SECTION 18. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 15451673. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this revenue procedure is in sections 4.05, 6.02(5)(d), 6.09(5), 6.09(6), 10, 11, 13.01, sections .05(8)(c) and .05(9)(c) of Appendix A, and sections 2.01–2.07 of Appendix B. This information is required to enable the Commissioner, Tax Exempt and Government Entities Division of the IRS to consider the issuance of various types of closing agreements and compliance statements. This information will be used to issue closing agreements and compliance statements to allow individual plans to continue to maintain their tax favored status. As a result, favorable tax treatment of the benefits of the eligible employees is retained. The likely respondents are individuals, state or local governments, businesses or other for-profit institutions, nonprofit institutions, and small businesses or organizations.

The estimated total annual reporting or recordkeeping burden is 91,791 hours.

The estimated annual burden per respondent/recordkeeper varies from .5 to 45.5 hours, depending on individual circumstances, with an estimated average of 25.28 hours. The estimated number of respondents or recordkeepers is 5,375.

The estimated frequency of responses is occasional.

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

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DRAFTING INFORMATION

The principal authors of this revenue procedure are Kathleen Herrmann and Vernon S. Carter of the Office of the Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue procedure, please contact the Employee Plans’ taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:30 a.m. and 4:30 p.m. Eastern Time, Monday through Friday.

APPENDIX A

OPERATIONAL FAILURES AND CORRECTION METHODS

.01 General rule . (1) In general . This appendix sets forth Operational Failures and Correction Methods relating to Qualified Plans. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect Earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure. To the extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, the correction method listed for such failure, such as the correction method for an Employee Elective Deferral failure in section .05(9), may similarly be used to correct the failure.

(2) Correction methods permitted in Appendix A and Appendix B are safe har- bors . Correction methods permitted in Appendix A and Appendix B are deemed to be reasonable and appropriate methods of correcting a failure. Both Appendices set forth various correction methods that may be used to correct a failure, depending on the facts and circumstances. A Plan Sponsor may choose any correction method by which the plan can satisfy the eligibility requirements. For example, a

§ 401(k) plan that improperly excluded an employee may use the general correction method under .05(2). However, if the § 401(k) plan has an automatic contribution feature, the plan may use the correction method under .05(8), assuming the plan meets the eligibility requirements in .05(8)(a). If the § 401(k) plan doesn’t have an automatic contribution feature but corrects the failure within a specified time period, the plan may use the correction method under .05(9)(a) or (b), assuming the plan meets the eligibility requirements in .05(9)(a) or (b).

(3) Other reasonable correction meth- ods permitted . As provided in section 6.02(2), there may be more than one reasonable and appropriate correction of a failure. Any correction method used that is not described in Appendix A or Appendix B would need to satisfy the correction principles of section 6.02. For example, the sponsor of a 403(b) Plan that failed to satisfy the universal availability requirement of § 403(b)(12)(A)(ii) might propose to determine the missed deferral for an excluded employee using a percentage based on the average deferrals for all employees in the plan instead of using the rule for calculating missed deferrals set out in .05(6)(b). In doing so, the proposed correction method would fall outside Appendix A, and the Plan Sponsor would need to satisfy the general correction principles of section 6.02 and other applicable rules in this revenue procedure.

.02 Failure to properly provide the minimum top-heavy benefit under § 416 to non-key employees . In a defined contribution plan, the permitted correction method is to properly contribute and allocate the required top-heavy minimums to the plan in the manner provided for in the plan on behalf of the non-key employees (and any other employees required to receive topheavy allocations under the plan). In a defined benefit plan, the minimum required benefit must be accrued in the manner provided in the plan.

.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth in § 401(m)(2), or, for plan years begin- ning on or before December 31, 2001, the multiple use test of § 401(m)(9) . The permitted correction method is to make QNECs (as defined in § 1.401(k)–6) on behalf of the nonhighly compensated em

ployees to the extent necessary to raise the actual deferral percentage or actual contribution percentage of the nonhighly compensated employees to the percentage needed to pass the test or tests. For purposes of correcting a failed ADP, ACP, or multiple use test, any amounts used to fund QNECs must satisfy the definition of QNEC in § 1.401(k)–6). The contributions must be made on behalf of all eligible nonhighly compensated employees (to the extent permitted under § 415) and must be the same percentage of compensation. QNECs contributed to satisfy the ADP test need not be taken into account for determining additional contributions (for example, a matching contribution), if any. For purposes of this section .03, employees who would have received a matching contribution had they made elective deferrals must be counted as eligible employees for the ACP test, and the plan must satisfy the ACP test. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.410(b)–6(b)(3)), in order to reduce the number of employees eligible to receive QNECs. Likewise, under this correction method, the plan may not be restructured into component plans in order to reduce the number of employees eligible to receive QNECs.

