SECTION 4. PROGRAM

ELIGIBILITY

.01 General program eligibility. EPCRS includes three specific voluntary

.04 Established practices and proce- dures. In order to be eligible for APRSC, the plan sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the requirements of § 401(a) or § 403(b). For example, the plan administrator might use a check sheet for tracking allocations and indicate on that check sheet whether a particular employee was a key employee for topheavy purposes. A plan document alone will not constitute evidence of established procedures. These established procedures must have been in place and routinely followed, but through an oversight or mistake in applying them, or because of an inadequacy in the procedures, an Operational Failure occurred.

.05 Plan amendments. (1) Correction by plan amendment not permitted in APRSC or VCR. Neither APRSC nor the VCR program is available for a plan sponsor to correct an Operational Failure

1998–12 I.R.B. 15 March 23, 1998

adopted, the amended provisions are not followed, then the plan is considered to have an Operational Failure.

An Operational Failure with respect to a § 403(b) Plan is a failure that would result in the loss of the exclusion allowance under § 403(b).

(3) Demographic Failure. The term “Demographic Failure” means a failure to satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b) that is not an Operational Failure.

The correction of a Demographic Failure generally requires a substantive corrective amendment to the plan adding more benefits or increasing existing benefits (see, for example, § 1.401(a)(4)–11(g) of the Income Tax Regulations).

.02 Favorable Letter. The term “Favorable Letter” means a current favorable determination letter for an individually designed plan (including a volume submitter plan), a current favorable opinion letter for a plan sponsor that has adopted a master or prototype plan, or a current favorable notification letter for a plan sponsor that has adopted a regional prototype plan. A plan has a current favorable determination letter, opinion letter, or notification letter if either (1), (2), or (3) below is satisfied:

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

(2) The plan has a favorable determination, opinion, or notification letter that considers the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), the Deficit Reduction Act of 1984 (“DEFRA”), and the Retirement Equity Act of 1984 (“REA”), and the § 401(b) remedial amendment period for TRA ’86 has not yet expired. (The remedial amendment period for TRA ’86 may not have expired either because the plan has a timely submitted, pending request for a determination, opinion, or notification letter that considers TRA ’86, or because the plan is an adoption of a master or prototype plan, regional prototype plan, or volume submitter plan, described in section 3 of Rev. Proc. 95–12, 1995–1 C.B. 508; a governmental plan described in Notice 96–64, 1996–2 C.B. 229; or a plan maintained by a tax-exempt organization, including a non-electing church plan, described in Notice 96–64.)

by a plan amendment that conforms the terms of the plan to the plan’s prior operations. Thus, if loans were made to participants, but the plan document did not permit loans to be made to participants, the failure cannot be corrected under VCR by retroactively amending the plan to provide for the loans. Nevertheless, if a plan sponsor corrects under APRSC or VCR, it may amend the plan to the extent necessary to reflect operational correction. For example, if the plan failed to satisfy the ADP test required under § 401(k)(3) and the employer must make qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions. The issuance of a compliance statement does not constitute a determination as to the effect of any plan amendment on the qualification of the plan.

(2) Limited availability of correc- tion by plan amendment in Walk-in CAP. In appropriate circumstances, a plan sponsor may use Walk-in CAP to correct an Operational Failure by a plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6). Future guidance will be issued regarding circumstances under which correction of an Operational Failure through plan amendment may be appropriate under Walk-in CAP.

.06 Egregious failures. Neither APRSC nor the VCR program is available to correct Operational Failures that are egregious. For example, if an employer has consistently and improperly covered only highly compensated employees or if a contribution to a defined contribution plan for a highly compensated individual is several times greater than the dollar limit set forth in § 415, the failure would be considered egregious.

.07 Diversion or misuse of plan assets. The APRSC, VCR, Walk-in CAP and Audit CAP programs are not available for Qualification Failures relating to the diversion or misuse of plan assets.

.08 Operational Failures in § 403(b) Plans. APRSC is also available to correct an Operational Failure in a § 403(b) Plan (other than a failure that would result solely in income inclusion for affected

employees). Thus, Operational Failures involving contributions to a § 403(b) Plan in excess of the § 415 limit and the maximum exclusion allowance (failures that result solely in the inclusion in income for affected participants) are not eligible for APRSC.

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