us-irs-revenue-procedures-rp-99-31•rp-99-31.pdf
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Part III---Administrative, Procedural and Miscellaneous
26 CFR 601.202: Closing Agreements.
Rev. Proc. 99-31
TABLE OF CONTENTS
SECTION 1. PURPOSE AND BACKGROUND
.01 Purpose
.02 Background
.03 Overview
.04 Request for Comments
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE; RELIANCE
.01 Effect of this Revenue Procedure
.02 Revenue Procedure Not Applicable to 403(b) Plans
.03 Reliance
.04 Effect of Future Guidance
SECTION 3. GENERALLY APPLICABLE PROVISIONS
.01 General
.02 Correction Should not Violate § 401(a)
.03 Consistency Requirement
.04 Treatment of Excess Amounts
.05 No Effect on Other Law
.06 Definitions
.07 Assumptions for Examples
SECTION 4. CORRECTION METHODS AND EXAMPLES
.01 ADP/ACP Failures
.02 Exclusion of Eligible Employees
(1) Exclusion of Eligible Employees in a 401(k) or (m)
Plan
(2) Exclusion of Eligible Employees in a Profit-Sharing Plan
.03 Vesting Failures
.04 § 415 Failures
(1) Failures Relating to a § 415(b) Excess
(2) Failures Relating to a § 415(c) Excess
.05 Other Overpayment Failures
.06 § 401(a)(17) Failures
.07 Correction by Amendment under Walk-in CAP
(1) § 401(a)(17) Failures
(2) Hardship Distribution Failures
SECTION 5. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01 Earnings Adjustment Methods
.02 Examples
SECTION 6. EFFECT ON OTHER DOCUMENTS
2
SECTION 7. EFFECTIVE DATE
SECTION 8. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
3
SECTION 1. PURPOSE AND BACKGROUND
.01 Purpose. (1) This revenue procedure augments the Employee
Plans Compliance Resolution System ("EPCRS"). It describes and
illustrates many of the correction methods sponsors of qualified
plans under Internal Revenue Code § 401(a) or 403(a) can use to
correct failures to comply with the qualified plan rules. Among
the numerous favorable comments on EPCRS, many suggested that it
would be helpful to provide additional guidance on acceptable
means of correction.
(2) This revenue procedure, together with the standardized
correction methods described in Rev. Proc. 98-22, 1998-12 I.R.B.
11, gives plan sponsors methods (and in many cases alternative
methods) they can use to correct the Operational Failures
typically encountered under EPCRS. Of course, other methods of
correcting the same Operational Failures might also be reasonable
and appropriate. The methods described in this revenue procedure
will be particularly useful for plan sponsors self-correcting
Operational Failures under APRSC. The revenue procedure includes
numerous examples illustrating these correction methods.
(3) The correction methods described in this revenue procedure
include the following --
CFor § 401(k) and § 401(m) nondiscrimination failures, in
addition to the SVP correction method, a "one-to-one"
correction method which combines distribution of excess
contributions with an equivalent corrective contribution
4
that typically will be less than the corrective contribution
under the SVP correction method for the same failure;
CIf eligible employees have been excluded from receiving
employer contributions under a profit-sharing or stock bonus
plan, then, in addition to the SVP correction method,
improperly allocated contributions can be reallocated to the
excluded eligible employees, in accordance with specified
requirements;
CIf an amount has been improperly forfeited under a defined
contribution plan, then either a corrective contribution can
be made or, in accordance with specified requirements, the
improperly forfeited amount can be reallocated;
CIf payments from a defined benefit plan exceeded the §
415(b) limits, the excess can be repaid to the plan or
future payments can be reduced;
CIf annual additions under a defined contribution plan
exceeded the § 415(c) limits, then in addition to the SVP
correction method, the previously paid excess can be repaid
to the plan or, in the case of certain terminated employees
who have received a distribution of elective deferrals,
nonvested employer contributions can be forfeited;
CIf amounts in excess of certain other limits have been paid,
then the excesses can be repaid to the plan or, as an
additional alternative in the case of a defined benefit
plan, future benefit payments can be reduced;
5
CIf contributions to a defined contribution plan have been
allocated based on compensation in excess of the §
401(a)(17) limit, then the excess allocation can be
reallocated to other participants or used to reduce future
employer contributions or, as an additional alternative,
under the Walk-in Closing Agreement Program ("Walk-in CAP"),
additional plan contributions can be made for other
employees;
CIf hardship distributions that were not permitted under plan
terms have been made, then, in accordance with specified
requirements, a corrective plan amendment can be made under
Walk-in CAP; and
CIf corrective contributions or allocations are made under a
defined contribution plan, several alternative methods are
provided for adjustments to reflect earnings.
This revenue procedure also expands the SVP correction method for
the exclusion of eligible employees from elective deferrals,
employee after-tax contributions, and matching contributions for
a full year to include partial year exclusions, and clarifies the
SVP correction method for exclusion of eligible employees from
employer nonelective contributions under profit-sharing and stock
bonus plans.
(4) The Service anticipates that the methods and examples
described in this revenue procedure will be updated, and the
methods and examples may be supplemented or expanded. In
6
addition, the Service will continue to monitor and improve EPCRS
as a whole, and accordingly, intends to revise Rev. Proc. 98-22
to reflect experience and public comments.
.02 Background. (1) Rev. Proc. 98-22, modified and
consolidated into EPCRS the various Internal Revenue Service
programs relating to correction of certain failures
("Qualification Failures"), which affect the qualification of a
plan intended to be qualified under § 401(a) or 403(a)
("Qualified Plans"), or § 403(b) ("403(b) plans"). The programs
consolidated into EPCRS include the Administrative Policy
Regarding Self-Correction ("APRSC"), the Voluntary Compliance
Resolution ("VCR") program, Walk-in CAP, and the Audit Closing
Agreement Program ("Audit CAP"). Rev. Proc. 99-13, 1999-5 I.R.B.
52, modified and amplified Rev. Proc. 98-22 with respect to
403(b) plans.
(2) Section 6 of Rev. Proc. 98-22 sets forth correction
principles that apply to all of the EPCRS programs. The
standardized correction methods permitted under the Standardized
VCR Procedure ("SVP") set forth in Appendix A of Rev. Proc. 98-22
are deemed to be reasonable and appropriate methods of correction
for certain Qualification Failures that arise solely from failure
to follow the terms of a plan ("Operational Failures"). Section
6.02(2) of Rev. Proc. 98-22 provides that there may be more than
one reasonable and appropriate correction method for a
Qualification Failure. Section 6.02(3) of Rev. Proc. 98-22
7
provides that corrective allocations under a defined contribution
plan should be adjusted for earnings and forfeitures that would
have been allocated to a participant’s account if the failure had
not occurred.
.03 Overview. (1) Section 2 of this revenue procedure
describes the effect of this revenue procedure and taxpayers’
ability to rely on it.
(2) Section 3 sets forth certain provisions that generally
apply with respect to the correction methods and earnings
adjustment methods under this revenue procedure, and assumptions
that apply for purposes of the examples in this revenue
procedure.
(3) Section 4 sets forth a number of reasonable and appropriate
correction methods (and examples) that may be used to correct
specific Operational Failures. Section 4 also clarifies and
expands on certain correction methods under SVP. Consistent with
section 6.02(2) of Rev. Proc. 98-22, other correction methods,
different from those illustrated in this revenue procedure, may
also be considered reasonable and appropriate for the same
Operational Failure.
(4) Section 5 sets forth earnings adjustment methods (and
examples) that may be used to adjust a corrective contribution or
allocation for earnings in a defined contribution plan.
Consequently, these earnings adjustment methods may be used to
determine the earnings adjustments for corrective contributions
8
or allocations under the correction methods in section 4 and
under certain SVP correction methods. Other earnings adjustment
methods, different from those illustrated in this revenue
procedure, may also be appropriate for adjusting corrective
contributions or allocations to reflect earnings.
