Bulletin No. 2008-35 September 2, 2008 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX REG–142680–06, page 565. Proposed regulations under section 7508A of the Code clarify rules relating to the postponement of certain tax-related acts by reason of a Presidentially declared disaster or terroristic or military action. The regulations clarify the scope of relief under section 7508A and specify that interest may be suspended dur- ing the postponement period. These changes are necessary to reflect changes in the law made by the Victims of Terrorism Tax Relief Act and current IRS practice. Notice 2008–71, page 462. This notice requests comments with respect to possible expan- sion of regulations section 1.475(a)–4 (safe harbor valuation regulations) so that financial institutions headquartered outside the United States can qualify to make the election described in regulations section 1.475(a)–4(b). Rev. Proc. 2008–51, page 562. This procedure provides that the Service will not treat the debt instrument, issued by a corporation pursuant to a binding finan- cial commitment obtained from an unrelated lender that satis- fies certain conditions, as an applicable high yield discount obli- gation (AHYDO) for purposes of sections 163(e)(5) and 163(i) of the Code. As a result, no portion of the corporation’s inter- est deductions attributable to the debt instrument will be disal- lowed under section 163(e)(5). EMPLOYEE PLANS Rev. Proc. 2008–50, page 464. This procedure updates the comprehensive system of correc- tion programs for sponsors of retirement plans that are in- tended to satisfy the requirements of sections 401(a), 403(a), 403(b), 408(k), or 408(p) of the Code, but that have not met these requirements for a period of time. This system, the Em- ployee Plans Compliance Resolution System (EPCRS), permits Plan Sponsors to correct these failures and thereby continue to provide their employees with retirement benefits on a tax-fa- vored basis. The components of EPCRS are the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Rev. Proc. 2006–27 modified and superseded. Rev. Proc. 2007–49, section 3, modified and superseded. (Continued on the next page) Finding Lists begin on page ii.
Transcript
Bulletin No. 2008-35September 2, 2008
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.
INCOME TAX
REG–142680–06, page 565.Proposed regulations under section 7508A of the Code clarifyrules relating to the postponement of certain tax-related actsby reason of a Presidentially declared disaster or terroristic ormilitary action. The regulations clarify the scope of relief undersection 7508A and specify that interest may be suspended dur-ing the postponement period. These changes are necessaryto reflect changes in the law made by the Victims of TerrorismTax Relief Act and current IRS practice.
Notice 2008–71, page 462.This notice requests comments with respect to possible expan-sion of regulations section 1.475(a)–4 (safe harbor valuationregulations) so that financial institutions headquartered outsidethe United States can qualify to make the election described inregulations section 1.475(a)–4(b).
Rev. Proc. 2008–51, page 562.This procedure provides that the Service will not treat the debtinstrument, issued by a corporation pursuant to a binding finan-cial commitment obtained from an unrelated lender that satis-fies certain conditions, as an applicable high yield discount obli-gation (AHYDO) for purposes of sections 163(e)(5) and 163(i)of the Code. As a result, no portion of the corporation’s inter-est deductions attributable to the debt instrument will be disal-lowed under section 163(e)(5).
EMPLOYEE PLANS
Rev. Proc. 2008–50, page 464.This procedure updates the comprehensive system of correc-tion programs for sponsors of retirement plans that are in-tended to satisfy the requirements of sections 401(a), 403(a),403(b), 408(k), or 408(p) of the Code, but that have not metthese requirements for a period of time. This system, the Em-ployee Plans Compliance Resolution System (EPCRS), permitsPlan Sponsors to correct these failures and thereby continueto provide their employees with retirement benefits on a tax-fa-vored basis. The components of EPCRS are the Self-CorrectionProgram (SCP), the Voluntary Correction Program (VCP), andthe Audit Closing Agreement Program (Audit CAP). Rev. Proc.2006–27 modified and superseded. Rev. Proc. 2007–49,section 3, modified and superseded.
(Continued on the next page)
Finding Lists begin on page ii.
EXEMPT ORGANIZATIONS
Announcement 2008–79, page 568.The IRS has revoked its determination that Ohio TaekwondoAssociation, Inc., of Cincinnati, OH; The Johnson Foundationof Sandy, UT; Chaim Ministries, Inc., of Los Alamitos, CA;Yes I Can of Burlington, NC; Surviving the System, Inc., ofPeoria, AZ; Gravette Medical Center Hospital of Gravette, AR;D & L Carousel Pre-School of Los Angeles, CA; Christmasin April of Mobile, AL; Foundation for Life Enhancement ofDallas, TX; Colgate Residences, Inc., of Houston, TX; HelpMinistries, Inc., of Mesa, AZ; CCC Centers of San Antonio,TX; Sunlight Ministries, Inc., of Brookhaven, MS; ConsumerCredit Counseling Services of Huntsville, Inc., of Huntsville, AL;Universal Training Center Nonprofit Corporation of Highland,CA; and Deep South Community Development Corporation ofDecatur, GA, qualify as organizations described in sections501(c)(3) and 170(c)(2) of the Code.
ESTATE TAX
T.D. 9414, page 454.Final regulations under sections 2036 and 2039 of the Codeprovide guidance on the portion of property transferred to atrust or otherwise that is properly includible in the grantor’sgross estate if the grantor has retained the use of the propertyor the right to an annuity, unitrust, or other payment from theproperty for life, for any period not ascertainable without ref-erence to the grantor’s death, or for a period that does not infact end before the grantor’s death. Rev. Ruls. 76–273 and82–105 obsoleted.
ADMINISTRATIVE
REG–142680–06, page 565.Proposed regulations under section 7508A of the Code clarifyrules relating to the postponement of certain tax-related actsby reason of a Presidentially declared disaster or terroristic ormilitary action. The regulations clarify the scope of relief undersection 7508A and specify that interest may be suspended dur-ing the postponement period. These changes are necessaryto reflect changes in the law made by the Victims of TerrorismTax Relief Act and current IRS practice.
September 2, 2008 2008–35 I.R.B.
The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all.
IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative 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 application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.
Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.
Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe 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 Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).
Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.
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.
2008–35 I.R.B. September 2, 2008
September 2, 2008 2008–35 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 163.—Interest
If a debt instrument issued by a corporation pur-suant to a binding financing commitment obtainedfrom an unrelated lender satisfies certain conditions,Rev. Proc. 2008–51 provides that the Service willnot treat the debt instrument as an applicable highyield discount obligation (AHYDO) for purposes of§§ 163(e)(5) and 163(i) of the Internal Revenue Code.As a result, no portion of the corporation’s interestdeductions attributable to the debt instrument willbe disallowed under § 163(e)(5). See Rev. Proc.2008-51, page 562.
Section 2036.—TransfersWith Retained Life Estate26 CFR 20.2036–1: Transfers with retained life es-tate.
T.D. 9414
DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 20
Grantor Retained InterestTrusts—Application ofSections 2036 and 2039
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-nal regulations providing guidance on theportion of property transferred to a trust orotherwise, that is properly includible in agrantor’s gross estate under Internal Rev-enue Code (Code) sections 2036 and 2039if the grantor has retained the use of theproperty or the right to an annuity, uni-trust, or other payment from such propertyfor life, for any period not ascertainablewithout reference to the grantor’s death, orfor a period that does not in fact end be-fore the grantor’s death. The final regula-tions affect estates that are required to fileForm 706, United States Estate (and Gen-eration-Skipping Transfer) Tax Return.
DATES: Effective Date: These regulationsare effective on July 14, 2008.
Applicability Date: For dates of ap-plicability, see §20.2036–1(c)(3) and§20.2039–1(f).
FOR FURTHER INFORMATIONCONTACT: Theresa M. Melchiorre at(202) 622–3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation ofProvisions
On June 7, 2007, proposed regulations(REG–119097–05, 2007–28 I.R.B. 74)were published in the Federal Register[72 FR 31487]. The proposed regula-tions contain proposed amendments tothe Estate Tax Regulations [26 CFR part20] providing guidance on the portion ofa trust properly includible in a grantor’sgross estate under sections 2036 and 2039if the grantor retained the use of propertyin the trust or the right to an annuity, uni-trust, or other payment from the trust forlife, for any period not ascertainable with-out reference to the grantor’s death, or fora period that does not in fact end beforethe grantor’s death. The trusts that werethe subject of the proposed regulationsinclude without limitation certain charita-ble remainder trusts (collectively CRTs)such as charitable remainder annuity trusts(CRATs) within the meaning of section664(d)(1), charitable remainder unitrusts(CRUTs) within the meaning of section664(d)(2) or (d)(3), and charitable remain-der trusts that do not qualify under section664, as well as other trusts establishedby a grantor (collectively GRTs) such asgrantor retained annuity trusts (GRATs),grantor retained unitrusts (GRUTs), andvarious forms of grantor retained incometrusts (GRITs), such as qualified personalresidence trusts (QPRTs) and personal res-idence trusts (PRTs). A CRT was withinthe scope of the proposed regulationswhether or not the CRT met the quali-fications of section 664(d)(1), (d)(2), or(d)(3) because either the CRT was createdprior to 1969, there was a defect in thedrafting of the CRT, there was no inten-tion to qualify the CRT for the charitablededuction, or for any other reason. AGRT was within the scope of the proposed
regulations whether or not the grantor’sretained interest was a “qualified interest”as defined in section 2702(b).
The proposed regulations incorpo-rate the guidance provided in Rev. Rul.76–273, 1976–2 C.B. 268, and Rev. Rul.82–105, 1982–1 C.B. 133, by proposingto amend §20.2036–1 to provide that theportion of the corpus of a CRT and GRTincludible in the decedent’s gross estateunder section 2036 is that portion of thetrust corpus necessary to generate a returnsufficient to provide the decedent’s re-tained annuity, unitrust, or other payment.See §601.601(d)(2)(ii)(b). The proposedregulations provide that, in cases whereboth section 2036 and section 2039 couldapply to a retained annuity, unitrust, orother payment in a CRT or a GRT, sec-tion 2036 (and therefore, when applicable,section 2035), rather than section 2039,will be applied. Accordingly, the pro-posed regulations also amend §20.2039–1by providing that section 2039 generallyshall not be applied to an annuity, unitrust,or other payment retained by a deceasedgrantor in a CRT or GRT.
Written comments were received on theproposed regulations, and a public hear-ing was held on September 26, 2007. Theproposed regulations, with certain changesmade in response to the written and oralcomments received, are adopted as finalregulations. Although the final regula-tions provide guidance as to the Code sec-tion (specifically, section 2036 or 2039) tobe applied in certain circumstances wheneach of those sections applies to the sametrust, the final regulations are not to be con-strued to foreclose the possibility that anyapplicable section of the Code (sections2035 through 2039, or any other section)properly may be applied in the future bythe IRS in appropriate circumstances be-yond those described in the final regula-tions.
Summary of Comments andExplanation of Provisions
References to the Terms GRAT and GRUT
A commentator recommended that theterms “GRAT” (grantor retained annu-ity trust) and “GRUT” (grantor retained
2008–35 I.R.B. 454 September 2, 2008
unitrust) in the proposed regulations bereplaced with references to §25.2702–3(b)and (c) because the terms GRAT andGRUT are not statutory or regulatoryterms in the Code. In response, the finalregulations include both the Treasury Reg-ulation citations and the terms GRAT andGRUT.
Application of section 2036 to a retainedinterest in a GRAT or a GRUT
A commentator suggested that section2036 is not applicable to a retained annu-ity interest in a GRAT to the extent the re-tained annuity interest is not payable fromtrust income. The commentator takes theposition that the retained annuity interestis payable from principal and/or income,in kind or in cash, and the size of the an-nuity payment is not defined in relationto trust income. Instead, the commenta-tor suggests that the annuity is defined asa fraction or percentage of the value ofthe GRAT’s original principal, and accord-ingly, pursuant to section 2033, only thepresent value of any unpaid annuity pay-ments as of a particular date or event, val-ued using section 7520, should be includi-ble in the deceased grantor’s gross estate.The commentator opined that section 2036includes a portion of the trust in the grossestate only to the extent that the trust’s in-come must be used to pay the retained an-nuity.
Another commentator suggested thatthe method in the proposed regulationsfor calculating the portion of GRAT orGRUT corpus includible in the deceasedgrantor’s gross estate under section 2036results in an overstatement of the propertyrequired to produce the retained annuitybecause the method calculates the prop-erty necessary to produce the full dollarvalue of a fixed annuity over the actuariallife expectancy of the decedent as of thedate of death, rather than for the actualterm of years. Instead, the commentatorstated that the method to be applied shouldvalue the retained annuity or unitrust in-terest, rather than the property in the trustrequired to produce the retained interest.
In addition, it has come to the atten-tion of the IRS and Treasury Departmentthat certain taxpayers have stated that sec-tion 2036 should not be applied to an annu-ity when the actuarial value of the presentvalue of the remainder interest in the trust
is zero, on the theory that the annuity wasacquired for full and adequate considera-tion.
The IRS and Treasury Department havecarefully considered these arguments andanalyses. The IRS and Treasury Depart-ment believe, however, that these posi-tions are not consistent with the languageof section 2036(a)(1), its legislative his-tory, and the case law interpreting this sec-tion, which require the inclusion in thegross estate of property over which a dece-dent has retained a “string” (the posses-sion or enjoyment of, or the right to theincome from the transferred property) forat least one of the required statutory pe-riods (hereinafter referred to as a lifetimeinterest). This section was enacted in re-sponse to a concern that a donor might oth-erwise be able to remove property from thedonor’s gross estate by giving that propertyaway before death while retaining the useor benefit of the property. Thus, section2036 requires inclusion in the gross es-tate of the property subject to the “string”,rather than the “string” or retained inter-est itself. For section 2036 purposes, ifthe grantor retains the possession or enjoy-ment of, or the right to the income from,the transferred property for life, for any pe-riod not ascertainable without reference tothe grantor’s death, or for a period whichdoes not in fact end before the grantor’sdeath, the value of the property over whichthe grantor retained the interest is includi-ble in the grantor’s gross estate. The in-terest retained by the grantor of a GRATor GRUT who dies during the term of theGRAT or GRUT is a retained lifetime in-terest because the grantor is retaining thepossession or enjoyment of, or the right tothe income from, the transferred propertyfor one of the statutorily required time pe-riods. Section 2036(a)(1), accordingly, in-cludes in the grantor’s gross estate all ora portion of the corpus of the GRAT orGRUT. To conclude otherwise would beto ignore the unambiguous statutory lan-guage and the intent of section 2036.
This conclusion is supported by thelegislative history and the U.S. SupremeCourt’s interpretation of section 2036 andits predecessors. See Commissioner v.Church, 335 U.S. 632, 637–638 (1949); 64Cong. Rec. H10729 (July 10, 1916) (state-ments of Messrs. Elston and Kitchin);71 Cong. Rec. S7078–7079 (March 3,1931) (statement of Senator Smoot); and
71 Cong. Rec. H7198–7199 (March 3,1931) (statement of Mr. Hawley).
In Church, the Court interpreted thepossession and enjoyment clause in sec-tion 811(c) (the predecessor to section2036) in keeping with its historic inter-pretation. Church, 335 U.S. at 645. TheCourt held that the term “possession andenjoyment” in section 811(c) includesin the transferor’s gross estate propertypassing at the transferor’s death in whichthe transferor has retained any type oflifetime interest (for example, income,a life estate, reverter, etc., contingent orotherwise, expressly stated in the transferdocument or by operation of state law)that delayed the beneficiaries’ actual useof the transferred property. The Courtstated, “It thus sweeps into the gross estateall property the ultimate possession or en-joyment of which is held in suspense untilthe moment of the decedent’s death orthereafter. . . . Testamentary dispositionsof an inter vivos nature cannot escapethe force of this section by hiding behindlegal niceties contained in devices andforms created by conveyancers.” Church,335 U.S. at 646, quoting Goldstone v.United States, 325 U.S. 687 (1945) andciting Helvering v. Hallock, 309 U.S.106 (1940). See, also, Spiegel’s Estate v.Commissioner, 335 U.S. 701 (1949).
In the Act of Oct. 25, 1949, ch.720, 63 Stat. 891 (1949) (codifiedat 26 USC 811(c)(1949)) (1949 Act),Congress amended section 811(c) toinclude interests retained for a term ofyears. H.R. Rep. No. 81–1412 at 9 (1949)(Conf. Report). The Conference Reportstates, in relevant part, that the “incomeinterests described by section 811(c)(1)(B)[the predecessor to section 2036] andby similar language elsewhere in theconference amendments include reservedrights to the income from transferredproperty and rights to possess or enjoynon-income-producing property [i.e.corpus].” Id. at 11.
The IRS and Treasury Department be-lieve, based upon the broad statutory lan-guage in section 2036, as well as its leg-islative history and relevant case law, thatunder section 2036, every type of life-time interest in property (annuity, income,use or enjoyment of the transferred prop-erty, etc.) retained for the requisite timeperiod constitutes the retained possessionand enjoyment of the transferred property
September 2, 2008 455 2008–35 I.R.B.
or the income therefrom, causing inclusionof the transferred property in the trans-feror’s gross estate. This is true regardlessof the extent to which the retained interestis paid from the income or the corpus ofthe transferred property. This interpreta-tion is consistent with the legislative intentspecifically expressed by Congress in the1949 Act’s amendment to section 811(c)as well as with the Supreme Court’s de-cision in Northeastern Pennsylvania Na-tional Bank & Trust Company v. UnitedStates, 387 U.S. 213 (1967). In that case,the Court held that a bequest to the dece-dent’s spouse of a fixed monthly stipend,payable from trust income or corpus, satis-fied the requirement of section 2056(b)(5)that the spouse receive all the income froma specific portion of trust corpus. The spe-cific portion of corpus qualifying for themarital deduction was determined by com-puting the amount of corpus necessary toproduce the guaranteed monthly payment,assuming a fixed rate of return.
In addition, this interpretation is con-sistent with the regulations under sec-tion 662. For trust accounting purposes,§1.662(a)–2(c) defines the phrase “theamount of income for the taxable yearrequired to be distributed currently” toinclude any amount required to be paidout of income or corpus, limited by theamount of income received by the estateor trust for the taxable year and not paid,credited, or required to be distributed toother beneficiaries for the taxable year.Thus, an annuity required to be paid in allevents (whether out of income or corpus)would qualify as income required to bedistributed currently to the extent there isincome (as defined in section 643(b)) notpaid, credited, or required to be distributedto other beneficiaries for the taxable year.If an annuity or a portion of an annuityis deemed to be income required to bedistributed currently, it is treated in all re-spects in the same manner as an amount oftaxable income. The phrase “the amountof income for the taxable year requiredto be distributed currently” also includesany amount required to be paid duringthe taxable year in all events (whether outof income or corpus) pursuant to a courtorder or decree or under local law, by adecedent’s estate as an allowance or awardfor the support of the decedent’s widowor other dependent for a limited periodduring the administration of the estate to
the extent there is income (as defined insection 643(b)) of the estate for the taxableyear not paid, credited, or required to bedistributed to other beneficiaries.
With regard to the commentator’s sug-gestion that section 2036 applies only tothe extent that the trust principal alone isinsufficient to fully satisfy the annuity pay-ment, the IRS and Treasury Departmentbelieve that this would condition the es-tate tax treatment on the nature and per-formance of the investments selected bythe trustee. The application of section2036 should not be dependent on either thetrustee’s exercise of his or her discretionto invest in income or nonincome produc-ing assets, or the actual performance of thetrust assets.
With regard to the position of certaintaxpayers that the full and adequate con-sideration exception under section 2036is satisfied when the present value of theremainder interest is zero, the IRS andTreasury Department believe that this ex-ception to section 2036 does not apply.There is a significant difference betweenthe bona fide sale of property to a thirdparty in exchange for an annuity, and theretention of an annuity interest in propertytransferred to a third party. In the bonafide sale, there is a negotiation and agree-ment between two parties, each of whomis the owner of a property interest beforethe sale; each uses his or her own propertyto provide consideration to the other in ex-change for the property interest to be re-ceived from the other in the sale. When thetransferor retains an annuity or similar in-terest in the transferred property (as in thecase of a GRAT or GRUT), the transferoris not selling the transferred property to athird party in exchange for an annuity be-cause there is no other owner of propertynegotiating or engaging in a sale transac-tion with the transferor. The transferor, in-stead, is transferring the property subjectto a retained possession and enjoyment of,or right to, the income from the property. Ifthe grantor retains the interest for life, forany period not ascertainable without ref-erence to the grantor’s death, or for a pe-riod that does not in fact end before thegrantor’s death, the property is subject toinclusion in the grantor’s gross estate un-der section 2036.
The portion of the GRAT or GRUTcorpus includible in the deceased grantor’sgross estate is that portion, valued as of
the grantor’s death (or the section 2032alternate valuation date, if applicable),necessary to yield that annual annuity,unitrust, or other payment without reduc-ing or invading principal. This portion isdetermined by using the section 7520 in-terest rate in effect on the decedent’s dateof death (or on the alternate valuation date,if applicable). The IRS has interpretedretained annuity interests under section2036 in this manner since the enactment ofthis section in 1916. See Regulations 37(revised, 1919), Article 24 at 22 (RevenueAct of 1918) or Treasury Department,Treasury Decisions under Internal Rev-enue Law of the United States, Vol. 21(Jan.-Dec., 1919), T.D. 2910, Art. 24 at771; Regulations 37 (revised, January,1921), Article 24 at 20 (Revenue Act of1918) or Treasury Department, TreasuryDecisions under Internal Revenue Lawof the United States, Vol. 23 (Jan.-Dec.,1921), T.D. 3145, Art. 24 at 299; Reg-ulations 63 (1922 Edition), Article 20 at21 (Revenue Act of 1921) or TreasuryDepartment, Treasury Decisions under In-ternal Revenue Law of the United States,Vol. 24 (Jan.-Dec., 1922), T.D. 3384, Art.20 at 1057; Regulations 68 (1924 Edition),Article 18 at 27 (Revenue Act of 1924) orTreasury Department, Treasury Decisionsunder Internal Revenue Law of the UnitedStates, Vol. 27 (Jan.-Dec., 1925), T.D.3683, Art. 18 at 107; Regulations 70 (1926Edition), Article 18 at 25 (Revenue Act of1926) or Treasury Department, TreasuryDecisions under Internal Revenue Lawof the United States, Vol. 28 (Jan.-Dec.,1926), T.D. 3918, Art. 18 at 451; andRegulations 70 (1929 Edition), Article18 at 27–28 (Revenue Act of 1926). TheIRS confirmed this interpretation in Rev.Rul. 76–273 and Rev. Rul. 82–105. Al-though this guidance predates the adventof GRATs and GRUTs, the analysis andholdings of this guidance consistently hasbeen applied to GRATs, GRUTs, and sim-ilar trust arrangements.
Pooled Income Funds
A commentator requested that the regu-lations be expanded to discuss their impacton both newer (under three years old) andmore mature (over three years old) pooledincome funds. The age of the fund deter-mines the formula to be used to determinethe fund’s rate of return, and thus the value
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of the charitable gift: funds that are at leastthree years old use the highest of the threelast taxable years’ rates of return; fundsthat are less than three years old generallyuse the highest of the three calendar-yearannual averages of the section 7520 ratesminus 1 percent. See §1.642(c)–6(e)(3)and (4). This distinction based on the du-ration of the fund, however, is not relevantfor purposes of determining the amount in-cluded in the transferor’s gross estate un-der section 2036 because the retained in-terest is the right to all of the income,thus mandating the inclusion of the entireshare of the fund’s corpus attributable tothe transferor. A pooled income fund ex-ample has been added to the final regula-tions as Example 5 in §20.2036–1(c)(2).
Remainder Interest in Personal Residencesand Farms
A commentator requested that theregulations be expanded to discuss theestate tax implications for charitable giftsof remainder interests in personal resi-dences and farms. The calculation of thecharitable deduction is beyond the scopeof these final regulations. Example 2of §20.2036–1(c)(1), however, has beenadded in the final regulations to confirmthat, if the transferor transferred a personalresidence to a third person while retainingthe right to use the personal residence forlife or for a term of years, and if the trans-feror died during that term, the fair marketvalue of the residence on the date of deathis includible in the transferor’s gross estateunder section 2036.
Alternate Valuation Date
A commentator questioned whether theproposed regulations imply that the por-tion of the trust includible in the grantor’sgross estate when the estate has made asection 2032 election is to be determinedwith reference to the section 7520 rate ineffect on the alternate valuation date. Thecommentator has requested an explanationof why the change in the section 7520 rateis not a change in value due only to themere lapse of time under §20.2032–1(f).
When a section 2032 election is made,the section 7520 interest rate (but not themortality factor) on the alternate valuationdate is used to determine the portion oftrust corpus includible in the grantor’s
gross estate under section 2036. The sec-tion 7520 interest rate reflects changes dueto market conditions, which is permittedunder section 2032. Mortality factors arenot necessary to determine the portionof trust corpus includible in the grantor’sgross estate under section 2036 becauseunder section 2036 the dispositive factoris whether the interest was retained for therequisite statutory period, not the lengthof the period remaining at the transferor’sdeath. See §20.2032–1(f) in cases wherethe mortality factor is applicable and thealternate valuation method under section2032 is elected.
Alternate Valuation Date Example
A commentator requested an ex-ample that illustrates how the rules of§20.2032–1(d) affect the trust’s value andhow required annuity payments made afterthe date of death but before the alternatevaluation date affect the estate inclusioncomputation. Any such example, whichwould properly belong in the regulationsunder section 2032, is beyond the scope ofthese final regulations.
Examples of CRAT and CRUT for a Termof Years
A commentator requested that the reg-ulation be expanded to include examplesor a discussion of the estate tax implica-tions for a donor who creates a CRAT ora CRUT for a term of years. In responseto this comment, Examples 1 and 3 of§20.2036–1(c)(2) are amended in the finalregulations to provide that, if the grantorinstead had retained an interest in a CRATor a CRUT for a term of years and had diedduring the term, the inclusion under sec-tion 2036 would be the same as when thegrantor retained an interest for life in theCRAT or CRUT.
Graduated GRAT Example
A commentator requested that exam-ples be provided that address a GRAT fromwhich the grantor receives increasing an-nuity payments. The commentator sug-gested two alternative methods for valuingthe annuity and requested that the IRS pro-vide guidance on the appropriate method.The IRS and Treasury Department agreethat such an example would be helpful and
appropriate but believe the issue requiresfurther consideration.
Example illustrating Proposed§20.2036–1(c)(1)
A commentator recommended that theexample found in §20.2036–1(c)(1)(ii)illustrating the provisions of§20.2036–1(c)(1)(i) be changed by re-placing the reference to D’s spouse (E),with D’s child (C), to avoid complicationswith section 2523. The commentator alsoexplained that, even if D dies before E, Dhas a right at death to more than one-halfof trust income because D has the right tothe entire trust income in the event E diesbefore D. The IRS and Treasury Depart-ment agree that this example should beprovided in the regulations under section2036, but believe the issue requires furtherconsideration.
Proposed Title for §20.2036–1(c)(2)
A commentator suggested that the titleof proposed regulation §20.2036–1(c)(2)be changed to “Retained annuity, unitrust,and other income interests in trusts.” Thiscomment is adopted because this regula-tion addresses retained interests in trust in-come and corpus.
Examples 1 and 3 of Proposed§20.2036–1(c)(2)
A commentator recommended that Ex-amples 1 and 3 of proposed regulation§20.2036–1(c)(2) state that, if D’s execu-tor elects to use the alternate valuation dateand also elects to use the interest rate com-ponent for either of the two months preced-ing the alternate valuation date, then un-der §1.664–2(c) of the Income Tax Regula-tions, the section 7520 rate and the mortal-ity table for that month should be used forpurposes of determining: (1) the portionof trust corpus includible in D’s estate; (2)the value of C’s continuing annuity inter-est; and (3) the charitable deduction avail-able for the portion of the CRAT includedin D’s estate.
The choice as to the monthly interestrate to be used to determine the portionof trust corpus includible in D’s estateand the value of C’s continuing annuityinterest present no issues under section2036, and are addressed by section 7520.
September 2, 2008 457 2008–35 I.R.B.
Mortality factors, however, generally arenot necessary to determine the portionof trust corpus includible in the grantor’sgross estate under section 2036. In caseswhere a mortality factor is applicable andthe alternate valuation method under sec-tion 2032 is elected, taxpayers are directedto §20.2032–1(f). The calculation of thecharitable deduction is beyond the scopeof these regulations. Accordingly, theissues raised in this comment will not beaddressed in these final regulations.
Example 1 of Proposed §20.2036–1(c)(2)
A commentator had several com-ments with respect to this example. Thecommentator pointed out that the trustin the example fails the 10 percent re-mainder requirement set forth in section664(d)(1)(D). In response, Example 1 hasbeen modified in the final regulations sothat the trust meets this requirement.
Second, the commentator concludedthat the charitable deduction of $30,024.80arrived at in the example would be cor-rect only if it is assumed that the annuitypayments to C were paid entirely from theportion of the trust that is includible in D’sgross estate. The commentator suggestedthat there is no basis for this assumption,and that C’s annuity payments are madefrom the trust as a whole and should beallocated between the included and ex-cluded portion of the trust in proportionto the relative values of each. This ap-proach results in a charitable deduction of$86,683 ($200,000 reduced by two-thirdsof the value of C’s annuity). In response,it has been determined that it is beyond thescope of the final regulations to addressthe calculation of the charitable deduction.Accordingly, the charitable deduction cal-culations in Example 1 and Example 3of §20.2036–1(c)(2) have been removedfrom the final regulations.
The commentator requested that theregulations include a statement that, ifan inter vivos CRAT is properly formedand subsequently included in the grantor’sgross estate, the requirements under sec-tion 664(d) for qualification as a CRAT donot need to be retested at the time of thegrantor’s death for purposes of determin-ing whether the grantor’s estate is entitledto a charitable deduction for the value ofthe remainder interest in the CRAT. This
issue is governed by section 664 and isbeyond the scope of the final regulations.
Finally, the commentator suggestedthat Example 1 be expanded to include aright retained by D to revoke C’s annuityinterest or to change the identity of thecharitable remainderman and to confirmthe impact of these retained powers onthe charitable deduction. Example 1 in§20.2036–1(c)(2) is expanded in the finalregulations to include the scenario that Dmay revoke C’s annuity interest or changethe identity of the charitable remainder-man. The example cites to section 2038for the inclusion of property in the grossestate on account of such retained powers.
Example 2 of Proposed §20.2036–1(c)(2)
A commentator suggested that the sen-tence, “No additional contributions weremade to the Trust after D’s transfer atthe creation of the Trust” be removed orchanged to reflect that no additional con-tributions may be made to a GRAT. Inresponse, the final regulations adopt thiscomment.
A commentator suggested that the ex-ample address the amount includible in D’sgross estate when the trust is payable to D’sestate after D’s death. In response, Exam-ple 2 of §20.2036–1(c)(2) is modified inthe final regulations to provide that the por-tion of trust corpus includible in D’s estateunder section 2036 is that portion neces-sary to support D’s retained interest at themoment before D’s death (calculated as di-rected in the example). Thus, it is not ma-terial whether annuity payments are madeto D’s estate after D’s death.
Effect on Other Documents
The following documents are obsoleteas of July 14, 2008.
It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations and,
because these regulations do not imposeon small entities a collection of informa-tion requirement, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking preced-ing this regulation was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.
Drafting Information
The principal author of these regula-tions is Theresa M. Melchiorre, Office ofChief Counsel, IRS.
* * * * *
Adoption of Amendments to theRegulations
Accordingly, 26 CFR part 20 isamended as follows:
PART 20—ESTATE TAX; ESTATESOF DECEDENTS DYING AFTERAUGUST 16, 1954
Paragraph 1. The authority citation forpart 20 continues to read in part as follows:
(a) In general. A decedent’s gross es-tate includes under section 2036 the valueof any interest in property transferred bythe decedent after March 3, 1931, whetherin trust or otherwise, except to the extentthat the transfer was for an adequate andfull consideration in money or money’sworth (see §20.2043–1), if the decedent re-tained or reserved—
(1) For his life;(2) For any period not ascertainable
without reference to his death (if the trans-fer was made after June 6, 1932); or
2008–35 I.R.B. 458 September 2, 2008
(3) For any period which does not infact end before his death:
(i) The use, possession, right to income,or other enjoyment of the transferred prop-erty.
* * * * *(c) Retained or reserved interest—(1)
Amount included in gross estate—(i) Ingeneral. * * *
(ii) Examples. The application of para-graph (c)(1)(i) of this section is illustratedin the following examples:
Example 1. [Reserved].Example 2. D transferred D’s personal residence
to D’s child (C), but retained the right to use the resi-dence for a term of years. D dies during the term. AtD’s death, the fair market value of the personal resi-dence is includible in D’s gross estate under section2036(a)(1) because D retained the right to use the res-idence for a period that did not in fact end before D’sdeath.
(2) Retained annuity, unitrust, andother income interests in trusts—(i) Ingeneral. This paragraph (c)(2) applies toa grantor’s retained use of an asset heldin trust or a retained annuity, unitrust, orother interest in any trust (other than atrust constituting an employee benefit)including without limitation the following(collectively referred to in this paragraph(c)(2) as “trusts”): certain charitable re-mainder trusts (collectively CRTs) suchas a charitable remainder annuity trust(CRAT) within the meaning of section664(d)(1), a charitable remainder unitrust(CRUT) within the meaning of section664(d)(2) or (d)(3), and any charitableremainder trust that does not qualify un-der section 664(d), whether because theCRT was created prior to 1969, there wasa defect in the drafting of the CRT, therewas no intention to qualify the CRT forthe charitable deduction, or otherwise;other trusts established by a grantor (col-lectively GRTs) such as a grantor retainedannuity trust (GRAT) paying out a qual-ified annuity interest within the meaningof §25.2702–3(b) of this chapter, a grantorretained unitrust (GRUT) paying out aqualified unitrust interest within the mean-ing of §25.2702–3(c) of this chapter; andvarious other forms of grantor retainedincome trusts (GRITs) whether or not thegrantor’s retained interest is a qualifiedinterest as defined in section 2702(b),including without limitation a qualifiedpersonal residence trust (QPRT) within themeaning of §25.2702–5(c) of this chap-ter and a personal residence trust (PRT)
within the meaning of §25.2702–5(b) ofthis chapter. If a decedent transferredproperty into such a trust and retained orreserved the right to use such property,or the right to an annuity, unitrust, orother interest in such trust with respect tothe property decedent so transferred fordecedent’s life, any period not ascertain-able without reference to the decedent’sdeath, or for a period that does not in factend before the decedent’s death, then thedecedent’s right to use the property or theretained annuity, unitrust, or other inter-est (whether payable from income and/orprincipal) constitutes the retention of thepossession or enjoyment of, or the rightto the income from, the property for pur-poses of section 2036. The portion of thetrust’s corpus includible in the decedent’sgross estate for Federal estate tax purposesis that portion of the trust corpus neces-sary to provide the decedent’s retaineduse or retained annuity, unitrust, or otherpayment (without reducing or invadingprincipal) as determined in accordancewith §20.2031–7 (or §20.2031–7A, if ap-plicable). The portion of the trust’s corpusincludible in the decedent’s gross estateunder section 2036, however, shall notexceed the fair market value of the trust’scorpus at the decedent’s date of death.
(ii) Graduated retained interests. [Re-served].
(iii) Examples. The application of para-graphs (c)(2)(i) and (c)(2)(ii) of this sec-tion are illustrated in the following exam-ples:
Example 1. (i) Decedent (D) transferred $100,000to an inter vivos trust that qualifies as a CRAT undersection 664(d)(1). The trust agreement provides foran annuity of $7,500 to be paid each year to D for D’slife, then to D’s child (C) for C’s life, with the remain-der to be distributed upon the survivor’s death to N, acharitable organization described in sections 170(c),2055(a), and 2522(a). The annuity is payable to D orC, as the case may be, annually on each December31st. D dies in September 2006, survived by C whowas then age 40. On D’s death, the value of the trustassets was $300,000 and the section 7520 interest ratewas 6 percent. D’s executor does not elect to use thealternate valuation date.
(ii) The amount of corpus with respect to which Dretained the right to the income, and thus the amountincludible in D’s gross estate under section 2036, isthat amount of corpus necessary to yield the annualannuity payment to D (without reducing or invadingprincipal). In this case, the formula for determiningthe amount of corpus necessary to yield the annualannuity payment to D is: annual annuity / section7520 interest rate = amount includible under section2036. The amount of corpus necessary to yield theannual annuity is $7,500 / .06 = $125,000. There-
fore, $125,000 is includible in D’s gross estate undersection 2036(a)(1). (The result would be the sameif D had retained an interest in the CRAT for a termof years and had died during the term. The resultalso would be the same if D had irrevocably relin-quished D’s annuity interest less than 3 years prior toD’s death because of the application of section 2035.)If, instead, the trust agreement had provided that Dcould revoke C’s annuity interest or change the iden-tity of the charitable remainderman, see section 2038with regard to the portion of the trust to be included inthe gross estate on account of such a retained power torevoke. Under the facts presented, section 2039 doesnot apply to include any amount in D’s gross estate byreason of this retained annuity. See §20.2039–1(e).
Example 2. (i) D transferred $100,000 to a GRATin which D’s annuity is a qualified interest describedin section 2702(b). The trust agreement provides foran annuity of $12,000 per year to be paid to D for aterm of ten years or until D’s earlier death. The annu-ity amount is payable in twelve equal installments atthe end of each month. At the expiration of the termof years or on D’s earlier death, the remainder is to bedistributed to D’s child (C). D dies prior to the expi-ration of the ten-year term. On the date of D’s death,the value of the trust assets is $300,000 and the sec-tion 7520 interest rate is 6 percent. D’s executor doesnot elect to use the alternate valuation date.
(ii) The amount of corpus with respect to which Dretained the right to the income, and thus the amountincludible in D’s gross estate under section 2036, isthat amount of corpus necessary to yield the annualannuity payment to D (without reducing or invadingprincipal). In this case, the formula for determiningthe amount of corpus necessary to yield the annualannuity payment to D is: annual annuity (adjustedfor monthly payments) / section 7520 interest rate =amount includible under section 2036. The Table Kadjustment factor for monthly annuity payments inthis case is 1.0272. Thus, the amount of corpus neces-sary to yield the annual annuity is ($12,000 x 1.0272)/ .06 = $205,440. Therefore, $205,440 is includiblein D’s gross estate under section 2036(a)(1). If, in-stead, the trust agreement had provided that the annu-ity was to be paid to D during D’s life and to D’s estatefor the balance of the 10-year term if D died duringthat term, then the portion of trust corpus includiblein D’s gross estate would still be as calculated in thisparagraph. It is not material whether payments aremade to D’s estate after D’s death. Under the factspresented, section 2039 does not apply to include anyamount in D’s gross estate by reason of this retainedannuity. See §20.2039–1(e).
Example 3. (i) In 2000, D created a CRUT withinthe meaning of section 664(d)(2). The trust instru-ment directs the trustee to hold, invest, and reinvestthe corpus of the trust and to pay to D for D’s life,and then to D’s child (C) for C’s life, in equal quar-terly installments payable at the end of each calendarquarter, an amount equal to 6 percent of the fair mar-ket value of the trust as valued on December 15 ofthe prior taxable year of the trust. At the terminationof the trust, the then-remaining corpus, together withany and all accrued income, is to be distributed to N, acharitable organization described in sections 170(c),2055(a), and 2522(a). D dies in 2006, survived by C,who was then age 55. The value of the trust assets onD’s death was $300,000. D’s executor does not electto use the alternate valuation date and, as a result, D’s
September 2, 2008 459 2008–35 I.R.B.
executor does not choose to use the section 7520 in-terest rate for either of the two months prior to D’sdeath.
(ii) The amount of the corpus with respect towhich D retained the right to the income, and thusthe amount includible in D’s gross estate under sec-tion 2036(a)(1), is that amount of corpus necessaryto yield the unitrust payments. In this case, suchamount of corpus is determined by dividing thetrust’s equivalent income interest rate by the section7520 rate (which was 6 percent at the time of D’sdeath). The equivalent income interest rate is deter-mined by dividing the trust’s adjusted payout rate bythe excess of 1 over the adjusted payout rate. Basedon §1.664–4(e)(3) of this chapter, the appropriateadjusted payout rate for the trust at D’s death is 5.786percent (6 percent x .964365). Thus, the equivalentincome interest rate is 6.141 percent (5.786 percent/ (1 - 5.786 percent)). The ratio of the equivalentinterest rate to the assumed interest rate under section7520 is 102.35 percent (6.141 percent / 6 percent).Because this exceeds 100 percent, D’s retained pay-out interest exceeds a full income interest in the trust,and D effectively retained the income from all theassets transferred to the trust. Accordingly, becauseD retained for life an interest at least equal to theright to all income from all the property transferredby D to the CRUT, the entire value of the corpusof the CRUT is includible in D’s gross estate undersection 2036(a)(1). (The result would be the same ifD had retained, instead, an interest in the CRUT fora term of years and had died during the term.) Underthe facts presented, section 2039 does not apply toinclude any amount in D’s gross estate by reason ofD’s retained unitrust interest. See §20.2039–1(e).
(iii) If, instead, D had retained the right to a uni-trust amount having an adjusted payout for whichthe corresponding equivalent interest rate would havebeen less than the 6 percent assumed interest rate ofsection 7520, then a correspondingly reduced propor-tion of the trust corpus would be includible in D’sgross estate under section 2036(a)(1). Alternatively,if the interest retained by D was instead only one-halfof the 6 percent unitrust interest, then the amount in-cluded in D’s estate would be the amount needed toproduce a 3 percent unitrust interest. All of the resultsin this Example 3 would be the same if the trust hadbeen a GRUT instead of a CRUT.
Example 4. During life, D established a 15-yearGRIT for the benefit of individuals who are notmembers of D’s family within the meaning of section2704(c)(2). D retained the right to receive all of thenet income from the GRIT, payable annually, duringthe GRIT’s term. D dies during the GRIT’s term. D’sexecutor does not elect to use the alternate valuationdate. In this case, the GRIT’s corpus is includible inD’s gross estate under section 2036(a)(1) because Dretained the right to receive all of the income fromthe GRIT for a period that did not in fact end beforeD’s death. If, instead, D had retained the right toreceive 60 percent of the GRIT’s net income, then60 percent of the GRIT’s corpus would have beenincludible in D’s gross estate under section 2036.Under the facts presented, section 2039 does notapply to include any amount in D’s gross estate byreason of D’s retained interest. See §20.2039–1(e).
Example 5. In 2003, D transferred $10X to apooled income fund that conforms to Rev. Proc.88–53,1988–2 C.B. 712 (1988) in exchange for 1 unit
in the fund. D is to receive all of the income fromthat 1 unit during D’s life. Upon D’s death, D’s child(C), is to receive D’s income interest for C’s life. In2008, D dies. D’s executor does not elect to use thealternate valuation date. In this case, the fair marketvalue of D’s 1 unit in the pooled income fund is in-cludible in D’s gross estate under section 2036(a)(1)because D retained the right to receive all of theincome from that unit for a period that did not in factend before D’s death. See §601.601(d)(2)(ii)(b) ofthis chapter.
Example 6. D transferred D’s personal residenceto a trust that met the requirements of a qualifiedpersonal residence trust (QPRT) as set forth in§25.2702–5(c) of this chapter. Pursuant to the termsof the QPRT, D retained the right to use the residencefor 10 years or until D’s prior death. D dies beforethe end of the term. D’s executor does not elect touse the alternate valuation date. In this case, the fairmarket value of the QPRT’s assets on the date of D’sdeath are includible in D’s gross estate under section2036(a)(1) because D retained the right to use theresidence for a period that did not in fact end beforeD’s death.
(3) Effective/applicability dates. Para-graphs (a) and (c)(1)(i) of this section areapplicable to the estates of decedents dy-ing after August 16, 1954. Paragraphs(c)(1)(ii) and (c)(2) of this section apply tothe estates of decedents dying on or afterJuly 14, 2008.
Par. 3. Section 20.2039–1 is amendedby:
1. Revising paragraph (a).2. Adding new paragraphs (e) and (f).The revision and addition reads as fol-
lows:
§20.2039–1 Annuities.
(a) In general. A decedent’s gross es-tate includes under section 2039(a) and(b) the value of an annuity or other pay-ment receivable by any beneficiary by rea-son of surviving the decedent under cer-tain agreements or plans to the extent thatthe value of the annuity or other paymentis attributable to contributions made bythe decedent or his employer. Sections2039(a) and (b), however, have no ap-plication to an amount which constitutesthe proceeds of insurance under a policyon the decedent’s life. Paragraph (b) ofthis section describes the agreements orplans to which section 2039(a) and (b) ap-plies; paragraph (c) of this section providesrules for determining the amount includi-ble in the decedent’s gross estate; para-graph (d) of this section distinguishes pro-ceeds of life insurance; and paragraph (e)of this section distinguishes annuity, uni-trust, and other interests retained by a dece-
dent in certain trusts. The fact that anannuity or other payment is not includi-ble in a decedent’s gross estate under sec-tion 2039(a) and (b) does not mean that itis not includible under some other sectionof part III of subchapter A of chapter 11.However, see section 2039(c) and (d) and§20.2039–2 for rules relating to the exclu-sion from a decedent’s gross estate of an-nuities and other payments under certain“qualified plans.” Further, the fact that anannuity or other payment may be includi-ble under section 2039(a) will not precludethe application of another section of chap-ter 11 with regard to that interest. For an-nuity interests in trust, see paragraph (e)(1)of this section.
* * * * *(e) No application to certain trusts.
Section 2039 shall not be applied to in-clude in a decedent’s gross estate all orany portion of a trust (other than a trustconstituting an employee benefit, but in-cluding those described in the followingsentence) if the decedent retained a rightto use property of the trust or retained anannuity, unitrust, or other interest in thetrust, in either case as described in section2036. Such trusts include without limita-tion the following (collectively referred toin this paragraph (e) as “trusts”): certaincharitable remainder trusts (collectivelyCRTs) such as a charitable remainder an-nuity trust (CRAT) within the meaning ofsection 664(d)(1), a charitable remainderunitrust (CRUT) within the meaning ofsection 664(d)(2) or (d)(3), and any othercharitable remainder trust that does notqualify under section 664(d), whether be-cause the CRT was created prior to 1969,there was a defect in the drafting of theCRT, there was no intention to qualify theCRT for the charitable deduction, or other-wise; other trusts established by a grantor(collectively GRTs) such as a grantor re-tained annuity trust (GRAT) paying out aqualified annuity interest within the mean-ing of §25.2702–3(b) of this chapter, agrantor retained unitrust (GRUT) payingout a qualified unitrust interest within themeaning of §25.2702–3(c) of this chap-ter; and various forms of grantor retainedincome trusts (GRITs) whether or not thegrantor’s retained interest is a qualifiedinterest as defined in section 2702(b),including without limitation a qualifiedpersonal residence trust (QPRT) within the
2008–35 I.R.B. 460 September 2, 2008
meaning of §25.2702–5(c) of this chap-ter and a personal residence trust (PRT)within the meaning of §25.2702–5(b) ofthis chapter. For purposes of determin-ing the extent to which a retained interestcauses all or a portion of a trust to beincluded in a decedent’s gross estate, see§20.2036–1(c)(1), (2), and (3).
(f) Effective/applicability dates. Thefirst, second, and fourth sentences in para-graph (a) of this section are applicable tothe estates of decedents dying after August16, 1954. The fifth sentence of paragraph(a) of this section is applicable to the es-tates of decedents dying on or after Octo-ber 27, 1972, and to the estates of dece-dents for which the period for filing a claimfor credit or refund of an estate tax over-
payment ends on or after October 27, 1972.The third, sixth, and seventh sentences ofparagraph (a) and all of paragraph (e) ofthis section are applicable to the estates ofdecedents dying on or after July 14, 2008.
Linda E. Stiff,Deputy Commissioner forServices and Enforcement.
Approved July 4, 2008.
Eric Solomon,Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 11, 2008,8:45 a.m., and published in the issue of the Federal Registerfor July 14, 2008, 73 F.R. 40173)
Final regulations provide guidance on the portionof property transferred to a trust or otherwise, thatis properly includible in a grantor’s gross estate un-der Internal Revenue Code (Code) sections 2036 and2039 if the grantor has retained the use of the prop-erty or the right to an annuity, unitrust, or other pay-ment from such property for life, for any period notascertainable without reference to the grantor’s death,or for a period that does not in fact end before thegrantor’s death. See T.D. 9414, page 454.
September 2, 2008 461 2008–35 I.R.B.
Part III. Administrative, Procedural, and MiscellaneousSection 475 Valuation SafeHarbor
Notice 2008–71
SECTION 1. PURPOSE
This notice requests comments with re-spect to possible expansion of § 1.475(a)–4of the Income Tax Regulations (safe harborvaluation regulations) so that financial in-stitutions headquartered outside the UnitedStates can qualify to make the election de-scribed in Treas. Reg. § 1.475(a)–4(b).
SECTION 2. BACKGROUND
On June 12, 2007, the Treasury De-partment and the Internal Revenue Ser-vice (Service) published the safe harborvaluation regulations in the Federal Reg-ister (T.D. 9328, 2007–27 I.R.B. 1 [72 FR32172]). For dealers in securities and fordealers in commodities that elect to markto market under section 475(e), those reg-ulations provide an elective safe harbor forvaluations under section 475. Specifically,if an eligible taxpayer makes the safe har-bor election, the values of certain posi-tions that the taxpayer reports on an eli-gible financial statement in a manner con-sistent with the requirements of the safeharbor valuation regulations are treated asthose positions’ fair market values for pur-poses of section 475. See Treas. Reg.§ 1.475(a)–4(b).
Any tax regulatory regime that permitsuse of values from a financial statementfor tax purposes must ensure that the fi-nancial accounting regime’s standards thatare used by taxpayers are consistent withthe requirements of applicable sections ofthe Internal Revenue Code (Code) (in thiscase section 475). The safe harbor valu-ation regulations are based on the conclu-sion that use of financial statement valuesfor tax purposes is justified to the extentthat the taxpayer satisfies certain basic cri-teria:
1. The financial accounting methodused in the taxpayer’s financial state-ment must be sufficiently consistentwith what section 475 requires fortax purposes (and therefore is an“eligible method,” see Treas. Reg.§ 1.475(a)–4(d)).
2. The taxpayer’s financial statementmust have sufficient indicia of re-liability to ensure that the taxpayercarefully and consistently follows thefinancial accounting method beingused in the statement (and thereforeis an “applicable financial statement,”see Treas. Reg. § 1.475(a)–4(h)).
3. The taxpayer’s record keeping andrecord production must enable theService to verify that the values usedfor tax purposes were the same asthe values reported on the financialstatement; and, when the values to bereported on the tax return are requiredto incorporate adjustments to the rawvalues in the financial statement, thetaxpayer’s record keeping and recordproduction must enable the Service toreconcile the two sets of values.
See generally the preamble to T.D. 9328(discussing the broad policies underlyingthe particular requirements in the safe har-bor valuation regulations).
Some financial institutions that arechartered outside of the United Statesand are engaged in a trade or businesswithin the United States (internationallyheadquartered financial institutions) havecommented that certain of the require-ments set forth in the safe harbor valuationregulations prevent them from using thesafe harbor. The Treasury Department andthe Service are considering expanding theregulatory safe harbor if the basic crite-ria above are satisfied and are requestingcomments regarding that expansion.
Two definitions in the current regula-tions would need to be amended in orderto expand the safe harbor valuation regimepotentially to include internationally head-quartered financial institutions.
Internationally headquartered financialinstitutions generally prepare financialstatements in accordance with the Inter-national Financial Reporting Standards(“IFRS”). The definition of “eligiblemethod” (see Treas. Reg. § 1.475(a)–4(d))excludes non-U.S. GAAP accounting sys-tems by including only accounting meth-ods that determine value in accordancewith U.S. GAAP. Therefore, in order for
internationally headquartered financialinstitutions generally to be eligible to usethe safe harbor, the definition of eligiblemethod would have to be amended toinclude IFRS (or more specifically theversion of IFRS the U.S. Securities andExchange Commission (SEC) is consider-ing for adoption).
Second, internationally headquarteredfinancial institutions generally do notprepare financial statements that sat-isfy the current regulatory requirementsfor being an “applicable financial state-ment” (within the meaning of Treas. Reg.§ 1.475(a)–4(h)). The definition of “ap-plicable financial statement” requirespreparation of the statement in accordancewith U.S. GAAP and use of the state-ment in filings with the SEC or with anyagency of the Federal government otherthan the Service. Internationally head-quartered financial institutions generallyfile complete, non-U.S.-GAAP-based fi-nancial statements with a home countrysupervisor or market regulator, not witha Federal agency other than the Serviceas required by the safe harbor valuationregulations. Thus, the home country fi-nancial statement is not an “applicablefinancial statement.” Therefore, in orderfor internationally headquartered financialinstitutions generally to be eligible to usethe safe harbor, the definition of appli-cable financial statement would have tobe amended to include non-U.S.-GAAPfinancial statements filed with the insti-tution’s home country regulator or someother financial statement that is filed bythat taxpayer with other appropriate regu-latory authorities.
Expansion of the Safe Harbor ValuationRegulations to Include IFRS
The decision whether to expand thedefinition of “eligible method” to in-clude IFRS (or, more specifically, theversion of IFRS ultimately adopted bythe SEC) will be based on the criteriaidentified above that justify use of finan-cial statement values for tax purposes.The current regulatory definition of “el-igible method” attempts to ensure that afinancial statement may serve as the ba-sis of valuation for tax purposes only ifthe accounting method used in that state-
2008–35 I.R.B. 462 September 2, 2008
ment is sufficiently consistent with theaccounting method that section 475 re-quires for tax purposes. The definitionof “eligible method,” which requires thatan eligible method be a mark-to-marketmethod, recognizes that the central dif-ference between a mark-to-market anda realization accounting method is that,under the former but not under the latter,the taxpayer’s income statement currentlyaccounts for unrealized changes in value.Moreover, in crafting the current safeharbor the Treasury Department and theService “concluded that the requirementsand limitations of the safe harbor ensuresufficient consistency when applied to fi-nancial statements prepared according toU.S. GAAP. This conclusion is less clearwhen the requirements and limitations areapplied to financial statements preparedunder other accounting regimes.” T.D.9328, 2007–27 I.R.B. 1, 5 [72 FR 32172,32176].
The Treasury Department and the Ser-vice continue to evaluate the issue ofwhether to expand the definition of “el-igible method” to include IFRS and aretherefore interested in comments on thedifferences between U.S. GAAP valuationstandards and those in IFRS, especiallydifferences between mark-to-market val-uation under IFRS and under U.S. GAAP(including whether IFRS permits vol-untary adoption of alternative valuationstandards).
Understanding these differences is nec-essary in evaluating whether any IFRSstandards are sufficiently consistent bothwith the three criteria described abovethat underlie the safe harbor and with thepolicies of other sections of the Code andthe Regulations (e.g., section 861 andTreas. Reg. § 1.882–5) that rely on assetvalues determined under section 475. Forexample, if a financial accounting methodarrives at a value by including fundingcosts (including any management alloca-tion of expenses) or permits those costs tobe taken into account pursuant to a vol-untary convention, allowing that methodmight significantly erode the policies ofother sections of the Code and the Regu-lations.
Expansion of “Applicable FinancialStatement”
The decision whether to expand the def-inition of “applicable financial statement”likewise will be based on the criteria iden-tified above that justify the use of financialstatement values for tax purposes. Manyinternationally headquartered financial in-stitutions file a U.S. GAAP-based balancesheet (a “call report”) with a United Statesbank regulator. Some commentators haveurged that this financial statement be per-mitted to be an “applicable financial state-ment’ to the extent that the other require-ments of the regulations are satisfied. Thispartial financial statement does not satisfythe current regulatory requirements of thesafe harbor. In particular, this partial fi-nancial statement does not contain an in-come statement and, as a result, changesin the values of the taxpayer’s positions arenot currently reflected in income. The par-tial financial statement, therefore, does notemploy an “eligible method,” and so thevalues reported on that partial statementare not eligible to be used in the safe har-bor. It has been suggested, however, thatwhen a taxpayer files a U.S. GAAP-basedcall report with a U.S. bank regulator andthe values on the call report correspond tothe values on the taxpayer’s home countryIFRS-based financial statements that in-clude an income statement, these circum-stances should nevertheless satisfy the def-inition of an “applicable financial state-ment” to the extent that the other require-ments of the regulations are satisfied.
