SECTION 17. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1673. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this revenue procedure is in sections 4.05, 6.02(5)(d), 6.05, 10.01, 10.02, 10.05–.07, 10.10–10.12, 11.02–11.04, 11.06–11.14, 13.01, section 2.01–2.07 of Appendix B, Appendix C, and Appendix E. This information is required to enable the Commissioner, Tax Exempt and Government

Entities Division of the Internal Revenue Service to make determinations regarding the issuance of various types of closing agreements and compliance statements. This information will be used to issue closing agreements and compliance statements to allow individual plans to continue to maintain their tax qualified and tax-deferred status. As a result, favorable tax treatment of the benefits of the eligible employees is retained. The likely respondents are individuals, state or local governments, businesses or other for-profit institutions, nonprofit institutions, and small businesses or organizations.

The estimated total annual reporting or recordkeeping burden is 76,222 hours.

The estimated annual burden per respondent/recordkeeper varies from .5 to 45.5 hours, depending on individual circumstances, with an estimated average of 20.4 hours. The estimated number of respondents or recordkeepers is 3,745.

The estimated frequency of responses is occasional.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. § 6103.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Avaneesh Bhagat and Louis Leslie of the Tax Exempt and Government Entities Division. For further information concerning this revenue procedure, please contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–5500 between 8:30 a.m. and 6:30 p.m., Eastern Time, Monday through Friday (a toll-free number). Mr. Bhagat and Mr. Leslie may be reached at (202) 283–9888 (not a toll-free number).

APPENDIX A

OPERATIONAL FAILURES AND

CORRECTION METHODS

.01 General rule . This appendix sets forth Operational Failures and Correction Methods relating to Qualified Plans. In each case, the method described corrects the Operational Failure identified

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the missed deferral, plus (ii) the matching contribution that would apply based on the missed deferral. If an employee was not provided the opportunity to elect and make elective deferrals to a safe harbor 401(k) plan that uses nonelective contributions to satisfy the safe harbor requirements of § 401(k)(12), then the missed deferral is deemed equal to 3% of compensation. The required QNC on behalf of the excluded employee is equal to (i) 50% of the missed deferral, plus (ii) the nonelective contribution required to be made on behalf of the employee. The QNC required to compensate the employee for the missed deferral opportunity and the corresponding matching or nonelective contribution is adjusted for earnings until the corrective QNC is made on behalf of the affected employee.

(d) If the employee should have been eligible to elect and make after-tax employee contributions (other than designated Roth contributions), the employer must make a QNC to the plan on behalf of the employee that is equal to the “missed opportunity for making after-tax employee contributions.” The missed opportunity for making after-tax employee contributions is equal to 40% of the employee’s “missed after-tax contributions.” The employee’s missed after-tax contributions are equal to the actual contribution percentage (ACP) for the employee’s group (either highly compensated or nonhighly compensated) times the employee’s compensation, but with the resulting amount not to exceed applicable plan limits. If the ACP consists of both matching and after-tax employee contributions, then, in lieu of basing the employee’s missed after-tax employee contributions on the ACP for the employee’s group, the employer is permitted to determine separately the portion of the ACP that is attributable to after-tax employee contributions for the employee’s group (either highly compensated or nonhighly compensated), multiplied by the employee’s compensation for the year of exclusion. The QNC also must be adjusted for earnings until the corrective QNC is made on behalf of the affected employee.

(e) If the employee was improperly excluded from an allocation of employer matching contributions because he or she was not given the opportunity to make after-tax employee contributions (other than designated Roth contributions), the employer should make a QNC on behalf

covering all other employees (as permitted in § 1.410(b)–6(b)(3)), in order to reduce the number of employees eligible to receive QNCs. Likewise, under this correction method, the plan may not be restructured into component plans in order to reduce the number of employees eligible to receive QNCs.

.04 Failure to distribute elective defer- rals in excess of the § 402(g) limit (in con- travention of § 401(a)(30)) . The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. In accordance with § 1.402(g)–1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test; a distribution to a nonhighly compensated employee is not included in the ADP test.

.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years . (1) For plans with employer provided contributions or benefits (which are neither elective contributions under a qualified cash or deferred arrangement under § 401(k) nor matching or after-tax employee contributions that are subject to § 401(m)), the permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a defined contribution plan or to provide benefit accruals for the employees excluded from a defined benefit plan.

