SECTION 1. PURPOSE AND — Internal Revenue Bulletin 2008-35

OVERVIEW

.01 Purpose . This revenue procedure updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code (the “Code”), but that have not met these requirements for a period of time. This system, the Employee Plans Compliance Resolution System (“EPCRS”), permits Plan Sponsors to correct these failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“Audit CAP”).

.02 General principles underlying EPCRS . EPCRS is based on the following general principles:

Sponsors and other administrators of eligible plans should be encouraged to establish administrative practices and procedures that ensure that these plans are operated properly in accordance with the applicable requirements of the Code.
Sponsors and other administrators of eligible plans should satisfy the applicable plan document requirements of the Code.
Sponsors and other administrators should make voluntary and timely correction of any plan failures, whether involving discrimination in favor of highly compensated employees, plan operations, the terms of the plan document, or adoption of a plan by an ineligible employer. Timely and efficient correction protects participating employees by providing them with their expected retirement benefits, including favorable tax treatment.
Voluntary compliance is promoted by providing for limited fees for voluntary corrections approved by the Ser

vice, thereby reducing employers’ uncertainty regarding their potential tax liability and participants’ potential tax liability.

Fees and sanctions should be graduated in a series of steps so that there is always an incentive to correct promptly.
Sanctions for plan failures identified on audit should be reasonable in light of the nature, extent, and severity of the violation.
Administration of EPCRS should be consistent and uniform.
Sponsors should be able to rely on the availability of EPCRS in taking corrective actions to maintain the tax-favored status of their plans. .03 Overview . EPCRS includes the following basic elements:
Self-correction (SCP) . A Plan Sponsor that has established compliance practices and procedures may, at any time without paying any fee or sanction, correct insignificant Operational Failures under a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, provided the SEP or SIMPLE IRA Plan is established and maintained on a document approved by the Service. In addition, in the case of a Qualified Plan that is the subject of a favorable determination letter from the Service or in the case of a 403(b) Plan, the Plan Sponsor generally may correct even significant Operational Failures without payment of any fee or sanction.
Voluntary correction with Service ap- proval (VCP) . A Plan Sponsor, at any time before audit, may pay a limited fee and receive the Service’s approval for correction of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan. Under VCP, there are special procedures for anonymous submissions and group submissions.
Correction on audit (Audit CAP) . If a failure (other than a failure corrected through SCP or VCP) is identified on

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Expanding the correction method for a failure to include an eligible employee in a § 401(k) plan to include a situation in which elective deferral and after-tax employee contribution elections are not implemented by the employer or are implemented in a manner inconsistent with the plan’s terms. (Appendix A .05 and Appendix B 2.02)
Revising the requirements for submitting a determination letter application when correcting certain Qualification Failures by plan amendment. (sections 6.05, 10.08, and 11.01)
Clarifying the scope of a compliance statement issued when correcting certain Qualification Failures by plan amendment. (sections 6.05 and 10.08)
Updating the definition of Excess Amounts and providing corrections for Excess Amounts failures, including those resulting from the failure to satisfy the requirements of § 415. This update includes correction rules largely similar to the corrections that were at § 1.415–6(b)(6)(iii) of the Income Tax Regulations (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the recently finalized regulations under § 415, but with the amount placed in an unallocated account to be reallocated in lieu of employer contributions other than elective deferrals. (sections 5.01(3) and 6.06, and Appendix A .08)
Updating the definition of Favorable Letter. (section 5.01(4))
Adding a factor to be considered in the determination of whether a correction method is reasonable and appropriate. The factor requires consideration of corrections of violations that are similar to the failure being addressed by other government agencies. In appropriate cases, for a failure that results from either the employer having ceased to exist, the employer no longer maintaining the plan, or similar reasons, the permitted correction would be to terminate the plan and distribute plan assets to participants and beneficiaries in accordance with standards and procedures substantially similar to those set forth in section 2578.1 of the Department of Labor Regulations (relating to abandoned plans). (section 6.02(2)(e)(ii) and Appendix A .09)
Clarifying that the earnings adjustment for corrective contributions or distributions is calculated from the date when the qualification failure occurred without regard to any extensions provided under the Code. (section 6.02(4)(e))
Clarifying that the earnings rate derived from the Department of Labor’s VFCP Online calculator may be used to determine the earnings adjustment applied to corrective contributions, distributions, allocations, and reallocations if it is not feasible to make a reasonable estimate of what the actual investment results would have been. (section 6.02(5)(a))
Providing that if the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. (section 6.02(5)(b))
Providing that if the Plan Sponsor attempts to use the IRS’ Letter Forwarding Program to locate participants and the Service declines to implement the letter forwarding request, then the Plan Sponsor will use alternate means to locate missing participants. (section 6.02(5)(d))
Clarifying that if a Plan Sponsor either (i) wants a participant’s deemed distribution to be reported on Form 1099–R for the year of correction (instead of the year of the failure) or (ii) wants relief from reporting a participant’s loan as a deemed distribution on Form 1099–R, then it must specifically request such relief. (sections 6.07(1) and 6.07(2)(a))
Clarifying the treatment of amounts improperly distributed to participants and beneficiaries under the plan which are rolled over to IRAs, with respect to the excise tax under § 4973. (sections 6.03(4) and 6.09(5))
Clarifying the circumstances under which a waiver of the excise tax under § 4974 would be considered under Audit CAP. (section 6.09(2))
Expanding income and excise taxes that the Service may exercise discretion to not pursue. (sections 6.09(5) and 6.09(6))
Clarifying the scope of a compliance statement issued with respect to certain nonamender failures. (sections 6.05 and 10.08)
Providing for new and expanded streamlined application procedures for interim nonamenders and the failure to implement optional law changes timely and other nonamenders, certain SEP, SARSEP and SIMPLE IRA failures, certain plan loan failures, Employer Eligibility Failures, § 402(g) failures, § 401(a)(9) failures, and failures that involve plan amendment in accordance with Appendix B 2.07. (section 11.02, Appendix F)
Reducing the compliance fee under certain circumstances for a plan where the sole failure is the failure of participant loans to comply with the requirements of § 72(p)(2). (section 12.02(3))
Clarifying that, in the case of a Qualification Failure that is intentional, the compliance fee under VCP will be determined in accordance with section 12.06. (section 12.06)
Providing that Audit CAP provisions apply if the Service identifies a participant loan that did not comply with the requirements of § 72(p)(2) (other than a loan failure that is corrected in accordance with SCP or VCP) upon an Employee Plans or Exempt Organizations examination of a Qualified Plan or 403(b) Plan. (sections 13.01 and 14.01)
Providing a sample application form for VCP filings. (revised Appendix D) .02 Future enhancements . (1) Future updates . It is expected that the EPCRS revenue procedure will continue to be updated from time to time, including, as noted above, further improvements to EPCRS based on comments previously received. Thus, the Service and Treasury continue to invite further comments on how to improve EPCRS. Comments should be sent to:

