SECTION 5. DEFINITIONS — Internal Revenue Bulletin 2003-25

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. In addition, if a plan has not been timely or properly amended during an applicable remedial amendment period for adopting good faith amendments for statutory changes as provided by the Service, but the plan is operated as though the good faith amendments were adopted, then for purposes of EPCRS, the plan is considered to have 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

use SCP 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 is 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 by retroactively amending the plan to provide for the loans. However, if a Plan Sponsor corrects an Operational Failure in accordance with SCP, 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.

.06 Submission for a determination let- ter . In any case in which correction of a Qualification Failure includes correction of a Plan Document Failure or Demographic Failure, or an Operational Failure by plan amendment, as permitted under section 4.05, other than the adoption of an amendment designated by the Service as a model amendment or the adoption of a prototype or volume submitter plan for which the Plan Sponsor has reliance on the plan’s opinion or advisory letter as provided in Rev. Proc. 2003–6, 2003–1 I.R.B. 191, 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. In the case of a plan amendment under SCP, as permitted under section 4.05(2), the determination let

ter application must be submitted before the end of the SCP correction period in section 9.02.

.07 Availability of correction of Em- ployer Eligibility Failure . SCP and Group Submissions under VCP are not available for a Plan Sponsor to correct an Employer Eligibility Failure.

.08 Egregious failures . SCP is not available to correct Operational 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 section 12.06.

.09 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.

.10 EGTRRA nonamenders . EPCRS is available for correction of Qualified Plans that have failed to adopt good faith plan amendments for the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107–16 (EGTRRA) within the period described in Notice 2001–42, 2001–2 C.B. 70. In the case of a terminated Qualified Plan, the VCP submission must include the EGTRRA amendment(s) and Form 5310. The Service will process the VCP submission and, when approved, issue a compliance statement and determination letter on the terminated plan. In the case of all other EGTRRA good faith nonamenders, a Plan Sponsor may submit under VCP to receive a compliance statement. The Plan Sponsor must adopt EGTRRA good faith amendment(s) within the time period set forth in the compliance statement. If adopted, the plan will not be treated as failing to adopt the EGTRRA good faith amendment(s) in a timely manner. Because the Service’s determination letter program has not opened for EGTRRA amendments, a determination letter will not be issued as part of the VCP submission. In addition, Plan Sponsors may have to amend the plan further within the EGTRRA remedial amendment period as provided in Notice 2001–42. Failure to amend, if required, will result in a failure requiring a subsequent VCP submission.

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bus Budget and Reconciliation Act of 1993 (“OBRA ’93”) and the Plan Sponsor has submitted an application for a determination letter on GUST by September 3, 2002, in accordance with the procedures set forth in Rev. Proc. 2002–35, 2002–24 I.R.B. 1187. (f) The plan is initially adopted or effective after February 28, 2002, and the Plan Sponsor timely submits an application for a determination letter or they adopt an approved master or prototype plan or volume submitter plan within the plan’s remedial amendment period under § 401(b).

(g) The plan is terminated prior to the expiration of the applicable GUST remedial amendment period under § 401(b) and the plan was amended to reflect the provisions of GUST.

(5) Maximum Payment Amount . The term “Maximum Payment Amount” means a monetary amount that is approximately equal to the tax the Service could collect upon plan disqualification and is the sum for the open taxable years of the:

(a) tax on the trust (Form 1041), (b) additional income tax resulting from the loss of employer deductions for plan contributions (and any interest or penalties applicable to the Plan Sponsor’s return), and

(6) Overpayment . The term “Overpayment” means a distribution to an employee or beneficiary that exceeds the employee’s or beneficiary’s benefit under the terms of the plan, including a distribution that results from a failure to comply with plan terms that implement § 401(a)(17), § 401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), § 411(a)(3)(G), or § 415. An Overpayment does not include a distribution of any Excess Amount described in section 5.01(3)(b) through (f).

(7) Plan Sponsor . The term “Plan Sponsor” means the employer that establishes or maintains a qualified retirement plan for its employees.

(8) Transferred Assets . The term “Transferred Assets” means plan assets that were received, in connection with a corporate merger, acquisition or other similar employer transaction, by the plan in a transfer (including a merger or consolidation of

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.

