SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction . The sanction under Audit CAP is a negotiated

February 12, 2001 610 2001–7 I.R.B.

percentage of the Maximum Payment Amount. For 403(b) Plans and SEPs, the sanction is a negotiated percentage of the Total Sanction Amount. Sanctions will not be excessive and will bear a reasonable relationship to the nature, extent, and severity of the failures, based on the factors below.

.02 Factors considered . Factors include: (1) the steps taken by the Plan Sponsor to ensure that the plan either had no failures or corrected them through SCP or VCP, including the extent to which correction had progressed before the examination was initiated, (2) the amount of the fee the Plan Sponsor would have paid under section 12 for correcting the failures, (3) the number and type of employees affected by the failure, (4) the number of nonhighly compensated employees who would be adversely affected if the plan were not treated as qualified or as satisfying the requirements of § 403(b) or § 408(k), (5) whether the failure is a failure to satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b), either directly or through § 403(b)(12), (6) the period over which the failure occurred (for example, the time that has elapsed since the end of the applicable remedial amendment period under § 401(b) for a Plan Document Failure), and (7) the reason for the failure (for example, data errors such as errors in transcription of data, the transposition of numbers, or minor arithmetic errors). Factors relating only to Qualified Plans also include: (1) whether the plan is the subject of a Favorable Letter, (2) whether the plan has both Operational and other failures, and (3) the extent to which the plan has accepted Transferred Assets, and the extent to which failures relate to Transferred Assets and occurred before the transfer. Additional factors relating only to 403(b) Plans include: (1) whether the plan has a combination of Operational, Demographic, or Employer Eligibility Failures, (2) the extent to which the failure relates to Excess Amounts, and (3) whether the failure is solely an Employer Eligibility Failure.

.03 Transferred Assets . If the examination involves a plan with Transferred Assets and the Service determines that the failures did not occur after the end of the second plan year that begins after the cor

porate merger, acquisition, or other similar employer transaction occurred, the sanction under Audit CAP will not exceed the sanction that would apply if the Transferred Assets were maintained as a separate plan.