SECTION 9. SELF-CORRECTION OF

SIGNIFICANT OPERATIONAL FAILURES

.01 Requirements . The requirements of this section are satisfied with respect to an Operational Failure (even if significant) if the Operational Failure is corrected and the correction is either completed or substantially completed (in accordance with section 9.03) by the last day of the correction period described in section 9.02.

.02 Correction period . The last day of the correction period for an Operational Failure is the last day of the second plan year following the plan year for which the failure occurred. However, in the case of

a failure to satisfy the requirements of § 401(k)(3), 401(m)(2), or 401(m)(9), the plan year that includes the last day of the additional period for correction permitted under § 401(k)(8) or 401(m)(6) is treated, for this purpose, as the plan year for which the Operational Failure occurs. The correction period for an Operational Failure that occurs for any plan year ends, in any event, on the first date the plan or Plan Sponsor is Under Examination for that plan year (determined without regard to the exception in the preceding sentence). (But see section 9.03 for special rules permitting completion of correction after the end of the correction period.) If a 403(b) Plan does not have a plan year, the calendar year is considered to be the plan year for purposes of this section. .03 Substantial completion of correction . Correction of an Operational Failure is substantially completed by the last day of the correction period only if the requirements of either paragraph (1) or (2) are satisfied.

(1) The requirements of this paragraph (1) are satisfied if:

(a) during the correction period, the Plan Sponsor is reasonably prompt in identifying the Operational Failure, formulating a correction method, and initiating correction in a manner that demonstrates a commitment to completing correction of the Operational Failure as expeditiously as practicable, and

(b) within 90 days after the last day of the correction period, the Plan Sponsor completes correction of the Operational Failure.

(2) The requirements of this paragraph (2) are satisfied if:

(a) during the correction period, correction is completed with respect to 85% of all participants affected by the Operational Failure, and

(b) thereafter, the Plan Sponsor completes correction of the Operational Failure with respect to the remaining affected participants in a diligent manner.

.04 Example . The following example illustrates the application of this section. Assume that the eligibility requirements of section 4 relating to APRSC have been met.

Employer Z established a qualified defined contribution plan in 1986 and received a favorable determination letter for TRA ‘86. During 1999, while doing a

February 7, 2000 528 2000–6 I.R.B.

ation under the VCR program does not preclude or impede (under § 7605(b) or any administrative provisions adopted by the Service) a subsequent examination of the Plan Sponsor or the plan by the Service with respect to the taxable year (or years) involved with respect to matters that are outside the compliance statement. A Plan Sponsor’s statements describing Operational Failures are made only for purposes of the VCR program and will not be regarded by the Service as an admission of a failure for purposes of any subsequent examination. If the plan failures include failures correctable under VCR and failures correctable under Walkin CAP, (e.g., interrelated Operational and Document Failures), the Plan Sponsor may include all such failures in a submission under Walk-in CAP.

.03 No concurrent examination activ- ity . Except in unusual circumstances, a plan that has been properly submitted under the VCR program will not be examined while the submission is pending. This practice regarding concurrent examinations does not extend to other plans of the Plan Sponsor. Thus, any plan of the Plan Sponsor that is not pending under the VCR program could be subject to examination.

.04 Insufficient information . Where it is not possible to obtain sufficient information to properly determine the nature or extent of a failure or there is insufficient information to effect proper correction, or in other special circumstances where the application of the VCR program would be inappropriate or impractical, the failure cannot be corrected under the VCR program.

.05 Initial processing . (1) The Service will review whether the eligibility requirements of section 4 and the submission requirements of section 12 are satisfied.

(2) If the plan is not the subject of a Favorable Letter or the failure is not an Operational Failure, the compliance fee will be returned to the Plan Sponsor, and the Plan Sponsor will be informed of the option to voluntarily request consideration under Walk-in CAP.

(3) If a Plan Sponsor requests a compliance statement under the VCR program for a plan with egregious failures described in section 4.07, the compliance fee will be returned and the Plan Sponsor

will be given 60 days to voluntarily request consideration under Walk-in CAP. If by the end of the 60-day period, a request for consideration under Walk-in CAP has not been received, the VCR request will be forwarded to Employee Plans Examinations (see section 12.12 of this revenue procedure)for examination consideration.

(4) If the Service determines that a submission is seriously deficient, the Service reserves the right to return the submission and the compliance fee without contacting the Plan Sponsor.

(5) If a request for consideration under the VCR program is not described in paragraph (2), (3), or (4) above, but nevertheless fails to comply with the provisions of this revenue procedure or if additional information is required, a Service representative will generally contact the Plan Sponsor or the Plan Sponsor’s representative and explain what is needed to complete the submission. The Plan Sponsor will have 21 calendar days from the date of this contact to provide the requested information. If the information is not received within 21 days, the matter will be closed, the compliance fee will not be returned, and the case may be referred to Employee Plans Examinations in accordance with section 10.05(3). Any request for an extension of the 21-day time period must be made in writing within the 21-day time period and must be approved by the Service.

.06 Processing of acceptable submis- sion . Once the Service determines that a request for consideration under the VCR program is acceptable, the Service will consult with the Plan Sponsor or the Plan Sponsor’s representative to discuss the proposed corrections and the plan’s administrative procedures. If agreement is reached, the Service will issue a compliance statement with an enclosed acknowledgment letter for signature by the Plan Sponsor. The case will not be closed favorably until the Service has received the signed acknowledgement letter from the Plan Sponsor. The Service will discuss the appropriateness of the plan’s existing administrative procedures with the Plan Sponsor. Where current procedures are inadequate for operating the plan in conformance with the qualification requirements of the Code, the compliance statement will be conditioned upon the

implementation of stated procedures within the stated time period. The Service may prescribe appropriate administrative procedures in the compliance statement.