.04 Request for Comments. The Service solicits comments and
suggestions relating to this revenue procedure. In particular,
the Service requests (1) comments on the correction methods,
earnings adjustment methods, and examples described in this
revenue procedure, (2) suggestions for alternative methods of
correction for the Operational Failures addressed in this revenue
procedure, and (3) suggestions for methods of correction for
Qualification Failures not addressed in this revenue procedure
(including methods for correcting failures with respect to 403(b)
plans). It is requested that comments and suggestions be
submitted by November 21, 1999, addressed to CC:DOM:CORP:R (Rev.
Proc. 99-31), Room 5228, Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044. In the alternative,
comments may be hand-delivered between the hours of 8 a.m. and 5
p.m. to CC:DOM:CORP:R (Rev. Proc. 99-31), Courier’s Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers may transmit comments
electronically by using the following site:
cynthia.grigsby@m1.irscounsel.treas.gov
9
SECTION 2. EFFECT OF THIS REVENUE PROCEDURE; RELIANCE
.01 Effect of this Revenue Procedure. If an Operational
Failure addressed in this revenue procedure is corrected in the
specific manner described in an applicable correction method set
forth in this revenue procedure, the Service will treat the
correction as a reasonable and appropriate correction for the
Operational Failure under section 6.02(2) of Rev. Proc. 98-22.
In addition, if an earnings adjustment is made to a corrective
contribution or allocation under a defined contribution plan in a
specific manner described in section 5 of this revenue procedure,
the Service will treat the earnings adjustment as satisfying the
requirement of section 6.02(3)(a) of Rev. Proc. 98-22 that
corrective allocations in a defined contribution plan be adjusted
for earnings.
.02
Revenue Procedure Not Applicable to 403(b) Plans. This
revenue procedure does not apply to 403(b) plans. Accordingly,
sponsors of 403(b) plans cannot rely on the correction methods
under section 4 and the earnings adjustment methods under section
5. For guidance relating to 403(b) plans, see Rev. Proc. 99-13.
.03 Reliance. Taxpayers may rely on Rev. Proc. 98-22, as
supplemented by this revenue procedure. Accordingly, if an
Operational Failure addressed in this revenue procedure is
corrected in accordance with the requirements of APRSC, VCR,
Walk-in CAP, or Audit CAP, whichever is applicable; the
eligibility requirements set forth in section 4 of Rev. Proc. 98-
10
22 for the applicable program are satisfied; and the Operational
Failure is corrected using an applicable correction method
described in this revenue procedure that otherwise satisfies
section 6.02 of Rev. Proc. 98-22, then, in accordance with
section 3 of Rev. Proc. 98-22, the plan will not be disqualified
by reason of the Operational Failure.
.04 Effect of Future Guidance. The Service expects that the
correction methods and earnings adjustment methods described in
this revenue procedure will be updated periodically in light of
experience gained and comments received. However, taxpayers will
be able to continue to rely on the correction methods and
earnings adjustment methods in this revenue procedure for
corrections prior to the publication of future guidance.
SECTION 3. GENERALLY APPLICABLE PROVISIONS
.01
General. Unless otherwise specified, the provisions of
this section 3 apply for purposes of the correction methods in
section 4 and the earnings adjustment methods in section 5 of
this revenue procedure.
.02 Correction Should Not Violate e Qualification Requirements.
As provided in Rev. Proc. 98-22, section 6.02(2)(d), the
correction method used to correct an Operational Failure should
not violate § 401(a). If an additional Qualification Failure is
created as a result of the use of a correction method in this
revenue procedure, then that Qualification Failure also must be
11
corrected in conjunction with the use of that correction method
and in accordance with the requirements of EPCRS.
.03 Consistency Requirement. Generally, where more than one
correction method is available to correct a type of Operational
Failure for a plan year (or where there are alternative ways to
apply a correction method), the correction method (or alternative
ways to apply the correction method) should be applied
consistently in correcting all Operational Failures of that type
for that plan year. Similarly, earnings adjustment methods
generally should be applied consistently with respect to
corrective contributions or allocations for a particular type of
Operational Failure for a plan year.
.04
Treatment of Excess Amounts. A distribution of an Excess
Amount is not eligible for the favorable tax treatment accorded
to distributions from qualified plans (such as eligibility for
rollover under § 402(c)). To the extent that a current or prior
distribution was a distribution of an Excess Amount, that
distribution is not an eligible rollover distribution. Thus, for
example, if such a distribution was contributed to an individual
retirement arrangement ("IRA"), the contribution is not a valid
rollover contribution for purposes of determining the amount of
excess contributions (within the meaning of § 4973) to the
individual's IRAs. Where an Excess Amount has been distributed
in connection with an Operational Failure that is being corrected
using a correction method set forth in section 4, the employer
12
must notify the recipient that (1) the Excess Amount was
distributed and (2) the Excess Amount was not eligible for
favorable tax treatment accorded to distributions from qualified
plans (and, specifically, was not eligible for tax-free
rollover).
.05 No Effect on Other Law. In accordance with section 6.06
of Rev. Proc. 98-22, compliance under these programs has no
effect on the rights of any party under any other law, including
Title I of the Employee Retirement Income Security Act of 1974.
.06
Definitions. (1) Definitions from Rev. Proc. 98-22. The
definitions set forth in section 5 of Rev. Proc. 98-22 apply for
purposes of this revenue procedure.
(2) Excess Amount Defined. For purposes of this revenue
procedure, an Excess Amount is (a) an Overpayment (within the
meaning of section 4.05(2)), (b) an elective deferral or employee
after-tax contribution returned to satisfy § 415, (c) an elective
deferral in excess of the limitation of § 402(g) that is
distributed, (d) an excess contribution or excess aggregate
contribution that is distributed to satisfy § 401(k) or § 401(m),
or (e) any similar amount required to be distributed in order to
maintain plan qualification.
.07 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;
13
(2) the employer 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 APRSC, VCR, Walk-in
CAP, 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.
SECTION 4. CORRECTION METHODS AND EXAMPLES
.01
ADP/ACP Failures
(1) Correction Methods. (a) SVP Correction Method. Appendix
A, section .03 of Rev. Proc. 98-22 sets forth the SVP correction
method for a failure to satisfy the actual deferral percentage
("ADP"), actual contribution percentage ("ACP"), or 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 SVP correction method, a failure to satisfy the ADP, ACP,
or multiple use test may be corrected using the one-to-one
correction method set forth in this section 4.01(1)(b). Under
14
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 highly
compensated employees or forfeited from 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.
(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 the amount treated as excess contributions
or excess aggregate contributions under the multiple use test
pursuant to § 401(m)(9) and § 1.401(m)-2(c) of the Income Tax
Regulations for the year, as assigned to each highly compensated
employee in accordance with § 401(k)(8)(C) and (m)(6)(C), over
(B) previous corrections permitted under § 401(k)(8), (m)(6), and
(m)(9). See Notice 97-2, 1997-1 C.B. 348.
(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 through the date of
15
correction. The amount assigned to a particular highly
compensated employee, as adjusted, is distributed or, to the
extent the amount is 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 3.06(2). Thus, pursuant to
section 3.04, the employer must notify the employee that the
Excess Amount was not eligible for favorable tax treatment
accorded to distributions from qualified plans (and,
specifically, was 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 4.01(b)(iii) (A)
or (B), then it is an Overpayment defined in section 4.05(2) that
must be corrected (see section 4.05(1)).
(iv) Contribution and Allocation of Equivalent Amount. (A)
The employer makes a contribution to the plan that is equal to
the aggregate amounts distributed and forfeited under paragraph
(1)(b)(iii)(A) (i.e., the excess contribution amount adjusted for
16
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 satisfy the vesting requirements and
distribution limitations of § 401(k)(2)(B) and (C).
(B)(1) This paragraph (1)(b)(iv)(B)(1) applies to a plan that
uses the current year testing method described in Notice 98-1,
1998-3 I.R.B. 42. 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 not highly compensated employees for
that year or (II) the eligible employees for the year of the
failure who were not highly compensated employees for that year
and who also are not highly 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 employer
selects, the contribution is allocated to each such employee
either as the same percentage of the employee's compensation for
the year of the failure or as the same dollar amount for each
employee. (See Examples 1, 2 and 3.) Under the one-to-one
17
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 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)
("401(k) plan") using the current year testing method
described in Notice 98-1. The plan does not provide for
matching contributions or employee after-tax contributions.
