SECTION 4. PROGRAM ELIGIBILITY

.01 EPCRS Programs . (1) SCP . SCP is available only for Operational Failures. Qualified Plans and 403(b) Plans are eligible for SCP with respect to significant and insignificant Operational Failures. SEPs and SIMPLE IRA Plans are eligible for SCP with respect to insignificant Operational Failures only.

(2) VCP . Qualified Plans, 403(b) Plans, SEPs and SIMPLE IRA 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 Qualified Plans, 403(b) Plans, SEPs and SIMPLE IRA Plans for correction of all failures found on examination that have not been corrected in accordance with SCP or VCP.

(4) Eligibility for other arrangements . The Service may extend EPCRS to other arrangements.

.02 Effect of examination . If the plan or Plan Sponsor is Under Examination, VCP is not available and SCP is only available as follows: while the plan or Plan Sponsor is Under Examination, insignificant Operational Failures can be corrected under

2006–22 I.R.B. 950 May 30, 2006

year, (ii) the plan is being examined during an on-cycle year, (iii) the failure is submitted in a VCP filing for a terminating plan, or (iv) the plan is a terminating plan Under Examination. Except as provided in section 10.08, in cases where a determination letter is not issued with respect to failures corrected through plan amendment, the issuance of a compliance statement or closing agreement will constitute a determination as to the effect of any plan amendment on the qualification of the plan. Notwithstanding any other provision of this section 4.06, the Service reserves the right to require the submission of a determination letter application with respect to any amendment proposed or adopted to correct any Qualification Failure under VCP or Audit CAP.

(2) In the case of any correction of an Operational Failure through plan amendment under SCP, as permitted under section 4.05(2), a Plan Sponsor must submit a determination letter application. The determination letter application must be submitted before the end of the plan’s applicable remedial amendment period described in Rev. Proc. 2005–66. As part of the determination letter submission, the amendment under SCP must be identified as such in the cover letter.

.07 Availability of correction of Em- ployer Eligibility Failure . SCP is not available for a Plan Sponsor to correct an Employer Eligibility Failure.

.08 Availability of correction of a ter- minated plan . Correction of Qualification Failures in a terminated plan may be made under VCP and Audit CAP, whether or not the plan trust is still in existence.

.09 Availability of correction of an Or- phan Plan . An Orphan Plan that is terminating may be corrected under VCP and Audit CAP, provided that the party acting on behalf of the plan is an Eligible Party, as defined in section 5.06(2).

.10 Availability of correction of § 457 plans . Submissions relating to § 457(b) eligible governmental plans will be accepted by the Service on a provisional basis outside of EPCRS through standards that are similar to EPCRS.

.11 Egregious failures . SCP is not available to correct Operational Failures that are egregious. For example, any of the following would be considered egregious: (a) a plan has consistently and improperly covered only highly compensated em

In addition, SCP may also be used in situations where the operational failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure. In the case of a failure that relates to Transferred Assets or to a plan assumed in connection with a corporate merger, acquisition, or other similar employer transaction between the Plan Sponsor and sponsor of the transferor plan or the prior plan sponsor of an assumed plan, the plan is considered to have established practices and procedures for the Transferred Assets if such practices and procedures are in effect for the Transferred Assets by the end of the first plan year that begins after the corporate merger, acquisition, or other similar transaction.

.05 Correction by plan amendment . (1) Availability of correction by plan amend- ment in VCP and Audit CAP . A Plan Sponsor may use VCP and Audit CAP for a Qualified Plan to correct Plan Document, Demographic, and Operational Failures by a plan amendment, including correcting an Operational Failure by 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). In addition, a Plan Sponsor may correct an Operational Failure by plan amendment to 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. Except as provided in section 4.06, 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.