(c) Demographic Failure . The term “Demographic Failure” means a failure to satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b) that is not an Operational Failure or an Employer Eligibility Failure. The correction of a Demographic Failure generally requires a corrective amendment to the plan adding more benefits or increasing existing benefits (cf., § 1.401(a)(4)–11(g)).

(d) Employer Eligibility Failure . The term “Employer Eligibility Failure” means the adoption of a plan intended to satisfy the requirements of § 401(a) by an employer that fails to meet the employer eligibility requirements to establish a § 401(k) plan. An Employer Eligibility Failure is not a Plan Document, Operational, or Demographic Failure.

(3) Excess Amount . The term “Excess Amount” means (a) an Overpayment, (b) an elective deferral or employee after-tax contribution returned to satisfy § 415, (c) an elective deferral in excess of the limitation of § 402(g) that is distributed, (d) an excess contribution or excess aggregate contribution that is distributed to satisfy § 401(k) or § 401(m), (e) an elective deferral that is distributed to satisfy the limitation of § 401(a)(17), or (f) any similar amount that is required to be distributed in order to maintain plan qualification.

(4) Favorable Letter . The term “Favorable Letter” means, in the case of a Qualified Plan, a current favorable determination letter for an individually designed plan (including a volume submitter plan that is not identical to an approved volume submitter plan), a current favorable opinion letter for a Plan Sponsor that has adopted a master or prototype plan, (standardized or nonstandardized), or a current favorable advisory letter and certification that the Plan Sponsor has adopted a plan that is identical to an approved volume submitter plan.

A plan has a current favorable determination letter, opinion letter, or advisory letter if (a), (b), (c), (d), (e), (f), or (g) below is satisfied:

(a) The plan has a favorable determination letter, opinion letter, or advisory letter/certification that considers GUST (GUST is an acronym for the Uruguay Round Agreements Act (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the Small Business Job Protection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA ’97), the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA ’98), and the Community Renewal Tax Relief Act of 2000 (CRA).)

(b) The plan has a favorable determination letter that considers GUST, excluding CRA, and the Plan Sponsor has by the latest of (i) the end of the first plan year beginning on or after January 1, 2002, (ii) the end of the plan’s GUST remedial amendment period, or (iii) June 30, 2003, amended the plan to comply with CRA.

(c) The plan either has a favorable determination letter, opinion letter, or notification letter for a regional prototype plan that considers the Tax Reform Act of 1986 (“TRA ’86”) or was initially adopted or effective after December 7, 1994, and the Plan Sponsor has by the later of February 28, 2002, or the last day of the first plan year beginning on or after January 1, 2001, either, (i) submitted an application for a determination letter on GUST, or, (ii) has adopted or certified that it intends to adopt a master or prototype plan or volume submitter plan, that was submitted for a GUST opinion letter or advisory letter by December 31, 2000, and does adopt a master or prototype plan or volume submitter plan in accordance with the procedures set forth in Rev. Proc. 2002–73, 2002–49 I.R.B. 932.

(d) The plan has a favorable determination letter that considers the Tax Reform Act of 1986 (“TRA ’86”) or was initially adopted or effective after December 7, 1994, and the plan is a plan directly affected by the September 11, 2001, terrorist attack on the United States, (see Rev. Proc. 2001–55, 2001–2 C.B. 552) and the Plan Sponsor has by June 30, 2002, submitted an application for a determination letter request for GUST.

(e) The plan was timely amended for TRA ’86, the Unemployment Compensation Act of 1992 (“UCA”), and the Omni

