SECTION 2. CORRECTION

METHODS AND EXAMPLES

including corrective contributions, would be the same whether or not the plan offered designated Roth contributions.

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

.01 ADP/ACP Failures . (1) Correction Methods . (a) Appendix A Correction Method . Appendix A.03 sets forth a correction method for a failure to satisfy the actual deferral percentage (“ADP”), actual contribution percentage (“ACP”), or, for plan years beginning on or before December 31, 2001, multiple use test set forth in §§ 401(k)(3), 401(m)(2), and 401(m)(9), respectively.

(b) One-to-One Correction Method . (i) General . In addition to the correction method in Appendix A, a failure to satisfy the ADP test or ACP test may be corrected by using the one-to-one correction method set forth in this section 2.01(1)(b). Under the one-to-one correction method, an excess contribution amount is determined and assigned to highly compensated employees as provided in paragraph (1)(b)(ii) below. That excess contribution amount (adjusted for Earnings) is either distributed to the highly compensated employees or forfeited from the highly compensated employees’ accounts as provided in paragraph (1)(b)(iii) below. That same dollar amount (i.e., the excess contribution amount, adjusted for Earnings) is contributed to the plan and allocated to nonhighly compensated employees as provided in paragraph (1)(b)(iv) below. 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)). Likewise, restructuring the plan into component plans is not permitted. This correction method may also be used to correct a failure to satisfy the multiple use test for plan years beginning on or before December 31, 2001.

(ii) Determination of the Excess Contribution Amount . The excess contribution amount for the year is equal to the excess of (A) the sum of the excess contributions (as defined in § 401(k)(8)(B)), the excess aggregate contributions (as defined in § 401(m)(6)(B)), and for plan years beginning on or before December 31, 2001 the amount treated as excess contributions or excess aggregate contributions under the multiple use test for the year, as assigned to each highly compensated employee in accordance with § § 401(k)(8)(C) and 401(m)(6)(C), over (B) previous corrections that complied with § § 401(k)(8) and 401(m)(6), and, for plan years beginning on or before December 31, 2001, the multiple use test.

(iii) Distributions and Forfeitures of the Excess Contribution Amount . (A) The portion of the excess contribution amount assigned to a particular highly compensated employee under paragraph (1)(b)(ii) is adjusted for Earnings from the end of the plan year of the year of the failure through the date of correction. The amount assigned to a particular highly compensated employee, as adjusted, is distributed or, to the extent the amount was forfeitable as of the close of the plan year of the failure, is forfeited. If the amount is forfeited, it is used in accordance with the plan provisions relating to forfeitures that were in effect for the year of the failure. If the amount so assigned to a particular highly compensated employee has been previously distributed, the amount is an Excess Amount within the meaning of section 5.01(3) of this revenue procedure. Thus, pursuant to section 6.06 of this revenue procedure, the Plan Sponsor must notify the employee that the Excess Amount is not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, is not eligible for tax-free rollover).

(B) If any matching contributions (adjusted for Earnings) are forfeited in accordance with § 411(a)(3)(G), the forfeited amount is used in accordance with the plan 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 Plan Sponsor makes a contribution to the plan that is equal to the aggregate amounts distributed and forfeited under

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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 be a QNEC as defined in § 1.401(k)–6.

(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 nonhighly compensated employees for that year or (II) the eligible employees for the year of the failure who were nonhighly compensated employees for that year and who also are nonhighly 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 Plan Sponsor 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 not further adjusted for Earnings and is treated as an annual addition under § 415 for the year of the failure for the employee for whom it is allocated.

(2) This paragraph (1)(b)(iv)(B) (2) applies to a plan that uses the prior year testing method described in § § 1.401(k)–2(a)(2) and 1.401(m)–2(a)(2) and, for periods prior to the effective date of those regulations, Notice 98–1. Paragraph (1)(b)(iv)(B)( 1 ) is applied by substituting “the year prior to the year of the failure” for “the year of the failure.”

(2) Examples .

Example 1 : Employer A maintains a profit-sharing plan with a cash or deferred arrangement that is intended to satisfy § 401(k) using the current year testing method. The plan does not provide for matching contributions or after-tax employee contributions. In 2007, it was discovered that the ADP test for 2005 was not performed correctly. When the ADP test was performed correctly, the test was not satisfied for 2005. For 2005, the ADP for highly compensated employees was 9% and the ADP for nonhighly compensated employees was 4%. Accordingly, the ADP for highly compensated employees exceeded the ADP for nonhighly compensated employees by more than two percentage points (in violation of § 401(k)(3)). There were two highly compensated employees eligible under the § 401(k) plan during 2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which is equal to 10% of Employee P’s compensation of $100,000 for 2005. Employee Q made elective deferrals of $9,500, which is equal to 8% of Employee Q’s compensation of $118,750 for 2005.

Correction : On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with § 401(k)(8)(C), $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and $2,937.50 to Employee Q. It is determined that the Earnings on the assigned amounts through June 30, 2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the Earnings are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their compensation for 2005 (subject to § 415 for 2005).

Example 2 : The facts are the same as in Example 1, except that for 2005 the plan also provides for (1) after-tax employee contributions and (2) matching contributions equal to 50% of the sum of an employee’s elective deferrals and after-tax employee contributions that do not exceed 10% of the employee’s compensation. The plan provides that matching contributions are subject to the plan’s 20% per year of service vesting schedule and that matching contributions are forfeited and used to reduce employer contributions if associated elective deferrals or after-tax employee contributions are distributed to correct an ADP or ACP test failure. For 2005, nonhighly compensated employees made after-tax

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employee contributions and no highly compensated employee made any after-tax employee contributions. Employee P received a matching contribution of $5,000 (50% of $10,000) and Employee Q received a matching contribution of $4,750 (50% of $9,500). Employees P and Q were 100% vested in 2005. It was determined that the plan satisfied the requirements of the ACP test for 2005.

Correction : The same corrective actions are taken as in Example 1 . In addition, in accordance with the plan’s terms, corrective action is taken to forfeit Employee P’s and Employee Q’s matching contributions associated with their distributed excess contributions. Employee P’s distributed excess contributions and associated matching contributions are $3,437.50 and $1,718.75, respectively. Employee Q’s distributed excess contributions and associated matching contributions are $2,937.50 and $1,468.75, respectively. Thus, $1,718.75 is forfeited from Employee P’s account and $1,468.75 is forfeited from Employee Q’s account. In addition, the Earnings on the forfeited amounts are also forfeited. It is determined that the respective Earnings on the forfeited amount for Employee P is $250 and for Employee Q is $220. The total amount of the forfeitures of $3,657.50 (Employee P’s $1,718.75 + $250 and Employee Q’s $1,468.75 + $220) is used to reduce contributions for 2007 and subsequent years.

.02 Exclusion of Otherwise Eligible Employees . (1) Exclusion of Eligible Employees in a § 401(k) or (m) Plan . (a) Correction Method . (i) Appendix A Correction Method for Full Year Exclusion . Appendix A, section .05(2) sets forth the correction method for the exclusion of an eligible employee from electing and making elective deferrals (other than designated Roth contributions) and after-tax employee contributions to a plan that provides benefits that are subject to the requirements of § 401(k) or 401(m) for one or more full plan years. (See Example 3 .) Appendix A, section .05(2) also specifies the method for determining missed elective deferrals and the corrective contributions for employees who were improperly excluded from electing and making elective deferrals to a safe harbor § 401(k) plan for one or more full plan years. (See Examples 8, 9, and 10 .) Appendix A, section .05(3) sets forth the correction method for the exclusion of an eligible employee from electing and making elective deferrals in a plan that (i) is subject to § 401(k) and (ii) provides employees with the opportunity to make designated Roth contributions. Appendix A, section .05(4) sets forth the correction method for the situation where an eligible employee was permitted to make an elective deferral, but was not provided with the opportunity to make catch-up contributions under the terms of the plan and § 414(v), and correction is being made by making a QNEC on behalf of the excluded employee. (See Example 11 .) Appendix A, section .05(5) sets forth the correction method for the failure by a plan to implement an employee’s election with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions. (See Example 12 .) In section 2.02(1)(a)(ii) below, the correction methods for (I) the exclusion of an eligible employee from all contributions (including designated Roth contributions) under a § 401(k) or (m) plan for a full year, as described in Appendix A, sections .05(2) and .05(3), (II) the exclusion of an eligible employee who was permitted to make elective deferrals, but was not permitted to make catch-up contributions for a full plan year as described in Appendix A, section .05(4), and (III) the exclusion of an eligible employee on account of the failure to implement an employee’s election to make elective deferrals or after-tax employee contributions to the plan as described in Appendix A, section .05(5) are expanded to include correction for the exclusion from these contributions (including designated Roth contributions) under a § 401(k) or (m) plan for a partial plan year. This correction for a partial year exclusion may be used in conjunction with the correction for a full year exclusion.

