SECTION 14. AUDIT CAP — Internal Revenue Bulletin 2018-42

SANCTION

.01 Determination of sanction. The sanction under Audit CAP is a negotiated amount that is determined based on the facts and circumstances, including the relevant factors described in section 14.02. Sanctions will not be excessive and will bear a reasonable relationship to the nature, extent, and severity of the failures, based on the factors below. The sanction generally will not be less than the VCP user fee applicable to the plan. See section 14.04 for special rules relating to the sanction for Nonamender Failures discovered during the determination letter application process.

.02 Factors considered . Factors include:

(1) For all plans (as appropriate) : (a) the steps taken by the Plan Sponsor to ensure that the plan had no failures;

(b) the steps taken by the Plan Sponsor to identify failures that may have occurred;

(d) the number and type of employees affected by the failure;

(e) the number of nonhighly compensated employees who would be adversely affected if the plan were not treated as qualified or as satisfying the requirements of § 403(b), 408(k), or 408(p);

(f) whether the failure is a failure to satisfy the requirements of § 401(a)(4),

401(a)(26), or 410(b), either directly or through § 403(b)(12);

(g) whether the failure is solely an Employer Eligibility Failure;

(h) the period over which the failure occurred (for example, the time that has elapsed since the end of the applicable remedial amendment period under § 401(b) for a Plan Document Failure);

(i) the reason for the failure (for example, data errors such as errors in transcription of data, the transposition of numbers, or minor arithmetic errors), and

(j) the Maximum Payment Amount. (2) Additional factors for Nonamender Failures in Qualified Plans. The factors considered for Nonamender Failures in Qualified Plans also include:

(a) whether the plan is the subject of a Favorable Letter;

(b) the internal controls implemented by the Plan Sponsor to ensure the timely adoption of required amendments;

(c) the extent to which the Plan Sponsor had adopted a timely plan amendment which later is found not to satisfy the qualification requirements of the Code;

(d) the extent to which the Plan Sponsor had otherwise adopted applicable amendments identified on the Required Amendments List described in § 9 of Rev. Proc. 2016–37 and published annually in the Internal Revenue Bulletin; and

(e) the extent to which the Plan Sponsor had reasonably determined that a provision on the Required Amendments List described in § 9 of Rev. Proc. 2016–37 was not applicable to the Plan Sponsor’s plan.

(3) Participant loan failure. An additional factor taken into account with respect to a participant loan that did not comply with the requirements of § 72(p)(2) is the extent to which the failure is a result solely of action (or inaction) of the employer or its agents (or the extent to which the failure is a result of the employee’s or beneficiary’s actions or inaction).

.03 Transferred Assets . If the examination involves a plan with Transferred Assets and the IRS determines that no new incidents of the failures that relate to the Transferred Assets occurred after the end of the second plan year that begins after the corporate merger, acquisition, or other similar employer transaction, the sanction under Audit CAP will not exceed the

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sanction that would apply if the Transferred Assets were maintained as a separate plan.

.04 Sanction for Nonamender Failures discovered during the determination letter application process . (1) Except as provided in section 14.04(2) and (3), if the only failure identified by the IRS during the determination letter application process is a Nonamender Failure that was not voluntarily identified by the Plan Sponsor:

(a) The sanction for an individually designed plan is determined as follows:

(i) 150% of the applicable VCP user fee described in Appendix A of Rev. Proc. 2018–4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted after the end of the plan’s last remedial amendment cycle to which Rev. Proc. 2007–44 applied, and

(ii) 250% of the applicable VCP user fee described Appendix A of Rev. Proc. 2018–4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted at any time before the end of the plan’s last remedial amendment cycle to which Rev. Proc. 2007–44 applied.

(b) The sanction for a Pre-approved Plan is determined as follows:

(ii) 250% of the applicable VCP user fee described in Appendix A of Rev. Proc. 2018–4 (and its annual successors) if the Nonamender Failure arose in connection with an amendment that was required to be adopted at any time before the end of the plan’s second six-year remedial amendment cycle.

(2) The sanction prescribed in section 14.04(1) may be reduced or increased in the following circumstances:

(a) If a plan amendment was timely adopted in order to maintain the plan’s qualified status but is found not to satisfy the qualification requirements of the Code, the applicable sanction described in section 14.04(1) may be reduced based on the facts and circumstances, including the

factors described in section 14.02(2)(a), (b) and (c). However, the sanction generally will not be less than the VCP user fee applicable to the plan.

(b) If a Nonamender Failure is egregious, the sanction will be determined under section 14.01. Whether a Nonamender Failure is egregious will be determined based on the facts and circumstances, including:

(i) the number of plan amendments that were not timely adopted;

(ii) the number of years that had elapsed from the end of the remedial amendment period until amendments were adopted (if at all); and

(iii) the extent to which the plan lacked internal controls to facilitate the timely adoption of amendments.