HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2002–47, page 119.LIFO; price indexes; department stores. The May 2002Bureau of Labor Statistics price indexes are accepted for useby department stores employing the retail inventory and last-in,first-out inventory methods for valuing inventories for tax yearsended on, or with reference to, May 31, 2002.

T.D. 9002, page 120.Final regulations under section 1502 of the Code revise rulesconcerning the common parent as agent for a consolidatedgroup, including the term and scope of the common parent’sauthority as agent, the designation of a substitute agent by aterminating common parent, the existence of a default substi-tute agent under certain conditions, the designation of a substi-tute agent by the Commissioner under certain circumstances,and the filing of a tentative carryback adjustment with respectto a loss from a separate return year.

Notice 2002–51, page 131.This notice solicits public comments on the application of sec-tion 142(a)(6) of the Code, which permits tax-exempt bonds tobe issued to finance solid waste disposal facilities.

Rev. Proc. 2002–50, page 173.This procedure states that if an individual exercises a statutoryor nonstatutory stock option and sells the stock on the sameday as the exercise, the sale constitutes an “excepted sale” forForm 1099–B reporting under section 1.6045–1(c)(3)(ii) of theregulations, provided certain conditions are satisfied.

Rev. Proc. 2002–51, page 175.Specifications are set forth for the private printing of papersubstitutes for the December 2001 revisions of Form W–2c,Corrected Wage and Tax Statement, and Form W–3c,Transmittal of Corrected Wage and Tax Statements. Rev.Proc. 95–18 superseded.

EMPLOYEE PLANS

Rev. Rul. 2002–45, page 116.Restorative payments; nondiscrimination; deductions;qualified defined contribution plan. This ruling describestwo situations in which certain payments, which are termed“restorative payments” in the ruling, to a qualified defined con-tribution plan are not treated as contributions for purposes ofvarious sections of the Code.

Rev. Rul. 2002–46, page 117.Deductibility; timing. Contributions made during a graceperiod to a section 401(k) plan or as matching contributions toa qualified defined contribution plan are not deductible by theemployer for a taxable year if the contributions are attributableto compensation earned by plan participants after the end ofthat taxable year. Rev. Proc. 2002–9 modified and amplified.

Notice 2002–48, page 130.Deductibility of contributions; timing. This notice providesthat the Service will not challenge the deductibility of certaincontributions actually made during the taxable year in anticipa-tion of section 401(k) deferrals and section 401(m) matchingcontributions.

(Continued on the next page)Finding Lists begin on page ii.

Bulletin No. 2002–29July 22, 2002

Notice 2002–49, page 130.Weighted average interest rate update. The weighted aver-age interest rate for July 2002 and the resulting permissiblerange of interest rates used to calculate current liability for pur-poses of the full funding limitation of section 412(c)(7) of theCode are set forth.

Rev. Proc. 2002–47, page 133.Administrative programs; closing agreements. This pro-cedure updates and expands upon the Service’s correction pro-grams for retirement plans within the jurisdiction of the Com-missioner, Tax Exempt and Government Entities Division. Rev.Proc. 2001–17 modified and superseded.

EXEMPT ORGANIZATIONS

Announcement 2002–66, page 183.A list is provided of organizations now classified as privatefoundations.

EMPLOYMENT TAX

Rev. Proc. 2002–51, page 175.Specifications are set forth for the private printing of papersubstitutes for the December 2001 revisions of Form W–2c,Corrected Wage and Tax Statement, and Form W–3c,Transmittal of Corrected Wage and Tax Statements. Rev.Proc. 95–18 superseded.

EXCISE TAX

Announcement 2002–65, page 182.This document contains corrections to proposed regulations(REG–209114–90, 2002–9 I.R.B. 576) under section 280G ofthe Code that provide guidance about the denial of the deduc-tion to a corporation for any excess golden parachute paymentto certain individuals.

ADMINISTRATIVE

T.D. 9001, page 128.Final regulations under section 6103 of the Code permit IRS todisclose an additional item of return information to the Depart-ment of Agriculture for its use in structuring, preparing, andconducting the Census of Agriculture. The additional item con-sists of the taxpayer’s telephone number provided on Form1040 (Schedule F).

Rev. Proc. 2002–49, page 172.Stranded costs. This procedure provides that investor-ownedutilities will not realize gross income upon the securitizationand transfer of a statutorily created intangible property right tocollect charges from their customers to cover stranded costscaused by restructuring of the electrical utility industry.

July 22, 2002 2002–29 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are consolidated semiannually into Cumulative Bulle-tins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in the Bul-letin. All published rulings apply retroactively unless otherwiseindicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in the rev-enue ruling. In those based on positions taken in rulings to tax-payers or technical advice to Service field offices, identifyingdetails and information of a confidential nature are deleted toprevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, andMiscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannualperiod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2002–29 I.R.B. July 22, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 103.—Interest onState and Local Bonds

The Service solicits public comments on theapplication of section 142(a)(6) to tax-exempt bondswhich finance solid waste recycling facilities. SeeNotice 2002–51, page 131.

Section 142.—Exempt FacilityBond

The Service solicits public comments on theapplication of section 142(a)(6), which permits tax-exempt bonds to be issued to finance solid wastedisposal facilities. See Notice 2002–51, page 131.

Section 401.—QualifiedPension, Profit-Sharing, andStock Bonus Plans

Will the Service challenge the deductibility ofcertain contributions actually made during the tax-able year in anticipation of section 401(k) deferralsand section 401(m) matching contributions? SeeNotice 2002–48, page 130.

26 CFR 1.401–1: Qualified pension, profit-sharing,and stock bonus plans.(Also §§ 404, 415, 4972; 1.415–6.)

Rev. Rul. 2002–45

Restorative payments; nondiscrimi-nation; deductions; qualified definedcontribution plan. This ruling describestwo situations in which certain payments,which are termed “restorative payments”in the ruling, to a qualified defined con-tribution plan are not treated as contribu-tions for various sections of the Code.

ISSUE

Under the facts described below, arepayments to the trust of a defined contri-bution plan qualified under § 401(a) ofthe Internal Revenue Code (the Code)treated as contributions for purposes of§ 401(a)(4), 401(k)(3), 401(m), 404,415(c), or 4972?

FACTS

Situation 1. Employer M maintainsPlan X, a defined contribution plan, for

the benefit of M’s employees. The plan isqualified under § 401(a). Employer Mcaused an unreasonably large portion ofthe assets of Plan X to be invested inEntity G, a high-risk investment. It islater determined that the investment hasbecome worthless.

A group of participants in Plan X filesa suit against Employer M alleging abreach of fiduciary duty in connectionwith the investment in Entity G. Follow-ing the filing of the suit, the parties agreeto a settlement pursuant to whichEmployer M does not admit that a breachof fiduciary duty occurred but makes apayment to Plan X equal to the amount ofthe losses (including an appropriateadjustment to reflect lost earnings) toPlan X from the investment in Entity G.The settlement also provides that the pay-ment will be allocated among the indi-vidual accounts of all of the participantsand beneficiaries in proportion to eachaccount’s investment in Entity G over theappropriate period. The court approvesthe settlement and enters a consent order.Employer M makes the payment to PlanX and the payment is allocated to theappropriate accounts.

Situation 2. The facts are the same asin Situation 1, except that no lawsuit isfiled against Employer M. However,Employer M becomes aware that partici-pants in Plan X are concerned about theinvestment in Entity G and are consider-ing taking legal action. Employer M alsolearns that lawsuits alleging fiduciarybreach have been filed against other com-panies by those companies’ employeesover losses to their qualified retirementplans due to investment in Entity G.Employer M decides to make the pay-ment to Plan X before a lawsuit is filed,after reasonably determining that it has areasonable risk of liability for breach offiduciary duty based on all of the relevantfacts and circumstances.

LAW AND ANALYSIS

The provisions of the Code that applyto contributions to qualified defined con-tribution plans include §§ 401(a)(4),401(k)(3), 401(m), 404, 415 and 4972.

Section 401(a)(4) generally providesthat the contributions or benefits provided

under a qualified defined contributionplan may not discriminate in favor ofhighly compensated employees. Whethercontributions under a defined contributionplan are discriminatory is generally deter-mined by comparing the amount of con-tributions allocated to the accounts ofhighly compensated employees with theamount of contributions allocated to theaccounts of nonhighly compensatedemployees.

Section 401(k)(3) contains participa-tion and nondiscrimination standards forelective deferrals to qualified cash ordeferred arrangements. Section 401(m)contains nondiscrimination tests formatching contributions and employeecontributions. Both § 401(k)(3) and§ 401(m) provide rules regarding quali-fied matching contributions and qualifiednonelective contributions.

Section 404 generally provides thatcontributions paid by an employer to orunder a plan, if they would otherwise bedeductible, are only deductible under§ 404, subject to various limitations under§ 404(a).

Section 415(c) generally limits theamount of contributions and other addi-tions under a qualified defined contribu-tion plan with respect to a participant forany year.

Section 4972(a) imposes a 10 percentexcise tax on the amount of the nonde-ductible contributions made to any“qualified employer plan,” including aplan qualified under § 401(a) or 403(a).

A payment made to a qualified definedcontribution plan is not treated as a con-tribution to the plan, and accordingly isnot subject to the Code provisionsdescribed above, if the payment is madeto restore losses to the plan resulting fromactions by a fiduciary for which there is areasonable risk of liability for breach of afiduciary duty under Title I of theEmployee Retirement Income SecurityAct of 1974 (ERISA) and plan partici-pants who are similarly situated aretreated similarly with respect to the pay-ment. For purposes of this revenue ruling,these payments are referred to as “restor-ative payments.”

The determination of whether a pay-ment to a qualified defined contributionplan is treated as a restorative payment,

2002–29 I.R.B. 116 July 22, 2002

rather than as a contribution, is based onall of the relevant facts and circum-stances. As a general rule, payments to adefined contribution plan are restorativepayments for purposes of this revenueruling only if the payments are made inorder to restore some or all of the plan’slosses due to an action (or a failure to act)that creates a reasonable risk of liabilityfor breach of fiduciary duty. In contrast,payments made to a plan to make up forlosses due to market fluctuations and thatare not attributable to a fiduciary breachare generally treated as contributions andnot as restorative payments. In no casewill amounts paid in excess of the amountlost (including appropriate adjustments toreflect lost earnings) be considered restor-ative payments. Furthermore, paymentsthat result in different treatment for simi-larly situated plan participants are notrestorative payments. The failure to allo-cate a share of the payment to the accountof a fiduciary responsible for the lossesdoes not result in different treatment forsimilarly situated participants.

Payments to a plan made pursuant to aDepartment of Labor (DOL) order orcourt-approved settlement to restorelosses to a qualified defined contributionplan on account of a breach of fiduciaryduty generally are treated as having beenmade on account of a reasonable risk ofliability.1

In no event are payments requiredunder a plan or necessary to comply witha requirement of the Code consideredrestorative payments, even if the pay-ments are delayed or otherwise made incircumstances under which there has beena breach of fiduciary duty. Thus, forexample, while the payment of delinquentelective deferrals or employee contribu-tions is part of an acceptable correctionunder the VFC Program, such payment isnot a restorative payment for purposes ofthis revenue ruling. Similarly, paymentsmade under the Employee Plans Compli-ance Resolution System (EPCRS), Rev.

Proc. 2002–47, on page 133, of this Bul-letin, or otherwise, to correct qualificationfailures are generally considered contri-butions and do not constitute restorativepayments for purposes of this revenueruling. However, the payment of appro-priate adjustments to reflect lost earningsrequired under EPCRS is generallytreated in the same manner as a restor-ative payment.

In Situation 1, the payment byEmployer M to restore losses to Plan Xon account of the investment in Entity Gis made pursuant to a court-approvedsettlement of the suit filed against it byplan participants and is not in excess ofthe amount lost (including appropriateadjustments to reflect lost earnings). InSituation 2, the payment by Employer Mis made after it reasonably determines,based on all of the relevant facts and cir-cumstances, that it has a reasonable riskof liability for breach of fiduciary dutyeven though no suit has yet been filed. Inreaching this determination, the followingfacts are taken into account: that Entity Gwas a high-risk investment, that a largeportion of the plan assets had beeninvested in Entity G, that participantsexpressed concern about the investment,and that several lawsuits had been filedagainst other employers alleging fiduciarybreach in connection with the investmentof plan assets in Entity G.