.04 Failure to distribute elective defer- rals in excess of the § 402(g) limit (in contravention of § 401(a)(30)) . The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. The inclusion of the deferral and the distribution in gross income applies whether or not any portion of the excess deferral is attributable to a designated Roth contribution (see § 402A(d)(3)). In accordance with § 1.402(g)–1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test and a distribution to a nonhighly compensated employee is not included in the ADP test.

.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years . (1) Improperly excluded employees: em- ployer provided contributions or benefits . For plans with employer provided contri

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butions or benefits (which are neither elective deferrals under a qualified cash or deferred arrangement under § 401(k) nor matching or after-tax employee contributions that are subject to § 401(m)), the permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a defined contribution plan or to provide benefit accruals for the employees excluded from a defined benefit plan.

(2) Improperly excluded employees: contributions subject to § 401(k) or 401(m) . (a) For plans providing benefits subject to § 401(k) or 401(m), the corrective contribution for an improperly excluded employee is described in the following paragraphs of this section .05(2). (See Examples 3 through 12 of Appendix B.)

(b) If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a § 401(k) plan that does not satisfy § 401(k)(3) by applying the safe harbor contribution requirements of § 401(k)(12) or 401(k)(13), the employer must make a QNEC to the plan on behalf of the employee that replaces the “missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the employee’s “missed deferral.” The missed deferral is determined by multiplying the actual deferral percentage for the year of exclusion (whether or not the plan is using current or prior year testing) for the employee’s group in the plan (either highly compensated or nonhighly compensated) by the employee’s compensation for that year. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.410(b)–6(b)(3)) in order to reduce the applicable ADP, the corresponding missed deferral, and the required QNEC. Likewise, restructuring the plan into component plans is not permitted in order to reduce the applicable ADP, the corresponding missed deferral, and the required QNEC. The QNEC required for the employee for the missed

deferral opportunity for the year of exclusion is adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

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

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

§ 401(k) plan that uses nonelective contributions to satisfy the safe harbor requirements of § 401(k)(12). The QNEC required to replace the employee’s missed deferral opportunity and the corresponding matching or nonelective contribution is adjusted for Earnings to the date the corrective QNEC is made on behalf of the employee.

(ii) If the employee was not provided the opportunity to make an affirmative election with respect to elective deferrals (other than designated Roth contributions) to a safe harbor § 401(k) plan that uses an automatic contribution arrangement to satisfy the safe harbor requirements of § 401(k)(13) and the failure occurs for a period that does not extend past the last day of the first plan year which begins after the date on which the first deferral would have been made (but for the failure), then the missed deferral is deemed to equal 3% of the employee’s compensation under the plan. If the failure occurs for a plan year or plan years subsequent to the period described in the prior sentence, then the missed deferral for each subsequent plan year is equal to the qualified percentage specified in the plan document to comply with § 401(k)(13)(C)(iii). The missed deferral determined in accordance with this section .05(2)(d)(ii) replaces the estimate based on the ADP test in a traditional § 401(k) plan. The required corrective employer contribution on behalf of the excluded employee is equal to (i) the missed deferral opportunity, which is an amount equal to 50% of the missed deferral, plus (ii) an amount equal to either the matching contribution that would apply under § 401(k)(13) based on the missed deferral or the nonelective contribution that would have been made on behalf of the employee under § 401(k)(13), whichever applies under the plan. The employer contribution for the missed deferral opportunity must be a QNEC. The corrective employer contribution consisting of the QNEC required to replace the employee’s missed deferral opportunity and the corresponding matching or nonelective contribution is adjusted for Earnings to the date the corrective employer contribution is made on behalf of the employee.