(ii) Expansion of Correction Method to Partial Year Exclusion . (A) In General . The correction method in Appendix A, section .05, is expanded to cover an employee who was improperly excluded from electing and making elective deferrals (including designated Roth contributions) or after-tax employee contributions for a portion of a plan year or from receiving matching contributions (on either elective deferrals or after-tax employee contributions) for a portion of a plan year. In such a case, a permitted correction method for the failure is for the Plan Sponsor to satisfy this section 2.02(1)(a)(ii). The Plan Sponsor makes a QNEC on behalf of the excluded employee. The method and examples described to correct the failure to include otherwise eligible employees do not apply until after correction of other qualification failures. Thus, for example, in the case of a § 401(k) plan that does not apply the safe harbor contribution requirements of § 401(k)(12) or 401(k)(13) the correction for improperly excluding an employee from making elective deferrals, as described in the narrative and the examples in this section cannot be used until after correction of the ADP test failure. (See Appendix A, section .05(2)(g).)

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(B) Elective Deferral Failures . (1) The appropriate QNEC for the failure to allow an employee to elect and make elective deferrals (including designated Roth contributions) for a portion of the plan year is equal to the missed deferral opportunity which is an amount equal to 50% of the employee’s missed deferral. The employee’s missed deferral is determined by multiplying the ADP of the employee’s group (either highly or nonhighly compensated), determined prior to correction under this section 2.02(1)(a)(ii), by the employee’s plan compensation for the portion of the year during which the employee was improperly excluded. In a safe harbor § 401(k) plan, the employee’s missed deferral is determined by multiplying 3% (or, if greater, whatever percentage of the participant’s compensation which, if contributed as an elective deferral, would have been matched at a rate of 100% or more) by the employee’s plan compensation for the portion of the year during which the employee was improperly excluded. The missed deferral for the portion of the plan year during which the employee was improperly excluded from being eligible to make elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding two sentences of this paragraph) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for Earnings. For purposes of correcting other failures under this revenue procedure (including determination of any required matching contribution) after correction has occurred under this section 2.02(1)(a)(ii)(B), the employee is treated as having made pre-tax elective deferrals equal to the employee’s missed deferral for the portion of the year during which the employee was improperly excluded. (See Examples 4 and 5 .)

(2) The appropriate corrective contribution for the plan’s failure to implement an employee’s election with respect to elective deferrals is equal to the missed deferral opportunity which is an amount equal to 50% of the employee’s missed deferral. Corrective contributions are adjusted for Earnings. The missed deferral is determined by multiplying the employee’s deferral percentage by the employee’s plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a fixed dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a fixed dollar amount to be deferred for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making elective deferral contributions divided by 12. The missed deferral for the portion of the plan year during which the eligible employee was improperly excluded from making elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding three sentences) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ADP test before this correction method can be used, as described in Appendix A, section .05(5)(d), still apply.

(C) After-Tax Employee Contribution Failures . (1) The appropriate corrective contribution for the failure to allow employees to elect and make after-tax employee contributions for a portion of the plan year is equal to the missed after-tax employee contributions opportunity, which is an amount equal to 40% of the employee’s missed after-tax employee contributions. The employee’s missed after-tax employee contributions are determined by multiplying the ACP of the employee’s group (either highly or nonhighly compensated), determined prior to correction under this section 2.02(1)(a)(ii)(C), by the employee’s plan compensation for the portion of the year during which the employee was improperly excluded. If the ACP consists of both matching and after-tax employee contributions, then, for purposes of the preceding sentence, in lieu of basing the missed after-tax employee contributions on the ACP for the employee’s group (either highly compensated or nonhighly compensated), the Plan Sponsor is permitted to determine separately the portions of the ACP that are attributable to matching contributions and after-tax employee contributions and base the missed after-tax employee contributions on the portion of the ACP that is attributable to after-tax employee contributions. The missed after-tax employee contribution is reduced to the extent that (i) the sum of that contribution and

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the actual total after-tax employee contributions made by the employee for the plan year would exceed (ii) the sum of the maximum after-tax employee contributions permitted under the plan for the employee for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section .05(2)(g), still apply.

(2) The appropriate corrective contribution for the plan’s failure to implement an employee’s election with respect to after-tax employee contributions for a portion of the plan year is equal to the missed after-tax employee contributions opportunity, which is an amount equal to 40% of the employee’s missed after-tax employee contributions. Corrective contributions are adjusted for Earnings. The missed after-tax employee contribution is determined by multiplying the employee’s elected after-tax employee contribution percentage by the employee’s plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a flat dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a flat dollar amount to be contributed for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making after-tax employee contributions divided by 12. The missed after-tax employee contribution is reduced to the extent that (i) the sum of that contribution and the actual total after-tax employee contributions made by the employee for the plan year would exceed (ii) the sum of the maximum after-tax employee contributions permitted under the plan for the employee for the plan year. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section .05(5)(d), still apply.

(D) Matching Contribution Failures . (1) The appropriate corrective contribution for the failure to make matching contributions for an employee because the employee was precluded from making elective deferrals (including designated Roth contributions) or after-tax employee contributions for a portion of the plan year is equal to the matching contribution that would have been made for the employee if (1) the employee’s elective deferrals for that portion of the plan year had equaled the employee’s missed deferrals (determined under section 2.02(1)(a)(i)(B)) or (2) the employee’s after-tax contribution for that portion of the plan year had equaled the employee’s missed after-tax employee contribution (determined under section 2.02(1)(a)(ii)(C)). This matching contribution is reduced to the extent that (i) the sum of this contribution and other matching contributions actually made on behalf of the employee for the plan year would exceed (ii) the maximum matching contribution permitted if the employee had made the maximum matchable contributions permitted under the plan for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section .05(2)(g), still apply.

(2) The appropriate corrective contribution for the failure to make matching contributions for an employee because of the failure by the plan to implement an employee’s election with respect to elective deferrals (including designated Roth contributions) or, where applicable, after-tax employee contributions for a portion of the plan year is equal to the matching contribution that would have been made for the employee if the employee made the elective deferral as determined under section 2.02(1)(a)(ii)(B)(2), or where applicable, the after-tax employee contribution determined under section 2.02(1)(a)(ii)(C)(2). This matching contribution is reduced to the extent that (i) the sum of this contribution and other matching contributions actually made on behalf of the employee for the plan year would exceed (ii) the maximum matching contribution permitted if the employee had made the maximum matchable contributions permitted under the plan for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section .05(5)(d), still apply.

(E) Use of Prorated Compensation . For purposes of this paragraph (1)(a)(ii), for administrative convenience, in lieu of using the employee’s actual plan compensation for the portion

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of the year during which the employee was improperly excluded, a pro rata portion of the employee’s plan compensation that would have been taken into account for the plan year, if the employee had not been improperly excluded, may be used.

(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax Employee Con- tributions . An Plan Sponsor is not required to make a corrective contribution with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and (C), but is required to make a corrective contribution with respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D), for an employee for a plan year if the employee has been provided the opportunity to make elective deferrals or after-tax employee contributions under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals or after-tax employee contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred. (See Examples 6 and 7 .)

(b) Examples .

Example 3 : Employer B maintains a § 401(k) plan. The plan provides for matching contributions for eligible employees equal to 100% of elective deferrals that do not exceed 3% of an employee’s compensation. The plan allows employees to make after-tax employee contributions up to a maximum of the lesser of 2% of compensation or $1,000. The after-tax employee contributions are not matched. The plan provides that employees who complete one year of service are eligible to participate in the plan on the next designated entry date. The entry dates are January 1, and July 1. In 2007, it is discovered that Employee V, an NHCE with compensation of $30,000, was excluded from the plan for the 2006 plan year even though she satisfied the plan’s eligibility requirements as of January 1, 2006.