This suggestion raises the questionwhether the basic criteria described abovewould be satisfied by the combination of acall report filed with a U.S. regulator andthe reporting party’s home country incomestatement. In order for this to be the case,the mark-to-market method in the homecountry income statement would have tobe an eligible method and the filing witha U.S. regulator would have to give thestatement sufficient indicia of reliabil-ity that the financial accounting methodis being carefully and consistently fol-lowed. In expressing uncertainty whethernon-U.S.-GAAP financial statements sat-isfy the criteria underlying the regulations,the preamble to the final regulations askeda number of questions to solicit publiccomment. T.D. 9328, 2007–27 I.R.B. at 5[72 FR at 32176]. The Treasury Depart-
ment and the Service continue to welcomeanswers to those questions.
SECTION 3. REQUEST FORCOMMENTS
In particular, to aid in the considerationof whether to expand the safe harbor val-uation regulations so that internationallyheadquartered financial institutions canmake the safe harbor valuation election,the Treasury Department and the Servicerequest answers to the following ques-tions:
1. If the existing regulatory require-ments discussed above were expandedto permit internationally headquar-tered financial institutions to makethe election described in Treas. Reg.§ 1.475(a)–4(b), are a significantnumber of these institutions likely tomake the election?
2. If the safe harbor were expanded toinclude circumstances where the val-ues reported in the U.S. call report ofa foreign bank are the same valuesthat are reported in a mark-to-marketincome statement filed in the bank’shome country, how will the Servicebe able to match the values used fortax purposes with those on the homecountry income statement?
3. What is the relationship between thecall report and the home-country in-come statement? Are there foreigncurrency translation considerationsbetween the two? How might thosebe resolved so that the Service caneffectively and efficiently audit therecords?
4. If the definition of “applicable finan-cial statement” is expanded, shouldthe applicable financial statement bethe one filed by the foreign bank withits home country bank regulator ratherthan with a home country market reg-ulator (like the SEC)?
5. How, if at all, does mark-to-marketvaluation under IFRS take expensesinto account, including funding costsor any similar amount (e.g., cost ofcarry)?a. Does IFRS allow these amounts
to be taken into account pur-suant to a voluntary accountingconvention under any circum-stances?
September 2, 2008 463 2008–35 I.R.B.
b. What regulatory amendments,if any, should be considered ifthose costs are taken into account,keeping in mind the interactionof section 475 with other sectionsof the Code and Income Tax Reg-ulations (e.g., section 861 andTreas. Reg. § 1.882–5)?
6. In what circumstances is section 475relevant for other purposes of theCode and in what circumstances dothe policies of other sections of theCode and the Regulations that relyon asset values determined under sec-tion 475 (including those determinedpursuant to an election under Treas.Reg. § 1.475(a)–4(b)) require specialadjustment to the amount determinedunder section 475?
7. Should the definition of “eligiblemethod” go beyond the accountingmethods that the SEC has accepted?If so, what is an appropriate (andadministrable) framework for evalu-ating whether such a method complieswith the basic criteria outlined above?
SECTION 4. INSTRUCTIONS
Comments should be submitted on orbefore November 1, 2008, and shouldinclude a reference to Notice 2008–71.Send submissions to CC:PA:LPD:PR(Notice 2008–71), Room 5203, Inter-nal Revenue Service, P.O. Box 7604,Ben Franklin Station, Washington, D.C.20044. Submissions may be hand-de-livered Monday through Friday betweenthe hours of 8:00 a.m. and 4:00 p.m.to CC:PA:LPD:PR (Notice 2008–71),
Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC 20224, or sent electron-ically via the following email address:[email protected] include the notice number 2008–71in the subject line of any electroniccommunication. All materials submittedwill be available for public inspection andcopying.
DRAFTING INFORMATION
The principal author of this notice isSheila Ramaswamy of the Office of As-sociate Chief Counsel (International). Forfurther information regarding this no-tice, contact Sheila Ramaswamy at (202)622–3870 (not a toll-free call).
26 CFR 601.202: Closing agreements.
Rev. Proc. 2008–50
TABLE OF CONTENTS
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM
APPENDIX A: OPERATIONAL FAILURES AND CORRECTION METHODS.01 General rule.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-key employees. . . . . . . . . . . . . . . 495.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth in § 401(m)(2), or, for plan years
beginning on or before December 31, 2001, the multiple use test of § 401(m)(9). . . . . . . . . . . . . . . . . . . . . . . . . . . 495.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). . . . . . . 496.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan
.01 Purpose. This revenue procedureupdates the comprehensive system ofcorrection programs for sponsors of retire-ment plans that are intended to satisfy therequirements of § 401(a), 403(a), 403(b),408(k), or 408(p) of the Internal RevenueCode (the “Code”), but that have not metthese requirements for a period of time.This system, the Employee Plans Com-pliance Resolution System (“EPCRS”),permits Plan Sponsors to correct thesefailures and thereby continue to providetheir employees with retirement benefitson a tax-favored basis. The componentsof EPCRS are the Self-Correction Pro-gram (“SCP”), the Voluntary CorrectionProgram (“VCP”), and the Audit ClosingAgreement Program (“Audit CAP”).
.02 General principles underlyingEPCRS. EPCRS is based on the followinggeneral principles:
• Sponsors and other administrators ofeligible plans should be encouraged toestablish administrative practices andprocedures that ensure that these plansare operated properly in accordancewith the applicable requirements ofthe Code.
• Sponsors and other administrators ofeligible plans should satisfy the appli-cable plan document requirements ofthe Code.
• Sponsors and other administratorsshould make voluntary and timely cor-rection of any plan failures, whetherinvolving discrimination in favor ofhighly compensated employees, planoperations, the terms of the plan doc-ument, or adoption of a plan by anineligible employer. Timely and effi-cient correction protects participatingemployees by providing them withtheir expected retirement benefits, in-cluding favorable tax treatment.
• Voluntary compliance is promoted byproviding for limited fees for volun-tary corrections approved by the Ser-
vice, thereby reducing employers’ un-certainty regarding their potential taxliability and participants’ potential taxliability.
• Fees and sanctions should be grad-uated in a series of steps so thatthere is always an incentive to correctpromptly.
• Sanctions for plan failures identifiedon audit should be reasonable in lightof the nature, extent, and severity of theviolation.
• Administration of EPCRS should beconsistent and uniform.
• Sponsors should be able to rely on theavailability of EPCRS in taking correc-tive actions to maintain the tax-favoredstatus of their plans.
.03 Overview. EPCRS includes the fol-lowing basic elements:
• Self-correction (SCP). A Plan Sponsorthat has established compliance prac-tices and procedures may, at any timewithout paying any fee or sanction,correct insignificant Operational Fail-ures under a Qualified Plan, a 403(b)Plan, a SEP, or a SIMPLE IRA Plan,provided the SEP or SIMPLE IRAPlan is established and maintained ona document approved by the Service.In addition, in the case of a QualifiedPlan that is the subject of a favorabledetermination letter from the Serviceor in the case of a 403(b) Plan, the PlanSponsor generally may correct evensignificant Operational Failures with-out payment of any fee or sanction.
• Voluntary correction with Service ap-proval (VCP). A Plan Sponsor, at anytime before audit, may pay a limitedfee and receive the Service’s approvalfor correction of a Qualified Plan,403(b) Plan, SEP, or SIMPLE IRAPlan. Under VCP, there are specialprocedures for anonymous submis-sions and group submissions.
• Correction on audit (Audit CAP). If afailure (other than a failure correctedthrough SCP or VCP) is identified on
audit, the Plan Sponsor may correctthe failure and pay a sanction. Thesanction imposed will bear a reason-able relationship to the nature, extent,and severity of the failure, taking intoaccount the extent to which correctionoccurred before audit.
SECTION 2. EFFECT OF THISREVENUE PROCEDURE ONPROGRAMS
.01 Effect on programs. This revenueprocedure modifies and supersedes Rev.Proc. 2006–27, 2006–1 C.B. 945 (as mod-ified by Rev. Proc. 2007–49, 2007–30I.R.B. 141), which was the prior consoli-dated statement of the correction programsunder EPCRS. The modifications to Rev.Proc. 2006–27 that are reflected in thisrevenue procedure include:
• Expanding the definition of a planloan failure to include violations of§ 72(p)(2), regardless of whether theplan contains language relating to§ 72(p). (sections 4.01 and 6.07)
• Clarifying that in particular cases theService may decline to make availableone or more correction programs underEPCRS in the interest of sound tax ad-ministration. (section 4.01(5))
• Expanding the scope of the SCP by: (i)liberalizing the requirements for deter-mining whether there was substantialcompletion of correction as of the firstdate the plan or Plan Sponsor is consid-ered to be Under Examination and (ii)expanding the failures for which sam-ple correction methods are provided.(sections 4.05(2) and 9.04, AppendixA .05, and Appendix B 2.02)
• Expanding the correction method withrespect to elective deferrals to includecatch-up contributions under § 414(v)and plans that provide the opportunityfor an employee to designate all or aportion of elective deferrals as desig-nated Roth contributions. (AppendixA .05, and Appendix B 2.02)
2008–35 I.R.B. 468 September 2, 2008
• Expanding the correction method for afailure to include an eligible employeein a § 401(k) plan to include a situationin which elective deferral and after-taxemployee contribution elections arenot implemented by the employer orare implemented in a manner inconsis-tent with the plan’s terms. (AppendixA .05 and Appendix B 2.02)
• Revising the requirements for submit-ting a determination letter applicationwhen correcting certain QualificationFailures by plan amendment. (sections6.05, 10.08, and 11.01)
• Clarifying the scope of a compliancestatement issued when correcting cer-tain Qualification Failures by planamendment. (sections 6.05 and 10.08)
• Updating the definition of ExcessAmounts and providing correctionsfor Excess Amounts failures, includ-ing those resulting from the failureto satisfy the requirements of § 415.This update includes correction ruleslargely similar to the corrections thatwere at § 1.415–6(b)(6)(iii) of the In-come Tax Regulations (as it appearedin the April 1, 2007 edition of 26 CFRpart 1) prior to amendments made bythe recently finalized regulations un-der § 415, but with the amount placedin an unallocated account to be reallo-cated in lieu of employer contributionsother than elective deferrals. (sections5.01(3) and 6.06, and Appendix A .08)
• Updating the definition of FavorableLetter. (section 5.01(4))
• Adding a factor to be considered inthe determination of whether a correc-tion method is reasonable and appro-priate. The factor requires considera-tion of corrections of violations that aresimilar to the failure being addressedby other government agencies. In ap-propriate cases, for a failure that re-sults from either the employer havingceased to exist, the employer no longermaintaining the plan, or similar rea-sons, the permitted correction wouldbe to terminate the plan and distrib-ute plan assets to participants and ben-eficiaries in accordance with standardsand procedures substantially similar tothose set forth in section 2578.1 of theDepartment of Labor Regulations (re-lating to abandoned plans). (section6.02(2)(e)(ii) and Appendix A .09)
• Clarifying that the earnings adjustmentfor corrective contributions or distribu-tions is calculated from the date whenthe qualification failure occurred with-out regard to any extensions providedunder the Code. (section 6.02(4)(e))
• Clarifying that the earnings rate de-rived from the Department of Labor’sVFCP Online calculator may be usedto determine the earnings adjustmentapplied to corrective contributions,distributions, allocations, and reallo-cations if it is not feasible to make areasonable estimate of what the actualinvestment results would have been.(section 6.02(5)(a))
• Providing that if the total correctivedistribution due a participant or benefi-ciary is $75 or less, the Plan Sponsor isnot required to make the corrective dis-tribution if the reasonable direct costsof processing and delivering the distri-bution to the participant or beneficiarywould exceed the amount of the distri-bution. (section 6.02(5)(b))
• Providing that if the Plan Sponsor at-tempts to use the IRS’ Letter Forward-ing Program to locate participants andthe Service declines to implement theletter forwarding request, then the PlanSponsor will use alternate means tolocate missing participants. (section6.02(5)(d))
• Clarifying that if a Plan Sponsor ei-ther (i) wants a participant’s deemeddistribution to be reported on Form1099–R for the year of correction (in-stead of the year of the failure) or (ii)wants relief from reporting a partici-pant’s loan as a deemed distribution onForm 1099–R, then it must specificallyrequest such relief. (sections 6.07(1)and 6.07(2)(a))
• Clarifying the treatment of amountsimproperly distributed to participantsand beneficiaries under the plan whichare rolled over to IRAs, with respect tothe excise tax under § 4973. (sections6.03(4) and 6.09(5))
• Clarifying the circumstances underwhich a waiver of the excise tax un-der § 4974 would be considered underAudit CAP. (section 6.09(2))
• Expanding income and excise taxesthat the Service may exercise discre-tion to not pursue. (sections 6.09(5)and 6.09(6))
• Clarifying the scope of a compliancestatement issued with respect to certainnonamender failures. (sections 6.05and 10.08)
• Providing for new and expandedstreamlined application procedures forinterim nonamenders and the failureto implement optional law changestimely and other nonamenders, cer-tain SEP, SARSEP and SIMPLE IRAfailures, certain plan loan failures, Em-ployer Eligibility Failures, § 402(g)failures, § 401(a)(9) failures, and fail-ures that involve plan amendment inaccordance with Appendix B 2.07.(section 11.02, Appendix F)
• Reducing the compliance fee undercertain circumstances for a plan wherethe sole failure is the failure of partici-pant loans to comply with the require-ments of § 72(p)(2). (section 12.02(3))
• Clarifying that, in the case of a Quali-fication Failure that is intentional, thecompliance fee under VCP will be de-termined in accordance with section12.06. (section 12.06)
• Providing that Audit CAP provisionsapply if the Service identifies a partic-ipant loan that did not comply with therequirements of § 72(p)(2) (other thana loan failure that is corrected in ac-cordance with SCP or VCP) upon anEmployee Plans or Exempt Organiza-tions examination of a Qualified Planor 403(b) Plan. (sections 13.01 and14.01)
.02 Future enhancements. (1) Futureupdates. It is expected that the EPCRSrevenue procedure will continue to beupdated from time to time, including,as noted above, further improvements toEPCRS based on comments previouslyreceived. Thus, the Service and Trea-sury continue to invite further commentson how to improve EPCRS. Commentsshould be sent to:
(2) Section 401(k) automatic enroll-ment. Comments are requested for certainspecific issues under EPCRS. First, com-ments are requested regarding methods
September 2, 2008 469 2008–35 I.R.B.
to correct the failure to implement auto-matic enrollment with respect to electivedeferrals in a § 401(k) plan that has anautomatic enrollment provision, includinga § 401(k) plan that is designed to be aqualified automatic contribution arrange-ment within the meaning of § 401(k)(13),but no amounts were withheld from thecompensation of an employee who hasmade no election. Second, comments arerequested regarding methods to correctthe failure to timely provide a safe harbornotice under a plan designed to satisfy therequirements of § 401(k)(12), 401(k)(13),or 414(w).
(3) Designated Roth contributions.Comments are also specifically requestedon special issues relating to designatedRoth contributions. For example, com-ments are requested on whether, if a planfailed to implement a participant’s electionto have a designated Roth contributionmade on his or her behalf, but instead apre-tax elective deferral was made for theparticipant with the participant’s compen-sation reduced accordingly, would it bean appropriate correction of the failurefor the employer to ask the participantwhether correction should be made by atransfer of the contribution (with earnings)to a Roth account and inclusion of theamount so transferred in the participant’scompensation in the year of the transfer(instead of either (i) a similar transfer witha corrected W–2 for the year of the failureand the participant having to complete anamended return for the year of the failureor (ii) a similar transfer and inclusion ofthe amount so transferred in the partic-ipant’s compensation in the year of thetransfer, but with the employer to make agrossup payment to the participant to makethe participant whole for the resulting in-come tax). Comments are also requestedregarding cases in which a plan fails tonotify an employee of his or her right toelect designated Roth contributions, suchas whether the correction for the failuredescribed in the preceding sentence shouldalso be applied in this case or whethersome additional corrective contributionshould be required to reflect the possibilitythat a participant’s decision to make anelective deferral might be affected by the
availability of designated Roth contribu-tions. See also section .05(3) of AppendixA and Example 3 of Appendix B, section2.02(1)(b), for an illustration of correctionfor exclusion of otherwise eligible em-ployees from being able to make electivedeferrals, which applies without regardto whether the plan only permits pre-taxelective deferrals or whether the plan alsopermits designated Roth elective deferrals.
(4) Section 1101 of the Pension Pro-tection Act of 2006. (a) Section 1101of the Pension Protection Act of 2006(PPA ’06), Public Law 109–280 (120Stat. 780), grants the Secretary of theTreasury the full authority to establishand implement EPCRS and, among otherthings, instructs the Secretary to continueto update and improve EPCRS, givingspecial attention to the following: (1)increasing the awareness and knowledgeof small employers concerning theavailability and use of the program; (2)taking into account special concerns andcircumstances that small employers facewith respect to compliance and correctionof compliance failures; (3) extendingthe duration of the self-correction periodunder SCP for significant compliancefailures; (4) expanding the availability tocorrect insignificant compliance failuresunder SCP during audit; and (5) assuringthat any tax, penalty, or sanction that isimposed by reason of a compliance failureis not excessive and bears a reasonablerelationship to the nature, extent, andseverity of the failure.
(b) EPCRS has historically been struc-tured to achieve the general principles thatare described in section 1.02 of this rev-enue procedure. This revenue procedure,like the many predecessor revenue proce-dures1 that addressed correction of qualifi-cation failures, continues to include mod-ifications that are designed to make theEPCRS programs more accessible, partic-ularly with respect to small employers. Forexample, Appendix F has been substan-tially expanded to add additional failuresthat commonly occur in plans maintainedby small employers, and significantly re-duces the burden and cost to an employerof submitting under the VCP. Various otherchanges have been made that will provide
assurance to small employers and otherPlan Sponsors, including expansion of thestandard corrections in Appendices A andB (such as correction for abandoned plansand orphan contracts and further expan-sion of standard correction for qualifica-tion failures involving the operational fail-ure to extend elective deferrals to eligi-ble employees). In addition, eligibilityunder SCP has been expanded with re-spect to employers who discover failuresin their plans and have begun the correc-tion process. See section 2.01 for a morethorough list of changes made in this rev-enue procedure.
PART II. PROGRAM EFFECT ANDELIGIBILITY
SECTION 3. EFFECT OF EPCRS;RELIANCE
.01 Effect of EPCRS on retirementplans. For a Qualified Plan, a 403(b)Plan, a SEP, or a SIMPLE IRA Plan, if theeligibility requirements of section 4 aresatisfied and the Plan Sponsor corrects afailure in accordance with the applicablerequirements of SCP in section 7, VCPin sections 10 and 11, or Audit CAP insection 13, the Service will not treat theplan as failing to meet § 401(a), § 403(b),§ 408(k), or § 408(p), as applicable. Thus,for example, if the Plan Sponsor correctsa failure in accordance with the require-ments of this revenue procedure, the planwill not thereby be treated as failing tosatisfy § 401(a), § 403(b), § 408(k), or§ 408(p), as applicable, for purposes ofapplying § 3121(a)(5) (FICA taxes) and§ 3306(b)(5) (FUTA taxes).
.02 Compliance statement. If a PlanSponsor or Eligible Organization receivesa compliance statement under VCP, thecompliance statement is binding upon theService and the Plan Sponsor or EligibleOrganization as provided in section 10.09.
.03 Other taxes and penalties. See sec-tion 6.09 for rules relating to other taxesand penalties.
.04 Reliance. Taxpayers may rely onthis revenue procedure, including the reliefdescribed in section 3.01.
1 See: Rev. Proc. 92–89, 1992–2 C.B. 498; Rev. Proc. 93–36, 1993–2 C.B. 474; Rev. Proc. 94–16, 1994–1 C.B. 576 ; Rev. Proc. 94–62, 1994–2 C.B. 778; Rev. Proc. 95–24, 1995–1 C.B.694; Rev. Proc. 96–29, 1996–1 C.B. 693; Rev. Proc. 96–50, 1996–2 C.B. 370; Rev. Proc. 98–22, 1998–1 C.B. 723; Rev. Proc. 99–13, 1999–1 C.B. 409; Rev. Proc. 99–31, 1999–2 C.B.280; Rev. Proc. 2000–16, 2000–1 C.B. 518; Rev. Proc. 2001–17, 2001–1 C.B. 589; Rev. Proc. 2002–47, 2002–2 C.B. 133; Rev. Proc. 2003–44, 2003–1 C.B. 1051; Rev. Proc. 2006–27,2006–1 C.B. 945; Rev. Proc. 2007–49, 2007–30 I.R.B. 141.
2008–35 I.R.B. 470 September 2, 2008
SECTION 4. PROGRAM ELIGIBILITY
.01 EPCRS Programs. (1) SCP. SCPis available only for Operational Failures.Qualified Plans and 403(b) Plans are eligi-ble for SCP with respect to significant andinsignificant Operational Failures. SEPsand SIMPLE IRA Plans are eligible forSCP only with respect to insignificant Op-erational Failures.
(2) VCP. Qualified Plans, 403(b) Plans,SEPs, and SIMPLE IRA Plans are eligiblefor VCP. VCP provides general proce-dures for correction of all QualificationFailures: Operational, Plan Document,Demographic, and Employer Eligibility.VCP also provides general proceduresfor the correction of participant loans thatdid not comply with the requirements of§ 72(p)(2).
(3) Audit CAP. Unless otherwise pro-vided, Audit CAP is available for Qual-ified Plans, 403(b) Plans, SEPs, andSIMPLE IRA Plans for correction of allfailures found on examination that havenot been corrected in accordance withSCP or VCP. Audit CAP also providesgeneral procedures for the correction ofparticipant loans that did not comply withthe requirements of § 72(p)(2).
(4) Eligibility for other arrangements.The Service may extend EPCRS to otherarrangements.
(5) Appropriate use of programs. In aparticular case, the Service may declineto make available one or more correctionprograms under EPCRS in the interest ofsound tax administration.
.02 Effect of examination. If the plan orPlan Sponsor is Under Examination, VCPis not available and SCP is only availableas follows: while the plan or Plan Sponsoris Under Examination, insignificant Op-erational Failures can be corrected underSCP; and, if correction of significant oper-ational failures has been completed or sub-stantially completed (as described in sec-tion 9.04) before the plan or Plan Sponsoris Under Examination, correction of thosefailures can be completed under SCP.
.03 Favorable Letter requirement. Theprovisions of SCP relating to significantOperational Failures (see section 9) areavailable for a Qualified Plan only if theplan is the subject of a Favorable Letter.The provisions of SCP relating to insignif-icant Operational Failures (see section 8)are available for a SEP but only if the
plan document consists of either (i) a validModel Form 5305–SEP or 5305A–SEPadopted by an employer in accordancewith the instructions on the applicableform (see Rev. Proc. 2002–10, 2002–1C.B. 401) or (ii) a prototype SEP that hasa current favorable opinion letter whichhas been amended in accordance withthe procedures set forth in Rev. Proc.2002–10. The provisions of SCP relatingto insignificant Operational Failures (seesection 8) are available for a SIMPLEIRA Plan but only if the plan documentconsists of either (i) a valid Model Form5305–SIMPLE or 5304–SIMPLE adoptedby an employer in accordance with the in-structions on the applicable form (see Rev.Proc. 2002–10) or (ii) a current favorableopinion letter for a Plan Sponsor that hasadopted a prototype SIMPLE IRA Planwhich has been amended in accordancewith the procedures set forth in Rev. Proc.2002–10.
.04 Established practices and proce-dures. In order to be eligible for SCP, thePlan Sponsor or administrator of a planmust have established practices and pro-cedures (formal or informal) reasonablydesigned to promote and facilitate over-all compliance with applicable Code re-quirements. For example, the plan ad-ministrator of a Qualified Plan that maybe top-heavy under § 416 may include inits plan operating manual a specific an-nual step to determine whether the planis top-heavy and, if so, to ensure that theminimum contribution requirements of thetop-heavy rules are satisfied. A plan docu-ment alone does not constitute evidence ofestablished procedures. In order for a PlanSponsor or administrator to use SCP, theseestablished procedures must have been inplace and routinely followed, and an Oper-ational Failure must have occurred throughan oversight or mistake in applying them.In addition, SCP may also be used in sit-uations where the Operational Failure oc-curred because the procedures that werein place, while reasonable, were not suffi-cient to prevent the occurrence of the fail-ure. In the case of a failure that relates toTransferred Assets or to a plan assumed inconnection with a corporate merger, acqui-sition, or other similar employer transac-tion between the Plan Sponsor and spon-sor of the transferor plan or the prior PlanSponsor of an assumed plan, the plan isconsidered to have established practices
and procedures for the Transferred Assetsif such practices and procedures are ineffect for the Transferred Assets by theend of the first plan year that begins afterthe corporate merger, acquisition, or othersimilar transaction.
.05 Correction by plan amendment. (1)Availability of correction by plan amend-ment in VCP and Audit CAP. A Plan Spon-sor may use VCP and Audit CAP for aQualified Plan to correct Plan Document,Demographic, and Operational Failures bya plan amendment, including correcting anOperational Failure by plan amendment toconform the terms of the plan to the plan’sprior operations, provided that the amend-ment complies with the requirements of§ 401(a), including the requirements of§§ 401(a)(4), 410(b), and 411(d)(6). In ad-dition, a Plan Sponsor may adopt a planamendment to reflect the corrective action.For example, if the plan failed to satisfythe actual deferral percentage (ADP) testrequired under § 401(k)(3) and the PlanSponsor must make qualified nonelectivecontributions not already provided for un-der the plan, the plan may be amendedto provide for qualified nonelective con-tributions. Except as provided in section6.05, the issuance of a compliance state-ment does not constitute a determination asto the effect of any plan amendment on thequalification of the plan.
(2) Availability of correction by planamendment in SCP. A Plan Sponsor mayuse SCP for a Qualified Plan to correct anOperational Failure by a plan amendmentin order to conform the terms of the plan tothe plan’s prior operations only to correctOperational Failures listed in section 2.07of Appendix B. These failures must be cor-rected in accordance with the correctionmethods set forth in section 2.07 of Ap-pendix B. Any plan amendment must com-ply with the requirements of § 401(a), in-cluding the requirements of §§ 401(a)(4),410(b), and 411(d)(6). If a Plan Sponsorcorrects an Operational Failure in accor-dance with the approved correction meth-ods under Appendix A or Appendix B, itmay amend the plan to reflect the correc-tive action. For example, if the plan failedto satisfy the actual deferral percentage(ADP) test required under § 401(k)(3) andthe Plan Sponsor makes qualified nonelec-tive contributions not already provided forunder the plan, the plan may be amendedto provide for qualified nonelective contri-
September 2, 2008 471 2008–35 I.R.B.
butions. SCP is not otherwise available fora Plan Sponsor to correct an OperationalFailure by a plan amendment.
.06 Availability of correction of Em-ployer Eligibility Failure. SCP is not avail-able for a Plan Sponsor to correct an Em-ployer Eligibility Failure.
.07 Availability of correction of a ter-minated plan. Correction of QualificationFailures in a terminated plan may be madeunder VCP and Audit CAP, whether or notthe plan trust is still in existence.
.08 Availability of correction of an Or-phan Plan. An Orphan Plan that is termi-nating may be corrected under VCP andAudit CAP, provided that the party actingon behalf of the plan is an Eligible Party,as defined in section 5.03(2). See section6.02(2)(e)(ii).
.09 Availability of correction of § 457plans. Submissions relating to § 457(b) el-igible governmental plans will be acceptedby the Service on a provisional basis out-side of EPCRS through standards that aresimilar to EPCRS.
.10 Submission for a determination let-ter. In any case in which correction of aQualification Failure includes correctionof a Plan Document Failure, DemographicFailure, or Operational Failure by planamendment, a determination letter appli-cation may be required. See section 6.05.
.11 Egregious failures. SCP is notavailable to correct Operational Failuresthat are egregious. Egregious failures in-clude: (a) a plan that has consistently andimproperly covered only highly compen-sated employees; (b) a plan that providesmore favorable benefits for an owner ofthe employer based on a purported collec-tive bargaining agreement where there hasin fact been no good faith bargaining be-tween bona fide employee representativesand the employer (see Notice 2003–24,2003–1 C.B. 853, with respect to welfarebenefit funds); or (c) a defined contribu-tion plan where a contribution is madeon behalf of a highly compensated em-ployee that is several times greater thanthe dollar limit set forth in § 415(c). VCPis available to correct egregious failures.However, egregious failures are subject tothe VCP fees described in section 12.06and, for purposes of section 12.06, anegregious failure would include any casein which the IRS concludes that the partiescontrolling the plan recognized that theaction taken would constitute a Qualifica-
tion Failure and the failure either involvesa substantial number of participants orbeneficiaries or involves participants whoare predominantly highly compensatedemployees. Audit CAP also is available tocorrect egregious failures.
.12 Diversion or misuse of plan assets.SCP, VCP, and Audit CAP are not avail-able to correct failures relating to the di-version or misuse of plan assets.
.13 Abusive tax avoidance transactions.(1) Effect on Programs. (a) SCP. With re-spect to SCP, in the event that the plan orthe Plan Sponsor has been a party to anabusive tax avoidance transaction (as de-fined in section 4.13(2)), SCP is not avail-able to correct any Operational Failure thatis directly or indirectly related to the abu-sive tax avoidance transaction.
(b) VCP. With respect to VCP, if theService determines that a plan or PlanSponsor was, or may have been, a party toan abusive tax avoidance transaction (asdefined in section 4.13(2)), then the matterwill be referred to the Internal RevenueService’s Employee Plans’ Tax ShelterCoordinator. Upon receiving a responsefrom the Tax Shelter Coordinator, the Ser-vice may determine that the plan or thePlan Sponsor has been a party to an abu-sive tax avoidance transaction, and thatthe failures addressed in the VCP sub-mission are related to that transaction. Inthose situations, the Service will concludethe review of the submission without is-suing a compliance statement and willrefer the case for examination. However,if the Tax Shelter Coordinator determinesthat the plan failures are unrelated to theabusive tax avoidance transaction or thatno abusive tax avoidance transaction oc-curred, then the Service will continue toaddress the failures identified in the VCPsubmission, and may issue a compliancestatement with respect to those failures.In no event may a compliance statementbe relied on for the purpose of concludingthat the plan or Plan Sponsor was not aparty to an abusive tax avoidance transac-tion. In addition, even if it is concludedthat the failures can be addressed pursuantto a VCP submission, the Service reservesthe right to make a referral of the abusivetax avoidance transaction matter for ex-amination.
(c) Audit CAP and SCP (for plansUnder Examination). For plans Under Ex-amination, if the Service determines that
the plan or Plan Sponsor was, or may havebeen, a party to an abusive tax avoidancetransaction, the matter may be referred tothe Internal Revenue Service’s EmployeePlans’ Tax Shelter Coordinator. Withrespect to plans Under Examination, anabusive tax avoidance transaction includesa transaction described in section 4.13(2)and any other transaction that the Servicedetermines was designed to facilitate theimpermissible avoidance of tax. Uponreceiving a response from the Tax ShelterCoordinator, (i) if the Service determinesthat a failure is related to the abusivetax avoidance transaction, the Service re-serves the right to conclude that neitherAudit CAP nor SCP is available for thatfailure and (ii) if the Service determinesthat satisfactory corrective actions havenot been taken with regard to the trans-action, the Service reserves the right toconclude that neither Audit CAP nor SCPis available to the plan.
(2) Abusive tax avoidance transactiondefined. For purposes of section 4.13(1)(except to the extent otherwise provided insection 4.13(1)(c)), an abusive tax avoid-ance transaction means any listed transac-tion under § 1.6011–4(b)(2) and any othertransaction identified as an abusive trans-action in the IRS web site entitled “EPAbusive Tax Transactions.”
PART III. DEFINITIONS,CORRECTION PRINCIPLES,AND RULES OF GENERALAPPLICABILITY
SECTION 5. DEFINITIONS
The following definitions apply for pur-poses of this revenue procedure:
.01 Definitions for Qualified Plans. Thedefinitions in this section 5.01 apply toQualified Plans.
(1) Qualified Plan. The term “QualifiedPlan” means a plan intended to satisfy therequirements of § 401(a) or § 403(a).
(2) Qualification Failure. The term“Qualification Failure” means any failurethat adversely affects the qualification of aplan. There are four types of QualificationFailures: (a) Plan Document Failures; (b)Operational Failures; (c) DemographicFailures; and (d) Employer EligibilityFailures.
(a) Plan Document Failure. The term“Plan Document Failure” means a plan
2008–35 I.R.B. 472 September 2, 2008
provision (or the absence of a plan pro-vision) that, on its face, violates the re-quirements of § 401(a) or § 403(a). Thus,for example, the failure of a plan to beamended to reflect a new qualification re-quirement within the plan’s applicable re-medial amendment period under § 401(b)is a Plan Document Failure. In addition,if a plan has not been timely or prop-erly amended during an applicable reme-dial amendment period for adopting goodfaith or interim amendments with respectto disqualifying provisions, as described in§1.401(b)–1(b)(1) of the Income Tax Reg-ulations, the plan has a Plan DocumentFailure. For purposes of this revenue pro-cedure, a Plan Document Failure includesany Qualification Failure that is a violationof the requirements of § 401(a) or § 403(a)and that is not an Operational Failure, De-mographic Failure, or Employer Eligibil-ity Failure.
(b) Operational Failure. The term “Op-erational Failure” means a QualificationFailure (other than an Employer EligibilityFailure) that arises solely from the failureto follow plan provisions. A failure to fol-low the terms of the plan providing for thesatisfaction of the requirements of § 401(k)and § 401(m) is considered to be an Op-erational Failure. A plan does not havean Operational Failure to the extent theplan is permitted to be amended retroac-tively to reflect the plan’s operations (e.g.,pursuant to § 401(b)). In the situationwhere a Plan Sponsor timely adopted agood faith or interim amendment which isnot a disqualifying provision as describedin § 1.401(b)–1(b)(1), and the plan was notoperated in accordance with the terms ofsuch amendment, the plan is considered tohave an Operational Failure.
(c) Demographic Failure. The term“Demographic Failure” means a failureto satisfy the requirements of § 401(a)(4),401(a)(26), or 410(b) that is not an Oper-ational Failure or an Employer EligibilityFailure. The correction of a DemographicFailure generally requires a correctiveamendment to the plan adding morebenefits or increasing existing benefits(cf. § 1.401(a)(4)–11(g)).
(d) Employer Eligibility Failure. Theterm “Employer Eligibility Failure” meansthe adoption of a plan intended to includea qualified cash or deferred arrangement
under § 401(k) by an employer that fails tomeet the employer eligibility requirementsto establish a § 401(k) plan. An EmployerEligibility Failure is not a Plan Document,Operational, or Demographic Failure.
(3) Excess Amount; Excess Allocations;Overpayment. (a) Excess Amount. Theterm “Excess Amount” means a Qualifica-tion Failure due to a contribution, alloca-tion, or similar credit that is made on be-half of a participant or beneficiary to a planin excess of the maximum amount permit-ted to be contributed, allocated, or creditedon behalf of the participant or beneficiaryunder the terms of the plan or that exceedsa limitation on contributions or allocationsprovided in the Code or regulations. Ex-cess Amounts include: (i) an elective de-ferral or after-tax employee contributionthat is in excess of the maximum con-tribution under the plan; (ii) an electivedeferral or after-tax employee contribu-tion made in excess of the limitation under§ 415; (iii) an elective deferral in excessof the limitation of § 402(g); (iv) an ex-cess contribution or excess aggregate con-tribution under § 401(k) or § 401(m); (v)an elective deferral or after-tax employeecontribution that is made with respect tocompensation in excess of the limitationof § 401(a)(17); and (vi) any other em-ployer contribution that exceeds a limita-tion under § 401(a)(17), § 401(m) (but onlywith respect to the forfeiture of nonvestedmatching contributions that are excess ag-gregate contributions), § 411(a)(3)(G), or§ 415. However, an Excess Amount doesnot include a contribution, allocation, orother credit that is made pursuant to a cor-rection method provided under this rev-enue procedure for a different Qualifica-tion Failure. Excess Amounts are limitedto contributions, allocations, or annual ad-ditions under a defined contribution plan,after-tax employee contributions to a de-fined benefit plan, and contributions or al-locations that are to be made to a sepa-rate account (with actual earnings) undera defined benefit plan. See generally sec-tion 6.06 for the treatment and correctionof certain Excess Amounts.
(b) Excess Allocation. The term “Ex-cess Allocation” means an Excess Amountfor which the Code or regulations do notprovide any corrective mechanism. Ex-cess Allocations include Excess Amounts
as defined in section 5.01(3)(a) (i), (ii), (v),and (vi) (except with respect to § 401(m) or§ 411(a)(3)(G) violations). Excess Alloca-tions must be corrected in accordance withsection 6.06(2).
(c) Overpayment. The term “Overpay-ment” means a Qualification Failure dueto a payment being made to a participantor beneficiary that exceeds the amountpayable to the participant or beneficiaryunder the terms of the plan or that ex-ceeds a limitation provided in the Code orregulations. Overpayments include bothpayments from a defined benefit plan andpayments from a defined contribution plan(either not made from the participant’s orbeneficiary’s account under the plan ornot permitted to be paid either under theterms of the plan or under the Code orregulations). However, an Overpaymentdoes not include a payment that is madepursuant to a correction method providedunder this revenue procedure for a differ-ent Qualification Failure. Overpaymentsmust be corrected in accordance with sec-tion 6.06(3).
(4) Favorable Letter. The term “Favor-able Letter” means, in the case of a Qual-ified Plan, a current favorable determina-tion letter for an individually designed plan(including a volume submitter plan that isnot identical to an approved volume sub-mitter plan), a current favorable opinionletter for a Plan Sponsor that has adopteda master or prototype plan, (standardizedor nonstandardized), or a current favor-able advisory letter and certification thatthe Plan Sponsor has adopted a plan that isidentical to an approved volume submitterplan. A plan has a current favorable deter-mination letter, opinion letter, or advisoryletter if (a), (b), (c), or (d) below is satis-fied:
(a) The plan has a favorable determina-tion letter, opinion letter, or advisory let-ter that considers the law changes incorpo-rated in the Plan Sponsor’s most recentlyexpired remedial amendment cycle deter-mined under the provisions of Rev. Proc.2007–44.
(b) For plans with respect to whom theinitial remedial amendment cycle underRev. Proc. 2007–44 has not expired,the favorable determination letter, opin-
September 2, 2008 473 2008–35 I.R.B.
ion letter, or advisory letter that considersGUST.2
(c) The plan is initially adopted or ef-fective after December 31, 2001, and thePlan Sponsor timely submits an applica-tion for a determination letter or adopts anapproved master or prototype plan or vol-ume submitter plan within the plan’s reme-dial amendment period under § 401(b).
(d) The plan is terminated prior to theexpiration of the plan’s applicable reme-dial amendment cycle, determined underthe provisions of Rev. Proc. 2007–44 andthe plan was amended to reflect the provi-sions of any legislation that was in effectwhen the plan was terminated.
(5) Maximum Payment Amount. Theterm “Maximum Payment Amount”means a monetary amount that is approx-imately equal to the tax the Service couldcollect upon plan disqualification and isthe sum for the open taxable years of the:
(a) tax on the trust (Form 1041) (andany interest or penalties applicable to thetrust return),
(b) additional income tax resulting fromthe loss of employer deductions for plancontributions (and any interest or penaltiesapplicable to the Plan Sponsor’s return),
(c) additional income tax resulting fromincome inclusion for participants in theplan (Form 1040), including the tax onplan distributions that have been rolledover to other qualified trusts (as definedin § 402(c)(8)(A)) or eligible retirementplans (as defined in § 402(c)(8)(B)) andany interest or penalties applicable to theparticipants’ returns, and
(d) any other tax that results from aQualification Failure that would apply butfor correction under this revenue proce-dure.
(6) Plan Sponsor; Employer. The terms“Plan Sponsor” and “Employer” mean theemployer that establishes or maintains aQualified Plan for its employees.
(7) Transferred Assets. The term“Transferred Assets” means plan assetsthat were received, in connection witha corporate merger, acquisition, or othersimilar employer transaction, by the planin a transfer (including a merger or consol-idation of plan assets) under § 414(l) froma plan sponsored by an employer that wasnot a member of the same controlled group
as the Plan Sponsor immediately prior tothe corporate merger, acquisition, or othersimilar employer transaction. If a transferof plan assets related to the same employertransaction is accomplished through sev-eral transfers, then the date of the transferis the date of the first transfer.
.02 Definitions for 403(b) Plans. Thedefinitions in this section 5.02 apply to403(b) Plans.
(1) 403(b) Plan. The term “403(b)Plan” means a plan or program intendedto satisfy the requirements of § 403(b).
(2) 403(b) Failure. The term “403(b)Failure” means any Operational, Demo-graphic, or Employer Eligibility Failure asdefined below.
(a) Operational Failure. The term “Op-erational Failure” means any of the follow-ing:
(i) A failure to satisfy the requirementsof § 403(b)(12)(A)(ii) (relating to theavailability of salary reduction contribu-tions);
(ii) A failure to satisfy the requirementsof § 401(m) (as applied to 403(b) Planspursuant to § 403(b)(12)(A)(i));
(iii) A failure to satisfy the requirementsof § 401(a)(17) (as applied to 403(b) Planspursuant to § 403(b)(12)(A)(i));
(iv) A failure to satisfy the distributionrestrictions of § 403(b)(7) or § 403(b)(11);
(v) A failure to satisfy the incidentaldeath benefit rules of § 403(b)(10);
(vi) A failure to pay minimum requireddistributions under § 403(b)(10);
(vii) A failure to give employees theright to elect a direct rollover under§ 403(b)(10), including the failure to givemeaningful notice of such right;
(viii) A failure of the annuity contractor custodial agreement to provide partici-pants with a right to elect a direct rolloverunder §§ 403(b)(10) and 401(a)(31);
(ix) A failure to satisfy the limit on elec-tive deferrals under § 403(b)(1)(E);
(x) A failure of the annuity contract orcustodial agreement to provide the limiton elective deferrals under §§ 403(b)(1)(E)and 401(a)(30);
(xi) A failure involving contributions orallocations of Excess Amounts; or
(xii) Any other failure to satisfy appli-cable requirements under § 403(b) that (A)results in the loss of § 403(b) status for the
plan or the loss of § 403(b) status for one ormore custodial account(s) or annuity con-tract(s) under the plan and (B) is not a De-mographic Failure, an Employer Eligibil-ity Failure, or a failure related to contribu-tions on behalf of individuals who are notemployees of the employer.
(b) Demographic Failure. Theterm “Demographic Failure” means afailure to satisfy the requirements of§ 401(a)(4), § 401(a)(26), or § 410(b)(as applied to 403(b) Plans pursuant to§ 403(b)(12)(A)(i)).
(c) Employer Eligibility Failure. Theterm “Employer Eligibility Failure” meansany of the following:
(i) The adoption of a plan intended tosatisfy the requirements of § 403(b) by aPlan Sponsor that is not a tax-exempt or-ganization described in § 501(c)(3) or apublic educational organization describedin § 170(b)(1)(A)(ii);
(ii) A failure to satisfy the nontransfer-ability requirement of § 401(g);
(iii) A failure to initially establish ormaintain a custodial account as required by§ 403(b)(7); or
(iv) A failure to purchase (initially orsubsequently) either an annuity contractfrom an insurance company (unless grand-fathered under Rev. Rul. 82–102, 1982–1C.B. 62) or a custodial account from aregulated investment company utilizing abank or an approved non-bank trustee/cus-todian.
(3) Excess Amount. The term “ExcessAmount” means any amount returned toensure that the plan satisfies the require-ments of §§ 401(a)(30), 415, or 403(b)(2)(for plan years prior to January 1, 2002).In addition, the term “Excess Amount” in-cludes (for all plan years) any distribu-tions required to ensure that the plan com-plies with the applicable requirements of§ 403(b).
(4) Maximum Payment Amount. Theterm “Maximum Payment Amount”means a monetary amount that is approx-imately equal to the tax the Service couldcollect as a result of the 403(b) Failure andis the sum for the open taxable years ofthe:
(a) additional income tax resulting fromincome inclusion for employees or otherparticipants (Form 1040), including the
2 GUST is an acronym for the Uruguay Round Agreements Act (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the Small Business JobProtection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA ’97), the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA ’98), and the Community RenewalTax Relief Act of 2000 (CRA).
2008–35 I.R.B. 474 September 2, 2008
tax on distributions that have been rolledover to other qualified trusts (as definedin § 402(c)(8)(A)) or eligible retirementplans (as defined in § 402(c)(8)(B)) andany interest or penalties applicable to theparticipants’ returns, and
(b) any other tax that results from a403(b) Failure that would apply but forcorrection under this revenue procedure.
(5) Plan Sponsor; Employer. The terms“Plan Sponsor” and “Employer” mean theemployer that offers a 403(b) Plan to itsemployees.
.03 Definitions for Orphan Plans. (1)Orphan Plan. With respect to VCP andAudit CAP, the term “Orphan Plan” meansany Qualified Plan or other plan with re-spect to which an “Eligible Party” (de-fined in section 5.03(2)) has determinedthat the Plan Sponsor (a) no longer ex-ists, (b) cannot be located, or (c) is unableto maintain the plan. However, the term“Orphan Plan” does not include any planwhich is subject to Title I of the EmployeeRetirement Income Security Act of 1974(“ERISA”) terminated pursuant to section2578.1 of the Department of Labor regu-lations governing the termination of aban-doned individual account plans.
(2) Eligible Party. The term “EligibleParty” means:
(a) A court appointed representativewith authority to terminate the plan anddispose of the plan’s assets;
(b) In the case of an Orphan Plan un-der investigation by the Department of La-bor, a person or entity who the Departmentof Labor determined has accepted respon-sibility for terminating the plan and dis-tributing the plan’s assets; or
(c) In the case of a Qualified Plan towhich Title I of ERISA has never applied,a surviving spouse who is the sole bene-ficiary of a plan that provided benefits toa participant who was (i) the sole ownerof the business that sponsored the plan and(ii) the only participant in the plan.
.04 References to Rev. Proc. 2007–44.References in sections 5.01(4), 6.05,10.05, and 10.08 of this revenue procedureto Rev. Proc. 2007–44, 2007–28 I.R.B.54, include any successor revenue proce-dure (and references to any section thereofif such references refer to the successorsection in any successor revenue proce-dure).
.05 SEP. The term “SEP” means a planintended to satisfy the requirements of
§ 408(k). For purposes of this revenueprocedure, the term SEP also includes asalary reduction SEP (“SARSEP”) de-scribed in § 408(k)(6), if applicable.
.06 SIMPLE IRA Plan. The term“SIMPLE IRA Plan” means a planintended to satisfy the requirements of§ 408(p).
.07 Under Examination. (1) The term“Under Examination” means: (a) a planthat is under an Employee Plans exami-nation (that is, an examination of a Form5500 series or other Employee Plans ex-amination); (b) a Plan Sponsor that is un-der an Exempt Organizations examination(that is, an examination of a Form 990 se-ries or other Exempt Organizations exam-ination); or (c) a plan that is under investi-gation by the Criminal Investigation Divi-sion of the Internal Revenue Service.
(2) A plan that is under an EmployeePlans examination includes any plan forwhich the Plan Sponsor, or a represen-tative, has received verbal or writtennotification from Employee Plans of animpending Employee Plans examina-tion, or of an impending referral for anEmployee Plans examination, and alsoincludes any plan that has been under anEmployee Plans examination and is nowin Appeals or in litigation for issues raisedin an Employee Plans examination. A planis considered to be Under Examinationif it is aggregated for purposes of satis-fying the nondiscrimination requirementsof § 401(a)(4), the minimum participationrequirements of § 401(a)(26), the mini-mum coverage requirements of § 410(b),or the requirements of § 403(b)(12), withany plan that is Under Examination. Inaddition, a plan is considered to be UnderExamination with respect to a failure of aqualification requirement (other than thosedescribed in the preceding sentence) if theplan is aggregated with another plan forpurposes of satisfying that qualificationrequirement (for example, § 401(a)(30),§ 415, or § 416) and that other plan isUnder Examination. For example, assumePlan A has a § 415 failure, Plan A is ag-gregated with Plan B only for purposes of§ 415, and Plan B is Under Examination.In this case, Plan A is considered to be Un-der Examination with respect to the § 415failure. However, if Plan A has a failurerelating to the spousal consent rules under§ 417 or the vesting rules of § 411, Plan Ais not considered to be Under Examination
with respect to the § 417 or § 411 failure.For purposes of this revenue procedure,the term aggregation does not include con-sideration of benefits provided by variousplans for purposes of the average benefitstest set forth in § 410(b)(2).
(3) An Employee Plans examinationalso includes a case in which a Plan Spon-sor has submitted any Form 5300, 5307or 5310 and the Employee Plans agentnotifies the Plan Sponsor, or a represen-tative, of possible Qualification Failures,whether or not the Plan Sponsor is offi-cially notified of an “examination.” Thiswould include a case where, for example,a Plan Sponsor has applied for a determi-nation letter on plan termination, and anEmployee Plans agent notifies the PlanSponsor that there are partial terminationconcerns. In addition, if, during the re-view process, the agent requests additionalinformation that indicates the existence ofa Qualification Failure(s) not previouslyidentified by the Plan Sponsor, the planis considered to be under an EmployeePlans examination. If, in such a case,the determination letter request under re-view is subsequently withdrawn, the planis nevertheless considered to be underan Employee Plans examination for pur-poses of eligibility under SCP and VCPwith respect to those issues raised by theagent reviewing the determination letterapplication. The fact that a Plan Spon-sor voluntarily submits a determinationletter application does not constitute avoluntary identification of QualificationFailures to the Service. In order to beeligible to perfect a determination letterapplication into a VCP submission, thePlan Sponsor (or the authorized represen-tative) must identify each QualificationFailure, in writing, to the reviewing agentbefore the agent recognizes the existenceof the Qualification Failure(s) or addressesthe Qualification Failure(s) in commu-nications with the Plan Sponsor (or theauthorized representative).
(4) A Plan Sponsor that is under an Ex-empt Organizations examination includesany Plan Sponsor that has received (orwhose representative has received) verbalor written notification from Exempt Orga-nizations of an impending Exempt Organi-zations examination or of an impending re-ferral for an Exempt Organizations exami-nation and also includes any Plan Sponsorthat has been under an Exempt Organiza-
September 2, 2008 475 2008–35 I.R.B.
tions examination and is now in Appeals orin litigation for issues raised in an ExemptOrganizations examination.
SECTION 6. CORRECTIONPRINCIPLES AND RULES OFGENERAL APPLICABILITY
.01 Correction principles; rules of gen-eral applicability. The general correctionprinciples in section 6.02 and rules of gen-eral applicability in sections 6.03 through6.11 apply for purposes of this revenueprocedure.
.02 Correction principles. Generally, afailure is not corrected unless full correc-tion is made with respect to all participantsand beneficiaries, and for all taxable years(whether or not the taxable year is closed).Even if correction is made for a closed tax-able year, the tax liability associated withthat year will not be redetermined becauseof the correction. Correction is determinedtaking into account the terms of the plan atthe time of the failure. Correction shouldbe accomplished taking into account thefollowing principles:
(1) Restoration of benefits. The correc-tion method should restore the plan to theposition it would have been in had the fail-ure not occurred, including restoration ofcurrent and former participants and ben-eficiaries to the benefits and rights theywould have had if the failure had not oc-curred.
(2) Reasonable and appropriate correc-tion. The correction should be reasonableand appropriate for the failure. Depend-ing on the nature of the failure, there maybe more than one reasonable and appropri-ate correction for the failure. For Quali-fied Plans, any correction method permit-ted under 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 or AppendixB applicable to a 403(b) Plan, a SEP, ora SIMPLE IRA Plan is similarly deemedto be a reasonable and appropriate methodof correcting the related failure. If a planhas a different but analogous failure to oneset forth in Appendix A or B (such as thefailure to provide a matching contributionby a governmental plan that is not sub-ject to § 401(m)), then the analogous cor-rection method under Appendix A or Bis generally available to correct any fail-
ure. Whether any other particular correc-tion method is reasonable and appropriateis determined taking into account the ap-plicable facts and circumstances and thefollowing principles:
(a) The correction method should, to theextent possible, resemble one already pro-vided for in the Code, regulations thereun-der, or other guidance of general applica-bility. For example, for Qualified Plansand 403(b) Plans, the correction methodset forth in § 1.402(g)–1(e)(2) would be thetypical means of correcting a failure under§ 402(g).
(b) The correction method should keepplan assets in the plan, except to the ex-tent the Code, regulations, or other guid-ance of general applicability provide forcorrection by distribution to participantsor beneficiaries or return of assets to theEmployer. For example, if an excess al-location (not in excess of the § 415 lim-its) made under a Qualified Plan was madefor a participant under a plan (other than a§ 401(k) plan), the excess should be real-located to other participants or, dependingon the facts and circumstances, used to re-duce future employer contributions.
(c) The correction method for failuresrelating to nondiscrimination should pro-vide benefits for nonhighly compensatedemployees. For example, for QualifiedPlans, the correction method set forth in§ 1.401(a)(4)–11(g) (rather than meth-ods making use of the special testingprovisions set forth in § 1.401(a)(4)–8or § 1.401(a)(4)–9), would be the typ-ical means of correcting a failure tosatisfy nondiscrimination requirements.Similarly, the correction of a failure tosatisfy the 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 typical meansof correcting such a failure.
(d) The correction method should notviolate another applicable specific re-quirement of § 401(a) or § 403(b) (forexample, § 401(a)(4), § 411(d)(6), or§ 403(b)(12), as applicable), § 408(k)for SEPs, or § 408(p) for SIMPLE IRAPlans, or a parallel requirement in Part 2of Subtitle B of Title I of ERISA (for plansthat are subject to Part 2 of Subtitle B ofTitle I of ERISA). If an additional failureis nevertheless created as a result of theuse of a correction method in this revenue
procedure, then that failure also must becorrected in conjunction with the use ofthat correction method and in accordancewith the requirements of this revenue pro-cedure.
(e)(i) If a correction method is onewhich another government agency hasauthorized with respect to a violation oflegal requirements within its interpretiveauthority and that correction relates toa violation for which there is a failureto which this revenue procedure applies,then the Service may take the correctionmethod of the other governmental agencyinto account for purposes of this revenueprocedure.
(ii) Thus, if the plan is subject toERISA, for a failure that results from ei-ther the employer having ceased to exist,the employer no longer maintaining theplan, or similar reasons, the permittedcorrection is to terminate the plan anddistribute plan assets to participants andbeneficiaries in accordance with standardsand procedures substantially similar tothose set forth in section 2578.1 of theDepartment of Labor Regulations (relat-ing to abandoned plans). This correctionmust satisfy four conditions. First, thecorrection must comply with standardsand procedures substantially similar tothose set forth in section 2578.1 of the De-partment of Labor Regulations (relating toabandoned plans). Second, the qualifiedtermination administrator, based on planrecords located and updated in accordancewith the Department of Labor Regulations,must have reasonably determined whether,and to what extent, the survivor annuityrequirements of §§ 401(a)(11) and 417 ap-ply to any benefit payable under the planand takes reasonable steps to comply withthose requirements (if applicable). Third,each participant and beneficiary must havebeen provided a nonforfeitable right to hisor her accrued benefits as of the date ofdeemed termination under the Departmentof Labor Regulations, subject to income,expenses, gains, and losses between thatdate and the date of distribution. Fourth,participants and beneficiaries must receivenotification of their rights under § 402(f).In addition, notwithstanding correctionunder this revenue procedure, the Servicereserves the right to pursue appropriateremedies under the Internal Revenue Codeagainst any party who is responsible forthe plan, such as the Plan Sponsor, plan
2008–35 I.R.B. 476 September 2, 2008
administrator, or owner of the business,even in its capacity as a participant or ben-eficiary under the plan. See, also, section.09(1) of Appendix A for parallel rules forplans that are not subject to ERISA.
(iii) Similarly, in the case of a violationof the fiduciary standards imposed by Part4 of Subtitle B of Title I of ERISA, cor-rection under the Voluntary Fiduciary Cor-rection Program established by the Depart-ment of Labor (at 71 FR 20262) for a fidu-ciary violation for which there is a sim-ilar failure under this revenue procedurewould generally be taken into account ascorrection under this revenue procedure.(See also section 7.3(b) of the Departmentof Labor’s Voluntary Fiduciary CorrectionProgram under which correction of a de-faulted participant loan that provides forrepayment in accordance with § 72(p)(2)requires only submission of the correctionunder VCP and inclusion of the VCP com-pliance statement (with proof of any re-quired corrective payment).)