(iii) In the case of a failure to make the required nonelective contribution for a plan year under a safe harbor § 401(k)

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plan that uses the nonelective contribution under § 401(k)(12)(C) to satisfy the safe harbor requirements of § 401(k)(12) or that uses the nonelective contribution under § 401(k)(13)(D)(i)(I) to satisfy the safe harbor requirements of § 401(k)(13), the nonelective contribution (which must be a QNEC in the case of a plan that uses § 401(k)(12) to satisfy ADP) required to be made on behalf of the employee is equal to 3% of the employee’s compensation during the period of the failure. For this purpose, the period of the failure for any plan year ends at the end of the plan year or, if earlier, the later of June 18, 2009 or the date 30 days after notice was provided to employees as required under applicable Treasury Regulations (see § 1.401(k)–3(g)(ii) of the proposed regulations, at 74 FR 23134).

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

(f) If the employee was improperly excluded from an allocation of employer matching contributions because he or she was not given the opportunity to make after-tax employee contributions (other than

designated Roth contributions), the employer must make a corrective employer nonelective contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the matching contribution the employee would have received had the employee made an after-tax employee contribution equal to the missed after-tax employee contribution determined under section .05(2)(e). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee.

(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded.

(3) Improperly excluded employees: designated Roth contributions . For employees who were improperly excluded from plans that (i) are subject to § 401(k) (as described in section .05(2)) and (ii) provide for the optional treatment of elective deferrals as designated Roth contributions, the correction is the same as described under section .05(2). Thus, for example, the corrective employer contribution required to replace the missed deferral opportunity is made in accordance with the method described in section .05(2)(b) in the case of a § 401(k) plan that is not a safe harbor § 401(k) plan or .05(2)(d) in the case of a safe harbor § 401(k) plan. However, none of the corrective contributions made by the employer may be treated as designated Roth contributions (and may not be included in an employee’s gross income)

and thus may not be contributed or allocated to a Roth account (as described in § 402A(b)(2)). The corrective employer contribution must be allocated to an account established for receiving a QNEC or any other employer contribution in which the employee is fully vested and subject to the withdrawal restrictions that apply to elective deferrals.

(4) Improperly excluded employees: catch-up contributions only . (a) Correc- tion for missed catch-up contributions . If an eligible employee was not provided the opportunity to elect and make catch-up contributions to a § 401(k) plan, the employer must make a QNEC to the plan on behalf of the employee that replaces the “missed deferral opportunity” attributable to the failure to permit an eligible employee to make a catch-up contribution pursuant to § 414(v). The missed deferral opportunity for catch-up contributions is equal to 50% of the employee’s missed deferral attributable to catch-up contributions. For this purpose, the missed deferral attributable to catch-up contributions is one half of the applicable catch-up contribution limit for the year in which the employee was improperly excluded. Thus, for example if an eligible employee was improperly precluded from electing and making catch-up contributions in 2006, the missed deferral attributable to catch-up contributions is $2,500, which is one half of $5,000, the 2006 catch-up contribution limit for a § 401(k) plan. The eligible employee’s missed deferral opportunity is $1,250 (that is, 50% of the missed deferral attributable to catch-up contributions of $2,500). The QNEC required to replace the missed deferral opportunity for the year of exclusion is adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee. For purposes of this correction, an eligible employee, pursuant to § 414(v) (5), refers to any participant who (i) would have attained age 50 by the end of the plan’s taxable year and (ii) in the absence of the plan’s catch-up provision, could not make additional elective deferrals on account of the plan or statutory limitations described in § 414(v)(3) and § 1.414(v)–1(b)(1).

(b) Correction for missed matching contributions on catch-up contributions . If an employee was precluded from making catch-up contributions under this sec

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tion .05(4), the Plan Sponsor should ascertain whether the affected employee would have been entitled to an additional matching contribution on account of the missed deferral. If the employee would have been entitled to an additional matching contribution, then the employer must make a corrective employer nonelective contribution for the matching contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the additional matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under paragraph (a) of this section .05(4). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee. If in addition to the failure to provide matching contributions under this section .05(4)(b), the plan also failed the ACP test, the correction methods described in this section cannot be used until after correction of the ACP test failure. For purposes of this section, in order to determine whether the plan passed the ACP test the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard any employer matching contribution that was not made on account of the plan’s failure to provide an eligible employee with the opportunity to make a catch-up contribution.