For the 2006 plan year, the relevant employee and contribution information is as follows:

Compensation Elective deferral Match After-Tax Employee Contribution

Highly Compensated Employees (HCEs):

R $200,000 $6,000 $6,000 $0 S $150,000 $12,000 $4,500 $1,000

Nonhighly Compensated Employees (NHCEs):

T $80,000 $12,000 $2,400 $1,000 U $50,000 $500 $500 $0

HCEs :

ADP - 5.5% ACP - 3.33% ACP attributable to matching contributions - 3% ACP attributable to after-tax employee contributions - 0.33%

NHCEs :

ADP - 8% ACP -2.63% ACP attributable to matching contributions - 2% ACP attributable to after-tax employee contributions - 0.63%

Correction : Employer B uses the correction method for a full year exclusion, described in Appendix A, section .05(2), to correct the failure to include Employee V in the plan for the full plan year beginning January 1, 2006. Employer B calculates the corrective QNEC to be made on behalf of Employee V as follows:

Elective deferrals: Employee V was eligible to, but was not provided with the opportunity to, elect and make elective deferrals in 2006. Thus, Employer B must make a QNEC to the plan on behalf of Employee V equal to the missed deferral opportunity for Employee V, which is 50% of Employee V’s missed deferral. The QNEC is adjusted for Earnings. The missed deferral for Employee V is determined by using the ADP for NHCEs for 2006 and multiplying that percentage by Employee V’s compensation for 2006. Accordingly, the missed deferral for Employee V on account of the employee’s improper exclusion from the plan is $2,400 (8% x $30,000). The missed deferral opportunity is $1,200 ( i.e., 50% x $2,400). Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to make elective deferrals to the plan is $1,200 (plus Earnings). The corrective contribution is made to a pre-tax QNEC account for Employee V (not to a designated Roth contributions account even if the plan offers designated Roth contributions, as provided in section .05(3) of Appendix A).

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Matching contributions: Employee V should have been eligible for, but did not receive, an allocation of employer matching contributions because Employee V was not provided the opportunity to make elective deferrals in 2006. Thus, Employer B must make a corrective employer nonelective contribution to the plan on behalf of Employee V that is equal to the matching contribution Employee V would have received had the missed deferral been made. The corrective employer nonelective contribution is adjusted for Earnings. Under the terms of the plan, if Employee V had made an elective deferral of $2,400 or 8% of compensation ($30,000), the employee would have been entitled to a matching contribution equal to 100% of the first 3% of Employee V’s compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed employer matching contribution is $900 (plus Earnings).

After-tax employee contributions: Employee V was eligible to, but was not provided with the opportunity to, elect and make after-tax employee contributions in 2006. Employer B must make a QNEC to the plan equal to the missed opportunity for making after-tax employee contributions for Employee V, which is 40% of Employee V’s missed after-tax employee contribution. The QNEC is adjusted for Earnings. The missed after-tax employee contribution for Employee V is estimated by using the ACP for NHCEs (to the extent that the ACP is attributable to after-tax employee contributions) for 2006 and multiplying that percentage by Employee V’s compensation for 2006. Accordingly, the missed after-tax employee contribution for Employee V, on account of the employee’s improper exclusion from the plan is $189 (0.63% x $30,000). The missed opportunity to make after-tax employee contributions to the plan is $76 (40% x $189). Thus, the required corrective contribution for the failure to provide Employee V with the opportunity to make the $189 after-tax employee contribution to the plan is $76 (plus Earnings).

The total required corrective contribution, before adjustments for Earnings, on behalf of Employee V is $2,176 ($1,200 for the missed deferral opportunity plus $900 for the missed matching contribution plus $76 for the missed opportunity to make after-tax employee contributions). The required corrective contribution is further adjusted for Earnings. The corrective contribution for the missed deferral opportunity ($1,200), the missed opportunity for after-tax employee contributions ($76), and related Earnings must be made in the form of a QNEC.

Example 4 : Employer C maintains a § 401(k) plan. The plan provides for matching contributions for each payroll period that are equal to 100% of an employee’s elective deferrals that do not exceed 2% of the eligible employee’s plan compensation during the payroll period. The plan provides for after-tax employee contributions. The after-tax employee contribution cannot exceed $1,000 for the plan year. The plan provides that employees who complete one year of service are eligible to participate in the plan on the next January 1 or July 1 entry date. Employee X, a nonhighly compensated employee, who met the eligibility requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to elect to have elective contributions made on his behalf to the plan. In August of 2006, the error was discovered and Employer C offered Employee X the opportunity to make elective deferrals and after-tax employee contributions as of September 1, 2006. Employee X made elective deferrals equal to 4% of the employee’s plan compensation for each payroll period from September 1, 2006 through December 31, 2006 (resulting in elective deferrals of $400). Employee X’s plan compensation for 2006 was $36,000 ($26,000 for the first eight months and $10,000 for the last four months). Employer C made matching contributions equal to $200 on behalf of Employee X, which is 2% of Employee X’s plan compensation for each payroll period from September 1, 2006 through December 31, 2006 ($10,000). After being allowed to participate in the plan, Employee X made $250 of after-tax employee contributions for the 2006 plan year. The ADP for nonhighly compensated employees for 2006 was 3% and the ACP for nonhighly compensated employees for 2006 was 2.3%. The ACP attributable to matching contributions for nonhighly compensated employees for 2006 was 1.8%. The ACP attributable to employee contributions for nonhighly compensated employees for 2006 was 0.5%.

Correction : In accordance with section 2.02(1)(a)(ii), Employer C uses the correction method described in Appendix A, section .05, to correct for the failure to provide Employee X the opportunity to elect and make elective deferrals and after-tax employee contributions, and, as a result, the failure of Employee X to receive matching contributions for a portion of the plan year (January 1, 2006 through August 31, 2006). Thus, Employer C makes a corrective contribution on behalf of Employee X that satisfies the requirements of section 2.02(1)(a)(ii). Employer C elects to utilize the provisions of section 2.02(1)(a)(ii)(E) to determine Employee X’s compensation for the portion of the year in which Employee X was not provided the opportunity to make elective deferrals and after-tax employee contributions. Thus, for administrative convenience, in lieu of using actual plan compensation of $26,000 for the period Employee X was excluded, Employee X’s annual plan compensation is prorated for the 8-month period that the employee was excluded from participating in the plan. The corrective contribution is determined as follows:

(1) Corrective contribution for missed deferral : Employee X was eligible to, but was not provided with the opportunity to, elect and make elective deferrals from January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of Employee X equal to Employee X’s missed deferral opportunity for that period, which is 50% of Employee X’s missed deferral. The corrective contribution is adjusted for Earnings. Employee X’s missed deferral is determined by multiplying the 3% ADP for nonhighly compensated employees by $24,000 (8/12ths of the employee’s 2006 compensation of $36,000). Accordingly, the missed deferral is $720. The missed deferral is not reduced because when this amount is added to the amount already deferred, no plan limit (including § 402(g)) was exceeded. Accordingly, the required QNEC is $360 ( i.e. 50% multiplied by the missed deferral amount of $720). The required QNEC is adjusted for Earnings.

(2) Corrective contribution for missed matching contribution : Under the terms of the plan, if Employee X had made an elective deferral of $720 or 3% of compensation for the period of exclusion ($24,000), the employee would have been entitled to a matching contribution equal to 2% of $24,000 or $480. The missed matching contribution is not reduced because no plan limit is exceeded when this amount is added to the matching contribution already contributed

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for the 2006 plan year. Accordingly, the required corrective employer contribution is $480. The required corrective employer contribution is adjusted for Earnings.

(3) Corrective contribution for missed after-tax employee contribution : Employee X was eligible to, but was not provided with the opportunity to elect and make after-tax employee contributions from January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of Employee X equal to the missed opportunity to make after-tax employee contributions. The missed opportunity to make after-tax employee contributions is equal to 40% of Employee X’s missed after-tax employee contributions. The QNEC is adjusted for Earnings. The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the employee’s 2006 plan compensation of $36,000). Accordingly, the missed after-tax employee contribution amount is $120. The missed after-tax employee contribution is not reduced because the sum of $120 and the previously made after-tax employee contribution of $250 is less than the overall plan limit of $1,000. Therefore, the required QNEC is $48 ( i.e., 40% multiplied by the missed after-tax employee contribution of $120). The QNEC is adjusted for Earnings.

The total required corrective contribution, before adjustments for Earnings, on behalf of Employee X is $888 ($360 for the missed deferral opportunity plus $480 for the missed matching contribution plus $48 for the missed opportunity to make after-tax employee contributions). The corrective contribution for the missed deferral opportunity ($360), the missed opportunity for after-tax employee contributions ($48), and related Earnings must be made in the form of a QNEC.