In both Situation 1 and Situation 2,therefore, the payment is made based ona reasonable determination that there is areasonable risk of liability for breach offiduciary duty and to restore losses to theplan. In addition, the payment is allocatedamong the individual accounts of the par-ticipants and beneficiaries in proportionto each account’s investment in Entity Gso that similarly situated participants arenot treated differently.

In both Situation 1 and Situation 2, thepayment is a restorative payment (asdefined in this revenue ruling) and, assuch, is not a contribution to a qualified

plan. Accordingly, the payment is nottaken into account under § 401(a)(4) or415(c) or, if applicable to the plan,§ 401(k)(3) or (m). In addition, the restor-ative payments to Plan X are not subjectto the provisions of § 404 or 4972.

HOLDING

The payments to the defined contribu-tion plans qualified under § 401(a) underthe facts described in Situation 1 andSituation 2 above are not contributionsfor purposes of § 401(a)(4), 401(k)(3),401(m), 404, 415(c), or 4972.

Drafting Information

The principal author of this revenueruling is Diane S. Bloom of the EmployeePlans, Tax Exempt and Government Enti-ties Division. For further informationregarding this revenue ruling, please con-tact the Employee Plans’ taxpayer assis-tance telephone service at 1–877–829–5500 (a toll-free number), between thehours of 8:00 a.m. and 6:30 p.m. Easterntime, Monday through Friday. Ms. Bloommay be reached at 1–202–283–9888 (nota toll-free number).

Section 404.—Deduction forContributions of an Employerto an Employees’ Trust orAnnuity Plan andCompensation Under aDeferred-Payment Plan

Whether “restorative payments” to a qualifieddefined contribution plan are deductible contribu-tions. See Rev. Rul. 2002–45, page 116.

Will the Service challenge the deductibility ofcertain contributions actually made during the tax-able year in anticipation of section 401(k) deferralsand section 401(m) matching contributions? SeeNotice 2002–48, page 130.

1 Whether a payment is made under the Voluntary Fiduciary Correction (VFC) Program established by the DOL may be taken into account in determining whether there is a reasonablerisk of liability. Final rules describing the VFC Program were issued by the DOL on March 28, 2002 (67 Fed. Reg. 15062). The VFC Program is designed to encourage employers tovoluntarily comply with Title I of ERISA by correcting certain violations of the law. If an applicant meets the VFC Program criteria it will receive a no action letter from the DOL, pur-suant to which the DOL will neither initiate a civil investigation under ERISA regarding the applicant’s responsibility for any transaction described in the letter nor assess a civil penaltyunder section 502(l) of ERISA on the correction amount paid to the plan or its participants.

July 22, 2002 117 2002–29 I.R.B.

Deductibility; timing. Contributionsmade during a grace period to a section401(k) plan or as matching contributionsto a qualified defined contribution planare not deductible by the employer for ataxable year if the contributions are attrib-utable to compensation earned by planparticipants after the end of that taxableyear.

Rev. Rul. 2002–46

ISSUE

Whether contributions made duringthe § 404(a)(6) grace period to a qualifiedcash or deferred arrangement within themeaning of § 401(k) or to a defined con-tribution plan as matching contributionswithin the meaning of § 401(m) aredeductible by an employer for a taxableyear, if the contributions are designated assatisfying a liability established beforethe end of that taxable year but are attrib-utable to compensation earned by planparticipants after the end of that taxableyear.

FACTS

Corporation M maintains Plan X,which consists of a qualified cash ordeferred arrangement within the meaningof § 401(k) and which also provides formatching contributions within the mean-ing of § 401(m). M’s taxable year is thefiscal year ending June 30. Plan X has acalendar plan year. Plan X was amendedto provide for M’s Board of Directors toset a minimum contribution for a planyear, to be allocated first toward electivedeferrals and matching contributions,with any excess to be allocated to partici-pants as of the end of the plan year inproportion to compensation earned duringthe plan year. Pursuant to this planamendment, M’s Board of Directorsadopted a resolution on June 15, 2001,setting a minimum contribution of$8,000,000 for the 2001 calendar planyear. By December 31, 2001 (the last dayof Plan X’s 2001 calendar plan year), Mhad contributed $8,000,000 to Plan X inaccordance with the terms of the plan.These amounts consisted of (a)$3,800,000 for elective deferrals andmatching contributions attributable tocompensation earned by plan participants

before the end of M’s taxable year endingJune 30, 2001 (Pre-Year End ServiceContributions), and (b) $4,200,000 forelective deferrals and matching contribu-tions attributable to compensation earnedby plan participants after the end of M’staxable year ending June 30, 2001 (Post-Year End Service Contributions). M madeeach contribution attributable to compen-sation earned during each pay period con-temporaneously with the issuance ofwage payments for the pay period.

M received an extension of time toMarch 15, 2002, to file the income taxreturn for its taxable year ending June 30,2001 (2001 Taxable Year). On the incometax return for its 2001 Taxable Year,which was timely filed on March 1, 2002,M claimed a deduction for the entire$8,000,000 for elective deferrals andmatching contributions made to Plan Xduring Plan X’s 2001 calendar plan year,relating to both Pre-Year End ServiceContributions and Post-Year End ServiceContributions. The total amount contrib-uted and claimed by M as a deduction didnot exceed 15 percent of the total com-pensation otherwise paid or accrued dur-ing M’s 2001 Taxable Year to participantsunder Plan X (and thus did not exceed theapplicable percentage limitation for thatyear under § 404(a)(3)(A)(i)).

LAW AND ANALYSIS

Section 404(a) provides in relevantpart that if contributions are paid to aprofit-sharing or stock bonus plan and areotherwise deductible under chapter 1 ofthe Code, those contributions are deduct-ible under § 404 (subject to certain limi-tations) in the taxable year of theemployer when paid, and are not deduct-ible under any other section of chapter 1of the Code.

Section 404(a)(6) provides in relevantpart that, for this purpose, “a taxpayershall be deemed to have made a paymenton the last day of the preceding taxableyear if the payment is on account of suchtaxable year and is made not later thanthe time prescribed by law for filing thereturn for such taxable year (includingextensions thereof).”

Rev. Rul. 90–105, 1990–2 C.B. 69,applies § 404(a)(6), as interpreted by Rev.Rul. 76–28, 1976–1 C.B. 106, to a situa-tion involving a contribution to a 401(k)

plan made after the end of the plan year.Rev. Rul. 90–105 holds that contributionsto a qualified cash or deferred arrange-ment within the meaning of § 401(k) or toa defined contribution plan as matchingcontributions within the meaning of§ 401(m) are not deductible by theemployer for a taxable year, if the contri-butions are attributable to compensationearned by plan participants after the endof that taxable year. See also Rev. Rul.76–28 (providing that a contributionmade after the close of an employer’s tax-able year will be deemed to have beenmade on account of the preceding taxableyear under § 404(a)(6) if, among otherconditions, the payment is treated by theplan in the same manner as the planwould treat a payment actually receivedon the last day of such preceding taxableyear of the employer) and Lucky Stores,Inc. v. Commissioner, 153 F.3d 964 (9thCir. 1998), cert. denied, 526 U.S. 1111(1999) (indicating, in the context of adefined benefit plan, that the plain mean-ing of § 404(a)(6) precludes deduction inthe preceding taxable year of grace periodcontributions that are required under col-lective bargaining agreements for workperformed after the end of that precedingtaxable year).

The facts in this revenue ruling are thesame as the facts in Rev. Rul. 90–105,except for the addition of the plan amend-ment and the board resolution setting aminimum contribution for the plan year.These factual differences do not changethe result. The plan amendment and theboard resolution setting a minimum con-tribution for the plan year establish aliability, prior to the end of M’s taxableyear, to make that contribution. However,M’s Post-Year End Service Contributionsstill are attributable to compensationearned by plan participants after the endof the taxable year. Neither the planamendment nor the board resolution bearon when that compensation is earned.Thus, for example, the Post-Year EndService Contributions in these circum-stances are still on account of that subse-quent taxable year rather than on accountof M’s 2001 Taxable Year, and so cannotbe deemed paid at the end of M’s 2001Taxable Year under § 404(a)(6). There-fore, the holding of Rev. Rul. 90–105

2002–29 I.R.B. 118 July 22, 2002

applies to the facts of this revenue ruling,and M’s Post-Year End Service Contribu-tions are not deductible for M’s 2001Taxable Year.

HOLDING

Grace period contributions to a quali-fied cash or deferred arrangement withinthe meaning of § 401(k) or to a definedcontribution plan as matching contribu-tions within the meaning of § 401(m) arenot deductible by the employer for a tax-able year, if the contributions are attribut-able to compensation earned by plan par-ticipants after the end of that taxable year.This holding applies regardless ofwhether the employer’s liability to makea minimum contribution is fixed beforethe close of that taxable year.

APPLICATION

A change in a taxpayer’s treatment ofcontributions to a method consistent withthis revenue ruling is a change in methodof accounting to which §§ 446 and 481apply. A taxpayer that wants to change itstreatment of contributions to a methodconsistent with this revenue ruling mustfollow the automatic change in method ofaccounting provisions in Rev. Proc.2002–9, 2002–3 I.R.B. 327 (as modifiedby Rev. Proc. 2002–19, 2002–13 I.R.B.696, and as modified and clarified byAnnouncement 2002–17, 2002–8 I.R.B.561), with the following modifications:

(1) The scope limitations in section4.02 of Rev. Proc. 2002–9 do not apply,provided the taxpayer ’s method ofaccounting for contributions addressed inthis revenue ruling is not an issue underconsideration for taxable years underexamination, within the meaning of sec-tion 3.09(1) of Rev. Proc. 2002–9, at thetime the Form 3115 is filed with thenational office.

(2) To assist the Service in process-ing changes in method of accountingunder this revenue ruling, and to ensureproper handling, section 6.02(4)(a) ofRev. Proc. 2002–9 is modified to requirethat a Form 3115 filed under this revenueruling include the statement: “AutomaticChange Filed Under Rev. Rul. 2002–46.”This statement should be legibly printedor typed on the appropriate line on anyForm 3115 filed under this revenue rul-ing.

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002–9 is modified andamplified to include in the APPENDIX achange to a method consistent with thisrevenue ruling.

LISTED TRANSACTIONS

The transaction described in this rev-enue ruling is substantially similar to thetransaction described in Rev. Rul.90–105, 1990–2 C.B. 69. Under Notice2000–15, 2000–1 C.B. 826, and Notice2001–51, 2001–34 I.R.B. 190, transac-tions that are the same as or substantiallysimilar to transactions described in thatnotice (including transactions describedin Rev. Rul. 90–105) are tax avoidancetransactions and are identified as “listedtransactions” for purposes of § 1.6011–4T(b)(2) of the Temporary Income TaxRegulations and § 301.6111–2T(b)(2) ofthe Temporary Procedure and Administra-tion Regulations. Those provisionsimpose certain requirements on taxpayersthat participate in listed transactions, andon promoters of listed transactions.

ALTERNATIVE RATIONALE IN REV.RUL. 90–105

An alternative rationale in Rev. Rul.90–105 was based upon language in§ 1.404(a)–1(b) of the Income Tax Regu-lations requiring that contributions becompensation for services actually ren-dered. As indicated in Notice 2002–48,elsewhere in this bulletin, the Service hasconcluded upon further consideration thatthis language is relevant only where thereasonableness of an employee’s compen-sation is in question, and thus is not anappropriate basis upon which to deter-mine the timing of deductions for thecontributions described in Notice 2002–48, Rev. Rul. 90–105, or this revenue rul-ing.

DRAFTING INFORMATION

The principal authors of this revenueruling are James E. Holland, Jr., of theEmployee Plans, Tax Exempt and Gov-ernment Entities Division and JohnRichards of the Office of the DivisionCounsel/Associate Chief Counsel (TaxExempt and Government Entities). Forfurther information regarding this revenueruling, contact the Employee Plans tax-payer assistance telephone service at1–877–829–5500 (a toll-free number)

between the hours of 8:00 a.m. and 4:00p.m., Eastern Time, Monday through Fri-day. Mr. Holland’s telephone number is(202) 283–9699 (not a toll-free call). Mr.Richards’s telephone number is (202)622–6090 (not a toll-free call).