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(2) A plan that is under an Employee Plans examination includes any plan for which the Plan Sponsor, or a representative, has received verbal or written notification from Employee Plans of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination, and also includes any plan that has been under an Employee Plans examination and is now in Appeals or in litigation for issues raised in an Employee Plans examination. A plan is considered to be Under Examination if it is aggregated for purposes of satisfying the nondiscrimination requirements of § 401(a)(4), the minimum participation requirements of § 401(a)(26), the minimum coverage requirements of § 410(b), or the requirements of § 403(b)(12), with a plan(s) that is Under Examination. In addition, a plan is considered to be Under Examination with respect to a failure of a qualification requirement (other than those described in the preceding sentence) if the plan is aggregated with another plan for purposes of satisfying that qualification requirement (for example, § 402(g), § 415, or § 416) and that other plan is Under Examination. For example, assume Plan A has a § 415 failure, Plan A is aggregated with Plan B only for purposes of § 415, and Plan B is Under Examination. In this case, Plan A is considered to be Under Examination with respect to the § 415 failure. However, if Plan A has a failure relating to the spousal consent rules under § 417 or the vesting rules of § 411, Plan A is not considered to be Under Examination with respect to the § 417 or § 411 failure. For purposes of this revenue procedure, the term aggregation does not include consideration of benefits provided by various plans for purposes of the average benefits test set forth in § 410(b)(2).

(3) An Employee Plans examination also includes a case in which a Plan Sponsor has submitted any Form 5300 series form and the Employee Plans agent notifies the Plan Sponsor, or a representative, of possible Qualification Failures, whether or not the Plan Sponsor is officially notified of an “examination.” This would include a case where, for example, a Plan Sponsor has applied for a determination letter on plan termination, and an Employee Plans agent notifies the Plan Sponsor that there are partial termination concerns. In addition, if, during the review process, the agent requests additional information that indicates the ex

plan assets) under § 414(l) from a plan sponsored by an employer that was not a member of the same controlled group as the Plan Sponsor prior to the corporate merger, acquisition, or other similar employer transaction. If a transfer of plan assets related to the same employer transaction is accomplished through several transfers, then the date of the transfer is the date of the first transfer.

.02 Definitions for 403(b) Plans . The definitions in this section 5.02 apply to 403(b) Plans. (1) 403(b) Plan . The term “403(b) Plan” means a plan or program intended to satisfy the requirements of § 403(b).

(2) 403(b) Failure . A 403(b) Failure is any Operational, Demographic, or Employer Eligibility Failure as defined below.

(a) Operational Failure . The term “Operational Failure” means any of the following:

(i) A failure to satisfy the requirements of § 403(b)(12)(A)(ii) (relating to the availability of salary reduction contributions);

(ii) A failure to satisfy the requirements of § 401(m) (as applied to 403(b) Plans pursuant to § 403(b)(12)(A)(i));

(iii) A failure to satisfy the requirements of § 401(a)(17) (as applied to 403(b) Plans pursuant to § 403(b)(12)(A)(i));

(iv) A failure to satisfy the distribution restrictions of § 403(b)(7) or § 403(b)(11);

(v) A failure to satisfy the incidental death benefit rules of § 403(b)(10);

(vi) A failure to pay minimum required distributions under § 403(b)(10);

(vii) A failure to give employees the right to elect a direct rollover under § 403(b)(10), including the failure to give meaningful notice of such right;

(viii) A failure of the annuity contract or custodial agreement to provide participants with a right to elect a direct rollover under §§ 403(b)(10) and 401(a)(31);

(ix) A failure to satisfy the limit on elective deferrals under § 403(b)(1)(E);

(x) A failure of the annuity contract or custodial agreement to provide the limit on elective deferrals under §§ 403(b)(1)(E) and 401(a)(30); (xi) A failure involving contributions or allocations of Excess Amounts; or

(xii) Any other failure to satisfy applicable requirements under § 403(b) that (A) results in the loss of § 403(b) status for the

plan or the loss of § 403(b) status for one or more custodial account(s) or annuity contract(s) under the plan and (B) is not a Demographic Failure, an Employer Eligibility Failure, or a failure related to contributions on behalf of individuals who are not employees of the employer.

(b) Demographic Failure . The term “Demographic Failure” means a failure to satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b) (as applied to 403(b) Plans pursuant to § 403(b)(12) (A)(i)).

(i) The adoption of a plan intended to satisfy the requirements of § 403(b) by an employer that is not a tax-exempt organization described in § 501(c)(3) or a public educational organization described in § 170(b)(1)(A)(ii);

(ii) A failure to satisfy the nontransferability requirement of § 401(g);

(iii) A failure to initially establish or maintain a custodial account as required by § 403(b)(7); or

(iv) A failure to purchase (initially or subsequently) either an annuity contract from an insurance company (unless grandfathered under Rev. Rul. 82–102, 1982–1 C.B. 62) or a custodial account from a regulated investment company utilizing a bank or an approved non-bank trustee/custodian.