(2) Availability of correction by plan amendment in SCP . A Plan Sponsor may use SCP for a Qualified Plan to correct an Operational Failure by a plan amendment in order 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. SCP is not otherwise available for a Plan Sponsor to correct an Operational Failure by a plan amendment. Any plan amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6). .06 Submission for a determination letter . (1) Under VCP and Audit CAP, a determination letter will be issued to correct a nonamender failure. In addition, a determination letter may be issued (a) to correct a failure in a plan that is either submitted under VCP or that is being examined during the last 12 months of the plan’s remedial amendment cycle, as defined in section 13 of Rev. Proc. 2005–66, 2005–37 I.R.B. 509 (an “on-cycle” filing), or (b) to correct a failure in either a VCP filing submitted for a terminating plan or a terminating plan under examination. For this purpose, the term “nonamender failure” means a failure to amend the plan to reflect a change in a qualification requirement within the plan’s applicable remedial amendment period, as set forth in Rev. Proc. 2005–66. A change in a qualification requirement includes a change arising from a statutory change, or a change in the requirements provided in regulations or other guidance published in the Internal Revenue Bulletin. A determination letter issued under VCP with respect to a nonamender failure will include only a determination on all applicable laws with respect to which the remedial amendment period has expired. Notwithstanding the above, a determination letter will not be issued with respect to a failure to amend a plan timely for (a) 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, including those changes listed in Notice 2005–5, 2005–3 I.R.B. 337, (b) plan amendments for the final and temporary regulations under §401(a)(9) as they appeared in the April 1, 2003, edition of 26 CFR Part 1 (the § 401(a)(9) final and temporary regulations) within the period described in Rev. Proc. 2002–29, 2002–1 C.B. 1176, as modified by Rev. Proc. 2003–10, 2003–1 C.B. 259, and (c) interim amendments as provided in section 5 of Rev. Proc. 2005–66. The preceding sentence is not applicable if (i) the failure is submitted in a VCP filing made during an on-cycle

May 30, 2006 951 2006–22 I.R.B.

(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 or interim amendments with respect to disqualifying provisions, as described in §1.401(b)–1(b)(1), 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 an Operational Failure to the extent the plan is permitted to be amended retroactively to reflect the plan’s operations ( e.g., pursuant to § 401(b)). In the situation where a Plan Sponsor timely adopted a good faith or interim amendment which is not a disqualifying provision as described in § 1.401(b)–1(b)(1), and the plan was not operated in accordance with the terms of such amendment, 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

ployees; (b) a plan provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003–24, 2003–1 C.B. 853, with respect to welfare benefit funds); or (c) a contribution to a defined contribution plan for a highly compensated employee is several times greater than the dollar limit set forth in § 415. VCP is available to correct egregious failures; however, these failures are subject to the fees described in section 12.06. Audit CAP also is available to correct egregious failures.

.12 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.

.13 Abusive tax avoidance transactions . (1) Effect on Programs . (a) SCP . With respect to SCP, in the event that the plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction (as defined in section 4.13(2)), SCP is not available to correct any Operational Failure that is directly or indirectly related to the abusive tax avoidance transaction.

(b) VCP . With respect to VCP, if the Service determines that a plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction (as defined in section 4.13(2)), then the matter will be referred to the Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. Upon receiving a response from the Tax Shelter Coordinator, the Service may determine that the plan or the Plan Sponsor has been a party to an abusive tax avoidance transaction, and that the failures addressed in the VCP submission are related to that transaction. In those situations, the Service will conclude the review of the submission without issuing a compliance statement and will refer the case for examination. However, if the Tax Shelter Coordinator determines that the plan failures are unrelated to the abusive tax avoidance transaction or that no abusive tax avoidance transaction occurred, then the Service will continue to address the failures identified in the VCP submission, and may issue a compliance statement with respect to those failures. In no event may a compliance statement be relied on for the purpose of concluding

that the plan or Plan Sponsor was not a party to an abusive tax avoidance transaction. In addition, even if it is concluded that the failures can be addressed pursuant to a VCP submission, the Service reserves the right to make a referral of the abusive tax avoidance transaction matter for examination.

(c) Audit CAP and SCP (for plans Under Examination) . For plans Under Examination, if the Service determines that the plan or Plan Sponsor was, or may have been, a party to an abusive tax avoidance transaction, the matter may be referred to the Internal Revenue Service’s Employee Plans’ Tax Shelter Coordinator. With respect to plans Under Examination, an abusive tax avoidance transaction includes a transaction described in section 4.13(2) and any other transaction that the Service determines was designed to facilitate the impermissible avoidance of tax. Upon receiving a response from the Tax Shelter Coordinator, (i) if the Service determines that a failure is related to the abusive tax avoidance transaction, the Service reserves the right to conclude that neither Audit CAP nor SCP is available for that failure and (ii) if the Service determines that satisfactory corrective actions have not been taken with regard to the transaction, the Service reserves the right to conclude that neither Audit CAP nor SCP is available to the plan.

(2) Definition . For purposes of section 4.13(1) (except to the extent otherwise provided in section 4.13(1)(c)), an abusive tax avoidance transaction means any listed transaction under § 1.6011–4(b)(2) and any other transaction identified as an abusive transaction in the IRS website entitled “EP Abusive Tax Transactions.”

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