(5) Failure to implement an employee election . (a) Missed opportunity for elec- tive deferrals . For eligible employees who filed elections to make elective deferrals under the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the “missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the employee’s “missed deferral.” The missed deferral is determined by multiplying the employee’s elected deferral percentage by the employee’s compensation. If the employee elected a dollar amount for an elective deferral, the missed deferral would be the specified dollar

amount. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. The QNEC must be adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

(b) Missed opportunity for after-tax employee contributions . For eligible employees who filed elections to make aftertax employee contributions under the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the employee’s missed opportunity for after-tax employee contributions. The missed opportunity for making after-tax employee contributions is equal to 40% of the employee’s “missed after-tax contributions.” The missed aftertax employee contribution is determined by multiplying the employee’s elected after-tax employee contribution percentage by the employee’s compensation. The QNEC must be adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

(c) Missed opportunity affecting match- ing contributions . In the event of failure described in paragraph (a) or (b) of this section .05(5), if the employee would have been entitled to an additional matching contribution had either the missed deferral or after-tax employee contribution been made, then the Plan Sponsor must make a corrective employer nonelective contribution for the matching contribution on behalf of the affected employee, or a corrective QNEC in the case of a safe harbor plan under § 401(k)(12). The corrective employer nonelective contribution or QNEC is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under this paragraph. The corrective employer nonelective contribution or QNEC must be adjusted for Earnings to the date the corrective contribution or QNEC is made on behalf of the affected employee.

(d) Coordination with correction of other Qualification Failures . The method for correcting the failures described in this section .05(5) does not apply until after the correction of other qualification fail

ures. Thus, for example, if in addition to the failure to implement an employee’s election, the plan also failed the ADP test or ACP test, the correction methods described in section .05(5)(a), (b), or (c) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(5), in order to determine whether the plan passed the ADP or ACP test the plan may rely on a test performed with respect to those eligible employees who were not impacted by the Plan Sponsor’s failure to implement employee elections and received allocations of employer matching contributions, in accordance with the terms of the plan, and may disregard employees whose elections were not properly implemented.

(6) Failure of a 403(b) Plan to satisfy the universal availability requirement of § 403(b)(12)(A)(ii) . (a) Subject to the specific rules in this section .05(6), the correction methods set forth in this section .05 (and section 2.02 of Appendix B) for a Qualified Plan also apply to a 403(b) Plan that has a similar failure.

(b) If the employee was not provided the opportunity to elect and make elective deferrals to a 403(b) Plan, then, in lieu of determining the missed deferral based on the actual deferral percentage as described in section .05(2)(b), the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the Plan Sponsor provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee.

(7) Improper exclusion of an eligible employee from a SIMPLE IRA plan sub- ject to the requirements of § 408(p) . (a) Subject to the specific rules in this section .05(7), the correction methods set forth in this section .05 for a Qualified Plan also apply to a SIMPLE IRA plan that has a similar failure.

(b) If the employee was not provided the opportunity to elect and make elective deferrals to a SIMPLE IRA plan, then, in lieu of determining the missed deferral based on the actual deferral percentage as described in section .05(2)(b), the missed deferral is deemed to be 3% of compensation.

(8) Special safe harbor correction method for failures related to automatic contribution features in a § 401(k) plan or

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street address, email address, and telephone number of a plan contact).

(d) Sunset of safe harbor correction method . The safe harbor correction method described in this section .05(8) of this appendix is available for plans only with respect to failures that begin on or before December 31, 2020.

(9) Safe harbor correction methods for Employee Elective Deferral Failures in § 401(k) plans or 403(b) Plans . (a) Safe harbor correction method for Employee Elective Deferral Failures that do not ex- ceed three months . Under this safe harbor correction method, an Employee Elective Deferral Failure (as defined in section .05(10) of this appendix ) can be corrected without a QNEC for missed elective deferrals if the following conditions are satisfied:

(i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;

(ii) Notice of the failure that satisfies the content requirements of section .05(9)(c) of this appendix is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and

(iii) If the eligible employee would have been entitled to additional matching contributions had the missed deferrals been made, the Plan Sponsor makes a corrective allocation (adjusted for Earnings, which may be calculated as described in section .05(8)(b) of this appendix) on behalf of the employee equal to the matching contributions that would have been required under the terms of the plan as if the missed deferrals had been contributed to the plan in accordance with the timing requirements under SCP for significant operational failures (described in section 9.02).