Section 415.—Limitations onBenefits and ContributionsUnder Qualified Plans

26 CFR 1.415–6: Limitation for defined contribu-tion plans.

Whether “restorative payments” to a qualifieddefined contribution plan are annual additions. SeeRev. Rul. 2002–45, page 116.

Section 472.—Last-in, First-out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; departmentstores. The May 2002 Bureau of LaborStatistics price indexes are accepted foruse by department stores employing theretail inventory and last-in, first-outinventory methods for valuing inventoriesfor tax years ended on, or with referenceto, May 31, 2002.

Rev. Rul. 2002–47

The following Department StoreInventory Price Indexes for May 2002were issued by the Bureau of Labor Sta-tistics. The indexes are accepted by theInternal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations andRev. Proc. 86–46, 1986–2 C.B. 739, forappropriate application to inventories ofdepartment stores employing the retailinventory and last-in, first-out inventorymethods for tax years ended on, or withreference to, May 31, 2002.

The Department Store Inventory PriceIndexes are prepared on a national basisand include (a) 23 major groups ofdepartments, (b) three special combina-tions of the major groups — soft goods,durable goods, and miscellaneous goods,and (c) a store total, which covers alldepartments, including some not listedseparately, except for the following:candy, food, liquor, tobacco, and contractdepartments.

July 22, 2002 119 2002–29 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STOREINVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups May2001

May2002

Percent Changefrom May 2001to May 20021

1. Piece Goods ------------------------------------------------------------ 491.2 490.1 -0.22. Domestics and Draperies -------------------------------------------- 598.8 586.9 -2.03. Women’s and Children’s Shoes ------------------------------------ 653.9 647.5 -1.04. Men’s Shoes ----------------------------------------------------------- 889.7 924.6 3.95. Infants’ Wear ----------------------------------------------------------- 625.4 614.9 -1.76. Women’s Underwear ------------------------------------------------- 570.4 542.9 -4.87. Women’s Hosiery ----------------------------------------------------- 352.0 345.4 -1.98. Women’s and Girls’ Accessories ----------------------------------- 553.1 558.0 0.99. Women’s Outerwear and Girls’ Wear ----------------------------- 394.6 386.7 -2.0

10. Men’s Clothing -------------------------------------------------------- 595.5 597.7 0.411. Men’s Furnishings ---------------------------------------------------- 619.2 602.1 -2.812. Boys’ Clothing and Furnishings ------------------------------------ 497.1 495.5 -0.313. Jewelry ------------------------------------------------------------------ 934.7 901.3 -3.614. Notions ------------------------------------------------------------------ 776.3 797.6 2.715. Toilet Articles and Drugs -------------------------------------------- 947.8 975.0 2.916. Furniture and Bedding ----------------------------------------------- 641.8 626.4 -2.417. Floor Coverings ------------------------------------------------------- 623.7 620.1 -0.618. Housewares ------------------------------------------------------------ 767.1 758.4 -1.119. Major Appliances ----------------------------------------------------- 224.3 220.7 -1.620. Radio and Television ------------------------------------------------- 54.7 50.4 -7.921. Recreation and Education2 ------------------------------------------ 90.2 86.9 -3.722. Home Improvements2 ------------------------------------------------ 125.7 125.4 -0.223. Auto Accessories2 ----------------------------------------------------- 108.9 110.9 1.8

Groups 1 – 15: Soft Goods ------------------------------------------------- 594.0 586.0 -1.3

Groups 16 – 20: Durable Goods ------------------------------------------- 423.0 413.1 -2.3

Groups 21 – 23: Misc. Goods2 --------------------------------------------- 98.6 96.8 -1.8

Store Total3 ------------------------------------------------------------- 530.8 522.3 -1.6

1 Absence of a minus sign before the percentage change in this column signifies a price increase.2 Indexes on a January 1986=100 base.3 The store total index covers all departments, including some not listed separately, except for the following: candy, food,liquor, tobacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenueruling is Michael Burkom of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further informationregarding this revenue ruling, contact Mr.Burkom at (202) 622–7718 (not a toll-free call).

Section 1502.—Regulations

26 CFR 1.1502–77: Agent for the group

T.D. 9002

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 602

Agent for Consolidated Group

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations regarding the agent forsubsidiaries of an affiliated group thatfiles a consolidated return (agent for thegroup). The regulations address certainissues concerning the scope of the com-mon parent’s authority, as well as ques-tions concerning the agent for the groupwhen the common parent’s existence ter-minates. These regulations affect all con-solidated groups.

DATES: Effective Date: These regula-tions are effective June 28, 2002.

2002–29 I.R.B. 120 July 22, 2002

Applicability Date: For dates of appli-cability, see §§ 1.1502–77(h) and 1.1502–78(f).

FOR FURTHER INFORMATION CON-TACT: Gerald B. Fleming, (202) 622–7770, or George R. Johnson, (202) 622–7930 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these final regulations have beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumber 1545–1699. Responses to thesecollections of information are required toobtain a benefit (the approval by the IRSof the common parent’s designation of asubstitute agent for the consolidatedgroup or recognition by the IRS of thecommon parent’s successor as a defaultsubstitute agent).

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.

The estimated annual burden perrespondent is 2 hours.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent to theInternal Revenue Service, Attn: IRSReports Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224, and tothe Office of Management and Budget,Attn: Desk Officer for the Department ofthe Treasury, Office of Information andRegulatory Affairs, Washington, DC20503.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

On September 26, 2000, a notice ofproposed rulemaking (REG–103805–99,2000–2 C.B. 376) relating to the agent for

the group was published in the FederalRegister (65 FR 57755). No public hear-ing was requested or held. Written com-ments responding to the notice of pro-posed rulemaking were received. Afterconsideration of all the comments, theproposed regulations are adopted asamended by this Treasury decision.

Explanation and Summary ofComments

These final regulations are substan-tially the same as the proposed regula-tions but reflect certain revisions based onvarious formal and informal commentsthat were received from the public andfrom IRS personnel. Many of the revi-sions are minor changes made to clarifycertain aspects of the proposed regula-tions. Certain of the more significant revi-sions are discussed below.

The final regulations reflect changesthat clarify the examples of matters forwhich the common parent is the agent.Specifically, the example on elections isexpanded to include other similar optionsthat are available to a member in deter-mining its separate taxable income andany changes in such options. The com-mon parent should make any necessaryrequests related to those options orchanges in such options (for example, torequest a change in a subsidiary’s methodor period of accounting). In addition, anexample is added to clarify that the com-mon parent takes any action on behalf ofa member of the group with respect to aforeign corporation. Finally, an exampleis added to clarify that a final partnershipadministrative adjustment (FPAA) undersection 6223 may be sent to the commonparent and that the mailing to the com-mon parent will be considered a mailingto each group member that is a partnerentitled to receive the FPAA.

In light of statutory changes notreflected in the proposed regulations, thefinal regulations modify the identificationof matters reserved to subsidiaries inparagraph (a)(3) of the proposed regula-tions. In particular, the reference to aDISC’s change in annual accountingperiod pursuant to § 1.991–1(b)(3)(ii) hasbeen removed because such a change inaccounting period is generally automaticand, in any event, is made by a DISC,which is not an includible corporationpursuant to section 1504(b)(7). In addi-

tion, the final regulations add as a spe-cific matter reserved to subsidiaries anyaction by a subsidiary acting as the taxmatters partner under the TEFRA partner-ship provisions of sections 6221 through6234 and the accompanying regulations.

The provisions requiring that a noticeof deficiency or notice and demand forpayment name each corporation that wasa member of the group for the consoli-dated return year have been eliminated.The IRS and Treasury have determinedthat these provisions are inconsistent withthe general rule that the common parent isagent for the group with respect to thegroup’s consolidated tax liability.

The final regulations have added aprovision for a default substitute agent forthe group under certain circumstances. Ifthe common parent fails to designate asubstitute agent before its existence ter-minates and it has a single successor thatis a domestic corporation, that successorbecomes the default substitute agent.Although the Commissioner’s approval isnot required, any such default substituteagent is advised to provide written notifi-cation to the IRS in accordance with pro-cedures established by the Commissioner.Until notification is received, the Com-missioner is not required to recognize thesuccessor’s status as default substituteagent and may continue to send commu-nications to the old common parent andthe Commissioner is not required torespond to communications (including,for example, a claim for refund) submit-ted by the successor on behalf of the con-solidated group.

Where the Commissioner designates asubstitute agent for the group, the pro-posed regulations provide for the Com-missioner and the designated agent togive notice of the designation to all mem-bers of the group. The final regulationsprovide for the Commissioner to givenotice to the designated agent, which isresponsible for giving notice to theremaining members of the group.

One comment suggested that thereshould be a mechanism for taxpayers torequest that the final regulations apply totaxable years beginning before the date ofissuance of the final regulations. Treasuryand the IRS recognize that some taxpay-ers may wish to have the additional flex-ibility afforded by paragraph (d)(1) of thefinal regulations allowing the designation

July 22, 2002 121 2002–29 I.R.B.

of a successor of a member (including asuccessor of the common parent) as thesubstitute agent for the group. Accord-ingly, the final regulations permit a com-mon parent to elect to apply paragraph(d)(1) of the final regulations with respectto designations for taxable years begin-ning before the date of adoption. Oncesuch an election is made, the provisionsof paragraph (d)(1) of the final regula-tions apply to any subsequent designationof a substitute agent for the consolidatedreturn years subject to the election.

Effective Date

The final regulations under § 1.1502–77 apply to taxable years beginning on orafter June 28, 2002. The current rules of§§ 1.1502–77 and 1.1502–77T, which arecollectively retained in § 1.1502–77A,continue to apply with respect to taxableyears beginning before June 28, 2002.

The final regulations under§ 1.1502–78 apply to taxable years towhich a loss or credit may be carriedback and for which the due date (withoutextensions) of the original return is afterJune 28, 2002.

Special Analyses

It has been determined that these finalregulations are not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It is hereby certifiedthat these regulations will not have a sig-nificant economic impact on a substantialnumber of small entities. This certifica-tion is based on the fact that these regula-

tions will primarily affect affiliatedgroups of corporations that have electedto file consolidated returns, which tend tobe larger businesses, and, moreover, thatany burden on taxpayers is minimal.Therefore, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) is not required.

Drafting Information

The principal authors of these pro-posed regulations are Gerald B. Flemingand George R. Johnson, Office of theAssociate Chief Counsel (Corporate).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by removing entries for“1.1502–77(e)” and “1.1502–78(b)” andadding entries in numerical order to readin part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.1502–77 also issued under

26 U.S.C. 1502 and 6402(j).Section 1.1502–78 also issued under

26 U.S.C. 1502, 6402(j), and 6411(c).* * *

Section 1.1502–77A also issued under26 U.S.C. 1502 and 6402(j). * * *

Par. 2. Section 1.338–1 is amended byadding a sentence at the end of paragraph(b)(2)(vii) to read as follows:

§ 1.338–1 General principles; status ofold target and new target.

* * * * *

(b) * * *(2) * * *(vii) * * * See also, for example,

§ 1.1502–77(e)(4), providing that an elec-tion under section 338 does not result ina deemed termination of target’s existencefor purposes of the rules applicable to theagent for a consolidated group.

* * * * *

Par. 3. In § 1.1502–6, paragraph (b) isamended by removing the language “dis-trict director” and adding “Commis-sioner” in each place it appears.