(3) Excess Amount . The term “Excess Amount” means any contributions or allocations that are in excess of the limits under § 415 for the year (and for years prior to 1/1/02, the § 403(b)(2) exclusion allowance limit for the year).

(4) Plan Sponsor . The term “Plan Sponsor” means the employer that offers a 403(b) Plan to its employees. (5) Total Sanction Amount . The term “Total Sanction Amount” means a monetary amount that is approximately equal to the income tax the Service could collect as a result of the failure.

.03 Under Examination . (1) The term “Under Examination” means: (a) a plan that is under an Employee Plans examination (that is, an examination of a Form 5500 series or other Employee Plans examination), or (b) a Plan Sponsor that is under an Exempt Organizations examination (that is, an examination of a Form 990 series or other Exempt Organizations examination).

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rection of a failure to satisfy the requirements of § 401(k)(3), § 401(m)(2), or § 401(m)(9) (relating to nondiscrimination), solely by distributing excess amounts to highly compensated employees would not be the typical means of correcting such a failure.

(c) The correction method should keep plan assets in the plan, except to the extent the Code, regulations, or other guidance of general applicability provide for correction by distribution to participants or beneficiaries or return of assets to the employer or Plan Sponsor. For example, if an excess allocation (not in excess of the § 415 limits) made under a Qualified Plan was made for a participant under a plan (other than a cash or deferred arrangement), the excess should be reallocated to other participants or, depending on the facts and circumstances, used to reduce future employer contributions.

(d) The correction method should not violate another applicable specific requirement of § 401(a) or § 403(b) (for example, § 401(a)(4), § 411(d)(6), or § 403(b)(12), as applicable), § 408(k) for SEPs, or § 408(p) for SIMPLE IRA Plans. If an additional failure is created as a result of the use of a correction method in this revenue procedure, then that failure also must be corrected in conjunction with the use of that correction method and in accordance with the requirements of this revenue procedure.

(3) Consistency Requirement . Generally, where more than one correction method is available to correct a type of Operational Failure for a plan year (or where there are alternative ways to apply a correction method), the correction method (or one of the alternative ways to apply the correction method) should be applied consistently in correcting all Operational Failures of that type for that plan year. Similarly, earnings adjustment methods generally should be applied consistently with respect to corrective contributions or allocations for a particular type of Operational Failure for a plan year. In the case of a Group Submission, the consistency requirement applies on a plan by plan basis.

(4) Principles regarding corrective al- locations and corrective distributions . The following principles apply where an appropriate correction method includes the use of corrective allocations or corrective distributions:

istence of a Qualification Failure(s) not previously identified by the Plan Sponsor, the plan is considered under an Employee Plans examination. The fact that a Plan Sponsor voluntarily submits a determination letter application does not constitute a voluntary identification of Qualification Failures to the Service. In order to be eligible to perfect a determination letter application into a VCP submission, the Plan Sponsor (or the authorized representative) must identify each Qualification Failure, in writing, to the reviewing agent before the agent recognizes the existence of the Qualification Failure(s) and/or addresses the Qualification Failure(s) in communications with the Plan Sponsor (or the authorized representative).

(4) A Plan Sponsor that is under an Exempt Organizations examination includes any Plan Sponsor that has received (or whose representative has received) verbal or written notification from Exempt Organizations of an impending Exempt Organizations examination or of an impending referral for an Exempt Organizations examination and also includes any Plan Sponsor that has been under an Exempt Organizations examination and is now in Appeals or in litigation for issues raised in an Exempt Organizations examination.

.04 SEP . The term “SEP” means a plan intended to satisfy the requirements of § 408(k). For purposes of this revenue procedure, the term SEP also includes a salary reduction SEP (“SARSEP”) described in § 408(k)(6), when applicable.

.05 SIMPLE IRA Plan . The term “SIMPLE IRA Plan” means a plan intended to satisfy the requirements of § 408(p).