.07 Failures discovered after initial submission .

(1) A Plan Sponsor that discovers additional, unrelated Operational Failures after its initial submission may request that such failures be added to its submission. The Service retains the discretion to reject the inclusion of such failures if the request is not timely, for example, if the Plan Sponsor makes its request when processing of the VCR submission is substantially complete.

(2) If the Service discovers an unrelated Operational Failure while the request is pending under the VCR program, the failure generally will be added to the failures under consideration in the submission. The Service retains the discretion to determine that a failure is outside the scope of the voluntary request for consideration because it was not voluntarily brought forward by the Plan Sponsor. In this case, the plan may be forwarded to Employee Plans Examinations for consideration on examination, but forwarding to Employee Plans Examinations will occur only in rare or unusual circumstances.

.08 Conference right . If the Service initially determines that it cannot issue a compliance statement because the parties cannot agree upon correction or a change in administrative procedures, the Plan Sponsor or the Plan Sponsor’s representative will be contacted by the Service representative and offered a conference with the Service. The conference can be held either in person or by telephone, and must be held within 21 calendar days of the date of contact. The Plan Sponsor will have 21 calendar days after the date of the conference to submit additional information in support of the submission. Any request for an extension of the 21-day time period must be made in writing within the 21-day time period and must be approved by the Service. Additional conferences may be held at the discretion of the Service.

.09 Failure to reach resolution . If resolution cannot be reached (for example, where information is not timely provided to the Service or because agreement cannot be reached on correction or a change

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in administrative procedures), the compliance fee will not be returned, and the case may be referred to Employee Plans Examinations for examination consideration.

.10 Concurrent processing of determi- nation letter applications . The Service may process a determination letter application (including an application requested on Form 5310, Application for Determination of Qualification Upon Termination) concurrently with a VCR submission for the same plan. However, issuance of the determination letter in response to an application made on a Form 5310 will be suspended pending the closure of the VCR submission.

.11 Special rules relating to SVP . (1) Under the VCR program, certain Operational Failures may be corrected under the Standardized VCR Procedure (“SVP”) rules in this section. SVP is available if the plan’s only identified Operational Failure or Failures are listed in Appendix A or Appendix B of this revenue procedure and the failures are corrected in accordance with an applicable correction method set forth in Appendix A or Appendix B. Appropriate correction must be made for any Qualification Failure that results from the application of an SVP correction. The Plan Sponsor must request an SVP compliance statement and pay the reduced compliance fee set forth in section 13.04.

(2) The correction methods set forth in Appendix A and Appendix B are strictly construed and are the only acceptable correction methods for failures corrected under SVP. If the Plan Sponsor wishes to modify a correction method provided in Appendix A or Appendix B or to propose another method, the Plan Sponsor may not use SVP, but may request a compliance statement under the regular VCR procedures.

(3) SVP is not available if the Plan Sponsor has identified more than two SVP failures in a single SVP request. If there are one or two failures that can be corrected under SVP and other failures that cannot be corrected under SVP, SVP is not available. The Service reserves the right to shift requests for consideration under SVP into the regular VCR program if the Plan Sponsor submits a second SVP request with respect to the same plan while the first SVP request is being con

sidered or during the 12 months after the first SVP compliance statement is issued. Both SVP requests may be shifted into the regular VCR program if the first SVP request is still being considered.

(4) The Service will review an SVP request within 120 days of the date the submission is received and determined to be complete. If the Service determines that the request is acceptable, the Service will issue a compliance statement on the Plan Sponsor’s proposed correction.

.12 General description of compliance statement. Under the VCR program, a Plan Sponsor receives a compliance statement from the Service. The compliance statement addresses the failures identified, the terms of correction, and any revision of administrative procedures, and provides that the Service will not treat the plan as disqualified on account of the Operational Failures described in the compliance statement. In addition, the time period within which proposed corrections and changes in administrative procedures must be implemented are set forth in the compliance statement. The compliance statement is conditioned on the accuracy and acceptability of any calculations or other material submitted in connection with the request.

.13 Compliance statement conditioned upon timely correction . The compliance statement is conditioned upon the implementation of the specific corrections and administrative changes set forth in the compliance statement within 150 days of the date of the compliance statement. Any request for an extension of this time period must be made in advance and in writing and must be approved by the Service.

.15 Acknowledgement letter . Within 30 calendar days after the compliance statement is issued, a Plan Sponsor that wishes to agree to the terms of the compliance statement must send a signed acknowledgement letter to the Service,

.14 Compliance statement for new plans conditioned upon timely amend- ment . Reliance on any compliance statement issued for a plan initially adopted or effective after December 7, 1994, other than an adoption of a master or prototype or regional prototype plan, is conditioned upon the plan being timely submitted for a determination letter within the plan’s remedial amendment period under § 401(b).

agreeing to the terms of the compliance statement. If the Plan Sponsor does not send the Service a signed acknowledgement letter within 30 calendar days, the plan may be referred to Employee Plans Examinations for examination consideration. Once the compliance statement has been issued (based on the information provided), the Plan Sponsor cannot request a modification of the compliance terms except by a new request for a compliance statement. However, if the requested modification is minor and is postmarked no later than 30 days after the compliance statement is issued, the VCR compliance fee for the modification will be the lesser of the original compliance fee or $1,250.

.16 Verification . Once the compliance statement has been issued, the Service may require verification that the corrections have been made and that any plan administrative procedures required by the statement have been implemented. This verification does not constitute an examination of the books and records of the employer or the plan (within the meaning of § 7605(b)). If the Service determines that the Plan Sponsor did not implement the corrections and procedures within the stated time period, the Service may consider the issues in an examination.