(2) For plans providing benefits subject to § 401(k) or § 401(m), the corrective contribution for an improperly excluded employee is described in the following paragraphs. (See examples 3 through 10 of Appendix B.)

(a) If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a 401(k) plan that does not satisfy the safe harbor contribution requirements of section 401(k)(12), the employer must make a QNC to the plan on behalf of the employee that compensates for the “missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the employee’s “missed deferral.” The missed deferral is determined by multiplying the actual deferral percentage for the employee’s group in the plan (either highly compensated or nonhighly compensated) for the year of exclusion by the employee’s compensation for that

year. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.410(b)–6(b)(3)) in order to reduce the applicable ADP, the corresponding missed deferral and the required QNC. Likewise, restructuring the plan into component plans is not permitted in order to reduce the applicable ADP, the corresponding missed deferral and the required QNC. The QNC required to compensate the employee for the missed deferral opportunity for the year of exclusion is adjusted for earnings until the corrective QNC is made on behalf of the affected employee.

(b) If the employee should have been eligible for but did not receive an allocation of employer matching contributions under a non-safe harbor plan because he or she was not given the opportunity to make elective deferrals, the employer should make a QNC on behalf of the affected employee. The QNC will be equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under section .05(2)(a) of this Appendix A. The QNC must be adjusted for earnings until the corrective QNC is made on behalf of the affected employee.

(c) If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a safe harbor 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of § 401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee. This estimate of the missed deferral replaces the estimate based on the ADP test in a traditional 401(k) plan. The required QNC on behalf of the excluded employee is equal to (i) the missed deferral opportunity, which is an amount equal to 50% of

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tion of forfeitures or from a reasonable error in estimating compensation) is to place the excess annual additions into an unallocated account, similar to the suspense account described in § 1.415–6(b)(6)(iii), to be used as an employer contribution in the succeeding year(s). While such amounts remain in the unallocated account, the employer is not permitted to make additional contributions to the plan. The permitted correction for failure to limit annual additions that are elective deferrals or employee contributions (even if the excess did not result from a reasonable error in determining the amount of elective deferrals or after-tax employee contributions that could be made with respect to an individual under the § 415 limits) is to distribute the elective deferrals or after-tax employee contributions using a method similar to that described under § 1.415–6(b)(6)(iv). Elective deferrals and after-tax employee contributions that are matched may be returned, provided that the matching contributions relating to such contributions are forfeited (which will also reduce excess annual additions for the affected individuals). The forfeited matching contributions are to be placed into an unallocated account to be used as an employer contribution in succeeding periods.

APPENDIX B

CORRECTION METHODS AND EXAMPLES; EARNINGS

ADJUSTMENT METHODS

AND EXAMPLES

SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES

.01 Purpose . (1) This appendix sets forth correction methods relating to Operational Failures under Qualified Plans. This appendix also sets forth earnings adjustment methods. The correction methods and earnings adjustment methods described in this appendix are acceptable under SCP and VCP.

(2) To the extent a failure listed in this appendix could occur under a 403(b) Plan, SEP, or a SIMPLE IRA Plan, the correction method listed for such failure may be used to correct the failure.

of the affected employee. The QNC is equal to the matching contribution the employee would have received had the employee made an after-tax employee contribution equal to the missed after-tax employee contribution determined under section .05(2)(d).

(f) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(a) through (e) cannot be used until after correction of the ADP or ACP test failures.

.06 Failure to timely pay the minimum distribution required under § 401(a)(9) . In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions. The amount to be distributed for each year in which the failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)–5 Q&A–3 of the regulations, reduced by the amount of the total missed minimum distributions for prior years. In a defined benefit plan, the permitted correction method is to distribute the required minimum distributions, plus an interest payment representing the loss of use of such amounts.

.07 Failure to obtain participant or spousal consent for a distribution subject to the participant and spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417 . (1) The permitted correction method is to give each affected participant a choice between providing informed consent for the distribution actually made or receiving a qualified joint and survivor annuity. In the event that participant or spousal consent is required but cannot be obtained, the participant must receive a qualified joint and survivor annuity based on the monthly amount that would have been provided under the plan at his or her retirement date. This annuity may be actuarially reduced to take into account distributions already received by the participant. However, the portion of the qualified joint and survivor annuity payable to the spouse upon the death of the par

ticipant may not be actuarially reduced to take into account prior distributions to the participant. Thus, for example, if in accordance with the automatic qualified joint and survivor annuity option under a plan, a married participant who retired would have received a qualified joint and survivor annuity of $600 per month payable for life with $300 per month payable to the spouse for the spouse’s life beginning upon the participant’s death, but instead received a single-sum distribution equal to the actuarial present value of the participant’s accrued benefit under the plan, then the $600 monthly annuity payable during the participant’s lifetime may be actuarially reduced to take the single-sum distribution into account. However, the spouse must be entitled to receive an annuity of $300 per month payable for life beginning at the participant’s death.

