SECTION 3. EARNINGS

ADJUSTMENT METHODS AND EXAMPLES

.01 Earnings Adjustment Methods . (1) In general. (a) Under section 6.02(5)(a), whenever the appropriate correction method for an Operational Failure in a defined contribution plan includes a corrective contribution or allocation that increases one or more employees’ account balances (now or in the future), the contribution or allocation is adjusted for earnings and forfeitures. This section 3 provides earnings adjustment methods (but not forfeiture adjustment methods) that may be used by an employer to adjust a corrective contribution or allocation for earnings in a defined contribution plan. Consequently, these earnings adjustment methods may be used to determine the earnings adjustments for corrective contributions or allocations made under the correction methods in section 2 and under the SVP correction methods in Appendix A. If an earnings adjustment method in this section 3 is used to adjust a corrective contribution or allocation, that adjustment is treated as satisfying the earnings adjustment requirement of section 6.02(5)(a). Other earnings adjustment methods, different from those illustrated in this section 3, may also be appropriate for adjusting corrective contributions or allocations to reflect earnings.

(b) Under the earnings adjustment methods of this section 3, a corrective contribution or allocation that increases an employee’s account balance is adjusted to reflect an “earnings amount” that is based on the earnings rate(s) (determined under section 3.01(3)) for the period of the failure (determined under section 3.01(2)). The earnings amount is allocated in accordance with section 3.01(4).

(c) The rule in section 6.02(6)(a) permitting reasonable estimates in certain circumstances applies for purposes of this section 3. For this purpose, a determination of

earnings made in accordance with the rules of administrative convenience set forth in this section 3 is treated as a precise determination of earnings. Thus, if the probable difference between an approximate determination of earnings and a determination of earnings under this section 3 is insignificant and the administrative cost of a precise determination would significantly exceed the probable difference, reasonable estimates may be used in calculating the appropriate earnings.

(d) This section 3 does not apply to corrective distributions or corrective reductions in account balances. Thus, for example, while this section 3 applies in increasing the account balance of an improperly excluded employee to correct the exclusion of the employee under the reallocation correction method described in section 2.02(2)(a)(iii)(B), this section 3 does not apply in reducing the account balances of other employees under the reallocation correction method. (See section 2.02(2)(a)(iii)(C) for rules that apply to the earnings adjustments for such reductions.) In addition, this section 3 does not apply in determining earnings adjustments under the one-to-one correction method described in section 2.01(1)(b)(iii).

(2) Period of the Failure. (a) General Rule. For purposes of this section 3, the “period of the failure” is the period from the date that the failure began through the date of correction. For example, in the case of an improper forfeiture of an employee’s account balance, the beginning of the period of the failure is the date as of which the account balance was improperly reduced.

(b) Rules for Beginning Date for Exclusion of Eligible Employees from Plan. (i) General Rule. In the case of an exclusion of an eligible employee from a plan contribution, the beginning of the period of the failure is the date on which contributions of the same type (e.g., elective deferrals, matching contributions, or discretionary nonelective employer contributions) were made for other employees for the year of the failure. In the case of an exclusion of an eligible employee from an allocation of a forfeiture, the beginning of the period of the failure is the date on which forfeitures were allocated to other employees for the year of the failure.

(ii) Exclusion from a 401(k) or (m) Plan. For administrative convenience, for

February 7, 2000 546 2000–6 I.R.B.

be assumed to be the actual earnings rate for the plan’s investments in that fund during that valuation period. For example, the earnings rate may be determined without regard to any special investment provisions that vary according to the size of the fund. Further, the earnings rate applicable to the corrective contribution or allocation for a portion of a valuation period may be a pro rata portion of the earnings rate for the entire valuation period, unless the application of this rule would result in either a significant understatement or overstatement of the actual earnings during that portion of the valuation period.

(4) Allocation Methods. (a) In General. For purposes of this section 3, the earnings amount generally may be allocated in accordance with any of the methods set forth in this paragraph (4). The methods under paragraph (4)(c), (d), and (e) are intended to be particularly helpful where corrective contributions are made at dates between the plan’s valuation dates.

(b) Plan Allocation Method. Under the plan allocation method, the earnings amount is allocated to account balances under the plan in accordance with the plan’s method for allocating earnings as if the failure had not occurred. (See Example 22.)

