SECTION 6. CORRECTION

PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of general applicability. The following general correction principles and rules of general applicability apply for purposes of this revenue procedure.

.02 Correction. Generally, a Qualification Failure is not corrected unless full correction is made with respect to all participants and beneficiaries, and for all taxable years (whether or not the taxable year is closed). In the case of an Operational Failure, correction is determined taking into account the terms of the plan at the time of the failure. Correction should be accomplished taking into account the following principles:

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

(2) Reasonable and appropriate cor- rection. The correction should be reasonable and appropriate for the Qualification Failure. Depending on the nature of the Qualification Failure, there may be more than one reasonable and appropriate correction for the failure. Any standardized correction method permitted under SVP (see Appendix A) is deemed to be a reasonable and appropriate method of correcting the related Qualification Failure. Whether any other particular correction method is reasonable and appropriate is determined taking into account the applicable facts and circumstances and the following principles:

(a) The correction method should, to the extent possible, resemble one already provided for in the Code, Income Tax Regulations, or other guidance of general applicability. For example, the defined contribution plan correction methods set

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forth in § 1.415–6(b)(6) would be the typical means of correcting a failure under § 415. Likewise, the correction method set forth in § 1.402(g)–1(e)(2) would be the typical means of correcting a failure under § 402(g).

(b) The correction method for Qualification Failures relating to nondiscrimination should provide benefits for nonhighly compensated employees. For example, the correction method set forth in § 1.401(a)(4)–11(g) (rather than methods making use of the special testing provisions set forth in § 1.401(a)(4)–8 or 1.401(a)(4)–9) would be the typical means of correcting a failure to satisfy nondiscrimination requirements. Similarly, the correction of a failure to satisfy the requirements of § 401(k)(3), 401(m)(2), or 401(m)(9) (relating to nondiscrimination) solely by distributing excess amounts to highly compensated employees would not be the typical means of correcting such a failure.

(c) The correction method should keep plan assets in the plan, except to the extent the Code, regulations, or other guidance of general applicability provide for correction by distribution to participants or beneficiaries or return of assets to the employer or plan sponsor. For example, if an excess allocation (not in excess of the § 415 limits) was made for a participant under a plan (other than a cash or deferred arrangement), the excess should be reallocated to other participants or, depending on the facts and circumstances, used to reduce future employer contributions.

(d) The correction method should not violate another applicable specific requirement of § 401(a) (for example, § 401(a)(4) or 411(d)(6)).

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

(a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the Qualification Failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for earnings and forfeitures that would have been allo

cated to the participant’s account if the failure had not occurred. The corrective allocation need not be adjusted for losses. For administrative convenience, in the case of corrective allocations, if the plan permitted directed investments for the years at issue, and thus had a number of funds, the plan would be permitted to use the highest rate earned in the plan for a particular year as the rate used for all corrections, provided that most of the employees receiving the corrective allocations are nonhighly compensated employees. Similar rules apply with respect to corrective distributions.

(b) A corrective allocation to a participant’s account because of a failure to make a required allocation in a prior limitation year will not be considered an annual addition with respect to the participant for the limitation year in which the correction is made, but will be considered an annual addition for the limitation year to which the corrective allocation relates. However, the normal rules of § 404, regarding deductions, apply.

(c) Corrective allocations should come only from employer contributions (including forfeitures if the plan permits their use to reduce employer contributions).

(d) In the case of a defined benefit plan, a corrective distribution for an individual should be increased to take into account the delayed payment, consistent with the plan’s actuarial adjustments.

(4) Special exceptions to full correc- tion. In general, a Qualification Failure must be fully corrected. Although the mere fact that correction is inconvenient or burdensome is not enough to relieve a plan sponsor of the need to make full correction, full correction may not be required in certain situations because it is unreasonable or not feasible. Even in these situations, the correction method adopted must be one that does not have significant adverse effects on participants and beneficiaries or the plan, and that does not discriminate significantly in favor of highly compensated employees. The exceptions described below specify those situations in which full correction is not required.

(a) Reasonable estimates. If it is not possible to make a precise calculation, or the probable difference between the approximate and the precise restoration of a

participant’s benefits is insignificant and the administrative cost of determining precise restoration would significantly exceed the probable difference, reasonable estimates may be used in calculating appropriate correction.

(b) Delivery of very small benefits. If the total corrective distribution due a participant or beneficiary is $20 or less, the plan sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution.

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

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

(6) Additional guidance. The Service may publish additional rules regarding appropriate correction methods.

.03 Correction under statute or regula- tions. Generally, none of the correction programs are needed to correct failures that can be corrected under the Code and related regulations. For example, as a general rule, a Plan Document Failure that is a disqualifying provision for which the remedial amendment period under § 401(b) has not expired can be corrected by operation of the Code through retroactive remedial amendment.

.04 Matters subject to excise taxes. Excise taxes and additional taxes, to the extent applicable, are not waived merely because the underlying failure has been corrected or because the taxes result from the correction. Thus, for example, the excise tax on certain excess contributions under § 4979 is not waived under these correction programs.

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The correction programs are not available for events for which the Code provides tax consequences other than plan disqualification (such as the imposition of an excise tax or additional income tax). For example, funding deficiencies (failures to make the required contributions to a plan subject to § 412), prohibited transactions, and failures to file the Form 5500 cannot be corrected under the correction programs. However, if the event is also an Operational Failure (for example, if the terms of the plan document relating to plan loans to participants were not followed and loans made under the plan did not satisfy § 72(p)(2)), the correction programs will be available to correct the Operational Failure, even though the excise or income taxes generally still will apply. (In limited circumstances, as described in section 10.05, if the failure involves the failure to satisfy the minimum distribution requirements of § 401(a)(9), the Service may enter into a closing agreement, as part of the VCR program, with respect to the excise tax under § 4974 applicable to plan participants.)

.05 Confidentiality and disclosure. Because each correction program relates directly to the enforcement of the qualification requirements, the information received or generated by the Service under the program is subject to the confidentiality requirements of § 6103, and is not a written determination within the meaning of § 6110.

.06 No effect on other law. Compliance under these programs has no effect on the rights of any party under any other law, including Title I of the Employee Retirement Income Security Act of 1974.