SECTION 4. PROGRAM

ELIGIBILITY

in sections 10 and 11, or Audit CAP in section 13, the Service will not treat the plan as failing to meet the requirements of § 401(a), 403(b), 408(k), or 408(p), as applicable, because of the failure. Thus, for example, if the Plan Sponsor corrects a failure in accordance with the requirements of this revenue procedure, the plan will not thereby be treated as failing to satisfy § 401(a), 403(b), 408(k), or 408(p), as applicable, for purposes of applying §§ 3121(a)(5) (FICA taxes) and 3306(b)(5) (FUTA taxes).

.02 Compliance statement . If a Plan Sponsor or Eligible Organization receives a compliance statement under VCP, the compliance statement is binding upon the Service and the Plan Sponsor or Eligible Organization as provided in section 10.08.

.03 Excise and other taxes . See section 6.09 for rules relating to excise and other taxes.

.04 Reliance . Taxpayers may rely on this revenue procedure, including the relief described in section 3.01.

.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 only with respect to insignificant Operational Failures.

(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. VCP also provides general procedures for the correction of participant loans that did not comply with the requirements of § 72(p)(2).

(3) Audit CAP . Unless otherwise provided, 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. Audit CAP also provides general procedures for the correction of participant loans that did not comply with the requirements of § 72(p)(2).

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

(5) Appropriate use of programs . In a particular case, the Service may decline to make available one or more correction programs under EPCRS in the interest of sound tax administration.

.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 SCP; and, if correction of significant operational failures has been completed or substantially completed (as described in section 9.04) before the plan or Plan Sponsor is Under Examination, correction of those failures can be completed under SCP.

.03 Favorable Letter requirement . The provisions of SCP relating to significant Operational Failures (see section 9) are available for Qualified Plans and 403(b) Plans only if the plans are the subject of a Favorable Letter. (See section 6.10(2) for rules treating a 403(b) Plan as having a Favorable Letter.) The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SEP only if the plan document consists of either (i) a valid Model Form 5305-SEP or 5305A-SEP adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002–10, 2002–1 C.B. 401) or (ii) a prototype SEP that has a current favorable opinion letter that has been amended in accordance with the procedures set forth in Rev. Proc. 2002–10. The provisions of SCP relating to insignificant Operational Failures (see section 8) are available for a SIMPLE IRA Plan only if the plan document consists of either (i) a valid Model Form 5305-SIMPLE or 5304-SIMPLE adopted by an employer in accordance with the instructions on the applicable form (see Rev. Proc. 2002–10) or (ii) a current favorable opinion letter for a Plan Sponsor that has adopted a prototype SIMPLE IRA Plan that has been amended in accordance with the procedures set forth in Rev. Proc. 2002–10.

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.04 Established practices and procedures . In order to be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with applicable Code requirements. For example, the plan administrator of a Qualified Plan that may be top-heavy under § 416 may include in its plan operating manual a specific annual step to determine whether the plan is top-heavy and, if so, to ensure that the minimum contribution requirements of the top-heavy rules are satisfied. A plan document alone does not constitute evidence of established procedures. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and an Operational Failure must have occurred through an oversight or mistake in applying them. 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. A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under which excess annual additions under § 415(c) are regularly corrected by return of elective deferrals to the affected employee within two and one-half months after the end of the plan’s limitation year. The correction, however, should not violate another applicable Code requirement. 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 the 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. (See section 6.10(2) for special rules regarding established practices and procedures for 403(b) Plans.)

.05 Correction by plan amendment . (1) Availability of correction by plan amendment in VCP and Audit CAP . A Plan Sponsor may use VCP and Audit CAP for a Qualified Plan or 403(b) Plan to correct Plan Document, Demographic, and Operational Failures by a plan amendment, including correcting an Operational Failure by a plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the applicable Code requirements, including, for a Qualified Plan, § 401(a) (including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6)). In addition, a Plan Sponsor may adopt a plan amendment to reflect the corrective action. For example, if the plan failed to satisfy the actual 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 6.05, 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 or 403(b) 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 with respect to 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. Any plan amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6), to the extent applicable to the plan. If a Plan Sponsor corrects an Operational Failure in accordance with the approved correction methods under Appendix B, it may amend the plan to reflect the corrective action. For example, if the plan failed to satisfy the actual deferral percentage (ADP) test required under § 401(k)(3) and the Plan Sponsor makes qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions. SCP is not otherwise available for a Plan Sponsor to correct an Operational Failure by a plan amendment.

.06 Availability of correction for Employer Eligibility Failure . SCP is not available for a Plan Sponsor to correct an Employer Eligibility Failure.

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.07 Availability of correction for a terminated plan . Correction of Qualification Failures and 403(b) Failures in a terminated plan may be made under VCP and Audit CAP, whether or not the plan trust or contract is still in existence.

.08 Availability of correction for an Orphan Plan . A failure in an Orphan Plan that is terminating may only 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 5.03(2). See section 6.02(2)(e)(ii). SCP is not available for correcting failures in Orphan Plans.

.09 Availability of correction for § 457 plans . Submissions relating to § 457(b) will be accepted by the Service on a provisional basis outside of EPCRS through standards that are similar to EPCRS. The availability of correction is generally limited to plans that are sponsored by governmental entities described in § 457(e)(1)(A). In the case of a § 457(b) plan that is an unfunded deferred compensation plan established for the benefit of top hat employees of a tax-exempt entity described in § 457(e)(1)(B), the Service generally will not enter into an agreement to address problems associated with such a plan. However, the Service may consider a submission where, for example, the plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a Qualified Plan.

.10 Submission for a determination letter . In any case in which correction of a Qualification Failure includes correction of a Plan Document Failure, Demographic Failure, or Operational Failure by plan amendment, a determination letter application may be required. See section 6.05.

.11 Egregious failures . SCP is not available to correct Operational Failures that are egregious. Egregious failures include: (a) a plan that has consistently and improperly covered only highly compensated employees; (b) a plan that 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 defined contribution plan where a contribution is made on behalf of a highly compensated employee that is several times greater than the dollar limit set forth in § 415(c). VCP is available to correct egregious failures. However, egregious failures are subject to the VCP fees described in section 12.06 and, for purposes of section 12.06, an egregious failure would include any case in which the IRS concludes that the parties controlling the plan recognized that the action taken would constitute a failure and the failure either involves a substantial number of participants or beneficiaries or involves participants who are predominantly highly compensated employees. 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

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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) . (1) 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 or (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) Abusive tax avoidance transaction defined . 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 on the IRS web site entitled “EP Abusive Tax Transactions.”

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