Example 5 : The facts (including the ADP and ACP results) are the same as in Example 4, except that it is now determined that Employee X, after being included in the plan in 2006, made after-tax employee contributions of $950.

Correction: The correction is the same as in Example 4, except that the QNEC required to replace the missed after-tax employee contribution is re-calculated to take into account applicable plan limits in accordance with the provisions of section 2.02(1)(a)(ii)(C). The QNEC is determined as follows: The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to after-tax employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the employee’s 2006 plan compensation of $36,000). The missed after-tax employee contribution amount, based on this calculation, is $120. However, the sum of this amount ($120) and the previously made after-tax employee contribution ($950) is $1,070. Because the plan limit for after-tax employee contributions is $1,000, the missed after-tax employee contribution needs to be reduced by $70, to ensure that the total after-tax employee contributions comply with the plan limit. Accordingly, the missed after-tax employee contribution is $50 ($120 minus $70) and the required QNEC is $20 ( i.e. 40% multiplied by the missed after-tax employee contribution of $50). The QNEC is adjusted for Earnings.

Example 6 : Employer D sponsors a § 401(k) plan. The plan has a one year of service eligibility requirement and provides for January 1 and July 1 entry dates. Employee Y, who should have been provided the opportunity to elect and make elective deferrals for the plan year beginning on January 1, 2006, was not provided the opportunity to elect and make elective deferrals until July 1, 2006. Employee Y made $5,000 in elective deferrals to the plan in 2006. Employee Y was a highly compensated employee with compensation for 2006 of $200,000. Employee Y’s compensation from January 1 through June 30, 2006 was $130,000. The ADP for highly compensated employees for 2006 was 10%. The ADP for nonhighly compensated employees for 2006 was 8%. The § 402(g) limit for deferrals made in 2006 was $15,000.

Correction: QNEC for missed deferral: Employee Y’s missed deferral is equal to the 10% ADP for highly compensated employees multiplied by $130,000 (compensation earned for the portion of the year in which Employee Y was erroneously excluded, i.e., January 1, 2006 through June 30, 2006). The missed deferral amount, based on this calculation is $13,000. However, the sum of this amount ($13,000) and the previously made elective contribution ($5,000) is $18,000. The 2006 § 402(g) limit for elective deferrals is $15,000. In accordance with the provisions of section 2.02(1)(a)(ii)(B), the missed deferral needs to be reduced by $3,000 to ensure that the total elective contribution complies with the applicable § 402(g) limit. Accordingly, the missed deferral is $10,000 ($13,000 minus $3,000) and the required QNEC is $5,000 ( i.e., 50% multiplied by the missed deferral of $10,000). The QNEC is adjusted for Earnings.

Example 7 : Employer E maintains a § 401(k) plan. The plan provides for matching contributions for each payroll period that are equal to 100% of an employee’s elective deferrals that do not exceed 2% of the eligible employee’s plan compensation during the payroll period. The plan also provides that the annual limit on matching contributions is $750. The plan provides for after-tax employee contributions. The after-tax employee contribution cannot exceed $1,000 during a plan year. The plan provides that employees who complete one year of service are eligible to participate in the plan on the next January 1 or July 1 entry date. Employee Z, a nonhighly compensated employee who met the eligibility requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to elect to have elective contributions made on his behalf to the plan. In March of 2006, the error was discovered and Employer E offered the employee an election opportunity as of April 1, 2006. Employee Z had the opportunity to make the maximum elective deferrals and/or after-tax employee contributions that could have been made under the terms of the plan for the entire 2006 plan year. The employee made elective deferrals equal to 3% of the employee’s plan compensation for each payroll period from April 1, 2006 through December 31, 2006 (resulting in elective deferrals of $960). The employee’s plan compensation for 2006 was $40,000 ($8,000 for the first three months and $32,000 for the last nine months). Employer E made matching contributions equal to $640 for the excluded employee, which is 2% of

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the employee’s plan compensation for each payroll period from April 1, 2006 through December 31, 2006 ($32,000). After being allowed to participate in the plan, the employee made $500 in after-tax employee contributions. The ADP for nonhighly compensated employees for 2006 was 3% and the ACP for nonhighly compensated employees for 2006 was 2.3%. The portion of the ACP attributable to matching contributions for nonhighly compensated employees for 2006 was 1.8%. The portion of the ACP attributable to after-tax employee contributions for nonhighly compensated employees for 2006 was 0.5%.

Correction : Employer E uses the correction method for partial year exclusions, pursuant to section 2.02(1)(a)(ii), to correct the failure to include an eligible employee in the plan. Because Employee Z was given an opportunity to make elective deferrals and after-tax employee contributions to the plan for at least the last 9 months of the plan year (and the amount of the elective deferrals or after-tax employee contributions that the employee had the opportunity to make was not less than the maximum elective deferrals or after-tax employee contributions that the employee could have made if the employee had been given the opportunity to make elective deferrals and after-tax employee contributions on January 1, 2006), under the special rule set forth in section 2.02(1)(a)(ii)(F), Employer E is not required to make a QNEC for the failure to provide the employee with the opportunity to make either elective deferrals or after-tax employee contributions. The employer only needs to make a corrective employer nonelective contribution for the failure to provide the employee with the opportunity to receive matching contributions on deferrals that could have been made during the first 3 months of the plan year. The calculation of the corrective employer contribution required to correct this failure is shown as follows:

The missed matching contribution is determined by calculating the matching contribution that the employee would have received had the employee been provided the opportunity to make elective deferrals during the period of exclusion, i.e., January 1, 2006 through March 31, 2006. Assuming that the employee elected to defer an amount equal to 3% of compensation (which is the ADP for the nonhighly compensated employees for the plan year), then, under the terms of the plan, the employee would have been entitled to a matching contribution of 2% of compensation. Pursuant to the provisions of section 2.02(1)(a)(ii)(E), Employer E determines compensation by prorating Employee Z’s annual compensation for the portion of the year that Employee Z was not given the opportunity to make elective deferrals or after-tax employee contributions. Accordingly, the missed matching contribution for the period of exclusion is obtained by multiplying 2% by Employee Z’s compensation of $10,000 (3/12ths of the employee’s 2006 plan compensation of $40,000). Based on this calculation, the missed matching contribution is $200. However, when this amount is added to the matching contribution already received ($640), the total ($840) exceeds the $750 plan limit on matching contributions by $90. Accordingly, pursuant to section 2.02(1)(a)(ii)(D), the missed matching contribution figure is reduced to $110 ($200 minus $90). The required corrective employer contribution is $110. The corrective contribution is adjusted for Earnings.

Example 8 : Employer G maintains a safe harbor § 401(k) plan that requires matching contributions that satisfy the requirements of § 401(k)(12), which are equal to: 100% of elective deferrals that do not exceed 3% of an employee’s compensation and 50% of elective deferrals that exceed 3% but do not exceed 5% of an employee’s compensation. Employee M, a nonhighly compensated employee who met the eligibility requirements and should have entered the plan on January 1, 2006, was not offered the opportunity to defer under the plan and was erroneously excluded for all of 2006. Employee M’s compensation for 2006 was $20,000.

Correction : In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral is equal to 3% multiplied by $20,000, or $600. Accordingly, the required QNEC for Employee M’s missed deferral opportunity in 2006 is $300, i.e., 50% of $600. The missed matching contribution, based on the missed deferral of $600, is $600. The required corrective contribution for Employee M’s missed matching contribution is $600. Since the matching contribution is required to satisfy the requirements of § 401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before adjustments for Earnings, on behalf of Employee M is $900 ( i.e., $300 for the missed deferral opportunity, plus $600 for the missed matching contribution). The QNEC is adjusted for Earnings.

Example 9 : Same facts as Example 8, except that the plan provides for matching contributions equal to 100% of elective deferrals that do not exceed 4% of an employee’s compensation.

Correction : In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on account of exclusion from the safe harbor § 401(k) plan is 4% of compensation. The missed deferral is 4% of compensation because the plan provides for a 100% match for deferrals up to that level of compensation. (See Appendix A, section .05(2)(d).) Therefore, in this case, Employee M’s missed deferral is equal to 4% multiplied by $20,000, or $800. The QNEC for Employee M’s missed deferral opportunity in 2006 is $400, i.e., 50% multiplied by $800. The missed matching contribution, based on the missed deferral of $800, is $800. Thus, the required corrective contribution for Employee M’s missed matching contribution is $800. Since the matching contribution is required to satisfy the requirements of § 401(k)(12), the corrective contribution must be made in the form of a QNEC. The total QNEC, before adjustments for Earnings, on behalf of Employee M is $1,200 ( i.e., $400 for the missed deferral opportunity plus $800 for the missed matching contribution). The QNEC is adjusted for Earnings.