(3) Consistency requirement. Gen-erally, where more than one correctionmethod is available to correct a type ofOperational Failure for a plan year (orwhere there are alternative ways to apply acorrection method), the correction method(or one of the alternative ways to applythe correction method) should be appliedconsistently in correcting all OperationalFailures of that type for that plan year.Similarly, earnings adjustment methodsgenerally should be applied consistentlywith respect to corrective contributions orallocations for a particular type of Opera-tional Failure for a plan year. In the caseof a Group Submission, the consistencyrequirement applies on a plan by plan ba-sis.
(4) Principles regarding corrective al-locations and corrective distributions. Thefollowing principles apply where an ap-propriate correction method includes theuse of corrective allocations or correctivedistributions:
(a) Corrective allocations under a de-fined contribution plan should be basedupon the terms of the plan and other appli-cable information at the time of the failure(including the compensation that wouldhave been used under the plan for the pe-riod with respect to which a corrective al-location is being made) and should be ad-justed for earnings (including losses) andforfeitures that would have been allocated
to the participant’s account if the failurehad not occurred. However, a correctiveallocation is not required to be adjustedfor losses. See section 3 of Appendix Bfor additional information on calculationof earnings for corrective allocations.
(b) A corrective allocation to a partici-pant’s account because of a failure to makea required allocation in a prior limitationyear is not considered an annual additionwith respect to the participant for the limi-tation year in which the correction is made,but is considered an annual addition forthe limitation year to which the correctiveallocation relates. However, the normalrules of § 404, regarding deductions, ap-ply.
(c) Corrective allocations should comeonly from employer nonelective contribu-tions (including forfeitures if the plan per-mits their use to reduce employer contribu-tions).
(d) In the case of a defined benefit plan,a corrective distribution for an individualshould be increased to take into accountthe delayed payment, consistent with theplan’s actuarial adjustments.
(e) In the case of a defined contributionplan, a corrective contribution or distribu-tion should be adjusted for earnings (in-cluding losses) from the date of the failure(determined without regard to any Codeprovision which permits a corrective con-tribution or distribution to be made at alater date).
(5) Special exceptions to full correc-tion. In general, a failure must be fullycorrected. Although the mere fact that cor-rection is inconvenient or burdensome isnot enough to relieve a Plan Sponsor of theneed to make full correction, full correc-tion may not be required in certain situa-tions because it is unreasonable or not fea-sible. Even in these situations, the correc-tion method adopted must be one that doesnot have significant adverse effects on par-ticipants and beneficiaries or the plan, andthat does not discriminate significantly infavor of highly compensated employees.The exceptions described below specifythose situations in which full correction isnot required.
(a) Reasonable estimates. If either (i)it is possible to make a precise calcula-tion but the probable difference betweenthe approximate and the precise restora-tion of a participant’s benefits is insignif-icant and the administrative cost of deter-
mining precise restoration would signifi-cantly exceed the probable difference or(ii) it is not possible to make a precise cal-culation (for example, where it is impos-sible to provide plan data), reasonable es-timates may be used in calculating appro-priate correction. If it is not feasible tomake a reasonable estimate of what the ac-tual investment results would have been,a reasonable interest rate may be used.For this purpose, the interest rate used bythe Department of Labor’s Voluntary Fidu-ciary Correction Program Online Calcula-tor (“VFCP Online Calculator”) is deemedto be a reasonable interest rate. The VFCPOnline Calculator can be found on the webat http://www.dol.gov/ebsa/calculator.
(b) Delivery of small benefits. If the to-tal corrective distribution due a participantor beneficiary is $75 or less, the Plan Spon-sor is not required to make the correctivedistribution if the reasonable direct costsof processing and delivering the distribu-tion to the participant or beneficiary wouldexceed the amount of the distribution. Thissection 6.02(5)(b) does not apply to correc-tive contributions.
(c) Recovery of small Overpayments.Generally, if the total amount of an Over-payment to a participant or beneficiary is$100 or less, the Plan Sponsor is not re-quired to seek the return of the Overpay-ment from the participant or beneficiary.The Plan Sponsor is not required to notifythe participant or beneficiary that the Over-payment is not eligible for favorable taxtreatment accorded to distributions fromQualified Plans (and, specifically, is not el-igible for tax-free rollover).
(d) Locating lost participants. Reason-able actions must be taken to find all cur-rent and former participants and beneficia-ries to whom additional benefits are due,but who have not been located after a mail-ing to the last known address. In general,such actions include use of the InternalRevenue Service Letter Forwarding Pro-gram (see Rev. Proc. 94–22, 1994–1 C.B.608) or the Social Security AdministrationEmployer Reporting Service. A plan willnot be considered to have failed to correcta failure due to the inability to locate an in-dividual if either of these programs is used;provided that, if the individual is later lo-cated, the additional benefits are providedto the individual at that time. The InternalRevenue Service Letter Forwarding Pro-gram may not be used to locate participants
September 2, 2008 477 2008–35 I.R.B.
in order to collect amounts owed to theplan. On occasion, the Internal RevenueService may decline to perform the letterforwarding request, even if additional ben-efits are due to participants. In such a sit-uation, it is expected that the Plan Spon-sor will take other reasonable actions to lo-cate participants to whom additional bene-fits are due.
(e) Small Excess Amounts. Generally, ifthe total amount of an Excess Amount withrespect to the benefit of a participant orbeneficiary is $100 or less, the Plan Spon-sor is not required to distribute or forfeitsuch Excess Amount. However, if the Ex-cess Amount exceeds a statutory limit, theparticipant or beneficiary must be notifiedthat the Excess Amount, including earn-ings, is not eligible for favorable tax treat-ment accorded to distributions from Quali-fied Plans (and, specifically, is not eligiblefor tax-free rollover). See section 6.06(1)for such notice requirements.
(f) Orphan Plans. The Service retainsthe discretion to determine under VCP andAudit CAP whether full correction will berequired in a terminating Orphan Plan.
(6) Correction principle for loan fail-ures. In the case of a loan failure correctedin accordance with section 6.07(2)(b) or(c) and section 6.07(3), the participant isgenerally responsible for paying the cor-rective payment. However, with respectto the failure listed in section 6.07(3), theemployer should pay a portion of the cor-rection payment on behalf of the partici-pant equal to the interest that accumulatesas a result of such failure — generally de-termined at a rate equal to the greater of theplan loan interest rate or the rate of returnunder the plan.
(7) Correction for exclusion of employ-ees for elective deferrals or after-tax em-ployee contributions. If a Qualified Planhas an Operational Failure that consists ofexcluding an employee that should havebeen eligible to make an elective deferralunder a cash or deferred arrangement or anafter-tax employee contribution, the em-ployer should contribute to the plan on be-half of the excluded employee an amountthat makes up for the value of the lost op-portunity to the employee to have a por-tion of his or her compensation contributedto the plan accumulated with earnings taxfree in the future. This correction princi-ple applies solely to this limited circum-stance. It does not, for example, extend
to the correction of a failure to satisfy anondiscrimination test, e.g., the ADP testpursuant to § 401(k)(3) and the ACP testpursuant to § 401(m)(2). Specific meth-ods and examples to correct this failure areprovided in Appendix A .05 and AppendixB 2.02. Similarly, the methods and exam-ples provided for correcting this failure donot extend to other failures. Thus, the cor-rection methods and the examples in Ap-pendix A .05 and Appendix B 2.02 cannot,for example, be used to correct ADP/ACPfailures.
(8) Reporting. Any corrective distribu-tions from the plan should be properly re-ported.
.03 Correction of an Employer Eligibil-ity Failure. (1) The permitted correction ofan Employer Eligibility Failure is the ces-sation of all contributions (including elec-tive deferrals and after-tax employee con-tributions) beginning no later than the datethe application under VCP is filed. Pur-suant to VCP correction, the assets in sucha plan are to remain in the trust, annuitycontract, or custodial account and are to bedistributed no earlier than the occurrenceof one of the applicable distribution events,e.g., for 403(b) Plans, an event describedin § 403(b)(7) (to the extent the assets areheld in custodial accounts) or § 403(b)(11)(for those assets invested in annuity con-tracts that would be subject to § 403(b)(11)restrictions if the employer were eligible).
(2) Cessation of contributions is notrequired if continuation of contributionswould not be an Employer EligibilityFailure (for example, with respect to atax-exempt employer that may maintain a§ 401(k) plan after 1996).
(3) A plan that is corrected throughVCP is treated as subject to all of the re-quirements and provisions of § 401(a) fora Qualified Plan, § 403(b) for a 403(b)Plan, § 408(k) for a SEP, and § 408(p)for a SIMPLE IRA Plan (including Codeprovisions relating to rollovers). There-fore, the Plan Sponsor must also correctall other failures in accordance with thisrevenue procedure.
(4) If correction is accomplished underVCP in accordance with the requirementsof this section 6.03, then any rolloversmade from the plan pursuant to a dis-tributable event are deemed to have beenmade from a qualified trust for the pur-pose of determining whether the amountsqualify as an eligible rollover distribution
under § 402(c) or an annuity contract thatsatisfies the requirements of § 403(b)(1)for the purpose of determining whetherthe amounts qualify as an eligible rolloveramount under § 403(b)(8), including thedetermination of excess contributions thatare subject to the § 4973 excise tax.
.04 Correction of a failure to obtainspousal consent. (1) Normally, the correc-tion method under VCP for a failure to ob-tain spousal consent for a distribution thatis subject to the spousal consent rules un-der §§ 401(a)(11) and 417 is similar to thecorrection method described in AppendixA .07. The Plan Sponsor must notify theaffected participant and spouse (to whomthe participant was married at the time ofthe distribution), so that the spouse canprovide spousal consent to the distributionactually made or the participant may re-pay the distribution and receive a qualifiedjoint and survivor annuity.
(2)(a) As alternatives to the correctionmethod in section 6.04(1), correction fora failure to obtain spousal consent maybe made under either section 6.04(2)(b) orsection 6.04(2)(c).
(b) In the event that spousal consent tothe prior distribution is not obtained (e.g.,because the spouse chooses not to con-sent, the spouse does not respond to thenotice, or the spouse cannot be located),the spouse is entitled to a benefit under theplan equal to the portion of the qualifiedjoint and survivor annuity that would havebeen payable to the spouse upon the deathof the participant had a qualified joint andsurvivor annuity been provided to the par-ticipant under the plan at the annuity start-ing date for the prior distribution. Suchspousal benefit must be provided if a claimis made by the spouse.
(c) In the event that spousal consentto the prior distribution is not obtained,the plan may offer the spouse the choicebetween (i) the survivor annuity benefitdescribed in section 6.04(2)(b) or (ii) asingle-sum payment equal to the actuar-ial present value of that survivor annu-ity benefit (calculated using the applica-ble interest rate and mortality table under§ 417(e)(3)). Any such single-sum pay-ment is treated in the same manner as a dis-tribution under § 402(c)(9) for purposes ofrolling over the payment to an IRA or othereligible retirement plan.
.05 Submission of a determination let-ter application. (1) In general. This sec-
2008–35 I.R.B. 478 September 2, 2008
tion 6.05 sets forth the situations in which adetermination letter application is requiredto be submitted as part of the correctionof a Qualification Failure if the correctionincludes a plan amendment. If a determi-nation letter is required under this section6.05, then, unless otherwise specified inthis revenue procedure, the provisions ofRev. Proc. 2007–44 will apply. Thus,for example, in the case of an ongoing in-dividually designed plan, a determinationletter application will be reviewed with re-spect to all items of the Cumulative List(as defined in Rev. Proc. 2007–44) thatwould apply to the remedial amendmentcycle during which the determination let-ter is filed. Notwithstanding any other partof this section 6.05, a determination let-ter is not required if the correction by planamendment is achieved through the adop-tion of an amendment that is designated asa model amendment by the Service or theadoption of a prototype or volume submit-ter plan with an opinion or advisory letteras provided in Rev. Proc. 2008–6, 2008–1I.R.B. 192, on which the Plan Sponsor hasreliance.
(2) Determination letter application re-quired. (a) VCP and Audit CAP. (i) A de-termination letter application is requiredfor a determination of whether the plandocument, including the corrective amend-ment, complies with the qualification re-quirements of § 401(a) if the Plan Spon-sor submits the failure under VCP or cor-rects the failure under Audit CAP duringan on-cycle year or in connection witha plan termination. An “on-cycle year”means the last 12 months of the plan’s re-medial amendment cycle set forth in Rev.Proc. 2007–44.
(ii) A determination letter applicationis required to correct a nonamender fail-ure under VCP or Audit CAP, whetheror not the plan is submitted under VCPor corrected under Audit CAP during anon-cycle year. For this purpose, the term“nonamender failure” means a failure toamend the plan to correct a disqualifyingprovision, described in §1.401(b)–1(b)within the applicable remedial amend-ment period. In general, a disqualifyingprovision includes a provision in the plandocument that violates a qualification re-quirement of the Code or the absence ofa provision that causes the plan to failto satisfy a qualification requirement ofthe Code. A disqualifying provision also
includes any provision designated by theCommissioner as a disqualifying provi-sion under §1.401(b)–1(b)(3).
(b) SCP. In the case of any correctionof an Operational Failure through planamendment under SCP that is permittedunder section 4.05(2) of this revenue pro-cedure, a Plan Sponsor must submit a de-termination letter application for the plan,including the corrective plan amendment,by the end of the plan’s next on-cycle year,or if earlier, in connection with the plan’stermination. The determination letter ap-plication should be mailed to the addressprovided in the instructions of the appli-cable Form 5300, 5307 or 5310. As partof the determination letter submission, thecover letter must identify the amendmentas a corrective amendment under SCP. Inaddition, the Plan Sponsor must includein the cover letter to the application: (1) astatement that neither the plan nor the PlanSponsor has been a party to an abusive taxavoidance transaction (as defined in sec-tion 4.13(2) of this revenue procedure); or(2) a brief identification of any abusive taxavoidance transaction to which the plan orthe Plan Sponsor has been a party.
(3) Determination Letter applicationnot required. (a) Failure to adopt timelyinterim amendments or amendments re-quired to implement optional law changes.If on any date during an off-cycle yearthat is prior to the plan’s on-cycle year,a Plan Sponsor submits a failure underVCP or corrects a failure under Audit CAPto adopt timely interim amendments ortimely amendments to the plan to imple-ment optional law changes, then a deter-mination letter application is not requiredand should not be submitted with the VCPsubmission or as part of the correction ofthe failure under Audit CAP. For purposesof this revenue procedure, interim amend-ments are interim amendments within themeaning of section 5.01 of Rev. Proc.2007–44. For purposes of this revenueprocedure, an optional law change refersto a law change implemented at the PlanSponsor’s discretion. An example of anoptional law provision is § 414(v) of theCode, which sets forth the provisionsrelating to catch-up contributions. Theissuance of a compliance statement orclosing agreement results in the correctiveamendments being treated as if they hadbeen adopted timely for the purpose of de-termining the availability of the extended
remedial amendment period described inRev. Proc. 2007–44. However, the is-suance of such a compliance statementor closing agreement does not constitutea determination as to whether the planamendment complies with the change inqualification requirement. Thus, in orderto ensure that the corrective amendmentadopted for this failure complies with thechange in qualification requirement, thePlan Sponsor should include the correctiveamendment along with the compliancestatement or closing agreement, with itsapplication for a determination letter dur-ing the plan’s on-cycle year or if earlier,in connection with the plan’s termination.The provisions of this section 6.05(3)(a)are applicable only if the VCP applicationsetting forth the interim or optional lawchange failure is submitted, or the AuditCAP correction is made, prior to the plan’sfirst on-cycle year following the date bywhich the amendment for the interim oroptional law change should have beenadopted pursuant to section 5.05 of Rev.Proc. 2007–44.
(b) Operational or Demographic Fail-ures corrected through plan amendmentunder VCP and Audit CAP. If, during anoff-cycle year, a Plan Sponsor submits anOperational or Demographic Failure underVCP or corrects such a failure under AuditCAP, then a determination letter applica-tion is not required and should not be sub-mitted with the VCP submission or as partof the correction of the failure under Au-dit CAP. If the plan amendment is acceptedas a proper correction for either an Op-erational Failure or a Demographic Fail-ure, the compliance statement under VCPor closing agreement issued under AuditCAP constitutes a determination on the ef-fect of the plan amendment on the quali-fication of the plan; however, the compli-ance statement issued under VCP is sub-ject to the condition that the amendmentbe submitted as part of a separate determi-nation letter submission during the plan’snext on-cycle year, or if earlier, in connec-tion with the plan’s termination, and thata favorable determination letter be issuedwith respect to the plan. The determina-tion letter application should be mailed tothe address listed in the instructions of theapplicable Form 5300, 5307 or 5310 andshould include a copy of the related com-pliance statement or closing agreement. APlan Sponsor that corrects an Operational
September 2, 2008 479 2008–35 I.R.B.
Failure or Demographic Failure througha plan amendment under Audit CAP dur-ing an off-cycle year should also include acopy of the closing agreement when sub-mitting a determination letter applicationduring the plan’s next on-cycle year, or ifearlier, in connection with the plan’s termi-nation.
(4) Determination letter applicationsoptional under EPCRS. A Plan Sponsormay submit a determination letter appli-cation with respect to the correction offailures through plan amendment prior tothe plan’s on-cycle year if the plan wouldbe given the same priority as an on-cyclefiling pursuant to sections 14.02 and 14.03of Rev. Proc. 2007–44, relating to certainnew plans, terminating plans, and off-cy-cle applications submitted in accordancewith published guidance issued by the Ser-vice specifying such submission, and inthe case of urgent business need. Determi-nation letter requests submitted pursuantto this section 6.05(4) must contain a writ-ten justification as to the eligibility of theplan under section 14.02 or 14.03 of Rev.Proc. 2007–44 and this section 6.05(4).In the case of urgent business need, theService will consider such requests basedon the facts and circumstances.
(5) Internal Revenue Service discre-tion. Notwithstanding any other provisionof section 6.05 of this revenue procedure,the Service reserves the right to requirethe submission of a determination letterapplication with respect to any amend-ment proposed or adopted to correct anyQualification Failure under VCP or AuditCAP.
.06 Special rules relating to Ex-cess Amounts. (1) Treatment of ExcessAmounts. Except as otherwise providedin section 6.02(5)(c), a distribution ofan Excess Amount is not eligible for thefavorable tax treatment accorded to dis-tributions from Qualified Plans (such aseligibility for tax-free rollover). Thus,for example, if such a distribution wascontributed to an individual retirementarrangement (IRA), the contribution is nota valid rollover contribution for purposesof determining the amount of excess con-tributions (within the meaning of § 4973)to the individual’s IRA. A distribution ofan Excess Amount is generally treatedin the manner described in section 3 ofRev. Proc. 92–93, 1992–2 C.B. 505, re-lating to the corrective disbursement of
elective deferrals. The distribution mustbe reported on Form 1099–R for the yearof distribution with respect to each par-ticipant or beneficiary receiving such adistribution. Except as otherwise providedin section 6.02(5)(c), where an ExcessAmount has been or is being distributed,the Plan Sponsor must notify the recipientthat (a) an Excess Amount has been or willbe distributed and (b) an Excess Amountis not eligible for favorable tax treatmentaccorded to distributions from QualifiedPlans (and, specifically, is not eligible forrollover).
(2) Correction of Excess Allocations.In general, an Excess Allocation, as de-fined in section 5.01(3)(a) of this revenueprocedure, is corrected in accordance withthe Reduction of Account Balance Cor-rection Method set forth in this paragraph.Under this method, the account balance ofan employee who received an Excess Allo-cation is reduced by the Excess Allocation(adjusted for earnings). If the Excess Allo-cation would have been allocated to otheremployees in the year of the failure hadthe failure not occurred, then that amount(adjusted for earnings) is reallocated tothose employees in accordance with theplan’s allocation formula. If the improp-erly allocated amount would not havebeen allocated to other employees absentthe failure, that amount (adjusted for earn-ings) is placed in a separate account that isnot allocated on behalf of any participantor beneficiary (an unallocated account)established for the purpose of holding Ex-cess Allocations, adjusted for earnings,to be used to reduce employer contribu-tions (other than elective deferrals) in thecurrent year or succeeding year(s). Whilesuch amounts remain in the unallocatedaccount, the employer is not permitted tomake contributions to the plan other thanelective deferrals. Excess Allocations thatare attributable to elective deferrals orafter-tax employee contributions, (alongwith earnings attributable thereto) must bedistributed to the participant. For quali-fication purposes, an Excess Allocationthat is corrected pursuant to this paragraphis disregarded for purposes of § 402(g),§ 415, the actual deferral percentage testof § 401(k)(3), and the actual contributionpercentage test of § 401(m)(2). If an Ex-cess Allocation resulting from a violationof § 415 consists of annual additions attrib-utable to both employer contributions and
elective deferrals or after-tax employeecontributions, then the correction of theExcess Allocation is completed by firstdistributing the unmatched employee’safter-tax contributions (adjusted for earn-ings) and then the unmatched employee’selective deferrals (adjusted for earnings).If any excess remains, and is attributableto either elective deferrals or after-taxemployee contributions that are matched,the excess is apportioned first to after-taxemployee contributions with the associ-ated matching employer contributions andthen to elective deferrals with the asso-ciated matching employer contributions.Any matching contribution or nonelec-tive employer contribution (adjusted forearnings) which constitutes an Excess Al-location is then forfeited and placed in anunallocated account established for thepurpose of holding Excess Allocations tobe used to reduce employer contributionsin the current year and succeeding year(s).Such unallocated account is adjusted forearnings. While such amounts remain inthe unallocated account, the employer isnot permitted to make contributions (otherthan elective deferrals) to the plan.
(3) Correction of Overpayment failures.An Overpayment from a defined benefitplan is corrected in accordance with therules in section 2.04(1) of Appendix B. AnOverpayment from a defined contributionplan is corrected in accordance with theReturn of Overpayment method set forthin this paragraph. Under this method, theemployer takes reasonable steps to havethe Overpayment, plus appropriate interestfrom the date of the distribution to the dateof the repayment, returned by the partici-pant or beneficiary to the plan. To the ex-tent the amount returned to a defined con-tribution plan is less than the Overpaymentadjusted for earnings at the plan’s earningsrate, then the employer or another personmust contribute the difference to the plan.The Overpayment, adjusted for earnings atthe plan’s earnings rate to the date of the re-payment, is to be placed in an unallocatedaccount, as described in section 6.06(2),to be used to reduce employer contribu-tions (other than elective deferrals) in thecurrent year and succeeding year(s) (or ifthe amount would have been allocated toother eligible employees who were in theplan for the year of the failure if the fail-ure had not occurred, then that amount isreallocated to the other eligible employ-
2008–35 I.R.B. 480 September 2, 2008
ees in accordance with the plan’s alloca-tion formula). In addition, the employermust notify the employee that the Over-payment was not eligible for favorable taxtreatment accorded to distributions fromQualified Plans (and, specifically, was noteligible for tax-free rollover).
.07 Rules relating to reporting planloan failures. (1) General rule for loans.Unless correction is made in accordancewith this section 6.07(2) or (3), a deemeddistribution under § 72(p)(1) in connec-tion with a failure relating to a loan toa participant made from a plan must bereported on Form 1099–R with respect tothe affected participant and any applicableincome tax withholding amount that wasrequired to be paid in connection with thefailure (see § 1.72(p)–1, Q&A–15) mustbe paid by the employer. As part of VCP,the deemed distribution may be reportedon Form 1099–R with respect to the af-fected participant for the year of correction(instead of the year of the failure. Therelief of reporting the participant’s loan asa deemed distribution on Form 1099–Rin the year of correction, as described inthe preceding sentence, applies only if thePlan Sponsor specifically requests suchrelief.
(2) Special rules for loans. (a) In gen-eral. The correction methods set forthin section 6.07(2)(b) and (c) and section6.07(3) are available for plan loans that donot comply with one or more requirementsof § 72(p)(2) and are corrected throughVCP. The correction methods describedin section 6.07(2)(b) and (c) and section6.07(3) are not available if the maximumperiod for repayment of the loan pursuantto § 72(p)(2)(B) has expired. The Servicereserves the right to limit the use of the cor-rection methods listed in section 6.07(2)(b)and (c) and section 6.07(3) to situationsthat it considers appropriate; for example,where the loan failure is caused by em-ployer action. A deemed distribution cor-rected under section 6.07(2)(b) or (c) orunder section 6.07(3) is not required to bereported on Form 1099–R and repaymentsmade by correction under sections 6.07(2)and 6.07(3) do not result in the affectedparticipant having additional basis in theplan for purposes of determining the taxtreatment of subsequent distributions fromthe plan to the affected participant. Therelief from reporting the participant’s loanas a deemed distribution on Form 1099–R,
as described in the preceding sentence, ap-plies only if the Plan Sponsor specificallyrequests such relief and provides an expla-nation supporting the request.
(b) Loans in excess of § 72(p)(2)(A).A failure to comply with plan provi-sions requiring that loans comply with§ 72(p)(2)(A) may be corrected by a cor-rective repayment to the plan based on theexcess of the loan amount over the max-imum loan amount under § 72(p)(2)(A).In the event that loan repayments weremade in accordance with the amortizationschedule for the loan before correction,such prior repayments may be applied (i)solely to reduce the portion of the loan thatdid not exceed the maximum loan amountunder § 72(p)(2)(A) (so that the correc-tive repayment would equal the originalloan excess plus interest thereon), (ii) toreduce the loan excess to the extent of theinterest thereon, with the remainder of therepayments applied to reduce the portionof the loan that did not exceed the maxi-mum loan amount under § 72(p)(2)(A) (sothat the corrective repayment would equalthe original loan excess), or (iii) pro rataagainst the loan excess and the maximumloan amount under § 72(p)(2)(A) (so thatthe corrective repayment would equal theoutstanding balance remaining on the orig-inal loan excess on the date that correctiverepayment is made). After the correc-tive payment is made, the loan may bereformed to amortize the remaining prin-cipal balance as of the date of repaymentover the remaining period of the originalloan. This is permissible as long as therecalculated payments over the remainingperiod would not cause the loan to violatethe maximum duration permitted under§ 72(p)(2)(B). The maximum duration isdetermined from the date the original loanwas made. In addition, the amortizationpayments determined for the remainingperiod must comply with the level amorti-zation requirements of § 72(p)(2)(C).
(c) Loan terms that do not satisfy§ 72(p)(2)(B) or (C). For a failure ofloan repayment terms to provide for arepayment schedule that complies with§ 72(p)(2)(B) or (C), the failure may becorrected by a reamortization of the loanbalance in accordance with § 72(p)(2)(C)over the remaining period that is themaximum period that complies with§ 72(p)(2)(B) measured from the originaldate of the loan.
(d) No requirement for plan provisions.This section 6.07 also applies even if theplan does not require loans to satisfy therequirements of § 72(p)(2). However, tocorrect the ERISA fiduciary violationsassociated with the failures described insection 6.07(2)(b), (c) and section 6.07(3)under the Department of Labor’s Volun-tary Fiduciary Correction Program, theplan must contain plan provisions requir-ing that loans comply with § 72(p)(2)(A),(B) and (C).
(3) Defaulted loans. A failure to re-pay the loan in accordance with the loanterms where the terms satisfy § 72(p)(2)may be corrected by (i) a lump sum repay-ment equal to the additional repaymentsthat the affected participant would havemade to the plan if there had been no fail-ure to repay the plan, plus interest accruedon the missed repayments, (ii) reamortiz-ing the outstanding balance of the loan, in-cluding accrued interest, over the remain-ing payment schedule of the original termof the loan or the period remaining had theloan been amortized over the maximumperiod that complies with § 72(p)(2)(B),measured from the original date of theloan, or (iii) any combination of (i) or (ii).
.08 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 a gen-eral rule, a Plan Document Failure that isa disqualifying provision for which the re-medial amendment period under § 401(b)has not expired can be corrected under pro-visions of the Code through retroactive re-medial amendment.
.09 Matters subject to excise taxes orother penalties. (1) Except as providedin this revenue procedure, the correctionprograms are not available for events forwhich the Code provides tax consequencesother than plan disqualification (such asthe imposition of an excise tax or addi-tional income tax). For example, fundingdeficiencies (failures to make the requiredcontributions to a plan subject to § 412),prohibited transactions, and failures to filethe Form 5500 series cannot be correctedunder this revenue procedure.
(2) As part of VCP and Audit CAP,if a failure involves the failure to satisfythe minimum required distribution re-quirements of § 401(a)(9), in appropriatecases, the Service will waive the excise
September 2, 2008 481 2008–35 I.R.B.
tax under § 4974 applicable to plan par-ticipants. The waiver will be included inthe compliance statement or in the closingagreement in the case of Audit CAP. Un-der VCP, the Plan Sponsor, as part of thesubmission, must request the waiver and,in cases where the participant subject tothe excise tax is either an owner-employeeas defined in § 401(c)(3) or a 10% ownerof a corporation, the Plan Sponsor mustalso provide an explanation supporting therequest. See section 12.02(2) relating tothe applicable compliance fee for certain§ 401(a)(9) failures. Under Audit CAP, thePlan Sponsor must make a specific requestfor waiver of the excise tax under § 4974.The Plan Sponsor should also provide anexplanation supporting the request for awaiver. Upon reviewing the request, thereasons for the failure, and other facts orcircumstances of the case under examina-tion, the Service will determine whether itis appropriate to approve the waiver of theexcise tax as part of the closing agreementnegotiated under Audit CAP.
(3) As part of VCP, if the failure in-volves a correction that requires the PlanSponsor to make a plan contribution thatis not deductible, in appropriate cases, theService will not pursue the excise tax un-der § 4972 on such nondeductible contri-butions. The Plan Sponsor, as part of thesubmission must request the relief and pro-vide an explanation supporting the request.
(4) As part of VCP, if a failure re-sults in excess contributions as defined in§ 4979(c) or excess aggregate contribu-tions as defined in § 4979(d) under a plan,the Service will not pursue the excise taxunder § 4979 in appropriate cases, e.g.,where correction is made for any case inwhich the ADP test was timely performedbut, due to reliance on inaccurate data, re-sulted in an insufficient amount of excesselective deferrals having been distributedto HCEs. The Plan Sponsor, as part ofthe submission, must request the reliefand provide an explanation supporting therequest.
(5) Subject to section 6.03(4), as part ofVCP, in appropriate cases, the Service willnot pursue the excise tax under § 4973 re-lating to excess contributions made to IRA(including either an individual retirementaccount (as defined in § 408(a)) or an in-dividual retirement annuity (as defined in§ 408(b)) under any of the following cir-cumstances:
(a) As part of the proposed correctionfor Overpayments, the participant or bene-ficiary (“recipient”) removes the Overpay-ment (plus earnings) from the recipient’sIRA and returns that amount to the plan;
(b) As part of the proposed correctionfor Excess Amounts, the recipient removesthe Excess Amount (plus earnings) fromthe recipient’s IRA and reports that amount(reduced by any applicable after-tax em-ployee contribution) as a taxable distri-bution for the year in which the ExcessAmount (plus earnings) is removed fromthe recipient’s IRA. The amount removedwill generally be taxed in a manner thatis similar to the manner in which the cor-rective disbursement of elective deferralsis taxed, as described in section 3 of Rev.Proc. 92–93; or
(c) In the case of an Overpayment thatwas not made pursuant to a distributableevent, the Plan Sponsor, as part of thesubmission, must request relief from the§ 4973 excise tax and provide an explana-tion supporting the request.
(6) As part of VCP, in appropriatecases, the Service will not pursue the 10%additional income tax under § 72(t) (orwill pursue only a portion thereof) if, aspart of the proposed correction for Over-payments that were not made pursuantto a distributable event, the participantor beneficiary (“recipient”) removes theamount improperly distributed and rolledover (plus earnings) from the recipient’sIRA and returns that amount to the plan.In appropriate cases, as a condition fornot pursuing all or a portion of the ad-ditional tax, the Service may requirethe Plan Sponsor to pay an additionalfee under VCP not in excess of the 10%additional income tax under § 72(t). ThePlan Sponsor, as part of the submission,must request the relief and provide an ex-planation supporting the request.
.10 Correction for SEPs and SIMPLEIRA Plans. (1) Correction for SEPs andSIMPLE IRA Plans generally. Generally,the correction for a SEP or a SIMPLEIRA Plan is expected to be similar to thecorrection required for a Qualified Planwith a similar Qualification Failure (i.e.,Plan Document Failure, Operational Fail-ure, Demographic Failure and EmployerEligibility Failure).
(2) Special correction for SEPs andSIMPLE IRA Plans. In any case in whichcorrection under section 6.10(1) is not fea-
sible for a SEP or SIMPLE IRA Plan or inany other case determined by the Servicein its discretion (including failures relatingto §§ 402(g), 415, and 401(a)(17), failuresrelating to deferral percentages, discon-tinuance of contributions to a SARSEPor SIMPLE IRA Plan, and retention ofExcess Amounts for cases in which therehas been no violation of a statutory limi-tation with respect to a SEP or SIMPLEIRA Plan), the Service may provide for adifferent correction. See section 12.05(2)for a special fee that may apply in such acase.
(3) Correction of failure to satisfy defer-ral percentage test. If the failure involvesa violation of the deferral percentage testunder § 408(k)(6)(A)(iii) applicable to aSARSEP, the failure may be corrected ineither one of the following ways:
(a) The Plan Sponsor may make contri-butions that are 100% vested to all eligi-ble nonhighly compensated employees (tothe extent permitted by § 415) necessaryto raise the deferral percentage needed topass the test. This amount may be calcu-lated as the same percentage of compensa-tion (regardless of the terms of the SEP).
(b) The Plan Sponsor may effect dis-tribution of excess contributions, adjustedfor earnings through the date of correc-tion, to highly compensated employeesto correct the failure. The Plan Sponsormust also contribute to the SEP an amountequal to the total amount distributed. Thisamount must be allocated to (i) currentemployees who were nonhighly compen-sated employees in the year of the failure,(ii) current nonhighly compensated em-ployees who were nonhighly compensatedemployees in the year of the failure, or (iii)employees (both current and former) whowere nonhighly compensated employeesin the year of the failure.
(4) Treatment of undercontributions toa SEP or a SIMPLE IRA Plan. (a) Make-upcontributions; earnings. The Plan Spon-sor should correct undercontributions to aSEP or a SIMPLE IRA Plan by contribut-ing make-up amounts that are fully vested,adjusted for earnings from the date of thefailure to the date of correction.
(b) Earnings adjustment methods. In-sofar as SEP and SIMPLE IRA Plan assetsare held in IRAs, there is no earnings rateunder the SEP or SIMPLE IRA Plan as awhole. If it is not feasible to make a rea-sonable estimate of what the actual invest-
2008–35 I.R.B. 482 September 2, 2008
ment results would have been, a reasonableinterest rate may be used.
(5) Treatment of Excess Amounts undera SEP or a SIMPLE IRA Plan. (a) Distri-bution of Excess Amounts. For purposesof section 6.10, an Excess Amount is anamount contributed on behalf of an em-ployee that is in excess of an employee’sbenefit under the plan, or an elective defer-ral in excess of the limitations of §§ 402(g)or 408(k)(6)(A)(iii). If an Excess Amountis attributable to elective deferrals, thePlan Sponsor may effect distribution ofthe Excess Amount, adjusted for earningsthrough the date of correction, to the af-fected participant. The amount distributedto the affected participant is includiblein gross income in the year of distribu-tion. The distribution is reported on Form1099–R for the year of distribution withrespect to each participant receiving thedistribution. In addition, the Plan Spon-sor must inform affected participants thatthe distribution of an Excess Amount isnot eligible for favorable tax treatmentaccorded to distributions from a SEP ora SIMPLE IRA Plan (and, specifically, isnot eligible for tax-free rollover). If theExcess Amount is attributable to employercontributions, the Plan Sponsor may ef-fect distribution of the employer ExcessAmount, adjusted for earnings through thedate of correction, to the Plan Sponsor.The amount distributed to the Plan Spon-sor is not includible in the gross income ofthe affected participant. The Plan Sponsoris not entitled to a deduction for such em-ployer Excess Amount. The distributionis reported on Form 1099–R issued to theparticipant indicating the taxable amountas zero.
(b) Retention of Excess Amounts. If anExcess Amount is retained in the SEP orSIMPLE IRA Plan under section 6.10(5), aspecial fee, in addition to the VCP submis-sion fee, will apply. See section 12.05(2)for the special fee. The Plan Sponsor isnot entitled to a deduction for an ExcessAmount retained in the SEP or SIMPLEIRA Plan. In the case of an Excess Amountretained in a SEP that is attributable to a§ 415 failure, the Excess Amount, adjustedfor earnings through the date of correction,must reduce affected participants’ applica-ble § 415 limit for the year following theyear of correction (or for the year of cor-rection if the Plan Sponsor so chooses),
and subsequent years, until the excess iseliminated.
(c) De minimis Excess Amounts. If thetotal Excess Amount in a SEP or SIMPLEIRA Plan, whether attributable to elec-tive deferrals or employer contributions,is $100 or less, the Plan Sponsor is notrequired to distribute the Excess Amountand the special fee described in section12.05(2) does not apply.
.11 Confidentiality and disclosure. Be-cause each correction program relates di-rectly to the enforcement of the Code qual-ification requirements, the information re-ceived or generated by the Service underthe program is subject to the confidential-ity requirements of § 6103 and is not awritten determination within the meaningof § 6110.
.12 No effect on other law. Correctionunder these programs has no effect on therights of any party under any other law, in-cluding Title I of ERISA. The Departmentof Labor maintains a Voluntary FiduciaryCorrection Program under which certainERISA fiduciary violations may be cor-rected. The Department of Labor alsomaintains a Delinquent Filer VoluntaryCompliance Program under which certainfailures to comply with the annual report-ing requirements (Form 5500 series) underERISA may be corrected.
PART IV. SELF-CORRECTION (SCP)
SECTION 7. IN GENERAL
The requirements of this section 7 aresatisfied with respect to an OperationalFailure if the Plan Sponsor of a QualifiedPlan, a 403(b) Plan, a SEP, or a SIMPLEIRA Plan satisfies the requirements of sec-tion 8 (relating to insignificant OperationalFailures) or, in the case of a Qualified Planor a 403(b) Plan, section 9 (relating to sig-nificant Operational Failures).
.01 Requirements. The requirements ofthis section 8 are satisfied with respect toan Operational Failure if the OperationalFailure is corrected and, given all the factsand circumstances, the Operational Failureis insignificant. This section 8 is availablefor correcting an insignificant Operational
Failure even if the plan or Plan Sponsor isUnder Examination and even if the Oper-ational Failure is discovered on examina-tion.
.02 Factors. The factors to be consid-ered in determining whether or not an Op-erational Failure under a plan is insignif-icant include, but are not limited to: (1)whether other failures occurred during theperiod being examined (for this purpose, afailure is not considered to have occurredmore than once merely because more thanone participant is affected by the failure);(2) the percentage of plan assets and con-tributions involved in the failure; (3) thenumber of years the failure occurred; (4)the number of participants affected rela-tive to the total number of participants inthe plan; (5) the number of participants af-fected as a result of the failure relative tothe number of participants who could havebeen affected by the failure; (6) whethercorrection was made within a reasonabletime after discovery of the failure; and (7)the reason for the failure (for example, dataerrors such as errors in the transcriptionof data, the transposition of numbers, orminor arithmetic errors). No single factoris determinative. Additionally, factors (2),(4), and (5) should not be interpreted to ex-clude small businesses.
.03 Multiple failures. In the case of aplan with more than one Operational Fail-ure in a single year, or Operational Failuresthat occur in more than one year, the Oper-ational Failures are eligible for correctionunder this section 8 only if all of the Op-erational Failures are insignificant in theaggregate. Operational Failures that havebeen corrected under SCP in section 9 andVCP in sections 10 and 11 are not takeninto account for purposes of determiningif Operational Failures are insignificant inthe aggregate.
.04 Examples. The following examplesillustrate the application of this section 8.It is assumed, in each example, that the el-igibility requirements of section 4 relatingto SCP (for example, the requirements ofsection 4.04 relating to established prac-tices and procedures) have been satisfiedand that no Operational Failures occurredother than the Operational Failures identi-fied below.
Example 1: In 1991, Employer X established PlanA, a profit-sharing plan that satisfies the requirementsof § 401(a) in form. In 2005, the benefits of 50 of the250 participants in Plan A were limited by § 415(c).
September 2, 2008 483 2008–35 I.R.B.
However, when the Service examined Plan A in 2008,it discovered that, during the 2005 limitation year,the annual additions allocated to the accounts of 3 ofthese employees exceeded the maximum limitationsunder § 415(c). Employer X contributed $3,500,000to the plan for the plan year. The amount of the ex-cesses totaled $4,550. Under these facts, because thenumber of participants affected by the failure relativeto the total number of participants who could havebeen affected by the failure, and the monetary amountof the failure relative to the total employer contribu-tion to the plan for the 2005 plan year, are insignif-icant, the § 415(c) failure in Plan A that occurred in2005 would be eligible for correction under this sec-tion 8.
Example 2: The facts are the same as in Exam-ple 1, except that the failure to satisfy § 415 occurredduring each of the 2005 and 2007 limitation years. Inaddition, the three participants affected by the § 415failure were not identical each year. The fact that the§ 415 failures occurred during more than one limita-tion year did not cause the failures to be significant;accordingly, the failures are still eligible for correc-tion under this section 8.
Example 3: The facts are the same as in Exam-ple 1, except that the annual additions of 18 of the 50employees whose benefits were limited by § 415(c)nevertheless exceeded the maximum limitations un-der § 415(c) during the 2005 limitation year, and theamount of the excesses ranged from $1,000 to $9,000,and totaled $150,000. Under these facts, taking intoaccount the number of participants affected by thefailure relative to the total number of participants whocould have been affected by the failure for the 2005limitation year (and the monetary amount of the fail-ure relative to the total employer contribution), thefailure is significant. Accordingly, the § 415(c) fail-ure in Plan A that occurred in 2005 is ineligible forcorrection under this section 8 as an insignificant fail-ure.
Example 4: Employer J maintains Plan C, amoney purchase pension plan established in 1992.The plan document satisfies the requirements of§ 401(a). The formula under the plan provides for anemployer contribution equal to 10% of compensa-tion, as defined in the plan. During its examinationof the plan for the 2005 plan year, the Service discov-ered that the employee responsible for entering datainto the employer’s computer made minor arithmeticerrors in transcribing the compensation data withrespect to 6 of the plan’s 40 participants, resulting inexcess allocations to those 6 participants’ accounts.Under these facts, the number of participants affectedby the failure relative to the number of participantsthat could have been affected is insignificant, andthe failure is due to minor data errors. Thus, thefailure occurring in 2005 would be insignificant andtherefore eligible for correction under this section 8.
Example 5: Public School maintains for its 200employees a salary reduction 403(b) Plan (the “Plan”)that satisfies the requirements of § 403(b). The busi-ness manager has primary responsibility for admin-istering the Plan, in addition to other administrativefunctions within Public School. During the 2005 planyear, a former employee should have received an ad-ditional minimum required distribution of $278 un-der § 403(b)(10). Another participant received an im-permissible hardship withdrawal of $2,500. Anotherparticipant made elective deferrals of which $1,000
was in excess of the § 402(g) limit. Under thesefacts, even though multiple failures occurred in a sin-gle plan year, the failures will be eligible for correc-tion under this section 8 because in the aggregate thefailures are insignificant.
.01 Requirements. The requirements ofthis section 9 are satisfied with respect toan Operational Failure (even if significant)if the Operational Failure is corrected andthe correction is either completed or sub-stantially completed (in accordance withsection 9.04) by the last day of the correc-tion period described in section 9.02.
.02 Correction period. (1) End of cor-rection period. The last day of the cor-rection period for an Operational Failureis the last day of the second plan year fol-lowing the plan year for which the failureoccurred. However, in the case of a failureto satisfy the requirements of §§ 401(k)(3),401(m)(2), or 401(m)(9), the correctionperiod does not end until the last day ofthe second plan year following the planyear that includes the last day of the addi-tional period for correction permitted un-der §§ 401(k)(8) or 401(m)(6). If a 403(b)Plan does not have a designated plan year,the plan year is deemed to be the calendaryear for purposes of this section 9.02.
(2) Extension of correction period forTransferred Assets. In the case of an Op-erational Failure that relates only to Trans-ferred Assets, or to a plan assumed in con-nection with a corporate merger, acquisi-tion or other similar employer transaction,the correction period does not end untilthe last day of the first plan year that be-gins after the corporate merger, acquisi-tion, or other similar employer transactionbetween the Plan Sponsor and the sponsorof the transferor plan or the prior sponsorof an assumed plan.
(3) Effect of examination. The correc-tion period for an Operational Failure thatoccurs for any plan year ends, in any event,on the first date the plan or Plan Sponsoris Under Examination for that plan year(determined without regard to the secondsentence of section 9.02). (But see section9.04 for special rules permitting comple-tion of correction after the end of the cor-rection period.)
.03 Correction by plan amendment.In order to complete correction by plan
amendment (as permitted under section4.05), the appropriate determination let-ter application must be submitted beforethe end of the plan’s applicable remedialamendment period described in Rev. Proc.2007–44.
.04 Substantial completion of correc-tion. Correction of an Operational Failureis substantially completed by the last dayof the correction period only if the require-ments of either paragraph (1) or (2) are sat-isfied.
(1) The requirements of this paragraph(1) are satisfied if:
(a) during the correction period, thePlan Sponsor is reasonably prompt inidentifying the Operational Failure, formu-lating a correction method, and initiatingcorrection in a manner that demonstratesa commitment to completing correction ofthe Operational Failure as expeditiouslyas practicable, and
(b) within 120 days after the last dayof the correction period, the Plan Sponsorcompletes correction of the OperationalFailure.
(2) The requirements of this paragraph(2) are satisfied if:
(a) during the correction period, correc-tion is completed with respect to 65% ofall participants affected by the OperationalFailure, and
(b) thereafter, the Plan Sponsor com-pletes correction of the Operational Failurewith respect to the remaining affected par-ticipants in a diligent manner.
.05 Examples. The following examplesillustrate the application of this section 9.It is assumed, in each example, that the el-igibility requirements of section 4 relatingto SCP have been met.
Example 1: Employer Z established a qualifieddefined contribution plan in 2003 and received afavorable determination letter. During 2007, whiledoing a self-audit of the operation of the plan for the2006 plan year, the plan administrator discoveredthat, despite the practices and procedures establishedby Employer Z with respect to the plan, severalemployees eligible to participate in the plan wereexcluded from participation. The administrator alsofound that for 2006 Operational Failures occurredbecause the elective deferrals of additional employ-ees exceeded the § 402(g) limit and Employer Zfailed to make the required top-heavy minimumcontribution. In addition, during the review of theadministration for the 2006 year, it was found that theplan administrator intended to implement correctionfor the failure to satisfy the ADP test (as described in§ 401(k)(3)) for the 2005 plan year. During the 2008plan year, the Plan Sponsor made QNECs on behalfof the excluded employees, distributed the excess
2008–35 I.R.B. 484 September 2, 2008
deferrals to the affected participants, and made atop-heavy minimum contribution to all participantsentitled to that contribution for the 2006 plan year.Each corrective contribution and distribution wascredited with earnings at a rate appropriate for theplan from the date the corrective contribution ordistribution should have been made to the date ofcorrection. The failed ADP test for 2005 was cor-rected by making corrective contributions, adjustedfor earnings, on behalf of nonhighly compensatedemployees using the method described in AppendixA .03 of this revenue procedure. Under these facts,the Plan Sponsor has corrected the ADP test failurefor the 2005 plan year and the Operational Failuresfor the 2006 plan year within the correction periodand thus satisfied the requirements of this section 9.
Example 2: Employer A established a qualifieddefined contribution plan, Plan A, in 1993 and hasreceived a favorable determination letter for the ap-plicable law changes. In April 2007, Employer Apurchased all of the stock of Employer B, a wholly-owned subsidiary of Employer C. Employees of Em-ployer B participated in Plan C, a qualified definedcontribution plan sponsored by Employer C. Follow-ing Employer A’s review of Plan C, Employer A andEmployer C agreed that Plan A would accept a trans-fer of plan assets from Plan C attributable to the ac-count balances of the employees of Employer B whohad participated in Plan C. As part of this agreement,Employer C represented to Employer A that Plan Cis tax qualified. Employers A and C also agreed thatsuch transfer would be in accordance with § 414(l)and § 1.414(l)–1 and addressed issues related to costsassociated with the transfer. Following the transac-tion, the employees of Employer B began participa-tion in Plan A. Effective July 1, 2007, Plan A ac-cepted the transfer of plan assets from Plan C. Afterthe transfer, Employer A determined that all the par-ticipants in one division of Employer B had been in-correctly excluded from allocation of the profit shar-ing contributions for the 2002 and 2003 plan years.During 2008, Employer A made corrective contribu-tions on behalf of the affected participants. The cor-rective contributions were credited with earnings at arate appropriate for the plan from the date the correc-tive contribution should have been made to the date ofcorrection and Employer A otherwise complied withthe requirements of SCP. Under these facts, EmployerA has, within the correction period, corrected the Op-erational Failures for the 2002 and 2003 plan yearswith respect to the assets transferred to Plan A, andthus satisfied the requirements of this section 9.
PART V. VOLUNTARY CORRECTIONPROGRAM WITH SERVICEAPPROVAL (VCP)
SECTION 10. VCP PROCEDURES
.01 VCP requirements. The require-ments of this section 10 are satisfied withrespect to failures submitted in accordancewith the requirements of this section 10if the Plan Sponsor pays the compliancefee required under section 12 and imple-ments the corrective actions and satisfies
any other conditions in the compliancestatement described in section 10.08.
.02 Identification of failures. VCP isnot based upon an examination of the planby the Service. Only the failures raised bythe Plan Sponsor or failures identified bythe Service in processing the applicationare addressed under VCP, and only thosefailures are covered by a VCP compliancestatement. The Service will not make anyinvestigation or finding under VCP con-cerning whether there are failures.
.03 Effect of VCP submission on exam-ination. Because VCP does not arise outof an examination, consideration underVCP does not preclude or impede (under§ 7605(b) or any administrative provisionsadopted by the Service) a subsequent ex-amination of the Plan Sponsor or the planby the Service with respect to the taxableyear (or years) involved with respect tomatters that are outside the compliancestatement. However, a Plan Sponsor’sstatements describing failures are madeonly for purposes of VCP and will not beregarded by the Service as an admissionof a failure for purposes of any subsequentexamination. See section 5.07 for the def-inition of Under Examination.
.04 No concurrent examination activity.Except in unusual circumstances, a planthat has been properly submitted underVCP will not be examined while the sub-mission is pending. Notwithstanding theabove, a plan that is eligible for a GroupSubmission under section 10.11 may beexamined while the Group Submission ispending with respect to issues not identi-fied in the Group Submission at the timesuch plan comes Under Examination. Inaddition, if it is determined that eitherthe plan or the Plan Sponsor was, or mayhave been a party to an abusive tax avoid-ance transaction (as defined under section4.13(2)), the Service may authorize theexamination of the plan, even if a sub-mission pursuant to VCP is pending. Thispractice regarding concurrent examina-tions does not extend to other plans of thePlan Sponsor. Thus, any plan of the PlanSponsor that is not pending under VCPcould be subject to examination.
.05 Determination letter application forplan amendments related to a VCP sub-mission. In any case in which a determi-nation letter may be submitted pursuant tosection 6.05, the Plan Sponsor must sub-mit a copy of the amendment, the appropri-
ate determination letter application form(i.e., Form 5300, 5307 or 5310) , and theappropriate user fee concurrently and tothe same address as the VCP submission.Pursuant to section 12.03 of Rev. Proc.2007–44, in the case of individually de-signed plans, a restated plan generally willbe required. The user fee for the deter-mination letter application and the fee forthe VCP submission must be submitted onseparate checks made payable to the U.S.Treasury. See section 11.13 for the VCPmailing address.
.06 Determination letter applicationsnot related to a VCP submission. (1)The Service may process a determina-tion letter application submitted under thedetermination letter program (includingan application requested on Form 5310)concurrently with a VCP submission forthe same plan. However, issuance of thedetermination letter in response to an ap-plication made on a Form 5310 will besuspended pending the closure of the VCPsubmission.
(2) A submission of a plan under the de-termination letter program does not consti-tute a submission under VCP. If the PlanSponsor discovers a Qualification Failure,the Qualification Failure may not be cor-rected as part of the determination letterprocess. The Plan Sponsor may use SCPand VCP instead, as applicable. If the Ser-vice in connection with a determinationletter application discovers a QualificationFailure, the Service may issue a closingagreement with respect to the failures iden-tified or, if appropriate, refer the case toEmployee Plans Examinations. In eithercase, the fee structure in section 12 relat-ing to VCP, will not apply. Except as pro-vided in section 10.06(3), the sanction insection 14.01 relating to Audit CAP willapply. See section 5.07(3) for a descrip-tion of when a plan submitted for a deter-mination letter is considered to be UnderExamination.
(3) If the Service in connection with adetermination letter application discoversthe plan has not been amended timely fortax legislation changes, the fee structure insection 14.04 will apply.
.07 Processing of submission. (1)Screening of submission. Upon receiptof a submission under VCP, the Servicewill review whether the eligibility require-ments of section 4 and the submissionrequirements of section 11 are satisfied.
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(2) Eligibility of submission. If, at anystage of the review process, the Servicedetermines that a VCP submission is se-riously deficient or that the application ofVCP would be inappropriate or impracti-cable, the Service reserves the right to re-turn the submission without contacting thePlan Sponsor. If no substantive processingof the case has occurred, the Service willrefund the compliance fee submitted withthe request.
(3) Review of submission. Once theService determines that the submission iscomplete under VCP, the Service will con-tact the Plan Sponsor or the Plan Sponsor’srepresentative to discuss the proposed cor-rections and the plan’s administrative pro-cedures.
(4) Additional information required. Ifadditional information is required, a Ser-vice representative will generally contactthe Plan Sponsor or the Plan Sponsor’srepresentative and explain what is neededto complete the submission. The PlanSponsor will have 21 calendar days fromthe date of this contact to provide the re-quested information. If the information isnot received within 21 days, the matter willbe closed, the compliance fee will not bereturned, and the case may be referred toEmployee Plans Examinations. 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 (by the applicable groupmanager).
(5) Additional failures discovered afterinitial submission. (a) A Plan Sponsor thatdiscovers additional unrelated Qualifica-tion or 403(b) Failures after its initial sub-mission may request that such failures beadded to its submission. However, the Ser-vice retains the discretion to reject the in-clusion of such failures if the request isnot timely (for example, if the Plan Spon-sor makes its request when processing ofthe submission is substantially complete)or the application of VCP would be inap-propriate or impracticable.
(b) If the Service discovers an unrelatedQualification or 403(b) Failure while therequest is pending, the failure generallywill be added to the failures under con-sideration. However, the Service retainsthe discretion to determine that a failure isoutside the scope of the voluntary requestfor consideration because the Plan Spon-sor did not voluntarily bring it forward. In
this case, if the additional failure is signif-icant, all aspects of the plan may be exam-ined and the rules pertaining to Audit CAPwill apply.
(6) Conference right. If the Service ini-tially determines that it cannot issue a com-pliance statement because the parties can-not agree upon correction or a change inadministrative procedures, the Plan Spon-sor (generally through the Plan Sponsor’srepresentative) will be contacted by theService representative and offered a con-ference with the Service. The conferencecan be held either in person or by telephoneand must be held within 21 calendar daysof the date of contact. The Plan Sponsorwill have 21 calendar days after the date ofthe conference to submit additional infor-mation in support of the submission. Anyrequest for an extension of the 21-day timeperiod must be made in writing within the21-day time period and must be approvedby the Service (by the applicable groupmanager). Additional conferences may beheld at the discretion of the Service.
(7) Failure to reach resolution. If theService and the Plan Sponsor cannot reachagreement with respect to the submission,the matter will be closed, the compliancefee will not be returned, and the case maybe referred to Employee Plans Examina-tions. In the case of an Anonymous Sub-mission that fails to reach resolution underthis revenue procedure, the Service will re-fund 50% of the applicable VCP fee. Seesection 12 for the VCP fee.
