SECTION 1. PURPOSE AND — Internal Revenue Bulletin 1998-12

OVERVIEW

.01 Purpose. This revenue procedure provides a comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of § 401(a) or § 403(a) of the Internal Revenue Code (the “Code”), but that have not met these requirements for a period of time. This system permits plan sponsors to correct these qualification failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The Internal Revenue Service (the “Service”) previously established several programs allowing correction of qualification failures, including the Administrative Policy Regarding Self-Correction (“APRSC”), the Voluntary Compliance Resolution (“VCR”) program, the Walk-in Closing Agreement Program (“Walk-in CAP”), and the Audit Closing Agreement Program (“Audit CAP”).

This revenue procedure modifies these programs and consolidates them into a coordinated Employee Plans Compliance Resolution System (“EPCRS”). In response to requests by practitioners, this revenue procedure sets forth and assembles in one place the specific rules and procedures applicable to the programs, including illustrative examples.

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

Sponsors of tax-qualified retirement plans should be encouraged to establish administrative practices and procedures that ensure that plans are operated properly in accordance with the tax qualification requirements.
Sponsors of tax-qualified retirement plans should maintain plan documents satisfying the tax qualification requirements.
Plan sponsors should make voluntary and timely correction of any plan qualification failures, whether involving discrimination in favor of highly compensated employees, plan operations, or the terms of the plan document. Timely and efficient correction protects participating

employees by providing them with their expected retirement benefits, including favorable tax treatment.

Voluntary compliance is promoted by providing for limited fees for voluntary corrections approved by the Service, thereby reducing employers’ uncertainty regarding their potential liability.
Sanctions for qualification failures identified on audit should be reasonable in light of the nature, extent, and severity of the violation.
Administration of EPCRS should be consistent and uniform.
Taxpayers should be able to rely on the availability of EPCRS in taking corrective actions to maintain the qualified status of their plans.

.03 Overview . EPCRS includes the following basic elements:

Self-correction. A plan sponsor that has established compliance practices and procedures may, at any time, correct insignificant operational failures without paying any fee or sanction. In addition, where a plan is the subject of a favorable determination letter from the Service, the plan sponsor generally may correct even significant operational failures within a two-year period without payment of any fee or sanction. (APRSC)
Voluntary correction with Service approval. In the case of any other qualification failure, a plan sponsor, at any time before audit, may pay a limited fee and receive the Service’s approval for the correction. (VCR and Walk-in CAP)
Correction on audit. If a qualification failure (other than a failure corrected as described above) is identified on audit and corrected, the sanction imposed will bear a reasonable relationship to the nature, extent and severity of the failure, taking into account the extent to which correction occurred before audit. (Audit CAP)

.04 TVC program. This revenue procedure does not incorporate or modify the Tax Sheltered Annuity Voluntary Correction program (“TVC”). TVC enables a sponsor of a § 403(b) Plan to voluntarily disclose to the Service certain operational defects it has discovered in its § 403(b) plans and pay both a fixed fee and a monetary sanction negotiated with the Service. The TVC program procedures under Rev. Proc. 95–24, 1995–1 C.B. 694, continue to apply, pending future

March 23, 1998 14 1998–12 I.R.B.

correction programs and an audit correction program for Qualified Plans. The voluntary correction programs are APRSC and VCR, both of which are available for Operational Failures, and Walk-in CAP, which applies to Plan Document and Demographic Failures and to Operational Failures that are not eligible for APRSC and VCR. APRSC is a voluntary employer-initiated procedure that generally does not involve Service approval, whereas VCR and Walk-in CAP are voluntary employer-initiated procedures that involve Service approval. The audit correction program is Audit CAP, which is available for all types of Qualification Failures found on examination that cannot be corrected under APRSC. Additional, specific rules are set forth below.

.02 Effect of examination. If the plan or plan sponsor is Under Examination, the VCR and Walk-in CAP programs are not available; insignificant Operational Failures can be corrected under APRSC; and significant Operational Failures can be corrected under APRSC in limited circumstances. See section 9.

.03 Favorable Letter requirement. The VCR program and the provisions of APRSC relating to significant Operational Failures (see section 9) are available only for a plan that is the subject of a Favorable Letter.

.02 Changes affecting specific pro- grams. This revenue procedure makes the following specific changes to the APRSC, VCR, Walk-in CAP, and Audit CAP correction programs:

(1) APRSC. APRSC enables a sponsor of a Qualified Plan or a § 403(b) Plan to self-correct Operational Failures it discovers in its plans. The provisions of APRSC are modified and restated to:

incorporate the recent extension of the period for correcting significant Operational Failures from the end of the first plan year following the plan year in which the Operational Failure occurred to the end of the second plan year following the plan year in which the Operational Failure occurred, as set forth in Announcement 97–121, 1997–50 I.R.B. 62;
- clarify that, for purposes of correcting a failure to satisfy the actual deferral percentage (“ADP”) or actual contribution percentage (“ACP”) test, the two-year correction period begins after the expiration of the statutory correction period; and
permit correction of an Operational Failure to be completed after the end of the correction period if correction was substantially completed by the end of the correction period.

(2) VCR. The VCR program enables a sponsor of a Qualified Plan to voluntarily disclose to the Service Operational Failures it has discovered in its plans and to pay a fixed fee to the Service. The provisions of VCR are modified to:

reduce the specificity required in the calculations supporting plan sponsors’ proposed correction methods;
revise the circumstances under which closing agreements will be entered into with respect to the excise tax under § 4974 (applicable to the failure to satisfy the minimum distribution requirements under § 401(a)(9));
extend the time period within which corrections are to be effected to 150 days;
clarify and simplify permissible correction methods under the Standardized VCR Procedure (SVP) (see Appendix A of this revenue procedure); and
provide a checklist for use by plan sponsors in preparing VCR and SVP requests (see Appendix B to this revenue procedure).

(3) Walk-in CAP. Walk-in CAP enables a sponsor of a Qualified Plan to voluntarily disclose to the Service Qualifica

tion Failures it has discovered in its plans and to pay a compliance correction fee. The provisions of Walk-in CAP are modified to:

discontinue the use of 40% (or any other percentage) of the Maximum Payment Amount as the basis for calculating sanctions (except for egregious failures);
provide for greater predictability and consistency by replacing the prior sanction structure with a limited range of compliance correction fees, with the lowest fees provided for small plans; and
provide a checklist for use by plan sponsors in preparing Walk-in CAP requests (see Appendix B to this revenue procedure).

(4) Audit CAP. Audit CAP, a program established in the key district offices that is available on examination of a Qualified Plan, enables the plan sponsor to negotiate a monetary sanction. The provisions of Audit CAP are modified and restated to:

clarify that the sanction imposed under Audit CAP will not be excessive and will bear a reasonable relationship to the nature, extent, and severity of the failure; and
provide assurance that correction made before audit, even for failures corrected outside of the APRSC, VCR, and Walk-in CAP programs, will be an important factor in reducing the potential sanction under Audit CAP.