Example 10 : Same facts as Example 8, except that the plan uses a rate of nonelective contributions to satisfy the requirements of § 401(k)(12) and provides for a nonelective contribution equal to 3% of compensation.

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Correction : In accordance with the provisions of section 2.02(1)(a)(ii)(B), Employee M’s missed deferral on account of exclusion from the safe harbor § 401(k) plan is 3% of compensation. Thus, the missed deferral is equal to 3% multiplied by $20,000, or $600. Thus, the QNEC for Employee M’s missed deferral opportunity in 2006 is $300 (50% of $600). The required nonelective contribution, based on the plan’s formula of 3% of compensation for nonelective contributions, is $600. Since the nonelective contribution is required to satisfy the requirements of § 401(k)(12), the corrective contribution is made in the form of a QNEC. The total required QNEC, before adjustments for Earnings, on behalf of Employee M is $900 ( i.e., $300 for the missed deferral opportunity, plus $600 for the missed nonelective contribution). The QNEC is adjusted for Earnings.

Example 11 : Employer H maintains a § 401(k) plan. The plan limit on deferrals is the lesser of the deferral limit under § 401(a)(30) or the limitation under § 415. The plan also provides that eligible participants (as defined in § 414(v)(5)) may make contributions in excess of the plan’s deferral limits, up to the limitations on catch-up contributions for the year. The plan also provides for a 60% matching contribution on elective deferrals. The deferral limit under § 401(a)(30) for 2006 is $15,000. The limitation on catch-up contributions under the terms of the plan and § 414(v)(2)(B)(i) is $5,000. Employee R, age 55, was provided with the opportunity to make elective deferrals up to the plan limit, but was not provided the option to make catch-up contributions. Employee R is a nonhighly compensated employee who earned $60,000 in compensation and made elective deferrals totaling $15,000 in 2006.

Correction : In accordance with the provisions of Appendix A, section .05(4), Employee R’s missed deferral on account of the plan’s failure to offer the opportunity to make catch-up contributions is $2,500 (or one half of the limitation on catch-up contributions for 2006). The missed deferral opportunity is $1,250 (or 50% of $2,500). Thus, the required QNEC for Employee R’s missed deferral opportunity relating to catch-up contributions in 2006 is $1,250 adjusted for Earnings. In addition, Employee R was entitled to an additional matching contribution, under the terms of the plan, equal to 60% of the missed deferral that is attributable to the catch-up contribution that the employee would have made had the failure not occurred. In this case, the missed deferral is $2,500 and the corresponding matching contribution is $1,500 ( i.e., 60% of $2,500). Thus, the required corrective contribution for the additional matching contribution that should have been made on behalf of Employee R is $1,500 adjusted for Earnings.

Example 12 : Employer K maintains a § 401(k) plan. The plan provides for matching contributions for eligible employees equal to 100% of elective deferrals that do not exceed 3% of an employee’s compensation. On January 1, 2006, Employee T made an election to contribute 10% of compensation for the 2006 plan year. However, Employee T’s election was not processed, and the required amounts were not withheld from Employee T’s salary in 2006. Employee T’s salary was $30,000 in 2006.

Correction : Employer K uses the correction method described in Appendix A, section .05(5), to correct the failure to implement Employee T’s election to make elective deferrals under the plan for the full plan year beginning January 1, 2006. Employer K calculates the corrective QNEC to be made on behalf of Employee T as follows:

(1) Elective deferrals : Employee T’s election to make elective deferrals, pursuant to an election, in 2006 was not implemented. Thus, pursuant to section .05(5)(a) of Appendix A, Employer K must make a QNEC to the plan on behalf of Employee T equal to the missed deferral opportunity for Employee T, which is 50% of Employee T’s missed deferral. The QNEC is adjusted for Earnings. The missed deferral for Employee T is determined by using T’s elected deferral percentage (10%) for 2006 and multiplying that percentage by Employee T’s compensation for 2006 ($30,000). Accordingly, the missed deferral for Employee V, on account of the employee’s improper exclusion from the plan is $3,000 (10% x $30,000). The missed deferral opportunity is $1,500 ( i.e., 50% x $3,000). Thus, the required QNEC for the failure to provide Employee V with the opportunity to make elective deferrals to the plan is $1,500 (adjusted for Earnings).

(2) Matching contributions : Employee T should have been eligible for but did not receive an allocation of employer matching contributions because no elective deferrals were made on behalf of Employee T in 2006. Thus, pursuant to section .05(5)(c) of Appendix A, Employer K must make a corrective employer nonelective contribution to the plan on behalf of Employee T that is equal to the matching contribution Employee T would have received had the missed deferral been made. The corrective employer nonelective contribution is adjusted for Earnings. Under the terms of the plan, if Employee T had made an elective deferral of $3,000 or 10% of compensation ($30,000), the employee would have been entitled to a matching contribution equal to 100% of the first 3% of Employee T’s compensation ($30,000) or $900. Accordingly, the contribution required to replace the missed employer matching contribution is $900 (adjusted for Earnings).

The total required corrective contribution, before adjustments for Earnings, on behalf of Employee T is $2,400 ($1,500 for the missed deferral opportunity plus $900 for the missed matching contribution). The corrective contribution for the missed deferral opportunity ($1,500) and related Earnings must be made in the form of a QNEC.

(2) Exclusion of Eligible Employees In a Profit-Sharing Plan . (a) Correction Methods . (i) Appendix A Correction Method . Appendix A, section .05, sets forth the correction method for correcting the failure to make a contribution on behalf of the employees improperly excluded from a defined contribution plan or to provide benefit accruals for the employees improperly excluded from a defined benefit plan. In the case of a defined contribution plan, the correction method is to make a contribution on behalf of the excluded employee. Section 2.02(2)(a)(ii) of

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this Appendix B clarifies the correction method in the case of a profit-sharing or stock bonus plan that provides for nonelective contributions (within the meaning of § 1.401(k)–6).

(ii) Additional Requirements for Appendix A Correction Method as applied to Profit-Sharing Plans . To correct for the exclusion of an eligible employee from nonelective contributions in a profit-sharing or stock bonus plan under the Appendix A correction method, an allocation amount is determined for each excluded employee on the same basis as the allocation amounts were determined for the other employees under the plan’s allocation formula ( e.g., the same ratio of allocation to compensation), taking into account all of the employee’s relevant factors ( e.g., compensation) under that formula for that year. The Plan Sponsor makes a corrective contribution on behalf of the excluded employee that is equal to the allocation amount for the excluded employee. The corrective contribution is adjusted for Earnings. If, as a result of excluding an employee, an amount was improperly allocated to the account balance of an eligible employee who shared in the original allocation of the nonelective contribution, no reduction is made to the account balance of the employee who shared in the original allocation on account of the improper allocation. (See Example 15 .)

(iii) Reallocation Correction Method . (A) In General . Subject to the limitations set forth in section 2.02(2)(a)(iii)(F) below, in addition to the Appendix A correction method, the exclusion of an eligible employee for a plan year from a profit-sharing or stock bonus plan that provides for nonelective contributions may be corrected using the reallocation correction method set forth in this section 2.02(2)(a)(iii). Under the reallocation correction method, the account balance of the excluded employee is increased as provided in paragraph (2)(a)(iii)(B) below, the account balances of other employees are reduced as provided in paragraph (2)(a)(iii)(C) below, and the increases and reductions are reconciled, as necessary, as provided in paragraph (2)(a)(iii)(D) below. (See Examples 16 and 17 .)

(B) Increase in Account Balance of Excluded Employee . The account balance of the excluded employee is increased by an amount that is equal to the allocation the employee would have received had the employee shared in the allocation of the nonelective contribution. The amount is adjusted for Earnings.

(C) Reduction in Account Balances of Other Employees . ( 1 ) The account balance of each employee who was an eligible employee who shared in the original allocation of the nonelective contribution is reduced by the excess, if any, of (I) the employee’s allocation of that contribution over (II) the amount that would have been allocated to that employee’s account had the failure not occurred. This amount is adjusted for Earnings taking into account the rules set forth in section 2.02(2)(a)(iii)(C)( 2 ) and ( 3 ) below. The amount after adjustment for Earnings is limited in accordance with section 2.02(2)(a)(iii)(C)( 4) below.