(8) Issuance of compliance statement.If agreement is reached, the Service willsend to the Plan Sponsor a compliancestatement specifying the corrective actionrequired. If the original submission issubsequently materially modified, then,unless the Plan Sponsor has submitted apenalty of perjury statement with respectto such subsequent modifications, thePlan Sponsor will be required to sign thecompliance statement. In such case, theService will send to the Plan Sponsor anunsigned compliance statement specifyingthe corrective action required. Within 30calendar days of the date the compliancestatement is sent, a Plan Sponsor must signthe compliance statement and return it andany compliance fee required to be paid atthe time that the compliance statement issigned (see section 11.05). The Servicewill then issue a signed copy of the compli-ance statement to the Plan Sponsor. If the
Plan Sponsor does not sign the compliancestatement and send it to the Service (witha compliance fee, if applicable) within 30calendar days, the plan may be referred toEmployee Plans Examinations.
(9) Timing of correction. The PlanSponsor must implement the specific cor-rections and administrative changes setforth in the compliance statement within150 days of the date of the compliancestatement. Any request for an extensionof this time period must be made priorto the expiration of the correction periodin writing and must be approved by theService. Correction of the failure to adopttimely interim amendments or amend-ments relating to the implementation ofoptional law changes, as described in sec-tion 6.05(3)(a), must be made by the dateof the submission. That is, the applicationshould include the executed amendmentsthat would correct this failure.
(10) Modification of compliance state-ment. Once the compliance statement hasbeen issued (based on the information pro-vided), the Plan Sponsor cannot request amodification of the compliance terms ex-cept by a new request for a compliancestatement. However, if the requested mod-ification is minor and is postmarked withinthe correction period provided for in thecompliance statement, the compliance feewill be equal to the lesser of one-half ofthe original compliance fee or $1,500. Therequest should be sent to the VCP mail-ing address provided for in section 11.13.The request should include a letter explain-ing the modification, a copy of the originalcompliance statement, a copy of the origi-nal application and if applicable any otherpertinent correspondence relating to the is-suance of the original compliance state-ment, and a check for the compliance feepayable to the U.S. Treasury.
(11) Verification. Once the compliancestatement has been issued, the Servicemay require verification that the correc-tion methods have been complied with andthat any plan administrative proceduresrequired by the compliance statement havebeen implemented. This verification doesnot constitute an examination of the booksand records of the employer or the plan(within the meaning of § 7605(b)). If theService determines that the Plan Sponsordid not implement the corrections and pro-cedures within the stated time period, the
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plan may be referred to Employee PlansExaminations.
.08 Compliance statement. (1) Generaldescription of compliance statement. Thecompliance statement issued for a VCPsubmission addresses the failures iden-tified, the terms of correction, includingany revision of administrative procedures,and the time period within which pro-posed corrections must be implemented,including any changes in administrativeprocedures. The compliance statementalso provides that the Service will not treatthe plan as failing to satisfy the applica-ble requirements of the Code on accountof the failures described in the compli-ance statement if the conditions of thecompliance statement are satisfied. Withrespect to a failure to amend a plan timelyfor interim amendments, or optional lawchanges, as described in section 6.05(3)of this revenue procedure, the issuanceof a compliance statement will result inthe corrective amendments being treatedas if they had been adopted timely forthe purpose of determining the availabil-ity of the extended remedial amendmentperiod currently described in Rev. Proc.2007–44. However, the issuance of such acompliance statement does not constitutea determination as to whether the interimamendment or other corrective amend-ment to reflect the implementation ofoptional law changes, as drafted, complieswith the change in qualification require-ment. The compliance statement will notmake any determination on whether thecorrective amendment conforms the termsof the plan to the plan’s prior operations,and whether the amendment complieswith the requirements of § 401(a), in-cluding the requirements of §§ 401(a)(4),410(b), and 411(d)(6). Where current pro-cedures are inadequate for operating theplan in conformance with the applicablerequirements of the Code, the compliancestatement will be conditioned upon theimplementation of stated administrativeprocedures. The Service may prescribeappropriate administrative procedures inthe compliance statement.
(2) Compliance statement conditionedupon timely correction. The compliancestatement is conditioned on (i) there beingno misstatement or omission of materialfacts in connection with the submissionand (ii) the implementation of the specific
corrections and satisfaction of any otherconditions in the compliance statement.
(3) Authority delegated. Compliancestatements (including relief from any ex-cise tax or other penalty as provided undersection 6.09) are authorized to be signedby managers within Employee Plans Rul-ings and Agreements, under the Tax Ex-empt and Government Entities OperatingDivision of the Service.
.09 Effect of compliance statement onexamination. The compliance statement isbinding upon both the Service and the PlanSponsor or Eligible Organization (as de-fined in section 10.11(2)) with respect tothe specific tax matters identified thereinfor the periods specified, but does not pre-clude or impede an examination of the planby the Service relating to matters outsidethe compliance statement, even with re-spect to the same taxable year or years towhich the compliance statement relates.
.10 Special rules relating to Anony-mous (John Doe) Submissions. (1) TheAnonymous Submission procedure inthis section 10.10 permits submissionof Qualified Plans, 403(b) Plans, SEPs,and SIMPLE IRA Plans under VCPwithout initially identifying the applicableplan(s), the Plan Sponsor(s), or theEligible Organization. The requirementsof this revenue procedure relating to VCP,including sections 10, 11, and 12, apply tothese submissions. However, informationidentifying the plan or the Plan Sponsormay be redacted (and the power of attorneystatement and the penalty of perjurystatement need not be included with theinitial submission). In addition, if adetermination letter application will berequested as part of the submission, thedetermination letter application should notbe submitted until the time all identifyinginformation is provided to the Service. Forpurposes of processing the submission, thestate of the Plan Sponsor must be identifiedin the initial submission. All anonymoussubmissions must be numbered or labeledon the first page of the VCP submissionby the Plan Sponsor or its representativeto facilitate identification and tracking ofthe submission. The identification numbershould be unique to the submissionand should not be used with respect toany other anonymous submission of thePlan Sponsor or representative. Oncethe Service and the plan representativereach agreement with respect to the
submission, the Service will contact theplan representative in writing indicatingthe terms of the agreement. The PlanSponsor will have 21 calendar days fromthe date of the letter of agreement toidentify the plan and Plan Sponsor. Ifthe Plan Sponsor does not submit theidentifying material (including the powerof attorney statement and the penalty ofperjury statement) within 21 calendar daysof the letter of agreement, the matter willbe closed and the compliance fee will notbe returned.
(2) Notwithstanding section 10.04, un-til the plan(s) and Plan Sponsor(s) are iden-tified to the Service, a submission underthis subsection does not preclude or im-pede an examination of the Plan Sponsoror its plan(s). Thus, a plan submitted un-der the Anonymous Submission procedurethat comes Under Examination prior to thedate the plan(s) and Plan Sponsor(s) identi-fying materials are received by the Servicewill no longer be eligible under VCP.
.11 Special rules relating to Group Sub-missions. (1) General rules. An EligibleOrganization may submit a VCP requestfor a Qualified Plan, a 403(b) Plan, a SEP,or a SIMPLE IRA Plan under a Group Sub-mission for Plan Document, Operationaland Employer Eligibility Failures. If asponsor of a master or prototype plan sub-mits failures with respect to more than onemaster or prototype plan, each plan will betreated as a separate submission and a sep-arate fee must be submitted for each pro-totype plan. Similarly, if a Volume Sub-mitter practitioner submits failures with re-spect to more than one Volume Submitterplan, each plan will be treated as a sepa-rate submission and a separate fee must besubmitted for each specimen plan.
(2) Eligible Organizations. For pur-poses of a Group Submission, the term“Eligible Organization” means either (a)a Sponsor (as that term is defined in sec-tion 4.07 of Rev. Proc. 2005–16, 2005–1C.B. 674) of a master or prototype plan,(b) a Volume Submitter practitioner, asthat term is defined in section 13.04 ofRev. Proc. 2005–16, (c) an insurancecompany or other entity that has issuedannuity contracts or provides serviceswith respect to assets for 403(b) Plans,or (d) an entity that provides its clientswith administrative services with respectto Qualified Plans, 403(b) Plans, SEPs,or SIMPLE IRA Plans. An Eligible
September 2, 2008 487 2008–35 I.R.B.
Organization is not eligible to make aGroup Submission unless the failures intheir submission result from a systemicerror involving the Eligible Organizationthat affects at least 20 plans and thatresult in at least 20 plans implementingcorrection. If, at any time before theService issues the compliance statement,the number of plans falls below 20, theEligible Organization must notify theService that it is no longer eligible to makea Group Submission (and the compliancefee may be retained).
(3) Special Group Submission proce-dures. (a) In general, a Group Submissionis subject to the same procedures as anyVCP submission in accordance with sec-tions 10 and 11, except that the EligibleOrganization is responsible for perform-ing the procedural obligations imposed onthe Plan Sponsor under sections 10 and 11.See section 11.02(15) for a special sub-mission requirement with respect to GroupSubmissions.
(b) The Eligible Organization must pro-vide notice to all Plan Sponsors of theplans included in the Group Submission.The notice must be provided at least 90days before the Eligible Organization pro-vides the Service with the information re-quired in section 10.11(3)(c). The purposeof the notice is to provide each Plan Spon-sor with information relating to the GroupSubmission request. The notice should ex-plain the reason for the Group Submis-sion and inform the Plan Sponsor that thePlan Sponsor’s plan will be included in theGroup Submission unless the Plan Spon-sor responds within the 90-day period toexclude the Plan Sponsor’s plan from theGroup Submission.
(c) When an Eligible Organization re-ceives an unsigned compliance statementon the proposed correction and agrees tothe terms of the compliance statement, theEligible Organization must return to theService within 120 calendar days not onlythe signed compliance statement and anyadditional compliance fee under section12.05, but also a list containing (i) the em-ployers’ tax identification numbers for thePlan Sponsors of the plans to which thecompliance statement may be applicable,(ii) the plans by name, plan number, typeof plan, and number of plan participants,(iii) a certification that each Plan Sponsorreceived notice of the Group Submission,
and (iv) a certification that each Plan Spon-sor timely filed the Form 5500 series re-turn for each plan. This list can be submit-ted at any stage of the submission processprovided that the requirements of section10.11(3)(b) have been satisfied. Appli-cants are encouraged to submit the list ona computer disk in Microsoft Word. Onlythose plans for which correction is actu-ally made within 240 calendar days of thedate of the signed compliance statement(or within such longer period as may beagreed to by the Service at the request ofthe Eligible Organization) will be coveredby the compliance statement.
(d) Notwithstanding section 4.02, ifa Plan Sponsor of a plan that is eligibleto be included in the Group Submissionand has not elected to be excluded fromthe Group Submission pursuant to section10.11(3)(b) is notified of an impendingEmployee Plans examination after theEligible Organization filed the Group Sub-mission application, the Plan Sponsor’splan will be included in the Group Submis-sion. However, with respect to such plan,the Group Submission will not precludeor impede an examination of the plan withrespect to any failures not identified in theGroup Submission application at the timethe plan comes Under Examination.
.12 Multiemployer and multiple em-ployer plans. (1) 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 VCP. Therequest must be with respect to the plan,rather than a portion of the plan affectingany particular employer.
(2) If a VCP submission for a multi-employer or multiple employer plan hasfailures that apply to fewer than all of theemployers under the plan, the plan admin-istrator may choose to have the compli-ance fee (in section 12) or sanction (in sec-tion 14) calculated separately for each em-ployer based on the assets attributable tothat employer, rather than being attribut-able to the assets of the entire plan. Thus,the plan administrator may choose to ap-ply the provisions of this paragraph wherethe failure is attributable in whole or in partto data, information, actions, or inactionsthat are within the control of the employ-ers rather than the multiemployer or mul-tiple employer plan (such as attribution in
whole or in part to the failure of a employerto provide the plan administrator with fulland complete information).
SECTION 11. APPLICATIONPROCEDURES FOR VCP
.01 General rules. The requirements ofthis section 11 are satisfied if the requestfor a compliance statement from the Ser-vice under VCP satisfies the informationaland other requirements of this section 11.In general, a request under VCP consists ofa letter from the Plan Sponsor (which maybe a letter from the Plan Sponsor’s repre-sentative) or Eligible Organization (or rep-resentative) to the Service that contains adescription of the failures, a description ofthe proposed methods of correction, andother procedural items set forth in this sec-tion 11. Appendix D and Appendix F ofthis revenue procedure are provided to as-sist the applicant in satisfying these re-quirements. Applicants are encouraged touse Appendix D or Appendix F, as applica-ble. If the Streamlined Application proce-dures described in section 11.02 are used,the applicant should use Appendix F andrelated schedules; otherwise, the applica-tion should be made in accordance with theprovisions of section 11.03, using the for-mat outlined in Appendix D.
The Appendix D and Appendix F for-mats for the application should not bemodified. Also, since the application mayform part of a document that is executedby the Service, the application itself (asdistinguished from any cover letter orother supplemental letters that the appli-cant may provide) should not be submittedunder the letterhead of the Plan Sponsoror the Plan Sponsor’s authorized represen-tative. The application also contains anEnforcement Resolution section (Part VIIof Appendix D and Part IV of AppendixF). The applicant should complete onlyParts I through VI, and Parts I throughIII, of Appendix D and Appendix F, re-spectively. The Enforcement Resolution(Part VII of Appendix D and Part IV ofAppendix F) may only be completed bythe Service. The application must includethe Enforcement Resolution section. Ifthe application is acceptable as submitted,the Service may execute the EnforcementResolution page to indicate its approvalof the submission. In such a situation, theexecuted Enforcement Resolution will be
2008–35 I.R.B. 488 September 2, 2008
made part of the compliance statement forthe submission.
.02 Streamlined Application proce-dures. (1) If all of the QualificationFailures the Plan Sponsor proposes to cor-rect through VCP are described in section11.02(3) and the Plan Sponsor proposesto correct such failures using a correctionmethod provided in the Appendix F sched-ules, then the submission should be madepursuant to those streamlined procedures.A Streamlined Application pursuant tothis section consists of the Appendix F, theappropriate schedule(s) for the failure(s)(as described in section 11.02(3)), andall other documents required as indicatedon the applicable schedule. The Servicereserves the right to request additionalinformation in connection with its pro-cessing of the Streamlined Application.The failure to provide the information re-quired in the format provided in AppendixF may result in a delay in the processingof the submission. If only certain failurescontained in the submission are describedin section 11.02(3) (or one or more of theproposed corrections is not a method setforth in the Appendix F schedules), thenthe submission may be made pursuant tothe Streamlined Application Procedures,to the extent applicable, and using the gen-eral rules of this section 11 to the extentthe Streamlined Application proceduresare not applicable.
(2) The Streamlined Application proce-dure in Appendix F should not be used ifany of its provisions (including the fail-ure, correction of the failure, or the PlanSponsor’s representation) do not apply tothe Plan or Plan Sponsor. In such circum-stance, a VCP submission should be madein accordance with the provisions of sec-tion 11.03 and Appendix D of this revenueprocedure.
(3) The failures eligible for the Stream-lined Application procedure and the appli-cable Appendix F schedules are describedas follows:
(a) Schedule 1: If the Plan Sponsorfailed to adopt timely (i) interim amend-ments described in section 6.05(2) or(ii) amendments required to reflect thechanged operation of the plan on accountof the Plan Sponsor’s decision to imple-ment optional law changes described insection 6.05(3)(b) of this revenue pro-cedure, the Plan Sponsor should submitAppendix F, Schedule 1.
(b) Schedule 2: If the Plan Sponsorfailed to timely adopt amendments to com-ply with required legislative or regulatorychanges (other than those described in(3)(a)), the Plan Sponsor should submitAppendix F, Schedule 2.
(c) Schedule 3: If the Plan is a SEP or aSARSEP and experienced one or more ofthe failures shown on Appendix F, Sched-ule 3, and if the Plan Sponsor proposesto correct such failure(s) by using themethod(s) provided on such schedule, thePlan Sponsor should submit Appendix F,Schedule 3.
(d) Schedule 4: If the Plan is a SIMPLEIRA and experienced one or more of thefailures shown on Appendix F, Schedule 4,and if the Plan Sponsor proposes to correctsuch failure(s) by using the method(s) pro-vided on such schedule, the Plan Sponsorshould submit Appendix F, Schedule 4.
(e) Schedule 5: If the Plan Sponsorfailed to administer the loans in accor-dance with the provisions of § 72(p)(2),the failure solely relates to employees whoare neither key employees (as defined in§ 416(i)(1)) nor self-employed individ-uals (as defined in § 401(c)(1)(B)), thePlan Sponsor should submit Appendix F,Schedule 5.
(f) Schedule 6: If the Plan Sponsorfailed to satisfy the criteria for an em-ployer to sponsor either a 403(b) Plan, ora § 401(k) plan, the Plan Sponsor shouldsubmit Appendix F, Schedule 6.
(g) Schedule 7: If the plan failed to dis-tribute elective deferrals made in excess ofthe § 402(g) limit, and the Plan Sponsorproposes to correct such failure using themethod described in Appendix A, section.04, the Plan Sponsor should submit Ap-pendix F, Schedule 7.
(h) Schedule 8: If the plan failed tomake required minimum distributionspursuant to § 401(a)(9), and proposes tocorrect such failure using the method de-scribed in Appendix A, section .06, thenthe Plan Sponsor should submit AppendixF, Schedule 8.
(i) Schedule 9: The Plan Sponsorshould submit Appendix F, Schedule 9 ifthe Plan experienced one or more of thefollowing failures:
1. § 401(a)(17) failure being correctedusing the method described in Appendix B,section 2.07(1)(a);
2. Hardship distribution failure beingcorrected using the method described inAppendix B, section 2.07(2)(a);
3. Loans permitted in operation butnot permitted by Plan document being cor-rected using the method described in Ap-pendix B, section 2.07(2)(a); or
4. Early inclusion of otherwise eligi-ble employee(s) being corrected using themethod described in Appendix B, section2.07(3)(a).
(4) An applicant may prepare a submis-sion that includes one or more of the sched-ules in Appendix F. The inclusion of multi-ple schedules set forth in Appendix F doesnot affect the fee for the submission, as de-termined in accordance with section 12.02.
.03 Submission requirements. If the ap-plication includes failures and correctionsthat are not addressed in Appendix F, thenthe submission should be made in accor-dance with the format provided in Appen-dix D. The application should include thefollowing:
(1) Identifying information for the ap-plicant. This would include, the name andEmployer Identification Number (EIN)of the applicant. (Note: Social SecurityNumbers are not acceptable. An appli-cant can obtain an EIN by calling (800)829–4933. An application for an EINcan also be made online by accessingwww.irs.gov and typing “How to Applyfor an EIN” in its search engine.)
(2) Identifying information for thePlan. A statement identifying the typeof plan submitted (e.g., Qualified Plan,403(b) Plan, SEP, or SIMPLE IRA Plan).In addition, if the submission involves aQualified Plan, the statement should alsoidentify the type of Qualified Plan beingsubmitted (e.g., Defined Benefit, MoneyPurchase, Profit Sharing, or Stock Bonus,and 401(k) or ESOP).
(3) Plan Data. Information relating tothe number of plan participants determinedin accordance with section 12.07 and thetotal amount of plan assets as of the mostrecent 5500 filing (or, if not filed, the mostrecent data available to the Plan Sponsor)prior to the filing of this VCP submission.
(4) Type of Submission. Where ap-plicable, the application should identifywhether the submission is a Group Sub-mission, an Anonymous Submission, anonamender submission, a multiemployeror multiple employer plan submission, oran Orphan Plan submission.
September 2, 2008 489 2008–35 I.R.B.
(5) Identification of Failures. A com-plete description of the failures, the yearsin which the failures occurred, includingclosed years (that is, years for which thestatutory period has expired), and the num-ber of employees affected by each failure.
(6) Explanation. An explanation ofhow and why the failures arose, includinga description of the administrative proce-dures applicable to the failures in effect atthe time the failures occurred.
(7) Proposed Method of Correction. Adetailed description of the method for cor-recting the failures that the Plan Spon-sor has implemented or proposes to imple-ment. Each step of the correction methodmust be described in narrative form. Thedescription must include the specific in-formation needed to support the suggestedcorrection method. This information in-cludes, for example, the number of em-ployees affected and the expected cost ofcorrection (both of which may be approxi-mated if the exact number cannot be deter-mined at the time of the request), the yearsinvolved, and calculations or assumptionsthe Plan Sponsor used to determine theamounts needed for correction.
(8) Earnings or actuarial adjustments.A description of the methodology that willbe used to calculate earnings or actuar-ial adjustments on any corrective contribu-tions or distributions (indicating the com-putation periods and the basis for deter-mining earnings or actuarial adjustments,in accordance with section 6.02(4)).
(9) Computations. Specific calcula-tions for each affected employee or a rep-resentative sample of affected employees.The sample calculations must be sufficientto demonstrate each aspect of the correc-tion method proposed. For example, if aPlan Sponsor requests a compliance state-ment with respect to a failure to satisfy thecontribution limits of § 415(c) and pro-poses a correction method that involveselective deferrals (whether matched or 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 a fail-ure to satisfy the ADP test in § 401(k)(3),the Plan Sponsor must submit the ADPtest results both before the correction andafter the correction.
(10) Former employees or beneficia-ries. The method that will be used to lo-
cate and notify former employees and ben-eficiaries, or an affirmative statement thatno former employees or beneficiaries wereaffected by the failures or will be affectedby the correction.
(11) Change in administrative proce-dures. A description of the measures thathave been or will be implemented to en-sure that the same failures will not recur.
(12) Request for excise relief (§§ 4972,4973, 4974 or 4979) or income tax reliefunder §72(t). If relief is sought, a specificrequest for relief should be included inthe submission, along with explanations,where applicable, supporting such request.
(13) Loan failures and income tax re-porting relief. A specific request for re-lief needs to be made if the applicant ei-ther wants relief from reporting a correctedparticipant loan as a deemed distribution orwants to report the loan as a deemed distri-bution in the year of correction instead ofthe year in which the deemed distributionoccurred.
(14) Under Examination statement. Astatement that, to the best of the Plan Spon-sor’s knowledge, neither the plan nor thePlan Sponsor is Under Examination.
(15) Abusive tax avoidance transactionstatement. A statement that neither theplan nor the Plan Sponsor has been a partyto an abusive tax avoidance transaction(as defined in section 4.13(2)) or a briefidentification of any abusive tax avoidancetransaction to which the plan or the PlanSponsor has been a party.
(16) Transferred Assets. If a submis-sion includes a failure that relates to Trans-ferred Assets and the failure occurred priorto the transfer, a description of the transac-tion (including the dates of the employerchange and the plan transfer).
(17) Unrelated determination letter ap-plication requests. A statement (if applica-ble) that the plan is currently being consid-ered in a determination letter applicationthat is not related to the VCP application.If the request for a determination letter ismade while a request for consideration un-der VCP is pending, the Plan Sponsor mustupdate the VCP request to add this infor-mation.
(18) 403(b) Plans only. In the case ofa 403(b) Plan submission, a statement thatthe Plan Sponsor has contacted all otherentities involved with the plan and hasbeen assured of cooperation in implement-ing the applicable correction, to the extent
necessary. For example, if the plan’s fail-ure is the failure to satisfy the requirementsof § 403(b)(1)(E) regarding elective defer-rals, the Plan Sponsor must, prior to mak-ing the VCP application, contact the in-surance company or custodian with con-trol over the plan’s assets to assure coop-eration in effecting a distribution of theexcess deferrals and the earnings thereon.An application under VCP must also con-tain a statement as to the type of employer(e.g., a tax-exempt organization describedin § 501(c)(3)) submitting the VCP appli-cation.
(19) Group Submissions only. A GroupSubmission must be signed by the Eligi-ble Organization or the Eligible Organi-zation’s authorized representative and ac-companied by a copy of the relevant por-tions of the plan document(s). In addi-tion, a Group Submission must include aseparate page for each affected Plan Spon-sor that provides the Plan Sponsor’s name,EIN, plan name, and failure(s).
(20) Orphan Plans only. If the plan isan Orphan Plan, whether relief from theVCP application fee or correction is beingrequested, and the supporting rationale forsuch relief.
.04 Required documents. A VCP sub-mission must be accompanied by the fol-lowing documents:
(1) Plan document. A copy of the entireplan document or the relevant portions ofthe plan document. For example, in a caseinvolving an improper exclusion of eligi-ble employees from a profit-sharing planwith a cash or deferred arrangement, rele-vant portions of the plan document includethe eligibility, allocation, and cash or de-ferred arrangement provisions of the ba-sic plan document (and the adoption agree-ment, if applicable), along with applica-ble definitions in the plan. If the plan isa 403(b) Plan and a plan document is notavailable, a written description of the planshould be submitted, with sample salaryreduction agreements if relevant. In thecase of a SEP and a SIMPLE IRA Plan, theentire plan document should be submitted.
(2) Determination letter application. Inany case in which correction of a Qualifi-cation Failure is made by plan amendment,as permitted under section 4.05, other thanthe adoption of an amendment designatedby the Service as a model amendment orthe adoption of a prototype or volume sub-mitter plan for which the Plan Sponsor has
2008–35 I.R.B. 490 September 2, 2008
reliance on the plan’s opinion or advisoryletter as provided in Rev. Proc. 2008–6,2008–1 I.R.B. 192, and the Plan Spon-sor is submitting a determination letter re-quest as permitted under section 6.05, thePlan Sponsor must submit a copy of theplan document in restated form, the appro-priate application form (i.e., Form 5300,5307 or 5310), the appropriate user feeconcurrently and to the same address as theVCP submission, and the most recent ver-sion of the Form 8717, User Fee for Em-ployee Plan Determination, Opinion, andAdvisory Letter Request. Pursuant to sec-tion 12.04 of Rev. Proc. 2007–44, ef-fective as of July 9, 2007, Form 6406,Short Form Application for Determinationfor Minor Amendment of Employee BenefitPlan, may not be used to apply for a deter-mination letter. An application submittedwith this form will no longer be acceptedby the Service. The user fee for the deter-mination letter application and the fee forthe VCP submission must be submitted onseparate checks made payable to the U.S.Treasury. See section 11.13 for the VCPmailing address.
.05 Date fee due generally. Except asprovided in sections 11.06 and 12.02(4),the VCP fee under section 12 and, if ap-plicable, the determination letter user feemust be included with the submission. TheVCP fee and the determination letter userfee must be submitted on separate checksmade payable to the U.S. Treasury. Ifthe appropriate fees are not included inthe submission, the submission will be re-turned.
.06 Additional fee due for SEPs,SIMPLE IRA Plans, and GroupSubmissions. In the case of a SEP,a SIMPLE IRA Plan, or a GroupSubmission, the initial fee describedin section 12.02, 12.04, or 12.05 mustbe included in the submission and anyadditional fee is due at the time thecompliance statement is signed by thePlan Sponsor and returned to the Service,or when agreement has been reachedbetween the Service and the Plan Sponsorregarding correction of the failure(s).
.07 Signed submission. The submissionmust be signed by the Plan Sponsor or thePlan Sponsor’s authorized representative.
.08 Power of attorney requirements. Tosign the submission or to appear beforethe Service in connection with the sub-mission, the Plan Sponsor’s representa-
tive must comply with the requirements ofsection 9.02(11) and (12) of Rev. Proc.2008–4, 2008–1 I.R.B. 121, and submitForm 2848, Power of Attorney and Dec-laration of Representative. A Form 2848that designates a representative not quali-fied to sign Part II of the Form 2848, e.g.,an unenrolled return preparer, will not beaccepted. A Plan Sponsor may authorizean individual, such as an unenrolled returnpreparer, to inspect or receive confiden-tial information using Form 8821, Tax In-formation Authorization. (See Form 8821and Instructions.) However, see section10.10 for special rules relating to Anony-mous Submissions.
.09 Penalty of perjury statement. Thefollowing declaration must accompanya request 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 supportof this submission are true, correct,and complete.” The declaration must besigned by the Plan Sponsor, not the PlanSponsor’s representative.
.10 Checklist. The Service will be ableto respond more quickly to a VCP requestif the request is carefully prepared andcomplete. The checklist in Appendix C isdesigned to assist Plan Sponsors and theirrepresentatives in preparing a submissionthat contains the information and docu-ments required under this revenue proce-dure. Except as otherwise provided inthe checklist, the checklist in Appendix Cmust be completed, signed, and dated bythe Plan Sponsor or the Plan Sponsor’s rep-resentative. A photocopy of this checklistmay be used.
.11 Designation. The letter to the Ser-vice should indicate in the upper right handcorner of the letter the type of plan submit-ted under VCP–a Qualified Plan, 403(b)Plan, SEP, or SIMPLE IRA Plan. In addi-tion, if the submission is a Group Submis-sion, an Anonymous Submission, a non-amender submission, a multiemployer ormultiple employer plan submission, or anOrphan Plan submission, the letter shouldso indicate.
.12 Acknowledgement letter. The Ser-vice will acknowledge receipt of a VCPsubmission if the Plan Sponsor or the PlanSponsor’s representative completes the
Acknowledgement Form in Appendix Eand includes it in the submission. A sepa-rate Appendix E Acknowledgement Formshould be included for each plan submit-ted. A photocopy of Appendix E may beused.
.13 VCP mailing address. All VCPsubmissions and accompanying determi-nation applications, if applicable, shouldbe mailed to:
.14 Maintenance of copies of submis-sions. Plan Sponsors and their represen-tatives should maintain copies of all cor-respondence submitted to the Service withrespect to their VCP requests.
.15 Assembling the submission. TheService will be able to process a submis-sion more quickly if the submission pack-age contains all of the items required by theAppendix C checklist and is assembled inthe following order:
1. If applicable, Form 8717, User Feefor Employee Plan Determination, Opin-ion, and Advisory Letter Request, and thecheck for the determination letter user feemade payable to the U.S. Treasury.
2. Determination letter application (i.e.,Form 5300, 5307, or 5310), if applicable.
3. Completed and signed Appendix Cchecklist.
4. A submission signed by the PlanSponsor or Plan Sponsor’s authorizedrepresentative, with a check for the VCPfee made payable to the U.S. Treasuryattached to the front of the submissionletter. The submission should include thefollowing information (see section 11.15,paragraph 5, for instructions relating toapplications submitted in the Appendix Dor Appendix F format):
• Type of plan (or group of plans) beingsubmitted.
• Description of the failures (if the fail-ures relate to Transferred Assets, in-clude a description of the related em-ployer transaction).
• An explanation of how and why thefailures arose.
• Description of the method for cor-recting failures, including earningsmethodology (if applicable) and sup-porting computations (if applicable).
September 2, 2008 491 2008–35 I.R.B.
• Description of the method used to lo-cate or notify former employees orbeneficiaries affected by the failuresor corrections. If no former employ-ees or beneficiaries are affected by thefailures or corrections, then the lettershould affirmatively state that positionwhen addressing this issue.
• Description of the administrative pro-cedures that have been or will be im-plemented to ensure that the failures donot recur.
• Whether a request is being made in or-der for participant loans corrected un-der this revenue procedure to not betreated as deemed distributions under§72(p) and the supporting rationale forsuch request. Alternatively, whether arequest is being made for participantloans corrected under this revenue pro-cedure to be treated as deemed distri-butions under §72(p) in the year of cor-rection.
• Whether relief is being requested fromimposition of the excise taxes under§§ 4972, 4973, 4974, or 4979, orthe 10% additional income tax under§ 72(t), and the supporting rationalefor such relief.
• If the plan is an Orphan Plan, whetherrelief from the VCP application fee isbeing requested, and the supporting ra-tionale for such relief.
• A statement specifying whether theplan is being considered in an unre-lated determination letter application(if applicable).
• A statement that the plan is not UnderExamination.
• A statement that the Plan Sponsor isnot under an Exempt Organizations ex-amination.
• A statement that neither the plan northe Plan Sponsor has been a party to anabusive tax avoidance transaction (asdefined in section 4.13(2)) or a briefidentification of any abusive tax avoid-ance transaction to which the plan orthe Plan Sponsor has been a party.
• Penalty of perjury statement.5. If the VCP application is submitted
using either the Appendix F or the Appen-dix D format, the application should in-clude a completed Appendix F or Appen-dix D, and any information/enclosures, in-cluding any related schedules. In addition,the application should include a separateEnforcement Resolution page.
6. Appendix E acknowledgement letter.7. Power of Attorney (Form 2848)
or Tax Information Authorization (Form8821), if applicable.
8. Copy of opinion or determinationletter (if applicable).
9. Relevant plan document language orplan document (if applicable).
10. Any other items that may be rele-vant to the submission.
SECTION 12. VCP FEES
.01 VCP fees. The compliance fees forall submissions under VCP are determinedunder this section 12. All fees must be sub-mitted by check made payable to the U.S.Treasury and, except for the special feesdescribed in sections 12.04 and 12.05(2),must be included with the initial submis-sion.
.02 VCP fee for Qualified Plans and403(b) Plans. (1) Except as otherwise pro-vided in this section 12, the compliance feefor a submission under VCP for QualifiedPlans and 403(b) Plans (including Anony-mous Submissions) is determined in accor-dance with the following chart.
Number of Participants Fee
20 or fewer $ 750
21 to 50 $ 1,000
51 to 100 $ 2,500
101 to 500 $ 5,000
501 to 1,000 $ 8,000
1,001 to 5,000 $15,000
5,001 to 10,000 $20,000
Over 10,000 $25,000
(2) If (a) a VCP submission involvesthe failure to satisfy the minimum distri-bution requirements of § 401(a)(9) for 50or fewer participants, (b) such failure is theonly failure of the submission, and (c) thefailure would result in the imposition of theexcise tax under § 4974, the compliancefee is $500.
(3) If (a) a VCP submission involves thefailure of participant loans to comply withthe requirements of § 72(p)(2), (b) the fail-ure does not affect more than 25% of thePlan Sponsor’s participants in any of the
year(s) in which the failure occurred, and(c) the failure is the only failure of the sub-mission, the applicable fee for a VCP sub-mission determined under the provisionsof section 12.02(1) is reduced by 50%.
(4) At the discretion of the Service, theVCP fee may be waived in the case of aterminating Orphan Plan. In such cases,the submission must include a request fora waiver of the VCP fee.
.03 VCP fee for nonamender failures.In general, the compliance fee for planswith a nonamender failure, as described
in section 6.05, is determined in accor-dance with the chart in section 12.02(1).The applicable fee for a VCP submissionthat contains only nonamender failures isreduced by 50% if it is submitted withina one-year period following the expira-tion of the plan’s remedial amendmentperiod for complying with such changes.Notwithstanding the above, the compli-ance fee for a submission that containsonly a failure to adopt timely interimamendments or amendments required to
2008–35 I.R.B. 492 September 2, 2008
implement optional law changes, as de-scribed in section 6.05(3)(a), is $375.
.04 VCP fee for Group Submission. Thecompliance fee for a Group Submission isbased on the number of plans affected bythe failure as described in the compliancestatement. With respect to pre-approvedplans, the fee is determined based on thenumber of basic plan documents submit-ted, irrespective of the number of accom-panying adoption agreements. The initialfee for the first 20 plans is $10,000. Anadditional fee is due equal to the prod-uct of the number of plans in excess of20 multiplied by $250. The maximumcompliance fee for a Group Submission is$50,000. If additional plans are added fol-lowing the Group Submission, the addi-tional fee is paid subject to the $50,000maximum compliance fee. If more thanone master or prototype plan is submit-ted as a Group Submission, each masteror prototype plan is considered a sepa-rate Group Submission for purposes of thecompliance fee.
.05 VCP fee for SEPs and SIMPLE IRAPlans. (1) In general, the compliance feefor a SEP or a SIMPLE IRA Plan submis-sion (including an Anonymous Submis-sion) is $250. Notwithstanding the preced-ing sentence, the Service reserves the rightto impose the fee schedule under section12.02 or section 12.06 in appropriate cir-cumstances.
(2) In any case in which a SEP orSIMPLE IRA Plan correction is notsimilar to a correction for a similarQualification Failure (as provided undersection 6.10(1)), the Service may imposean additional fee. If the failure involvesan Excess Amount to a SEP or a SIMPLEIRA Plan and the Plan Sponsor retains theExcess Amount in the SEP or SIMPLEIRA Plan, a fee equal to at least 10% of theExcess Amount excluding earnings willbe imposed. This is in addition to the SEPor SIMPLE IRA Plan compliance fee setforth in section 12.05(1).
.06 VCP fee for egregious or intentionalfailures. Notwithstanding the precedingprovisions of this section 12, in cases in-volving failures that are egregious (as de-scribed in section 4.11) or where the fail-ure is not inadvertent (i.e., is not a result ofan oversight or mistake), the compliancefee for Qualified Plans, 403(b) Plans, SEPsand SIMPLE IRA Plans is the greater of(1) the fee that would be determined un-
der the preceding provisions of this sec-tion 12, or (2) an amount equal to a negoti-ated percentage of the Maximum PaymentAmount, with such percentage not to ex-ceed 40%.
.07 Establishing the number of planparticipants. Compliance fees under thissection 12 are determined based on thetotal number of plan participants. For adescription of participant, see the Instruc-tions for Form 5500, lines 6 and 7. Fornew plans and ongoing plans, the numberof plan participants is determined fromthe most recently filed Form 5500 series.Thus, with respect to the 2007 Form 5500,the Plan Sponsor would use the numbershown in item 7f (or the equivalent itemon the Form 5500 C/R or EZ) to establishthe total number of plan participants. Inthe case of a terminated plan, the Form5500 used to determine the number ofplan participants must be the one filed forthe plan year prior to the plan year forwhich the Final Form 5500 return wasfiled. If the submission involves a planwith Transferred Assets and no new in-cidents of the failure occurred after theend of the second plan year that beginsafter the corporate merger, acquisition,or other similar employer transaction, thePlan Sponsor may calculate the number ofplan participants based on the Form 5500information that would have been filedby the Plan Sponsor for the plan year thatincludes the employer transaction if theTransferred Assets were maintained as aseparate plan.
PART VI. CORRECTION ON AUDIT(AUDIT CAP)
SECTION 13. DESCRIPTION OFAUDIT CAP
.01 Audit CAP requirements. If the Ser-vice identifies a Qualification or 403(b)Failure (other than a failure that has beencorrected in accordance with SCP or VCP)upon an Employee Plans or Exempt Orga-nizations examination of a Qualified Plan,403(b) Plan, SEP, or SIMPLE IRA Plan,the requirements of this section 13 are sat-isfied with respect to the failure if the PlanSponsor corrects the failure, pays a sanc-tion in accordance with section 14, satis-fies any additional requirements of section13.03, and enters into a closing agreementwith the Service. This section 13 also ap-
plies if the Service identifies a participantloan that did not comply with the require-ments of § 72(p)(2) (other than a loan fail-ure that is corrected in accordance withSCP or VCP) upon an Employee Plansor Exempt Organizations examination of aQualified Plan or 403(b) Plan.
.02 Payment of sanction. Payment ofthe sanction under section 14 generally isrequired at the time the closing agreementis signed. All sanction amounts should besubmitted by certified check or cashier’scheck made payable to the U.S. Treasury.
.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. If existingadministrative procedures are inadequatefor operating the plan in conformance withthe applicable requirements of the Code,the closing agreement may be conditionedupon the implementation of stated proce-dures. In addition, for Qualified Plans,pursuant to section 6.05, the Plan Sponsormay be required to obtain a Favorable Let-ter before the closing agreement is signed.If a Favorable Letter is required, the PlanSponsor is required to pay the applicableuser fee for obtaining the letter.
.04 Failure to reach resolution. If theService and the Plan Sponsor cannot reachan agreement with respect to the correc-tion of the failure(s) or the amount of thesanction, the plan will be disqualified or, inthe case of a 403(b) Plan, SEP, or SIMPLEIRA Plan will not have reliance on this rev-enue procedure.
.05 Effect of closing agreement. A clos-ing agreement constitutes an agreementbetween the Service and the Plan Spon-sor that is binding with respect to the taxmatters identified therein for the periodsspecified.
.06 Other procedural rules. The proce-dural rules for Audit CAP are set forth inInternal Revenue Manual (“IRM”) 7.2.2,EPCRS.
SECTION 14. AUDIT CAP SANCTION
.01 Determination of sanction. Ex-cept as otherwise provided in section14.04, the sanction under Audit CAP isa negotiated percentage of the MaximumPayment Amount. Sanctions will not beexcessive and will bear a reasonable rela-tionship to the nature, extent, and severity
September 2, 2008 493 2008–35 I.R.B.
of the failures, based on the factors be-low. In the case of any participant loanthat did not comply with the requirementsof § 72(p)(2), the Maximum PaymentAmount will include the tax the Servicecould collect as a result of the loan notbeing excluded from gross income under§ 72(p)(2).
.02 Factors considered. Factors in-clude: (1) the steps taken by the PlanSponsor to ensure that the plan had no fail-ures; (2) the steps taken to identify failuresthat may have occurred; (3) the extent towhich correction had progressed beforethe examination was initiated, includingfull correction; (4) the number and type ofemployees affected by the failure; (5) thenumber of nonhighly compensated em-ployees who would be adversely affectedif the plan were not treated as qualified oras satisfying the requirements of § 403(b),§ 408(k) or § 408(p); (6) whether the fail-ure is a failure to satisfy the requirementsof § 401(a)(4), § 401(a)(26), or § 410(b),either directly or through § 403(b)(12); (7)whether the failure is solely an EmployerEligibility Failure; (8) the period overwhich the failure(s) occurred (for example,the time that has elapsed since the end ofthe applicable remedial amendment periodunder § 401(b) for a Plan Document Fail-ure); and (9) the reason for the failure(s)(for example, data errors such as errors intranscription of data, the transposition ofnumbers, or minor arithmetic errors). Fac-tors relating only to Qualified Plans also
include: (1) whether the plan is the subjectof a Favorable Letter; and (2) whetherthe failure(s) were discovered during thedetermination letter process. If one of thefailures discovered during an EmployeePlans examination includes the failure toamend the plan timely for relevant legisla-tion, it is expected that the sanction will begreater than the applicable fee described insection 14.04. An additional factor takeninto account with respect to a participantloan that did not comply with the require-ments of § 72(p)(2) is the extent to whichthe failure is a result solely of action (orinaction) of the employer or its agents (orto the extent to which the failure is a resultof the employee’s or beneficiary’s actionsor inaction).
.03 Transferred Assets. If the exam-ination involves a plan with TransferredAssets and the Service determines that nonew incidents of the failures that relate tothe Transferred Assets occur after the endof the second plan year that begins afterthe corporate merger, acquisition, or othersimilar employer transaction, the sanctionunder Audit CAP will not exceed the sanc-tion that would apply if the Transferred As-sets were maintained as a separate plan.
.04 Fee for nonamenders discoveredduring the determination letter applicationprocess not related to a VCP submission.(1) The compliance fee for nonamenders(as defined in section 6.05(2)(a)(ii)) notvoluntarily identified by the Plan Sponsor,but instead discovered by the Service in
connection with the determination letterapplication process as described in section5.03(3) is determined in accordance withthe chart below. This fee schedule appliesif the only failure in the submission is thenonamender failure.
(2) The acronyms listed in the chart re-fer to the following laws:
(a) Employee Retirement Income Se-curity Act of 1974 (ERISA),
(b) Tax Equity and Fiscal Responsibil-ity Act of 1982 (TEFRA); Deficit Reduc-tion Act of 1984 (DEFRA); and Retire-ment Equity Act of 1984 (REA) together(T/D/R),
(c) Tax Reform Act of 1986 (TRA’86),
(d) Unemployment Compensation Actof 1992 (UCA); Omnibus Budget and Rec-onciliation Act of 1993 (OBRA ’93),
(e) The Uruguay Round AgreementsAct; the Uniformed Services Employmentand Reemployment Rights Act of 1994;the Small Business Job Protection Act of1996; the Taxpayer Relief Act of 1997;the Internal Revenue Service Restructur-ing and Reform Act of 1998; and the Com-munity Renewal Tax Relief Act of 2000(collectively known as “GUST”),
(f) Final and temporary regulationsunder § 401(a)(9), 74 FR 18987, publishedon April 17, 2002 (“401(a)(9) Regs”),
(g) The Economic Growth andTax Relief Reconciliation Act of 2001(“EGTRRA”).
Over 10,000 $40,000 $48,000 $56,000 $64,000 $72,000 $80,000
2008–35 I.R.B. 494 September 2, 2008
PART VII. EFFECT ON OTHERDOCUMENTS; EFFECTIVE DATE;PAPERWORK REDUCTION ACT
SECTION 15. EFFECT ON OTHERDOCUMENTS
.01 Rev. Proc. 2006–27 modified andsuperseded. Rev. Proc. 2006–27 is modi-fied and superseded by this revenue proce-dure.
.02 Section 3 of Rev. Proc. 2007–49modified and superseded. Section 3 ofRev. Proc. 2007–49, 2007–30 I.R.B. 141,is modified and superseded by this revenueprocedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is generally ef-fective January 1, 2009. However, PlanSponsors are permitted, at their option, toapply the provisions of this revenue proce-dure on or after September 2, 2008.
SECTION 17. PAPERWORKREDUCTION ACT
The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Officeof Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545–1673.
An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validOMB control number.
The collection of information inthis revenue procedure is in sections4.05, 6.02(5)(d), 6.05, 6.09(5), 6.09(6),10.01, 10.02, 10.05–10.07, 10.10–10.12,11.02–11.05, 11.07–11.15, 13.01, section2.01–2.07 of Appendix B, Appendix C,Appendix D, Appendix E, and AppendixF. This information is required to enablethe Commissioner, Tax Exempt and Gov-ernment Entities Division of the InternalRevenue Service to make determinationsregarding the issuance of various types ofclosing agreements and compliance state-ments. This information will be used toissue closing agreements and compliancestatements to allow individual plans tocontinue to maintain their tax qualifiedand tax-deferred status. As a result, fa-
vorable tax treatment of the benefits ofthe eligible employees is retained. Thelikely respondents are individuals, stateor local governments, businesses or otherfor-profit institutions, nonprofit institu-tions, and small businesses or organiza-tions.
The estimated total annual reporting orrecordkeeping burden is 76,222 hours.
The estimated annual burden per re-spondent/recordkeeper varies from .5 to45.5 hours, depending on individual cir-cumstances, with an estimated average of20.4 hours. The estimated number of re-spondents or recordkeepers is 3,745.
The estimated frequency of responses isoccasional.
Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. § 6103.
DRAFTING INFORMATION
The principal authors of this rev-enue procedure are Avaneesh Bhagatand Maxine Terry of the EmployeePlans, Tax Exempt and GovernmentEntities Division. For further informationregarding this revenue procedure,please contact the Employee Plans’taxpayer assistance telephone serviceat 877–829–5500 (a toll-free number)between the hours of 8:30 a.m. and4:30 p.m. Eastern Time, Mondaythrough Friday. Alternatively, youcan direct your questions to eitherMr. Bhagat or Ms. Terry by sendinga question via electronic mail [email protected].
APPENDIX A
OPERATIONAL FAILURES ANDCORRECTION METHODS
.01 General rule. This appendix setsforth Operational Failures and CorrectionMethods relating to Qualified Plans. 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(4) of this revenue pro-
cedure. The correction methods in thisappendix are acceptable to correct Qualifi-cation Failures under VCP, and to correctQualification Failures under SCP thatoccurred notwithstanding that the planhas established practices and proceduresreasonably designed to promote and facil-itate overall compliance with the Code, asprovided in section 4.04 of this revenueprocedure. To the extent a failure listed inthis appendix could occur under a 403(b)Plan, a SEP, or a SIMPLE IRA Plan, thecorrection method listed for such failuremay similarly be used to correct the fail-ure.
.02 Failure to properly provide the min-imum top-heavy benefit under § 416 tonon-key employees. In a defined contribu-tion plan, the permitted correction methodis to properly contribute and allocate therequired top-heavy minimums to the planin the manner provided for in the planon behalf of the non-key employees (andany other employees required to receivetop-heavy allocations under the plan). Ina defined benefit plan, the minimum re-quired benefit must be accrued in the man-ner provided in the plan.
.03 Failure to satisfy the ADP test setforth in § 401(k)(3), the ACP test set forthin § 401(m)(2), or, for plan years begin-ning on or before December 31, 2001, themultiple use test of § 401(m)(9). The per-mitted correction method is to make qual-ified nonelective contributions (QNECs)(as defined in §1.401(k)–6) on behalf ofthe nonhighly compensated employees tothe extent necessary to raise the actualdeferral percentage or actual contributionpercentage 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 mustbe the same percentage of compensation.QNECs contributed to satisfy the ADPtest need not be taken into account fordetermining additional contributions (e.g.,a matching contribution), if any. For pur-poses of this section .03, employees whowould have received a matching contri-bution had they made elective deferralsmust be counted as eligible employeesfor the ACP test, and the plan must sat-isfy the ACP test. Under this correctionmethod, a plan may not be treated as twoseparate plans, one covering otherwise
September 2, 2008 495 2008–35 I.R.B.
excludable employees and the other cov-ering all other employees (as permitted in§ 1.410(b)–6(b)(3)), in order to reduce thenumber of employees eligible to receiveQNECs. Likewise, under this correctionmethod, the plan may not be restructuredinto component plans in order to reducethe number of employees eligible to re-ceive QNECs.
.04 Failure to distribute elective defer-rals in excess of the § 402(g) limit (in con-travention of § 401(a)(30)). The permit-ted correction method is to distribute theexcess deferral to the employee and to re-port the amount as taxable in the year ofdeferral and in the year distributed. Theinclusion of the deferral and the distribu-tion (for both the excess deferral and earn-ings) in gross income applies whether ornot any portion of the excess deferral isattributable to a designated Roth contri-bution (see § 402A(d)(3)). In accordancewith § 1.402(g)–1(e)(1)(ii), a distributionto a highly compensated employee is in-cluded in the ADP test; and a distributionto a nonhighly compensated employee isnot included in the ADP test.
.05 Exclusion of an eligible employeefrom all contributions or accruals underthe plan for one or more plan years. (1)Improperly excluded employees: employerprovided contributions or benefits. Forplans with employer provided contribu-tions or benefits (which are neither electivedeferrals under a qualified cash or deferredarrangement under § 401(k) nor matchingor after-tax employee contributions thatare subject to § 401(m)), the permitted cor-rection method is to make a contributionto the plan on behalf of the employees ex-cluded from a defined contribution plan orto provide benefit accruals for the employ-ees excluded from a defined benefit plan.
(2) Improperly excluded employees:contributions subject to § 401(k) or§ 401(m). (a) For plans providing bene-fits subject to § 401(k) or § 401(m), thecorrective contribution for an improperlyexcluded employee is described in the fol-lowing paragraphs of this section .05(2).(See Examples 3 through 12 of AppendixB.)
(b) If the employee was not providedthe opportunity to elect and make elec-tive deferrals (other than designated Rothcontributions) to a § 401(k) plan that doesnot satisfy § 401(k)(3) by applying thesafe harbor contribution requirements of
§ 401(k)(12) or § 401(k)(13), the em-ployer must make a QNEC to the plan onbehalf of the employee that replaces the“missed deferral opportunity.” The misseddeferral opportunity is equal to 50% ofthe employee’s “missed deferral.” Themissed deferral is determined by multi-plying the actual deferral percentage forthe year of exclusion (whether or not theplan is using current or prior year test-ing) for the employee’s group in the plan(either highly compensated or nonhighlycompensated) by the employee’s com-pensation for that year. The employee’smissed deferral amount is reduced furtherto the extent necessary to ensure that themissed deferral does not exceed applicableplan limits, including the annual defer-ral limit under § 402(g) for the calendaryear in which the failure occurred. Underthis 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 applicable ADP, the corre-sponding missed deferral, and the requiredQNEC. Likewise, restructuring the planinto component plans is not permitted inorder to reduce the applicable ADP, thecorresponding missed deferral, and the re-quired QNEC. The QNEC required for theemployee for the missed deferral opportu-nity for the year of exclusion is adjustedfor earnings to the date the correctiveQNEC is made on behalf of the affectedemployee.
(c) If the employee should have beeneligible for but did not receive an alloca-tion of employer matching contributionsunder a non-safe harbor plan because heor she was not given the opportunity tomake elective deferrals, the employershould make a QNEC on behalf of theaffected employee. The QNEC is equal tothe matching contribution the employeewould have received had the employeemade a deferral equal to the missed de-ferral determined under section .05(2)(b).The QNEC must be adjusted for earningsto the date the corrective QNEC is madeon behalf of the affected employee.
(d) If the employee was not providedthe opportunity to elect and make elec-tive deferrals (other than designated Rothcontributions) to a safe harbor § 401(k)plan that uses a rate of matching contri-butions to satisfy the safe harbor require-
ments of § 401(k)(12), then the missed de-ferral is deemed equal to the greater of 3%of compensation or the maximum defer-ral percentage for which the employer pro-vides a matching contribution rate that isat least as favorable as 100% of the elec-tive deferral made by the employee. Thisestimate of the missed deferral replacesthe estimate based on the ADP test in atraditional § 401(k) plan. The requiredQNEC on behalf of the excluded employeeis equal to (i) the missed deferral oppor-tunity, which is an amount equal to 50%of the missed deferral, plus (ii) the match-ing contribution that would apply based onthe missed deferral. If an employee wasnot provided the opportunity to elect andmake elective deferrals to a safe harbor§ 401(k) plan that uses nonelective contri-butions to satisfy the safe harbor require-ments of § 401(k)(12), then the missed de-ferral is deemed equal to 3% of compen-sation. The required QNEC on behalf ofthe excluded employee is equal to (i) 50%of the missed deferral, plus (ii) the non-elective contribution required to be madeon behalf of the employee. The QNECrequired to replace the employee’s misseddeferral opportunity and the correspondingmatching or nonelective contribution is ad-justed for earnings to the date the correc-tive QNEC is made on behalf of the af-fected employee.
(e) If the employee should have been el-igible to elect and make after-tax employeecontributions (other than designated Rothcontributions), the employer must make aQNEC to the plan on behalf of the em-ployee that is equal to the “missed op-portunity for making after-tax employeecontributions.” The missed opportunity formaking after-tax employee contributionsis equal to 40% of the employee’s “missedafter-tax contributions.” The employee’smissed after-tax contributions are equal tothe actual contribution percentage (ACP)for the employee’s group (either highlycompensated or nonhighly compensated)times the employee’s compensation, butwith the resulting amount not to exceed ap-plicable plan limits. If the ACP consists ofboth matching and after-tax employee con-tributions, then, in lieu of basing the em-ployee’s missed after-tax employee con-tributions on the ACP for the employee’sgroup, the employer is permitted to deter-mine separately the portion of the ACP thatis attributable to after-tax employee con-
2008–35 I.R.B. 496 September 2, 2008
tributions for the employee’s group (eitherhighly compensated or nonhighly compen-sated), multiplied by the employee’s com-pensation for the year of exclusion. TheQNEC must be adjusted for earnings to thedate the corrective QNEC is made on be-half of the affected employee.
(f) If the employee was improperlyexcluded from an allocation of employermatching contributions because he or shewas not given the opportunity to makeafter-tax employee contributions (otherthan designated Roth contributions), theemployer must make a QNEC on behalfof the affected employee. The QNEC isequal to the matching contribution theemployee would have received had theemployee made an after-tax employeecontribution equal to the missed after-taxemployee contribution determined undersection .05(2)(e). The QNEC must beadjusted for earnings to the date the cor-rective QNEC is made on behalf of theaffected employee.
(g) The methods for correcting the fail-ures described in this section .05(2) do notapply until after the correction of otherqualification failures. Thus, for example,if, in addition to the failure of excludingan eligible employee, the plan also failedthe ADP or ACP test, the correction meth-ods described in section .05(2)(b) through(f) cannot be used until after correction ofthe ADP or ACP test failures. For pur-poses of this section .05(2), in order to de-termine whether the plan passed the ADPor ACP test, the plan may rely on a test per-formed with respect to those eligible em-ployees who were provided with the op-portunity to make elective deferrals or af-ter-tax employee contributions and receivean allocation of employer matching con-tributions, in accordance with the terms ofthe plan and may disregard the employeeswho were improperly excluded.
(3) Improperly excluded employees:designated Roth contributions. For em-ployees who were improperly excludedfrom plans that (i) are subject to § 401(k)(as described in section .05(2)) and (ii) pro-vide for the optional treatment of electivedeferrals as designated Roth contributions,the correction is the same as described un-der section .05(2). Thus, for example, thecorrective employer contribution requiredto replace the missed deferral opportunityis made in accordance with the methoddescribed in section .05(2)(b) in the case
of a § 401(k) plan that is not a safe harbor§ 401(k) plan or .05(2)(d) in the case ofa safe harbor § 401(k) plan. However,none of the corrective contributions madeby the employer may be treated as desig-nated Roth contributions (and may not beincluded in an employee’s gross income)and thus may not be contributed or al-located to a designated Roth account (asdescribed in § 402A(b)(2)). The correctivecontribution must be allocated to an ac-count established for receiving a QNEC orany other employer contribution in whichthe employee is fully vested and subjectto the withdrawal restrictions that apply toelective deferrals.