(c) Specific Employee Allocation Method. Under the specific employee allocation method, the entire earnings amount is allocated solely to the account balance of the employee on whose behalf the corrective contribution or allocation is made (regardless of whether the plan’s allocation method would have allocated the earnings solely to that employee). In determining the allocation of plan earnings for the valuation period during which the corrective contribution or allocation is made, the corrective contribution or allocation (including the earnings amount) is treated in the same manner as any other contribution under the plan on behalf of the employee during that valuation period. Alternatively, where the plan’s allocation

method does not allocate plan earnings for a valuation period to a contribution made during that valuation period, plan earnings for the valuation period during which the corrective contribution or allocation is made may be allocated as if that employee’s account balance had been increased as of the last day of the prior valuation period by the corrective contribution or allocation, including only that portion of the earnings amount attributable to earnings through the last day of the prior valuation period. The employee’s account balance is then further increased as of the last day of the valuation period during which the corrective contribution or allocation is made by that portion of the earnings amount attributable to earnings after the last day of the prior valuation period. (See Example 23.)

(d) Bifurcated Allocation Method. Under the bifurcated allocation method, the entire earnings amount for the valuation periods ending before the date the corrective contribution or allocation is made is allocated solely to the account balance of the employee on whose behalf the corrective contribution or allocation is made. The earnings amount for the valuation period during which the corrective contribution or allocation is made is allocated in accordance with the plan’s method for allocating other earnings for that valuation period in accordance with section 3.01(4)(b). (See Example 24.)

(e) Current Period Allocation Method. Under the current period allocation method, the portion of the earnings amount attributable to the valuation period during which the period of the failure begins (“first partial valuation period”) is allocated in the same manner as earnings for the valuation period during which the corrective contribution or allocation is made in accordance section 3.01(4)(b). The earnings for the subsequent full valuation periods ending before the beginning of the valuation period during which the corrective contribution or allocation is made are

allocated solely to the employee for whom the required contribution should have been made. The earnings amount for the valuation period during which the corrective contribution or allocation is made (“second partial valuation period”) is allocated in accordance with the plan’s method for allocating other earnings for that valuation period in accordance with section 3.01(4)(b). (See Example 25.)

.02 Examples. Example 22 : Employer L maintains a profit-sharing plan that provides only for nonelective contributions. The plan has a single investment fund. Under the plan, assets are valued annually (the last day of the plan year) and earnings for the year are allocated in proportion to account balances as of the last day of the prior year, after reduction for distributions during the current year but without regard to contributions received during the current year (the “prior year account balance”). Plan contributions for 1997 were made on March 31, 1998. On April 20, 2000 Employer L determines that an operational failure occurred for 1997 because Employee X was improperly excluded from the plan. Employer L decides to correct the failure by using the SVP correction method for the exclusion of an eligible employee from nonelective contributions in a profit-sharing plan. Under this method, Employer L determines that this failure is corrected by making a contribution on behalf of Employee X of $5,000 (adjusted for earnings). The earnings rate under the plan for 1998 was +20%. The earnings rate under the plan for 1999 was +10%. On May 15, 2000, when Employer L determines that a contribution to correct for the failure will be made on June 1, 2000, a reasonable estimate of the earnings rate under the plan from January 1, 2000 to June 1, 2000 is +12%. Earnings Adjustment on the Corrective Contribu- tion: The $5,000 corrective contribution on behalf of Employee X is adjusted to reflect an earnings amount based on the earnings rates for the period of the failure (March 31, 1998 through June 1, 2000) and the earnings amount is allocated using the plan allocation method. Employer L determines that a pro rata simplifying assumption may be used to determine the earnings rate for the period from March 31, 1998 to December 31, 1998, because that rate does not significantly understate or overstate the actual earnings for that period. Accordingly, Employer L determines that the earnings rate for that period is 15% (9/12 of the plan’s 20% earnings rate for the year). Thus, applicable earnings rates under the plan during the period of the failure are:

Time Periods Earnings Rate

3/31/98 - 12/31/98 (First Partial Valuation Period) +15%

1/1/99 - 12/31/99 +10%

1/1/00 - 6/1/00 (Second Partial Valuation Period) +12%

2000–6 I.R.B. 547 February 7, 2000

If the $5,000 corrective contribution had been contributed for Employee X on March 31, 1998, (1) earnings for 1998 would have been increased by the amount of the earnings on the additional $5,000 contribution from March 31, 1998 through December 31, 1998 and would have been allocated as 1998 earnings in proportion to the prior year (December 31, 1997) account balances, (2) Employee X’s account balance as of December 31, 1998 would have been increased by the additional $5,000 contribution, (3) earnings for 1999 would have been increased by the 1999 earnings on the additional $5,000 contribution (including 1998 earnings thereon) allocated in proportion to the prior year (December 31, 1998) account balances along with other 1999 earnings, and (4) earnings for 2000 would have been increased by the earnings on the additional $5,000 (including 1998 and 1999 earnings thereon) from January 1 to June 1, 2000 and