Internal Revenue Service Attention: SE:T:EP:RA:VC 1111 Constitution Avenue, NW Washington, D.C. 20224

(2) Section 401(k) automatic enroll- ment . Comments are requested for certain specific issues under EPCRS. First, comments are requested regarding methods

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to correct the failure to implement automatic enrollment with respect to elective deferrals in a § 401(k) plan that has an automatic enrollment provision, including a § 401(k) plan that is designed to be a qualified automatic contribution arrangement within the meaning of § 401(k)(13), but no amounts were withheld from the compensation of an employee who has made no election. Second, comments are requested regarding methods to correct the failure to timely provide a safe harbor notice under a plan designed to satisfy the requirements of § 401(k)(12), 401(k)(13), or 414(w).

(3) Designated Roth contributions . Comments are also specifically requested on special issues relating to designated Roth contributions. For example, comments are requested on whether, if a plan failed to implement a participant’s election to have a designated Roth contribution made on his or her behalf, but instead a pre-tax elective deferral was made for the participant with the participant’s compensation reduced accordingly, would it be an appropriate correction of the failure for the employer to ask the participant whether correction should be made by a transfer of the contribution (with earnings) to a Roth account and inclusion of the amount so transferred in the participant’s compensation in the year of the transfer (instead of either (i) a similar transfer with a corrected W–2 for the year of the failure and the participant having to complete an amended return for the year of the failure or (ii) a similar transfer and inclusion of the amount so transferred in the participant’s compensation in the year of the transfer, but with the employer to make a grossup payment to the participant to make the participant whole for the resulting income tax). Comments are also requested regarding cases in which a plan fails to notify an employee of his or her right to elect designated Roth contributions, such as whether the correction for the failure described in the preceding sentence should also be applied in this case or whether some additional corrective contribution should be required to reflect the possibility that a participant’s decision to make an elective deferral might be affected by the

availability of designated Roth contributions. See also section .05(3) of Appendix A and Example 3 of Appendix B, section 2.02(1)(b), for an illustration of correction for exclusion of otherwise eligible employees from being able to make elective deferrals, which applies without regard to whether the plan only permits pre-tax elective deferrals or whether the plan also permits designated Roth elective deferrals.

(4) Section 1101 of the Pension Pro- tection Act of 2006 . (a) Section 1101 of the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780), grants the Secretary of the Treasury the full authority to establish and implement EPCRS and, among other things, instructs the Secretary to continue to update and improve EPCRS, giving special attention to the following: (1) increasing the awareness and knowledge of small employers concerning the availability and use of the program; (2) taking into account special concerns and circumstances that small employers face with respect to compliance and correction of compliance failures; (3) extending the duration of the self-correction period under SCP for significant compliance failures; (4) expanding the availability to correct insignificant compliance failures under SCP during audit; and (5) assuring that any tax, penalty, or sanction that is imposed by reason of a compliance failure is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure.

(b) EPCRS has historically been structured to achieve the general principles that are described in section 1.02 of this revenue procedure. This revenue procedure, like the many predecessor revenue procedures ¹ that addressed correction of qualification failures, continues to include modifications that are designed to make the EPCRS programs more accessible, particularly with respect to small employers. For example, Appendix F has been substantially expanded to add additional failures that commonly occur in plans maintained by small employers, and significantly reduces the burden and cost to an employer of submitting under the VCP. Various other changes have been made that will provide

assurance to small employers and other Plan Sponsors, including expansion of the standard corrections in Appendices A and B (such as correction for abandoned plans and orphan contracts and further expansion of standard correction for qualification failures involving the operational failure to extend elective deferrals to eligible employees). In addition, eligibility under SCP has been expanded with respect to employers who discover failures in their plans and have begun the correction process. See section 2.01 for a more thorough list of changes made in this revenue procedure.