(4) Improperly excluded employees:catch-up contributions only. (a) Correc-tion for missed catch-up contributions. Ifan eligible employee was not provided theopportunity to elect and make catch-upcontributions to a § 401(k) plan, the em-ployer must make a QNEC to the planon behalf of the employee that replacesthe “missed deferral opportunity” attrib-utable to the failure to permit an eligibleemployee to make a catch-up contributionpursuant to § 414(v). The missed deferralopportunity for catch-up contributions isequal to 50% of the employee’s misseddeferral attributable to catch-up contribu-tions. For this purpose, the missed deferralattributable to catch-up contributions isone half of the applicable catch-up con-tribution limit for the year in which theemployee was improperly excluded. Thus,for example if an eligible employee wasimproperly precluded from electing andmaking catch-up contributions in 2006,the missed deferral attributable to catch-upcontributions is $2,500, which is one halfof $5,000, the 2006 catch-up contributionlimit for a § 401(k) plan. The eligibleemployee’s missed deferral opportunity is$1,250 (i.e., 50% of the missed deferralattributable to catch-up contributions of$2,500). The QNEC required to replacethe missed deferral opportunity for theyear of exclusion is adjusted for earningsto the date the corrective QNEC is madeon behalf of the affected employee. Forpurposes of this correction, an eligibleemployee, pursuant to § 414(v)(5), refersto any participant who (i) would haveattained age 50 by the end of the plan’staxable year and (ii) in the absence of theplan’s catch-up provision, could not makeadditional elective deferrals on account of
the plan or statutory limitations describedin § 414(v)(3) and § 1.414(v)–1(b)(1).
(b) Correction for missed matchingcontributions. If an employee was pre-cluded from making catch-up contribu-tions under this section .05(4), the PlanSponsor should ascertain whether the af-fected employee would have been entitledto an additional matching contributionon account of the missed deferral. If theemployee would have been entitled toan additional matching contribution, thenthe employer must make a QNEC for thematching contribution on behalf of theaffected employee. The QNEC is equalto the additional matching contributionthe employee would have received hadthe employee made a deferral equal to themissed deferral determined under para-graph (a) of this section .05(4). The QNECmust be adjusted for earnings to the datethe corrective QNEC is made on behalfof the affected employee. If in addition tothe failure to provide matching contribu-tions under this section .05(4)(b) , the planalso failed the ACP test, the correctionmethods described in this section cannotbe used until after correction of the ACPtest failure. For purposes of this section,in order to determine whether the planpassed the ACP test the plan may rely ona test performed with respect to those eli-gible employees who were provided withthe opportunity to make elective deferralsor after-tax employee contributions andreceive an allocation of employer match-ing contributions, in accordance with theterms of the plan and may disregard anyemployer matching contribution that wasnot made on account of the plan’s failureto provide an eligible employee with theopportunity to make a catch up contribu-tion.
(5) Failure to implement an employeeelection. (a) Missed opportunity for elec-tive deferrals. For eligible employees whofiled elections to make elective deferralsunder the Plan which the Plan Sponsorfailed to implement on a timely basis, thePlan Sponsor must make a QNEC to theplan on behalf of the employee to replacethe “missed deferral opportunity.” Themissed deferral opportunity is equal to50% of the employee’s “missed defer-ral.” The missed deferral is determinedby multiplying the employee’s electeddeferral percentage by the employee’scompensation. If the employee elected
September 2, 2008 497 2008–35 I.R.B.
a dollar amount for an elective deferral,the missed deferral would be the specifieddollar amount. The employee’s misseddeferral amount is reduced further to theextent necessary to ensure that the misseddeferral does not exceed applicable planlimits, including the annual deferral limitunder § 402(g) for the calendar year inwhich the failure occurred.
(b) Missed opportunity for after-taxemployee contributions. For eligibleemployees who filed elections to makeafter-tax employee contributions underthe Plan which the Plan Sponsor failedto implement on a timely basis, the PlanSponsor must make a QNEC to the plan onbehalf of the employee to replace the em-ployee’s missed opportunity for after-taxemployee contributions. The missed op-portunity for making after-tax employeecontributions is equal to 40% of the em-ployee’s “missed after-tax contributions.”The missed after-tax employee contri-bution is determined by multiplying theemployee’s elected after-tax employeecontribution percentage by the employee’scompensation.
(c) Missed opportunity affecting match-ing contributions. In the event of failuredescribed in section (a) or (b) of this sec-tion .05(5), if the employee would havebeen entitled to an additional matchingcontribution had either the missed de-ferral or after-tax employee contributionbeen made, then the employer must makea QNEC for the matching contributionon behalf of the affected employee. TheQNEC is equal to the matching contribu-tion the employee would have receivedhad the employee made a deferral equal tothe missed deferral determined under thisparagraph. The QNEC must be adjustedfor earnings to the date the correctiveQNEC is made on behalf of the affectedemployee.
(d) Coordination with correction ofother Qualification Failures. The methodfor correcting the failures described inthis section .05(5) does not apply untilafter the correction of other qualificationfailures. Thus, for example, if in additionto the failure to implement an employee’selection, the plan also failed the ADPtest or ACP test, the correction methodsdescribed in section .05(5)(a), (b) or (c)cannot be used until after correction of theADP or ACP test failures. For purposesof this section .05(5), in order to deter-
mine whether the plan passed the ADPor ACP test the plan may rely on a testperformed with respect to those eligibleemployees who were not impacted by thePlan Sponsor’s failure to implement em-ployee elections and received allocationsof employer matching contributions, inaccordance with the terms of the plan andmay disregard employees whose electionswere not properly implemented.
.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 (with earn-ings from the date of the failure to thedate of the distribution). The amount re-quired to be distributed for each year inwhich the initial failure occurred shouldbe determined by dividing the adjusted ac-count balance on the applicable valuationdate by the applicable distribution period.For this purpose, adjusted account balancemeans the actual account balance, deter-mined in accordance with § 1.401(a)(9)–5Q&A–3, reduced by the amount of the to-tal missed minimum distributions for prioryears. In a defined benefit plan, the per-mitted correction method is to distributethe required minimum distributions, plusan interest payment representing the lossof use of such amounts.
.07 Failure to obtain participant orspousal consent for a distribution subjectto the participant and spousal consentrules under §§ 401(a)(11), 411(a)(11),and 417. (1) The permitted correctionmethod is to give each affected partici-pant a choice between providing informedconsent for the distribution actually madeor receiving a qualified joint and survivorannuity. In the event that participant orspousal consent is required but cannot beobtained, the participant must receive aqualified joint and survivor annuity basedon the monthly amount that would havebeen provided under the plan at his orher retirement date. This annuity may beactuarially reduced to take into accountdistributions already received by the par-ticipant. However, the portion of the qual-ified joint and survivor annuity payableto the spouse upon the death of the par-ticipant may not be actuarially reduced totake into account prior distributions to theparticipant. Thus, for example, if, in ac-cordance with the automatic qualified jointand survivor annuity option under a plan,
a married participant who retired wouldhave received a qualified joint and sur-vivor annuity of $600 per month payablefor life with $300 per month payable tothe spouse for the spouse’s life beginningupon the participant’s death, but insteadreceived a single-sum distribution equalto the actuarial present value of the par-ticipant’s accrued benefit under the plan,then the $600 monthly annuity payableduring the participant’s lifetime may beactuarially reduced to take the single-sumdistribution into account. However, thespouse must be entitled to receive an an-nuity of $300 per month payable for lifebeginning at the participant’s death.
(2) An alternative permitted correctionmethod is to give each affected participanta choice between (i) providing informedconsent for the distribution actually made,(ii) receiving a qualified joint and survivorannuity (both (i) and (ii) of this section.07(2) are described in section .07(1) ofthis Appendix A), or (iii) a single-sum pay-ment to the participant’s spouse equal tothe actuarial present value of that survivorannuity benefit (calculated using the appli-cable interest rate and mortality table un-der § 417(e)(3)). For example, assumingthe actuarial present value of a $300 permonth annuity payable to the spouse forthe spouse’s life beginning upon the partic-ipant’s death were $7,837 (calculated us-ing the applicable interest rate and applica-ble mortality table under § 417(e)(3)), thesingle-sum payment to the spouse underclause (iii) of this section .07(2) is equal to$7,837. If the single-sum payment is madeto the spouse, then the payment is treatedin the same manner as a distribution under§ 402(c)(9) for purposes of rolling over thepayment to an IRA or other eligible retire-ment plan.
.08 Failure to satisfy the § 415 limits ina defined contribution plan. For limitationyears beginning before January 1, 2009,the permitted correction for failure to limitannual additions (other than elective defer-rals and after-tax employee contributions)allocated to participants in a defined con-tribution plan as required in § 415 (even ifthe excess did not result from the alloca-tion of forfeitures or from a reasonable er-ror in estimating compensation) is to placethe excess annual additions into an unallo-cated account, similar to the suspense ac-count described in § 1.415–6(b)(6)(iii) (asit appeared in the April 1, 2007 edition of
2008–35 I.R.B. 498 September 2, 2008
26 CFR part 1) prior to amendments madeby the recently finalized regulations under§ 415, to be used as an employer contri-bution, other than elective deferrals, in thesucceeding year(s). While such amountsremain in the unallocated account, the em-ployer is not permitted to make additionalcontributions to the plan. The permittedcorrection for failure to limit annual addi-tions that are elective deferrals or after-taxemployee contributions (even if the ex-cess did not result from a reasonable errorin determining compensation, the amountof elective deferrals or after-tax employeecontributions that could be made with re-spect to an individual under the § 415 lim-its) is to distribute the elective deferralsor after-tax employee contributions usinga method similar to that described under§ 1.415–6(b)(6)(iv) (as it appeared in theApril 1, 2007 edition of 26 CFR part 1)prior to amendments made by the recentlyfinalized regulations under § 415. Electivedeferrals and after-tax employee contribu-tions that are matched may be returnedto the employee, provided that the match-ing contributions relating to such contri-butions are forfeited (which will also re-duce excess annual additions for the af-fected individuals). The forfeited match-ing contributions are to be placed into anunallocated account to be used as an em-ployer contribution, other than elective de-ferrals, in succeeding periods. For limita-tion years beginning on or after January 1,2009, the failure to limit annual additionsallocated to participants in a defined con-tribution plan as required in § 415 is cor-rected in accordance with section 6.06(2)and (3).
.09 Abandoned Orphan Plans; orphancontracts and other abandoned plan as-sets. (1) Abandoned plans. If (a) a plan hasone or more failures (whether a Qualifica-tion Failure or a 403(b) Failure) that resultfrom either the employer having ceased toexist, the employer no longer maintainingthe plan, or similar reasons and (b) the planis an Orphan Plan, as defined in section5.03 (i.e., is not a plan to which ERISAapplies), the permitted correction is to ter-minate the plan and distribute plan assetsto participants and beneficiaries. This cor-rection must satisfy four conditions. First,the correction must comply with condi-tions, standards, and procedures substan-
tially similar to those set forth in section2578.1 of the Department of Labor Regu-lations (relating to abandoned plans). Sec-ond, the qualified termination administra-tor, based on plan records located and up-dated in accordance with the Departmentof Labor Regulations, must have reason-ably determined whether, and to what ex-tent, the survivor annuity requirements of§§ 401(a)(11) and 417 apply to any benefitpayable under the plan and takes reason-able steps to comply with those require-ments (if applicable). Third, each partic-ipant and beneficiary must have been pro-vided a nonforfeitable right to his or her ac-crued benefits as of the date of deemed ter-mination under the Department of LaborRegulations, subject to income, expenses,gains, and losses between that date and thedate of distribution. Fourth, participantsand beneficiaries must receive notificationof their rights under § 402(f). In addition,notwithstanding correction under this rev-enue procedure, the Service reserves theright to pursue appropriate remedies un-der the Internal Revenue Code against anyparty who is responsible for the plan, suchas the Plan Sponsor, plan administrator,or owner of the business, even in its ca-pacity as a participant or beneficiary un-der the plan. However, with respect to thefirst through third conditions above, no-tice need not be furnished to the Depart-ment of Labor, and notices furnished to thePlan Sponsor, participants, or beneficiariesneed not indicate that the procedures fol-lowed or notices furnished actually com-ply with, or are required under, Depart-ment of Labor regulations.
(2) Orphan contracts or other assets.In any case in which a 403(b) Failure re-sults from the employer having ceased in-volvement with respect to specific assets(including an insurance annuity contract)held under a defined contribution plan onbehalf of a participant who is a formeremployee or on behalf of a beneficiary, apermitted correction is to distribute thoseplan assets to the participant or benefi-ciary. Compliance with the distributionrules of section 2578.1(d)(2)(vii) of theDepartment of Labor Regulations satisfiesthis paragraph .09(2).
APPENDIX B
CORRECTION METHODSAND EXAMPLES; EARNINGS
ADJUSTMENT METHODSAND EXAMPLES
SECTION 1. PURPOSE,ASSUMPTIONS FOR EXAMPLESAND SECTION REFERENCES
.01 Purpose. (1) This appendix setsforth correction methods relating to Opera-tional Failures under Qualified Plans. Thisappendix also sets forth earnings adjust-ment methods. In each case, the methoddescribed corrects the Operational Failureidentified in the headings below. Correc-tive allocations and distributions shouldreflect earnings and actuarial adjustmentsin accordance with section 6.02(4) of thisrevenue procedure. The correction meth-ods in this appendix are acceptable tocorrect Qualification Failures under VCP,and to correct Qualification Failures underSCP that occurred notwithstanding thatthe plan has established practices and pro-cedures reasonably designed to promoteand facilitate overall compliance with theCode, as provided in section 4.04 of thisrevenue procedure.
(2) To the extent a failure listed in thisappendix could occur under a 403(b) Plan,SEP, or a SIMPLE IRA Plan, the correc-tion method listed for such failure maysimilarly be used to correct the failure.
.02 Assumptions for Examples. Unlessotherwise specified, for ease of presenta-tion, the examples assume that:
(1) the plan year and the § 415 limita-tion year are the calendar year;
(2) the employer maintains a single planintended to satisfy § 401(a) and has nevermaintained any other plan;
(3) in a defined contribution plan, theplan provides that forfeitures are used toreduce future employer contributions;
(4) the Qualification Failures are Op-erational Failures and the eligibility andother requirements for SCP, VCP or AuditCAP, whichever applies, are satisfied; and
(5) there are no Qualification Failuresother than the described Operational Fail-ures, and if a corrective action would resultin any additional Qualification Failure, ap-propriate corrective action is taken for that
September 2, 2008 499 2008–35 I.R.B.
additional Qualification Failure in accor-dance with EPCRS.
.03 Designated Roth contributions. Theexamples in this Appendix B generally donot identify whether the plan offers desig-nated Roth contributions. The results inthe examples, including corrective contri-butions, would be the same whether or notthe plan offered designated Roth contribu-tions.
.04 Section references. References tosection 2 and section 3 are references to thesection 2 and 3 in this appendix.
A Correction Method. Appendix A, sec-tion .03 sets forth a correction method fora failure to satisfy the actual deferral per-centage (“ADP”), actual contribution per-centage (“ACP”), or, for plan years be-ginning on or before December 31, 2001,multiple use test set forth in §§ 401(k)(3),401(m)(2), and 401(m)(9), respectively.
(b) One-to-One Correction Method.(i) General. In addition to the correctionmethod in Appendix A, a failure to sat-isfy the ADP test, ACP test, or, for planyears beginning on or before December31, 2001, the multiple use test may be cor-rected by 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 compensatedemployees or forfeited from the highlycompensated employees’ accounts as pro-vided in paragraph (1)(b)(iii) below. Thatsame dollar amount (i.e., the excess con-tribution amount, adjusted for earnings)is contributed to the plan and allocatedto nonhighly compensated employees asprovided in paragraph (1)(b)(iv) below.Under this correction method, a plan maynot be treated as two separate plans, onecovering otherwise excludable employeesand the other covering all other employ-ees (as permitted in § 1.410(b)–6(b)(3)).Likewise, restructuring the plan into com-ponent plans is not permitted.
(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 excess contri-butions (as defined in § 401(k)(8)(B)), theexcess aggregate contributions (as definedin § 401(m)(6)(B)), and for plan years be-ginning on or before December 31, 2001the amount treated as excess contributionsor excess aggregate contributions underthe multiple use test for the year, as as-signed to each highly compensated em-ployee in accordance with § 401(k)(8)(C)and § 401(m)(6)(C), over (B) previous cor-rections that complied with § 401(k)(8),§ 401(m)(6), and, for plan years beginningon or before December 31, 2001, the mul-tiple use test.
(iii) Distributions and Forfeitures of theExcess Contribution Amount. (A) The por-tion of the excess contribution amount as-signed to a particular highly compensatedemployee under paragraph (1)(b)(ii) is ad-justed for earnings from the end of the planyear of the year of the failure through thedate of correction. The amount assigned toa particular 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 theyear of the failure. If the amount so as-signed to a particular highly compensatedemployee has been previously distributed,the amount is an Excess Amount within themeaning of section 5.01(3) of this revenueprocedure. Thus, pursuant to section 6.06of this revenue procedure, the employermust notify the employee that the ExcessAmount is not eligible for favorable taxtreatment accorded to distributions fromqualified plans (and, specifically, is not el-igible for tax-free rollover).
(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 the planprovisions relating to forfeitures that werein 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 5.01(6) of thisrevenue procedure that must be corrected(see sections 2.04 and 2.05 below).
(iv) Contribution and Allocation ofEquivalent Amount. (A) The employermakes a contribution to the plan thatis equal to the aggregate amounts dis-tributed and forfeited under paragraph(1)(b)(iii)(A) (i.e., the excess contributionamount adjusted for earnings, as providedin paragraph (1)(b)(iii)(A), which does notinclude any matching contributions for-feited in accordance with § 411(a)(3)(G)as provided in paragraph (1)(b)(iii)(B)).The contribution must satisfy the vestingrequirements and distribution limitationsof § 401(k)(2)(B) and (C).
(B)(1) This paragraph (1)(b)(iv)(B)(1)applies to a plan that uses the cur-rent year testing method described in§1.401(k)–2(a)(2), §1.401(m)–2(a)(2)and, for periods prior to the effective dateof those regulations, Notice 98–1, 1998–1C.B. 327. The contribution made underparagraph (1)(b)(iv)(A) is allocated to theaccount balances of those individuals whowere either (I) the eligible employees forthe year of the failure who were nonhighlycompensated employees for that year or(II) the eligible employees for the year ofthe failure who were nonhighly compen-sated employees for that year and who alsoare nonhighly compensated employeesfor the year of correction. Alternatively,the contribution is allocated to accountbalances of eligible employees describedin (I) or (II) of the preceding sentence, ex-cept that the allocation is made only to theaccount balances of those employees whoare employees on a date during the yearof the correction that is no later than thedate of correction. Regardless of whichof these four options (described in the twopreceding sentences) the employer selects,eligible employees must receive a uniformallocation (as a percentage of compensa-tion) of the contribution. (See Examples1 and 2.) Under the one-to-one correc-tion method, the amount allocated to theaccount 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 employeefor 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 §1.401(k)–2(a)(2)and §1.401(m)–2(a)(2) and, for peri-ods prior to the effective date of those
2008–35 I.R.B. 500 September 2, 2008
regulations, Notice 98–1. Paragraph(1)(b)(iv)(B)(1) is applied by substituting“the year prior to the year of the failure”for “the year of the failure”.
(3) Examples.
Example 1:Employer A maintains a profit-sharing plan with
a cash or deferred arrangement that is intended to sat-isfy § 401(k) using the current year testing method.The plan does not provide for matching contributionsor after-tax employee contributions. In 2007, it wasdiscovered that the ADP test for 2005 was not per-formed correctly. When the ADP test was performedcorrectly, the test was not satisfied for 2005. For2005, the ADP for highly compensated employeeswas 9% and the ADP for nonhighly compensated em-ployees was 4%. Accordingly, the ADP for highlycompensated employees exceeded the ADP for non-highly compensated employees by more than two per-centage points (in violation of § 401(k)(3)). Therewere two highly compensated employees eligible un-der the § 401(k) plan during 2005, Employee P andEmployee Q. Employee P made elective deferrals of$10,000, which is equal to 10% of Employee P’s com-pensation of $100,000 for 2005. Employee Q madeelective deferrals of $9,500, which is equal to 8% ofEmployee Q’s compensation of $118,750 for 2005.
Correction:On June 30, 2007, Employer A uses the one-to-
one correction method to correct the failure to sat-isfy the ADP test for 2005. Accordingly, EmployerA calculates the dollar amount of the excess con-tributions for the two highly compensated employ-ees in the manner described in § 401(k)(8)(B). Theamount of the excess contribution for Employee Pis $4,000 (4% of $100,000) and the amount of theexcess contribution for Employee Q is $2,375 (2%of $118,750), or a total of $6,375. In accordancewith § 401(k)(8)(C), $6,375, the excess contributionamount, is assigned $3,437.50 to Employee P and$2,937.50 to Employee Q. It is determined that theearnings on the assigned amounts through June 30,2007 are $687 and $587 for Employees P and Q, re-spectively. The assigned amounts and the earningsare distributed to Employees P and Q. Therefore, Em-ployee P receives $4,124.50 ($3,437.50 + $687) andEmployee Q receives $3,524.50 ($2,937.50 + $587).In addition, on the same date, Employer A makes acorrective contribution to the § 401(k) plan equal to$7,649 (the sum of the $4,124.50 distributed to Em-ployee P and the $3,524.50 distributed to EmployeeQ). The corrective contribution is allocated to theaccount balances of eligible nonhighly compensatedemployees for 2005, pro rata based on their compen-sation for 2005 (subject to § 415 for 2005).
Example 2:The facts are the same as in Example 1, except
that for 2005 the plan also provides for (1) after-taxemployee contributions and (2) matching contribu-tions equal to 50% of the sum of an employee’s elec-tive deferrals and after-tax employee contributionsthat do not exceed 10% of the employee’s compensa-tion. The plan provides that matching contributionsare subject to the plan’s 20% per year of servicevesting schedule and that matching contributions are
forfeited and used to reduce employer contributionsif associated elective deferrals or after-tax employeecontributions are distributed to correct an ADP orACP test failure. For 2005, nonhighly compensatedemployees made after-tax employee contributionsand no highly compensated employee made any af-ter-tax employee contributions. Employee P receiveda matching contribution of $5,000 (50% of $10,000)and Employee Q received a matching contribution of$4,750 (50% of $9,500). Employees P and Q were100% vested in 2005. It was determined that the plansatisfied the requirements of the ACP test for 2005.
Correction:The same corrective actions are taken as in Ex-
ample 1. In addition, in accordance with the plan’sterms, corrective action is taken to forfeit EmployeeP’s and Employee Q’s matching contributions associ-ated with their distributed excess contributions. Em-ployee P’s distributed excess contributions and as-sociated matching contributions are $3,437.50 and$1,718.75, respectively. Employee Q’s distributedexcess contributions and associated matching con-tributions are $2,937.50 and $1,468.75, respectively.Thus, $1,718.75 is forfeited from Employee P’s ac-count and $1,468.75 is forfeited from Employee Q’saccount. In addition, the earnings on the forfeitedamounts are also forfeited. It is determined that therespective earnings on the forfeited amount for Em-ployee P is $250 and for Employee Q is $220. The to-tal amount of the forfeitures of $3,657.50 (EmployeeP’s $1,718.75 + $250 and Employee Q’s $1,468.75+ $220) is used to reduce contributions for 2007 andsubsequent years.
.02 Exclusion of Otherwise EligibleEmployees.
(1) Exclusion of Eligible Employeesin a 401(k) or (m) Plan. (a) Correc-tion Method. (i) Appendix A CorrectionMethod for Full Year Exclusion. AppendixA section .05(2) sets forth the correctionmethod for the exclusion of an eligibleemployee from electing and making elec-tive deferrals (other than designated Rothcontributions) and after-tax employee con-tributions to a plan that provides benefitsthat are subject to the requirements of§ 401(k) or § 401(m) for one or more fullplan years. (See Example 3.) Appendix Asection .05(2) also specifies the method fordetermining missed elective deferrals andthe corrective contributions for employ-ees who were improperly excluded fromelecting and making elective deferrals to asafe harbor § 401(k) plan for one or morefull plan years. (See Examples 8, 9 and10.) Appendix A section .05(3) sets forththe correction method for the exclusionof an eligible employee from electing andmaking elective deferrals in a plan that(i) is subject to § 401(k) and (ii) providesemployees with the opportunity to make
designated Roth contributions. AppendixA section .05(4) sets forth the correctionmethod for the situation where an eligibleemployee was permitted to make an elec-tive deferral, but was not provided withthe opportunity to make catch-up contri-butions under the terms of the plan and§ 414(v), and correction is being made bymaking a QNEC on behalf of the excludedemployee. (See Example 11.) AppendixA section .05(5) sets forth the correctionmethod for the failure by a plan to imple-ment an employee’s election with respectto elective deferrals (including designatedRoth contributions) or after-tax employeecontributions. (See Example 12.) In sec-tion 2.02(1)(a)(ii) below, the correctionmethods for (I) the exclusion of an eligibleemployee from all contributions (includ-ing designated Roth contributions) undera 401(k) or (m) plan for a full year, asdescribed in Appendix A sections .05(2)and .05(3), (II) the exclusion of an eligi-ble employee who was permitted to makeelective deferrals, but was not permitted tomake catch-up contributions for a full planyear as described in Appendix A section.05(4), and (III) the exclusion of an eligi-ble employee on account of the failure toimplement an employee’s election to makeelective deferrals or after-tax employeecontributions to the plan as described inAppendix A section .05(5) are expanded toinclude correction for the exclusion fromthese contributions (including designatedRoth contributions) under a 401(k) or (m)plan for a partial plan year. This correctionfor a partial year exclusion may be used inconjunction with the correction for a fullyear exclusion.
(ii) Expansion of Correction Method toPartial Year Exclusion. (A) In General.The correction method in Appendix A,section .05 is expanded to cover an em-ployee who was improperly excluded fromelecting and making elective deferrals(including designated Roth contributions)or after-tax employee contributions for aportion of a plan year or from receivingmatching contributions (on either electivedeferrals or after-tax employee 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 QNEC on behalf of the excludedemployee. The method and examples de-scribed to correct the failure to include
September 2, 2008 501 2008–35 I.R.B.
otherwise eligible employees do not applyuntil after correction of other qualificationfailures. Thus, for example, in the caseof a § 401(k) plan that does not apply thesafe harbor contribution requirements of§ 401(k)(12) or § 401(k)(13) the correc-tion for improperly excluding an employeefrom making elective deferrals, as de-scribed in the narrative and the examplesin this section cannot be used until aftercorrection of the ADP test failure. (SeeAppendix A section .05(2)(g).)
(B) Elective Deferral Failures. (1) Theappropriate QNEC for the failure to allowan employee to elect and make electivedeferrals (including designated Roth con-tributions) for a portion of the plan yearis equal to the missed deferral opportu-nity which is an amount equal to 50%of the employee’s missed deferral. Theemployee’s missed deferral is determinedby multiplying the ADP of the employee’sgroup (either highly or nonhighly com-pensated), determined prior to correctionunder this section 2.02(1)(a)(ii), by theemployee’s plan compensation for the por-tion of the year during which the employeewas improperly excluded. In a safe har-bor § 401(k) plan, the employee’s misseddeferral is determined by multiplying 3%(or, if greater, whatever percentage of theparticipant’s compensation which, if con-tributed as an elective deferral, would havebeen matched at a rate of 100% or more)by the employee’s plan compensationfor the portion of the year during whichthe employee was improperly excluded.The missed deferral for the portion of theplan year during which the employee wasimproperly excluded from being eligibleto make elective deferrals is reduced tothe extent that (i) the sum of the misseddeferral (as determined in the precedingtwo sentences of this paragraph) and anyelective deferrals actually made by theemployee for that year would exceed (ii)the maximum elective deferrals permittedunder the plan for the employee for thatplan year (including the § 402(g) limit).The corrective contribution is adjustedfor earnings. For purposes of correctingother failures under this revenue pro-cedure (including determination of anyrequired matching contribution) after cor-rection has occurred under this section2.02(1)(a)(ii)(B), the employee is treatedas having made pre-tax elective deferralsequal to the employee’s missed deferral
for the portion of the year during whichthe employee was improperly excluded.(See Examples 4 and 5.)
(2) The appropriate corrective contri-bution for the plan’s failure to implementan employee’s election with respect toelective deferrals is equal to the misseddeferral opportunity which is an amountequal to 50% of the employee’s misseddeferral. Corrective contributions areadjusted for earnings. The missed de-ferral is determined by multiplying theemployee’s deferral percentage by the em-ployee’s plan compensation for the portionof the year during which the employeewas improperly excluded. If the employeeelected a fixed dollar amount that can beattributed to the period of exclusion, thenthe flat dollar amount for the period ofexclusion may be used for this purpose.If the employee elected a fixed dollaramount to be deferred for the entire planyear, then that dollar amount is multipliedby a fraction. The fraction is equal tothe number of months, including partialmonths where applicable, during whichthe eligible employee was excluded frommaking catch-up contributions divided by12. The missed deferral for the portionof the plan year during which the eligibleemployee was improperly excluded frommaking elective deferrals is reduced tothe extent that (i) the sum of the misseddeferral (as determined in the precedingthree sentences) and any elective defer-rals actually made by the employee forthat year would exceed (ii) the maximumelective deferrals permitted under the planfor the employee for that plan year (in-cluding the § 402(g) limit). The correctivecontribution is adjusted for earnings. Therequirements relating to the passage of theADP test before this correction methodcan be used, as described in Appendix Asection .05(5)(d) still apply.
(C) After-tax Employee ContributionFailures. (1) The appropriate correc-tive contribution for the failure to allowemployees to elect and make after-taxemployee contributions for a portion ofthe plan year is equal to the missed af-ter-tax employee contributions opportu-nity, which is an amount equal to 40% ofthe employee’s missed after-tax employeecontributions. The employee’s missedafter-tax employee contributions is deter-mined by multiplying the ACP of the em-ployee’s group (either highly or nonhighly
compensated), determined prior to correc-tion under this section 2.02(1)(a)(ii)(C),by the employee’s plan compensation forthe portion of the year during which theemployee was improperly excluded. Ifthe ACP consists of both matching andafter-tax employee contributions, then forpurposes of the preceding sentence, in lieuof basing the missed after-tax employeecontributions on the ACP for the em-ployee’s group (either highly compensatedor nonhighly compensated), the Employeris permitted to determine separately theportions of the ACP that are attributable tomatching contributions and after-tax em-ployee contributions and base the missedafter-tax employee contributions on theportion of the ACP that is attributableto after-tax employee contributions. Themissed after-tax employee contributionis reduced to the extent that (i) the sumof that contribution and the actual totalafter-tax employee contributions made bythe employee for the plan year would ex-ceed (ii) the sum of the maximum after-taxemployee contributions permitted underthe plan for the employee for the plan year.The corrective contribution is adjusted forearnings. The requirements relating to thepassage of the ACP test before this correc-tion method can be used, as described inAppendix A section .05(2)(g) still apply.
(2) The appropriate corrective contri-bution for the plan’s failure to implementan employee’s election with respect toafter-tax employee contributions for aportion of the plan year is equal to themissed after-tax employee contributionsopportunity, which is an amount equal to40% of the employee’s missed after-taxemployee contributions. Corrective con-tributions are adjusted for earnings. Themissed after-tax employee contribution isdetermined by multiplying the employee’selected after-tax employee contributionpercentage by the employee’s plan com-pensation for the portion of the year duringwhich the employee was improperly ex-cluded. If the employee elected a flatdollar amount that can be attributed tothe period of exclusion, then the flat dol-lar amount for the period of exclusionmay be used for this purpose. If the em-ployee elected a flat dollar amount tobe contributed for the entire plan year,then that dollar amount is multiplied by afraction. The fraction is equal to the num-ber of months, including partial months
2008–35 I.R.B. 502 September 2, 2008
where applicable, during which the eligi-ble employee was excluded from makingafter-tax employee contributions dividedby 12. The missed after-tax employeecontribution is reduced to the extent that(i) the sum of that contribution and the ac-tual total after-tax employee contributionsmade by the employee for the plan yearwould exceed (ii) the sum of the maximumafter-tax employee contributions permit-ted under the plan for the employee for theplan year. The requirements relating to thepassage of the ACP test before this correc-tion method can be used, as described inAppendix A section .05(5)(d) still apply.
(D) Matching Contribution Failures.(1) The appropriate corrective contribu-tion for the failure to make matchingcontributions for an employee becausethe employee was precluded from makingelective deferrals (including designatedRoth contributions) or after-tax employeecontributions for a portion of the plan yearis equal to the matching contribution thatwould have been made for the employeeif (1) the employee’s elective deferrals forthat portion of the plan year had equaledthe employee’s missed deferrals (deter-mined under section 2.02(1)(a)(i)(B)) or(2) the employee’s after-tax contribu-tion for that portion of the plan year hadequaled the employee’s missed after-taxemployee contribution (determined undersection 2.02(1)(a)(ii)(C)). This matchingcontribution is reduced to the extent that(i) the sum of this contribution and othermatching contributions actually made onbehalf of the employee for the plan yearwould exceed (ii) the maximum matchingcontribution permitted if the employeehad made the maximum matchable con-tributions permitted under the plan for theplan year. The corrective contribution isadjusted for earnings. The requirements
relating to the passage of the ACP test be-fore this correction method can be used, asdescribed in Appendix A section .05(2)(g)still apply.
(2) The appropriate corrective contribu-tion for the failure to make matching con-tributions for an employee because of thefailure by the plan to implement an em-ployee’s election with respect to electivedeferrals (including designated Roth con-tributions) or, where applicable, after-taxemployee contributions for a portion of theplan year is equal to the matching contri-bution that would have been made for theemployee if the employee made the elec-tive deferral as determined under section2.02(1)(a)(ii)(B)(2), or where applicable,the after-tax employee contribution deter-mined under section 2.02(1)(a)(ii)(C)(2).This matching contribution is reduced tothe extent that (i) the sum of this contri-bution and other matching contributionsactually made on behalf of the employeefor the plan year would exceed (ii) themaximum matching contribution permit-ted if the employee had made the max-imum matchable contributions permittedunder the plan for the plan year. The cor-rective contribution is adjusted for earn-ings. The requirements relating to the pas-sage of the ACP test before this correctionmethod can be used, as described in Ap-pendix A section .05(5)(d), still apply.
(E) Use of Prorated Compensation.For purposes of this paragraph (1)(a)(ii),for administrative convenience, in lieu ofusing the employee’s actual plan com-pensation for the portion of the year dur-ing which the employee was improperlyexcluded, 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.
(F) Special Rule for Brief Exclusionfrom Elective Deferrals and After-TaxEmployee Contributions. An employer isnot required to make a corrective contri-bution with respect to elective deferrals(including designated Roth contributions)or after-tax employee contributions, asprovided in sections 2.02(1)(a)(ii)(B) and(C), but is required to make a correctivecontribution with respect to any match-ing contributions, as provided in section2.02(1)(a)(ii)(D) for an employee for aplan year if the employee has been pro-vided the opportunity to make electivedeferrals or after-tax employee contri-butions under the plan for a period of atleast the last 9 months in that plan yearand during that period the employee hadthe opportunity to make elective defer-rals or after-tax employee contributionsin an amount not less than the maximumamount that would have been permitted ifno failure had occurred. (See Examples 6and 7.)
(b) Examples.
Example 3:Employer B maintains a § 401(k) plan. The plan
provides for matching contributions for eligible em-ployees equal to 100% of elective deferrals that donot exceed 3% of an employee’s compensation. Theplan allows employees to make after-tax employeecontributions up to a maximum of the lesser of 2%of compensation or $1,000. The after-tax employeecontributions are not matched. The plan provides thatemployees who complete one year of service are eli-gible to participate in the plan on the next designatedentry date. The entry dates are January 1, and July 1.In 2007, it is discovered that Employee V, a NHCEwith compensation of $30,000, was excluded fromthe plan for the 2006 plan year even though she satis-fied the plan’s eligibility requirements as of January1, 2006.
For the 2006 plan year, the relevant employee andcontribution information is as follows:
September 2, 2008 503 2008–35 I.R.B.
Compensation Elective deferral Match After-Tax EmployeeContribution
Highly Compensated Employees (HCEs):
R $200,000 $ 6,000 $6,000 0S $150,000 $12,000 $4,500 $1,000
ADP - 5.5%ACP - 3.33%ACP attributable to matching contributions - 3%ACP attributable to after-tax employee contributions - 0.33%
NHCEs:
ADP - 8%ACP - 2.63%ACP attributable to matching contributions - 2%ACP attributable to after-tax employee contributions - 0.63%
Correction:Employer B uses the correction method for a
full year exclusion, described in Appendix A section.05(2), to correct the failure to include Employee Vin the plan for the full plan year beginning January 1,2006. Employer B calculates the corrective QNECto be made on behalf of Employee V as follows:
Elective deferrals: Employee V was eligible to,but was not provided with the opportunity to, electand make elective deferrals in 2006. Thus, EmployerB must make a QNEC to the plan on behalf of Em-ployee V equal to the missed deferral opportunity forEmployee V, which is 50% of Employee V’s misseddeferral. The QNEC is adjusted for earnings. Themissed deferral for Employee V is determined by us-ing the ADP for NHCEs for 2006 and multiplyingthat percentage by Employee V’s compensation for2006. Accordingly, the missed deferral for EmployeeV on account of the employee’s improper exclusionfrom the plan is $2,400 (8% x $30,000). The misseddeferral opportunity is $1,200 (i.e., 50% x $2,400).Thus, the required corrective contribution for the fail-ure to provide Employee V with the opportunity tomake elective deferrals to the plan is $1,200 (plusearnings). The corrective contribution is made to apre-tax QNEC account for Employee V (not to a des-ignated Roth contributions account even if the planoffers designated Roth contributions, as provided insection .05(3) of Appendix A).
Matching contributions: Employee V shouldhave been eligible for, but did not receive, an allo-cation of employer matching contributions becauseEmployee V was not provided the opportunity tomake elective deferrals in 2006. Thus, Employer Bmust make a QNEC to the plan on behalf of Em-ployee V that is equal to the matching contributionEmployee V would have received had the misseddeferral been made. The QNEC is adjusted for earn-ings. Under the terms of the plan, if Employee V hadmade an elective deferral of $2,400 or 8% of com-pensation ($30,000), the employee would have beenentitled to a matching contribution equal to 100% offirst 3% of Employee V’s compensation ($30,000)or $900. Accordingly, the contribution required to
replace the missed employer matching contributionis $900 (plus earnings).
After-tax employee contributions: Employee Vwas eligible to, but was not provided with the oppor-tunity to, elect and make after-tax employee contri-butions in 2006. Employer B must make a QNECto the plan equal to the missed opportunity for mak-ing after-tax employee contributions for Employee V,which is 40% of Employee V’s missed after-tax em-ployee contribution. The QNEC is adjusted for earn-ings. The missed after-tax employee contributionfor Employee V is estimated by using the ACP forNHCEs (to the extent that the ACP is attributable toafter-tax employee contributions) for 2006 and mul-tiplying that percentage by Employee V’s compensa-tion for 2006. Accordingly, the missed after-tax em-ployee contribution for Employee V, on account ofthe employee’s improper exclusion from the plan is$189 (0.63% x $30,000). The missed opportunity tomake after-tax employee contributions to the plan is$76 (40% x $189). Thus, the required corrective con-tribution for the failure to provide Employee V withthe opportunity to make the $189 after-tax employeecontribution to the plan is $76 (plus earnings).
The total required corrective QNEC, before ad-justments for earnings, on behalf of Employee V is$2,176 ($1,200 for the missed deferral opportunityplus $900 for the missed matching contribution plus$76 for the missed opportunity to make after-taxemployee contributions). The required correctiveQNEC is further adjusted for earnings.
Example 4:Employer C maintains a § 401(k) plan. The plan
provides for matching contributions for each payrollperiod that are equal to 100% of an employee’s elec-tive deferrals that do not exceed 2% of the eligibleemployee’s plan compensation during the payroll pe-riod. The plan provides for after-tax employee contri-butions. The after-tax employee contribution cannotexceed $1,000 for the plan year. The plan providesthat employees who complete one year of service areeligible to participate in the plan on the next January 1or July 1 entry date. Employee X, a nonhighly com-
pensated employee, who met the eligibility require-ments and should have entered the plan on January 1,2006, was not offered the opportunity to participatein the plan. In August of 2006, the error was dis-covered and Employer C offered Employee X the op-portunity to make elective deferrals and after-tax em-ployee contributions as of September 1, 2006. Em-ployee X made elective deferrals equal to 4% of theemployee’s plan compensation for each payroll pe-riod from September 1, 2006 through December 31,2006 (resulting in elective deferrals of $400). Em-ployee X’s plan compensation for 2006 was $36,000($26,000 for the first eight months and $10,000 forthe last four months). Employer C made matchingcontributions equal to $200 on behalf of Employee X,which is 2% of Employee X’s plan compensation foreach payroll period from September 1, 2006 throughDecember 31, 2006 ($10,000). After being allowedto participate in the plan, Employee X made $250of after-tax employee contributions for the 2006 planyear. The ADP for nonhighly compensated employ-ees for 2006 was 3% and the ACP for nonhighly com-pensated employees for 2006 was 2.3%. The ACPattributable to matching contributions for nonhighlycompensated employees for 2003 was 1.8%. TheACP attributable to employee contributions for non-highly compensated employees for 2006 was 0.5%.
Correction:In accordance with section 2.02(1)(a)(ii), Em-
ployer C uses the correction method described inAppendix A section .05 to correct for the failure toprovide Employee X the opportunity to elect andmake elective deferrals and after-tax employee con-tributions, and, as a result, not receiving matchingcontributions for a portion of the plan year (January1, 2006 through August 31, 2006). Thus, EmployerC makes a corrective contribution on behalf ofEmployee X that satisfies the requirements of sec-tion 2.02(1)(a)(ii). Employer C elects to utilize theprovisions of section 2.02(1)(a)(ii)(E) to determineEmployee X’s compensation for the portion of theyear in which Employee X was not provided theopportunity to make elective deferrals and after-tax
2008–35 I.R.B. 504 September 2, 2008
employee contributions. Thus, for administrativeconvenience, in lieu of using actual plan compen-sation of $26,000 for the period Employee X wasexcluded, Employee X’s annual plan compensationis prorated for the 8-month period that the employeewas excluded from participating in the plan. Thecorrective contribution is determined as follows:
(1) Corrective contribution for missed deferral:Employee X was eligible to, but was not providedwith the opportunity to, elect and make electivedeferrals from January 1 through August 31 of2006. Employer C must make a corrective contri-bution to the plan on behalf of Employee X equalto Employee X’s missed deferral opportunity forthat period, which is 50% of Employee X’s misseddeferral. From January 1 through August 31, 2006.The corrective contribution is adjusted for earnings.Employee X’s missed deferral is determined bymultiplying the 3% ADP for nonhighly compensatedemployees by $24,000 (8/12ths of the employee’s2006 compensation of $36,000). Accordingly, themissed deferral is $720. The missed deferral is notreduced because when this amount is added to theamount already deferred, no plan limit (including§ 402(g)) was exceeded. Accordingly, the requiredcorrective contribution is $360 (i.e., 50% multipliedby the missed deferral amount of $720). The requiredcorrective contribution is adjusted for earnings.
(2) Corrective contribution for missed match-ing contribution: Under the terms of the plan, ifEmployee X had made an elective deferral of $720or 3% of compensation for the period of exclusion($24,000), the employee would have been entitledto a matching contribution equal to 2% of $24,000or $480. The missed matching contribution is notreduced because no plan limit is exceeded whenthis amount is added to the matching contributionalready contributed for the 2006 plan year. Accord-ingly, the required corrective contribution is $480.The required corrective contribution is adjusted forearnings.
(3) Corrective contribution for missed after-taxemployee contribution: Employee X was eligible to,but was not provided with the opportunity to electand make after-tax employee contributions fromJanuary 1 through August 31 of 2006. Employer Cmust make a corrective contribution to the plan onbehalf of Employee X equal to the missed opportu-nity to make after-tax employee contributions. Themissed opportunity to make after-tax employee con-tributions is equal to 40% of Employee X’s missedafter-tax employee contributions. The correctivecontribution is adjusted for earnings. The missedafter-tax employee contribution amount is equal tothe 0.5% ACP attributable to employee contributionsfor nonhighly compensated employees multipliedby $24,000 (8/12ths of the employee’s 2006 plancompensation of $36,000). Accordingly, the missedafter-tax employee contribution amount is $120.The missed after-tax employee contribution is notreduced because the sum of $120 and the previouslymade after-tax employee contribution of $250 is lessthan the overall plan limit of $1,000. Therefore, therequired corrective contribution is $48 (i.e., 40%multiplied by the missed after-tax employee con-tribution of $120). The corrective contribution isadjusted for earnings.
The total required QNEC on behalf of the em-ployee is $888 ($360 for the missed deferral opportu-
nity plus $480 for the missed matching contributionplus $48 for the missed opportunity to make after-taxemployee contributions).
Example 5:The facts (including the ADP and ACP results)
are the same as in Example 4, except that it is nowdetermined that Employee X, after being included inthe plan in 2006, made after-tax employee contribu-tions of $950.
Correction:The correction is the same as in Example 4,
except that the corrective contribution required toreplace the missed after-tax employee contributionis re-calculated to take into account applicable planlimits in accordance with the provisions of section2.02(1)(a)(ii)(C). The required corrective contribu-tion is determined as follows:
Corrective contribution for missed after-taxemployee contribution: The missed after-tax em-ployee contribution amount is equal to the 0.5%ACP attributable to after-tax employee contributionsfor nonhighly compensated employees multipliedby $24,000 (8/12ths of the employee’s 2006 plancompensation of $36,000). The missed after-taxemployee contribution amount, based on this calcu-lation, is $120. However, the sum of this amount($120) and the previously made after-tax employeecontribution ($950) is $1,070. Because the plan limitfor after-tax employee contributions is $1,000, themissed after-tax employee contribution needs to bereduced by $70, to ensure that the total after-taxemployee contributions comply with the plan limit.Accordingly, the missed after-tax employee contri-bution is $50 ($120 minus $70) and the requiredcorrective contribution is $20 (i.e., 40% multipliedby the missed after-tax employee contribution of$50). The corrective contribution is adjusted forearnings.
Example 6:Employer D sponsors a § 401(k) plan. The plan
has a one year of service eligibility requirement andprovides for January 1 and July 1 entry dates. Em-ployee Y, who should have been provided the oppor-tunity to elect and make elective deferrals on Jan-uary 1, 2006, was not provided the opportunity toelect and make elective deferrals until July 1, 2006.The employee made $5,000 in elective deferrals tothe plan in 2006. The employee was a highly com-pensated employee with compensation for 2006 of$200,000. Employee Y’s compensation from January1 through June 30, 2006 was $130,000. The ADP forhighly compensated employees for 2006 was 10%.The ADP for nonhighly compensated employees for2006 was 8%. The § 402(g) limit for deferrals madein 2006 was $15,000.
Correction:Corrective contribution for missed deferral: Em-
ployee W’s missed deferral is equal to the 10% ADPfor highly compensated employees multiplied by$130,000 (compensation earned for the portion ofthe year in which Employee W was erroneouslyexcluded, i.e., January 1 through June 30, 2006).The missed deferral amount, based on this calcula-tion is $13,000. However, the sum of this amount($13,000) and the previously made elective contribu-
tion ($5,000) is $18,000. The 2006 § 402(g) limit forelective deferrals is $15,000. In accordance with theprovisions of section 2.02(1)(a)(ii)(B), the misseddeferral needs to be reduced by $3,000, to ensurethat the total elective contribution complies with theapplicable § 402(g) limit. Accordingly, the misseddeferral is $7,000 ($10,000 minus $3,000) and therequired corrective contribution is $3,500 (i.e., 50%multiplied by the missed deferral of $7,000). Thecorrective contribution is adjusted for earnings.
Example 7:Employer E maintains a § 401(k) plan. The plan
provides for matching contributions for each payrollperiod that are equal to 100% of an employee’s elec-tive deferrals that do not exceed 2% of the eligibleemployee’s plan compensation during the payroll pe-riod. The plan also provides that the annual limit onmatching contributions is $750. The plan providesfor after-tax employee contributions. The after-taxemployee contribution cannot exceed $1,000 duringa plan year. The plan provides that employees whocomplete one year of service are eligible to partic-ipate in the plan on the next January 1 or July 1entry date. Employee Z, a nonhighly compensatedemployee who met the eligibility requirements andshould have entered the plan on January 1, 2006was not offered the opportunity to participate in theplan. In March of 2006, the error was discoveredand Employer E offered the employee an electionopportunity as of April 1, 2006. Employee Z had theopportunity to make the maximum elective deferralsand/or after-tax employee contributions that couldhave been made under the terms of the plan for theentire 2006 plan year. The employee made electivedeferrals equal to 3% of the employee’s plan com-pensation for each payroll period from April 1, 2006through December 31, 2006 (resulting in electivedeferrals of $960). The employee’s plan compen-sation for 2006 was $40,000 ($8,000 for the firstthree months and $32,000 for the last nine months).Employer E made matching contributions equal to$640 for the excluded employee, which is 2% ofthe employee’s plan compensation for each payrollperiod from April 1, 2006 through December 31,2006 ($32,000). After being allowed to participatein the plan, the employee made $500 in after-taxemployee contributions. The ADP for nonhighlycompensated employees for 2006 was 3% and theACP for nonhighly compensated employees for 2006was 2.3%. The portion of the ACP attributable tomatching contributions for nonhighly compensatedemployees for 2006 was 1.8%. The portion of theACP attributable to after-tax employee contributionsfor nonhighly compensated employees for 2006 was0.5%.
Correction:Employer E uses the correction method for partial
year exclusions, pursuant to section 2.02(1)(a)(ii), tocorrect the failure to include an eligible employee inthe plan. Because Employee Z was given an opportu-nity to make elective deferrals and after-tax employeecontributions to the plan for at least the last 9 monthsof the plan year (and the amount of the elective defer-rals or after-tax employee contributions that the em-ployee had the opportunity to make was not less thanthe maximum elective deferrals or after-tax employeecontributions that the employee could have made if
September 2, 2008 505 2008–35 I.R.B.
the employee had been given the opportunity to makeelective deferrals and after-tax employee contribu-tions on January 1, 2006), under the special rule setforth in section 2.02(1)(a)(ii)(F), Employer E is notrequired to make a corrective contribution for the fail-ure to provide the employee with the opportunity tomake either elective deferrals or after-tax employeecontributions. The employer only needs to make acorrective contribution for the failure to provide theemployee with the opportunity to receive matchingcontributions on deferrals that could have been madeduring the first 3 months of the plan year. The calcu-lation of the corrective contribution required to cor-rect this failure is shown as follows:
The missed matching contribution is determinedby calculating the matching contribution that theemployee would have received had the employeebeen provided the opportunity to make elective de-ferrals during the period of exclusion, i.e., January1, 2006 through March 31, 2006. Assuming that theemployee elected to defer an amount equal to 3% ofcompensation (which is the ADP for the nonhighlycompensated employees for the plan year), then,under the terms of the plan, the employee would havebeen entitled to a matching contribution of 2% ofcompensation. Pursuant to the provisions of section2.02(1)(a)(ii)(E), Employer E determines compensa-tion by prorating Employee Z’s annual compensationfor the portion of the year that Employee Z was notgiven the opportunity to make elective deferrals orafter-tax employee contributions. Accordingly, therequired matching contribution for the period of ex-clusion is obtained by multiplying 2% by EmployeeZ’s compensation of $10,000 (3/12ths of the em-ployee’s 2006 plan compensation of $40,000). Basedon this calculation, the missed matching contributionis $200. However, when this amount is added to thematching contribution already received ($640), thetotal ($840) exceeds the $750 plan limit on match-ing contributions by $90. Accordingly, pursuantto section 2.02(1)(a)(ii)(D), the missed matchingcontribution figure is reduced to $110 ($200 minus$90). The required corrective contribution is $110.The corrective contribution is adjusted for earnings.
Example 8:Employer G maintains a safe harbor § 401(k)
plan that requires matching contributions that satisfythe requirements of §401(k)(12), which are equalto: 100% of elective deferrals that do not exceed3% of an employee’s compensation and 50% ofelective deferrals that exceed 3% but do not exceed5% of an employee’s compensation. Employee M, anonhighly compensated employee who met the eligi-bility requirements and should have entered the planon January 1, 2006, was not offered the opportunityto defer under the plan and was erroneously excludedfor all of 2006. Employee M’s compensation for2006 was $20,000.
Correction:In accordance with the provisions of section
2.02(1)(a)(ii)(B), Employee M’s missed deferral onaccount of exclusion from the safe harbor § 401(k)plan is 3% of compensation. Thus, the missed defer-ral is equal to 3% multiplied by $20,000, or $600.Accordingly, the required QNEC for Employee M’smissed deferral opportunity in 2006 is $300, i.e.,50% of $600. The required matching contribution,
based on the missed deferral of $600, is $600. Therequired corrective contribution for Employee M’smissed matching contribution is $600. The totalrequired corrective contribution, before adjustmentsfor earnings, on behalf of Employee M is $900 (i.e.,$300 for the missed deferral opportunity, plus $600for the missed matching contribution). The correc-tive contribution is adjusted for earnings.
Example 9:Same facts as Example 8, except that the plan pro-
vides for matching contributions equal to 100% ofelective deferrals that do not exceed 4% of an em-ployee’s compensation.
Correction:In accordance with the provisions of section
2.02(1)(a)(ii)(B), Employee M’s missed deferral onaccount of exclusion from the safe harbor § 401(k)plan is 4% of compensation. The missed deferralis 4% of compensation because the plan providesfor a 100% match for deferrals up to that level ofcompensation. (See Appendix A section .05(2)(d).)Therefore, in this case, Employee M’s missed defer-ral is equal to 4% multiplied by $20,000, or $800.The required corrective contribution for EmployeeM’s missed deferral opportunity in 2006 is $400,i.e., 50% multiplied by $800. The required matchingcontribution, based on the missed deferral of $800, is$800. Thus, the required corrective contribution forEmployee M’s missed matching contribution is $800.The total required corrective contribution, before ad-justments for earnings, on behalf of Employee M is$1,200 (i.e., $400 for the missed deferral opportunityplus $800 for the missed matching contribution).The corrective contribution is adjusted for earnings.
Example 10:Same facts as Example 8, except that the plan uses
a rate of nonelective contributions to satisfy the re-quirements of §401(k)(12) and provides for a QNECequal to 3% of compensation.
Correction:In accordance with the provisions of section
2.02(1)(a)(ii)(B), Employee M’s missed deferral onaccount of exclusion from the safe harbor § 401(k)plan is 3% of compensation. Thus, the misseddeferral is equal to 3% multiplied by $20,000, or$600. Thus, the required corrective contribution forEmployee M’s missed deferral opportunity in 2006is $300 (50% of $600). The required nonelectivecontribution, based on the plan’s formula of 3% ofcompensation for nonelective contributions, is $600.The total required QNEC, before adjustments forearnings, on behalf of Employee M is $900 (i.e., $300for the missed deferral opportunity, plus $600 forthe missed nonelective contribution). The correctivecontribution is adjusted for earnings.
Example 11:Employer H maintains a § 401(k) plan. The plan
limit on deferrals is the lesser of the deferral limit un-der § 401(a)(30) or the limitation under § 415. Theplan also provides that eligible participants (as de-fined in § 414(v)(5) may make contributions in ex-cess of the plan’s deferral limits, up to the limitationson catch-up contributions for the year. The plan alsoprovides for a 60% matching contribution on elective
deferrals. The deferral limit under § 401(a)(30) for2006 is $15,000. The limitation on catch-up contribu-tions under the terms of the plan and § 414(v)(2)(B)(i)is $5,000.
Employee R, age 55, was provided with theopportunity to make elective deferrals up to theplan limit, but was not provided the option to makecatch-up contributions. Employee R is a nonhighlycompensated employee who earned $60,000 incompensation and made elective deferrals totaling$15,000 in 2006.