( 2 ) This paragraph (2)(a)(iii)(C)( 2 ) applies if most of the employees with account balances that are being reduced are nonhighly compensated employees. If there has been an overall gain for the period from the date of the original allocation of the contribution through the date of correction, no adjustment for Earnings is required to the amount determined under section 2.02(2)(a)(iii)(C)( 1 ) for the employee. If the amount for the employee is being adjusted for Earnings and the plan permits investment of account balances in more than one investment fund, for administrative convenience, the reduction to the employee’s account balance may be adjusted by the lowest rate of return of any fund for the period from the date of the original allocation of the contribution through the date of correction.

( 3 ) If an employee’s account balance is reduced and the original allocation was made to more than one investment fund or there was a subsequent distribution or transfer from the fund receiving the original allocation, then reasonable, consistent assumptions are used to determine the Earnings adjustment.

( 4 ) The amount determined in section 2.02(2)(a)(iii)(C)( 1 ) for an employee after the application of section 2.02(2)(a)(iii)(C)( 2 ) and ( 3 ) may not exceed the account balance of the employee on the date of correction, and the employee is permitted to retain any distribution made prior to the date of correction.

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(D) Reconciliation of Increases and Reductions . If the aggregate amount of the increases under section 2.02(2)(a)(iii)(B) exceeds the aggregate amount of the reductions under section 2.02(2)(a)(iii)(C), the Plan Sponsor makes a corrective contribution to the plan for the amount of the excess. If the aggregate amount of the reductions under section 2.02(2)(a)(iii)(C) exceeds the aggregate amount of the increases under section 2.02(2)(a)(iii)(B), then the amount by which each employee’s account balance is reduced under section 2.02(2)(a)(iii)(C) is decreased on a pro rata basis.

(E) Reductions Among Multiple Investment Funds . If an employee’s account balance is reduced and the employee’s account balance is invested in more than one investment fund, then the reduction may be made from the investment funds selected in any reasonable manner.

(F) Limitations on Use of Reallocation Correction Method . If any employee would be permitted to retain any distribution pursuant to section 2.02(2)(a)(iii)(C)( 4 ), then the reallocation correction method may not be used unless most of the employees who would be permitted to retain a distribution are nonhighly compensated employees.

(b) Examples .

Example 13 : Employer D maintains a profit-sharing plan that provides for discretionary nonelective employer contributions. The plan provides that the employer’s contributions are allocated to account balances in the ratio that each eligible employee’s compensation for the plan year bears to the compensation of all eligible employees for the plan year and, therefore, the only relevant factor for determining an allocation is the employee’s compensation. The plan provides for self-directed investments among four investment funds and daily valuations of account balances. For the 2006 plan year, Employer D made a contribution to the plan of a fixed dollar amount. However, five employees who met the eligibility requirements were inadvertently excluded from participating in the plan. The contribution resulted in an allocation on behalf of each of the eligible employees, other than the excluded employees, equal to 10% of compensation. Most of the employees who received allocations under the plan for the year of the failure were nonhighly compensated employees. No distributions have been made from the plan since 2006. If the five excluded employees had shared in the original allocation, the allocation made on behalf of each employee would have equaled 9% of compensation. The excluded employees began participating in the plan in the 2007 plan year.

Correction : Employer D uses the Appendix A correction method to correct the failure to include the five eligible employees. Thus, Employer D makes a corrective contribution to the plan. The amount of the corrective contribution on behalf of the five excluded employees for the 2006 plan year is equal to 10% of compensation of each excluded employee, the same allocation that was made for other eligible employees, adjusted for Earnings. The excluded employees receive an allocation equal to 10% of compensation (adjusted for Earnings) even though, had the excluded employees originally shared in the allocation for the 2006 contribution, their account balances, as well as those of the other eligible employees, would have received an allocation equal to only 9% of compensation.

Example 14 : The facts are the same as in Example 13 . Correction : Employer D uses the reallocation correction method to correct the failure to include the five eligible employees. Thus, the account balances are adjusted to reflect what would have resulted from the correct allocation of the employer contribution for the 2006 plan year among all eligible employees, including the five excluded employees. The inclusion of the excluded employees in the allocation of that contribution would have resulted in each eligible employee, including each excluded employee, receiving an allocation equal to 9% of compensation. Accordingly, the account balance of each excluded employee is increased by 9% of the employee’s 2006 compensation, adjusted for Earnings. The account balance of each of the eligible employees other than the excluded employees is reduced by 1% of the employee’s 2006 compensation, adjusted for Earnings. Employer D determines the adjustment for Earnings using the rate of return of each eligible employee’s excess allocation (using reasonable, consistent assumptions). Accordingly, for an employee who shared in the original allocation and directed the investment of the allocation into more than one investment fund or who subsequently transferred a portion of a fund that had been credited with a portion of the 2006 allocation to another fund, reasonable, consistent assumptions are followed to determine the adjustment for Earnings. It is determined that the total of the initially determined reductions in account balances exceeds the total of the required increases in account balances. Accordingly, these initially determined reductions are decreased pro rata so that the total of the actual reductions in account balances equals the total of the increases in the account balances, and Employer D does not make any corrective contribution. The reductions from the account balances are made on a pro rata basis among all of the funds in which each employee’s account balance is invested.

Example 15 : The facts are the same as in Example 13 . Correction : The correction is the same as in Example 14, except that, because most of the employees whose account balances are being reduced are nonhighly compensated employees, for administrative convenience, Employer D uses the rate of

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return of the fund with the lowest rate of return for the period of the failure to adjust the reduction to each account balance. It is determined that the aggregate amount (adjusted for Earnings) by which the account balances of the excluded employees is increased exceeds the aggregate amount (adjusted for Earnings) by which the other employees’ account balances are reduced. Accordingly, Employer D makes a contribution to the plan in an amount equal to the excess. The reduction from account balances is made on a pro rata basis among all of the funds in which each employee’s account balance is invested.

.03 Vesting Failures . (1) Correction Methods . (a) Contribution Correction Method . A failure in a defined contribution plan to apply the proper vesting percentage to an employee’s account balance that results in forfeiture of too large a portion of the employee’s account balance may be corrected using the contribution correction method set forth in this paragraph. The Plan Sponsor makes a corrective contribution on behalf of the employee whose account balance was improperly forfeited in an amount equal to the improper forfeiture. The corrective contribution is adjusted for Earnings. If, as a result of the improper forfeiture, an amount was improperly allocated to the account balance of another employee, no reduction is made to the account balance of that employee. (See Example 16 .)

(b) Reallocation Correction Method . In lieu of the contribution correction method, in a defined contribution plan under which forfeitures of account balances are reallocated among the account balances of the other eligible employees in the plan, a failure to apply the proper vesting percentage to an employee’s account balance which results in forfeiture of too large a portion of the employee’s account balance may be corrected under the reallocation correction method set forth in this paragraph. A corrective reallocation is made in accordance with the reallocation correction method set forth in section 2.02(2)(a)(iii), subject to the limitations set forth in section 2.02(2)(a)(iii)(F). In applying section 2.02(2)(a)(iii)(B), the account balance of the employee who incurred the improper forfeiture is increased by an amount equal to the amount of the improper forfeiture and the amount is adjusted for Earnings. In applying section 2.02(2)(a)(iii)(C)( 1 ), the account balance of each employee who shared in the allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that was allocated to that employee’s account. The Earnings adjustments for the account balances that are being reduced are determined in accordance with sections 2.02(2)(a)(iii)(C)( 2 ) and ( 3 ) and the reductions after adjustments for Earnings are limited in accordance with section 2.02(2)(a)(iii)(C)( 4 ). In accordance with section 2.02(2)(a)(iii)(D), if the aggregate amount of the increases exceeds the aggregate amount of the reductions, the Plan Sponsor makes a corrective contribution to the plan for the amount of the excess. In accordance with section 2.02(2)(a)(iii)(D), if the aggregate amount of the reductions exceeds the aggregate amount of the increases, then the amount by which each employee’s account balance is reduced is decreased on a pro rata basis. (See Example 17 .)

(2) Examples .

Example 16 : Employer E maintains a profit-sharing plan that provides for nonelective contributions. The plan provides for self-directed investments among four investment funds and daily valuation of account balances. The plan provides that forfeitures of account balances are reallocated among the account balances of other eligible employees on the basis of compensation. During the 2006 plan year, Employee R terminated employment with Employer E and elected and received a single-sum distribution of the vested portion of his account balance. No other distributions have been made since 2006. However, an incorrect determination of Employee R’s vested percentage was made resulting in Employee R receiving a distribution of less than the amount to which he was entitled under the plan. The remaining portion of Employee R’s account balance was forfeited and reallocated (and these reallocations were not affected by the limitations of § 415). Most of the employees who received allocations of the improper forfeiture were nonhighly compensated employees.

