SECTION 4. CORRECTION

METHODS

.01 In general. The correction principles and rules of general applicability de

scribed in Section 6 of Rev. Proc. 98–22 apply to 403(b) Plans, except as provided in sections 4.02 and 4.03 below. Thus, a failure with respect to a 403(b) Plan is generally not corrected unless correction is made with respect to all participants and beneficiaries for all taxable years pursuant to this revenue procedure.

.02 Correction of Excess Amounts. Excess Amounts may be corrected only pursuant to paragraph (1) or (2) of this section 4.02.

(1) Distribution of Excess Amounts. In order to correct under this paragraph (1), Excess Amounts for a year, adjusted for earnings through the date of distribution, must be distributed to affected participants and beneficiaries and are includible in their gross income in the year distributed. A distribution of Excess Amounts is generally treated in the manner described in Section 3 of Rev. Proc. 92–93, 1992–2 C.B. 505, relating to the corrective disbursement of elective deferrals. The distribution must be reported on Forms 1099-R for the year of distribution with respect to each participant or beneficiary receiving such a distribution. The distribution of Excess Amounts is not an eligible rollover distribution within the meaning of § 403(b)(8). In addition, the employer must inform affected participants and beneficiaries that the distribution of Excess Amounts is not eligible for rollover. Excess Amounts distributed pursuant to this paragraph (1) are not treated as amounts previously excludable under § 403(b)(2)(A)(ii) for purposes of calculating the maximum exclusion allowance for the taxable year of the distribution and for subsequent taxable years.

(2) Retention of Excess Amounts. Alternatively, only under TVC and Audit CAP for 403(b) Plans, Excess Amounts will be treated as corrected (even though the Excess Amounts are retained in the 403(b) Plan) if the requirements of this paragraph (2) are satisfied. Excess Amounts arising from a § 415 failure, adjusted for earnings through the date of correction, must reduce affected participants’ applicable § 415 limit for the year following the year of correction (or for the year of correction if the employer so chooses), and subsequent years, until the excess is eliminated. Excess Amounts (whether arising from a § 415 failure or a

§ 403(b)(2) failure), adjusted for earnings through the date of correction, must also reduce participants’ exclusion allowances by being treated as amounts previously excludable under § 403(b)(2)(A)(ii) beginning with the year following the year of correction (or the year of correction if the employer so chooses). The correction described in this paragraph (2) must generally be used for all participants who have Excess Amounts. See section 8.03 below for the correction compliance fee that is generally applicable to Excess Amounts corrected pursuant to this paragraph (2).

.03 Correction of a Plan of an Ineligi- ble Employer. The permitted correction of a Plan of an Ineligible Employer under TVC is the cessation of all contributions (including salary reduction and after-tax contributions) beginning no later than the date the application under TVC is filed. Pursuant to TVC correction, the assets in such a plan are to remain in the annuity contract or custodial account and are to be distributed no earlier than the occurrence of one of the distribution events described in § 403(b)(7) (to the extent the assets are held in custodial accounts) or § 403(b)(11) (for those assets invested in annuity contracts that would be subject to § 403(b)(11) restrictions if the employer were eligible). A Plan of an Ineligible Employer that is corrected through TVC will be treated as subject to all of the requirements and provisions of § 403(b), including the provisions of § 403(b)(8) (relating to rollovers). Because a Plan of an Ineligible Employer will be treated as subject to all of the requirements of § 403(b), the plan must, as part of TVC correction, also correct all other Operational, Demographic, and Eligibility Failures in accordance with this revenue procedure. The correction of a Plan of an Ineligible Employer is subject to the fee described in section 8.04 below (or, with respect to the correction of multiple failures, section 8.05 below).