(b) Safe harbor correction method for Employee Elective Deferral Failures that extend beyond three months but do not extend beyond the SCP correction period for significant failures . This safe harbor

a 403(b) Plan . (a) Eligibility to use safe harbor correction method . This safe harbor correction method is available for certain Employee Elective Deferral Failures (as defined in section .05(10) of this appendix associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a § 401(k) plan or 403(b) Plan (including employees who made affirmative elections in lieu of automatic contributions but whose elections were not implemented correctly). If the failure to implement an automatic contribution feature for an affected eligible employee or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature does not extend beyond the end of the 9½-month period after the end of the plan year of the failure (which is generally the filing deadline of the Form 5500 series return, including automatic extensions), no QNEC for the missed elective deferrals is required, provided that the following conditions are satisfied:

(i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the 9½-month period after the end of the plan year in which the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;

(ii) Notice of the failure that satisfies the content requirements of section .05(8)(c) of this appendix is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and

(iii) If the eligible employee would have been entitled to additional matching contributions had the missed deferrals been made, the Plan Sponsor makes a corrective allocation (adjusted for Earnings) on behalf of the employee equal to the matching contributions that would have been required under the terms of the plan as if the missed deferrals had been contributed to the plan in accordance with timing requirements under SCP for significant operational failures (described in section 9.02).

(b) Calculation of Earnings for certain failures to implement automatic contribu- tion features . This correction method provides an alternative safe harbor method for calculating Earnings for Employee Elective Deferral Failures under § 401(k) plans or 403(b) Plans that have automatic contribution features and that are corrected in accordance with the procedures in this section .05(8). If an affected eligible employee has not affirmatively designated an investment alternative, missed Earnings may be calculated based on the plan’s default investment alternative, provided that, with respect to a correction made in accordance with the procedures in this section .05(8), any cumulative losses reflected in the Earnings calculation will not result in a reduction in the required corrective contributions relating to any matching contributions. The Plan Sponsor may also use the Earnings adjustment methods set forth in section 3 of Appendix B.

(c) Content of notice requirement . The notice required under section .05(8)(a)(ii) of this appendix must include the following information:

(i) General information relating to the failure, such as the percentage of eligible compensation that should have been deferred and the approximate date that the compensation should have begun to be deferred. The general information need not include a statement of the dollar amounts that should have been deferred.

(ii) A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly).

(iii) A statement that corrective allocations relating to missed matching contributions have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.

(iv) An explanation that the affected participant may increase his or her deferral percentage in order to make up for the missed deferral opportunity, subject to applicable limits under § 402(g).

(v) The name of the plan and plan contact information (including name,

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correction is for failures that exceed three months (or the conditions for the safe harbor correction method described in section .05(8) or .05(9)(a) of this appendix are not met by the Plan Sponsor). Under this safe harbor correction, the required corrective employer contribution is equal to 25% of the missed deferrals (25% QNEC) in lieu of the higher QNEC required in sections .05(2)(b) and .05(5)(a) of this appendix. In order to use this safe harbor correction method, the Plan Sponsor must satisfy the following conditions:

(i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the second plan year following the plan year in which the failure occurred or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;

(ii) Notice of the failure that satisfies the content requirements of section .05(9)(c) of this Appendix A is given to an affected participant not later than 45 days after the date on which correct deferrals begin; and

(iii) Corrective allocations, as described in section 6.02(4) of this revenue procedure (including the 25% QNEC and employer contributions to make up for any missed matching contributions), are made in accordance with timing requirements under SCP for significant operational failures (described in section 9.02 of this revenue procedure), including adjustments for Earnings, which may be calculated as described in section .05(8)(b) of this appendix.

(c) Content of notice requirement . The notice required under section .05(9)(a)(ii) and section .05(9)(b)(ii) of this appendix must include the following information:

(i) General information relating to the failure, such as the percentage of eligible compensation that should have been deferred and the approximate date that the compensation should have begun to be deferred. The general information need not include a statement of the dollar amounts that should have been deferred.

(ii) A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan

(or that appropriate deductions and contributions will begin shortly).

