SECTION 4. PROGRAM

ELIGIBILITY

.01 Programs for Qualified Plans and 403(b) Plans . (1) SCP . Qualified Plans and 403(b) Plans are eligible for SCP. SCP is available only for Operational Failures.

(2) VCP . Qualified Plans and 403(b) Plans are eligible for VCP. VCP provides general procedures for correction of all Qualification Failures: Operational, Plan Document, Demographic, and Employer Eligibility.

(3) Audit CAP . Audit CAP is available for correction of all failures found on examination that have not been corrected in accordance with SCP or VCP.

.02 Eligibility for other arrangements . (1) A SEP that is maintained under a Plan Document is eligible for SCP with respect to insignificant failures and is eligible for VCP (under the special VCSEP procedure). A SEP is also eligible for Audit CAP. For purposes of EPCRS, a failure to satisfy § 408(k) is treated like the corresponding Qualification Failure. A failure to satisfy § 408(k) includes a failure to satisfy the 50%-eligible-employees election requirement of § 408(k)(6)(A)(ii) and a failure to satisfy the 25-employee limit of § 408(k)(6)(B).

(2) The Service may extend EPCRS to other arrangements.

.03 Effect of examination . If the plan or Plan Sponsor is Under Examination, VCP is not available. However, while the plan or Plan Sponsor is Under Examination, insignificant Operational Failures can be corrected under SCP and, if correction has been substantially completed before the plan or Plan Sponsor is Under Examination, significant Operational Failures can be corrected under SCP.

.04 Favorable Letter requirement . VCO and the provisions of SCP relating to significant Operational Failures (see section 9) are available for a Qualified Plan only if the plan is the subject of a Favorable Letter.

.05 Established practices and proce- dures . In order to be eligible for SCP, 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 applicable Code requirements. For example, the plan administrator of a Qualified Plan that may be topheavy under § 416 may include in its plan operating manual a specific annual step to determine whether the plan is top-heavy and, if so, to ensure that the minimum contribution requirements of the topheavy rules are satisfied. A plan document alone does not constitute evidence of established procedures. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and

February 12, 2001 594 2001–7 I.R.B.

an Operational Failure must have occurred through an oversight or mistake in applying them, because of an inadequacy in the procedures, or because the failure relates to Transferred Assets and did not occur after the end of the second plan year that begins after the corporate merger, acquisition, or other similar transaction.

.06 Correction by plan amendment . (1) Availability of correction by plan amend- ment in VCP general procedures . A Plan Sponsor may use VCP for a Qualified Plan 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). (2) Certain correction by plan amendment permitted in SCP and VCO . A Plan Sponsor may use SCP or VCO for a Qualified Plan to correct an Operational Failure by a plan amendment to conform the terms of the plan to the plan’s prior operations only to correct Operational Failures listed in section 2.07 of Appendix B. These failures must be corrected in accordance with the correction methods set forth in section 2.07 of Appendix B. The amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6). SCP and VCO are not otherwise available for a Plan Sponsor to correct an Operational Failure by a plan amendment. 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 SCP or VCO by retroactively amending the plan to provide for the loans. However, if a Plan Sponsor corrects an Operational Failure in accordance with SCP or VCO, it may amend the plan to the extent necessary to reflect the corrective action. For example, if the plan failed to satisfy the average deferral percentage (“ADP”) test required under § 401(k)(3) and the Plan Sponsor 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.

.07 Submission for a determination letter . In a case in which correction of a Qualification Failure includes correction of a Plan Document Failure or correction of an Operational Failure by plan amendment, as permitted under section 4.06, other than adoption of an amendment designated by the Service as a model amendment or standardized or prototype plan, the amendment must be submitted to the Service for approval using the appropriate application form (i.e., the Form 5300 series or, if permitted, Form 6406) to ensure that the amendment satisfies applicable qualification requirements.

.08 Availability of correction of Employer Eligibility Failure . A Plan Sponsor may use VCP general procedures, VCT, and VCSEP to correct an Employer Eligibility Failure. However, under sections 4.01, 4.02, and 10, SCP, VCO, and VCGroup are not available for a Plan Sponsor to correct an Employer Eligibility Failure.

.09 Egregious failures . SCP, VCO, VCGroup, and VCSEP are not available to correct 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. VCP is available to correct egregious failures; however, these failures are subject to the fees described in sections 12.01(4) and 12.05(6). .10 Diversion or misuse of plan assets . SCP, VCP, and Audit CAP are not available to correct failures relating to the diversion or misuse of plan assets.

The following definitions apply for purposes of this revenue procedure:

.01 Definitions for Qualified Plans . The definitions in this section 5.01 apply to Qualified Plans.

(1) Qualified Plan . The term “Qualified Plan” means a plan intended to satisfy the requirements of § 401(a) or

§ 403(a).

(2) Qualification Failure . The term “Qualification Failure” means any failure that adversely affects the qualification of a plan. There are four types of Qualification Failures: (a) Plan Document Failures, (b) Operational Failures, (c) Demographic Failures, and (d) Employer Eligibility Failures.

(a) Plan Document Failure . The term “Plan Document Failure” means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or § 403(a). Thus, for example, the failure of a plan to be amended to reflect a new qualification requirement within the plan’s applicable remedial amendment period under § 401(b) is a Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes any Qualification Failure that is a violation of the requirements of § 401(a) or § 403(a) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.

(b) Operational Failure . The term “Operational Failure” means a Qualification Failure (other than an Employer Eligibility Failure) that arises solely from the failure to follow plan provisions. A failure to follow the terms of the plan providing for the satisfaction of the requirements of § 401(k) and § 401(m) is considered to be an Operational Failure. A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively pursuant to § 401(b) or another statutory provision to reflect the plan’s operations. However, if within an applicable remedial amendment period under § 401(b), a plan has been properly amended for statutory or regulatory changes and, on or after the later of the date the amendment is effective or is adopted, the amended provisions are not followed, then the plan is considered to have an Operational Failure.

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

failed to satisfy the average deferral per- (c) Demographic Failure . The centage (“ADP”) test required under term “Demographic Failure” means a fail SECTION 5. DEFINITIONS

§ 401(k)(3) and the Plan Sponsor must ure to satisfy the requirements of make qualified nonelective contributions The following definitions apply for § 401(a)(4), § 401(a)(26), or § 410(b) that not already provided for under the plan, purposes of this revenue procedure: is not an Operational Failure or an the plan may be amended to provide for .01 Definitions for Qualified Plans . Employer Eligibility Failure. The correcqualified nonelective contributions. The The definitions in this section 5.01 apply tion of a Demographic Failure generally issuance of a compliance statement does to Qualified Plans. requires a corrective amendment to the not constitute a determination as to the (1) Qualified Plan . The term plan adding more benefits or increasing effect of any plan amendment on the qual- “Qualified Plan” means a plan intended to existing benefits (cf., § 1.401(a) ification of the plan. satisfy the requirements of § 401(a) or (4)–11(g)).

2001–7 I.R.B. 595 February 12, 2001