In 1999, it was discovered that the ADP test for 1997 was
not performed correctly. When the ADP test was performed
correctly, the test was not satisfied for 1997. For 1997,
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)). (The ADP
18
for nonhighly compensated employees for 1996 also was 4%, so
the ADP test for 1997 would not have been satisfied even if
the plan had used the prior year testing method described in
Notice 98-1.) There were two highly compensated employees
eligible under the 401(k) plan during 1997, Employee P and
Employee Q. Employee P made elective deferrals of $8,000,
which is equal to 10% of Employee P’s compensation of
$80,000 for 1997. Employee Q made elective deferrals of
$9,500, which is equal to 8% of Employee Q’s compensation of
$118,750 for 1997.
Correction
:
On June 30, 1999, Employer A uses the one-to-one correction
method to correct the failure to satisfy the ADP test for
1997. 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 $3,200
(4% of $80,000) and the amount of the excess contribution
for Employee Q is $2,375 (2% of $118,750), or a total of
$5,575. In accordance with § 401(k)(8)(C), $5,575, the
excess contribution amount, is assigned $2,037.50 to
Employee P and $3,537.50 to Employee Q. It is determined
that the earnings on the assigned amounts through June 30,
1999 are $407 and $707 for Employees P and Q, respectively.
The assigned amounts and the earnings are distributed to
19
Employees P and Q. Therefore, Employee P receives $2,444.50
($2,037.50 + $407) and Employee Q receives $4,244.50
($3,537.50 + $707). In addition, on the same date, a
corrective contribution is made to the 401(k) plan equal to
$6,689 (the sum of the $2,444.50 distributed to Employee P
and the $4,244.50 distributed to Employee Q). The
corrective contribution is allocated to the account balances
of eligible nonhighly compensated employees for 1997, pro
rata based on their compensation for 1997 (subject to § 415
for 1997).
Example 2
:
The facts are the same as in Example 1.
Correction:
The correction is the same as in Example 1, except that the
corrective contribution of $6,689 is allocated in an equal
dollar amount to the account balances of eligible nonhighly
compensated employees for 1997 who are employees on June 30,
1999 and who are nonhighly compensated employees for 1999
(subject to § 415 for 1997).
Example 3:
The facts are the same as in Example 1, except that for 1997
the plan also provides (1) for employee after-tax
contributions and (2) for matching contributions equal to
50% of the sum of an employee's elective deferrals and
employee after-tax contributions that do not exceed 10% of
20
the employee’s compensation. The plan provides that
matching contributions are subject to the plan’s 5-year
graded vesting schedule and that matching contributions are
forfeited and used to reduce employer contributions if
associated elective deferrals or employee after-tax
contributions are distributed to correct an ADP, ACP or
multiple use test failure. For 1997, nonhighly compensated
employees made employee after-tax contributions and no
highly compensated employee made any employee after-tax
contributions. Employee P received a matching contribution
of $4,000 (50% of $8,000) and Employee Q received a matching
contribution of $4,750 (50% of $9,500). Employees P and Q
were 100% vested in 1997. It is determined that, for 1997,
the ACP for highly compensated employees was not more than
125% of the ACP for nonhighly compensated employees, so that
the ACP and multiple use tests would have been satisfied for
1997 without any corrective action.
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
$2,037.50 and $1,018.75, respectively. Employee Q’s
21
distributed excess contributions and associated matching
contributions are $3,537.50 and $1,768.75, respectively.
Thus, $1,018.75 is forfeited from Employee P’s account and
$1,768.75 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 $150 and for Employee
Q is $204. The total amount of the forfeitures of $3,141.50
(Employee P’s $1,018.75 + $150 and Employee Q’s $1,768.75 +
$204) is used to reduce contributions for 1999 and
subsequent years.
.02
Exclusion of Eligible Employees
(1) Exclusion of Eligible Employees in a 401(k) or (m) Plan.
(a) Correction Method. (i) SVP Correction Method for Full Year
Exclusion. Appendix A, section .05 of Rev. Proc. 98-22 sets
forth the SVP correction method for the exclusion of an eligible
employee from all contributions under a 401(k) or (m) plan for
one or more full plan years. (See Example 4.) In section
4.02(1)(a)(ii) below, the SVP correction method for the exclusion
of an eligible employee from all contributions under a 401(k) or
(m) plan for a full year is expanded to include correction for
the exclusion of an eligible employee from all 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.
22
(ii) Expansion of SVP Correction Method to Partial Year
Exclusion. (A) In General. The correction method in Appendix A,
section .05 of Rev. Proc. 98-22 is expanded to cover an employee
who was improperly excluded from making elective deferrals or
employee after-tax contributions for a portion of a plan year or
from receiving matching contributions (on either elective
deferrals or employee after-tax contributions) for a portion of a
plan year. In such case, the permitted correction method under
SVP for the failure is for the employer to satisfy this section
4.02(1)(a)(ii). The employer makes a corrective contribution on
behalf of the excluded employee that satisfies the vesting
requirements and distribution limitations of § 401(k)(2)(B) and
(C).
(B) Elective Deferral Failures. The appropriate corrective
contribution for the failure to allow employees to make elective
deferrals for a portion of the plan year is equal to the ADP of
the employee's group (either highly or nonhighly compensated),
determined prior to correction under this section 4.02(1)(a)(ii),
multiplied by the employee's plan compensation for the portion of
the year during which the employee was improperly excluded. The
corrective contribution 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 (1
) the sum
of that contribution and any elective deferrals actually made by
the employee for that year would exceed (2) the maximum elective
23
deferrals permitted under the plan for the employee for that plan
year (including the § 402(g) limit). The corrective contribution
is adjusted for earnings. (See Examples 5 and 6.)
(C) Employee After-tax and Matching Contribution Failures.
The appropriate corrective contribution for the failure to allow
employees to make employee after-tax contributions or to receive
matching contributions because the employee was precluded from
making employee after-tax contributions or elective deferrals for
a portion of the plan year is equal to the ACP of the employee's
group (either highly or nonhighly compensated), determined prior
to correction under this section 4.02(1)(a)(ii), multiplied by
the employee's plan compensation for the portion of the year
during which the employee was improperly excluded. The
corrective contribution is reduced to the extent that (1
) the sum
of that contribution and the actual total employee after-tax and
matching contributions made by and for the employee for the plan
year would exceed (2) the sum of the maximum employee after-tax
contributions permitted under the plan for the employee for the
plan year and the matching contributions that would have been
made if the employee had made the maximum matchable contributions
permitted under the plan for the employee for that plan year.
The corrective contribution is adjusted for earnings.
(D) 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 of
24
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.
(E) Special Rule for Brief Exclusion from Elective Deferrals.
An employer is not required to make a corrective contribution
with respect to elective deferrals, as provided in section
4.02(1)(a)(ii)(B), (but is required to make a corrective
contribution with respect to any employee after-tax and matching
contributions, as provided in section 4.02(1)(a)(ii)(C)) for an
employee for a plan year if the employee has been provided the
opportunity to make elective deferrals 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 in an amount not less than the maximum amount that
would have been permitted if no failure had occurred. (See
Example 7.)
(b) Examples.
Example 4
:
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 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. Twelve
25
employees (8 nonhighly compensated employees and 4 highly
compensated employees) who had met the one year eligibility
requirement after July 1, 1995 and before January 1, 1996
were inadvertently excluded from participating in the plan
beginning on January 1, 1996. These employees were offered
the opportunity to begin participating in the plan on
January 1, 1997. For 1996, the ADP for the highly
compensated employees was 8% and the ADP for the nonhighly
compensated employees was 6%. In addition, for 1996, the
ACP for the highly compensated employees was 2.5% and the
ACP for the nonhighly compensated employees was 2%. The
failure to include the 12 employees was discovered during
1998.