Par. 4. Immediately following § 1.1502–41A, an undesignated center head-ing is added to read as follows:

REGULATIONS APPLICABLE TOTAXABLE YEARS BEGINNINGBEFORE JUNE 28, 2002

Par. 5. Section 1.1502–77 is redesig-nated as § 1.1502–77A, transferredimmediately after the undesignated centerheading “REGULATIONS APPLI-CABLE TO TAXABLE YEARS BEGIN-NING BEFORE JUNE 28, 2002” andamended as follows:

1. The section heading is revised.2. In the list below, for each paragraph

indicated in the left column, remove thelanguage in the middle column and addthe language in the right column:

Paragraph Remove Add(a), last sentence district director Commissioner

(b), first sentencedistrict director with whom theconsolidated return is filed

Commissioner

(b), first sentence such district director the Commissioner(b), second sentence such district director the Commissioner(c) district director Commissioner

(d), first sentencedistrict director with whom theconsolidated return is filed

Commissioner

(d), first sentence such district director the Commissioner(d), second sentence district director Commissioner(d), second sentence (each place itappears)

such district director the Commissioner

(d), third sentence (each place it appears) such district director the Commissioner

2002–29 I.R.B. 122 July 22, 2002

3. Paragraph (e) is removed andreserved.

4. Paragraphs (f) and (g) are added.The revision and additions read as fol-

lows:

§ 1.1502–77A Common parent agent forsubsidiaries applicable for consolidatedreturn years beginning before June 28,2002.

* * * * *(f) Cross-reference. For further rules

applicable to groups that include insol-vent financial institutions, see § 301.6402–7 of this chapter.

(g) Effective date. This section appliesto taxable years beginning before June28, 2002, except paragraph (e) of this sec-tion applies to statutory notices and waiv-ers of the statute of limitations for taxableyears for which the due date (withoutextensions) of the consolidated return isafter September 7, 1988, and which beginbefore June 28, 2002.

Par. 6. New § 1.1502–77 is added toread as follows:

§ 1.1502–77 Agent for the group.

(a) Scope of agency—(1) In general—(i) Common parent. Except as provided inparagraphs (a)(3) and (6) of this section,the common parent (or a substitute agentdescribed in paragraph (a)(1)(ii) of thissection) for a consolidated return year isthe sole agent (agent for the group) that isauthorized to act in its own name withrespect to all matters relating to the taxliability for that consolidated return year,for—

(A) Each member in the group; and(B) Any successor (see paragraph

(a)(1)(iii) of this section) of a member.(ii) Substitute agents. For purposes of

this section, any corporation designatedas a substitute agent pursuant to para-graph (d) of this section to replace thecommon parent or a previously desig-nated substitute agent acts as agent for thegroup to the same extent and subject tothe same limitations as are applicable tothe common parent, and any reference inthis section to the common parentincludes any such substitute agent.

(iii) Successor. For purposes of thissection only, the term successor means anindividual or entity (including a disre-garded entity) that is primarily liable, pur-

suant to applicable law (including, forexample, by operation of a state or Fed-eral merger statute), for the tax liability ofa member of the group. Such determina-tion is made without regard to § 1.1502–1(f)(4) or 1.1502–6(a). (For inclusion of asuccessor in references to a subsidiary ormember, see paragraph (c)(2) of this sec-tion.)

(iv) Disregarded entity. If a subsidiaryof a group becomes, or its successor is orbecomes, a disregarded entity for Federaltax purposes, the common parent contin-ues to serve as the agent with respect tothat subsidiary’s tax liability under§ 1.1502–6 for consolidated return yearsduring which it was included in thegroup, even though the entity generally isnot treated as a person separate from itsowner for Federal tax purposes.

(v) Transferee liability. For purposesof assessing, paying and collecting trans-feree liability, any exercise of or relianceon the common parent’s agency authoritypursuant to this section is binding on atransferee (or subsequent transferees) of amember, regardless of whether the mem-ber’s existence terminates prior to suchexercise or reliance.

(vi) Purported common parent. If anycorporation files a consolidated returnpurporting to be the common parent of aconsolidated group but is subsequentlydetermined not to have been the commonparent of the claimed group, that corpora-tion is treated, to the extent necessary toavoid prejudice to the Commissioner, asif it were the common parent.

(2) Examples of matters subject toagency. With respect to any consolidatedreturn year for which it is the commonparent—

(i) The common parent makes anyelection (or similar choice of a permis-sible option) that is available to a subsid-iary in the computation of its separatetaxable income, and any change in anelection (or similar choice of a permis-sible option) previously made by or for asubsidiary, including, for example, arequest to change a subsidiary’s methodor period of accounting;

(ii) All correspondence concerning theincome tax liability for the consolidatedreturn year is carried on directly with thecommon parent;

(iii) The common parent files for allextensions of time, including extensions

of time for payment of tax under section6164, and any extension so filed is con-sidered as having been filed by eachmember;

(iv) The common parent gives waivers,gives bonds, and executes closing agree-ments, offers in compromise, and allother documents, and any waiver or bondso given, or agreement, offer in compro-mise, or any other document so executed,is considered as having also been given orexecuted by each member;

(v) The common parent files claimsfor refund, and any refund is madedirectly to and in the name of the com-mon parent and discharges any liability ofthe Government to any member withrespect to such refund;

(vi) The common parent takes anyaction on behalf of a member of thegroup with respect to a foreign corpora-tion, for example, elections by, andchanges to the method of accounting of, acontrolled foreign corporation in accor-dance with § 1.964–1(c)(3);

(vii) Notices of claim disallowance aremailed only to the common parent, andthe mailing to the common parent is con-sidered as a mailing to each member;

(viii) Notices of deficiencies aremailed only to the common parent(except as provided in paragraph (b) ofthis section), and the mailing to the com-mon parent is considered as a mailing toeach member;

(ix) Notices of final partnershipadministrative adjustment under section6223 with respect to any partnership inwhich a member of the group is a partnermay be mailed to the common parent,and, if so, the mailing to the common par-ent is considered as a mailing to eachmember that is a partner entitled toreceive such notice (for other rulesregarding partnership proceedings, seeparagraphs (a)(3)(v) and (a)(6)(iii) of thissection);

(x) The common parent files petitionsand conducts proceedings before theUnited States Tax Court, and any suchpetition is considered as also having beenfiled by each member;

(xi) Any assessment of tax may bemade in the name of the common parent,and an assessment naming the commonparent is considered as an assessmentwith respect to each member; and

July 22, 2002 123 2002–29 I.R.B.

(xii) Notice and demand for paymentof taxes is given only to the common par-ent, and such notice and demand is con-sidered as a notice and demand to eachmember.

(3) Matters reserved to subsidiaries.Except as provided in this paragraph(a)(3) and paragraph (a)(6) of this section,no subsidiary has authority to act for or torepresent itself in any matter related tothe tax liability for the consolidated returnyear. The following matters, however, arereserved exclusively to each subsidiary—

(i) The making of the consent requiredby § 1.1502–75(a)(1);

(ii) Any action with respect to the sub-sidiary’s liability for a federal tax otherthan the income tax imposed by chapter 1of the Internal Revenue Code (including,for example, employment taxes underchapters 21 through 25 of the InternalRevenue Code, and miscellaneous excisetaxes under chapters 31 through 47 of theInternal Revenue Code);

(iii) The making of an election undersection 936(e);

(iv) The making of an election to betreated as a DISC under § 1.992–2; and

(v) Any actions by a subsidiary actingas tax matters partner under sections 6221through 6234 and the accompanyingregulations (but see paragraph (a)(2)(ix)of this section regarding the mailing of afinal partnership administrative adjust-ment to the common parent).

(4) Term of agency—(i) In general.Except as provided in paragraph(a)(4)(iii) of this section, the commonparent for the consolidated return yearremains the agent for the group withrespect to that year until the common par-ent’s existence terminates, regardless ofwhether one or more subsidiaries in thatyear cease to be members of the group,whether the group files a consolidatedreturn for any subsequent year, whetherthe common parent ceases to be the com-mon parent or a member of the group inany subsequent year, or whether thegroup continues pursuant to § 1.1502–75(d) with a new common parent in anysubsequent year.

(ii) Replacement of substitute agentdesignated by Commissioner. If the Com-missioner replaces a previously desig-nated substitute agent pursuant to para-graph (d)(3)(ii) of this section, thereplaced substitute agent ceases to be the

agent after the Commissioner designatesanother substitute agent.

(iii) New common parent after a groupstructure change. If the group continuesin existence with a new common parentpursuant to § 1.1502–75(d) during a con-solidated return year, the common parentat the beginning of the year is the agentfor the group through the date of the§ 1.1502–75(d) transaction, and the newcommon parent becomes the agent for thegroup beginning the day after the transac-tion, at which time it becomes the agentfor the group with respect to the entireconsolidated return year (including theperiod through the date of the transaction)and the former common parent is nolonger the agent for that year.

(5) Identifying members in notice of alien. Notwithstanding any other provi-sions of this paragraph (a), any notice ofa lien, any levy or any other proceedingto collect the amount of any assessment,after the assessment has been made, mustname the entity from which such collec-tion is to be made.

(6) Direct dealing with a member—(i)Several liability. The Commissioner may,upon issuing to the common parent writ-ten notice that expressly invokes theauthority of this provision, deal directlywith any member of the group withrespect to its liability under § 1.1502–6for the consolidated tax of the group, inwhich event such member has soleauthority to act for itself with respect tothat liability. However, if the Commis-sioner believes or has reason to believethat the existence of the common parenthas terminated, he may, if he deems itadvisable, deal directly with any memberwith respect to that member’s liabilityunder § 1.1502–6 without giving thenotice required by this provision.

(ii) Information requests. The Com-missioner may, upon informing the com-mon parent, request information relevantto the consolidated tax liability from anymember of the group. However, if theCommissioner believes or has reason tobelieve that the existence of the commonparent has terminated, he may requestsuch information from any member of thegroup without informing the commonparent.

(iii) Members as partners in partner-ships. The Commissioner generally willdeal directly with any member in its

capacity as a partner of a partnership thatis subject to the provisions of sections6221 through 6234 and the accompanyingregulations (but see paragraph (a)(2)(ix)of this section regarding the mailing of afinal partnership administrative adjust-ment to the common parent). However, ifrequested to do so in accordance with theprovisions of § 301.6223(c)–1(b) of thischapter, the Commissioner may deal withthe common parent as agent for suchmember on any matter related to the part-nership, except in regards to a settlementunder section 6224(c) and except to theextent the member acts as tax matterspartner of the partnership.

(b) Copy of notice of deficiency toentity that has ceased to be a member ofthe group. An entity that ceases to be amember of the group during or after aconsolidated return year may file a writ-ten notice of that fact with the Commis-sioner and request a copy of any notice ofdeficiency with respect to the tax for aconsolidated return year during which theentity was a member, or a copy of anynotice and demand for payment of suchdeficiency, or both. Such filing does notlimit the scope of the agency of the com-mon parent provided for in paragraph (a)of this section. Any failure by the Com-missioner to comply with such requestdoes not limit an entity’s tax liabilityunder § 1.1502–6. For purposes of thisparagraph (b), references to an entityinclude a successor of such entity.

(c) References to member or subsid-iary. For purposes of this section, all ref-erences to a member or subsidiary for aconsolidated return year include—

(1) Each corporation that was a mem-ber of the group during any part of suchyear (except that any reference to a sub-sidiary does not include the common par-ent);

(2) Except as indicated otherwise, asuccessor (as defined in paragraph(a)(1)(iii) of this section) of any corpora-tion described in paragraph (c)(1) of thissection; and

(3) Each corporation whose incomewas included in the consolidated returnfor such year, notwithstanding that the taxliability of such corporation should havebeen computed on the basis of a separatereturn, or as a member of another consoli-dated group, under the provisions of§ 1.1502–75.

2002–29 I.R.B. 124 July 22, 2002

(d) Termination of common parent—(1) Designation of substitute agent bycommon parent. (i) If the common par-ent’s existence terminates, it may desig-nate a substitute agent for the group andnotify the Commissioner, as provided inthis paragraph (d)(1).

(A) Subject to the Commissioner’sapproval under paragraph (d)(1)(ii) of thissection, before the common parent’sexistence terminates, the common parentmay designate, for each consolidatedreturn year for which it is the commonparent and for which the period of limita-tions either for assessment, for collectionafter assessment, or for claiming a creditor refund has not expired, one of the fol-lowing to act as substitute agent in itsplace—

(1) Any corporation that was a mem-ber of the group during any part of theconsolidated return year and, except asprovided in paragraph (e)(3)(ii) of thissection, has not subsequently been disre-garded as an entity separate from itsowner or reclassified as a partnership forFederal tax purposes; or

(2) Any successor (as defined in para-graph (a)(1)(iii) of this section) of such acorporation or of the common parent thatis a domestic corporation (and, except asprovided in paragraph (e)(3)(ii) of thissection, is not disregarded as an entityseparate from its owner or classified as apartnership for Federal tax purposes),including a corporation that will becomea successor at the time that the commonparent’s existence terminates.