would be allocated in proportion to the prior year (December 31, 1999) account balances along with other 2000 earnings. Accordingly, the $5,000 corrective contribution is adjusted to reflect an earnings amount of $2,084 ($5,000[(1.15)(1.10)(1.12)–1]) and the earnings amount is allocated to the account balances under the plan allocation method as follows: (a) Each account balance that shared in the allocation of earnings for 1998 is increased, as of December 31, 1998, by its appropriate share of the earnings amount for 1998, $750 ($5,000(.15)). (b) Employee X’s account balance is increased, as of December 31, 1998, by $5,000. (c) The resulting December 31, 1998 account balances will share in the 1999 earnings, including the $575 for 1999 earnings included in the corrective contribution ($5,750(.10)), to determine the account balances as of December 31, 1999. However, each account balance

TABLE 1

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

other than Employee X’s account balance has already shared in the 1999 earnings, excluding the $575. Accordingly, Employee X’s account balance as of December 31, 1999 will include $500 of the 1999 portion of the earnings amount based on the $5,000 corrective contribution allocated to Employee X’s account balance as of December 31, 1998 ($5,000(.10)). Then each account balance that originally shared in the allocation of earnings for 1999 (i.e., excluding the $5,500 additions to Employee X’s account balance) is increased by its appropriate share of the remaining 1999 portion of the earnings amount, $75. (d) The resulting December 31, 1999 account balances (including the $5,500 additions to Employee X’s account balance) will share in the 2000 portion of the earnings amount based on the estimated January 1, 2000 to June 1, 2000 earnings included in the corrective contribution equal to $759 ($6,325(.12)). (See Table 1.)

1$5,000 x 15%

2$5,750($5,000 +750) x 10%

3$6,325($5,000 +750 +575) x 12%

4 After reduction for distributions during the year for which earning are being determined but without regard to contributions received during the year for which earnings are being determined.

Example 23 : The facts are the same as in Example 22. Earnings Adjustment on the Corrective Contribution : The earnings amount on the corrective contribution is the same as in Example 22, but the earnings amount is allocated using the specific employee allocation method. Thus, the entire earnings amount for all peri

ods through June 1, 2000 (i.e., $750 for March 31, 1998 to December 31, 1998, $575 for 1999, and $759 for January 1, 2000 to June 1, 2000) is allocated to Employee X. Accordingly, Employer L makes a contribution on June 1, 2000 to the plan of $7,084 ($5,000(1.15)(1.10)(1.12)). Employee X’s account balance as of December 31, 2000 is increased by

$7,084. Alternatively, Employee X’s account balance as of December 31, 1999 is increased by $6,325 ($5,000(1.15)(1.10)), which shares in the allocation of earnings for 2000, and Employee X’s account balance as of December 31, 2000 is increased by the remaining $759. (See Table 2.)

February 7, 2000 548 2000–6 I.R.B.

TABLE 2

CALCULATION AND ALLOCATION OF THE ADJUSTED CORRECTIVE AMOUNT FOR EARNINGS

1$5,000 x 15% 2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12%

Example 24 : The facts are the same as in Example 22. Earnings Adjustment on the Corrective Contribu- tion: The earnings amount on the corrective contribution is the same as in Example 22, but the earnings amount is allocated using the bifurcated allocation

method. Thus, the earnings for the first partial valuation period (March 31, 1998 to December 31, 1998) and the earnings for 1999 are allocated to Employee X. Accordingly, Employer L makes a contribution on June 1, 2000 to the plan of $7,084 ($5,000(1.15)(1.10)(1.12)). Employee X’s account balance as of December 31, 1999 is increased by

TABLE 3

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

$6,325 ($5,000(1.15)(1.10)); and the December 31, 1999 account balances of employees (including Employee X’s increased account balance) will share in estimated January 1, 2000 to June 1, 2000 earnings on the corrective contribution equal to $759 ($6,325(.12)). (See Table 3.)