Correction : Employer E uses the contribution correction method to correct the improper forfeiture. Thus, Employer E makes a contribution on behalf of Employee R equal to the incorrectly forfeited amount (adjusted for Earnings) and Employee R’s account balance is increased accordingly and subsequently distributed to Employee R. No reduction is made from the account balances of the employees who received an allocation of the improper forfeiture.

Example 17 : The facts are the same as in Example 16 . Correction : Employer E uses the reallocation correction method to correct the improper forfeiture. Thus, Employee R’s account balance is increased by the amount that was improperly forfeited (adjusted for Earnings) and such increase will

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be distributed to Employee R. The account of each employee who shared in the allocation of the improper forfeiture is reduced by the amount of the improper forfeiture that was allocated to that employee’s account (adjusted for Earnings). Because most of the employees whose account balances are being reduced are nonhighly compensated employees, for administrative convenience, Employer E uses the rate of return of the fund with the lowest rate of return for the period of the failure to adjust the reduction to each account balance. It is determined that the amount (adjusted for Earnings) by which the account balance of Employee R is increased exceeds the aggregate amount (adjusted for Earnings) by which the other employees’ account balances are reduced. Accordingly, Employer E makes a contribution to the plan in an amount equal to the excess. The reduction from the account balances is made on a pro rata basis among all of the funds in which each employee’s account balance is invested.

.04 § 415 Failures . (1) Failures Relating to a § 415(b) Excess . (a) Correction Methods . (i) Return of Overpayment Correction Method . Overpayments as a result of amounts being paid in excess of the limits of § 415(b) may be corrected using the return of Overpayment correction method set forth in this paragraph (1)(a)(i). The Plan Sponsor takes reasonable steps to have the Overpayment (with appropriate interest) returned by the recipient to the plan and reduces future benefit payments (if any) due to the employee to reflect § 415(b). To the extent the amount returned by the recipient is less than the Overpayment, adjusted for Earnings at the plan’s earnings rate, then the Plan Sponsor or another person contributes the difference to the plan. In addition, in accordance with section 6.06 of this revenue procedure, the Plan Sponsor must notify the recipient that the Overpayment was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). (See Examples 20 and 21 .)

(ii) Adjustment of Future Payments Correction Method . (A) In General . In addition to the return of overpayment correction method, in the case of plan benefits that are being distributed in the form of periodic payments, Overpayments as a result of amounts being paid in excess of the limits in § 415(b) may be corrected by using the adjustment of future payments correction method set forth in this paragraph (1)(a)(ii). Future payments to the recipient are reduced so that they do not exceed the § 415(b) maximum limit and an additional reduction is made to recoup the Overpayment (over a period not longer than the remaining payment period) so that the actuarial present value of the additional reduction is equal to the Overpayment plus interest at the interest rate used by the plan to determine actuarial equivalence. (See Examples 18 and 19 .)

(B) Joint and Survivor Annuity Payments . If the employee is receiving payments in the form of a joint and survivor annuity, with the employee’s spouse to receive a life annuity upon the employee’s death equal to a percentage ( e.g., 75%) of the amount being paid to the employee, the reduction of future annuity payments to reflect § 415(b) reduces the amount of benefits payable during the lives of both the employee and spouse, but any reduction to recoup Overpayments made to the employee does not reduce the amount of the spouse’s survivor benefit. Thus, the spouse’s benefit will be based on the previous specified percentage ( e.g., 75%) of the maximum permitted under § 415(b), instead of the reduced annual periodic amount payable to the employee.

(C) Overpayment Not Treated as an Excess Amount . An Overpayment corrected under this adjustment of future payment correction method is not treated as an Excess Amount as defined in section 5.01(3) of this revenue procedure.

(b) Examples .

Example 18 : Employer F maintains a defined benefit plan funded solely through employer contributions. The plan provides that the benefits of employees are limited to the maximum amount permitted under § 415(b), disregarding cost-of-living adjustments under § 415(d) after benefit payments have commenced. At the beginning of the 2006 plan year, Employee S retired and started receiving an annual straight life annuity of $185,000 from the plan. Due to an administrative error, the annual amount received by Employee S for 2006 included an Overpayment of $10,000 (because the § 415(b)(1)(A) limit for 2006 was $175,000). This error was discovered at the beginning of 2007.

Correction : Employer F uses the adjustment of future payments correction method to correct the failure to satisfy the limit in § 415(b). Future annuity benefit payments to Employee S are reduced so that they do not exceed the § 415(b) maximum limit, and, in addition, Employee S’s future benefit payments from the plan are actuarially reduced to recoup the Overpayment. Accordingly, Employee S’s future benefit payments from the plan are reduced to $175,000 and further reduced by $1,000 annually for life, beginning in 2007. The annual benefit amount is reduced by $1,000 annually for

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life because, for Employee S, the actuarial present value of a benefit of $1,000 annually for life commencing in 2007 is equal to the sum of $10,000 and interest at the rate used by the plan to determine actuarial equivalence beginning with the date of the first Overpayment and ending with the date the reduced annuity payment begins. Thus, Employee S’s remaining benefit payments are reduced so that Employee S receives $174,000 for 2007, and for each year thereafter.

Example 19 : The facts are the same as in Example 18 . Correction : Employer F uses the adjustments of future payments correction method to correct the § 415(b) failure, by recouping the entire excess payment made in 2006 from Employee S’s remaining benefit payments for 2007. Thus, Employee S’s annual annuity benefit for 2007 is reduced to $164,400 to reflect the excess benefit amounts (increased by interest) that were paid from the plan to Employee S during the 2006 plan year. Beginning in 2008, Employee S begins to receive annual benefit payments of $175,000.

Example 20 : The facts are the same as in Example 18, except that the benefit was paid to Employee S in the form of a single-sum distribution in 2006, which exceeded the maximum § 415(b) limits by $110,000.

Correction : Employer F uses the return of overpayment correction method to correct the § 415(b) failure. Thus, Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment (with interest at the rate used by the plan to calculate the singlesum payment) is owed to the plan. Employer F takes reasonable steps to have the Overpayment (with interest at the rate used by the plan to calculate the single-sum payment) paid to the plan. Employee S pays the $110,000 (plus the requested interest) to the plan. It is determined that the plan’s rate of return for the relevant period was 2 percentage points more than the rate used by the plan to calculate the single-sum payment. Accordingly, Employer F contributes the difference to the plan.

Example 21 : The facts are the same as in Example 20 . Correction : Employer F uses the return of overpayment correction method to correct the § 415(b) failure. Thus, Employer F notifies Employee S of the $110,000 Overpayment and that the Overpayment was not eligible for favorable tax treatment accorded to distributions from qualified plans (and, specifically, was not eligible for tax-free rollover). The notice also informs Employee S that the Overpayment (with interest at the rate used by the plan to calculate the singlesum payment) is owed to the plan. Employer F takes reasonable steps to have the Overpayment (with interest at the rate used by the plan to calculate the single-sum payment) paid to the plan. As a result of Employer F’s recovery efforts, some, but not all, of the Overpayment (with interest) is recovered from Employee S. It is determined that the amount returned by Employee S to the plan is less than the Overpayment adjusted for Earnings at the plan’s rate of return. Accordingly, Employer F contributes the difference to the plan.

(2) Failures Relating to a § 415(c) Excess . (a) Correction Methods . (i) Appendix A Cor- rection Method . Appendix A, section .08, sets forth the correction method for correcting the failure to satisfy the § 415(c) limits on annual additions.

(ii) Forfeiture Correction Method . In addition to the Appendix A correction method, the failure to satisfy § 415(c) with respect to a nonhighly compensated employee (A) who in the limitation year of the failure had annual additions consisting of both (I) either elective deferrals or after-tax employee contributions or both and (II) either matching or nonelective contributions or both, (B) for whom the matching and nonelective contributions equal or exceed the portion of the employee’s annual addition that exceeds the limits under § 415(c) (“§ 415(c) excess”) for the limitation year, and (C) who has terminated with no vested interest in the matching and nonelective contributions (and has not been reemployed at the time of the correction), may be corrected by using the forfeiture correction method set forth in this paragraph. The § 415(c) excess is deemed to consist solely of the matching and nonelective contributions. If the employee’s § 415(c) excess (adjusted for Earnings) has previously been forfeited, the § 415(c) failure is deemed to be corrected. If the § 415(c) excess (adjusted for Earnings) has not been forfeited, that amount is placed in an unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer nonelective contributions in succeeding year(s) (or if the amount would have been allocated to other employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other employees in accordance with the plan’s allocation formula). Note that while this correction method will permit more favorable tax treatment of elective deferrals for the employee than the Appendix A correction method, this correction method could be less

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favorable to the employee in certain cases, for example, if the employee is subsequently reemployed and becomes vested. (See Examples 22 and 23 .)