Correction
:
Employer B uses the SVP correction method for full year
exclusions to correct the failure to include the 12 eligible
employees in the plan for the full plan year beginning
January 1, 1996. Thus, Employer B makes a corrective
contribution (that satisfies the vesting requirements and
distribution limitations of § 401(k)(2)(B) and (C)) for each
of the excluded employees. The contribution for each of the
improperly excluded highly compensated employees is 10.5%
(the highly compensated employees’ ADP of 8% plus ACP of
2.5%) of the employee's plan compensation for the 1996 plan
year (adjusted for earnings). The contribution for each of
26
the improperly excluded nonhighly compensated employees is
8% (the nonhighly compensated employee’s ADP of 6% plus ACP
of 2%) of the employee’s plan compensation for the 1996 plan
year (adjusted for earnings).
Example 5:
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 does not provide for
employee after-tax contributions. 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. A nonhighly compensated employee who met the
eligibility requirements and should have entered the plan on
January 1, 1996 was not offered the opportunity to
participate in the plan. In August of 1996, the error was
discovered and Employer C offered the employee an election
opportunity as of September 1, 1996. The employee made
elective deferrals equal to 4% of the employee's plan
compensation for each payroll period from September 1, 1996
through December 31, 1996 (resulting in elective deferrals
of $500). The employee's plan compensation for 1996 was
$36,000 ($23,500 for the first eight months and $12,500 for
the last four months). Employer C made matching
27
contributions equal to $250 for the excluded employee, which
is 2% of the employee’s plan compensation for each payroll
period from September 1, 1996 through December 31, 1996
($12,500). The ADP for nonhighly compensated employees for
1996 was 3% and the ACP for nonhighly compensated employees
for 1996 was 1.8%.
Correction:
Employer C uses the SVP correction method for partial year
exclusions to correct the failure to include the eligible
employee in the plan. Thus, Employer C makes a corrective
contribution (that satisfies the vesting requirements and
distribution limitations of § 401(k)(2)(B) and (C)) for the
excluded employee. In determining the amount of corrective
contributions (both for the elective deferral and for the
matching contribution), for administrative convenience, in
lieu of using actual plan compensation of $23,500 for the
period the employee was excluded, the employee's annual plan
compensation is pro rated for the eight-month period that
the employee was excluded from participating in the plan.
The failure to provide the excluded employee the right to
make elective deferrals is corrected by the employer making
a corrective contribution on behalf of the employee that is
equal to $720 (the 3% ADP percentage for nonhighly
compensated employees multiplied by $24,000, which is
8/12ths of the employee's 1996 plan compensation of
28
$36,000), adjusted for earnings. In addition, to correct
for the failure to receive the plan’s matching contribution,
a corrective contribution is made on behalf of the employee
that is equal to $432 (the 1.8% ACP for the nonhighly
compensated group multiplied by $24,000, which is 8/12ths of
the employee’s 1996 plan compensation of $36,000), adjusted
for earnings. Employer C determines that $682, the sum of
the actual matching contribution received by the employee
for the plan year ($250) and the corrective contribution to
correct the matching contribution failure ($432), does not
exceed $720, the maximum matching contribution available to
the employee under the plan (2% of $36,000) determined as if
the employee had made the maximum matchable contributions.
In addition to correcting the failure to include the
eligible employee in the plan, Employer C reruns the ADP and
ACP tests for 1996 (taking into account the corrective
contribution and plan compensation for 1996 for the excluded
employee) and determines that the tests were satisfied.
Example 6
:
The facts are the same as in Example 5, except that the plan
provides for matching contributions that are equal to 100%
of an eligible employee’s elective deferrals that do not
exceed 2% of the employee’s plan compensation for the plan
year. Accordingly, the actual matching contribution made by
Employer C for the excluded employee for the last four
29
months of 1996 is $500 (which is equal to 100% of the $500
of elective deferrals made by the employee for the last four
months of 1996).
Correction:
The correction is the same as in Example 5, except that the
corrective contribution made for the first 8 months of 1996
to correct the failure to make matching contributions is
equal to $220 (adjusted for earnings), instead of the $432
(adjusted for earnings) in Example 5, because the corrective
contribution is limited to the maximum matching
contributions available under the plan for the employee for
the plan year, $720 (2% of $36,000), reduced by the actual
matching contributions made for the employee for the plan
year, $500.
Example 7
:
The facts are the same as in Example 5, except that the
error is discovered in March of 1996 and the employee was
given the opportunity to make elective deferrals beginning
on April 1, 1996. The amount of elective deferrals that the
employee was given the opportunity to make during 1996 was
not less than the maximum elective deferrals that the
employee could have made if the employee had been given the
opportunity to make elective deferrals beginning on January
1, 1996. The employee made elective deferrals equal to 4%
of the employee’s plan compensation for each payroll period
30
from April 1, 1996 through December 31, 1996 of $28,000
(resulting in elective deferrals of $1,120). Employer C
made a matching contribution equal to $560, which is 2% of
the employee’s plan compensation for each payroll period
from April 1, 1996 through December 31, 1996 ($28,000). The
employee’s plan compensation for 1996 was $36,000 ($8,000
for the first three months and $28,000 for the last nine
months).
Correction
:
Employer C uses the SVP correction method for partial year
exclusions to correct the failure to include an eligible
employee in the plan. Because the employee was given an
opportunity to make elective deferrals to the plan for at
least the last 9 months of the plan year (and the amount of
the elective deferrals that the employee had the opportunity
to make was not less than the maximum elective deferrals
that the employee could have made if the employee had been
given the opportunity to make elective deferrals beginning
on January 1, 1996), under the special rule set forth in
section 4.02(1)(a)(ii)(E), Employer C is not required to
make a corrective contribution for the failure to allow the
employee to make elective deferrals. In determining the
amount of corrective contribution with respect to the
failure to allow the employee to receive matching
contributions, in lieu of using actual plan compensation of
31
$8,000 for the period the employee was excluded, the
employee’s annual plan compensation is pro rated for the
three-month period that the employee was excluded from
participating in the plan. Accordingly, a corrective
contribution is made on behalf of the employee that is equal
to $160, which is the lesser of (i) $162 (a matching
contribution of 1.8% of $9,000, which is 3/12ths of the
employee’s 1996 plan compensation of $36,000), and (ii) $160
(the excess of the maximum matching contribution for the
entire plan year, which is equal to 2% of $36,000, or $720,
over the matching contributions made after March 31, 1996,
$560). The contribution is adjusted for earnings.
(2) Exclusion of Eligible Employees In a Profit-Sharing Plan.
(a) Correction Methods. (i) SVP Correction Method. Appendix
A, section .05 of Rev. Proc. 98-22 sets forth the SVP correction
method for correcting the exclusion of an eligible employee. In
the case of a defined contribution plan, the SVP correction
method is to make a contribution on behalf of the excluded
employee. Section 4.02(2)(a)(ii) below clarifies the SVP
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)-1(g)(10)).
(ii) Clarification of SVP Correction Method for Profit-Sharing
Plans. To correct for the exclusion of an eligible employee from
nonelective contributions in a profit-sharing or stock bonus plan
32
under the SVP 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 employer 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 8.)
(iii) Reallocation Correction Method. (A) In General. Subject
to the limitations set forth in section 4.02(2)(a)(iii)(F) below,
in addition to the SVP 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 4.02(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
33
(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 9 and 10.)
(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 had the failure
not occurred. This amount is adjusted for earnings taking into
account the rules set forth in section 4.02(2)(a)(iii)(C)(2) and
(3) below. The amount after adjustment for earnings is limited
in accordance with section 4.02(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
4.02(2)(a)(iii)(C)(1) for the employee. If the amount for the
34
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 earnings rate 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 4.02(2)(a)(iii)(C)(1) for
an employee after the application of section
4.02(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.