1$5,000 x 15% 2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12% 4 After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year

Example 25 : The facts are the same as in Example 22. Earnings Adjustment on the Corrective Contribu- tion : The earnings amount on the corrective contribution is the same as in Example 22, but the earnings amount is allocated using the current period allocation method. Thus, the earnings for the first partial valuation period (March 31, 1998 to December 31, 1998) are allocated as 2000 earnings. Accordingly,

Employer L makes a contribution on June 1, 2000 to the plan of $7,084 ($5,000 (1.15)(1.10)(1.12)). Employee X’s account balance as of December 31, 1999 is increased by the sum of $5,500 ($5,000(1.10)) and the remaining 1999 earnings on the corrective contribution equal to $75 ($5,000(.15)(.10)). Further, both (1) the estimated March 31, 1998 to December 31, 1998 earnings on the corrective contribution equal to $750 ($5,000(.15)) and (2) the estimated January 1, 2000

to June 1, 2000 earnings on the corrective contribution equal to $759 ($6,325(.12)) are treated in the same manner as 2000 earnings by allocating these amounts to the December 31, 2000 account balances of employees in proportion to account balances as of December 31, 1999 (including Employee X’s increased account balance). (See Table 4.) Thus, Employee X is allocated the earnings for the full valuation period during the period of the failure.

2000–6 I.R.B. 549 February 7, 2000

TABLE 4

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

1$5,000 x 15% 2$5,750($5,000 +750) x 10% 3$6,325($5,000 +750 +575) x 12% 4 After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year for which earnings are being determined.

February 7, 2000 550 2000–6 I.R.B.

APPENDIX C

VCR/SVP/WALK-IN CAP/TVC CHECKLIST

IS YOUR SUBMISSION COMPLETE?

INSTRUCTIONS

The Service will be able to respond more quickly to your VCR, SVP, Walk-in CAP or TVC request if it is carefully prepared and complete. To ensure that your request is in order, use this checklist. Answer each question in the checklist by inserting yes, no, or N/A, as appropriate, in the blank next to the item. Sign and date the checklist (as taxpayer or authorized representative) and place it on top of your request.

You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request, substantive consideration of your submission will be deferred until a completed checklist is received.

TAXPAYER’S NAME

TAXPAYER’S I.D. NO.

PLAN NAME & NO.

ATTORNEY/P.O.A.

The following items relate to all submissions:

______ 1. Have you included a complete description of the failure(s) and the years in which the failure(s) occurred (including the years for which the statutory period has expired)? (See section 12.03(1) of Rev. Proc. 2000–16.) (Hereafter, all section references are to Rev. Proc. 2000–16.)

______ 2. Have you included an explanation of how and why the failure(s) arose, including a description of the administrative procedures for the plan in effect at the time the failure(s) occurred? (See section 12.03(2) and (3).)

______ 3. Have you included a detailed description of the method for correcting the failure(s) identified in your submission? This description must include, for example, the number of employees affected and the expected cost of correction (both of which may be approximated if the exact number cannot be determined at the time of the request), the years involved, and calculations or assumptions the Plan Sponsor used to determine the amounts needed for correction. In lieu of providing correction calculations with respect to each employee affected by a failure, you may submit calculations with respect to a representative sample of affected employees. However, the representative sample calculations must be sufficient to demonstrate each aspect of the correction method proposed. Note that each step of the correction method must be described in narrative form. (See section 12.03(4).)

______ 4. Have you described the earnings or interest methodology (indicating computation period and basis for determining earnings or interest rates) that will be used to calculate earnings or interest on any corrective contributions or distributions? (As a general rule, the interest rate (or rates) earned by the plan during the applicable period(s) should be used in determining the earnings for corrective contributions or distributions.) (See section 12.03(5).)

If you inserted “N/A” for item 4, enter explanation:

______ 5. Have you submitted specific calculations for each affected employee or a representative sample of affected employees? (See section 12.03(6).)

______ 6. Have you described the method that will be used to locate and notify former employees or, if there are no former employees affected by the failure(s), provided an affirmative statement to that effect? (See section 12.03(7).)

______ 7. Have you provided a description of the administrative measures that have been or will be implemented to

2000–6 I.R.B. 551 February 7, 2000

ensure that the same failure(s) do not recur? (See section 12.03(8).)

______ 8. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the plan is not currently under an Employee Plans examination? (See section 12.03(9).)

______ 9. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the Plan Sponsor is not under an Exempt Organizations examination? (See section 12.03(9).)

______ 10. If the plan is currently being considered in a determination letter application on a Form 5310, have you included a statement to that effect? (See section 12.03(10).)

______ 11. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable) relevant to the failure(s) and method(s) of correction? (See section 12.04(3).)

______ 12. Have you included a copy of the plan’s most recent Favorable Letter and/or the required applicable document(s)? (See section 12.04(4).)