(2) An alternative permitted correction method is to give each affected participant a choice between (i) providing informed consent for the distribution actually made, (ii) receiving a qualified joint and survivor annuity (both (i) and (ii) of this section .07(2) are as described in section .07(1) of this Appendix A), or (iii) a single-sum payment equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under § 417(e)(3)). For example, if the actuarial present value of a $300 per month annuity payable to the spouse for the spouse’s life beginning upon the participant’s death is $7,837 (calculated using the applicable interest rate and mortality table under § 417(e)(3), and based on the assumptions that the participant is age 65, that the spouse is age 62, and that the applicable interest rate is 6%), then the single-sum payment under clause (iii) of this section .07(2) is equal to $7,837. If the spouse elects to receive the single-sum payment, then the payment is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or other eligible retirement plan.

.08 Failure to satisfy the § 415 limits in a defined contribution plan . The permitted correction for failure to limit annual additions (other than elective deferrals and after-tax employee contributions) allocated to participants in a defined contribution plan as required in § 415 (even if the excess did not result from the alloca

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provisions relating to forfeitures that were in effect for the year of the failure.

(C) If a payment was made to an employee and that payment is a forfeitable match described in either paragraph (1)(b)(iii)(A) or (B), then it is an Overpayment defined in section 5.01(6) of this revenue procedure that must be corrected (see sections 2.04 and 2.05 below).

(iv) Contribution and Allocation of Equivalent Amount. (A) The employer makes a contribution to the plan that is equal to the aggregate amounts distributed and forfeited under paragraph (1)(b)(iii)(A) ( i.e., the excess contribution amount adjusted for earnings, as provided in paragraph (1)(b)(iii)(A), which does not include any matching contributions forfeited in accordance with § 411(a)(3)(G) as provided in paragraph (1)(b)(iii)(B)). The contribution must satisfy the vesting requirements and distribution limitations of § 401(k)(2)(B) and (C).

(B)(1) This paragraph (1)(b)(iv)(B)( 1 ) applies to a plan that uses the current year testing method described in § 1.401(k)–2(a)(2), § 1.401(m)–2(a)(2) and, for periods prior to the effective date of those regulations, Notice 98–1, 1998–1 C.B. 327. The contribution made under paragraph (1)(b)(iv)(A) is allocated to the account balances of those individuals who were either (I) the eligible employees for the year of the failure who were not highly compensated employees for that year or (II) the eligible employees for the year of the failure who were not highly compensated employees for that year and who also are not highly compensated employees for the year of correction. Alternatively, the contribution is allocated to account balances of eligible employees described in (I) or (II) of the preceding sentence, except that the allocation is made only to the account balances of those employees who are employees on a date during the year of the correction that is no later than the date of correction. Regardless of which of these four options (described in the two preceding sentences) the employer selects, eligible employees must receive a uniform allocation (as a percentage of compensation) of the contribution. (See Examples 1 and 2.) Under the one-to-one correction method, the amount allocated to the account balance of an employee ( i.e., the employee’s share of the total amount contributed under paragraph (1)(b)(iv)(A)) is

.02 Assumptions for Examples . Unless otherwise specified, for ease of presentation, the examples assume that:

(1) the plan year and the § 415 limitation year are the calendar year;

(2) the employer maintains a single plan intended to satisfy § 401(a) and has never maintained any other plan;

(3) in a defined contribution plan, the plan provides that forfeitures are used to reduce future employer contributions;

(4) the Qualification Failures are Operational Failures and the eligibility and other requirements for SCP, VCP or Audit CAP, whichever applies, are satisfied; and

(5) there are no Qualification Failures other than the described Operational Failures, and if a corrective action would result in any additional Qualification Failure, appropriate corrective action is taken for that additional Qualification Failure in accordance with EPCRS.

.03 Section references . References to section 2 and section 3 are references to the section 2 and 3 in this appendix.