(D) Reconciliation of Increases and Reductions. If the
aggregate amount of the increases under section
4.02(2)(a)(iii)(B) exceeds the aggregate amount of the reductions
under section 4.02(2)(a)(iii)(C), the employer makes a corrective
contribution to the plan for the amount of the excess. If the
aggregate amount of the reductions under section
4.02(2)(a)(iii)(C) exceeds the aggregate amount of the increases
under section 4.02(2)(a)(iii)(B), then the amount by which each
35
employee’s account balance is reduced under section
4.02(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 4.02(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 8:
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 1997 plan year,
36
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 1997. 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
1998 plan year.
Correction
:
Employer D uses the SVP 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 1997 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
37
allocation for the 1997 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 9:
The facts are the same as in Example 8.
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 1997 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 1997 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 1997 compensation, adjusted for earnings.
Employer D determines the adjustment for earnings using the
earnings rate of each eligible employee’s excess allocation
(using reasonable, consistent assumptions). Accordingly,
38
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 1997
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 reduction 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 10
:
The facts are the same as in Example 8.
Correction:
The correction is the same as in Example 9, except that,
because most of the employees whose account balances are
being reduced are nonhighly compensated employees, for
administrative convenience, Employer D uses the earnings
rate of the fund with the lowest earnings rate for the
period of the failure to adjust the reduction to each
39
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 employer 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 11.)
(b) Reallocation Correction Method. In addition to the
contribution correction method, in a defined contribution plan
40
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
4.02(2)(a)(iii), subject to the limitations set forth in section
4.02(2)(a)(iii)(F). In applying section 4.02(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 4.02(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 4.02(2)(a)(iii)(C)(2) and
(3) and the reductions after adjustments for earnings are limited
in accordance with section 4.02(2)(a)(iii)(C)(4). In accordance
with section 4.02(2)(a)(iii)(D), if the aggregate amount of the
increases exceeds the aggregate amount of the reductions, the
employer makes a corrective contribution to the plan for the
amount of the excess. In accordance with section
41
4.02(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 12.)
(2) Examples.
Example 11:
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 1997 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 1997. 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.
42
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. No
reduction is made from the account balances of the employees
who received an allocation of the improper forfeiture.
Example 12
:
The facts are the same as in Example 11.
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). 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 earnings rate of the fund with the
lowest earnings rate 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
43
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 employer 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 employer or
another person contributes the difference to the plan. In
addition, in accordance with section 3.04, the employer 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 15 and 16.)
44
(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 13 and 14.)
(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),
45
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 3.06(2).
(b) Examples.
Example 13
:
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 1998 plan year, Employee
S retired and started receiving an annual straight life
annuity of $140,000 from the plan. Due to an administrative
error, the annual amount received by Employee S for 1998
included an Overpayment of $10,000 (because the §
415(b)(1)(A) limit for 1998 was $130,000). This error was
discovered at the beginning of 1999.
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
46
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 $130,000 and further
reduced by $1,000 annually for life, beginning in 1999. The
annual benefit amount is reduced by $1,000 annually for life
because, for Employee S, the actuarial present value of a
benefit of $1,000 annually for life commencing in 1999 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 $129,000 for 1999, and for each year thereafter.
Example 14
:
The facts are the same as in Example 13.
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 1998 from
Employee S's remaining benefit payments for 1999. Thus,
Employee S's annual annuity benefit for 1999 is reduced to
$119,400 to reflect the excess benefit amounts (increased by
interest) that were paid from the plan to Employee S during
the 1998 plan year. Beginning in 2000, Employee S begins to
47
receive annual benefit payments of $130,000.
Example 15:
The facts are the same as in Example 13, except that the
benefit was paid to Employee S in the form of a single-sum
distribution in 1998, 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
single-sum 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 earnings rate 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 16
:
48
The facts are the same as in Example 15.
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
single-sum 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 earnings rate. Accordingly, Employer F
contributes the difference to the plan.
(2) Failures Relating to a § 415(c) Excess.
(a) Correction Methods. (i) SVP Correction Method. Appendix
A, section .08 of Rev. Proc. 98-22 sets forth the SVP correction
method for correcting the failure to satisfy the § 415(c) limits
on annual additions.
49
(ii) Forfeiture Correction Method. In addition to the SVP
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 employee after-tax contributions and
(II) either matching or nonelective contributions, (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, similar to the suspense account
described in § 1.415-6(b)(6)(iii), to be used to reduce employer
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
50
method will permit more favorable tax treatment of elective
deferrals for the employee than the SVP correction method, this
correction method could be less favorable to the employee in
certain cases, for example, if the employee is subsequently
reemployed and becomes vested. (See Examples 17 and 18.)
(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 this paragraph. The employer
takes reasonable steps to have the Overpayment (i.e., the
distribution of the 415(c) excess adjusted for earnings to the
date of the distribution), plus appropriate interest from the
date of the distribution to the date of the repayment, returned
by the employee to the plan. To the extent the amount returned
by the employee is less than the Overpayment adjusted for
earnings at the plan's earnings rate, then the employer or
another person contributes the difference to the plan. The
Overpayment, adjusted for earnings at the plan's earnings rate to
the date of the repayment, is to be placed in an unallocated
account, similar to the suspense account described in § 1.415-
6(b)(6)(iii), to be used to reduce employer contributions in
succeeding year(s) (or if the amount would have been allocated to
other eligible employees who were in the plan for the year of the
failure if the failure had not occurred, then that amount is
51
reallocated to the other eligible employees in accordance with
the plan’s allocation formula). In addition, the employer must
notify the employee 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).
(b) Examples.
Example 17
:
Employer G maintains a 401(k) plan. The plan provides for
nonelective employer contributions, elective deferrals, and
employee after-tax 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 employee
after-tax contributions. For the 1998 limitation year,
Employee U had § 415 compensation of $40,000, and,
52
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 $7,500 $4,500
Contributions
Elective 10,000 5,800
Deferrals
After-tax 500 0
Contributions _________ _________
Total Contributions $18,000 $10,300
§ 415(c) Limit $15,000 $10,000
§ 415(c) Excess $3,000 $300
Correction:
Employer G uses the SVP 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 employee after-tax 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
53
reduced by $300 (adjusted for earnings) which is placed in
an unallocated account, similar to the suspense account
described in § 1.415-6(b)(6)(iii), 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 18:
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 SVP 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
54
(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, similar to the suspense
account described in § 1.415-6(b)(6)(iii), 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
Other Overpayment Failures.
(1) Correction of Overpayment. An Overpayment, other than one
described in section 4.04(1) (relating to a § 415(b) excess) or
section 4.04(2) (relating to a § 415(c) excess), may be corrected
in accordance with this section 4.05. An Overpayment from a
defined benefit plan is corrected in accordance with the rules in
section 4.04(1). An Overpayment from a defined contribution plan
is corrected in accordance with the rules in section
4.04(2)(a)(iii).
(2) Overpayment Defined. For purposes of this revenue
procedure, an Overpayment is defined as a distribution to an
employee or beneficiary that exceeds the employee's or
55
beneficiary’s benefit under the terms of the plan because of a
failure to comply with plan terms that implement § 401(a)(17),
401(m) (but only with respect to the forfeiture of nonvested
matching contributions that are excess aggregate contributions),
411(a)(3)(G), or 415. An Overpayment does not include a
distribution of an Excess Amount described in section 3.06(2)
(b), (c), (d), or (e).
.06
§ 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 this paragraph. The account balance of an
employee who received an allocation on the basis of compensation
in excess of the § 401(a)(17) limit is reduced by this improperly
allocated amount (adjusted for earnings). If the improperly
allocated amount would have been allocated to other employees in
the year of the failure if the failure had not occurred, then
that amount (adjusted for earnings) is reallocated to those
employees in accordance with the plan's allocation formula. If
the improperly allocated amount would not have been allocated to
other employees absent the failure, that amount (adjusted for
earnings) is placed in an unallocated account, similar to the
suspense account described in § 1.415-6(b)(6)(iii), to be used to
56
reduce employer contributions in succeeding year(s). For
example, if a plan provides for a fixed level of employer
contributions for each eligible employee, and the plan provides
that forfeitures are used to reduce future employer
contributions, the improperly allocated amount (adjusted for
earnings) would be used to reduce future employer contributions.