Correction:In accordance with the provisions of Appendix
A section .05(4), Employee R’s missed deferral onaccount of the plan’s failure to offer the opportunityto make catch-up contributions is $2,500 (or one halfof the limitation on catch-up contributions for 2006).The missed deferral opportunity is $1,250 (or 50%of $2,500). Thus, the required QNEC for EmployeeR’s missed deferral opportunity relating to catch-upcontributions in 2006 is $1,250 adjusted for earnings.
In addition, Employee R was entitled to an addi-tional matching contribution, under the terms of theplan, equal to 60% of the missed deferral that is attrib-utable to the catch-up contribution that the employeewould have made had the failure not occurred. Inthis case, the missed deferral is $2,500 and the corre-sponding matching contribution is $1,500 (i.e., 60%of $2,500). Thus, the required corrective contributionfor the additional matching contribution that shouldhave been made on behalf of Employee R is $1,500adjusted for earnings.
Example 12:Employer K maintains a § 401(k) plan. The plan
provides for matching contributions for eligible em-ployees equal to 100% of elective deferrals that donot exceed 5% of an employee’s compensation. OnJanuary 1, 2006, Employee T made an election tocontribute 10% of compensation for the 2006 planyear. However, Employee T’s election was not pro-cessed, and the required amounts were not withheldfrom Employee T’s salary in 2006. Employee T’ssalary was $30,000 in 2006.
Correction:Employer K uses the correction method described
in Appendix A section .05(5), to correct the failureto implement Employee T’s election to make electivedeferrals under the plan for the full plan year begin-ning January 1, 2006. Employer K calculates the cor-rective QNEC to be made on behalf of Employee Tas follows:
(1) Elective deferrals:Employee T’s election to make elective deferrals,
pursuant to an election, in 2006 was not implemented.Thus, pursuant to section .05(5)(a) of Appendix A,Employer K must make a QNEC to the plan on behalfof Employee T equal to the missed deferral opportu-nity for Employee T, which is 50% of Employee T’smissed deferral. The QNEC is adjusted for earnings.The missed deferral for Employee T is determinedby using T’s elected deferral percentage (10%) for2006 and multiplying that percentage by EmployeeT’s compensation for 2006 ($30,000). Accordingly,the missed deferral for Employee V, on account ofthe employee’s improper exclusion from the plan is$3,000 (10% x $30,000). The missed deferral oppor-
2008–35 I.R.B. 506 September 2, 2008
tunity is $1,500 (i.e., 50% x $3,000). Thus, the re-quired corrective contribution for the failure to pro-vide Employee V with the opportunity to make elec-tive deferrals to the plan is $1,500 (plus earnings).
(2) Matching contributions:Employee T should have been eligible for but did
not receive an allocation of employer matching con-tributions because no elective deferrals were made onbehalf of Employee T in 2006. Thus, pursuant tosection .05(5)(c) of Appendix A, Employer K mustmake a QNEC to the plan on behalf of Employee Tthat is equal to the matching contribution EmployeeT would have received had the missed deferral beenmade. The QNEC is adjusted for earnings. Under theterms of the plan, if Employee T had made an electivedeferral of $3,000 or 10% of compensation ($30,000),the employee would have been entitled to a matchingcontribution equal to 100% of first 3% of EmployeeT’s compensation ($30,000) or $900. Accordingly,the contribution required to replace the missed em-ployer matching contribution is $900 (plus earnings).
The total required corrective QNEC, before ad-justments for earnings, on behalf of Employee T is$2,400 ($1,500 for the missed deferral opportunityplus $900 for the missed matching contribution).
(2) Exclusion of Eligible Employees Ina Profit-Sharing Plan.
(a) Correction Methods. (i) AppendixA Correction Method. Appendix A, sec-tion .05 sets forth the correction methodfor correcting the failure to make a contri-bution on behalf of the employees improp-erly excluded from a defined contributionplan or to provide benefit accruals for theemployees improperly excluded from a de-fined benefit plan. In the case of a definedcontribution plan, the correction methodis to make a contribution on behalf of theexcluded employee. Section 2.02(2)(a)(ii)of this Appendix B clarifies the correctionmethod in the case of a profit-sharing orstock bonus plan that provides for nonelec-tive contributions (within the meaning of§1.401(k)–6).
(ii) Additional Requirements for Appen-dix A Correction Method as applied toProfit-Sharing Plans. To correct for theexclusion of an eligible employee fromnonelective contributions in a profit-shar-ing or stock bonus plan under the Ap-pendix A correction method, an allocationamount is determined for each excludedemployee on the same basis as the allo-cation 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 relevant fac-tors (e.g., compensation) under that for-mula for that year. The Employer makesa corrective contribution on behalf of theexcluded employee that is equal to the allo-
cation amount for the excluded employee.The corrective contribution is adjusted forearnings. If, as a result of excluding anemployee, an amount was improperly allo-cated to the account balance of an eligibleemployee who shared in the original allo-cation of the nonelective contribution, noreduction is made to the account balanceof the employee who shared in the originalallocation on account of the improper allo-cation. (See Example 15.)
(iii) Reallocation Correction Method.(A) In General. Subject to the limita-tions set forth in section 2.02(2)(a)(iii)(F)below, in addition to the Appendix Acorrection method, the exclusion of aneligible employee for a plan year froma profit-sharing or stock bonus plan thatprovides for nonelective contributionsmay be corrected using the reallocationcorrection method set forth in this sec-tion 2.02(2)(a)(iii). Under the reallocationcorrection method, the account balanceof the excluded employee is increased asprovided in paragraph (2)(a)(iii)(B) below,the account balances of other employ-ees are reduced as provided in paragraph(2)(a)(iii)(C) below, and the increases andreductions are reconciled, as necessary, asprovided in paragraph (2)(a)(iii)(D) below.(See Examples 16 and 17.)
(B) Increase in Account Balance of Ex-cluded Employee. The account balanceof the excluded employee is increased byan amount that is equal to the allocationthe employee would have received had theemployee shared in the allocation of thenonelective contribution. The amount isadjusted for earnings.
(C) Reduction in Account Balances ofOther Employees. (1) The account balanceof each employee who was an eligibleemployee who shared in the original al-location of the nonelective contributionis reduced by the excess, if any, of (I)the employee’s allocation of that contri-bution over (II) the amount that wouldhave been allocated to that employee’saccount had the failure not occurred. Thisamount is adjusted for earnings takinginto account the rules set forth in sec-tion 2.02(2)(a)(iii)(C)(2) and (3) below.The amount after adjustment for earn-ings is limited in accordance with section2.02(2)(a)(iii)(C)(4) below.
(2) This paragraph (2)(a)(iii)(C)(2) ap-plies if most of the employees with accountbalances that are being reduced are non-
highly compensated employees. If therehas been an overall gain for the periodfrom the date of the original allocation ofthe contribution through the date of correc-tion, no adjustment for earnings is requiredto the amount determined under section2.02(2)(a)(iii)(C)(1) for the employee. Ifthe amount for the employee is being ad-justed for earnings and the plan permitsinvestment of account balances in morethan one investment fund, for administra-tive convenience, the reduction to the em-ployee’s account balance may be adjustedby the lowest earnings rate of any fundfor the period from the date of the origi-nal allocation of the contribution throughthe date of correction.
(3) If an employee’s account balanceis reduced and the original allocation wasmade to more than one investment fundor there was a subsequent distribution ortransfer from the fund receiving the orig-inal allocation, then reasonable, consis-tent assumptions are used to determine theearnings adjustment.
(4) The amount determined in sec-tion 2.02(2)(a)(iii)(C)(1) for an em-ployee after the application of section2.02(2)(a)(iii)(C)(2) and (3) may not ex-ceed the account balance of the employeeon the date of correction, and the employeeis permitted to retain any distribution madeprior to the date of correction.
(D) Reconciliation of Increases andReductions. If the aggregate amount of theincreases under section 2.02(2)(a)(iii)(B)exceeds the aggregate amount of the re-ductions under section 2.02(2)(a)(iii)(C),the Employer makes a corrective contri-bution to the plan for the amount of theexcess. If the aggregate amount of thereductions under section 2.02(2)(a)(iii)(C)exceeds the aggregate amount of the in-creases under section 2.02(2)(a)(iii)(B),then the amount by which each employee’saccount balance is reduced under section2.02(2)(a)(iii)(C) is decreased on a prorata basis.
(E) Reductions Among Multiple Invest-ment Funds. If an employee’s account bal-ance is reduced and the employee’s ac-count balance is invested in more than oneinvestment fund, then the reduction may bemade from the investment funds selectedin any reasonable manner.
(F) Limitations on Use of Reallo-cation Correction Method. If any em-ployee would be permitted to retain
September 2, 2008 507 2008–35 I.R.B.
any distribution pursuant to section2.02(2)(a)(iii)(C)(4), then the reallocationcorrection method may not be used un-less most of the employees who wouldbe permitted to retain a distribution arenonhighly compensated employees.
(b) Examples.
Example 13:Employer D maintains a profit-sharing plan that
provides for discretionary nonelective employer con-tributions. The plan provides that the employer’s con-tributions are allocated to account balances in the ra-tio that each eligible employee’s compensation for theplan year bears to the compensation of all eligible em-ployees for the plan year and, therefore, the only rel-evant factor for determining an allocation is the em-ployee’s compensation. The plan provides for self-di-rected investments among four investment funds anddaily valuations of account balances. For the 2006plan year, Employer D made a contribution to theplan of a fixed dollar amount. However, five em-ployees who met the eligibility requirements were in-advertently excluded from participating in the plan.The contribution resulted in an allocation on behalfof each of the eligible employees, other than the ex-cluded employees, equal to 10% of compensation.Most of the employees who received allocations un-der the plan for the year of the failure were nonhighlycompensated employees. No distributions have beenmade from the plan since 2006. If the five excludedemployees had shared in the original allocation, theallocation made on behalf of each employee wouldhave equaled 9% of compensation. The excluded em-ployees began participating in the plan in the 2007plan year.
Correction:Employer D uses the Appendix A correction
method to correct the failure to include the fiveeligible employees. Thus, Employer D makes acorrective contribution to the plan. The amountof the corrective contribution on behalf of the fiveexcluded employees for the 2006 plan year is equalto 10% of compensation of each excluded employee,the same allocation that was made for other eligibleemployees, adjusted for earnings. The excludedemployees receive an allocation equal to 10% ofcompensation (adjusted for earnings) even though,had the excluded employees originally shared in theallocation for the 2006 contribution, their accountbalances, as well as those of the other eligible em-ployees, would have received an allocation equal toonly 9% of compensation.
Example 14:The facts are the same as in Example 13.
Correction:Employer D uses the reallocation correction
method to correct the failure to include the fiveeligible employees. Thus, the account balances areadjusted to reflect what would have resulted fromthe correct allocation of the employer contributionfor the 2006 plan year among all eligible employees,including the five excluded employees. The inclu-sion of the excluded employees in the allocation ofthat contribution would have resulted in each eligi-
ble employee, including each excluded employee,receiving an allocation equal to 9% of compensation.Accordingly, the account balance of each excludedemployee is increased by 9% of the employee’s 2006compensation, adjusted for earnings. The accountbalance of each of the eligible employees otherthan the excluded employees is reduced by 1% ofthe employee’s 2006 compensation, adjusted forearnings. Employer D determines the adjustmentfor earnings using the earnings rate of each eligibleemployee’s excess allocation (using reasonable, con-sistent assumptions). Accordingly, for an employeewho shared in the original allocation and directedthe investment of the allocation into more than oneinvestment fund or who subsequently transferred aportion of a fund that had been credited with a portionof the 2006 allocation to another fund, reasonable,consistent assumptions are followed to determinethe adjustment for earnings. It is determined thatthe total of the initially determined reductions inaccount balances exceeds the total of the requiredincreases in account balances. Accordingly, theseinitially determined reductions are decreased prorata so that the total of the actual reductions in ac-count balances equals the total of the increases in theaccount balances, and Employer D does not makeany corrective contribution. The reductions from theaccount balances are made on a pro rata basis amongall of the funds in which each employee’s accountbalance is invested.
Example 15:The facts are the same as in Example 13.
Correction:The correction is the same as in Example 14, ex-
cept that, because most of the employees whose ac-count balances are being reduced are nonhighly com-pensated employees, for administrative convenience,Employer D uses the earnings rate of the fund withthe lowest earnings rate for the period of the failureto adjust the reduction to each account balance. It isdetermined that the aggregate amount (adjusted forearnings) by which the account balances of the ex-cluded employees is increased exceeds the aggregateamount (adjusted for earnings) by which the otheremployees’ account balances are reduced. Accord-ingly, Employer D makes a contribution to the planin an amount equal to the excess. The reduction fromaccount balances is made on a pro rata basis amongall of the funds in which each employee’s account bal-ance is invested.
tion Correction Method. A failure in a de-fined contribution plan to apply the propervesting percentage to an employee’s ac-count balance that results in forfeiture oftoo large a portion of the employee’s ac-count balance may be corrected using thecontribution correction method set forthin this paragraph. The Employer makesa corrective contribution on behalf of theemployee whose account balance was im-properly forfeited in an amount equal tothe improper forfeiture. The corrective
contribution is adjusted for earnings. If,as a result of the improper forfeiture, anamount was improperly allocated to the ac-count balance of another employee, no re-duction is made to the account balance ofthat employee. (See Example 16.)
(b) Reallocation Correction Method. Inlieu of the contribution correction method,in a defined contribution plan under whichforfeitures of account balances are reallo-cated among the account balances of theother eligible employees in the plan, a fail-ure to apply the proper vesting percentageto an employee’s account balance whichresults in forfeiture of too large a portionof the employee’s account balance maybe corrected under the reallocation correc-tion method set forth in this paragraph.A corrective reallocation is made in ac-cordance with the reallocation correctionmethod set forth in section 2.02(2)(a)(iii),subject to the limitations set forth in sec-tion 2.02(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.In applying section 2.02(2)(a)(iii)(C)(1),the account balance of each employee whoshared in the allocation of the improperforfeiture is reduced by the amount of theimproper forfeiture that was allocated tothat employee’s account. The earningsadjustments for the account balances thatare being reduced are determined in accor-dance with sections 2.02(2)(a)(iii)(C)(2)and (3) and the reductions after adjust-ments for earnings are limited in accor-dance with section 2.02(2)(a)(iii)(C)(4). Inaccordance with section 2.02(2)(a)(iii)(D),if the aggregate amount of the increasesexceeds the aggregate amount of the re-ductions, the Employer makes a correc-tive contribution to the plan for the amountof the excess. In accordance with section2.02(2)(a)(iii)(D), if the aggregate amountof the reductions exceeds the aggregateamount of the increases, then the amountby which each employee’s account balanceis reduced is decreased on a pro rata basis.(See Example 17.)
(2) Examples.
Example 16:Employer E maintains a profit-sharing plan that
provides for nonelective contributions. The plan pro-vides for self-directed investments among four in-vestment funds and daily valuation of account bal-
2008–35 I.R.B. 508 September 2, 2008
ances. The plan provides that forfeitures of accountbalances are reallocated among the account balancesof other eligible employees on the basis of compen-sation. During the 2006 plan year, Employee R ter-minated employment with Employer E and electedand received a single-sum distribution of the vestedportion of his account balance. No other distribu-tions have been made since 2006. However, an incor-rect determination of Employee R’s vested percent-age was made resulting in Employee R receiving adistribution of less than the amount to which he wasentitled under the plan. The remaining portion of Em-ployee R’s account balance was forfeited and reallo-cated (and these reallocations were not affected bythe limitations of § 415). Most of the employees whoreceived allocations of the improper forfeiture werenonhighly compensated employees.
Correction:Employer E uses the contribution correction
method to correct the improper forfeiture. Thus, Em-ployer E makes a contribution on behalf of EmployeeR equal to the incorrectly forfeited amount (adjustedfor earnings) and Employee R’s account balance isincreased accordingly. No reduction is made fromthe account balances of the employees who receivedan allocation of the improper forfeiture.
Example 17:The facts are the same as in Example 16.
Correction:Employer E uses the reallocation correction
method to correct the improper forfeiture. Thus,Employee R’s account balance is increased by theamount that was improperly forfeited (adjusted forearnings). The account of each employee who sharedin the allocation of the improper forfeiture is reducedby the amount of the improper forfeiture that wasallocated to that employee’s account (adjusted forearnings). Because most of the employees whoseaccount balances are being reduced are nonhighlycompensated employees, for administrative conve-nience, Employer E uses the earnings rate of thefund with the lowest earnings rate for the period ofthe 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.(1) Failures Relating to a § 415(b) Ex-
cess.(a) Correction Methods. (i) Return of
Overpayment Correction Method. Over-payments as a result of amounts being paidin excess of the limits of § 415(b) maybe corrected using the return of Overpay-ment correction method set forth in thisparagraph (1)(a)(i). The Employer takesreasonable 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 ex-tent the amount returned by the recipi-ent is less than the Overpayment, adjustedfor earnings at the plan’s earnings rate,then the Employer or another person con-tributes the difference to the plan. In ad-dition, in accordance with section 6.05 ofthis revenue procedure, the Employer mustnotify the recipient that the Overpaymentwas not eligible for favorable tax treat-ment accorded to distributions from quali-fied plans (and, specifically, was not eligi-ble for tax-free rollover). (See Examples20 and 21.)
(ii) Adjustment of Future PaymentsCorrection Method. (A) In General. Inaddition to the return of overpayment cor-rection method, in the case of plan benefitsthat are being distributed in the form ofperiodic payments, Overpayments as aresult of amounts being paid in excess ofthe limits in § 415(b) may be correctedby using the adjustment of future pay-ments correction method set forth in thisparagraph (1)(a)(ii). Future payments tothe recipient are reduced so that they donot exceed the § 415(b) maximum limitand an additional reduction is made torecoup the Overpayment (over a periodnot longer than the remaining paymentperiod) so that the actuarial present valueof the additional reduction is equal to theOverpayment plus interest at the interestrate used by the plan to determine actuarialequivalence. (See Examples 18 and 19.)
(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, thereduction of future annuity payments to re-flect § 415(b) reduces the amount of bene-fits payable during the lives of both the em-ployee and spouse, but any reduction to re-coup Overpayments made to the employeedoes not reduce the amount of the spouse’ssurvivor benefit. Thus, the spouse’s bene-fit will be based on the previous specifiedpercentage (e.g., 75%) of the maximumpermitted under § 415(b), instead of the re-duced annual periodic amount payable tothe employee.
(C) Overpayment Not Treated as an Ex-cess Amount. An Overpayment correctedunder this adjustment of future paymentcorrection method is not treated as an Ex-cess Amount as defined in section 5.01(3)of this revenue procedure.
(b) Examples.
Example 18:Employer F maintains a defined benefit plan
funded solely through employer contributions. Theplan provides that the benefits of employees arelimited to the maximum amount permitted under§ 415(b), disregarding cost-of-living adjustments un-der § 415(d) after benefit payments have commenced.At the beginning of the 2006 plan year, EmployeeS retired and started receiving an annual straightlife annuity of $185,000 from the plan. Due to anadministrative error, the annual amount received byEmployee S for 1998 included an Overpayment of$10,000 (because the § 415(b)(1)(A) limit for 2006was $175,000). This error was discovered at thebeginning of 2007.
Correction:Employer F uses the adjustment of future pay-
ments correction method to correct the failure to sat-isfy the limit in § 415(b). Future annuity benefit pay-ments to Employee S are reduced so that they do notexceed the § 415(b) maximum limit, and, in addition,Employee S’s future benefit payments from the planare actuarially reduced to recoup the Overpayment.Accordingly, Employee S’s future benefit paymentsfrom the plan are reduced to $175,000 and further re-duced by $1,000 annually for life, beginning in 2007.The annual benefit amount is reduced by $1,000 an-nually for life because, for Employee S, the actuarialpresent value of a benefit of $1,000 annually for lifecommencing in 2007 is equal to the sum of $10,000and interest at the rate used by the plan to determineactuarial equivalence beginning with the date of thefirst Overpayment and ending with the date the re-duced annuity payment begins. Thus, Employee S’sremaining benefit payments are reduced so that Em-ployee S receives $174,000 for 2007, and for eachyear thereafter.
Example 19:The facts are the same as in Example 18.
Correction:Employer F uses the adjustments of future pay-
ments correction method to correct the § 415(b) fail-ure, by recouping the entire excess payment made in2006 from Employee S’s remaining benefit paymentsfor 2007. Thus, Employee S’s annual annuity benefitfor 2007 is reduced to $164,400 to reflect the excessbenefit amounts (increased by interest) that were paidfrom the plan to Employee S during the 2006 planyear. Beginning in 2008, Employee S begins to re-ceive annual benefit payments of $175,000.
Example 20:The facts are the same as in Example 18, except
that the benefit was paid to Employee S in the formof a single-sum distribution in 2006, which exceededthe maximum § 415(b) limits by $110,000.
September 2, 2008 509 2008–35 I.R.B.
Correction:Employer F uses the return of overpayment cor-
rection method to correct the § 415(b) failure. Thus,Employer F notifies Employee S of the $110,000Overpayment and that the Overpayment was noteligible for favorable tax treatment accorded to dis-tributions from qualified plans (and, specifically, wasnot eligible for tax-free rollover). The notice alsoinforms Employee S that the Overpayment (withinterest at the rate used by the plan to calculate thesingle-sum payment) is owed to the plan. EmployerF takes reasonable steps to have the Overpayment(with interest at the rate used by the plan to calculatethe single-sum payment) paid to the plan. EmployeeS pays the $110,000 (plus the requested interest) tothe plan. It is determined that the plan’s earningsrate for the relevant period was 2 percentage pointsmore than the rate used by the plan to calculatethe single-sum payment. Accordingly, Employer Fcontributes the difference to the plan.
Example 21:The facts are the same as in Example 20.
Correction:Employer F uses the return of overpayment cor-
rection method to correct the § 415(b) failure. Thus,Employer F notifies Employee S of the $110,000Overpayment and that the Overpayment was noteligible for favorable tax treatment accorded to dis-tributions from qualified plans (and, specifically, wasnot eligible for tax-free rollover). The notice alsoinforms Employee S that the Overpayment (withinterest at the rate used by the plan to calculate thesingle-sum payment) is owed to the plan. EmployerF takes reasonable steps to have the Overpayment(with interest at the rate used by the plan to calculatethe single-sum payment) paid to the plan. As a resultof Employer F’s recovery efforts, some, but notall, of the Overpayment (with interest) is recoveredfrom Employee S. It is determined that the amountreturned by Employee S to the plan is less than theOverpayment adjusted for earnings at the plan’searnings rate. Accordingly, Employer F contributesthe difference to the plan.
(2) Failures Relating to a § 415(c) Ex-cess.
(a) Correction Methods. (i) AppendixA Correction Method. Appendix A, sec-
tion .08 sets forth the correction method forcorrecting the failure to satisfy the § 415(c)limits on annual additions.
(ii) Forfeiture Correction Method. Inaddition to the Appendix A correctionmethod, the failure to satisfy § 415(c)with respect to a nonhighly compensatedemployee (A) who in the limitation yearof the failure had annual additions consist-ing of both (I) either elective deferrals orafter-tax employee contributions or bothand (II) either matching or nonelectivecontributions or both, (B) for whom thematching and nonelective contributionsequal or exceed the portion of the em-ployee’s annual addition that exceeds thelimits under § 415(c) (“§ 415(c) excess”)for the limitation year, and (C) who hasterminated with no vested interest in thematching and nonelective contributions(and has not been reemployed at the timeof the correction), may be corrected byusing the forfeiture correction methodset forth in this paragraph. The § 415(c)excess is deemed to consist solely of thematching and nonelective contributions.If the employee’s § 415(c) excess (ad-justed 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 unallocatedaccount, as described in section 6.06(2) ofthis revenue procedure, to be used to re-duce employer nonelective contributionsin succeeding year(s) (or if the amountwould have been allocated to other em-ployees who were in the plan for the yearof the failure if the failure had not oc-curred, then that amount is reallocated tothe other employees in accordance withthe plan’s allocation formula). Note that
while this correction method will permitmore favorable tax treatment of electivedeferrals for the employee than the Appen-dix A correction method, this correctionmethod could be less favorable to the em-ployee in certain cases, for example, if theemployee is subsequently reemployed andbecomes vested. (See Examples 22 and23.)
(iii) Return of Overpayment Correc-tion Method. A failure to satisfy § 415(c)that includes a distribution of the § 415(c)excess attributable to nonelective contri-butions and matching contributions maybe corrected using the return of Overpay-ment correction method set forth in section6.06(3) of this revenue procedure.
(b) Examples.
Example 22:Employer G maintains a § 401(k) plan. The
plan provides for nonelective employer contribu-tions, elective deferrals, and after-tax employeecontributions. 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 dis-tribution of the employee’s vested account balanceand that forfeitures are used to reduce employercontributions. For the 1998 limitation year, theannual additions made on behalf of two nonhighlycompensated employees in the plan, Employees Tand U, exceeded the limit in § 415(c). For the 1998limitation year, Employee T had § 415 compensationof $60,000, and, accordingly, a § 415(c)(1)(B) limitof $15,000. Employee T made elective deferrals andafter-tax employee 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 had threeyears of service with Employer G, terminated hisemployment and received his entire vested accountbalance (which consisted of his elective deferrals).The annual additions for Employees T and U con-sisted of:
Correction:Employer G uses the Appendix A correction
method to correct the § 415(c) excess with respectto Employee T (i.e., $3,000). Thus, a distributionof plan assets (and corresponding reduction of theaccount balance) consisting of $500 (adjusted for
earnings) of after-tax employee contributions and$2,500 (adjusted for earnings) of elective deferrals ismade to Employee T. Employer G uses the forfeiturecorrection method to correct the § 415(c) excess withrespect to Employee U. Thus, the § 415(c) excessis deemed to consist solely of the nonelective con-tributions. Accordingly, Employee U’s nonvested
account balance is reduced by $300 (adjusted forearnings) which is placed in an unallocated account,as described in section 6.06(2) of this revenue proce-dure, to be used to reduce employer contributions insucceeding year(s). After correction, it is determinedthat the ADP and ACP tests for 1998 were satisfied.
2008–35 I.R.B. 510 September 2, 2008
Example 23:Employer H maintains a § 401(k) plan. The
plan provides for nonelective employer contribu-tions, matching contributions and elective deferrals.The plan provides for matching contributions thatare equal to 100% of an employee’s elective de-ferrals that do not exceed 8% of the employee’splan compensation for the plan year. For the 1998limitation year, Employee V had § 415 compensa-tion of $50,000, and, accordingly, a § 415(c)(1)(B)limit of $12,500. During that limitation year, theannual additions for Employee V totaled $15,000,consisting of $5,000 in elective deferrals, a $4,000matching contribution (8% of $50,000), and a $6,000nonelective employer contribution. Thus, the annualadditions for Employee V exceeded the § 415(c)limit by $2,500.
Correction:Employer H uses the Appendix A correction
method to correct the § 415(c) excess with respectto Employee V (i.e., $2,500). Accordingly, $1,000of the unmatched elective deferrals (adjusted forearnings) are distributed to Employee V. The remain-ing $1,500 excess is apportioned equally betweenthe elective deferrals and the associated matchingemployer contributions, so Employee V’s accountbalance is further reduced by distributing to Em-ployee V $750 (adjusted for earnings) of the electivedeferrals and forfeiting $750 (adjusted for earnings)of the associated employer matching contributions.The forfeited matching contributions are placed in anunallocated account, as described in section 6.06(2)of this revenue procedure, to be used to reduce em-ployer contributions in succeeding year(s). Aftercorrection, it is determined that the ADP and ACPtests for 1998 were satisfied.
.05 Correction of Other OverpaymentFailures.
An Overpayment, other than one de-scribed in section 2.04(1) (relating to a§ 415(b) excess) or section 2.04(2) (re-lating to a § 415(c) excess), may be cor-rected in accordance with this section 2.05.An Overpayment from a defined benefitplan is corrected in accordance with therules in section 2.04(1). An Overpaymentfrom a defined contribution plan is cor-rected in accordance with the rules in sec-tion 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 basis ofcompensation in excess of the limit under§ 401(a)(17) for the plan year may be cor-rected using the reduction of account bal-ance correction method set forth in section6.06(2) of this revenue procedure.
(2) Example.
Example 24:Employer J maintains a money purchase pension
plan. Under the plan, an eligible employee is entitledto an employer contribution of 8% of the employee’scompensation up to the § 401(a)(17) limit ($220,000for 2006). During the 2006 plan year, an eligibleemployee, Employee W, inadvertently was creditedwith a contribution based on compensation above the§ 401(a)(17) limit. Employee W’s compensation for2006 was $250,000. Employee W received a contri-bution of $20,000 for 2006 (8% of $250,000), ratherthan the contribution of $17,600 (8% of $220,000)provided by the plan for that year, resulting in an im-proper allocation of $2,400.
Correction:The § 401(a)(17) failure is corrected using the re-
duction of account balance method by reducing Em-ployee W’s account balance by $2,400 (adjusted forearnings) and crediting that amount to an unallocatedaccount, as described in section 6.06(2) of this rev-enue procedure, to be used to reduce employer con-tributions in succeeding year(s).
.07 Correction by Amendment.(1) § 401(a)(17) Failures. (a) Contribu-
tion Correction Method. In addition to thereduction of account balance correctionmethod under section 6.06(2) of this rev-enue procedure, an employer may correcta § 401(a)(17) failure for a plan year undera defined contribution plan by using thecontribution correction method set forth inthis paragraph. The Employer contributesan additional amount on behalf of each ofthe other employees (excluding each em-ployee for whom there was a § 401(a)(17)failure) who received an allocation for theyear of the failure, amending the plan (asnecessary) to provide for the additionalallocation. The amount contributed for anemployee is equal to the employee’s plancompensation for the year of the failuremultiplied by a fraction, the numerator ofwhich is the improperly allocated amountmade on behalf of the employee with thelargest improperly allocated amount, andthe denominator of which is the limit un-der § 401(a)(17) applicable to the yearof the failure. The resulting additionalamount for each of the other employees isadjusted for earnings. (See Example 25.)
(b) Example.
Example 25:The facts are the same as in Example 24.
Correction:Employer J corrects the failure under VCP using
the contribution correction method by (1) amend-ing the plan to increase the contribution percentagefor all eligible employees (other than EmployeeW) for the 2003 plan year and (2) contributing an
additional amount (adjusted for earnings) for thoseemployees for that plan year. To determine theincrease in the plan’s contribution percentage (andthe additional amount contributed on behalf of eacheligible employee), the improperly allocated amount($2,400) is divided by the § 401(a)(17) limit for 2006($220,000). Accordingly, the plan is amended toincrease the contribution percentage by 1.09 percent-age points ($2,400/$220,000) from 8% to 9.09%. Inaddition, each eligible employee for the 2006 planyear (other than Employee W) receives an additionalcontribution of 1.09% multiplied by that employee’splan compensation for 2006. This additional contri-bution is adjusted for earnings.
(2) Hardship Distribution Failures andPlan Loan Failures. (a) Plan Amend-ment Correction Method. The OperationalFailure of making hardship distributionsto employees under a plan that does notprovide for hardship distributions maybe corrected using the plan amendmentcorrection method set forth in this para-graph. The plan is amended retroactivelyto provide for the hardship distributionsthat were made available. This paragraphdoes not apply unless (i) the amendmentsatisfies § 401(a), and (ii) the plan asamended would have satisfied the qualifi-cation requirements of § 401(a) (includingthe requirements applicable to hardshipdistributions under § 401(k), if applicable)had the amendment been adopted whenhardship distributions were first madeavailable. (See Example 26.) The PlanAmendment Correction Method is alsoavailable for the Operational Failure ofpermitting plan loans to employees un-der a plan that does not provide for planloans. The plan is amended retroactivelyto provide for the plan loans that weremade available. This paragraph does notapply unless (i) the amendment satisfies§ 401(a), and (ii) the plan as amendedwould have satisfied the qualificationrequirements of § 401(a) (and the re-quirements applicable to plan loans under§ 72(p)) had the amendment been adoptedwhen plan loans were first made available.
(b) Example.
Example 26:Employer K, a for-profit corporation, maintains
a § 401(k) plan. Although plan provisions in 2005did not provide for hardship distributions, beginningin 2005 hardship distributions of amounts allowed tobe distributed under § 401(k) were made currentlyand effectively available to all employees (within themeaning of § l.401(a)(4)–4). The standard used to de-termine hardship satisfied the deemed hardship distri-bution standards in § 1.401(k)–1(d). Hardship distri-butions were made to a number of employees during
September 2, 2008 511 2008–35 I.R.B.
the 2005 and 2006 plan years, creating an OperationalFailure. The failure was discovered in 2007.
Correction:Employer K corrects the failure under VCP by
adopting a plan amendment, effective January 1,2005, to provide a hardship distribution option thatsatisfies the rules applicable to hardship distributionsin § 1.401(k)–1(d). The amendment provides thatthe hardship distribution option is available to allemployees. Thus, the amendment satisfies § 401(a),and the plan as amended in 2005 would have sat-isfied § 401(a) (including § 1.401(a)(4)–4 and therequirements applicable to hardship distributionsunder § 401(k)) if the amendment had been adoptedin 2005.
(3) Early Inclusion of Otherwise Eli-gible Employee Failure. (a) Plan Amend-ment Correction Method. The OperationalFailure of including an otherwise eligibleemployee in the plan who either (i) hasnot completed the plan’s minimum ageor service requirements, or (ii) has com-pleted the plan’s minimum age or servicerequirements but became a participant inthe plan on a date earlier than the appli-cable plan entry date, may be correctedby using the plan amendment correctionmethod set forth in this paragraph. Theplan is amended retroactively to changethe eligibility or entry date provisions toprovide for the inclusion of the ineligibleemployee to reflect the plan’s actual oper-ations. The amendment may change theeligibility or entry date provisions withrespect to only those ineligible employeesthat were wrongly included, and only tothose ineligible employees, provided (i)the amendment satisfies § 401(a) at thetime it is adopted, (ii) the amendmentwould have satisfied § 401(a) had theamendment been adopted at the earliertime when it is effective, and (iii) the em-ployees affected by the amendment arepredominantly nonhighly compensatedemployees.
(b) Example.
Example 27:Employer L maintains a § 401(k) plan applicable
to all of its employees who have at least six monthsof service. The plan is a calendar year plan. Theplan provides that Employer L will make matchingcontributions based upon an employee’s salary reduc-tion contributions. In 2007, it is discovered that allfour employees who were hired by Employer L in2006 were permitted to make salary reduction con-tributions to the plan effective with the first weeklypaycheck after they were employed. Three of the fouremployees are nonhighly compensated. Employer Lmatched these employees’ salary reduction contribu-tions in accordance with the plan’s matching contri-bution formula. Employer L calculates the ADP and
ACP tests for 2006 (taking into account the salary re-duction and matching contributions that were madefor these employees) and determines that the testswere satisfied.
Correction:Employer L corrects the failure under SCP by
adopting a plan amendment, effective for employeeshired on or after January 1, 2006, to provide that thereis no service eligibility requirement under the planand submitting the amendment to the Service for adetermination letter.
SECTION 3. EARNINGSADJUSTMENT METHODS ANDEXAMPLES
.01 Earnings Adjustment Methods. (1)In general. (a) Under section 6.02(4)(a)of this revenue procedure, whenever theappropriate correction method for an Op-erational Failure in a defined contributionplan includes a corrective contribution orallocation that increases one or more em-ployees’ account balances (now or in thefuture), the contribution or allocation isadjusted for earnings and forfeitures. Thissection 3 provides earnings adjustmentmethods (but not forfeiture adjustmentmethods) that may be used by an em-ployer to adjust a corrective contributionor allocation for earnings in a definedcontribution plan. Consequently, theseearnings adjustment methods may be usedto determine the earnings adjustmentsfor corrective contributions or allocationsmade under the correction methods in sec-tion 2 and under the correction methodsin Appendix A. If an earnings adjustmentmethod in this section 3 is used to adjusta corrective contribution or allocation,that adjustment is treated as satisfying theearnings adjustment requirement of sec-tion 6.02(4)(a) of this revenue procedure.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 increases anemployee’s account balance is adjusted toreflect an “earnings amount” that is basedon the earnings rate(s) (determined undersection 3.01(3)) for the period of the fail-ure (determined under section 3.01(2)).The earnings amount is allocated in accor-dance with section 3.01(4).
(c) The rule in section 6.02(5)(a) of thisrevenue procedure permitting reasonableestimates in certain circumstances appliesfor purposes of this section 3. For this pur-pose, a determination of earnings made inaccordance with the rules of administra-tive convenience set forth in this section3 is treated as a precise determination ofearnings. Thus, if the probable differencebetween an approximate determination ofearnings and a determination of earningsunder this section 3 is insignificant and theadministrative cost of a precise determina-tion would significantly exceed the prob-able difference, reasonable estimates maybe used in calculating the appropriate earn-ings.
(d) This section 3 does not apply tocorrective distributions or corrective re-ductions in account balances. Thus, forexample, while this section 3 applies inincreasing the account balance of an im-properly excluded employee to correctthe exclusion of the employee under thereallocation correction method describedin section 2.02(2)(a)(iii)(B), this section3 does not apply in reducing the accountbalances of other employees under the re-allocation correction method. (See section2.02(2)(a)(iii)(C) for rules that apply tothe earnings adjustments for such reduc-tions.) In addition, this section 3 does notapply in determining earnings adjustmentsunder the one-to-one correction methoddescribed in section 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 the caseof an improper forfeiture of an employee’saccount balance, the beginning of the pe-riod of the failure is the date as of which theaccount balance was improperly reduced.See section 6.02(4)(e) of this revenue pro-cedure.
(b) Rules for Beginning Date for Ex-clusion of Eligible Employees from Plan.(i) General Rule. In the case of an exclu-sion of an eligible employee from a plancontribution, the beginning of the periodof the failure is the date on which con-tributions of the same type (e.g., electivedeferrals, matching contributions, or dis-cretionary nonelective employer contribu-tions) were made for other employees forthe year of the failure. In the case of anexclusion of an eligible employee from an
2008–35 I.R.B. 512 September 2, 2008
allocation of a forfeiture, the beginningof the period of the failure is the date onwhich forfeitures were allocated to otheremployees for the year of the failure.
(ii) Exclusion from a 401(k) or (m)Plan. For administrative convenience,for purposes of calculating the earningsrate for corrective contributions for a planyear (or the portion of the plan year) dur-ing which an employee was improperlyexcluded from making periodic electivedeferrals or after-tax employee contribu-tions, or from receiving periodic matchingcontributions, the Employer may treat thedate on which the contributions wouldhave been made as the midpoint of the planyear (or the midpoint of the portion of theplan year) for which the failure occurred.Alternatively, in this case, the Employermay treat the date on which the contribu-tions would have been made as the firstdate of the plan year (or the portion ofthe plan year) during which an employeewas excluded, provided that the earningsrate used is one half of the earnings rateapplicable under section 3.01(3) for theplan year (or the portion of the plan year)for which the failure occurred.
(3) Earnings Rate. (a) General Rule.For purposes of this section 3, the earn-ings rate generally is based on the invest-ment results that would have applied to thecorrective contribution or allocation if thefailure 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 earnings rateis based on the rate applicable to the em-ployee’s investment choices for the periodof the failure. For administrative conve-nience, if most of the employees for whomthe corrective contribution or allocation ismade are nonhighly compensated employ-ees, the rate of return of the fund with thehighest earnings rate under the plan for theperiod of the failure may be used to de-termine the earnings rate for all correctivecontributions or allocations. If the em-ployee had not made any applicable in-vestment choices, the earnings rate may bebased on the earnings rate under the planas a whole (i.e., the average of the ratesearned by all of the funds in the valua-tion periods during the period of the failureweighted by the portion of the plan assetsinvested in the various funds during the pe-riod 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 maybe assumed to be the actual earnings ratefor the plan’s investments in that fund dur-ing that valuation period. For example,the earnings rate may be determined with-out regard 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 bea pro rata portion of the earnings rate forthe entire valuation period, unless the ap-plication of this rule would result in eithera significant understatement or overstate-ment of the actual earnings during that por-tion of the valuation period.
(4) Allocation Methods. (a) In General.For purposes of this section 3, the earningsamount generally may be allocated in ac-cordance with any of the methods set forthin this paragraph (4). The methods underparagraph (4)(c), (d), and (e) are intendedto be particularly helpful where correctivecontributions are made at dates betweenthe plan’s valuation dates.
(b) Plan Allocation Method. Underthe plan 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 28.)
(c) Specific Employee AllocationMethod. Under the specific employeeallocation method, the entire earningsamount is allocated solely to the accountbalance of the employee on whose behalfthe corrective contribution or allocationis made (regardless of whether the plan’sallocation method would have allocatedthe earnings solely to that employee). Indetermining the allocation of plan earn-ings for the valuation period during whichthe corrective contribution or allocation ismade, the corrective contribution or allo-cation (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 allocationmethod does not allocate plan earningsfor a valuation period to a contributionmade during that valuation period, planearnings for the valuation period during
which the corrective contribution or al-location is made may be allocated as ifthat employee’s account balance had beenincreased as of the last day of the priorvaluation period by the corrective contri-bution or allocation, including only thatportion of the earnings amount attribut-able to earnings through the last day of theprior valuation period. The employee’saccount balance is then further increasedas of the last day of the valuation periodduring which the corrective contributionor allocation is made by that portion of theearnings amount attributable to earningsafter the last day of the prior valuationperiod. (See Example 29.)
(d) Bifurcated Allocation Method. Un-der the bifurcated allocation method, theentire earnings amount for the valuationperiods ending before the date the correc-tive contribution or allocation is made isallocated solely to the account balance ofthe employee on whose behalf the cor-rective contribution or allocation is made.The earnings amount for the valuation pe-riod during which the corrective contribu-tion or allocation is made 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 30.)
(e) Current Period Allocation Method.Under the current period allocationmethod, the portion of the earnings amountattributable to the valuation period dur-ing which 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 ofthe valuation period during which the cor-rective contribution or allocation is madeare allocated solely to the employee forwhom the required contribution shouldhave been made. The earnings amountfor the valuation period during which thecorrective contribution or allocation ismade (“second partial valuation period”)is allocated in accordance with the plan’smethod for allocating other earnings forthat valuation period in accordance withsection 3.01(4)(b). (See Example 31.)
.02 Examples.
September 2, 2008 513 2008–35 I.R.B.
Example 28:Employer L maintains a profit-sharing plan that
provides only for nonelective contributions. The planhas a single investment fund. Under the plan, assetsare valued annually (the last day of the plan year) andearnings for the year are allocated in proportion to ac-count balances as of the last day of the prior year, afterreduction for distributions during the current year butwithout regard to contributions received during thecurrent year (the “prior year account balance”). Plancontributions for 1997 were made on March 31, 1998.On April 20, 2000 Employer L determines that an op-erational failure occurred for 1997 because EmployeeX was improperly excluded from the plan. EmployerL decides to correct the failure by using the Appen-dix A correction method for the exclusion of an el-
igible employee from nonelective contributions in aprofit-sharing plan. Under this method, Employer Ldetermines that this failure is corrected by making acontribution on behalf of Employee X of $5,000 (ad-justed for earnings). The earnings rate under the planfor 1998 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 reasonableestimate of the earnings rate under the plan from Jan-uary 1, 2000 to June 1, 2000 is +12%.
Earnings Adjustment on the Corrective Contribution:The $5,000 corrective contribution on behalf of
Employee X is adjusted to reflect an earnings amount
based 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 determine theearnings rate for the period from March 31, 1998 toDecember 31, 1998, because that rate does not sig-nificantly understate or overstate the actual earningsfor that period. Accordingly, Employer L determinesthat the earnings rate for that period is 15% (9/12 ofthe plan’s 20% earnings rate for the year). Thus, ap-plicable earnings rates under the plan during the pe-riod of the failure are:
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 December 31,1998 and would have been allocated as 1998 earningsin proportion to the prior year (December 31, 1997)account balances, (2) Employee X’s account balanceas of December 31, 1998 would have been increasedby the additional $5,000 contribution, (3) earnings for1999 would have been increased by the 1999 earn-ings on the additional $5,000 contribution (including1998 earnings thereon) allocated in proportion to theprior year (December 31, 1998) account balancesalong with other 1999 earnings, and (4) earningsfor 2000 would have been increased by the earningson the additional $5,000 (including 1998 and 1999earnings thereon) from January 1 to June 1, 2000 andwould 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 follows:
(a) Each account balance that shared in the allo-cation 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, asof December 31, 1998, by $5,000.
(c) The resulting December 31, 1998 accountbalances will share in the 1999 earnings, includingthe $575 for 1999 earnings included in the correctivecontribution ($5,750(.10)), to determine the accountbalances as of December 31, 1999. However, eachaccount balance other than Employee X’s accountbalance has already shared in the 1999 earnings,
excluding the $575. Accordingly, Employee X’s ac-count balance as of December 31, 1999 will include$500 of the 1999 portion of the earnings amountbased on the $5,000 corrective contribution allocatedto Employee X’s account balance as of December31, 1998 ($5,000(.10)). Then each account balancethat originally shared in the allocation of earningsfor 1999 (i.e., excluding the $5,500 additions toEmployee X’s account balance) is increased by itsappropriate share of the remaining 1999 portion ofthe 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 Jan-uary 1, 2000 to June 1, 2000 earnings included in thecorrective contribution equal to $759 ($6,325(.12)).(See Table 1.)
2008–35 I.R.B. 514 September 2, 2008
TABLE 1CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period Earnings 15% 7501 All 12/31/1997 Account Balances4
1999 Earnings 10% 5752 Employee X ($500)/All 12/31/1998Account Balances ($75)4
Second Partial Valuation PeriodEarnings
12% 7593 All 12/31/1999 Account 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 forwhich earnings are being determined.
Example 29:The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution:The earnings amount on the corrective contribu-
tion is the same as in Example 30, but the earningsamount is allocated using the specific employee al-
location method. Thus, the entire earnings amountfor all periods through June 1, 2000 (i.e., $750 forMarch 31, 1998 to December 31, 1998, $575 for1999, and $759 for January 1, 2000 to June 1, 2000)is allocated to Employee X. Accordingly, EmployerL makes a contribution on June 1, 2000 to the planof $7,084 ($5,000(1.15)(1.10)(1.12)). Employee X’s
account balance as of December 31, 2000 is increasedby $7,084. Alternatively, Employee X’s account bal-ance as of December 31, 1999 is increased by $6,325($5,000(1.15)(1.10)), which shares in the allocationof earnings for 2000, and Employee X’s account bal-ance as of December 31, 2000 is increased by the re-maining $759. (See Table 2.)
TABLE 2CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period Earnings 15% 7501 Employee X
1999 Earnings 10% 5752 Employee X
Second Partial Valuation PeriodEarnings
12% 7593 Employee X
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 30:The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution:The earnings amount on the corrective contribu-
tion is the same as in Example 23, but the earnings
amount is allocated using the bifurcated allocationmethod. Thus, the earnings for the first partial val-uation period (March 31, 1998 to December 31,1998) and the earnings for 1999 are allocated toEmployee X. Accordingly, Employer L makes acontribution 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 sharein estimated January 1, 2000 to June 1, 2000 earn-
September 2, 2008 515 2008–35 I.R.B.
ings on the corrective contribution equal to $759($6,325(.12)). (See Table 3.)
TABLE 3CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period Earnings 15% 7501 Employee X
1$5,000 x 15%2$5,750($5,000 +750) x 10%3$6,325($5,000 +750 +575) x 12%4After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year.
Example 31:The facts are the same as in Example 28.
Earnings Adjustment on the Corrective Contribution:The earnings amount on the corrective contribu-
tion is the same as in Example 23, 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, 1999is increased by the sum of $5,500 ($5,000(1.10)) andthe remaining 1999 earnings on the corrective contri-bution equal to $75 ($5,000(.15)(.10)). Further, both(1) the estimated March 31, 1998 to December 31,1998 earnings on the corrective contribution equalto $750 ($5,000(.15)) and (2) the estimated January1, 2000 to June 1, 2000 earnings on the corrective
contribution equal to $759 ($6,325(.12)) are treatedin the same manner as 2000 earnings by allocatingthese amounts to the December 31, 2000 account bal-ances of employees in proportion to account balancesas of December 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.
TABLE 4CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings Rate Amount Allocated to:
Corrective Contribution $5,000 Employee X
First Partial Valuation Period Earnings 15% 7501 12/31/99 Account Balances (includingEmployee X’s $5,575)4
1$5,000 x 15%2$5,750($5,000 +750) x 10%3$6,325($5,000 +750 +575) x 12%4After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year forwhich earnings are being determined.
2008–35 I.R.B. 516 September 2, 2008
APPENDIX CVCP CHECKLIST
Plan Name: EIN: Plan #:
INSTRUCTIONS
NOTE: If you are submitting a Streamlined Application under VCP using Appendix F in accordance with section 11.02 of thisrevenue procedure, this Appendix C does not need to be completed. If you are submitting a VCP submission using Appendix D,then Part I of this Appendix C does not need to be completed.
The Service will be able to respond more quickly to your VCP request if it is carefully prepared and complete. To ensure that yourrequest is in order, use this checklist. Sign and date the checklist (as plan sponsor or authorized representative) and include it inthe submission as provided in section 11.10 of Rev. Proc. 2008–50. (Hereafter, all section references are to Rev. Proc. 2008–50)
You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request,substantive consideration of your submission will be deferred until a completed checklist is received.
5. APPLICANT’S EIN 6. PLAN NO.(do not use a Social Security Number)
7. PLAN NAME
8. TYPE OF SUBMISSION
□ REGULAR SUBMISSION
□ REGULAR SUBMISSION — ANONYMOUS
□ REGULAR SUBMISSION — MULTI-EMPLOYER PLAN
□ REGULAR SUBMISSION — MULTIPLE EMPLOYER PLAN
□ GROUP SUBMISSION
September 2, 2008 517 2008–35 I.R.B.
9. TYPE OF PLAN (CHECK ONE ONLY):
□ 01 PROFIT SHARING □ 09 CASH BALANCE
□ 02 401(k) □ 10 GOVERNMENTAL PLAN (§ 414(d))
□ 03 MONEY PURCHASE □ 11 SEP
□ 04 DEFINED BENEFIT □ 12 SARSEP
□ 05 ESOP □ 13 SIMPLE
□ 06 TARGET BENEFIT □ 14 STOCK BONUS
□ 07 403(b) □ 15 KSOP
□ 08 457 □ 16 OTHER (specify):
10. DATE (month and day) ON WHICH PLAN YEAR ENDS .
11. NUMBER OF PARTICIPANTS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES(See Rev. Proc. 2008–50, section 12.07.):
12. ASSETS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES (ROUND TONEAREST DOLLAR): $See Rev. Proc. 2008–50, section 12.07.
If the Applicant is being represented by someone in connection with this matter or wishes to authorize someone toreceive information from us in connection with this matter, submit a completed Form 2848 or Form 8821 and completeitems 13 through 18.
13. NAME OF APPLICANT’S REPRESENTATIVE
14. NAME OF REPRESENTATIVE’S FIRM (if applicable)
15. REPRESENTATIVE’S ADDRESS
16. REPRESENTATIVE’S PHONE NO. 17. FAX NO.
18. REPRESENTATIVE’S E-MAIL ADDRESS(optional)
PART II – SUBMISSION REQUIREMENTSAnswer each question by answering “Yes” or “N/A” as appropriate
Yes N/A QuestionReference
(Rev. Proc.section)
1. Have you included an explanation of how and why the failure(s) arose,including a description of the applicable administrative procedures for theplan in effect at the time the failure(s) occurred?
11.03(6)
2008–35 I.R.B. 518 September 2, 2008
Yes N/A QuestionReference
(Rev. Proc.section)
2. Have you included a detailed description of the method for correctingthe failure(s) identified in your submission? 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 cannotbe determined at the time of the request), the years involved, and calculationsor assumptions the Plan Sponsor used to determine the amounts needed forcorrection. Note that each step of the correction method must be describedin narrative form.
11.03(7)
3. If you are you requesting that participant loans being corrected underthis revenue procedure not be treated as distributions pursuant to § 72(p),have you included the request and a detailed description of the failure?Alternatively, if you are requesting that participant loans being correctedunder this revenue procedure be recognized as distributions in the year ofcorrection instead of the year that the deemed distribution occurred under§ 72(p), have you included the request and a detailed description of thefailure?
11.03(13)
4. Have you described the earnings or interest methodology (indicatingcomputation period and basis for determining earnings or interest rates) thatwill be used to calculate earnings or interest on any corrective contributionsor distributions? (As a general rule, the interest rate (or rates) earned bythe plan during the applicable period(s) should be used in determining theearnings for corrective contributions or distributions.)
11.03(8)
5. Have you submitted specific calculations for either all affected employeesor a representative sample of affected employees? In lieu of providingcorrection calculations with respect to each employee affected by a failure,you may submit calculations with respect to a representative sample ofaffected employees. However, the representative sample calculations mustbe sufficient to demonstrate each aspect of the correction method proposed.
11.03(9)
6. If you are requesting a waiver of the excise tax under § 4974 of the Code,have you included the request, and, if applicable, an explanation supportingthe request for any affected owner-employee or 10 percent owner?
11.03(12)
7. If you are requesting relief of the excise tax under §§ 4972, 4973, or 4979,have you included the request and a detailed description of the failure?
11.03(12)
8. Have you described the method that will be used to locate and notifyformer employees or, if there are no former employees affected by thefailure(s) or the correction(s), provided an affirmative statement to thateffect?
11.03(10)
9. Have you provided a description of the administrative measures that havebeen or will be implemented to ensure that the same failure(s) do not recur?
11.03(11)
10. Have you included a statement that, to the best of the Plan Sponsor’sknowledge, the plan is not currently under an Employee Plans examination?
11.03(14)
11. Have you included a statement that, to the best of the Plan Sponsor’sknowledge, the Plan Sponsor is not under an Exempt Organizationsexamination?
11.03(14)
12. Have you included a statement that neither the plan nor the Plan Sponsorhas been a party to an abusive tax avoidance transaction? Alternatively, haveyou provided a statement identifying the abusive tax avoidance transaction(s)to which the plan or the Plan Sponsor has been a party?
11.03(15)
September 2, 2008 519 2008–35 I.R.B.
Yes N/A QuestionReference
(Rev. Proc.section)
13. If the submission includes a failure related to Transferred Assets, haveyou included a description of the related employer transaction, including thedate of the employer transaction and the date the assets were transferredto the plan?
11.03(16)
14. Have you included a copy of the portions of the plan document (andadoption agreement, if applicable) relevant to the failure(s) and method(s) ofcorrection?
11.04(1)
15. Have you included the original signature of the sponsor or the sponsor’sauthorized representative?
11.07
16. Have you included a Power of Attorney (Form 2848) or Tax InformationAuthorization (Form 8821)? Note: Authorization to represent a plan sponsorbefore the Service using Form 2848 is limited to attorneys, certified publicaccountants, enrolled agents, enrolled retirement plan agents, and enrolledactuaries.
11.08
17. Have you included a Penalty of Perjury Statement signed (originalsignature only) and dated by the Plan Sponsor?
11.09
18. Have you submitted the Appendix E acknowledgement letter? 11.12
19. Where applicable, have you submitted an application for a determinationletter and Form 8717 together with a check for the user fee made payableto the U.S. Treasury?
10.05 and 11.04(2)
20. If the plan is currently being considered in an unrelated determinationletter application, have you included a statement to that effect?
11.03(17)
21. Have you included a check for the VCP compliance fee, and, ifapplicable, a separate check for the determination letter fee, each madepayable to the U. S. Treasury?
11.04 and 11.05
22. If your submission is for a terminating Orphan Plan, have you included arequest for a waiver of the VCP fee?
11.03(22)
23. Have you assembled your submission as described in section 11.15? 11.15
If you inserted “N/A” for any item, enter an explanation here:
Signature Date
Title or Authority
Typed or printed name of person signing checklist
2008–35 I.R.B. 520 September 2, 2008
APPENDIX DVCP SUBMISSION
Plan Name: EIN: Plan #:(Please include the plan name, EIN, and plan number information on each page of the submission.)