(B) The common parent must notifythe Commissioner in writing (under pro-cedures prescribed by the Commissioner)of the designation and provide thefollowing—

(1) An agreement executed by the des-ignated corporation agreeing to serve asthe group’s substitute agent; and

(2) If the designated corporation wasnot itself a member of the group duringthe consolidated return year (because thedesignated corporation is a successor of amember of the group for the consolidatedreturn year), a statement by the desig-nated corporation acknowledging that it isor will be primarily liable for the consoli-dated tax as a successor of a member.

(ii) A designation under paragraph(d)(1)(i)(A) of this section does not applyunless and until it is approved by the

Commissioner. The Commissioner’sapproval of such a designation is noteffective before the existence of the com-mon parent terminates.

(2) Default substitute agent. If thecommon parent fails to designate a substi-tute agent for the group before its exist-ence terminates and if the common parenthas a single successor that is a domesticcorporation, such successor becomes thesubstitute agent for the group upon termi-nation of the common parent’s existence.However, see paragraph (d)(4) of this sec-tion regarding the consequences of thesuccessor’s failure to notify the Commis-sioner of its status as default substituteagent in accordance with proceduresestablished by the Commissioner.

(3) Designation by the Commissioner.(i) In the event the common parent’sexistence terminates and no designation ismade and approved under paragraph(d)(1) of this section and the Commis-sioner believes or has reason to believethat there is no successor of the commonparent that satisfies the requirements ofparagraph (d)(2) of this section (or theCommissioner believes or has reason tobelieve there is such a successor but hasno last known address on file for suchsuccessor), the Commissioner may, at anytime, with or without a request from anymember of the group, designate a corpo-ration described in paragraph (d)(1)(i)(A)of this section to act as the substituteagent. The Commissioner will notify thedesignated substitute agent in writing ofits designation, and the designation iseffective upon receipt by the designatedsubstitute agent of such notice. The desig-nated substitute agent must give notice ofthe designation to each corporation thatwas a member of the group during anypart of the consolidated return year, but afailure by the designated substitute agentto notify any such member of the groupdoes not invalidate the designation.

(ii) At the request of any member, theCommissioner may, but is not required to,replace a substitute agent previously des-ignated under paragraph (d)(3)(i) of thissect ion with another corporat iondescribed in paragraph (d)(1)(i)(A) of thissection.

(4) Absence of designation or notifica-tion of default substitute agent. Until adesignation of a substitute agent for thegroup under paragraph (d)(1) of this sec-

tion has become effective, the Commis-sioner has received notification in accor-dance with procedures established by theCommissioner that a successor qualifyingunder paragraph (d)(2) of this section hasbecome the substitute agent by default, orthe Commissioner has designated a sub-stitute agent under paragraph (d)(3) ofthis section—

(i) Any notice of deficiency or othercommunication mailed to the commonparent, even if no longer in existence, isconsidered as having been properlymailed to the agent for the group; and

(ii) The Commissioner is not requiredto act on any communication (including,for example, a claim for refund) submit-ted on behalf of the group by any personother than the common parent (includinga successor of the common parent quali-fying as a default substitute agent underparagraph (d)(2) of this section).

(e) Termination of a corporation’sexistence—(1) In general. For purposesof paragraphs (a)(1)(v), (a)(4)(i), and (d)of this section, the existence of a corpora-tion is deemed to terminate if—

(i) Its existence terminates under appli-cable law; or

(ii) Except as provided in paragraph(e)(3) of this section, it becomes, for Fed-eral tax purposes, either—

(A) An entity that is disregarded as anentity separate from its owner; or

(B) An entity that is reclassified as apartnership.

(2) Purported agency. If the existenceof the agent for the group terminatesunder circumstances described in para-graph (e)(1)(ii) of this section, until theCommissioner has approved the designa-tion of a substitute agent for the grouppursuant to paragraph (d)(1) of this sec-tion or the Commissioner designates asubstitute agent and notifies the desig-nated substitute agent pursuant to para-graph (d)(3) of this section, any post-termination action by that purported agenton behalf of the group has the sameeffect, to the extent necessary to avoidprejudice to the Commissioner, as if theagent’s corporate existence had not termi-nated.

(3) Exceptions where no eligible cor-poration exists. (i) For purposes of thecommon parent’s term as agent underparagraph (a)(4)(i) of this section and the

July 22, 2002 125 2002–29 I.R.B.

term as agent of the substitute agent des-ignated under paragraph (d) of this sec-tion, if a corporation either becomes dis-regarded as an entity separate from itsowner or is reclassified as a partnershipfor Federal tax purposes, its existence isnot deemed to terminate if the effect ofsuch termination would be that no corpo-ration remains eligible to serve as thesubstitute agent for the group’s consoli-dated return year.

(ii) Similarly, for purposes of para-graph (d) of this section, an entity that iseither disregarded as an entity separatefrom its owner or reclassified as a part-nership for Federal tax purposes is notprecluded from designation as a substituteagent merely because of such classifica-tion if the effect of the inability to makesuch designation would be that no corpo-ration remains eligible to serve as thesubstitute agent for the group’s consoli-dated return year.

(iii) Any entity described in paragraphs(e)(3)(i) or (ii) of this section that remainsor becomes the agent for the group istreated as a corporation for purposes ofthis section.

(4) Exception for section 338 transac-tions. Notwithstanding section 338(a)(2),a target corporation for which an electionis made under section 338 is not deemedto terminate for purposes of this section.

(f) Examples. The following examplesillustrate the principles of this section.Unless otherwise indicated, each exampleaddresses the question of which corpora-tion is the proper party to execute a con-sent to waive the statute of limitations forYears 1 and 2 or the more general ques-tion of which corporation may be desig-nated as a substitute agent for the groupfor Years 1 and 2. In each example, as ofJanuary 1 of Year 1, the P group consistsof P and its two subsidiaries, S and S–1.P, as the common parent of the P group,files consolidated returns for the P groupin Years 1 and 2. On January 1 of Year 1,domestic corporations S–2, U, V, W,W–1, X, Y, Z and Z–1 are not related toP or the members of the P group. All cor-porations are calendar year taxpayers. Fornone of the tax years at issue does theCommissioner exercise the authorityunder paragraph (a)(6) of this section todeal with any member separately. Anysurviving corporation in a merger is asuccessor as described in paragraph

(a)(1)(iii) of this section. Any notificationto the Commissioner of the designation ofthe P group’s substitute agent also con-tains a statement signed on behalf of thedesignated agent that it agrees to act asthe group’s substitute agent and, in thecase of a successor, that it is primarilyliable as a successor of a member. Theexamples are as follows:

Example 1. Disposition of all group members.On December 31 of Year 1, P sells all the stock ofS–1 to X. On December 31 of Year 2, P distributesall the stock of S to P’s shareholders. P files a sepa-rate return for Year 3. Although P is no longer acommon parent after Year 2, P remains the agent forthe P group for Years 1 and 2. For as long as Premains in existence, only P may execute a waiverof the period of limitations on assessment on behalfof the group for Years 1 and 2.

Example 2. Acquisition of common parent byanother group. The facts are the same as in Example1, except on January 1 of Year 3, all of the outstand-ing stock of P is acquired by Y. P thereafter joins inthe Y group consolidated return as a member of Ygroup. Although P is a member of Y group in Year3, P remains the agent for the P group for Years 1and 2. For as long as P remains in existence, only Pmay execute a waiver of the period of limitations onassessment on behalf of the P group for Years 1 and2.

Example 3. Merger of common parent—designation of remaining member as substituteagent. On December 31 of Year 1, P sells all thestock of S–1 to X. On July 1 of Year 2, P acquiresall the stock of S–2. On November 30 of Year 2, Pdistributes all the stock of S to P’s shareholders. OnJanuary 1 of Year 3, P merges into Y corporation.Just before the merger, P notifies the Commissionerin writing of the planned merger and of its designa-tion of S as the substitute agent for the P group forYears 1 and 2. S is the only member that P can des-ignate as the substitute agent for both Years 1 and 2because it is the only subsidiary that was a memberof the P group during part of both years. AlthoughS–2 is the only remaining subsidiary of the P groupwhen P merges into Y, S–2 was a member of the Pgroup only in Year 2. For that reason, S–2 cannot bethe substitute agent for the P group for Year 1. Alter-natively, P could designate a different substituteagent for each year, selecting S or S–1 as the substi-tute agent for Year 1, and S or S–2 as the substituteagent for Year 2. P could also designate its succes-sor Y as the substitute agent for both Years 1 and 2.

Example 4. Forward triangular merger of com-mon parent. On January 1 of Year 3, P merges withand into Z–1, a subsidiary of Z, in a forward trian-gular merger described in section 368(a)(1)(A) and(a)(2)(D). The transaction constitutes a reverseacquisition under § 1.1502–75(d)(3)(i) because P’sshareholders receive more than 50% of Z’s stock inexchange for all of P’s stock. Just before the merger,P notifies the Commissioner in writing of theplanned merger and its designation of Z–1, the cor-poration that will survive the planned merger, as thesubstitute agent of the P group for Years 1 and 2.Because Z–1 will be P’s successor (within the mean-ing of paragraph (a)(1) of this section) after theplanned merger, P may designate Z–1 as the substi-

tute agent for the P group for Years 1 and 2, pursu-ant to paragraph (d)(1) of this section. Alternatively,P could have designated S or S–1 as the substituteagent for the P group for Years 1 and 2. Although Zis the new common parent of the P group, whichcontinues pursuant to § 1.1502–75(d)(3)(i), P maynot designate Z as the substitute agent for Years 1and 2 because Z was not a member of the groupduring any part of Years 1 or 2 and is not a succes-sor of P or any other member of P group.

Example 5. Reverse triangular merger of com-mon parent. On March 1 of Year 3, W–1, a subsid-iary of W, merges into P, in a reverse triangularmerger described in section 368(a)(1)(A) and(a)(2)(E). P survives the merger with W–1. Thetransaction constitutes a reverse acquisition under§ 1.1502–75(d)(3)(i) because P’s shareholdersreceive more than 50% of W’s stock in exchange forall of P’s stock. Under paragraph (a) of this section,P remains the agent for the P group for Years 1 and2, even though the P group continues with W as itsnew common parent pursuant to § 1.1502–75(d)(3)(i). Because the transaction constitutes areverse acquisition, the P group is treated as remain-ing in existence with W as its common parent.Before March 2 of Year 3, P is the agent for the Pgroup for Year 3. Beginning on March 2 of Year 3,W becomes the agent for the P group with respect toall of Year 3 (including the period through March 1)and subsequent consolidated return years. For aslong as P remains in existence, P remains the agentof the P group under paragraph (a) of this section forYears 1 and 2, and therefore only P may execute awaiver of the period of limitations on assessment onbehalf of the P group for Years 1 and 2.

Example 6. Reverse triangular merger of com-mon parent—subsequent spinoff of common parent.The facts are the same as in Example 5, except thaton April 1 of Year 4, in a transaction unrelated to theYear 3 reverse acquisition, P distributes the stock ofits subsidiaries S and S–1 to W, and W then distrib-utes the stock of P to the W shareholders. Beginningon March 2 of Year 3, W becomes the agent for theP group with respect to Year 3 (including the periodthrough March 1) and subsequent consolidatedreturn years. Although P is no longer a member ofthe P group after the Year 4 spinoff, P remains theagent for the P group under paragraph (a) of thissection for Years 1 and 2. Thus, for as long as Premains in existence, only P may execute a waiverof the period of limitations on assessment on behalfof the P group for Years 1 and 2.