(See Example 19.) If a payment was made to an employee and that
payment was attributable to an improperly allocated amount, then
it is an Overpayment defined in section 4.05(2) that must be
corrected (see section 4.05(1)).
(2) Example.
Example 19
:
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 ($160,000 for 1998). During the 1998
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 1998
was $220,000. Employee W received a contribution of $17,600
for 1998 (8% of $220,000), rather than the contribution of
$12,800 (8% of $160,000) provided by the plan for that year,
resulting in an improper allocation of $4,800.
Correction:
The § 401(a)(17) failure is corrected using the reduction of
57
account balance method by reducing Employee W’s account
balance by $4,800 (adjusted for earnings) and crediting that
amount to an unallocated account, similar to the suspense
account described in § 1.415-6(b)(6)(iii), to be used to
reduce employer contributions in succeeding year(s).
.07 Correction by Amendment Under Walk-in CAP.
(1) § 401(a)(17) Failures. (a) Contribution Correction Method.
In addition to the reduction of account balance correction method
under section 4.06, an employer may correct a § 401(a)(17)
failure for a plan year under a defined contribution plan under
the Walk-in Closing Agreement Program ("Walk-in CAP") (in
accordance with the requirements of section 11 of Rev. Proc. 98-
22) by using the contribution correction method set forth in this
paragraph. The employer 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, amending 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
58
adjusted for earnings. (See Example 20.)
(b) Examples.
Example 20:
The facts are the same as in Example 19.
Correction:
Employer J corrects the failure under Walk-in CAP 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 1998 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
($4,800) is divided by the § 401(a)(17) limit for 1998
($160,000). Accordingly, the plan is amended to increase the
contribution percentage by 3 percentage points
($4,800/$160,000) from 8% to 11%. In addition, each eligible
employee for the 1998 plan year (other than Employee W)
receives an additional contribution of 3% multiplied by that
employee's plan compensation for 1998. This additional
contribution is adjusted for earnings.
(2) Hardship Distribution Failures. (a) Plan Amendment
Correction Method. The Operational Failure of making hardship
distributions to employees under a plan that does not provide for
59
hardship distributions may be corrected under Walk-in CAP (in
accordance with the requirements of section 11 of Rev. Proc. 98-
22) 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 21.)
(b) Example.
Example 21
:
Employer K, a for-profit corporation, maintains a 401(k)
plan. Although plan provisions in 1998 did not provide for
hardship distributions, beginning in 1998 hardship
distributions of amounts allowed to be distributed under §
401(k) were made currently and effectively available to all
employees (within the meaning of § l.401(a)(4)-4). The
standard used to determine hardship satisfied the deemed
hardship distribution standards in § 1.401(k)-1(d)(2).
Hardship distributions were made to a number of employees
during the 1998 and 1999 plan years, creating an Operational
Failure. The failure was discovered in 2000.
Correction:
60
Employer K corrects the failure through Walk-in CAP by
adopting a plan amendment, effective January 1, 1998, to
provide a hardship distribution option that satisfies the
rules applicable to hardship distributions in § 1.401(k)-
1(d)(2). The amendment provides that the hardship
distribution option is available to all employees. Thus,
the amendment satisfies § 401(a), and the plan as amended in
2000 would have satisfied § 401(a) (including § 1.401(a)(4)-
4 and the requirements applicable to hardship distributions
under § 401(k)) if the amendment had been adopted in 1998.
SECTION 5. EARNINGS ADJUSTMENT METHODS AND EXAMPLES
.01
Earnings Adjustment Methods. (1) In general. (a) Under
section 6.02(3)(a) of Rev. Proc. 98-22, whenever the appropriate
correction method for an Operational Failure in a defined
contribution plan includes a corrective contribution or
allocation that increases one or more employees' account balance
(now or in the future), the contribution or allocation is
adjusted for earnings and forfeitures. This section 5 provides
earnings adjustment methods (but not forfeiture adjustment
methods) that may be used by an employer to adjust a corrective
contribution or allocation for earnings in a defined contribution
plan. Consequently, these earnings adjustment methods may be
used to determine the earnings adjustments for corrective
contributions or allocations made under the correction methods in
61
section 4 and under the SVP correction methods in Appendix A, in
Rev. Proc. 98-22. If an earnings adjustment method in this
section 5 is used to adjust a corrective contribution or
allocation, that adjustment is treated as satisfying the earnings
adjustment requirement of section 6.02(3)(a) of Rev. Proc. 98-22.
Other earnings adjustment methods, different from those
illustrated in this section 5, may also be appropriate for
adjusting corrective contributions or allocations to reflect
earnings.
(b) Under the earnings adjustment methods of this section 5, a
corrective contribution or allocation that increases an
employee’s account balance is adjusted to reflect an "earnings
amount" that is based on the earnings rate(s) (determined under
section 5.01(3)) for the period of the failure (determined under
section 5.01(2)). The earnings amount is allocated in accordance
with section 5.01(4).
(c) The rule in section 6.02(4)(a) of Rev. Proc. 98-22
permitting reasonable estimates in certain circumstances applies
for purposes of this section 5. For this purpose, a
determination of earnings made in accordance with the rules of
administrative convenience set forth in this section 5 is treated
as a precise determination of earnings. Thus, if the probable
difference between an approximate determination of earnings and a
determination of earnings under this section 5 is insignificant
and the administrative cost of a precise determination would
62
significantly exceed the probable difference, reasonable
estimates may be used in calculating the appropriate earnings.
(d) This section 5 does not apply to corrective distributions
or corrective reductions in account balances. Thus, for example,
while this section 5 applies in increasing the account balance of
an improperly excluded employee to correct the exclusion of the
employee under the reallocation correction method described in
section 4.02(2)(a)(iii)(B), this section 5 does not apply in
reducing the account balances of other employees under the
reallocation correction method. (See section 4.02(2)(a)(iii)(C)
for rules that apply to the earnings adjustments for such
reductions.) In addition, this section 5 does not apply in
determining earnings adjustments under the one-to-one correction
method described in section 4.01(1)(b)(iii).
(2) Period of the Failure. (a) General Rule. For purposes of
this section 5, the "period of the failure" is the period from
the date that the failure began through the date of correction.
For example, in the case of an improper forfeiture of an
employee’s account balance, the beginning of the period of the
failure is the date as of which the account balance was
improperly reduced.
(b) Special Rules for Beginning Date for Exclusion of Eligible
Employees from Plan. (i) General Rule. In the case of an
exclusion of an eligible employee from a plan contribution, the
beginning of the period of the failure is the date on which
63
contributions of the same type (e.g., elective deferrals,
matching contributions, or discretionary nonelective employer
contributions) were made for other employees for the year of the
failure. In the case of an exclusion of an eligible employee
from an allocation of a forfeiture, the beginning of the period
of the failure is the date on which forfeitures were allocated
to other employees for the year of the failure.
(ii) Exclusion from a 401(k) or (m) Plan. For administrative
convenience, for purposes of calculating the earnings rate for
corrective contributions for a plan year (or the portion of the
plan year) during which an employee was improperly excluded from
making periodic elective deferrals or employee after-tax
contributions, or from receiving periodic matching contributions,
the employer may treat the date on which the contributions would
have been made as the midpoint of the plan year (or the midpoint
of the portion of the plan year) for which the failure occurred.
Alternatively, in this case, the employer may treat the date on
which the contributions would have been made as the first date of
the plan year (or the portion of the plan year) during which an
employee was excluded, provided that the earnings rate used is
one half of the earnings rate applicable under section 5.01(3)
for the plan year (or the portion of the plan year) for which the
failure occurred.
(3) Earnings Rate. (a) General Rule. For purposes of this
section 5, the earnings rate generally is based on the investment
64
results that would have applied to the corrective contribution or
allocation if the failure had not occurred.
(b) Multiple Investment Funds. If a plan permits employees to
direct the investment of account balances into more than one
investment fund, the earnings rate is based on the rate
applicable to the employee’s investment choices for the period of
the failure. In accordance with section 6.03(3)(a) of Rev. Proc.
