings (including Employee X’s

$6,325)4

Total Amount Contributed $7,084

1$5,000 x 15%2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12%4 After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year

Example 25: The facts are the same as in Example22.Earnings Adjustment on the Corrective Contribu-tion:The earnings amount on the corrective contributionis the same as in Example 22, but the earningsamount is allocated using the current period alloca-tion method. Thus, the earnings for the first partialvaluation period (March 31, 1998 to December 31,1998) are allocated as 2000 earnings. Accordingly,

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

to June 1, 2000 earnings on the corrective contribu-tion equal to $759 ($6,325(.12)) are treated in thesame manner as 2000 earnings by allocating theseamounts to the December 31, 2000 account balancesof employees in proportion to account balances as ofDecember 31, 1999 (including Employee X’s in-creased account balance). (See Table 4.) Thus, Em-ployee X is allocated the earnings for the full valua-tion period during the period of the failure.

February 7, 2000 550 2000–6 I.R.B.

TABLE 4

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation 15% 7501 12/31/99 Account BalancesPeriod Earnings (including Employee X’s

$5,575)4

1999 Earnings 10% 5752 Employee X

Second Partial Valuation 12% 7593 12/31/99 Account Balances Period Earnings (including Employee X’s

$5,575)4

Total Amount Contributed $7,084

1$5,000 x 15%2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12%4 After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year forwhich earnings are being determined.

APPENDIX C

VCR/SVP/WALK-IN CAP/TVC CHECKLISTIS YOUR SUBMISSION COMPLETE?

INSTRUCTIONS

The Service will be able to respond more quickly to your VCR, SVP, Walk-in CAP or TVC request if it is carefully prepared andcomplete. To ensure that your request is in order, use this checklist. Answer each question in the checklist by inserting yes, no, orN/A, as appropriate, in the blank next to the item. Sign and date the checklist (as taxpayer or authorized representative) andplace it on top of your request.

You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request,substantive consideration of your submission will be deferred until a completed checklist is received.

TAXPAYER’S NAME

TAXPAYER’S I.D. NO.

PLAN NAME & NO.

ATTORNEY/P.O.A.

The following items relate to all submissions:

______ 1. Have you included a complete description of the failure(s) and the years in which the failure(s) occurred(including the years for which the statutory period has expired)? (See section 12.03(1) of Rev. Proc. 2000–16.)(Hereafter, all section references are to Rev. Proc. 2000–16.)

______ 2. Have you included an explanation of how and why the failure(s) arose, including a description of the admin-istrative procedures for the plan in effect at the time the failure(s) occurred? (See section 12.03(2) and (3).)

______ 3. Have you included a detailed description of the method for correcting the failure(s) identified in your submis-sion? This description must include, for example, the number of employees affected and the expected cost ofcorrection (both of which may be approximated if the exact number cannot be determined at the time of therequest), the years involved, and calculations or assumptions the Plan Sponsor used to determine the amountsneeded for correction. In lieu of providing correction calculations with respect to each employee affected by afailure, you may submit calculations with respect to a representative sample of affected employees. However,the representative sample calculations must be sufficient to demonstrate each aspect of the correction methodproposed. Note that each step of the correction method must be described in narrative form. (See section12.03(4).)

______ 4. Have you described the earnings or interest methodology (indicating computation period and basis for deter-mining earnings or interest rates) that will be used to calculate earnings or interest on any corrective contribu-tions or distributions? (As a general rule, the interest rate (or rates) earned by the plan during the applicableperiod(s) should be used in determining the earnings for corrective contributions or distributions.) (See section12.03(5).)

If you inserted “N/A” for item 4, enter explanation:

______ 5. Have you submitted specific calculations for each affected employee or a representative sample of affectedemployees? (See section 12.03(6).)

______ 6. Have you described the method that will be used to locate and notify former employees or, if there are noformer employees affected by the failure(s), provided an affirmative statement to that effect? (See section12.03(7).)

______ 7. Have you provided a description of the administrative measures that have been or will be implemented to

2000–6 I.R.B. 551 February 7, 2000

ensure that the same failure(s) do not recur? (See section 12.03(8).)

______ 8. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the plan is not currentlyunder an Employee Plans examination? (See section 12.03(9).)

______ 9. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the Plan Sponsor is notunder an Exempt Organizations examination? (See section 12.03(9).)

______ 10. If the plan is currently being considered in a determination letter application on a Form 5310, have youincluded a statement to that effect? (See section 12.03(10).)

______ 11. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable) rele-vant to the failure(s) and method(s) of correction? (See section 12.04(3).)

______ 12. Have you included a copy of the plan’s most recent Favorable Letter and/or the required applicable docu-ment(s)? (See section 12.04(4).)

______ 13. Have you included the appropriate voluntary compliance or correction fee? (See section 12.05.) ______ 14. Have you included the original signature of the sponsor or the sponsor’s representative? (See section

12.06.)______ 15. Have you included a Power of Attorney (Form 2848)? Note: (representation under the VCR/SVP, Walk-in

CAP and TVC is limited to attorneys, certified public accountants, enrolled agents, and enrolled actuaries; unen-rolled return preparers are not eligible to act as representatives under the VCR or TVC program). (See section12.07.)

______ 16. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the PlanSponsor? (See section 12.08.)

______ 17. Have you designated your submission as a VCR, SVP, Walk-in CAP, or TVC submission, as appropriate?(See section 12.10.)

The following items relate only to submissions under VCR (including SVP):______ 18. Have you included a copy of the first page, the page containing employee census information (currently line

7f of the 1998 Form 5500), and the information relating to plan assets (currently line 31f of the 1998 Form5500) of the most recently filed Form 5500 series return? Note: If a Form 5500 is not applicable, insert N/Aand furnish the name of the plan, and the census information required of Form 5500 series filers. (See section12.04(1).)

______ 19. Have you proposed a time period of correction that is limited to 150 days from the date the compliancestatement is issued? (See section 10.13.)

The following items relate only to submissions under SVP:______ 20. Have you included a statement identifying your request as an SVP request? (See section 12.03(11).)______ 21. Are each of the failures you have identified eligible for correction under SVP? (See Appendix A and

Appendix B.)______ 22. Have you identified no more than two SVP failures? (If more than two failures were identified, SVP is not

available, but you may make a submission under VCR.) (See section 10.11(3).) ______ 23. Have you proposed to correct the failure(s) identified in your request using the permitted correction

method(s) set forth in Appendix A or Appendix B? (See Appendix A and Appendix B.)

The following item relates only to submissions under Walk-in CAP:______ 24. Have you included a copy of the most recently filed Form 5500? (See section 12.04(1).)______ 25. Have you submitted an application for a determination letter? (See section 11.01(4).)

Signature Date

Title or Authority

Typed or printed name of person signing checklist

February 7, 2000 552 2000–6 I.R.B.