Example 7. Qualified stock purchase and section338 election. On March 31 of Year 2, V purchasesthe stock of P in a qualified stock purchase (withinthe meaning of section 338(d)(3)), and V makes atimely election pursuant to section 338(g) withrespect to P. Although section 338(a)(2) providesthat P is treated as a new corporation as of thebeginning of the day after the acquisition date forpurposes of subtitle A, paragraph (e)(4) of this sec-tion provides that P’s existence is not deemed to ter-minate for purposes of this section notwithstandingthe general rule of section 338(a)(2). Therefore, theelection under section 338(g) does not result in atermination of P under paragraph (e) of this section,and new P remains the agent of the P group for Year1 and the period ending March 31 of Year 2 (shortYear 2). For as long as new P remains in existence,only new P may execute a waiver of the period of

2002–29 I.R.B. 126 July 22, 2002

limitations on assessment on behalf of the P groupfor Year 1 and short Year 2.

Example 8. Fraudulent conveyance of assets. OnMarch 15 of Year 2, P files a consolidated returnthat includes the income of S and S–1 for Year 1.On December 1 of Year 2, S–1 transfers assets hav-ing a fair market value of $100x to U in exchangefor $10x. This transfer of assets for less than fairmarket value constitutes a fraudulent conveyanceunder applicable state law. On March 1 of Year 5, Pexecutes a waiver extending to December 31 of Year6 the period of limitations on assessment withrespect to the group’s Year 1 consolidated return. OnFebruary 1 of Year 6, the Commissioner issues anotice of deficiency to P asserting a deficiency of$30x for the P group’s Year 1 consolidated taxliability. P does not file a petition for redetermina-tion in the Tax Court, and the Commissioner makesa timely assessment against the P group. P, S andS–1 are all insolvent and are unable to pay the defi-ciency. On February 1 of Year 8, the Commissionersends a notice of transferee liability to U, whichdoes not file a petition in the Tax Court. On August1 of Year 8, the Commissioner assesses the amountof the P group’s deficiency against U. Under section6901(c), the Commissioner may assess U’s trans-feree liability within one year after the expiration ofthe period of limitations against the transferor S–1.By operation of section 6213(a) and 6503(a), theissuance of the notice of deficiency to P and theexpiration of the 90-day period for filing a petitionin the Tax Court have the effect of further extendingby 150 days the P group’s limitations period onassessment from the previously extended date ofDecember 31 of Year 6 to May 30 of Year 7. Pursu-ant to paragraph (a)(1)(v) of this section, the waiverexecuted by P on March 1 of Year 5 to extend theperiod of limitations on assessment to December 31of Year 6 and the further extension of the P group’slimitations period to May 30 of Year 7 (by operationof sections 6213(a) and 6503(a)) have the derivativeeffect of extending the period of limitations onassessment of U’s transferee liability to May 30 ofYear 8. By operation of section 6901(f), the issuanceof the notice of transferee liability to U and theexpiration of the 90-day period for filing a petitionin the Tax Court have the effect of further extendingthe limitations period on assessment of U’s liabilityas a transferee by 150 days, from May 30 of Year 8to October 27 of Year 8. Accordingly, the Commis-sioner may send a notice of transferee liability to Uat any time on or before May 30 of Year 8 andassess the unpaid liability against U at any time onor before October 27 of Year 8. The result would bethe same even if S–1 ceased to exist before March 1of Year 5, the date P executed the waiver.

(g) Cross-reference. For further rulesapplicable to groups that include insol-vent financial institutions, see§ 301.6402–7 of this chapter.

(h) Effective date—(1) Application—(i) In general. This section applies withrespect to taxable years beginning on orafter June 28, 2002.

(ii) Election to apply for prior taxableyears . Notwithstanding paragraphs(h)(1)(i) and (h)(2) of this section, thecommon parent may elect to apply para-

graph (d)(1) of this section in lieu of§ 1.1502–77A(d) in designating a substi-tute agent for taxable years beginningbefore June 28, 2002. The common par-ent makes such an election by expresslyreferring to the election under this para-graph (h)(1)(ii) in notifying the Commis-sioner of the designation of the substituteagent. Once made, such election appliesto any subsequent designation of a substi-tute agent for the consolidated returnyear(s) subject to the election.

(2) Prior law. For taxable years begin-ning before June 28, 2002, see § 1.1502–77A.

§ 1.1502–77T(a) [Redesignated as§ 1.1502–77A(e) and Amended]

Par. 7. Section 1.1502–77T(a) is redes-ignated as § 1.1502–77A(e) and isamended by removing the language “dis-trict director” and adding “Commis-sioner” in each place it appears.

§ 1.1502–77T [Removed]

Par. 8. Section 1.1502–77T is re-moved.

Par. 9. Section 1.1502–78 is amendedas follows:

1. Paragraph (a) is revised.2. Paragraph (b)(1) is amended by add-

ing the language “for the carryback year(or agent designated under § 1.1502–77(d) for the carryback year)” at the endof the first sentence.

3. Paragraph (b)(2) is amended byremoving the language “6213(b)(2)” andadding “6213(b)(3)” in its place.

4. In paragraph (c), the last sentence ofExample (1) is amended by adding thelanguage “for the carryback year” after“parent.”

5. In paragraph (c), the last sentence ofExample (2) is amended by removing thelanguage “S–1” and adding “P” in itsplace.

6. In paragraph (c) Example (3), theseventh sentence is amended by removingthe language “Z must” and adding “Xmust” in its place.

7. In paragraph (c) Example (3), thelast sentence is amended by removing thelanguage “6213(b)(2)” and adding“6213(b)(3)” in its place.

8. Paragraph (e)(2)(v) is removed.9. Paragraph (f) is added.

The revision and addition read as fol-lows:

§ 1.1502–78 Tentative carrybackadjustments.

(a) General rule. If a group has a con-solidated net operating loss, a consoli-dated net capital loss, or a consolidatedunused business credit for any taxableyear, then any application under section6411 for a tentative carryback adjustmentof the taxes for a consolidated return yearor years preceding such year shall bemade by the common parent corporationfor the carryback year (or substitute agentdesignated under § 1.1502–77(d) for thecarryback year) to the extent such loss orunused business credit is not apportionedto a corporation for a separate return yearpursuant to § 1.1502–21(b), 1.1502–22(b), or 1.1502–79(c). In the case of theportion of a consolidated net operatingloss or consolidated net capital loss orconsolidated unused business credit towhich the preceding sentence does notapply and that is to be carried back to acorporation that was not a member of aconsolidated group in the carryback year,the corporation to which such loss orcredit is attributable shall make any appli-cation under section 6411. In the case ofa net capital loss or net operating loss orunused business credit arising in a sepa-rate return year that may be carried backto a consolidated return year, after takinginto account the application of § 1.1502–21(b)(3)(ii)(B) with respect to any netoperating loss arising in another consoli-dated group, the common parent for thecarryback year (or substitute agent desig-nated under § 1.1502–77(d) for the carry-back year) shall make any applicationunder section 6411.

* * * * *

(f) Effective date—(1) In general. Thissection applies to taxable years to whicha loss or credit may be carried back andfor which the due date (without exten-sions) of the original return is after June28, 2002, except that the provisions ofparagraph (e)(2) apply for applications bynew members of consolidated groups fortentative carryback adjustments resultingfrom net operating losses, net capitallosses, or unused business credits arising

July 22, 2002 127 2002–29 I.R.B.

in separate return years of new membersthat begin on or after January 1, 2001.

(2) Prior law. For taxable years towhich a loss or credit may be carriedback and for which the due date (withoutextensions) of the original return is on orbefore June 28, 2002, see § 1.1502–78 ineffect prior to June 28, 2002, as containedin 26 CFR part 1 revised April 1, 2002.

Par. 10. Immediately before § 1.1502–79A, an undesignated center heading isadded to read as follows:

REGULATIONS APPLICABLE TOTAXABLE YEARS BEFOREJANUARY 1, 1997

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 11. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 12. Section 602.101, paragraph (b)

is amended by adding an entry in numeri-cal order to the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *1.1502–77................................................................................................................................................................. 1545–1699* * * * *

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

Approved May 20, 2002.

Pamela F. Olson,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June27, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for June 28, 2002, 67 F.R.43538)

Section 4972.—Tax onNondeductible Contributionsto Qualified Employer Plans

Whether “restorative payments” to a qualifieddefined contribution plan are contributions. See Rev.Rul. 2002–45, page 116.

Section 6045.—Returns ofBrokers

26 CFR 1.6045–1(c)(3)(ii): Excepted sales.

Information Reporting on Form 1099–B.Exception from reporting on Form 1099–B in con-nection with certain stock option transactions, underspecified conditions. See Rev. Proc. 2002–50, page173.

Section 6103.—Confidentialityand Disclosure of Returns andReturn Information

26 CFR 301.6103(j)(5)–1: Disclosures of returninformation to officers and employees of the Depart-ment of Agriculture for certain statistical purposesand related activities.

T.D. 9001

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Disclosure of ReturnInformation to Officers andEmployees of the Departmentof Agriculture for CertainStatistical Purposes andRelated Activities

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This contains a final regula-tion relating to return information to bedisclosed to the Department of Agricul-ture (Department) for use in conductingthe Census of Agriculture. The regulationprovides for the disclosure of an addi-tional item of return information to theDepartment. The regulation provides

guidance to IRS personnel responsible fordisclosing the return information.

DATES: Effective Date: This final regula-tion is effective June 19, 2002.

Applicability Date: For dates of appli-cability of this final regulation, see§ 301.6103(j)(5)–1(d).

FOR FURTHER INFORMATION CON-TACT: Joseph Conley, 202–622–4580(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Under section 6103(j)(5) of the Inter-nal Revenue Code (Code), upon writtenrequest from the Secretary of Agriculture,the Secretary of the Treasury shall furnishsuch returns or return information as pre-scribed by Treasury regulation to officersand employees of the Department whoseofficial duties require access to suchreturns or return information for the pur-pose of, but only to the extent necessaryin, structuring, preparing, and conductingthe Census of Agriculture pursuant to theCensus of Agriculture Act of 1997. Cur-rently, § 301.6103(j)(5)–1 provides anitemized description of the return infor-mation authorized to be disclosed for thispurpose. By letter dated May 8, 2001, theSecretary of Agriculture requested thatthe Treasury Regulations be amended toauthorize the disclosure of an additionalitem of return information, the taxpayer’s

2002–29 I.R.B. 128 July 22, 2002

telephone number contained on Form1040/Schedule F.

This document adopts a final regula-tion that authorizes IRS personnel to dis-close the additional item of return infor-mation that has been requested by theSecretary of Agriculture.

Explanation of Provisions

This final regulation will permit theIRS to disclose to the Department, for itsuse in structuring, preparing, and con-ducting the Census of Agriculture, anadditional item of return information, thetaxpayer’s telephone number provided onthe Form 1040/Schedule F. According tothe Department, the disclosure of thisadditional item of return information willimprove the efficiency of the Depart-ment’s list-building operations by reduc-ing the potential for duplication in theCensus of Agriculture. After receivinginformation from the IRS, the Departmentattempts to link such information to otherrecords held by or available to theDepartment, doing so where possible onthe basis of names, social security num-bers or employer identification numbers,and addresses. The Department intends touse taxpayer telephone numbers to matchrecords that cannot be matched otherwiseor to determine that questionable linksbetween records, such as those basedmerely on name and address information,constitute or do not constitute definitematches. By means of the matching pro-cess, the Department avoids duplicatecontacts and furthers its classification offarms for Census of Agriculture purposes.The IRS will provide taxpayer telephonenumbers to the Department under thisfinal regulation with the understandingthat the Department will only use themfor such purpose, and that it will not usethe information to telephone taxpayers.

Special Analyses

Section 553 of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) requiresthat a notice of proposed rulemaking bepublished in the Federal Register and,after such notice, that the Federal agencythat issued the notice give interested per-sons an opportunity to participate in therulemaking through submission of writtencomments, with or without opportunityfor oral presentation. These requirementsare subject to certain exceptions, includ-ing when the agency for good cause findsthat notice and public comment areimpracticable, unnecessary, or contrary tothe public interest. Because the finalregulation merely amends a preexistingregulation (§ 301.6103(j)(5)–1) to add asingle item of information to a list of suchitems, it is determined that the notice andpublic-comment procedure required by 5U.S.C. 553 is unnecessary in this casepursuant to the exception in 5 U.S.C.553(b)(3)(B). For the same reason, adelayed effective date is not required pur-suant to 5 U.S.C. 553(d)(3)

It has also been determined that thisTreasury decision is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. Because nonotice of proposed rulemaking isrequired, the provisions of the RegulatoryFlexibility Act (5 U.S.C. 601 et seq.) donot apply. Pursuant to section 7805(f) ofthe Code, this regulation was submitted tothe Chief Counsel of the Small BusinessAdministration for comment on its impacton small business.