98-22, for administrative convenience, if most of the employees
for whom the corrective contribution or allocation is made are
nonhighly compensated employees, the rate of return of the fund
with the highest earnings rate under the plan for the period of
the failure may be used to determine the earnings rate for all
corrective contributions or allocations. If the employee had not
made any applicable investment choices, the earnings rate may be
based on the earnings rate under the plan as a whole (i.e., the
average of the rates earned by all of the funds in the valuation
periods during the period of the failure weighted by the portion
of the plan assets invested in the various funds during the
period of the failure).
(c) Other Simplifying Assumptions. For administrative
convenience, the earnings rate applicable to the corrective
contribution or allocation for a valuation period with respect to
any investment fund may be assumed to be the actual earnings rate
for the plan’s investments in that fund during that valuation
period. For example, the earnings rate may be determined without
65
regard to any special investment provisions that vary according
to the size of the fund. Further, the earnings rate applicable
to the corrective contribution or allocation for a portion of a
valuation period may be a pro rata portion of the earnings rate
for the entire valuation period, unless the application of this
rule would result in either a significant understatement or
overstatement of the actual earnings during that portion of the
valuation period.
(4) Allocation Methods. (a) In General. For purposes of this
section 5, the earnings amount generally may be allocated in
accordance with any of the methods set forth in this paragraph
(4). The methods under paragraph (4)(c), (d), and (e) are
intended to be particularly helpful where corrective
contributions are made at dates between the plan’s valuation
dates.
(b) Plan Allocation Method. Under the plan allocation method,
the earnings amount is allocated to account balances under the
plan in accordance with the plan's method for allocating earnings
as if the failure had not occurred. (See Example 22.)
(c) Specific Employee Allocation Method. Under the specific
employee allocation method, the entire earnings amount is
allocated solely to the account balance of the employee on whose
behalf the corrective contribution or allocation is made
(regardless of whether the plan's allocation method would have
allocated the earnings solely to that employee). In determining
66
the allocation of plan earnings for the valuation period during
which the corrective contribution or allocation is made, the
corrective contribution or allocation (including the earnings
amount) is treated in the same manner as any other contribution
under the plan on behalf of the employee during that valuation
period. Alternatively, where the plan’s allocation method does
not allocate plan earnings for a valuation period to a
contribution made during that valuation period, plan earnings for
the valuation period during which the corrective contribution or
allocation is made may be allocated as if that employee’s account
balance had been increased as of the last day of the prior
valuation period by the corrective contribution or allocation,
including only that portion of the earnings amount attributable
to earnings through the last day of the prior valuation period.
The employee’s account balance is then further increased as of
the last day of the valuation period during which the corrective
contribution or allocation is made by that portion of the
earnings amount attributable to earnings after the last day of
the prior valuation period. (See Example 23.)
(d) Bifurcated Allocation Method. Under the bifurcated
allocation method, the entire earnings amount for the valuation
periods ending before the date the corrective contribution or
allocation is made is allocated solely to the account balance of
the employee on whose behalf the corrective contribution or
allocation is made. The earnings amount for the valuation period
67
during which the corrective contribution or allocation is made is
allocated in accordance with the plan’s method for allocating
other earnings for that valuation period in accordance with
section 5.01(4)(b). (See Example 24.)
(e) Current Period Allocation Method. Under the current
period allocation method, the portion of the earnings amount
attributable to the valuation period during which the period of
the failure begins ("first partial valuation period") is
allocated in the same manner as earnings for the valuation period
during which the corrective contribution or allocation is made in
accordance section 5.01(4)(b). The earnings for the subsequent
full valuation periods ending before the beginning of the
valuation period during which the corrective contribution or
allocation is made are allocated solely to the employee for whom
the required contribution should have been made. The earnings
amount for the valuation period during which the corrective
contribution or allocation is made ("second partial valuation
period") is allocated in accordance with the plan’s method for
allocating other earnings for that valuation period in accordance
with section 5.01(4)(b). (See Example 25.)
.02 Examples.
Example 22
:
Employer L maintains a profit-sharing plan that provides
only for nonelective contributions. The plan has a single
investment fund. Under the plan, assets are valued annually
68
(the last day of the plan year) and earnings for the year
are allocated in proportion to account balances as of the
last day of the prior year, after reduction for
distributions during the current year but without regard to
contributions received during the current year (the "prior
year account balance"). Plan contributions for 1997 were
made on March 31, 1998. On April 20, 2000 Employer L
determines that an operational failure occurred for 1997
because Employee X was improperly excluded from the plan.
Employer L decides to correct the failure by using the SVP
correction method for the exclusion of an eligible employee
from nonelective contributions in a profit-sharing plan.
Under this method, Employer L determines that this failure
is corrected by making a contribution on behalf of Employee
X of $5,000 (adjusted for earnings). The earnings rate
under the plan for 1998 was +20%. The earnings rate under
the plan for 1999 was +10%. On May 15, 2000, when Employer
L determines that a contribution to correct for the failure
will be made on June 1, 2000, a reasonable estimate of the
earnings rate under the plan from January 1, 2000 to June 1,
2000 is +12%.
Earnings Adjustment on the Corrective Contribution
:
The $5,000 corrective contribution on behalf of Employee X
is adjusted to reflect an earnings amount based on the
earnings rates for the period of the failure (March 31, 1998
69
through June 1, 2000) and the earnings amount is allocated
using the plan allocation method. Employer L determines
that a pro rata simplifying assumption may be used to
determine the earnings rate for the period from March 31,
1998 to December 31, 1998, because that rate does not
significantly understate or overstate the actual earnings
for that period. Accordingly, Employer L determines that
the earnings rate for that period is 15% (9/12 of the plan’s
20% earnings rate for the year). Thus, applicable earnings
rates under the plan during the period of the failure are:
Time Periods Earnings Rate
3/31/98 - 12/31/98 (First Partial Valuation Period) +15%
1/1/99 - 12/31/99 +10%
1/1/00 - 6/1/00 (Second Partial Valuation Period) +12%
If the $5,000 corrective contribution had been contributed
for Employee X on March 31, 1998, (1) earnings for 1998
would have been increased by the amount of the earnings on
the additional $5,000 contribution from March 31, 1998
through December 31, 1998 and would have been allocated as
1998 earnings in proportion to the prior year (December 31,
1997) account balances, (2) Employee X’s account balance as
of December 31, 1998 would have been increased by the
additional $5,000 contribution, (3) earnings for 1999 would
have been increased by the 1999 earnings on the additional
$5,000 contribution (including 1998 earnings thereon)
70
allocated in proportion to the prior year (December 31,
1998) account balances along with other 1999 earnings, and
(4) earnings for 2000 would have been increased by the
earnings on the additional $5,000 (including 1998 and 1999
earnings thereon) from January 1 to June 1, 2000 and would
be allocated in proportion to the prior year (December 31,
1999) account balances along with other 2000 earnings.
Accordingly, the $5,000 corrective contribution is adjusted
to reflect an earnings amount of $2,084
($5,000[(1.15)(1.10)(1.12)-1]) and the earnings amount is
allocated to the account balances under the plan allocation
method as follows:
(a) Each account balance that shared in the allocation of
earnings for 1998 is increased, as of December 31, 1998, by
its appropriate share of the earnings amount for 1998, $750
($5,000(.15)).
(b) Employee X’s account balance is increased, as of
December 31, 1998, by $5,000.
(c) The resulting December 31, 1998 account balances will
share in the 1999 earnings, including the $575 for 1999
earnings included in the corrective contribution
($5,750(.10)), to determine the account balances as of
December 31, 1999. However, each account balance other than
Employee X’s account balance has already shared in the 1999
earnings, excluding the $575. Accordingly, Employee X’s
71
account balance as of December 31, 1999 will include $500
of the 1999 portion of the earnings amount based on the
$5,000 corrective contribution allocated to Employee X’s
account balance as of December 31, 1998 ($5,000(.10)). Then
each account balance that originally shared in the
allocation of earnings for 1999 (i.e., excluding the $5,500
additions to Employee X’s account balance) is increased by
its appropriate share of the remaining 1999 portion of the
earnings amount, $75.