5. APPLICANT’S EIN 6. PLAN NO.(do not use a Social Security Number)
7. PLAN NAME
8. TYPE OF SUBMISSION
□ REGULAR SUBMISSION
□ REGULAR SUBMISSION — ANONYMOUS
□ REGULAR SUBMISSION — MULTI-EMPLOYER PLAN
□ REGULAR SUBMISSION — MULTIPLE EMPLOYER PLAN
□ GROUP SUBMISSION
9. TYPE OF PLAN (CHECK ONE ONLY):
□ 01 PROFIT SHARING □ 09 CASH BALANCE
□ 02 401(k) □ 10 GOVERNMENTAL PLAN (§ 414(d))
□ 03 MONEY PURCHASE □ 11 SEP
□ 04 DEFINED BENEFIT □ 12 SARSEP
□ 05 ESOP □ 13 SIMPLE
□ 06 TARGET BENEFIT □ 14 STOCK BONUS
□ 07 403(b) □ 15 KSOP
□ 08 457 □ 16 OTHER (specify):
10. DATE (month and day) ON WHICH PLAN YEAR ENDS .
11. NUMBER OF PARTICIPANTS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES(See Rev. Proc. 2008–50, section 12.07.):
12. ASSETS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES (ROUND TONEAREST DOLLAR): $(See Rev. Proc. 2008–50, section 12.07)
If the Applicant is being represented by someone in connection with this matter or wishes to authorize someone toreceive information from us in connection with this matter, submit a completed Form 2848 or Form 8821, and completeitems 13 through 18.
September 2, 2008 521 2008–35 I.R.B.
13. NAME OF APPLICANT’S REPRESENTATIVE
14. NAME OF REPRESENTATIVE’S FIRM
15. REPRESENTATIVE’S ADDRESS:
16. REPRESENTATIVE’S PHONE NO. 17. FAX NO.
18. REPRESENTATIVE’S E-MAIL ADDRESS(optional)
PART II. APPLICANT’S DESCRIPTION OF FAILURES
Attach additional pages, as needed. Label attachment “PART II. APPLICAN’TS DESCRIPTION OF FAILURES.” List andnumber each failure separately.
PART III. APPLICANT’S DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
Attach additional pages, as needed. Label attachment “PART III. APPLICAN’TS DESCRIPTION OF THE PROPOSEDMETHOD OF CORRECTION.” Describe the correction method applicable to each failure listed in Part II.
PART IV. APPLICANT’S PROPOSED REVISION TO ADMINISTRATIVE PROCEDURES
Attach additional pages, as needed. Label attachment “PART IV. APPLICAN’TS PROPOSED REVISION TOADMINISTRATIVE PROCEDURES.” Please include an explanation of how and why the failures arose and a description of themeasures that will be implemented to ensure that the same failures will not occur.
PART V. REQUESTS RELATED TO EXCISE TAXES, ADDITIONAL TAX, AND TAX REPORTING
□ The Applicant requests that the Service not pursue the following taxes under the Internal Revenue Code (attach supportingrationale as required by Section 6.09), labeled “PART V. REQUESTS RELATED TO EXCISE TAX, ADDITIONAL TAX,AND TAX REPORTING.”)
□ Excise tax under § 4972 with respect to failure(s) # .
□ Excise tax under § 4973 with respect to failure(s) # .
□ Excise tax under § 4974 with respect to failure(s) # .
□ Excise tax under § 4979 with respect to failure(s) # .
□ Imposition of additional tax under § 72(t) with respect to failure(s) # .
□ The Applicant requests that the Service grant the following with respect to plan loan failures as described in section 6.07 ofRev. Proc. 2008–50:
□ With respect to failure(s) # , that a deemed distribution corrected pursuant to this VCP submissionnot be required to be reported on Form 1099–R and that repayments made by such correction not result in theaffected participant having additional basis in the plan for purposes of determining the tax treatment of subsequentdistributions from the plan.
□ With respect to failure(s) # , that a deemed distribution be reported on Form 1099–R with respect toaffected participant(s) for the year of correction instead of the year of the failure.
PART VI. APPLICANT’S REPRESENTATIONS
(Note: Since the representations include the penalty of perjury statement, the representations under Part VI of this Appendix Dmust be signed by the Plan Sponsor, not the plan representative.)
2008–35 I.R.B. 522 September 2, 2008
A. Under Examination
To the best of my knowledge:
1) The subject plan is not currently under examination of either an Employee Plans Form 5500 series return or otherEmployee Plans examination,
2) The Plan Sponsor is not under an Exempt Organizations examination (that is, an examination of a Form 990 seriesreturn or other Exempt Organizations examination),
3) Neither the Plan Sponsor nor any of its representatives has received verbal or written notification from the Tax Exemptand Government Entities Division of the Internal Revenue Service of an impending examination or of any impendingreferral for such examination, nor is the plan in Appeals or litigation for any issues raised in such an examination, and
4) The subject plan is not currently under investigation by the Criminal Investigation Division of the Internal RevenueService.
B. Abusive tax avoidance transaction (check box that applies)
□ Neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction as defined in section4.13(2) of Rev. Proc. 2008–50.
□ The plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction. Details of the transaction(s) areprovided in a separate statement which has been included with the submission.
C. Compliance Fee
The Applicant will neither attempt to amortize, deduct, or recover from the Internal Revenue Service any compliancefee paid in connection with this compliance statement nor receive any Federal tax benefit on account of payment ofsuch compliance fee.
D. Penalties of Perjury
Under penalties of perjury, I declare that I have examined this submission, including accompanying documents andrepresentations. To the best of my knowledge and belief, the facts and information presented in support of this submissionare true, correct, and complete.
Signed: Date:
Name (printed): Title:
PART VII. ENFORCEMENT RESOLUTION (to be completed by IRS only)
The Service will not pursue the sanction of revoking the tax-favored status of the plan under §§ 401(a), 403(b), 408(k) or 408(p)on account of the failure(s) described in this submission. This compliance statement considers only the acceptability of thecorrection method(s) and the revision(s) of administrative procedures described in the submission and does not express an opinionas to the accuracy or acceptability of any calculations or other material submitted with the application. In no event may thiscompliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor (as defined in Rev. Proc. 2008–50)was not a party to an abusive tax avoidance transaction. The compliance statement should not be construed as affecting the rightsof any party under any other law, including Title I of the Employee Retirement Income Security Act of 1974.
This compliance statement is conditioned on (1) there being no misstatement or omission of material facts in connectionwith the submission and (2) the completion of all corrections described within one hundred fifty (150) days of the date ofthe compliance statement.
□ The Service will treat the failure to adopt interim amendments or amendments for optional law changes, as describedin section 6.05(3)(a) of Rev. Proc. 2008–50 as if they had been adopted timely for the purpose of making availablethe extended remedial amendment period currently set forth in Revenue Procedure 2007–44, 2007–28 I.R.B. 54, orits successors. However, this compliance statement does not constitute a determination as to whether any such planamendments, as drafted, comply with the applicable changes in qualification requirements.
□ The Service will not pursue the following on account of the qualification failure(s) described in this submission:
□ Excise tax under § 4972.
□ Excise tax under § 4973.
September 2, 2008 523 2008–35 I.R.B.
□ Excise tax under § 4974.
□ Excise tax under § 4979.
□ With respect to the loan failure(s) described in this submission:
□ The Service will not require deemed distributions under § 72(p) to be reported on Forms 1099–R with respect to theparticipant(s) affected by the failure(s), and repayments made pursuant to the correction of such loan(s) will not resultin an affected participant having additional basis in the plan for the purpose of determining the tax treatment ofsubsequent distributions from the plan to such participant(s).
□ The Service will require deemed distributions under § 72(p) to be reported on Form 1099–R with respect to theparticipant(s) affected by the failure(s). However, the plan will be permitted to report deemed distributions on Form1099–R in the year of correction, instead of the year of the failure.
□ With respect to the Overpayment failures described in this submission that were corrected by removing improperdistributions from the IRA(s) of the affected participant(s) and returning those distributions to the plan, the Service will notpursue % of the 10% additional income tax under § 72(t).
Approved:Joyce Kahn, ManagerEmployee Plans Voluntary ComplianceTax Exempt and Government Entities Division
Date:
2008–35 I.R.B. 524 September 2, 2008
APPENDIX EACKNOWLEDGEMENT LETTER
[ ]
[ ]
[ ]
[ ]
[INSERT NAME ANDADDRESS OF PLANSPONSOR ORAUTHORIZED REPRESENTATIVEAT LEFT]
Applicant’s Name:
Plan Name:[insert plan name]
Plan No.[insert plan number]
Control No.:(to be completed by IRS)
Received Date:(to be completed by IRS)
The Internal Revenue Service, Employee Plans Voluntary Compliance, has received your VCP submission for the above-captionedplan. Your request has been assigned the control number listed above. This number should be referred to in any communicationto us concerning your submission.
You will be contacted when the case is assigned to an agent. If you need to inquire about the status of your case prior to that date,please call (626) 312–4921 (not a toll-free number). Please leave a message with the name of the plan, the Control Number,your name, and a phone number where you can be reached.
Thank you.
September 2, 2008 525 2008–35 I.R.B.
APPENDIX FSTREAMLINED VCP SUBMISSION
Plan Name: EIN: Plan #:(Please include the plan name, EIN, and plan number information on each page of the submission.)
5. APPLICANT’S EIN 6. PLAN NO.(do not use a Social Security Number)
7. PLAN NAME
8. TYPE OF SUBMISSION
□ REGULAR SUBMISSION
□ REGULAR SUBMISSION — ANONYMOUS
□ REGULAR SUBMISSION — MULTI-EMPLOYER PLAN
□ REGULAR SUBMISSION — MULTIPLE EMPLOYER PLAN
□ GROUP SUBMISSION
9. TYPE OF PLAN (CHECK ONE ONLY):
□ 01 PROFIT SHARING □ 09 CASH BALANCE
□ 02 401(k) □ 10 GOVERNMENTAL PLAN (§ 414(d))
□ 03 MONEY PURCHASE □ 11 SEP
□ 04 DEFINED BENEFIT □ 12 SARSEP
□ 05 ESOP □ 13 SIMPLE
□ 06 TARGET BENEFIT □ 14 STOCK BONUS
□ 07 403(b) □ 15 KSOP
□ 08 457 □ 16 OTHER (specify):
10. DATE (month and day) ON WHICH PLAN YEAR ENDS .
11. NUMBER OF PARTICIPANTS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES(See Rev. Proc. 2008–50, section 12.07.):
12. ASSETS IN THE PLAN AS PROVIDED ON THE MOST RECENTLY FILED FORM 5500 SERIES (ROUND TONEAREST DOLLAR): $See Rev. Proc. 2008–50, section 12.07.
If the Applicant is being represented by someone in connection with this matter or wishes to authorize someone toreceive information from us in connection with this matter, submit a completed Form 2848 or Form 8821, and completeitems 13 through 18.
13. NAME OF APPLICANT’S REPRESENTATIVE
2008–35 I.R.B. 526 September 2, 2008
14. NAME OF REPRESENTATIVE’S FIRM
15. REPRESENTATIVE’S ADDRESS:
16. REPRESENTATIVE’S PHONE NO. 17. FAX NO.
18. REPRESENTATIVE’S E-MAIL ADDRESS(optional)
PART II. APPLICANT’S ENCLOSURES
The Applicant encloses the following documents with this submission:
□ VCP fee of $ made payable to the U.S. Treasury (required). (If the fee is determined on the basis of treatingTransferred Assets as a separate plan, pursuant to section 12.07 of Rev. Proc. 2008–50, please enclose a description ofthe related employer transaction, including the date of the employer transaction and the date the assets were transferredto the plan.)
□ A written request if the application is made for a terminating Orphan Plan and the Applicant is applying for a waiver ofthe VCP fee.
□ Power of Attorney (Form 2848) or Tax Information Authorization (Form 8821), if applicable.
□ If the plan is being considered for an unrelated determination letter application, a statement to that effect.
□ Appendix E (optional)
□ Completed Appendix F schedule(s). (Check the schedules that apply)
□ Schedule 1 — Interim and Certain Discretionary Nonamender Failures
□ Schedule 2 — Nonamender Failures (other than those to which Schedule 1 applies)
□ Schedule 3 — SEPs and SARSEPs
□ Schedule 4 — SIMPLE IRAs
□ Schedule 5 — Plan Loan Failures
□ Schedule 6 — Employer Eligibility Failure
□ Schedule 7 — Failure to Distribute Elective Deferrals in Excess of the § 402(g) Limit
□ Schedule 8 — Failure to Pay Required Minimum Distributions Timely under § 401(a)(9)
□ Schedule 9 — Correction by Plan Amendment (in accordance with Appendix B)
□ Information required by each schedule, as set forth in each applicable Part entitled “Enclosures.”.
PART III. APPLICANT’S REPRESENTATIONS
A. Under Examination
To the best of my knowledge:
1) The subject plan is not currently under examination of either an Employee Plans Form 5500 series return or otherEmployee Plans examination,
2) The Plan Sponsor is not under an Exempt Organizations examination (that is, an examination of a Form 990 seriesreturn or other Exempt Organizations examination),
3) Neither the Plan Sponsor nor any of its representatives has received verbal or written notification from the TaxExempt and Government Entities Division of the Internal Revenue Service (“Service”) of an impending examinationor of any impending referral for such examination nor is the plan in Appeals or litigation for any issues raised insuch an examination, and
4) The subject plan is not currently under investigation by the Criminal Investigation Division of the Internal RevenueService.
September 2, 2008 527 2008–35 I.R.B.
B. Abusive tax avoidance transaction (check box that applies)
□ Neither the plan nor the Plan Sponsor has been a party to an abusive tax avoidance transaction as defined in section4.13(2) of Rev. Proc. 2008–50.
□ The plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction. Details of the transaction(s)are provided in a separate statement which has been included with the submission.
C. Compliance Fee
The Applicant will neither attempt to amortize, deduct, or recover from the Internal Revenue Service any compliancefee paid in connection with this compliance statement nor receive any Federal tax benefit on account of payment ofsuch compliance fee.
D. Penalties of Perjury
Under penalties of perjury, I declare that I have examined this submission, including accompanying documents andrepresentations. To the best of my knowledge and belief, the facts and information presented in support of this submissionare true, correct, and complete.
Signed: Date:
Name (printed):
Title:
PART IV: ENFORCEMENT RESOLUTION (to be completed by IRS only)
The Internal Revenue Service will not pursue the sanction of revoking the tax-favored status of the plan under §§ 401(a), 403(b),408(k), or 408(p) of the Internal Revenue Code on account of the failure(s) described in the schedules submitted pursuant tothis Appendix F. This compliance statement considers only the acceptability of the correction method(s) and the revision(s) ofadministrative procedures described in the schedules submitted pursuant to this Appendix F submission and does not express anopinion as to the accuracy or acceptability of any calculations or other material submitted with the application. In no event maythis compliance statement be relied on for the purpose of concluding that the plan or Plan Sponsor (as defined in Rev. Proc.2008–50) was not a party to an abusive tax avoidance transaction. The compliance statement should not be construed as affectingthe rights of any party under any other law, including Title I of the Employee Retirement Income Security Act of 1974.
This compliance statement is conditioned on (1) there being no misstatement or omission of material facts in connection with thesubmission and (2) the completion of all corrections described in the applicable schedule(s) to this Appendix F submission withinone hundred fifty (150) days of the date of the compliance statement.
In addition:(paragraph applies only if checked by the Service)
□ For failure(s) described in Schedule 1 of Appendix F, the Service will treat the amendments as if they had been adoptedtimely for the purpose of making available the extended remedial amendment period set forth in Revenue Procedure2007–44, 2007–28 I.R.B. 54, or its successors. However, this compliance statement does not constitute a determination asto whether any such plan amendment, as drafted, complies with the applicable change in qualification requirements.
□ For failure(s) described in Schedule 3 of Appendix F, the Service will not pursue the following:
□ Excise tax under § 4972.
□ Excise tax under § 4979.
□ For failure(s) described in Schedule 4 of Appendix F, the Service will not pursue excise tax under § 4972.
□ For loan failure(s) described in section of Schedule 5 of Appendix F, the Service will not require the deemeddistributions to be reported on Form 1099–R with respect to the participant(s) affected by the failure(s). The repaymentsmade pursuant to the correction of such loan(s) will not result in an affected participant having additional basis in the planfor the purpose of determining the tax treatment of subsequent distributions from the plan to such participant(s).
□ For loan failure(s) described in section of Schedule 5 of Appendix F, the Service will require the deemed distributionsto be reported on Form 1099–R with respect to the participant(s) affected by the failure(s). However, the plan will bepermitted to report deemed distributions on Form 1099–R in the year of correction instead of the year of the failure.
2008–35 I.R.B. 528 September 2, 2008
□ For minimum distribution failure(s) described in Schedule 8 of Appendix F, the Service will waive the excise tax under§ 4974.
Approved:Joyce Kahn, ManagerEmployee Plans Voluntary ComplianceTax Exempt and Government Entities Division
Date:
September 2, 2008 529 2008–35 I.R.B.
APPENDIX F, SCHEDULE 1Interim and Certain Discretionary Nonamender Failures
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURES
A. Interim Amendments
The plan identified above was not amended timely for (check all failures that apply)
□ Good faith amendments under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) requiredunder Notice 2001–42 (for details see Notice 2001–57). If the Plan Sponsor failed to timely adopt one or more good faithamendments required for the plan to comply with EGTRRA, then check the box on the left and check the applicableamendments below:
□ The increased limit on annual additions under § 415(c) (applies to defined contribution plans that do not incorporate§ 415(c) by reference)
□ Modification of top heavy rules under § 416 (applies to both defined benefit and defined contribution plans)
□ Vesting requirements for employer matching contributions under § 411 (applies to plans that provided for employermatching contributions that do not vest as rapidly as any of the schedules provided for under § 411(a)(12))
□ Modification of rules relating to eligible rollover distributions under §§ 401(a)(31)(A), 401(a)(31)(C), 402(c)(4), and402(c)(8) (applies to both defined benefit and defined contribution plans)
□ Repeal of the multiple use test under Treasury Regulations § 1.401 (m)–2 (applies to § 401(k) plans that wereformerly subject to the multiple use test)
□ Suspension period following hardship distribution (required for plans subject to the safe harbor requirements of§ 401(k)(12) or § 401(m)(11))
□ Plan provisions prohibiting loans to any owner-employee or shareholder-employee (required for plans that provideloans to participants but prohibit the making of loans to owner-employees or Subchapter S shareholder-employees)
□ The automatic rollover provision under § 401(a)(31)(B), as described in Notice 2005–5 (applies to both defined benefit anddefined contribution plans)
□ The final and temporary regulations under § 401(a)(9) (interim amendment required for defined contribution plans;defined benefit plans have until the end of the extended EGTRRA remedial amendment period to amend. See Rev.Procs. 2002–29 and 2003–10.)
□ Guidance relating to the prescribed mortality table under § 415(b)(2)(E)(v) or the applicable mortality table under§ 417(e)(3)(A)(ii)(I), as described in Rev. Rul. 2001–62 (applies to defined benefit plans.)
□ Interim amendments, as described in Rev. Proc. 2007–44 or its successors. If the plan failed to adopt one or moreamendments required for the plan to comply with a law change, then check the box on the left and check the applicableamendments below:
□ Final §§ 401(k) and 401(m) regulations (plans with 401(k) and 401(m) provisions must comply with the regulationsfor plan years beginning on or after January 1, 2006)
□ Prohibited allocation of securities in an ESOP maintained by a S-Corp. pursuant to § 409(p)
□ Retroactive annuity starting date provisions pursuant to Treasury Regulations § 1.417(e)–1 (required for plans thatprovide for retroactive annuity starting dates)
□ Final regulations regarding low normal retirement age (§ 1.401(a)–1(b)(2))
□ Amendments to § 1.411(d)–3 of the final regulations
□ Final regulations under § 415
2008–35 I.R.B. 530 September 2, 2008
□ Other (i.e., any other interim amendment that complies with the requirements in Rev. Proc. 2007–44 or its successors).Please list:
B. Implementation of Applicable Optional Law Changes (defined in section 6.05(3) of Rev. Proc. 2008–50)
The plan identified above was not amended timely for (check all failures that apply)
□ Optional good faith EGTRRA amendments under Notice 2001–42 (for details, see Notice 2001–57). If the Plan Sponsorimplemented any of the optional law changes and failed to adopt good faith amendments timely to conform the plan to itsoperation, then check the box on the left and check the applicable amendments below:
□ Increasing the limit on compensation (under § 401(a)(17)) that is taken into account for the purpose of determiningallocations in a defined contribution plan or benefits in a defined benefit plan
□ Disregarding amounts attributable to rollovers in determining the value of an employee’s vested accrued benefitsubject to involuntary distribution pursuant to § 411(a)(11)(D).
□ Increasing the contribution limit for elective deferrals on account of the increased limitation under § 402(g) or, in thecase of a SIMPLE 401(k) plan, § 408(p)(2)
□ Adding types of rollovers accepted by the plan pursuant to EGTRRA §§ 641, 642, and 643 (available for rolloversaccepted after December 31, 2001)
□ Providing for catch-up contributions pursuant to § 414(v)
□ Adding “severance from employment” as a distributable event pursuant to §§ 401(k)(2) and 401(k)(10)
□ Increasing the limit on a participant’s benefit pursuant to § 415(b)
□ Final §§ 401(k) and 401(m) regulations (optional for plan years beginning before January 1, 2006, the earliest possible planyear in which regulations could be effective: plan year ending after December 29, 2004)
□ Permitting participants to designate elective deferrals as Roth contributions pursuant to § 402A
□ Permitting deemed individual retirement accounts pursuant to § 408(q)
□ Final regulations under § 409(p) regarding ESOPs holding S-Corp stock
□ Other amendments relating to implementation of optional law changes. Please list
PART II. DESCRIPTION OF METHOD OF CORRECTION
The Plan Sponsor has adopted amendments that satisfy the requirements of all of the items checked in Part I of this Appendix F,Schedule 1 retroactively to the effective dates of the specific provisions contained in the amendments. The executed amendmentshave been enclosed with this submission.
September 2, 2008 531 2008–35 I.R.B.
PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
The Applicant has taken the following step(s) to ensure that the failure(s) will not recur:
PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses copies of the signed and datedamendments used to correct the failure(s) identified in Part I of this Appendix F, Schedule 1.
2008–35 I.R.B. 532 September 2, 2008
APPENDIX F, SCHEDULE 2Nonamender Failures (other than those to which Schedule 1 applies)
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURES
The plan identified above was not amended to comply with the applicable provisions of the following legislative and regulatoryrequirements by the applicable deadlines in accordance with § 401(b) and the regulations thereunder:
□ The Employee Retirement Income Security Act of 1974 (ERISA)
□ The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
□ The Deficit Reduction Act of 1984 (DEFRA)
□ The Retirement Equity Act of 1984 (REA)
□ The Tax Reform Act of 1986 (TRA ’86)
□ The Unemployment Compensation Amendments of 1992 (UCA)
□ The Omnibus Budget Reconciliation Act of 1993 (OBRA)
□ GUST (includes The Uruguay Round Agreements Act, the Uniformed Services Employment and Reemployment RightsAct of 1994, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Internal Revenue ServiceRestructuring and Reform Act of 1998, and the Community Renewal Tax Relief Act of 2000)
□ The changes required by the 2005 Cumulative List (Notice 2005–101, 2005–2 C.B. 1219)
□ The changes required by the 2006 Cumulative List (Notice 2007–3, 2007–1 C. B. 255)
□ The changes required by the 2007 Cumulative List (Notice 2007–94, 2007–2 C.B. 1179)
□ Other (specify the legal requirement and applicable Cumulative List):
PART II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
The Plan Sponsor has adopted (or will adopt) amendments that satisfy the requirements of all of the items checked in Part I ofthis Appendix F, Schedule 2 retroactively to the effective dates of the specific provisions contained in the amendments. Theamendments and restated plan documents (where applicable) are enclosed with this submission.
PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
The Plan Sponsor has taken the following step(s) to ensure that the failure(s) will not recur:
September 2, 2008 533 2008–35 I.R.B.
PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• Copies of all amendments used to correct the failure(s), either as adopted or in proposed form,• A copy of the plan document in effect prior to any of the amendments used to correct the failure(s),• A copy of the most recent determination letter issued with respect to the plan (if applicable), and• A determination letter application (Form 5300, 5307, or 5310 along with Form 8717 and the applicable user fee payment made
payable to the U.S. Treasury).
2008–35 I.R.B. 534 September 2, 2008
APPENDIX F, SCHEDULE 3SEPs and SARSEPs
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
Instructions: This Schedule 3 is available for Simplified Employee Pension plans (SEPs), including SEPs that includesalary reduction arrangements (i.e., Salary Reduction Simplified Employee Pension plans (SARSEPs).)
PART I. IDENTIFICATION OF FAILURE(S) AND PROPOSED METHOD(S) OF CORRECTION
The following failure(s) occurred with respect to the plan identified above. Check the failure(s) that apply. Within each failure,check applicable boxes, and provide the information requested:
□ A. Employer Eligibility Failure (SARSEPs only)
□ The Plan Sponsor was not eligible to sponsor a SARSEP because the plan was established on . (Plan Sponsors werenot permitted to establish SARSEPs after December 31, 1996.)
□ The plan was adopted by a Plan Sponsor who was (or subsequently became) ineligible to sponsor a SARSEP under therequirements of § 408(k)(6) because the Plan Sponsor (and, if applicable, its related controlled group or affiliated servicegroup employers) had more than 25 employees (including leased employees, if applicable) during the following planyear(s):
The plan was adopted by a Plan Sponsor that became ineligible to sponsor a SARSEP under the requirements of§ 408(k)(6) because, in one or more plan year(s), fewer than 50% of the employees eligible to participate in the plan electedto make salary reduction contributions. The failure occurred during the following plan year(s):
Description of Proposed Method of Correction
All contributions ceased as of (insert date beginning no later than the date this application is filed underVCP). The Plan Sponsor will not permit any new salary reduction contributions to the plan.
□ B. Failure to satisfy the deferral percentage test (SARSEPs only)
At least one highly compensated employee (“HCE”) deferred an amount which, as a percentage of compensation, wasmore than 125% of the average deferral percentage (“ADP”) for all nonhighly compensated employees (“NHCEs”)eligible to participate in the plan (§ 408(k)(6)(A)(iii)).
The total excess deferrals for each affected plan year were as follows:
Year Excess Deferrals
September 2, 2008 535 2008–35 I.R.B.
Description of the Proposed Method of Correction
The Plan Sponsor has made (or will make) nonforfeitable contributions on behalf of all eligible NHCEs. Each eligibleNHCE will receive a contribution equal to a uniform percentage of compensation. The uniform percentage is equal tothe difference between the (1) ADP that would have been required for a HCE’s deferral percentage to have passed thenondiscrimination test and (2) the actual ADP for NHCEs. (Example: In a particular plan year, an HCE defers 10% ofcompensation. The ADP for NHCEs for the same plan year is 5% of compensation. However, in order for the plan to passthe nondiscrimination test, the ADP should have been 8% of compensation. The corrective contribution on behalf of eacheligible NHCE will be equal to 3% of compensation.) The corrective contribution made on behalf of each NHCE will alsobe adjusted for earnings. Earnings will be calculated from the last day of the plan year for which the failure occurredthrough the date of the corrective contribution. The corrective contribution (adjusted for earnings) will be made to eachaffected NHCE’s SARSEP IRA account. If an affected employee does not have a SARSEP IRA account, a SARSEPIRA account will be established for that employee. Earnings will be calculated for an affected NHCE’s account onthe basis of one of the following methods (check one):
□ Actual investment results of the affected NHCE’s SARSEP IRA account.
□ The interest rate incorporated in the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator(“VFCP Online Calculator”) (http://www.dol.gov/ebsa/calculator/main.html), since the actual earnings of the affectedNHCE’s SARSEP IRA account cannot be ascertained
□ Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculatorfor years in which the actual earnings of the affected NHCE’s SARSEP IRA account cannot be ascertained. The VFCPOnline Calculator was or will be used for the following years:
The total corrective contribution (before adjusting for earnings) on behalf of the affected NHCEs for each plan yearis as follows:
Year Corrective contribution
Former employees affected by the failure (check one):
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted, and corrective contributions will be made to their SARSEP IRAaccounts. To the extent that an affected former employee cannot be located following a mailing to the employee’slast known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include theuse of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or theSocial Security Administration Employer Reporting Service. After such actions are taken, if an affected employeeis not found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to theaffected employee’s SARSEP IRA account at that time.
□ C. Failure to Make Required Employer Contributions (SEPs or SARSEPs)
The Plan Sponsor failed to make employer contributions on behalf of eligible employees as required under the termsof the plan.
□ The failure occurred on account of the erroneous exclusion of eligible employees.
□ Other (describe):
The failure occurred for the following plan years: .
2008–35 I.R.B. 536 September 2, 2008
Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.For each affected employee, the corrective contribution will be determined by calculating the contribution the employeewould have been entitled to under the terms of the plan and subtracting any contributions already made on behalf of theparticipant for the plan year. The required contribution made on behalf of an affected participant will be adjusted forearnings. Earnings will be calculated from the last day of the plan year for which the failure occurred through the date ofthe corrective contribution. The corrective contribution (adjusted for earnings) will be made to each affected employee’sSEP (or SARSEP, if applicable) IRA account. If an affected employee does not have a SEP (or SARSEP, if applicable)IRA account, a SEP (or SARSEP, if applicable) account will be established for that employee.
The total corrective contribution (before adjusting for earnings) for each year is:
Year Corrective Contribution
Earnings will be calculated for an affected employee on the basis of the following method(s) (check one):
□ Actual investment results of the affected employee’s SEP or SARSEP IRA account.
□ The interest rate incorporated in the VFCP Online Calculator, since the actual earnings of the affected employee’s IRAaccount cannot be ascertained.
□ Actual investment results for years in which data is available, or the rate incorporated in the VFCP OnlineCalculator for years in which the actual earnings of the affected employee’s IRA cannot be ascertained. The VFCPOnline Calculator was or will be used for the following years:
Former employees affected by the failure (check one):
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted, and corrective contributions will be made to their SEP or SARSEP IRAaccounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s lastknown address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the use ofthe Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the SocialSecurity Administration Employer Reporting Service. After such actions are taken, if an affected employee is notfound but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the affectedemployee’s SEP or SARSEP IRA account at that time.
□ D. Failure to provide eligible employees with the opportunity to make elective deferrals (SARSEPs only)
The plan did not provide employee(s) who satisfied the applicable eligibility requirements with the opportunity to makeelective deferrals to the SARSEP. The failure occurred for the following plan years:
Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.The corrective contribution will be made to compensate the affected employee(s) for the missed deferral opportunity.The corrective contribution on behalf of each affected employee is equal to 50% of what the employee’s deferral mighthave been had he or she been provided with the opportunity to make elective deferrals to the plan. Since the employee’sdeferral decision is not known, the deferral amount is estimated by determining the average of the deferral percentagesfor the employee’s group (highly compensated or nonhighly compensated). (Example: N, an NHCE, was erroneouslyexcluded from the plan. During the year of exclusion, N made $10,000 in compensation. The average of the deferralpercentages for other NHCEs who were provided with the opportunity to make elective deferrals was 5%. N’s misseddeferral is estimated to be: 5% times $10,000 or $500. The required corrective contribution on behalf of N, beforeadjusting for earnings, is 50% of $500 or $250.)
September 2, 2008 537 2008–35 I.R.B.
The total corrective contribution (before adjusting for earnings) on behalf of the affected NHCEs for each plan yearis as follows:
Year Corrective contribution
The corrective contribution made on behalf of each affected employee will also be adjusted for earnings. Earnings will becalculated from the date(s) that the contribution(s) should have been made through the date of the corrective contribution.The corrective contribution (adjusted for earnings) will be made to each affected employee’s SARSEP IRA account. If anaffected employee does not have a SARSEP IRA account, a SARSEP IRA account will be established for that employee.Earnings will be calculated on the basis of one of the following methods (check one):
□ Actual investment results of the affected employee’s SARSEP IRA account.
□ The interest rate incorporated in the VFCP Online Calculator, since the actual earnings of the affected employee’s IRAaccount cannot be ascertained.
□ Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculatorfor years in which the actual earnings of the affected employee’s IRA account cannot be ascertained. The VFCPOnline Calculator was or will be used for the following years:
Former employees affected by the failure (check one):
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted, and corrective contributions will be made to their SARSEP IRAaccounts. To the extent that an affected former employee cannot be located following a mailing to the employee’s lastknown address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the use ofthe Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the SocialSecurity Administration Employer Reporting Service. After such actions are taken, if an affected employee is notfound but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to the affectedemployee’s SEP or SARSEP IRA account at that time.
□ E. Excess Amounts Contributed
□ The Plan Sponsor contributed Excess Amounts to the Plan on behalf of participants as follows:(check boxes that apply)
□ Amounts were contributed in excess of the benefit the participants were entitled to under the plan.
□ SARSEP only: Elective deferrals were contributed to the SARSEP in excess of the limitation under the termsof the SARSEP (e.g., the lesser of 25% of compensation or the applicable limit under § 402(g)).
The total of the Excess Amounts for each affected plan year was as follows:
Year Excess AmountsNumber ofParticipants
Affected
2008–35 I.R.B. 538 September 2, 2008
Description of the Proposed Method of Correction(check all correction methods that apply)
□ Distribution of Excess Elective Deferrals (SARSEPs only)
The Plan Sponsor has effected (or will effect) a corrective distribution of the Excess Amounts, adjusted for earningsthrough the date of correction, to the affected participant(s). The earnings adjustment will be based on the actualrates of return of the participant’s SARSEP IRA account from the date(s) that the excess deferrals were madethrough the date of correction.
Affected participants were (or will be) informed that the corrective distribution of an Excess Amount is not eligible forfavorable tax treatment accorded to distributions from a SARSEP and, specifically, is not eligible for tax-free rollover.
The total corrective distribution (before adjusting for earnings) for each affected year is as follows:
Year Corrective DistributionNumber ofParticipants
Affected
□ Distribution of Excess Employer Contributions
The Plan Sponsor has effected (or will effect) the return of excess employer contributions, adjusted for earningsthrough the date of correction, to the Plan Sponsor. The earnings adjustment will be based on the actual rates of returnof the SEP or SARSEP from the date(s) that the excess employer contributions were made through the date ofcorrection. The amount returned to the Plan Sponsor is not includible in the gross income of the affected participant(s).The Plan Sponsor is not entitled to a deduction for such excess employer contributions. The amount returned isreported on Form 1099–R as a distribution issued to the affected participant(s), indicating the taxable amount as zero.
The amount to be returned to the Plan Sponsor (before adjusting for earnings) for each affected year is as follows:
YearReturn of Excess
Employer Contributions
Number ofParticipants
Affected
□ Retention of Excess Amounts
Note: If this correction method is selected, an additional VCP fee is required. (See section 12.05(2) of Rev. Proc.2008–50.)
September 2, 2008 539 2008–35 I.R.B.
□ The Excess Amounts (including earnings) were retained in the SARSEP or SEP IRA accounts of the affectedparticipants as follows:
YearExcess
AmountsRetained
Number ofParticipants
Affected
The earnings adjustment will be based on the actual rates of return of the SEP or SARSEP from the date(s) that theexcess employer contributions were made through the date of correction.
□ Excess Amounts of $100 or less (See section 6.02(5)(e) of Rev. Proc. 2008–50.)
For one or more participants, the total Excess Amount (employer contributions and/or elective deferrals beforeadjusting for earnings) is $100 or less. The Excess Amount will not be distributed.
PART II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implementedto ensure that the same failures will not occur.
PART III. REQUEST(S) FOR EXCISE TAX RELIEF(check applicable boxes)
□ Excise tax pursuant to § 4979. The Applicant requests that the Service not pursue the excise tax under § 4979. (This appliesonly to failures to satisfy the nondiscrimination test for elective deferrals. See section 6.09(4) of Rev. Proc. 2008–50 for anexample of a situation where a request for relief under § 4979 would be considered. Please enclose a written explanation insupport of your request for relief from this excise tax.)
□ Excise tax pursuant to § 4972. The Applicant requests that the Service not pursue the excise tax under § 4972. (This appliesto situations where corrective contributions made in accordance with this submission would be nondeductible contributionsfor the year of correction and thus would be subject to the excise tax under § 4972. See section 6.09(3) of Rev. Proc.2008–50. Please enclose a written explanation in support of your request for relief from this excise tax.)
2008–35 I.R.B. 540 September 2, 2008
PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• The applicable plan document. (This could be an IRS form document, such as a Form 5305–SEP or 5305A–SEP, or a prototypeplan document developed by a financial institution. If a prototype plan document is used, please send a copy of the most recentfavorable opinion letter issued for such plan document).
• A written explanation of how and why the failure(s) described in this submission occurred, including a description of the ad-ministrative procedures applicable to the failure(s) in effect at the time the failure(s) occurred.
• For failures that involve corrective contributions or corrective distributions, a description of assumptions and supporting calcu-lations used to determine the amounts needed for correction:
1) For failures to satisfy the nondiscrimination test for elective deferrals, computations in support of the proposed correction,including:
a) The determination of HCEs and NHCEs,
b) The deferral percentages of individual employees and the applicable ADP calculations,
c) The determination of corrective contributions on behalf of NHCEs to correct the ADP test, and,
d) Calculations showing how the earnings adjustment and the ultimate corrective contribution on behalf of affectedemployees will be determined. (Please use estimates, including an estimated correction date, if corrective distributionshave not been made yet.)
2) For failures to make required employer contributions and for failures to provide eligible employees with the opportunityto make elective deferrals:
a) Computations in support of the corrective contribution amounts attributable to each participant. In the case of a failureto provide eligible employees with the opportunity to make elective deferrals, please include computations showinghow the average deferral percentage, missed deferral, and corrective contribution amount was determined.
b) Calculations showing how the earnings adjustment and the ultimate corrective contribution on behalf of affectedemployees will be determined.
3) For failures involving the contribution of Excess Amounts:
a) Computations in support of the excess contribution amounts attributable to each participant;
b) Calculations showing how the earnings adjustment and the ultimate corrective distribution amounts are determined.(Please use estimates, including an estimated correction date, if corrective distributions have not been made yet.)
• Explanations in support of requests for excise tax relief.• Any other information that would be useful for the purpose of understanding the proposals made under the submission.
September 2, 2008 541 2008–35 I.R.B.
APPENDIX F, SCHEDULE 4SIMPLE IRAs
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE(S) AND CORRECTION METHODS
The following failure(s) occurred with respect to the SIMPLE IRA Plan identified above:(Check failure(s) that apply. Within each failure, check applicable boxes, and provide the information requested.)
□ A. Employer Eligibility Failure
□ The plan was adopted by a Plan Sponsor who was (or subsequently became) ineligible to sponsor a SIMPLE IRAPlan under the requirements of § 408(p) because the Plan Sponsor (and, if applicable, its related controlled group oraffiliated service group employers) had more than 100 employees (including leased employees, if applicable) whoearned $5,000 or more in compensation during the following plan year(s):
□ The plan was adopted by a Plan Sponsor who was not eligible to sponsor a SIMPLE IRA Plan under the requirementsof § 408(p) because the Plan Sponsor established or maintained a Qualified Plan with respect to which contributionswere made (or under which benefits were accrued) during any plan year of the SIMPLE IRA Plan. The failureoccurred during the following plan year(s):
Description of the Proposed Method of Correction
All contributions to the plan ceased as of (insert a date no later than the date this application is filed underVCP). The Plan Sponsor will not permit any new employer or salary reduction contributions to be made to the plan.
□ B. Failure to Make Required Employer Contributions
The Plan Sponsor failed to make employer contributions on behalf of eligible employees as required under the termsof the plan.
□ The failure occurred on account of the erroneous exclusion of eligible employees
□ Other (describe):
The failure occurred for the following plan years:
For the applicable plan years, the provisions of the plan document required the Plan Sponsor to make employercontributions based on the following formula:
□ 2% nonelective contribution on behalf of each eligible employee who earned at least $5,000 in compensation forthe year.
□ Matching contribution on behalf of each eligible employee equal to deferrals up to 3% of compensation.
□ Grace period applied. The plan provided for a matching contribution on behalf of each eligible employee equal todeferrals up to ____% of compensation.
(Note: If the failure occurred for multiple plan years and different employer contribution criteria applied during thoseyears, check the applicable box, and indicate the plan years for which the formula applied).
2008–35 I.R.B. 542 September 2, 2008
Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.For each affected employee, the corrective contribution will be determined by calculating the contribution the employeewould have been entitled to receive under the terms of the plan and subtracting any contributions already made on behalfof the employee for the plan year. The corrective contribution made on behalf of an affected employee will be adjustedfor earnings. Earnings will be calculated from the last day of the plan year for which the failure occurred through thedate of the corrective contribution. The corrective contribution (adjusted for earnings) will be made to each affectedemployee’s SIMPLE IRA account. If an affected employee does not have a SIMPLE IRA account, an account willbe established for that employee.
If the plan did not provide eligible employees with the opportunity to make elective deferrals and the plan provides formatching contributions, the corrective matching contribution will be based on the assumption that the eligible employeewould have made an elective deferral equal to 3% of compensation.
The total corrective contribution (before adjusting for earnings) for each plan year is:
Year Corrective contribution
The earnings calculation for an affected employee will be based on one of the following method(s) (check one):
□ Actual investment results of the affected employee’s SIMPLE IRA account.
□ The interest rate incorporated in the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator(“VFCP Online Calculator”) (http://www.dol.gov/ebsa/calculator/main.html), since the actual earnings of the affectedemployee’s IRA account cannot be ascertained.
□ Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculatorfor years in which the actual earnings of the affected employee’s IRA account cannot be ascertained. The VFCPOnline Calculator was or will be used for the following years:
Former employees affected by the failure (check one):
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted, and corrective contributions will be made to their SIMPLE IRAaccounts. To the extent that an affected former employee cannot be located following a mailing to the employee’slast known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include theuse of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or theSocial Security Administration Employer Reporting Service. After such actions are taken, if an affected employeeis not found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to theaffected employee’s SIMPLE IRA account at that time.
□ C. Failure to provide eligible employees with the opportunity to make elective deferrals
The plan did not provide employee(s) who satisfied the applicable eligibility requirements with the opportunity to makeelective deferrals to the SIMPLE IRA plan. The failure occurred for the following plan years:
September 2, 2008 543 2008–35 I.R.B.
Description of the Proposed Method of Correction
The Plan Sponsor has contributed (or will contribute) additional amounts to the plan on behalf of each affected employee.The corrective contribution will be made to compensate the affected employee(s) for the missed deferral opportunity.The corrective contribution on behalf of each affected employee is equal to 50% of what the employee’s deferral mighthave been had he or she been provided with the opportunity to make elective deferrals to the plan. Since the employee’sdeferral decision is not known, the deferral amount is estimated by assuming that the excluded employee would havemade an elective deferral equal to 3% of his or her compensation. (Example: N, a nonhighly compensated employeewas erroneously excluded from the plan. During the year of exclusion, N made $10,000 in compensation. N’s misseddeferral is estimated to be: 3% times $10,000 or $300. The required corrective contribution on behalf of N, beforeadjusting for earnings, is 50% of $300 or $150). Thus, the required corrective contribution for an employee who waserroneously excluded from making elective deferrals from a SIMPLE IRA Plan is equal to 1.5% of compensation(adjusted for earnings).
The total corrective contribution (before adjusting for earnings) on behalf of the affected employees for each planyear is as follows:
Year Corrective contribution
The corrective contribution made on behalf of each affected employee will also be adjusted for earnings. Earnings will becalculated from the date(s) that the contribution(s) should have been made through the date of the corrective contribution.The corrective contribution (adjusted for earnings) will be made to each affected employee’s SIMPLE IRA account. If anaffected employee does not have a SIMPLE IRA account, a SIMPLE IRA account will be established for that employee.Earnings will be calculated on the basis of one of the following methods (check one):
□ Actual investment results of the affected employee’s SIMPLE IRA account.
□ The interest rate incorporated in the VFCP Online Calculator, since the actual earnings of the affected employee’s IRAaccount cannot be ascertained.
□ Actual investment results for years in which data is available, or the rate incorporated in the VFCP Online Calculatorfor years in which the actual earnings of the affected employee’s IRA account cannot be ascertained. The VFCPOnline Calculator was or will be used for the following years:
Former employees affected by the failure (check one):
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted, and corrective contributions will be made to their SIMPLE IRAaccounts. To the extent that an affected former employee cannot be located following a mailing to the employee’slast known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include theuse of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or theSocial Security Administration Employer Reporting Service. After such actions are taken, if an affected employee isnot found but is subsequently located on a later date, the Plan Sponsor will make a corrective contribution to theaffected employee’s SIMPLE IRA account at that time.
□ D. Excess Amounts Contributed
The Plan Sponsor contributed Excess Amounts to the plan on behalf of participants as follows:(check boxes that apply)
□ Amounts were contributed in excess of the benefit the participants were entitled to under the plan.
□ Elective deferrals were made to the SIMPLE IRA in excess of the limitation under the terms of the SIMPLE IRA(e.g., the applicable limit under § 408(p)(2)(E)).
2008–35 I.R.B. 544 September 2, 2008
The total of the Excess Amounts for each affected plan year was as follows:
YearExcess
Amounts
Number ofParticipants
Affected
Description of the Proposed Method of Correction(check all correction methods that apply)
□ Distribution of Excess Elective Deferrals
The Plan Sponsor has effected (or will effect) a distribution of the Excess Amounts, adjusted for earnings throughthe date of correction, to the affected participant(s). The earnings adjustment will be based on the actual rates ofreturn of the participant’s SARSEP IRA account from the date(s) that the excess deferrals were made through thedate of correction.
Affected participants were (or will be) informed that the distribution of an Excess Amount is not eligible for favorabletax treatment accorded to distributions from a SIMPLE IRA and, specifically, is not eligible for tax-free rollover.
The total corrective distribution (before adjusting for earnings) for each affected plan year is as follows:
YearCorrective
Distribution
Number ofParticipants
Affected
□ Distribution of Excess Employer Contributions
The Plan Sponsor has effected (or will effect) the return of excess employer contributions, adjusted for earningsthrough the date of correction, to the Plan Sponsor. The earnings adjustment will be based on the actual rates of returnon the affected participants’ SIMPLE IRA accounts from the date(s) that the excess employer contributions weremade through the date of correction. The amount returned to the Plan Sponsor is not includible in the gross income ofthe affected participant(s). The Plan Sponsor is not entitled to a deduction for such excess employer contributions.The amount returned is reported on Form 1099–R as a distribution issued to the affected participant(s), indicating thetaxable amount as zero.
September 2, 2008 545 2008–35 I.R.B.
The return of the excess employer contributions (before adjusting for earnings) for each affected plan year is as follows:
YearReturn of Excess
Employer Contributions
Number ofParticipants
Affected
□ Retention of Excess Amounts
Note: If this correction method is selected, an additional VCP fee is required.(See section 12.05(2) of Rev. Proc. 2008–50.)
□ The Excess Amounts (including earnings) were retained in the SIMPLE IRA accounts of the affected participantsas follows.
YearExcess
AmountsRetained
Number ofParticipants
Affected
The earnings adjustment will be based on the actual rates of return of the SEP or SARSEP from the date(s) that theexcess employer contributions were made through the date of correction.
□ Excess Amounts of $100 or less (See section 6.02(5)(e) of Rev. Proc. 2008–50.)
For one or more participants, the total Excess Amount (employer contributions and/or elective deferrals beforeadjusting for earnings) is $100 or less. The Excess Amount will not be distributed.
Former employees affected by the Excess Amounts failure (check one):
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted, and corrective contributions will be made to their SIMPLE IRAaccounts. To the extent that an affected former employee cannot be located following a mailing to the employee’slast known address, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include theuse of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or theSocial Security Administration Employer Reporting Service. After such actions are taken, if an affected employeeis not found but is subsequently located on a later date, the Plan Sponsor will make corrective contributions to theaffected employee’s SIMPLE IRA account at that time.
2008–35 I.R.B. 546 September 2, 2008
PART II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implementedto ensure that the same failures will not occur.
PART III. REQUEST(S) FOR EXCISE TAX RELIEF(check if applicable)
□ Excise tax pursuant to § 4972. The Plan Sponsor requests that the Service not pursue the excise tax under § 4972. (Thisapplies to situations where corrective contributions made in accordance with this submission would be nondeductiblecontributions for the year of correction and subject to the excise tax under § 4972. See section 6.09(3) of Rev. Proc.2008–50. Please enclose a written explanation in support of your request for relief from this excise tax.)
PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• The applicable plan document. (This could be an IRS form document, such as a 5305–SIMPLE or 5304–SIMPLE, or a prototypedocument developed by a financial institution. If a prototype plan document is used, please send a copy of the most recentopinion letter issued with respect to such plan document.)
• A written explanation of how and why the failure(s) described in this submission occurred, including a description of the ad-ministrative procedures applicable to the failure(s) in effect at the time the failure(s) occurred.
• For failures that involve corrective contributions or corrective distributions, a description of assumptions and supporting calcu-lations used to determine the amount needed for correction:
1) For failures to make required Employer Contributions and for failures to provide eligible employees with the opportunityto make elective deferrals:
a) Computations in support of the corrective contribution amounts attributable to each participant. In the case of a failureto provide eligible employees with the opportunity to make elective deferrals, please include computations showinghow the average deferral percentage, missed deferral, and corrective contribution amount was determined.
b) Calculations showing how the earnings adjustment and the ultimate corrective contribution on behalf of affectedemployees will be determined. (Please use estimates, including an estimated correction date, if correctivecontributions have not been made yet.)
2) For failures involving the contribution of Excess Amounts:
a) Computations in support of the excess contribution amounts attributable to each participant.
b) Calculations showing how the earnings adjustment and the ultimate corrective distribution amounts are determined.(Please use estimates, including an estimated correction date, if corrective distributions have not been made yet.)
• Explanations in support of requests for excise tax relief.• Any other information that would be useful for the purpose of understanding the proposals made under the submission.
September 2, 2008 547 2008–35 I.R.B.
APPENDIX F, SCHEDULE 5Plan Loan Failures
(Qualified Plans and 403(b) Plans)
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE
The plan identified above did not comply with the requirements of § 72(p)(2) of the Internal Revenue Code. (Note: The conditionsof § 72(p)(2) must be satisfied for a participant loan to be exempt from being treated as a distribution to the participant under§ 72(p)(1).) The failure occurred for the following reason(s) (check applicable boxes and provide the information requested):
□ A. The loan(s) exceeded the limit under § 72(p)(2)(A)
Plan YearNumber ofparticipants
affected
Total number of loansissued that
violated § 72(p)(2)(A)
□ B. Loan terms did not satisfy the limits on the duration of the loan under § 72(p)(2)(B)
Plan YearNumber ofparticipants
affected
Total number of loansissued that
violated § 72(p)(2)(B)
□ C. Loan terms did not satisfy § 72(p)(2)(C) relating to the frequency and amortization of payments
Plan YearNumber ofparticipants
affected
Total number of loansissued that
violated § 72(p)(2)(C)
2008–35 I.R.B. 548 September 2, 2008
□ D. Defaulted loan(s) (where the loan terms satisfied the requirements of § 72(p)(2), but default(s) occurred because loanpayments were not made in accordance with the terms of the loan)
Plan Yearof loan defaults
Number ofparticipants
affected
Total number ofloans in default
PART II. ELIGIBILITY FOR USE OF APPENDIX F, SCHEDULE 5
Yes No
A. □ □ Is any affected participant either a key employee (as defined in § 416(i)(1)) or an owner-employee (as defined in§ 401(c)(3))?
If ”Yes,” proceed to Part II B.
If ”No,” skip Part II B and proceed to Part II C.
B. □ □ Is the purpose of this request limited to permitting the Plan Sponsor to report the loan as a deemed distribution inthe year of correction instead of the year of the failure?
If ”Yes,” complete part III and then proceed directly to part IV D. (Parts IV A, B, and C do not apply.)
If ”No,” STOP — do NOT use this schedule. Any request for relief should be made by filing an applicationusing the format described in Appendix D.
C. □ □ Will correction be completed before the maximum period for repayment of the loan (pursuant to § 72(p)(2)(B))has expired? (Note: The maximum period is determined from the original date of the loan. Generally, this periodis five years from the original date of the loan, except for home loans as described in § 72(p)(2)(B)(ii).) If ”Yes,”and the Plan Sponsor wants relief from reporting the loan as a deemed distribution, complete Part III and thenanswer applicable questions in Parts IV A through IV C. If ”No,” complete Part III and then proceed to Part IV D.
PART III. EXPLANATION OF HOW AND WHY THE PLAN LOAN FAILURES OCCURRED
September 2, 2008 549 2008–35 I.R.B.
PART IV. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
If the Plan Sponsor is requesting relief from reporting loans as deemed distributions, then complete Parts IV A, B,or C, as applicable.
If the Plan Sponsor is only requesting postponement of reporting loans as deemed distributions on Form 1099–R, thenproceed directly to Part IV D.
A. Correction for Loans in Excess of § 72(p)(2)(A)
Any participant affected by this failure will make a corrective repayment to the plan. After repaying the excess of the loanamount over the maximum loan amount under § 72(p)(2)(A) (the “excess loan amount”), the remaining balance of theloan will be paid over the remaining period of the original loan (not beyond the period permitted under § 72(p)(2)(B),determined from the original date of the loan) in a manner that complies with the frequency and level payment requirementsof § 72(p)(2)(C). The excess loan amount that will be repaid by the participant is determined based on how previously madepayments have been applied to the loan. The previous loan payments were applied as follows (check applicable box, andcomplete necessary information)
□ Prior loan payments were made in accordance with an amortization schedule that complied with the requirements of§ 72(p)(2)(B) relating to the terms of the loan and § 72(p)(2)(C) relating to frequency, and level loan payments. For thepurpose of determining the excess loan amount and the remaining outstanding amount of the loan to be repaid over theremaining period of the loan, the previously made loan payments will be applied as follows (check box that applies)
□ 1. Solely to reduce the portion of the loan that did not exceed the maximum loan amount under § 72(p)(2)(A) of theCode. Result: The corrective repayment would equal the excess loan amount plus interest thereon.
□ 2. To reduce the excess loan amount to the extent of the interest thereon, with the remainder of the repayments appliedto reduce the portion of the loan that did not exceed the maximum loan amount under § 72(p)(2)(A). Result: Thecorrective repayment would equal the excess loan amount.
□ 3. Pro rata against the excess loan amount and the maximum loan amount under § 72(p)(2)(A). Result: The correctiverepayment would equal the outstanding balance remaining on the excess loan amount on the date that correctiverepayment is made.
□ Prior loan payments were not made in accordance with an amortization schedule that complied with the requirements of§72(p)(2)(B) or (C):
Methodology for determining the excess loan amount that will be repaid and the remaining outstanding balance of theloan that will be amortized over the remaining period of the loan:
After the corrective repayment is made:(Check one of the two options listed below)
□ Option 1: The remaining loan balance will be repaid according to the original amortization schedule. (This option isavailable only if the original amortization schedule would result in the loan being paid within the maximum periodpermitted under §72(p)(2)(B) determined from the original date of the loan.)
□ Option 2: The loan will be reformed to amortize the remaining principal balance as of the date of repayment over theremaining period of the original loan, provided that the recalculated payments over the remaining period comply withthe requirements of § 72(p)(2)(B) determined from the original date of the loan.
2008–35 I.R.B. 550 September 2, 2008
B. Correction for loans with terms that: (i) provided for a repayment period that exceeded the period permitted under§ 72(p)(2)(B) and/or (ii) provided for payments that did not provide for substantially level amortization with payments notless frequently than quarterly, as provided under § 72(p)(2)(C).
□ 1. The loan balance will be reamortized with payments made on a substantially level basis (per § 72(p)(2)(C)), madeat least quarterly.
□ 2. The reamortized loan balance will be paid over a remaining period that does not extend beyond five years from thedate of the original loan (per § 72(p)(2)(B)).
C. Correction for defaulted loans with terms that complied with the requirements of § 72(p)(2)(A), (B), and (C): (checkthe box that applies)
□ 1. A lump sum repayment will be made to the plan in an amount equal to the additional repayments that the affectedparticipant would have made to the plan if there had been no failure to repay the plan, plus interest accrued onthe missed repayments.
□ 2. The outstanding balance of the loan, including accrued interest, will be reamortized over a remaining period that doesnot extend beyond five years from the date of the original loan.
□ 3. The Applicant will use a combination of the methods described in #1 and #2 above, as follows:
Determination of Interest Accrued on Missed Repayments: (check the box that applies)
□ Plan loan rate [insert rate]
□ Rate of return of investments under plan [insert rate]
Note: “Rate of return of investments” option may only be used if the rate of investment return under the plan equals orexceeds the plan loan rate.