Drafting Information

The principal author of this temporaryregulation is Joseph Conley, Office ofAssociate Chief Counsel (Procedure &Administration), Disclosure and PrivacyLaw Division.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 301 isamended as follows:

PART 301 — PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6103(j)(5)–1 also issued

under 26 U.S.C. 6103(j)(5); * * *Par. 2. Section 301.6103(j)(5)–1 is

amended by adding paragraph (b)(2)(xiv)to read as follows:

§ 301.6103(j)(5)–1 Disclosures of returninformation to officers and employees ofthe Department of Agriculture forcertain statistical purposes and relatedactivities.

* * * * *(b) * * *(2) * * *(xiv) Taxpayer telephone number.

* * * * *

(d) Effective dates. This section isapplicable on July 31, 2001, except para-graph (b)(2)(xiv) which is applicable onJune 19, 2002.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

Approved June 10, 2002.

Pamela F. Olson,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June18, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for June 19, 2002, 67 F.R.41621)

July 22, 2002 129 2002–29 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Deduction for Contributions ofan Employer to an Employees’Trust or Annuity Plan andCompensation Under aDeferred-Payment Plan

Notice 2002–48

Questions have arisen about certainvariations on the fact pattern described inRev. Rul. 90–105, 1990–2 C.B. 69, andtheir effect on the timing of an employ-er’s deduction for contributions to a cashor deferred arrangement within the mean-ing of § 401(k) or to a defined contribu-tion plan as matching contributionswithin the meaning of § 401(m). Rev.Rul. 2002–46, page 118 of this Bulletin,addresses a fact pattern that is substan-tially similar to the fact pattern in Rev.Rul. 90–105. This notice addresses twoother variations on this fact pattern. Thefacts in Rev. Rul. 90–105 involve contri-butions that are attributable to compensa-tion earned after the end of an employer’staxable year and are made after the end ofthat year but during the § 404(a)(6) graceperiod. Rev. Rul. 90–105 holds that suchcontributions are not deductible for thetaxable year.

In Rev. Rul. 2002–46, the plan isamended to provide for a board resolutionsetting a minimum contribution for a planyear (to be allocated first toward electivedeferrals and matching contributions,with any excess to be allocated to partici-pants as of the end of the plan year inproportion to compensation earned duringthe plan year), and a board resolution isadopted before the end of the taxable yearpursuant to that amendment. Rev. Rul.2002–46 reaches the same result as Rev.Rul. 90–105.

This notice addresses two other varia-tions on the Rev. Rul. 90–105 fact pat-tern, neither of which involves graceperiod contributions. One variationinvolves an actual payment to the planbefore the end of the taxable year, inanticipation of § 401(k) deferrals and§ 401(m) matches to occur after the endof the tax year (but before the end of the

overlapping plan year). The other varia-tion involves such a prepayment, com-bined with a guaranteed minimum contri-bution as described in Rev. Rul. 2002–46.Because these variations involve actualpayments before the end of the taxableyear, § 404(a)(6) and Rev. Rul. 90–105,1990–2 C.B. 69, do not affect the deduct-ibility of the contributions.

Rev. Rul. 90–105 based its holding inpart upon § 1.404(a)–1(b) of the IncomeTax Regulations. Specifically, Rev. Rul.90–105 relied upon language in the regu-lation requiring that contributions becompensation for services actually ren-dered. Upon further consideration, theService has concluded that this languageis relevant only where the reasonablenessof an employee’s compensation is inquestion, and thus is not an appropriatebasis upon which to determine the timingof deductions for the contributionsdescribed in Rev. Rul. 90–105, Rev. Rul.2002–46, and this notice.

The Service is reviewing other issuesthat may be raised by the two factual pat-terns addressed in this notice. Any addi-tional guidance concerning the mattersaddressed in this notice will be prospec-tive in application. Pending such addi-tional guidance, the Service will not chal-lenge the deductibility of contributionsdescribed in this notice, provided actualpayment is made during the taxable yearand the amount deducted does not exceedthe applicable limitation under § 404(a)(3)(A)(i).

The transactions described in thisnotice are not “reportable transactions”for purposes of § 1.6011–4T(b)(1) of theTemporary Income Tax Regulations andare not “listed transactions” for purposesof § 301.6111–2T(b)(2) of the TemporaryProcedure and Administration Regula-tions.

The principal author of this notice isJohn Richards of the Office of the Divi-sion Counsel/Associate Chief Counsel(Tax Exempt and Government Entities).For further information regarding thisnotice, contact Mr. Richards at (202)622–6090 (not a toll-free call).

Weighted Average InterestRate Update

Notice 2002–49

Sect ions 412(b)(5)(B) and412(l)(7)(C)(i) of the Internal RevenueCode provide that the interest rates usedto calculate current liability for purposesof determining the full funding limitationunder § 412(c)(7) and the required contri-bution under § 412(l) must be within apermissible range around the weightedaverage of the rates of interest on 30-yearTreasury securities during the four-yearperiod ending on the last day before thebeginning of the plan year.

Notice 88–73, 1988–2 C.B. 383, pro-vides guidelines for determining theweighted average interest rate and theresulting permissible range of interestrates used to calculate current liability forthe purpose of the full funding limitationof § 412(c)(7) of the Code.

Section 417(e)(3)(A)(ii)(II) of theCode defines the applicable interest rate,which must be used for purposes of deter-mining the minimum present value of aparticipant’s benefit under § 417(e)(1)and (2), as the annual rate of interest on30-year Treasury securities for the monthbefore the date of distribution or suchother time as the Secretary may by regu-lations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulationsprovides that the applicable interest ratefor a month is the annual interest rate on30-year Treasury securities as specifiedby the Commissioner for that month inrevenue rulings, notices or other guidancepublished in the Internal Revenue Bulle-tin.

The rate of interest on 30-year Trea-sury Securities for June 2002 is 5.52 per-cent. Pursuant to Notice 2002–26,2002–15 I.R.B. 743, the Service hasdetermined this rate as the monthly aver-age of the daily determination of yield onthe 30-year Treasury bond maturing inFebruary 2031.

Section 405 of the Job Creation andWorker Assistance Act of 2002 amended§ 412(l)(7)(C) of the Code to provide that

2002–29 I.R.B. 130 July 22, 2002

for plan years beginning in 2002 and2003 the permissible range is extended to120 percent.

The following rates were determinedfor the plan years beginning in the monthshown below.

Month YearWeightedAverage

90% to 110%Permissible

Range

90% to 120%Permissible

Range

July 2002 5.67 5.10 to 6.23 5.10 to 6.80

Drafting Information

The principal author of this notice isTodd Newman of the Employee Plans,Tax Exempt and Government EntitiesDivision. For further information regard-ing this notice, please contact theEmployee Plans’ taxpayer assistance tele-phone service at 1–877–829–5500 (a toll-free number), between the hours of 8:00a.m. and 6:30 p.m. Eastern time, Mondaythrough Friday. Mr. Newman may bereached at 1–202–283–9888 (not a toll-free number).

Bonds for Solid WasteDisposal Facilities

Notice 2002–51

PURPOSE

The Treasury Department and theInternal Revenue Service have receivedinquiries regarding the application of sec-tion 142(a)(6) of the Internal RevenueCode to recycling facilities. As part of thePriority Guidance Plan for the period July1, 2002 through June 30, 2003, Treasuryand the IRS intend to undertake a guid-ance project to address the application ofsection 142(a)(6) to recycling facilities.Accordingly, Treasury and the IRS aresoliciting public comment on the issue.

BACKGROUND

Generally, interest on a state or localbond is excluded from gross incomeunder section 103. However, section103(b) provides that the exclusion doesnot apply to a private activity bond unlessthe bond is a qualified bond. Section141(e) defines “qualified bond” toinclude an exempt facility bond that

meets certain requirements. Section142(a) lists the categories of exempt facil-ity bonds, which include bonds for solidwaste disposal facilities under section142(a)(6).

Section 142(a)(6) was added to theCode as part of the Tax Reform Act of1986, P.L. 99–514; 100 Stat. 2606;1986–3 C.B. (Vol. 1) 523. However,exempt activity financing for solid wastedisposal facilities was not first introducedin the 1986 Act. Rather, it was also per-mitted under section 103(b)(4)(E) of theInternal Revenue Code of 1954. Guidancehas been issued under section103(b)(4)(E) that is applicable to section142(a)(6). The Conference Report to the1986 Act provides that “[t]he conferenceagreement allows exempt-facility bondsto be issued to finance solid waste dis-posal facilities, defined generally as underpresent law.” Conf. Rpt. 99–841 (Vol. II),at II–704; 1986–3 C.B. (Vol. 4) 704.

Section 1.103–8(f)(2)(ii)(a) of theregulations defines “solid waste disposalfacilities” as any property or portionthereof used for the collection, storage,treatment, utilization, processing, or finaldisposal of solid waste. Section 1.103–8(f)(2)(ii)(b) provides that the term “solidwaste” has the same meaning as in formersection 203(4) of the Solid Waste Dis-posal Act (42 U.S.C. § 3252(4)), asquoted in the regulations, except thatmaterial will not qualify as solid wasteunless, on the date of issue of the obliga-tions issued to provide the facility to dis-pose of the waste material, it is propertythat is useless, unused, unwanted, or dis-carded solid material which has no mar-ket or other value at the place where it islocated. Thus, where any person is will-ing to purchase the property, at any price,the material is not waste. However, if anyperson is willing to remove the property

at his own expense but is not willing topurchase it at any price, the material iswaste.

Former section 203(4) of the SolidWaste Disposal Act, as quoted in§ 1.103–8(f)(2)(ii)(b), provides that,

The term “solid waste” means gar-bage, refuse, and other discardedsolid materials, including solid-waste materials resulting fromindustrial, commercial, and agricul-tural operations, and from commu-nity activities, but does not includesolids or dissolved material indomestic sewage or other signifi-cant pollutants in water resources,such as silt, dissolved or suspendedsolids in industrial waste watereffluents, dissolved materials in irri-gation return flows or other com-mon water pollutants.

Section 1.103–8(f)(2)(ii)(c) states thata facility that disposes of solid waste byreconstituting, converting, or otherwiserecycling it into material that is not wasteshall also qualify as a solid waste disposalfacility if solid waste constitutes at least65 percent, by weight or volume, of thetotal materials introduced into the recy-cling process. Such a recycling facilityshall not fail to qualify as a solid wastedisposal facility solely because it operatesat a profit.

Section 17.1(a) of the Temporary regu-lations provides that, in the case of prop-erty that has both a solid waste disposalfunction and a function other than the dis-posal of solid waste, only the portion ofthe cost of the property allocable to thefunction of solid waste disposal is takeninto account as an expenditure to providesolid waste disposal facilities. However, afacility that otherwise qualifies as a solidwaste disposal facility will not be treatedas having a function other than solid

July 22, 2002 131 2002–29 I.R.B.

waste disposal merely because material orheat which has utility or value is recov-ered or results from the disposal process.Where materials or heat are recovered,the waste disposal function includes theprocessing of those materials or heat thatoccurs in order to put them into the formin which the materials or heat are in factsold or used, but does not include furtherprocessing which converts the materialsor heat into other products.

Section 17.1(c) of the Temporary regu-lations contains an example in whichCompany A proposed to build a recyclingfacility that would process discardedwaste by separating out metals, glass, andsimilar materials. As separated, some ofthe items were commercially saleable.However, A did not intend to sell the met-als and glass until the metals were furtherseparated, sorted, sized and cleaned andthe glass was pulverized. The metals andpulverized glass would then be sold tocommercial users. The example con-cludes that the waste disposal functionincludes such processing of the metalsand glass, but does not include furtherprocessing.