______ 13. Have you included the appropriate voluntary compliance or correction fee? (See section 12.05.) ______ 14. Have you included the original signature of the sponsor or the sponsor’s representative? (See section 12.06.) ______ 15. Have you included a Power of Attorney (Form 2848)? Note: (representation under the VCR/SVP, Walk-in CAP and TVC is limited to attorneys, certified public accountants, enrolled agents, and enrolled actuaries; unenrolled return preparers are not eligible to act as representatives under the VCR or TVC program). (See section 12.07.) ______ 16. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the Plan Sponsor? (See section 12.08.) ______ 17. Have you designated your submission as a VCR, SVP, Walk-in CAP, or TVC submission, as appropriate? (See section 12.10.)

The following items relate only to submissions under VCR (including SVP): ______ 18. Have you included a copy of the first page, the page containing employee census information (currently line 7f of the 1998 Form 5500), and the information relating to plan assets (currently line 31f of the 1998 Form 5500) of the most recently filed Form 5500 series return? Note: If a Form 5500 is not applicable, insert N/A and furnish the name of the plan, and the census information required of Form 5500 series filers. (See section 12.04(1).) ______ 19. Have you proposed a time period of correction that is limited to 150 days from the date the compliance statement is issued? (See section 10.13.)

The following items relate only to submissions under SVP: ______ 20. Have you included a statement identifying your request as an SVP request? (See section 12.03(11).) ______ 21. Are each of the failures you have identified eligible for correction under SVP? (See Appendix A and Appendix B.) ______ 22. Have you identified no more than two SVP failures? (If more than two failures were identified, SVP is not available, but you may make a submission under VCR.) (See section 10.11(3).) ______ 23. Have you proposed to correct the failure(s) identified in your request using the permitted correction method(s) set forth in Appendix A or Appendix B? (See Appendix A and Appendix B.)

The following item relates only to submissions under Walk-in CAP: ______ 24. Have you included a copy of the most recently filed Form 5500? (See section 12.04(1).) ______ 25. Have you submitted an application for a determination letter? (See section 11.01(4).)

Signature Date

Title or Authority

Typed or printed name of person signing checklist

February 7, 2000 552 2000–6 I.R.B.

23, Rev. Proc. 93–9, 1993–1 C.B. 474, Rev. Proc. 93–10, 1993–1 C.B. 476, Rev. Proc. 93–12, 1993–1 C.B. 479, Rev. Proc. 94–13, 1994–1 C.B. 566, and Rev. Proc. 95–12, 1995–1 C.B. 508, sets forth the procedures of the Service on the issuance of opinion letters regarding the acceptability of the form of M&P plans.

.02 Rev. Proc. 89–13, 1989–1 C.B. 801, as modified by Rev. Proc. 90–21, Rev. Proc. 91–66, Rev. Proc. 92–41, Rev. Proc. 93–9, Rev. Proc. 93–10, Rev. Proc. 93–12, Rev. Proc. 94–13, Rev. Proc. 95–12, and Rev. Proc. 95–42, 1995–2 C.B. 411, sets forth the procedures of the Service on the issuance of notification letters regarding the acceptability of the form of regional prototype plans.

.03 Rev. Proc. 93–10 modified both Rev. Proc. 89–9 and Rev. Proc. 89–13 to provide for nonstandardized safe harbor plans.

.04 Rev. Proc. 97–41, 1997–2 C.B. 489, as modified by Rev. Proc. 98–14, 1998–4 I.R.B. 22, and Rev. Proc. 99–23, 1999–16 I.R.B. 5, provided a remedial amendment period under § 401(b) for amending plans for certain changes in the plan qualification requirements made by GUST. The GUST remedial amendment period ends on the last day of the first plan year beginning on or after January 1, 2000. .05 Rev. Proc. 98–14, as modified by Rev. Proc. 98–53, 1998–53 I.R.B. 9, allowed employers, sponsors of M&P and regional prototype plans, and volume submitter practitioners to apply for determination, opinion, notification, and advisory letters that take into account most of the recent changes in law affecting plan qualification, but excluding changes under SBJPA that are effective after 1998 (that is, the safe harbors in § 401(k)(12) and § 401(m)(11) for satisfying the nondiscrimination requirements of §§ 401(k) and 401(m), and the repeal of the combined plan limitations under § 415(e)).

.06 Announcement 99–50, 1999–19 I.R.B. 1, announced that the Service was temporarily discontinuing acceptance of applications for opinion and notification letters for M&P and regional prototype plans until further notice.

.07 Rev. Proc. 2000–6, 2000–1 I.R.B. 187, contains the Service’s general procedures for employee plan determination letter requests and requests for advisory letters

26 CFR 601.201: Rulings and determination letters. (Also Part I, Sections 401, 403 and 501; 1.401–1, 1.403(a)–1, 1.501(a)–1.)

Rev. Proc. 2000–20

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