Actual Interest Rate used [insert rate]
The interest rate for missed payments was determined as follows:
The additional unpaid interest (will be / has been (circle one)) paid by the: (check the box that applies)
□ Plan Sponsor
□ Affected participants
(Note: Irrespective of the Plan Sponsor’s election to have the affected participants pay the unpaid interest, inaccordance with section 6.02(6) of Rev. Proc. 2008–50, the Service may, based on the facts and circumstances,determine that the Plan Sponsor should pay all or a portion of the additional unpaid interest. If the Service makes thisdetermination, the Plan Sponsor will be requested to revise this submission.)
September 2, 2008 551 2008–35 I.R.B.
D. Correction for Deemed Distributions (check if applicable)
□ The Plan Sponsor is not eligible to or will not correct in accordance with Parts IV A through IV C of this Appendix F,Schedule 5. The Plan Sponsor proposes that the loans be reported as deemed distributions (using Form 1099 R) for theyear of correction instead of the year of the failure. The Plan Sponsor shall pay any applicable income tax withholdingamount that was required to be paid in connection with the failure. (See Income Tax Regulations § 1.72(p)–1, Q&A–15.)
PART V. DESCRIPTION OF STEPS TAKEN TO ENSURE THAT THE FAILURE DOES NOT RECUR
PART VI. REQUEST FOR RELIEF
Yes No
□ □ The Plan Sponsor requests relief from reporting participant loans as deemed distributions.
□ □ The Plan Sponsor requests that the plan be permitted to report the participant loans as deemed distributions in theyear of correction instead of the year of the failure.
PART VII. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• Loan amortization schedules for affected participants (A sample representation may be provided if there are multiple participantsaffected.)
• Specific calculations for each affected employee or a representative sample of affected employees (The sample calculations mustbe sufficient to demonstrate each aspect of the correction method proposed (e.g., for a failure with respect to a loan that exceedsthe maximum amount permitted by § 72(p)(2)(A), the calculations must include the amounts of the excess loan amounts that willbe repaid to the plan, determination of the outstanding loan balance, and the proposed method of repayment of the outstandingloan balance; for the correction of a defaulted loan, the enclosure should set forth the periods of such loan defaults.))
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE
The following failure occurred with respect to the plan identified above (check failure that applies)
□ 403(b) Plans
The plan was intended to satisfy the requirements of § 403(b) but was adopted by a Plan Sponsor that was not a tax-exemptorganization described in § 501(c)(3) or a public educational organization described in § 170(b)(1)(A)(ii). The type oforganization sponsoring the Plan during the period of the failure was: .
The failure occurred during the following plan years: .
□ Section 401(k) Plans
The plan intended to include a qualified cash or deferred arrangement and satisfy the requirements of §§ 401(a) and 401(k)but was adopted by an employer that failed to meet the eligibility requirements to establish a § 401(k) Plan.
Describe why the employer was ineligible to maintain the 401(k) plan:
PART II. DESCRIPTION OF PROPOSED METHOD OF CORRECTION
□ Section 403(b) Plans
1. All contributions under the plan ceased as of . (Insert date beginning no later than the date theapplication under VCP was filed.)
2. No new employee or employer contributions will be permitted in the future.
3. The assets in the plan will remain in the trust, annuity contract, or custodial account and will be distributed no earlierthan the occurrence of one of the permitted events under § 403(b)(7) or § 403(b)(11).
□ Section 401(k) Plans
1. All contributions under the plan ceased as of . (Insert date beginning no later than the date theapplication under VCP was filed.)
2. No new employee or employer contributions will be permitted in the future.
3. The assets in the plan will remain in the trust, annuity contract, or custodial account and will be distributed no earlierthan the occurrence of one of the permitted events under § 401(k).
PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implementedto ensure that the same failures will not occur.
September 2, 2008 553 2008–35 I.R.B.
APPENDIX F, SCHEDULE 7Failure to Distribute Elective Deferrals in Excess of the § 402(g) Limit
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE
Calendar Years(Year of Deferral)
Number ofAffected
Participants
Amount of Excess DeferralsDistributed (excluding
earnings)
PART II. DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
The plan will distribute the excess deferral to the employee(s) and report the amount as taxable in the year of deferral and in theyear distributed. In accordance with Income Tax Regulations § 1.402(g)–1(e)(1)(ii), a distribution to a highly compensatedemployee is included in the Average Deferral Percentage (ADP) test; however, a distribution to a nonhighly compensatedemployee is not included in the ADP test.
For any distributions attributable to elective deferrals designated as Roth Contributions, all distributions will be reported astaxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral.
The excess deferral to be distributed will also be adjusted for earnings. Earnings will be determined from the end of the year inwhich the failure occurred through the year of correction. Earnings will be included in the distribution amount that is to bereported as taxable in the year of distribution.
PART III. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implementedto ensure that the same failures will not occur.
2008–35 I.R.B. 554 September 2, 2008
PART IV. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• Specific calculations for each affected employee or a representative sample of affected employees (The sample calculationsmust be sufficient to demonstrate each aspect of the correction method proposed.)
September 2, 2008 555 2008–35 I.R.B.
APPENDIX F, SCHEDULE 8Failure to Pay Required Minimum Distributions Timely under § 401(a)(9)
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE
Calendar YearsNumber of Affected
Participants
Total Amount of MissedRequired Minimum
Distributions
PART II. DESCRIPTION OF THE PROPOSED METHOD OF CORRECTION
□ Defined Contribution plan only — The plan will distribute the required minimum distributions to affected participants.For each affected participant, the amount to be distributed for each year in which the failure occurred will be determinedby dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For thispurpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)–5Q&A–3 of the Income Tax Regulations, reduced by the amount of the total missed minimum distributions for prior years.
□ Defined Benefit plan only — The plan will distribute the required minimum distributions plus an interest paymentrepresenting the loss of use of such amounts. The interest adjustment is determined as follows:
PART III. REQUEST FOR RELIEF
A. □ The Applicant requests relief with regard to excise taxes under § 4974
Yes No
□ □ At least one affected participant is either an owner-employee (see § 401(c)(3)), or, if the Plan Sponsor is acorporation, a 10 percent owner of such corporation
2008–35 I.R.B. 556 September 2, 2008
If “Yes,” the Applicant submits the following explanation for its request for relief from the § 4974 excise tax:
PART IV. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implementedto ensure that the same failures will not occur.
PART V. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• Specific calculations for each affected employee or a representative sample of affected employees (The sample calculationsmust be sufficient to demonstrate each aspect of the correction method proposed. For a defined benefit plan, these specificcalculations must illustrate the interest rate used to represent the loss of the use of the missed required minimum distributions.)
September 2, 2008 557 2008–35 I.R.B.
APPENDIX F, SCHEDULE 9Correction by Plan Amendment (in accordance with Appendix B)
Plan Name: EIN: Plan #:
(Please include the plan name, EIN, and plan number information on each page of the submission.)
PART I. IDENTIFICATION OF FAILURE(S) AND CORRECTION METHOD(S) AS SET FORTH IN REV. PROC.2008–50, APPENDIX B, SECTION .07
The following failure(s) occurred with respect to the plan identified above (check failure(s) that apply)
□ A. § 401(a)(17) Failure in a Defined Contribution Plan(check as applicable)
□ Contributions
□ Forfeitures
were allocated on the basis of compensation in excess of the limit under § 401(a)(17) as provided below:
(Enter the plan years in which the failure occurred, the amount of the allocations in excess of § 401(a)(17) made for eachplan year (including earnings), and the number of participants affected by the failure for each plan year:)
Plan YearAmounts Allocated inExcess of § 401(a)(17)
Number ofParticipants
Affected
Description of Proposed Method of Correction:
An additional amount has been (or will be) contributed to the plan on behalf of each of the employees who received anallocation for the year of the failure (excluding each employee for whom there was a § 401(a)(17) failure). The amountcontributed for an employee is equal to the employee’s plan compensation for the year of the failure multiplied by afraction, the numerator of which is the improperly allocated amount made on behalf of the employee with the largestimproperly allocated amount, and the denominator of which is the limit under § 401(a)(17) applicable to the year of thefailure. In addition, the plan will be retroactively amended to reflect the increased contribution and allocation percentagesfor the plan’s participants.
2008–35 I.R.B. 558 September 2, 2008
(Enter the plan years in which the failure occurred, the fraction used to determine the additional amount allocated toemployees other than those for whom there was a § 401(a)(17) failure, and the total required contribution (before adjustingfor earnings) for each plan year in which the failure occurred:)
Plan Year
Fraction Used toDetermine the
Additional AmountAllocated
Total RequiredContribution (before
adjusting forearnings)
The resulting additional amount will be adjusted for earnings from the end of the plan year in which the failure occurredthrough the date of the corrective contribution. The method for determining the earnings adjustment is as follows:
Former employees affected by the failure (check one)
□ There are no former employees affected by the failure.
□ Affected former employees will be contacted and contributions will be made to the plan on their behalf. To theextent that an affected former employee cannot be located following a mailing to the employee’s last knownaddress, the Plan Sponsor will take reasonable actions to locate that employee. Such actions include the use ofthe Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22, 1994–1 C.B. 608) or the SocialSecurity Administration Employer Reporting Service. After such actions are taken, if an affected employee is notfound but is subsequently located on a later date, the Plan Sponsor will make corrective contributions on behalf of theaffected employee at that time.
□ B. Hardship Distribution Failure
Hardship distributions were made to participants under the plan. All plan participants were entitled to request hardshipdistributions, and all requests were evaluated in accordance with uniform eligibility standards, as described below:
September 2, 2008 559 2008–35 I.R.B.
(Enter the plan years in which the failure occurred, the number of hardship distributions made for each plan year, andthe number and amount of distributions made to highly compensated employees (HCEs) and nonhighly compensatedemployees (NHCEs) respectively, affected by the failure for each plan year.)
Plan Year
Number ofHardship
DistributionsMade During the
Plan Year
Number ofHardship
Distributions Madeto NHCEs
Amountof Distributions
Number ofHardship
Distributions Madeto HCEs
Amount ofDistribution
Description of the Proposed Method of Correction:
The failure was (or will be) corrected by retroactively amending the plan to provide for the hardship distributions thatwere made available. The effective date of the corrective amendment is: ________________________.
□ C. Plan Loan Failure
Plan loans were made to participants under the plan. All plan participants were entitled to request plan loans underuniform standards of eligibility, and all plan loans made satisfied the requirements of § 72(p).
(Enter the plan years in which the failure occurred, the number of participant plan loans made for each plan year, and thenumber and amount of plan loans made to highly compensated employees (HCEs) and nonhighly compensated employees(NHCEs) respectively, affected by the failure for each plan year.)
Plan Year
Number of PlanLoans Made
During the PlanYear
Number of PlanLoans Made to
NHCEs
Amount ofPlan Loans
Number of PlanLoans Made to
HCEs
Amount ofPlan Loans
Description of the Proposed Method of Correction:
The failure was (or will be) corrected by retroactively amending the plan to provide for the plan loans that were madeavailable. The effective date of the corrective amendment is: ________________________.
□ D. Early Inclusion of Otherwise Eligible Employee Failure
Employees:(check the applicable box(es))
□ Who had not satisfied the plan’s minimum age or service requirements were treated as eligible participants on a dateprior to their being eligible under the plan and were entitled to the same benefits under the plan to which they wouldhave been entitled had they completed the minimum age or service requirements of the plan.
□ Who had completed the plan’s minimum age or service requirements were treated as eligible participants prior tothe applicable plan entry date and were entitled to the same benefits under the plan to which they would have beenentitled had they entered the plan timely.
2008–35 I.R.B. 560 September 2, 2008
The plan’s minimum age or service requirements and plan entry date, as applicable, for the years of the failure were asfollows:
(Enter the plan years in which the failure occurred and the number of participants affected by the failure, broken down bytype of employee (highly compensated employee (HCE) or nonhighly compensated employees (NHCE) respectively, foreach plan year.)
Plan Year
Number of NHCEsAffected by the
Failure During thePlan Year
Number of HCEsAffected by the
Failure During thePlan Year
Description of the Proposed Correction Method:
The failure was (or will be) corrected by retroactively amending the plan to provide for the inclusion of the ineligibleemployees. The effective date of the corrective amendment is: .
PART II. CHANGE IN ADMINISTRATIVE PROCEDURES
Please include an explanation of how and why the failures arose and a description of the measures that will be implementedto ensure that the same failures will not occur.
September 2, 2008 561 2008–35 I.R.B.
PART III. ENCLOSURES
In addition to the applicable enclosures listed on Appendix F, the Plan Sponsor encloses the following with this submission:
• Copies of all amendments used to correct the failure(s), either as adopted or in proposed form (required)• A copy of the plan document in effect prior to any of the amendments used to correct the failure(s) (required)• For a § 401(a)(17) failure in a defined contribution plan, specific calculations for each affected employee or a representative
sample of affected employees. (The sample calculations must be sufficient to demonstrate each aspect of the correction methodproposed. For example, the determination of the fraction used to determine the additional amount to be allocated to each em-ployee (other than those for whom there was a § 401(a)(17) failure) must be demonstrated.)
26 CFR 601.601: Rules and regulations.(Also Part I, § 163.)
Rev. Proc. 2008–51
SECTION 1. PURPOSE
This revenue procedure describes cir-cumstances in which the Internal RevenueService (“Service”) will not treat a debt in-strument as an applicable high yield dis-count obligation (“AHYDO”) for purposesof §§ 163(e)(5) and 163(i) of the InternalRevenue Code.
This revenue procedure provides cer-tainty with respect to certain potential taxissues that may be implicated by the is-suance of a debt instrument (including adeemed issuance of a debt instrument un-der § 1.1001–3 of the Income Tax Regu-lations) in the circumstances described be-low. No inference should be drawn aboutwhether similar consequences would ob-tain if a debt instrument falls outside thelimited scope of this revenue procedure.Furthermore, there should be no inferencethat, in the absence of this revenue pro-cedure, a debt instrument within its scopewould be an AHYDO.
SECTION 2. BACKGROUND
.01 Corporations frequently obtainfinancing commitments (“FinancingCommitments”) from potential lenders(“Lenders”) in advance of borrowingmoney. These Financing Commitmentsensure that the corporation will have suffi-cient debt financing at a future date, withincertain parameters (for example, the totalamount to be borrowed, an interest ratenot to exceed a certain level, and the termof the loan).
.02 In some cases, the Financing Com-mitments are not ultimately called upon by
the corporation, and the corporation ob-tains debt financing from other sources (ordoesn’t borrow at all).
.03 In other cases, the Financing Com-mitments are called upon by the corpora-tion, and the Lender extends credit pur-suant to terms negotiated earlier, as partof the Financing Commitment. In some ofthese situations, the corporation will bor-row on terms that were generally estab-lished in the Financing Commitment, andwhich generally remain fixed (or “perma-nent”) over the term of the resulting debtinstrument. (The “permanent” nature ofthe terms frequently allows the debt to bequickly sold by the Lender to other hold-ers.) Alternatively, the corporation willborrow on terms that are temporary (forexample, in effect for a year or less) butthat change to different, more “permanent”terms (that is, terms that will last for theremaining term of the financing arrange-ment) after this temporary period. (Thecorporation may attempt to refinance theloan during the temporary, or “bridge,” pe-riod on terms that are more favorable thanthe “permanent” terms embedded in theloan extended pursuant to the FinancingCommitment.)
.04 As recent events have demon-strated, market conditions can worsen, inan unanticipated fashion, between the timea binding Financing Commitment is ob-tained by the corporation and the time thecorporation calls upon the Lender to per-form pursuant to the Financing Commit-ment. This can have a number of collateraleconomic consequences, which can poten-tially result in situations in which the issueprice of a debt instrument is significantlyless than the amount of money actuallyreceived by the corporation, viewing thetransactions as a whole. For example:
(1) In situations in which a corporationissues debt with “permanent” terms previ-ously established in the Financing Com-
mitment (that is, debt without temporary,or “bridge,” terms), the Lender may be un-able to sell the debt to third parties fora price equal to (or near) the amount ofmoney provided to the corporation pur-suant to the Financing Commitment. Inthese situations, the issue price of the debtmay be significantly less than the amountof money advanced to the corporation. Forexample, this result could occur, in certaincircumstances, if the Lender sells a sub-stantial amount of the debt to third partiesin its capacity as an underwriter within themeaning of § 1.1273–2(e).
(2) In situations in which a corporationissues debt with temporary, or “bridge,”terms previously established in the Fi-nancing Commitment, the corporationmay be unable to refinance the debt inthe capital markets with new, alternative,“permanent” debt financing with termsthat are more (or equally) favorable thanthe “permanent” terms embedded in thedebt issued pursuant to the FinancingCommitment. Thus, in order to allowthe Lender to sell the debt to third parties(whether as part of a separately negotiatedtransaction or because the corporation isrequired to do so by contract), the partiesmay amend the terms of the debt to make itmore marketable. Depending on the factsof a given case, such amendments mayconstitute a “significant modification”within the meaning of § 1.1001–3. In thissituation, the issue price of the new debt,deemed to have been issued to retire theold debt, may be significantly less than theamount of money initially advanced to thecorporation. For example, this result couldoccur, in certain circumstances, if the newdebt is traded on an established marketwithin the meaning of § 1.1273–2(f).
.05 The issuance of a debt instrumentpursuant to a Financing Commitment (orpursuant to the significant modificationof a debt instrument originally issued
2008–35 I.R.B. 562 September 2, 2008
pursuant to a Financing Commitment)potentially raises adverse income tax con-sequences in situations in which the issueprice of the debt instrument is less than thecash actually received by the corporationfor the debt instrument issued pursuant tothe Financing Commitment. For example,interest deductions on the debt instrumentmay be disallowed under § 163(e)(5).
SECTION 3. APPLICABLE LAW
.01 Under § 163(e)(5), in the case ofan AHYDO, a corporation is not alloweda deduction for the disqualified portion ofthe original issue discount (“OID”) on theobligation, and the corporation’s deduc-tion for the remaining portion of the OIDis deferred until the OID is paid in cash orin property (other than debt of the issueror a related person within the meaning of§ 453(f)(1)).
.02 Section 163(i) defines an AHYDOas any debt instrument if:
(1) The maturity date of the debt instru-ment is more than five years from the dateof issue;
(2) The yield to maturity of the debtinstrument equals or exceeds the sum ofthe applicable Federal rate in effect under§ 1274(d) for the calendar month in whichthe instrument is issued plus five percent-age points; and
(3) The debt instrument has significantOID.
.03 Under § 163(i)(2), a debt instrumenthas significant OID if:
(1) The aggregate amount that wouldbe includible in gross income with respectto the debt instrument for periods beforethe close of any accrual period (as definedin § 1275(a)(5)) ending after the date fiveyears after the date of issue, exceeds
(2) The sum of the aggregate amount ofinterest to be paid under the debt instru-ment before the close of the accrual period,and the product of the issue price of thedebt instrument (as defined in §§ 1273(b)and 1274(a)) and its yield to maturity.
.04 For purposes of determiningwhether a debt instrument is an AHYDO,§ 163(i)(3) provides that any paymentunder the debt instrument is assumed tobe made on the last day permitted underthe debt instrument, and any paymentto be made in the form of another debtinstrument of the issuer (or a related per-son within the meaning of § 453(f)(1)) is
assumed to be made when such debt in-strument is required to be paid in cash or inproperty other than such debt instrument.
.05 Section 1.1001–3 provides rules todetermine whether a modification of theterms of a debt instrument results in an ex-change of the original debt instrument fora modified instrument that differs materi-ally either in kind or in extent. Section1.1001–3 applies to any modification of adebt instrument, regardless of the form ofthe modification (including an exchange ofa new debt instrument for an existing debtinstrument).
SECTION 4. SCOPE
This revenue procedure applies to adebt instrument described in either section4.01, section 4.02, or section 4.03 of thisrevenue procedure.
.01 Debt Instrument Issued For MoneyPursuant to a Financing Commitment.The debt instrument is issued by a corpo-ration and—
(1) The debt instrument is issued formoney and the terms of the debt instrumentare consistent with the general terms of abinding Financing Commitment obtainedby the corporation from an unrelated partybefore January 1, 2009; and
(2) The debt instrument would not be anAHYDO within the meaning of § 163(i),if, solely for purposes of making a determi-nation under this section 4.01(2), the issueprice of the debt instrument were the netcash proceeds actually received by the cor-poration for the debt instrument (regard-less of whether a different issue price is de-termined under § 1.1273–2).
.02 Debt Instrument Exchanged for aDebt Instrument Issued Pursuant to a Fi-nancing Commitment. The debt instru-ment is issued by a corporation and—
(1) The debt instrument is issued inexchange (including a deemed exchangeunder § 1.1001–3) for a debt instrument(“Old Debt Instrument A”) issued by thecorporation and described in section 4.01of this revenue procedure;
(2) The debt instrument is issued within15 months following the issuance of OldDebt Instrument A;
(3) The debt instrument would not be anAHYDO within the meaning of § 163(i),if, solely for purposes of making a deter-mination under this section 4.02(3), theissue price of the debt instrument were
the net cash proceeds actually received bythe corporation for Old Debt InstrumentA (regardless of whether a different issueprice is determined under § 1.1273–2 or§ 1.1274–2, whichever is applicable);
(4) The maturity date of the debt instru-ment is not more than one year later thanthe maturity date of Old Debt InstrumentA; and
(5) The stated redemption price atmaturity of the debt instrument is notgreater than the stated redemption priceat maturity of Old Debt Instrument A(see § 1.1273–1(b) to determine the statedredemption price at maturity of a debtinstrument).
.03 Debt Instrument Indirectly Ex-changed for a Debt Instrument IssuedPursuant to a Financing Commitment.The debt instrument is issued by a corpo-ration and—
(1) The debt instrument is issued inexchange (including a deemed exchangeunder § 1.1001–3) for a debt instrument(“Old Debt Instrument B”) issued by thecorporation and described in section 4.02of this revenue procedure;
(2) The debt instrument is issued within15 months following the issuance of OldDebt Instrument A;
(3) The debt instrument would not be anAHYDO within the meaning of § 163(i),if, solely for purposes of making a deter-mination under this section 4.03(3), theissue price of the debt instrument werethe net cash proceeds actually received bythe corporation for Old Debt InstrumentA (regardless of whether a different issueprice is determined under § 1.1273–2 or§ 1.1274–2, whichever is applicable);
(4) The maturity date of the debt instru-ment is not more than one year later thanthe maturity date of Old Debt InstrumentA; and
(5) The stated redemption price atmaturity of the debt instrument is notgreater than the stated redemption priceat maturity of Old Debt Instrument A(see § 1.1273–1(b) to determine the statedredemption price at maturity of a debtinstrument).
SECTION 5. APPLICATION
If this revenue procedure applies to adebt instrument, the Service will not treatthe debt instrument as an AHYDO for pur-poses of §§ 163(e)(5) and 163(i).
September 2, 2008 563 2008–35 I.R.B.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective onAugust 8, 2008. Sections 4.02(4), 4.02(5),4.03(4) and 4.03(5) of this revenue proce-dure do not apply to debt instruments is-sued before August 8, 2008.
SECTION 7. REQUEST FORCOMMENTS
The Service invites public commentrelated to this revenue procedure. Com-ments should be submitted no later thanNovember 15, 2008, to the Internal Rev-enue Service, CC:PA:LPD:RU (Rev. Proc.
2008–51), room 5203, P.O. Box 7604,Ben Franklin Station, Washington, DC20044. Comments also may be hand de-livered between the hours of 8 a.m. and4 p.m. to the Courier’s Desk, InternalRevenue Service, 1111 Constitution Av-enue, NW, Washington, DC 20224, Attn:CC:PA:LPD:RU (Rev. Proc. 2008–51),room 5203. Alternatively, commentsmay be submitted via the Internet [email protected] the revenue procedure number(Rev. Proc. 2008–51) in the subjectline. All comments will be available forpublic inspection and copying in theirentirety. Therefore, comments received by
the IRS and Treasury should not includetaxpayer-specific information or of aconfidential nature. Comments shouldinclude the name and telephone number ofa person to contact.
SECTION 8. DRAFTINGINFORMATION
The principal author of this revenueprocedure is William E. Blanchard of theOffice of Associate Chief Counsel (Finan-cial Institutions and Products). For furtherinformation, contact Mr. Blanchard at(202) 622–3950 (not a toll-free call).
2008–35 I.R.B. 564 September 2, 2008
Part IV. Items of General InterestNotice of ProposedRulemaking
Postponement of CertainTax-Related Deadlines byReason of PresidentiallyDeclared Disaster orTerroristic or Military Actions
REG–142680–06
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document containsa proposed regulation that proposes toamend existing regulations issued undersection 7508A of the Internal RevenueCode (Code). The purpose of the proposedregulation is to clarify rules relating to thepostponement of certain tax-related actsby reason of a Presidentially declared dis-aster or terroristic or military action. Theproposed regulation clarifies the scope ofrelief under section 7508A and specifiesthat interest may be suspended during thepostponement period. These changes arenecessary to reflect changes in the lawmade by the Victims of Terrorism TaxRelief Act and current IRS practice. Theproposed regulation will affect taxpayersdetermined by the Secretary to be affectedby a Presidentially declared disaster orterroristic or military action.
DATES: Written or electronically gener-ated comments and requests for a publichearing must be received by October 14,2008.
ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–142680–06),room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–142680–06),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronically,via the Federal eRulemakingPortal at www.regulations.gov (IRSREG–142680–06).
FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulation Mary Ellen Keys (202) 622–4570,concerning submission of commentsOluwafunmilayo Taylor, (202) 622–7180(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposedamendments to the Procedure and Admin-istration Regulations (26 CFR part 301).Section 7508A of the Internal RevenueCode (Code) relates to the postponementof certain tax-related acts by reason ofPresidentially declared disaster or terroris-tic or military action. Section 7508A wasadded by section 911(a) of the TaxpayerRelief Act of 1997, Public Law 105–34(111 Stat. 788, 877–78 (1997)) (the 1997Act), which was effective for any periodfor performing an act that had not expiredbefore December 5, 1997.
Section 7508A authorizes the Secretaryto postpone the deadlines for the perfor-mance of certain tax-related acts for tax-payers determined to be affected by a Pres-identially declared disaster or a terroristicor military action. Section 301.7508A–1provides guidance for taxpayers seekingrelief under section 7508A.
Since the publication of §301.7508A–1on December 14, 2000, section 7508A wasamended by the Victims of Terrorism TaxRelief Act of 2001, Public Law 107–134(115 Stat. 2427, 2433–35 (2002)) (the2002 Act). The 2002 Act amended thestatute by extending the time period dur-ing which the Secretary may postpone cer-tain tax-related acts and allowing the Sec-retary to suspend the accrual of interest,penalties, additional amounts, or additionsto the tax during the period of postpone-ment. The proposed regulation incorpo-rates amendments to section 7508A.
Explanation of Provisions
The proposed regulation reflects thatthe period of time the Secretary may post-pone certain tax-related acts has beenincreased from 90 days to one year. Ad-ditionally, the proposed regulation reflectsthat the Secretary is authorized under sec-tion 7508A to suspend interest, penalties,
additional amounts, and additions to taxwhich would normally accrue during thetime the tax-related act is postponed. Be-fore the 2002 Act, generally, a taxpayerwas responsible for interest that accruedduring the postponement period (with alimited exception under former section6404(h) when the taxpayer received bothan extension of time to file under section6081 and an extension of time to pay undersection 6161).
The proposed regulation sets forth howthe IRS generally implements postpone-ments of time under section 7508A. Theproposed regulation provides, however,that the IRS may grant further relief totaxpayers under section 7508A by rev-enue ruling, revenue procedure, notice,announcement, news release or other guid-ance published in the Internal RevenueBulletin, in addition to that relief providedby the proposed regulation.
The proposed regulation demonstratesthat although specific tax-related acts maybe due on different dates within the post-ponement period, the acts may be post-poned under section 7508A until the lastday of the period. Under the proposedregulation, when an affected taxpayer isrequired to perform a tax-related act bya due date that falls within the postpone-ment period, the taxpayer is entitled topostponement of the act and is eligible forrelief from interest, penalties, additionalamounts, and additions to tax during thepostponement period.
The proposed regulation provides thatthe postponement period under section7508A runs concurrently with extensionsof time to file or pay, if any, under othersections of the Code. Thus, when the orig-inal due date falls within the postponementperiod, an affected taxpayer has until thelast day of the postponement period tofile for an extension of time to file or pay,but any resulting extension runs from theoriginal due date.
The proposed regulation also providesthat, where the extended due date, butnot the original due date, falls within thepostponement period, relief under section7508A is specific to the type of extensionreceived. Thus, an affected taxpayer whoreceived an extension of time to file, butnot an extension of time to pay, is eligible
September 2, 2008 565 2008–35 I.R.B.
for a postponement of time to file andrelief from penalties relating to the failureto file. The taxpayer is not eligible forpenalty and interest relief relating to thefailure to pay, as the payment due date wasnot extended.
The regulation also clarifies that a post-ponement of time under section 7508A toperform a tax-related act does not extendthe due date to perform the act, but instead,merely allows the IRS to disregard a timeperiod of up to one year for performanceof the act.
Proposed Effective Date
The regulation, as proposed, applies toPresidentially declared disasters or terror-istic or military actions occurring on or af-ter the date of publication of a Treasury de-cision adopting these rules as final regula-tions in the Federal Register.
Special Analyses
It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Or-der 12866. Therefore, a regulatory assess-ment is not required. It has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to this regulation. Theregulation does not impose a collectionof information requirement on small busi-ness entities, thus the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.
Comments and Requests for a PublicHearing
Before this proposed regulation isadopted as a final regulation, considerationwill be given to any written (a signed orig-inal and eight (8) copies) and electroniccomments that are submitted timely to theIRS. All comments will be available forpublic inspection and copying. A publichearing will be scheduled if requested inwriting by any person that timely submitscomments. If a public hearing is sched-uled, notice of the date, time, and place forthe public hearing will be published in theFederal Register.
Drafting Information
The principal authors of this pro-posed regulation are Melissa Quale andMary Ellen Keys of the Office of theAssociate Chief Counsel (Procedure andAdministration).
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR part 301 is pro-posed to be amended as follows:
PART 301—PROCEDURE ANDADMINISTRATION
Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:
amended by1. Revising paragraphs (b) and (e).2. Adding paragraph (d)(3).3. Removing paragraph (f) and redes-
ignating paragraphs (g) and (h) as para-graphs (f) and (g) respectively and revisingthem.
The revisions and addition read as fol-lows.
§301.7508A–1 Postponement of certaintax-related deadlines by reasons ofa Presidentially declared disaster orterroristic or military action.
* * * * *(b) Postponed deadlines—(1) In gen-
eral. In the case of a taxpayer determinedby the Secretary to be affected by a Pres-identially declared disaster (as definedin section 1033(h)(3)) or a terroristicor military action (as defined in section692(c)(2)), the Secretary may specify apostponement period (as defined in para-graph (d)(1) of this section) of up to oneyear that may be disregarded in determin-ing under the internal revenue laws, inrespect of any tax liability of the affectedtaxpayer (as defined in paragraph (d)(1) ofthis section)—
(i) Whether any or all of the acts de-scribed in paragraph (c) of this sectionwere performed within the time pre-scribed;
(ii) The amount of interest, penalty, ad-ditional amount, or addition to the tax; and
(iii) The amount of credit or refund.
(2) Effect of postponement period.When an affected taxpayer is required toperform a tax-related act by a due datethat falls within the postponement period,the affected taxpayer is eligible for post-ponement of time to perform the act untilthe last day of the period. The affectedtaxpayer is eligible for relief from interest,penalties, additional amounts, or additionsto tax during the postponement period.
(3) Interaction between postponementperiod and extensions of time to file orpay—(i) In general. The postponementperiod under section 7508A runs concur-rently with extensions of time to file andpay, if any, under other sections of the In-ternal Revenue Code.
(ii) Original due date prior to, but ex-tended due date within, the postponementperiod. When the original due date pre-cedes the first day of the postponementperiod and the extended due date fallswithin the postponement period, the fol-lowing rules apply. If an affected taxpayerreceived an extension of time to file, filingwill be timely on or before the last dayof the postponement period, and the tax-payer is eligible for relief from penaltiesor additions to tax related to the failureto file during the postponement period.Similarly, if an affected taxpayer receivedan extension of time to pay, payment willbe timely on or before the last day of thepostponement period, and the taxpayer iseligible for relief from interest, penalties,additions to tax and additional amountsrelated to the failure to pay during thepostponement period.
(4) Due date not extended. The post-ponement of the deadline of a tax-relatedact does not extend the due date for the act,but merely allows the IRS to disregard atime period of up to one year for perfor-mance of the act. To the extent that otherstatutes may rely on the date a return is dueto be filed, the postponement period willnot change the due date of the return.
(5) Additional relief. The rules of thisparagraph (b) demonstrate how the IRSgenerally implements section 7508A. TheIRS may determine, however, that addi-tional relief to taxpayers is appropriate andmay provide additional relief to the extentallowed under section 7508A. To the ex-tent that the IRS grants additional relief,the IRS will provide specific guidance onthe scope of relief in the manner providedin paragraph (e) of this section.
2008–35 I.R.B. 566 September 2, 2008
* * * * *(d) * * *(3) Postponement period means the pe-
riod of time (up to one year) that the IRSpostpones deadlines for performing tax-re-lated acts under section 7508A.
(e) Notice of postponement of certainacts. If a tax-related deadline is postponedunder section 7508A and this section, theIRS will publish a revenue ruling, revenueprocedure, notice, announcement, newsrelease, or other guidance in the InternalRevenue Bulletin (see §601.601(d)(2) ofthis chapter) describing the acts postponed,the postponement period, and the locationof the covered disaster area. Guidanceunder this paragraph (e) will be publishedas soon as practicable after the occurrenceof a terroristic or military action or decla-ration of a Presidentially declared disaster.
(f) Examples. The rules of this sectionare illustrated by the following examples:
Example 1. (i) Corporation X, a calendar yeartaxpayer, has its principal place of business in CountyM in State W. Pursuant to a timely filed request forextension of time to file, Corporation X’s 2005 Form1120, “U.S. Corporation Income Tax Return,” is dueon September 15, 2006. Also due on September15, 2006, is Corporation X’s third quarter estimatedtax payment for 2006. Corporation X’s 2006 thirdquarter Form 720, “Quarterly Federal Excise TaxReturn,” and third quarter Form 941, “Employer’sQUARTERLY Federal Tax Return,” are due on Oc-tober 31, 2006. In addition, Corporation X has anemployment tax deposit due on September 15, 2006.
(ii) On September 1, 2006, a hurricane strikesCounty M in State W. On September 6, 2006, thePresident declares a disaster within the meaning ofsection 1033(h)(3). Also on September 6, 2006, theIRS determines that County M in State W is a cov-ered disaster area and publishes guidance announcingthat the time period for affected taxpayers to file re-turns, pay taxes and perform other time-sensitive actsfalling on or after September 1, 2006, and on or beforeNovember 30, 2006, has been postponed to Novem-ber 30, 2006, pursuant to section 7508A.
(iii) Because Corporation X’s principal place ofbusiness is in County M, Corporation X is an affectedtaxpayer. Accordingly, Corporation X’s 2005 Form1120 will be timely if filed on or before November30, 2006. Corporation X’s 2006 third quarter esti-mated tax payment will be timely if made on or beforeNovember 30, 2006. In addition, pursuant to para-graph (c) of this section, Corporation X’s 2006 thirdquarter Form 720 and third quarter Form 941 will betimely if filed on or before November 30, 2006. How-ever, because deposits of taxes are excluded from thescope of paragraph (c) of this section, CorporationX’s employment tax deposit is due on September 15,2006. In addition, Corporation X’s deposits relatingto the third quarter Form 720 are not postponed. Ab-sent reasonable cause, Corporation X is subject to thefailure to deposit penalty under section 6656 and ac-crual of interest.
Example 2. The facts are the same as in Example1, except that because of the severity of the hurricanethe IRS determines that postponement of governmentacts is necessary under these circumstances and pub-lishes guidance accordingly. During 2006, Corpora-tion X’s 2002 Form 1120 is being examined by theIRS. Pursuant to a timely filed request for extensionof time to file, Corporation X timely filed its 2002Form 1120 on September 17, 2003 (because March15, 2003, falls on a Saturday, Corporation X’s 2002Form 1120 was due to be filed on March 17, 2003).Without application of this section, the statute of limi-tation on assessment for the 2002 income tax year willexpire on September 17, 2006. However, pursuant toparagraph (c) of this section, assessment of tax is oneof the government acts for which up to one year maybe disregarded. Because September 17, 2006, fallswithin the period in which government acts are post-poned, the statute of limitation on assessment for Cor-poration X’s 2002 income tax will expire on Novem-ber 30, 2006. Because Corporation X did not timelyfile an extension to pay, payment of its 2002 incometax was due on March 17, 2003. As such, CorporationX will be subject to the failure to pay penalty and re-lated interest beginning on March 18, 2003. The duedate for payment of Corporation X’s 2002 income taxpreceded the postponement period. Therefore, Cor-poration X is not entitled to the suspension of interestor penalties during the disaster period with respect toits 2002 income tax liability.
Example 3. The facts are the same as in Exam-ple 2, except that the examination of the 2002 taxableyear was completed earlier in 2006, and on July 28,2006, the IRS mailed a statutory notice of deficiencyto Corporation X. Without application of this section,Corporation X has 90 days (or until October 26, 2006)to file a petition with the Tax Court. However, pur-suant to paragraph (c) of this section, filing a peti-tion with the Tax Court is one of the taxpayer acts forwhich a period of up to one year may be disregarded.Because Corporation X is an affected taxpayer, Cor-poration X’s petition to the Tax Court will be timelyif filed on or before November 30, 2006, the last dayof the postponement period.
Example 4. (i) H and W, individual calendar yeartaxpayers, intend to file a joint Form 1040, “U.S. In-dividual Income Tax Return,” for the 2007 taxableyear and are required to file a Schedule H, “House-hold Employment Taxes.” The joint return is due onApril 15, 2008. H’s and W’s principal residence is inCounty M in State Q.
(ii) On April 2, 2008, a severe ice storm strikesCounty M. On April 5, 2008, the President declaresa disaster within the meaning of section 1033(h)(3).Also on April 5, 2008, the IRS determines thatCounty M in State Q is a covered disaster area andpublishes guidance announcing that the time periodfor affected taxpayers to file returns, pay taxes andperform other time-sensitive acts falling on or afterApril 2, 2008, and on or before June 2, 2008, hasbeen postponed to June 2, 2008.
(iii) Because H’s and W’s principal residence is inCounty M, H and W are affected taxpayers. April 15,2008, the due date for the filing of H’s and W’s 2007Form 1040 and Schedule H, falls within the postpone-ment period described in the IRS published guidance.Thus, H’s and W’s return will be timely if filed on orbefore June 2, 2008. If H and W request an extensionof time to file under section 6081 on or before June
2, 2008, the extension is deemed to have been filedby April 15, 2008. Thus, H’s and W’s return will betimely if filed on or before October 15, 2008.
(iv) April 15, 2008, is also the due date for thepayment due on the return. This date falls within thepostponement period described in the IRS publishedguidance. Thus, the payment of tax due with the re-turn will be timely if paid on or before June 2, 2008,the last day of the postponement period. If H and Wfail to pay the tax due on the 2007 Form 1040 by June2, 2008, and do not receive an extension of time topay under section 6161, H and W will be subject tofailure to pay penalties and accrual of interest begin-ning on June 3, 2008.
Example 5. (i) H and W, residents of County D inState G, intend to file an amended return to request arefund of 2007 taxes. H and W timely filed their 2007income tax return on April 15, 2008. Under section6511(a), H’s and W’s amended 2007 tax return mustbe filed on or before April 15, 2011.
(ii) On April 1, 2011, an earthquake strikesCounty D. On April 5, 2011, the President declaresa disaster within the meaning of section 1033(h)(3).Also on April 5, 2011, the IRS determines thatCounty D in State G is a covered disaster area andpublishes guidance announcing that the time periodfor affected taxpayers to file returns, pay taxes andperform other time-sensitive acts falling on or afterApril 1, 2011, and on or before September 28, 2011,has been postponed to September 28, 2011.
(iii) Under paragraph (c) of this section, filing aclaim for refund of tax is one of the taxpayer acts forwhich up to one year may be disregarded. The post-ponement period for this disaster begins on April 1,2011, and ends on September 28, 2011. Accordingly,H’s and W’s claim for refund for 2007 taxes willbe timely if filed on or before September 28, 2011.Moreover, in applying the lookback period in sec-tion 6511(b)(2)(A), which limits the amount of the al-lowable refund, the period from September 28, 2011,back to April 1, 2011, is disregarded under paragraph(b)(1)(C) of this section. Thus, if the claim is filedon or before September 28, 2011, amounts deemedpaid on April 15, 2008, under section 6513(b), suchas estimated tax and tax withheld from wages, willhave been paid within the lookback period of section6511(b)(2)(A).
Example 6. (i) A is an unmarried, calendar yeartaxpayer whose principal residence is located inCounty W in State Q. A intends to file a Form 1040for the 2007 taxable year. The return is due on April15, 2008. A timely files Form 4868, “Application forAutomatic Extension of Time To File U.S. IndividualIncome Tax Return.” Due to A’s timely filing ofForm 4868, the extended filing deadline for A’s 2007tax return is October 15, 2008. Because A timelyrequested an extension of time to file, A will not besubject to the failure to file penalty under section6651(a)(1), if A files the 2007 Form 1040 on orbefore October 15, 2008. However, A failed to paythe tax due on the return by April 15, 2008, and didnot receive an extension of time to pay under section6161. Absent reasonable cause, A is subject to thefailure to pay penalty under section 6651(a)(2) andaccrual of interest.
(ii) On September 30, 2008, a blizzard strikesCounty W. On October 3, 2008, the President declaresa disaster within the meaning of section 1033(h)(3).Also on October 3, 2008, the IRS determines that
September 2, 2008 567 2008–35 I.R.B.
County W in State Q is a covered disaster area andannounces that the time period for affected taxpayersto file returns, pay taxes and perform other time-sen-sitive acts falling on or after September 30, 2008, andon or before December 2, 2008, has been postponedto December 2, 2008.
(iii) Because A’s principal residence is in CountyW, A is an affected taxpayer. Because October 15,2008, the extended due date to file A’s 2007 Form1040, falls within the postponement period describedin the IRS’s published guidance, A’s return is timelyif filed on or before December 2, 2008. However, thepayment due date, April 15, 2008, preceded the post-ponement period. Thus, A will continue to be subjectto failure to pay penalties and accrual of interest dur-ing the postponement period.
Example 7. (i) H and W, individual calendar yeartaxpayers, intend to file a joint Form 1040 for the2007 taxable year. The joint return is due on April15, 2008. After credits for taxes withheld on wagesand estimated tax payments, H and W owe tax for the2007 taxable year. H’s and W’s principal residence isin County J in State W.
(ii) On March 1, 2008, severe flooding strikesCounty J. On March 5, 2008, the President declaresa disaster within the meaning of section 1033(h)(3).Also on March 5, 2008, the IRS determines thatCounty J in State W is a covered disaster area andpublishes guidance announcing that the time periodfor affected taxpayers to file returns, pay taxes andperform other time-sensitive acts falling on or afterMarch 1, 2008, and on or before May 30, 2008, hasbeen postponed to May 30, 2008.
(iii) Because H’s and W’s principal residence is inCounty J, H and W are affected taxpayers. Pursuantto the IRS’s grant of relief under section 7508A, Hand W received a postponement of the time to filethe joint return and pay the tax due until May 30,2008. Therefore, H’s and W’s joint return withoutextension is timely if filed on or before May 30, 2008.Similarly, H’s and W’s 2007 income taxes will betimely paid if paid on or before May 30, 2008.
(iv) On April 30, 2008, H and W timely file Form4868, “Application for Automatic Extension of TimeTo File U.S. Individual Income Tax Return.” H andW’s extension will be deemed to have been filed onApril 15, 2008. Thus, H’s and W’s 2007 income taxreturn is timely filed if filed on or before October 15,2008.
(v) H and W did not request or receive an exten-sion of time to pay. Therefore, pursuant to section7508A, H’s and W’s 2007 income tax payment is dueon May 30, 2008. H and W will be subject to the fail-ure to pay penalty under section 6651(a)(2) and in-terest if H and W do not pay the tax due on the 2007joint return on or before May 30, 2008. H and W willbe subject to failure to pay penalties and accrual ofinterest beginning on May 31, 2008.
Example 8. The facts are the same as in Exam-ple 7 except that H and W file the joint 2007 returnand pay the tax due on June 15, 2008. Later, H andW discover additional deductions that would lowertheir taxable income for 2007. On June 15, 2011, Hand W file a claim for refund under section 6511(a).The amount of H and W’s overpayment exceeds theamount of taxes paid on June 15, 2008, the amountpaid within three years of filing the claim. Section6511(a) requires that a claim for refund be filed within
three years from the time the return was filed or twoyears from the time the tax was paid, whichever pe-riod expires later. Section 6511(b)(2)(A) includeswithin the lookback period the period of an exten-sion of time to file. Thus, payments that H and Wmade on or after May 30, 2008, would be eligible tobe refunded. Since the period from April 15, 2008,to May 30, 2008, is disregarded, payments H and Wmade on April 15, 2008, (including withholding or es-timated tax payments deemed to have been made onApril 15, 2008) would also be included in the section6511(b)(2)(A) lookback period. Thus, H and W areentitled to a full refund in the amount of their over-payment.
(g) Proposed effective date. The regula-tion, as proposed, applies to Presidentiallydeclared disasters or terroristic or militaryactions occurring on or after the date ofpublication of the Treasury decision adopt-ing these rules as final regulations in theFederal Register.
Linda E. Stiff,Deputy Commissioner forServices and Enforcement.
(Filed by the Office of the Federal Register on July 14, 2008,8:45 a.m., and published in the issue of the Federal Registerfor July 15, 2008, 73 F.R. 40471)
Deletions From CumulativeList of OrganizationsContributions to Whichare Deductible Under Section170 of the Code
Announcement 2008–79
The Internal Revenue Service has re-voked its determination that the organi-zations listed below qualify as organiza-tions described in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.
Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an or-ganization ceases to qualify under section170(c)(2) if the organization has not timelyfiled a suit for declaratory judgment undersection 7428 and if the contributor (1) hadknowledge of the revocation of the rulingor determination letter, (2) was aware thatsuch revocation was imminent, or (3) was
in part responsible for or was aware of theactivities or omissions of the organizationthat brought about this revocation.
If on the other hand a suit for declara-tory judgment has been timely filed,contributions from individuals and orga-nizations described in section 170(c)(2)that are otherwise allowable will continueto be deductible. Protection under sec-tion 7428(c) would begin on September 2,2008, and would end on the date the courtfirst determines that the organization isnot described in section 170(c)(2) as moreparticularly set forth in section 7428(c)(1).For individual contributors, the maximumdeduction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that werethe basis for revocation.
Ohio Taekwondo Association, Inc.Cincinnati, OH
The Johnson FoundationSandy, UT
Chaim Ministries, Inc.Los Alamitos, CA
Yes I CanBurlington, NC
Surviving the System, Inc.Peoria, AZ
Gravette Medical Center HospitalGravette, AR
D & L Carousel Pre-SchoolLos Angeles, CA
Christmas in AprilMobile, AL
Foundation for Life EnhancementDallas, TX
Colgate Residences, Inc.Houston, TX
Help Ministries, Inc.Mesa, AZ
CCC CentersSan Antonio, TX
Sunlight Ministries, Inc.Brookhaven, MS
Consumer Credit Counseling Services ofHuntsville, Inc.Huntsville, AL
Universal Training Center NonprofitCorporationHighland, CA
Deep South Community DevelopmentCorporationDecatur, GA
2008–35 I.R.B. 568 September 2, 2008
Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:
Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).
Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.
Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.
Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A
and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).
Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.
Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.
Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance
of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.
Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.
Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.
AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.
A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.
ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.
PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.
September 2, 2008 i 2008–35 I.R.B.
Numerical Finding List1
Bulletins 2008–27 through 2008–35
Announcements:
2008-62, 2008-27 I.R.B. 74
2008-63, 2008-28 I.R.B. 114
2008-64, 2008-28 I.R.B. 114
2008-65, 2008-31 I.R.B. 279
2008-66, 2008-29 I.R.B. 164
2008-67, 2008-29 I.R.B. 164
2008-68, 2008-30 I.R.B. 244
2008-69, 2008-32 I.R.B. 318
2008-70, 2008-32 I.R.B. 318
2008-71, 2008-32 I.R.B. 321
2008-72, 2008-32 I.R.B. 321
2008-73, 2008-33 I.R.B. 391
2008-74, 2008-33 I.R.B. 392
2008-75, 2008-33 I.R.B. 392
2008-76, 2008-33 I.R.B. 393
2008-77, 2008-33 I.R.B. 394
2008-78, 2008-34 I.R.B. 453
2008-79, 2008-35 I.R.B. 568
Notices:
2008-55, 2008-27 I.R.B. 11
2008-56, 2008-28 I.R.B. 79
2008-57, 2008-28 I.R.B. 80
2008-58, 2008-28 I.R.B. 81
2008-59, 2008-29 I.R.B. 123
2008-60, 2008-30 I.R.B. 178
2008-61, 2008-30 I.R.B. 180
2008-62, 2008-29 I.R.B. 130
2008-63, 2008-31 I.R.B. 261
2008-64, 2008-31 I.R.B. 268
2008-65, 2008-30 I.R.B. 182
2008-66, 2008-31 I.R.B. 270
2008-67, 2008-32 I.R.B. 307
2008-68, 2008-34 I.R.B. 418
2008-69, 2008-34 I.R.B. 419
2008-71, 2008-35 I.R.B. 462
Proposed Regulations:
REG-164965-04, 2008-34 I.R.B. 450
REG-143453-05, 2008-32 I.R.B. 310
REG-142680-06, 2008-35 I.R.B. 565
REG-129243-07, 2008-27 I.R.B. 32
REG-138355-07, 2008-32 I.R.B. 311
REG-142040-07, 2008-34 I.R.B. 451
REG-149405-07, 2008-27 I.R.B. 73
REG-100464-08, 2008-32 I.R.B. 313
REG-101258-08, 2008-28 I.R.B. 111
REG-102122-08, 2008-31 I.R.B. 278
REG-115457-08, 2008-33 I.R.B. 390
REG-121698-08, 2008-29 I.R.B. 163
Revenue Procedures:
2008-32, 2008-28 I.R.B. 82
2008-33, 2008-28 I.R.B. 93
2008-34, 2008-27 I.R.B. 13
2008-35, 2008-29 I.R.B. 132
2008-36, 2008-33 I.R.B. 340
2008-37, 2008-29 I.R.B. 137
2008-38, 2008-29 I.R.B. 139
2008-39, 2008-29 I.R.B. 143
2008-40, 2008-29 I.R.B. 151
2008-41, 2008-29 I.R.B. 155
2008-42, 2008-29 I.R.B. 160
2008-43, 2008-30 I.R.B. 186
2008-44, 2008-30 I.R.B. 187
2008-45, 2008-30 I.R.B. 224
2008-46, 2008-30 I.R.B. 238
2008-47, 2008-31 I.R.B. 272
2008-49, 2008-34 I.R.B. 423
2008-50, 2008-35 I.R.B. 464
2008-51, 2008-35 I.R.B. 562
Revenue Rulings:
2008-32, 2008-27 I.R.B. 6
2008-33, 2008-27 I.R.B. 8
2008-34, 2008-28 I.R.B. 76
2008-35, 2008-29 I.R.B. 116
2008-36, 2008-30 I.R.B. 165
2008-37, 2008-28 I.R.B. 77
2008-38, 2008-31 I.R.B. 249
2008-39, 2008-31 I.R.B. 252
2008-40, 2008-30 I.R.B. 166
2008-41, 2008-30 I.R.B. 170
2008-42, 2008-30 I.R.B. 175
2008-43, 2008-31 I.R.B. 258
2008-44, 2008-32 I.R.B. 292
2008-45, 2008-34 I.R.B. 403
Treasury Decisions:
9401, 2008-27 I.R.B. 1
9402, 2008-31 I.R.B. 254
9403, 2008-32 I.R.B. 285
9404, 2008-32 I.R.B. 280
9405, 2008-32 I.R.B. 293
9406, 2008-32 I.R.B. 287
9407, 2008-33 I.R.B. 330
9408, 2008-33 I.R.B. 323
9409, 2008-29 I.R.B. 118
9410, 2008-34 I.R.B. 414
9411, 2008-34 I.R.B. 398
9413, 2008-34 I.R.B. 404
9414, 2008-35 I.R.B. 454
1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin2008–26, dated June 30, 2008.
2008–35 I.R.B. ii September 2, 2008
Finding List of Current Actions onPreviously Published Items1
Bulletins 2008–27 through 2008–35
Announcements:
2008-64
Corrected by
Ann. 2008-71, 2008-32 I.R.B. 321
2008-72
Corrected by
Ann. 2008-78, 2008-34 I.R.B. 453
Notices:
99-48
Superseded by
Rev. Proc. 2008-40, 2008-29 I.R.B. 151
2000-9
Obsoleted by
Rev. Proc. 2008-41, 2008-29 I.R.B. 155
2004-2
Amplified by
Notice 2008-59, 2008-29 I.R.B. 123
2004-50
Amplified by
Notice 2008-59, 2008-29 I.R.B. 123
2006-88
Modified and superseded by
Notice 2008-60, 2008-30 I.R.B. 178
2007-22
Amplified by
Notice 2008-59, 2008-29 I.R.B. 123
Proposed Regulations:
REG-129243-07
Corrected by
Ann. 2008-75, 2008-33 I.R.B. 392
REG-151135-07
Hearing scheduled by
Ann. 2008-64, 2008-28 I.R.B. 114
REG-101258-08
Corrected by
Ann. 2008-73, 2008-33 I.R.B. 391
Revenue Procedures:
92-25
Superseded by
Rev. Proc. 2008-41, 2008-29 I.R.B. 155
92-83
Obsoleted by
Rev. Proc. 2008-37, 2008-29 I.R.B. 137
2001-42
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B. 143
Revenue Procedures— Continued:
2002-9
Modified and amplified by
Rev. Proc. 2008-43, 2008-30 I.R.B. 186
2005-29
Superseded by
Rev. Proc. 2008-49, 2008-34 I.R.B. 423
2006-27
Modified and superseded by
Rev. Proc. 2008-50, 2008-35 I.R.B. 464
2006-29
Superseded by
Rev. Proc. 2008-34, 2008-27 I.R.B. 13
2006-34
Superseded by
Rev. Proc. 2008-44, 2008-30 I.R.B. 187
2007-19
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B. 143
2007-42
Superseded by
Rev. Proc. 2008-32, 2008-28 I.R.B. 82
2007-43
Superseded by
Rev. Proc. 2008-33, 2008-28 I.R.B. 93
2007-49
Section 3 modified and superseded by
Rev. Proc. 2008-50, 2008-35 I.R.B. 464
2007-50
Superseded by
Rev. Proc. 2008-36, 2008-33 I.R.B. 340
2007-70
Modified by
Ann. 2008-63, 2008-28 I.R.B. 114
2007-72
Amplified and superseded by
Rev. Proc. 2008-47, 2008-31 I.R.B. 272
2008-12
Modified and superseded by
Rev. Proc. 2008-35, 2008-29 I.R.B. 132
Revenue Rulings:
67-213
Amplified by
Rev. Rul. 2008-40, 2008-30 I.R.B. 166
71-234
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B. 186
76-273
Obsoleted by
T.D. 9414, 2008-35 I.R.B. 454
Revenue Rulings— Continued:
77-480
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B. 186
82-105
Obsoleted by
T.D. 9414, 2008-35 I.R.B. 454
91-17
Amplified by
Rev. Proc. 2008-41, 2008-29 I.R.B. 155Rev. Proc. 2008-42, 2008-29 I.R.B. 160
Superseded in part by
Rev. Proc. 2008-40, 2008-29 I.R.B. 151
2005-6
Amplified by
Rev. Proc. 2008-38, 2008-29 I.R.B. 139
2008-12
Amplified by
Rev. Rul. 2008-38, 2008-31 I.R.B. 249
Clarified by
Ann. 2008-65, 2008-31 I.R.B. 279
Treasury Decisions:
9391
Corrected by
Ann. 2008-74, 2008-33 I.R.B. 392
1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.
September 2, 2008 iii 2008–35 I.R.B.
INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.
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purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
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If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224
Internal Revenue ServiceWashington, DC 20224Official BusinessPenalty for Private Use, $300