(iii) A statement that corrective allocations have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.

(iv) An explanation that the affected participant may increase his or her deferral percentage in order to make up for the missed deferral opportunity, subject to applicable limits under § 402(g).

(v) The name of the plan and plan contact information (including name, street address, email address, and telephone number of a plan contact).

(10) Employee Elective Deferral Fail- ure. For purposes of sections .05(8) and .05(9) of this appendix, an “Employee Elective Deferral Failure” is a failure to implement elective deferrals correctly in a § 401(k) plan or 403(b) Plan, including elective deferrals pursuant to an affirmative election or pursuant to an automatic contribution feature under a § 401(k) plan or 403(b) Plan, and a failure to afford an employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan. Automatic contribution features include automatic enrollment and automatic escalation features (including automatic escalation features that were affirmatively elected).

.06 Failure to timely pay the minimum distribution required under § 401(a)(9) . In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with Earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)–5, Q&A–3, reduced by the amount of the total missed minimum distributions for prior years. In a defined benefit plan, the permitted correction method is to distribute the required minimum distributions, plus an interest payment based on the plan’s actuarial equivalence factors in effect on the date that the distribution should have been made. See

section 6.02(4)(d) of this revenue procedure. If this correction is made at the time the plan is subject to a restriction on single-sum payments pursuant to § 436(d), the Plan Sponsor must contribute to the plan the applicable amount under section 6.02(4)(e)(ii)(A) as part of the correction.

.07 Failure to obtain participant or spousal consent for a distribution subject to the participant and spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417 . (1) The permitted correction method is to give each affected participant a choice between providing informed consent for the distribution actually made or receiving a qualified joint and survivor annuity. In the event that participant or spousal consent is required but cannot be obtained, the participant must receive a qualified joint and survivor annuity based on the monthly amount that would have been provided under the plan at his or her retirement date. This annuity may be actuarially reduced to take into account distributions already received by the participant. However, the portion of the qualified joint and survivor annuity payable to the spouse upon the death of the participant may not be actuarially reduced to take into account prior distributions to the participant. Thus, for example, if, in accordance with the automatic qualified joint and survivor annuity option under a plan, a married participant who retired would have received a qualified joint and survivor annuity of $600 per month payable for life with $300 per month payable to the spouse for the spouse’s life beginning upon the participant’s death, but instead received a single-sum distribution equal to the actuarial present value of the participant’s accrued benefit under the plan, then the $600 monthly annuity payable during the participant’s lifetime may be actuarially reduced to take the single-sum distribution into account. However, the spouse must be entitled to receive an annuity of $300 per month payable for life beginning at the participant’s death.

(2) An alternative permitted correction method is to give each affected participant a choice between (i) providing informed consent for the distribution actually made, (ii) receiving a qualified joint and survivor annuity (both (i) and (ii) of this section .07(2) are described in section .07(1) of this Appendix A), or (iii) a single-sum payment to

Bulletin No. 2018–42 647 October 15, 2018

the participant’s spouse equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under § 417(e)(3)). For example, assuming the actuarial present value of a $300 per month annuity payable to the spouse for the spouse’s life beginning upon the participant’s death was $7,837 (calculated using the applicable interest rate and applicable mortality table under § 417(e)(3)), the single-sum payment to the spouse under clause (iii) of this section .07(2) is equal to $7,837. If the single-sum payment is made to the spouse, then the payment is treated in the same manner as a distribution under § 402(c)(9) for purposes of rolling over the payment to an IRA or other eligible retirement plan. If correction is made at the time the plan is subject to a restriction on single-sum payments pursuant to § 436(d), then the alternative permitted correction in this section .07(2) is available only if the Plan Sponsor (or other person) contributes to the plan the applicable amount under section 6.02(4)(e)(ii)(A) as part of the correction.