(d) The resulting December 31, 1999 account balances
(including the $5,500 additions to Employee X’s account
balance) will share in the 2000 portion of the earnings
amount based on the estimated January 1, 2000 to June 1,
2000 earnings included in the corrective contribution equal
to $759 ($6,325(.12)). (See Table 1.)
_________________________________________________________________
TABLE 1
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective $5,000Employee X
Contribution
First Partial Valuation 15% 750All 12/31/1997
Period EarningsAccount Balances
1
4
1999 Earnings10% 575Employee X ($500)/
2
All 12/31/1998
Account Balances
($75)
4
Second Partial12% 759All 12/31/1999
Valuation PeriodAccount Balances
Earnings(including Employee
3
X’s $5,500)
4
72
Total Amount $7,084
Contributed
$5,000 x 15%
1
$5,750($5,000 +750) x 10%
2
$6,325($5,000 +750 +575) x 12%
3
After reduction for distributions during the year for which
4
earning are being determined but without regard to contributions
received during the year for which earnings are being determined.
___________________________________________________________________________
________
Example 23:
The facts are the same as in Example 22.
Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the
same as in Example 22, but the earnings amount is allocated
using the specific employee allocation method. Thus, the
entire earnings amount for all periods through June 1, 2000
(i.e., $750 for March 31, 1998 to December 31, 1998, $575
for 1999, and $759 for January 1, 2000 to June 1, 2000) is
allocated to Employee X. Accordingly, Employer L makes a
contribution on June 1, 2000 to the plan of $7,084
($5,000(1.15)(1.10)(1.12)). Employee X’s account balance as
of December 31, 2000 is increased by $7,084. Alternatively,
Employee X’s account balance as of December 31, 1999 is
increased by $6,325 ($5,000(1.15)(1.10)), which shares in
the allocation of earnings for 2000, and Employee X’s
account balance as of December 31, 2000 is increased by the
remaining $759. (See Table 2.)
73
______________________________________________________________
TABLE 2
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective $5,000Employee X
Contribution
First Partial Valuation 15% 750Employee X
Period Earnings
1
1999 Earnings10% 575Employee X
2
Second Partial12% 759Employee X
Valuation Period
Earnings
3
Total Amount $7,084
Contributed
$5,000 x 15%
1
$5,750($5,000 +750) x 10%
2
$6,325($5,000 +750 +575) x 12%
3
___________________________________________________________
Example 24:
The facts are the same as in Example 22.
Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the
same as in Example 22, but the earnings amount is allocated
using the bifurcated allocation method. Thus, the earnings
for the first partial valuation period (March 31, 1998 to
December 31, 1998) and the earnings for 1999 are allocated
to Employee X. Accordingly, Employer L makes a contribution
on June 1, 2000 to the plan of $7,084
74
($5,000(1.15)(1.10)(1.12)). Employee X’s account balance as
of December 31, 1999 is increased by $6,325
($5,000(1.15)(1.10)); and the December 31, 1999 account
balances of employees (including Employee X’s increased
account balance) will share in estimated January 1, 2000 to
June 1, 2000 earnings on the corrective contribution equal
to $759 ($6,325(.12)). (See Table 3.)
______________________________________________________________
TABLE 3
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective $5,000Employee X
Contribution
First Partial Valuation 15% 750Employee X
Period Earnings
1
1999 Earnings10% 575Employee X
2
Second Partial12% 759 12/31/99 Account
Valuation PeriodBalances (including
EarningsEmployee X’s
3
$6,325)
4
Total Amount $7,084
Contributed
$5,000 x 15%
1
$5,750($5,000 +750) x 10%
2
$6,325($5,000 +750 +575) x 12%
3
After reduction for distributions during the 2000 year but without regard to contributions
4
received during the 2000 year .
____________________________________________________________
Example 25:
75
The facts are the same as in Example 22.
Earnings Adjustment on the Corrective Contribution:
The earnings amount on the corrective contribution is the
same as in Example 22, but the earnings amount is allocated
using the current period allocation method. Thus, the
earnings for the first partial valuation period (March 31,
1998 to December 31, 1998) are allocated as 2000 earnings.
Accordingly, Employer L makes a contribution on June 1, 2000
to the plan of $7,084 ($5,000 (1.15)(1.10)(1.12)). Employee
X’s account balance as of December 31, 1999 is increased by
the sum of $5,500 ($5,000(1.10)) and the remaining 1999
earnings on the corrective contribution equal to $75
($5,000(.15)(.10)). Further, both (1) the estimated March
31, 1998 to December 31, 1998 earnings on the corrective
contribution equal to $750 ($5,000(.15)) and (2) the
estimated January 1, 2000 to June 1, 2000 earnings on the
corrective contribution equal to $759 ($6,325(.12)) are
treated in the same manner as 2000 earnings by allocating
these amounts to the December 31, 2000 account balances of
employees in proportion to account balances as of December
31, 1999 (including Employee X’s increased account balance).
(See Table 4.) Thus, Employee X is allocated the earnings
for the full valuation period during the period of the
failure.
76
_________________________________________________________________
TABLE 4
CALCULATION AND ALLOCATION OF THE
CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS
Earnings RateAmountAllocated to:
Corrective $5,000Employee X
Contribution
First Partial Valuation 15% 75012/31/99 Account
Period EarningsBalances (including
1
Employee X’s
$5,575)
4
1999 Earnings10% 575Employee X
2
Second Partial12% 759 12/31/99 Account
Valuation PeriodBalances (including
EarningsEmployee X’s
3
$5,575)
4
Total Amount $7,084
Contributed
$5,000 x 15%
1
$5,750($5,000 +750) x 10%
2
$6,325($5,000 +750 +575) x 12%
3
After reduction for distributions during the year for which earnings are being determined but
4
without regard to contributions received during the year for which earnings are being
determined.
____________________________________________________________
SECTION 6. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 98-22 clarified and supplemented. Rev. Proc. 98-22
is clarified and supplemented by this revenue procedure.
SECTION 7. EFFECTIVE DATE
The effective date of this revenue procedure is January 1,
77
2000. In addition, employers are permitted, at their option, to
apply the provisions of this revenue procedure on or after March
9, 1998 (the release date of Rev. Proc. 98-22). Unless a plan
sponsor applies the provisions of this revenue procedure earlier,
this revenue procedure is effective:
(1) with respect to VCR and Walk-in CAP, for applications
submitted on or after January 1, 2000;
(2) with respect to Audit CAP, for examinations begun on or
after January 1, 2000; and
(3) with respect to APRSC, for failures for which correction is
not complete before May 1, 2000.
SECTION 8. 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 1545-1656.
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 collections of information in this revenue procedure are in
sections 3.04 and 4.01 - 4.07. This information is required to
enable the Office of Assistant Commissioner (Employee Plans and
Exempt Organizations) of the Internal Revenue Service to make
determinations regarding the issuance of certain closing
78
agreements and to ascertain if plan participants have been
notified of certain actions. This information can allow
individual plans to continue to maintain their tax qualified
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, business or other for-
profit institutions, nonprofit institutions, and small businesses
or organizations.
The estimated total annual reporting and/or recordkeeping
burden is 10,800 hours.
The estimated annual burden per respondent/recordkeeper varies
from 2 to 12 hours, depending on individual circumstances, with
an estimated average of 10.8 hours. The estimated number of
respondents and/or recordkeepers is 1,000.
The estimated annual frequency of responses is occasionally.
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.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Jeanne
Royal Singley and Maxine Terry of the Employee Plans Division.
For more information concerning this revenue procedure, call the
79
Employee Plans Division’s taxpayer assistance telephone service
at (202) 622-6074/6075 (not toll-free numbers) between the hours
of 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday. Ms.
Singley and Ms. Terry may be reached at (202) 622-6214 (also not
a toll-free number).Poursuivez vos recherches dans ChatGPT ou Claude
Connectez Omnilex pour rechercher dans le corpus juridique depuis votre assistant IA.