(iii) Return of Overpayment Correction Method . A failure to satisfy § 415(c) that includes a distribution of the § 415(c) excess attributable to nonelective contributions and matching contributions may be corrected using the return of Overpayment correction method set forth in section 6.06(3) of this revenue procedure.

(b) Examples .

Example 22 : Employer G maintains a § 401(k) plan. The plan provides for nonelective employer contributions, elective deferrals, and after-tax employee contributions. The plan provides that the nonelective contributions vest under a 5-year cliff vesting schedule. The plan provides that when an employee terminates employment, the employee’s nonvested account balance is forfeited five years after a distribution of the employee’s vested account balance and that forfeitures are used to reduce employer contributions. For the 1998 limitation year, the annual additions made on behalf of two nonhighly compensated employees in the plan, Employees T and U, exceeded the limit in § 415(c). For the 1998 limitation year, Employee T had § 415 compensation of $60,000, and, accordingly, a § 415(c)(1)(B) limit of $15,000. Employee T made elective deferrals and after-tax employee contributions. For the 1998 limitation year, Employee U had § 415 compensation of $40,000, and, accordingly, a § 415(c)(1)(B) limit of $10,000. Employee U made elective deferrals. Also, on January 1, 1999, Employee U, who had three years of service with Employer G, terminated his employment and received his entire vested account balance (which consisted of his elective deferrals). The annual additions for Employees T and U consisted of:

T U Nonelective Contributions $7,500 $4,500 Elective Deferrals $10,000 $5,800 After-tax Contributions $500 $0

Total Contributions $18,000 $10,300 § 415(c) Limit $15,000 $10,000 § 415(c) Excess $3,000 $300

Correction : Employer G uses the Appendix A correction method to correct the § 415(c) excess with respect to Employee T ( i.e., $3,000). Thus, a distribution of plan assets (and corresponding reduction of the account balance) consisting of $500 (adjusted for Earnings) of after-tax employee contributions and $2,500 (adjusted for Earnings) of elective deferrals is made to Employee T. Employer G uses the forfeiture correction method to correct the § 415(c) excess with respect to Employee U. Thus, the § 415(c) excess is deemed to consist solely of the nonelective contributions. Accordingly, Employee U’s nonvested account balance is reduced by $300 (adjusted for Earnings) which is placed in an unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer contributions in succeeding year(s). After correction, it is determined that the ADP and ACP tests for 1998 were satisfied.

Example 23 : Employer H maintains a § 401(k) plan. The plan provides for nonelective employer contributions, matching contributions, and elective deferrals. The plan provides for matching contributions that are equal to 100% of an employee’s elective deferrals that do not exceed 8% of the employee’s plan compensation for the plan year. For the 1998 limitation year, Employee V had § 415 compensation of $50,000, and, accordingly, a § 415(c)(1)(B) limit of $12,500. During that limitation year, the annual additions for Employee V totaled $15,000, consisting of $5,000 in elective deferrals, a $4,000 matching contribution (8% of $50,000), and a $6,000 nonelective employer contribution. Thus, the annual additions for Employee V exceeded the § 415(c) limit by $2,500.

Correction : Employer H uses the Appendix A correction method to correct the § 415(c) excess with respect to Employee V (i.e., $2,500). Accordingly, $1,000 of the unmatched elective deferrals (adjusted for Earnings) are distributed to Employee V. The remaining $1,500 excess is apportioned equally between the elective deferrals and the associated matching employer contributions, so Employee V’s account balance is further reduced by distributing to Employee V $750 (adjusted for Earnings) of the elective deferrals and forfeiting $750 (adjusted for Earnings) of the associated employer matching contributions. The forfeited matching contributions are placed in an unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer contributions in succeeding year(s). After correction, it is determined that the ADP and ACP tests for 1998 were satisfied.

.05 Correction of Other Overpayment Failures . An Overpayment, other than one described in section 2.04(1) (relating to a § 415(b) excess) or section 2.04(2) (relating to a § 415(c) excess), may be corrected in accordance with this section 2.05. An Overpayment from a defined

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benefit plan is corrected in accordance with the rules in section 2.04(1). An Overpayment from a defined contribution plan is corrected in accordance with the rules in section 2.04(2)(a)(iii).

.06 Section 401(a)(17) Failures . (1) Reduction of Account Balance Correction Method . The allocation of contributions or forfeitures under a defined contribution plan for a plan year on the basis of compensation in excess of the limit under § 401(a)(17) for the plan year may be corrected using the reduction of account balance correction method set forth in section 6.06(2) of this revenue procedure.

(2) Example .

Example 24 : Employer J maintains a money purchase pension plan. Under the plan, an eligible employee is entitled to an employer contribution of 8% of the employee’s compensation up to the § 401(a)(17) limit ($220,000 for 2006). During the 2006 plan year, an eligible employee, Employee W, inadvertently was credited with a contribution based on compensation above the § 401(a)(17) limit. Employee W’s compensation for 2006 was $250,000. Employee W received a contribution of $20,000 for 2006 (8% of $250,000), rather than the contribution of $17,600 (8% of $220,000) provided by the plan for that year, resulting in an improper allocation of $2,400.

Correction : The § 401(a)(17) failure is corrected using the reduction of account balance method by reducing Employee W’s account balance by $2,400 (adjusted for Earnings) and crediting that amount to an unallocated account, as described in section 6.06(2) of this revenue procedure, to be used to reduce employer contributions in succeeding year(s).

.07 Correction by Amendment . (1) Section 401(a)(17) Failures . (a) Contribution Correc- tion Method . In addition to the reduction of account balance correction method under section 6.06(2) of this revenue procedure, a Plan Sponsor may correct a § 401(a)(17) failure for a plan year under a defined contribution plan by using the contribution correction method set forth in this paragraph. The Plan Sponsor contributes an additional amount on behalf of each of the other employees (excluding each employee for whom there was a § 401(a)(17) failure) who received an allocation for the year of the failure, and amends the plan (as necessary) to provide for the additional allocation. The amount contributed for an employee is equal to the employee’s plan compensation for the year of the failure multiplied by a fraction, the numerator of which is the improperly allocated amount made on behalf of the employee with the largest improperly allocated amount, and the denominator of which is the limit under § 401(a)(17) applicable to the year of the failure. The resulting additional amount for each of the other employees is adjusted for Earnings. (See Example 25 .)

(b) Example .

Example 25 : The facts are the same as in Example 24 . Correction : Employer J corrects the failure under VCP using the contribution correction method by (1) amending the plan to increase the contribution percentage for all eligible employees (other than Employee W) for the 2003 plan year and (2) contributing an additional amount (adjusted for Earnings) for those employees for that plan year. To determine the increase in the plan’s contribution percentage (and the additional amount contributed on behalf of each eligible employee), the improperly allocated amount ($2,400) is divided by the § 401(a)(17) limit for 2006 ($220,000). Accordingly, the plan is amended to increase the contribution percentage by 1.09 percentage points ($2,400/$220,000) from 8% to 9.09%. In addition, each eligible employee for the 2006 plan year (other than Employee W) receives an additional contribution of 1.09% multiplied by that employee’s plan compensation for 2006. This additional contribution is adjusted for Earnings.

(2) Hardship Distribution Failures and Plan Loan Failures . (a) Plan Amendment Correction Method . The Operational Failure of making hardship distributions to employees under a plan that does not provide for hardship distributions may be corrected using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to provide for the hardship distributions that were made available. This paragraph does not apply unless (i) the amendment satisfies § 401(a), and (ii) the plan as amended would have satisfied the qualification requirements of § 401(a) (including the requirements applicable to hardship distributions under § 401(k), if applicable) had the amendment been adopted when hardship distributions were first made available. (See Example 26 .) The Plan Amendment Correction Method is also available for the Operational Failure of permitting plan loans to employees under a plan that does not provide for plan loans. The plan is amended retroactively to provide for

2013–4 I.R.B. 389 January 22, 2013