.08 Failure to satisfy the § 415 limits in a defined contribution plan . For limitation years beginning before January 1, 2009, the permitted correction for failure to limit annual additions (other than elective deferrals and after-tax employee contributions) allocated to participants in a defined contribution plan as required in § 415 (even if the excess did not result from the allocation of forfeitures or from a reasonable error in estimating compensation) is to place the excess annual additions into an unallocated account, similar to the suspense account described in § 1.415– 6(b)(6)(iii) (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under § 415, to be used as an employer contribution, other than elective deferrals, in the succeeding year(s). While such amounts remain in the unallocated account, the Plan Sponsor is not permitted to make additional contributions to the plan. The permitted correction for failure to limit annual additions that are elective deferrals or after-tax employee contributions (even if the excess did not result from a reasonable error in determining compensation, the amount of elective deferrals or

after-tax employee contributions that could be made with respect to an individual under the § 415 limits) is to distribute the elective deferrals or after-tax employee contributions using a method similar to that described under § 1.415– 6(b)(6)(iv) (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under § 415. Elective deferrals and aftertax employee contributions that are matched may be returned to the employee, provided that the matching contributions relating to such contributions are forfeited (which will also reduce excess annual additions for the affected individuals). The forfeited matching contributions are to be placed into an unallocated account to be used as an employer contribution, other than elective deferrals, in succeeding periods. For limitation years beginning on or after January 1, 2009, the failure to limit annual additions allocated to participants in a defined contribution plan as required in § 415 is corrected in accordance with section 6.06(2) and (4).

.09 Orphan Plans; orphan contracts and other assets . (1) Orphan Plans . If (a) a plan has one or more failures (whether a Qualification Failure or a 403(b) Failure) that result from the Plan Sponsor having ceased to exist, the Plan Sponsor no longer maintaining the plan, or similar reasons and (b) the plan is an Orphan Plan, as defined in section 5.03, the permitted correction is to terminate the plan and distribute plan assets to participants and beneficiaries. This correction must satisfy four conditions. First, the correction must comply with conditions, standards, and procedures substantially similar to those set forth in section 2578.1 of the Department of Labor regulations (relating to abandoned plans). Second, the qualified termination administrator, as defined in 2578.1(g) of the Department of Labor regulations, based on plan records located and updated in accordance with the Department of Labor regulations, must have reasonably determined whether, and to what extent, the survivor annuity requirements of §§ 401(a)(11) and 417 apply to any benefit payable under the plan and take reasonable steps to comply with those requirements (if applicable). Third, each participant and beneficiary must have been provided a nonforfeit

able right to his or her accrued benefits as of the date of deemed termination under the Department of Labor regulations, subject to income, expenses, gains, and losses between that date and the date of distribution. Fourth, participants and beneficiaries must receive notification of their rights under § 402(f). In addition, notwithstanding correction under this revenue procedure, the IRS reserves the right to pursue appropriate remedies under the Code against any party who is responsible for the plan, such as the Plan Sponsor, plan administrator, or owner of the business, even in its capacity as a participant or beneficiary under the plan. However, with respect to the first through third conditions above, notice need not be furnished to the Department of Labor, and notices furnished to the Plan Sponsor, participants, or beneficiaries need not indicate that the procedures followed or notices furnished actually comply with, or are required under, Department of Labor regulations.

(2) 403(b) Failures for orphan con- tracts or other assets . (a) Former employ- ees or beneficiaries . In any case in which a 403(b) Failure results from the Plan Sponsor having ceased involvement with respect to specific assets (including an insurance annuity contract) held under a defined contribution plan on behalf of a participant who is a former employee or on behalf of a beneficiary, a permitted correction is to distribute those plan assets to the participant or beneficiary. Compliance with the distribution rules of section 2578.1(d)(2)(vii) of the Department of Labor regulations satisfies this paragraph .09(2)).

(b) Failures Relating to Information Sharing Agreements . In any case in which a 403(b) Failure results from a contract issued in an exchange not being part of a 403(b) Plan due to the failure to have an information sharing agreement pursuant to § 1.403(b)–10(b)(2)(i)(C), a permitted correction is for the assets held under the contract to be transferred to another vendor to which contributions are being made under the plan in order to become a contract which is held under the plan without regard to the special rules in § 1.403(b)– 10(b).

October 15, 2018 648 Bulletin No. 2018–42

APPENDIX B

CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS AND EXAMPLES

SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES

.01 Purpose . (1) This appendix sets forth correction methods relating to Operational Failures under Qualified Plans. This appendix also sets forth Earnings adjustment methods. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect Earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure.

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

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

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

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

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

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

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

.03 Designated Roth contributions . The examples in this Appendix B generally do not identify whether the plan offers designated Roth contributions. The results in the 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.