The example further provides that theremaining waste was burned and the heatproduced was used to make steam. Com-pany B, which operated an adjacent gen-erating facility, could use steam forpower. B needed steam with certain char-acteristics and as a result, certain of A’sequipment was more costly than it wouldhave been to produce steam for someother uses. The example concludes thatthe disposal function includes the equip-ment actually used to put the heat into theform in which it was sold. If A con-structed pipes to carry the steam to B’sfacility, the pipes would not be includedin the solid waste disposal function. Simi-larly, if A installed generating equipmentand used the steam to generate electricity,the disposal function would not includethe generating equipment.

In Revenue Ruling 72–190, 1972–1C.B. 29, bonds financed facilities leasedto a private corporation. The facilitiesreconstituted discarded solid materialsfrom a manufacturing process so that thematerials could be reintroduced into amanufacturing process. The corporationhad previously discarded the materialsresulting from its manufacturing process

because they could not be reintroducedinto its production process or sold for useby someone else. Thus, at the time thefacilities were constructed, the discardedmaterials were of no value to the corpora-tion at the place where they were dis-carded. The ruling concludes that thefacilities are solid waste disposal facili-ties.

In Revenue Ruling 75–184, 1975–1C.B. 41, bonds financed facilities leasedto a private person, P, that used the facili-ties to recycle used corrugated containersinto corrugated paperboard. To providethe raw material needed for the opera-tions, P entered into a ten-year contractwith an unrelated corporation, M. M col-lected and sorted discarded corrugatedcontainers from the refuse stream to meetits obligations under the contract with P,which included baling and loading fortransportation. The price P paid to M con-sisted of a specified amount per ton forprocessing plus an additional specifiedamount per ton for the containers, F.O.B.,at M’s location. The ruling concludes thatthe containers were not solid wastebecause they had value at M’s locationand P was willing to purchase them at astated price.

In Revenue Ruling 76–222, 1976–1C.B. 26, bonds financed facilities leasedto a private person, X, that used the facili-ties for collecting and processing garbageinto fuel for subsequent sale to Y, a pub-lic utility. X received the garbage fromgarbage collectors at collection stations.X did not pay for the garbage; rather, itreceived a fee from the garbage collectorsfor the privilege of dumping their gar-bage. The garbage was then packed intocontainers for transportation by truck ortrain to X’s processing station adjacent toY’s utility plant. At the processing sta-tion, the garbage was reduced to a small,uniform size and classified into noncom-bustible and combustible fractions. Non-combustible fractions were sold to scrapdealers or placed in a landfill. The com-bustible fraction was fed to a surge binfrom which it was blown into boilers atY’s utility plant. Y paid X a stipulatedamount per ton for the combustible frac-tions based on their BTU value. The rul-ing concludes that the facilities, otherthan the equipment used to transport the

fuel from the surge bin to the boilers, aresolid waste disposal facilities.

In Revenue Ruling 80–197, 1980–2C.B. 44, bonds financed facilitiesacquired by the taxpayer, a private bever-age manufacturer. The taxpayer used thefacilities to package beverages in reusablecontainers. State law prohibited the saleof beverages in non-returnable containersand required beverage purchasers to pay adeposit that was refunded on return of thebeverage containers. The taxpayer deter-mined that it was less costly to use reus-able containers than it was to use newcontainers. The ruling notes that if a reus-able container is not returned, but is dis-carded, it could potentially become solidwaste. However, once the reusable con-tainer is returned to the taxpayer and thedeposit is refunded to the retailer, thereusable container is not useless,unwanted, or discarded solid material.The ruling concludes that even though amarket for used containers did not existby virtue of the mandatory deposit, reus-able containers had value to the taxpayerbecause reuse of these containers was lesscostly than the purchase of new contain-ers, and thus the containers were not solidwaste.

REQUEST FOR PUBLIC COMMENTS

Treasury and the IRS are solicitingpublic comments regarding the applica-tion of section 142(a)(6) to recyclingfacilities. Treasury and the IRS also invitecomments on any other issues concerningthe application of that Code provision.

Taxpayers may submit comments inwriting to:

Internal Revenue ServiceAttn: CC:CORP:R

(Notice 2002–51,Room 5226)

P.O. Box 7604Ben Franklin StationWashington, D.C. 20044

Alternatively, taxpayers may submitcomments electronically at:ht tp: / /www. irs .us t reas .gov /prod/cover.html (the IRS Internet Site)

All comments should be received byOctober 21, 2002. The comments submit-ted will be available for public inspectionand copying.

2002–29 I.R.B. 132 July 22, 2002

DRAFTING INFORMATION

The principal authors of this notice are

Michael Brewer and Rebecca Harrigal ofthe Office of the Assistant Chief Counsel(CC:TEGE:EOEG). For further informa-

tion regarding this notice, contact Mr.Brewer at (202) 622–3980 (not a toll-freecall).

26 CFR 601.202: Closing agreements.

Rev. Proc. 2002–47

TABLE OF CONTENTS

PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

SECTION 1. PURPOSE AND OVERVIEW.01 Purpose ......................................................................................................................................................................p. 136.02 General principles underlying EPCRS .....................................................................................................................p. 136.03 Overview. ...................................................................................................................................................................p. 136

SECTION 2. EFFECT OF THIS REVENUE PROCEDURE ON PROGRAMS.01 Effect on programs ....................................................................................................................................................p. 137.02 Future enhancements.................................................................................................................................................p. 137

PART II. PROGRAM EFFECT AND ELIGIBILITY

SECTION 3. EFFECT OF EPCRS; RELIANCE.01 Effect of EPCRS on Qualified Plans. .......................................................................................................................p. 137.02 Effect of EPCRS on 403(b) Plans. ...........................................................................................................................p. 137.03 Effect of EPCRS on SEPs. ........................................................................................................................................p. 137.04 Compliance Statement ...............................................................................................................................................p. 138.05 Other taxes and penalties .........................................................................................................................................p. 138.06 Reliance .....................................................................................................................................................................p. 138

SECTION 4. PROGRAM ELIGIBILITY.01 Programs for Qualified Plans and 403(b) Plans.....................................................................................................p. 138.02 Eligibility for other arrangements ............................................................................................................................p. 138.03 Effect of examination ................................................................................................................................................p. 138.04 Favorable Letter requirement ...................................................................................................................................p. 138.05 Established practices and procedures ......................................................................................................................p. 138.06 Correction by plan amendment.................................................................................................................................p. 138.07 Submission for a determination letter ......................................................................................................................p. 138.08 Availability of correction of Employer Eligibility Failure.......................................................................................p. 138.09 Egregious failures......................................................................................................................................................p. 139.10 Diversion or misuse of plan assets...........................................................................................................................p. 139

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

SECTION 5. DEFINITIONS.01 Definitions for Qualified Plans. ..............................................................................................................................p. 139.02 Definitions for 403(b) Plans ....................................................................................................................................p. 140.03 Under Examination ..................................................................................................................................................p. 141.04 SEP ............................................................................................................................................................................p. 141

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY.01 Correction principles; rules of general applicability ..............................................................................................p. 141.02 Correction principles.................................................................................................................................................p. 141.03 Correction of an Employer Eligibility Failure (only available under VCP

general procedures, VCT, and VCSEP)....................................................................................................................p. 143.04 Correction by plan amendment.................................................................................................................................p. 143

July 22, 2002 133 2002–29 I.R.B.

.05 Special rules relating to Excess Amounts ................................................................................................................p. 143

.06 Correction under statute or regulations.................................................................................................................. p. 143

.07 Matters subject to excise taxes .................................................................................................................................p. 143

.08 Correction for SEPs ..................................................................................................................................................p. 144

.09 Confidentiality and disclosure ..................................................................................................................................p. 144

.10 No effect on other law ............................................................................................................................................. p. 144

PART IV. SELF-CORRECTION (SCP)

SECTION 7. IN GENERAL

SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES.01 Requirements ............................................................................................................................................................p. 144.02 Factors.......................................................................................................................................................................p. 144.03 Multiple failures ....................................................................................................................................................... p. 145.04 Examples....................................................................................................................................................................p. 145

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES.01 Requirements ............................................................................................................................................................ p. 145.02 Correction period..................................................................................................................................................... p. 145.03 Correction by plan amendment. .............................................................................................................................. p. 145.04 Substantial completion of correction. .......................................................................................................................p. 145.05 Examples....................................................................................................................................................................p. 146

PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCP)

SECTION 10. VCP GENERAL PROCEDURES.01 VCP requirements. ................................................................................................................................................... p. 146.02 Identification of failures........................................................................................................................................... p. 146.03 Availability of correction of a terminated plan........................................................................................................p. 146.04 Effect of VCP submission on examination. ..............................................................................................................p. 146.05 No concurrent examination activity. ....................................................................................................................... p. 146.06 Submission of determination letter application for plan amendments. ................................................................. p. 146.07 Processing of submission......................................................................................................................................... p. 146.08 Compliance statement. ............................................................................................................................................. p. 147.09 Effect of compliance statement on examination.......................................................................................................p. 148.10 Processing of determination letter applications not submitted under VCP............................................................p. 148.11 Special rules relating to VCO...................................................................................................................................p. 148.12 Special rules relating to VCS. ..................................................................................................................................p. 148.13 Special rules relating to Anonymous (John Doe) Submission Procedure...............................................................p. 148.14 Special rules relating to VCT. ..................................................................................................................................p. 148.15 Special rules relating to VCGroup. ..........................................................................................................................p. 148.16 Special rules relating to VCSEP...............................................................................................................................p. 149.17 Multiemployer and multiple employer plans............................................................................................................p. 149

SECTION 11. APPLICATION PROCEDURES FOR VCP.01 General rules. ............................................................................................................................................................p. 149.02 Submission requirements. ..........................................................................................................................................p. 149.03 Submission requirements under special procedures.................................................................................................p. 150.04 Required documents. .................................................................................................................................................p. 150.05 Date VCP fee due generally. ....................................................................................................................................p. 150.06 Fee due earlier for VCO, VCS, Anonymous Submission, VCGroup, and VCSEP. ................................................p. 151.07 Signed submission. ....................................................................................................................................................p. 151.08 Power of attorney requirements................................................................................................................................p. 151.09 Penalty of perjury statement. ....................................................................................................................................p. 151.10 Checklist. ...................................................................................................................................................................p. 151.11 Designation. ...............................................................................................................................................................p. 151.12 VCP mailing address.................................................................................................................................................p. 151.13 Maintenance of copies of submissions. ....................................................................................................................p. 151

2002–29 I.R.B. 134 July 22, 2002

SECTION 12. VCP FEES

.01 VCP general procedure compliance fee. ..................................................................................................................p. 151

.02 VCO fee. ....................................................................................................................................................................p. 152

.03 VCS fee. .....................................................................................................................................................................p. 152

.04 Fee for Anonymous Submission................................................................................................................................p. 152

.05 VCT fee. .....................................................................................................................................................................p. 152

.06 VCGroup fees. ...........................................................................................................................................................p. 153

.07 VCSEP fees................................................................................................................................................................p. 153

.08 Establishing amount of assets and number of plan participants. ...........................................................................p. 153

PART VI. CORRECTION ON AUDIT (AUDIT CAP)

SECTION 13. DESCRIPTION OF AUDIT CAP.01 Audit CAP requirements. .........................................................................................................................................p. 153.02 Payment of sanction................................................................................................................................................. p. 153.03 Additional requirements. .......................................................................................................................................... p. 153.04 Failure to reach resolution. ..................................................................................................................................... p. 153.05 Effect of closing agreement. .................................................................................................................................... p. 153.06 Other procedural rules. ........................................................................................................................................... p. 153

Section 14. AUDIT CAP SANCTION.01 Determination of sanction. ...................................................................................................................................... p. 153.02 Factors considered................................................................................................................................................... p. 153.03 Transferred Assets. ................................................................................................................................................... p. 154

PART VII. EFFECT ON OTHER DOCUMENTS; EFFECTIVE DATE; PAPERWORK REDUCTION ACT

SECTION 15. EFFECT ON OTHER DOCUMENTS.01 Revenue procedure modified and superseded ......................................................................................................... p. 154

SECTION 16. EFFECTIVE DATE

SECTION 17. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION

APPENDIX A: OPERATIONAL FAILURES AND CORRECTIONS UNDER VCS.01 General rule. ............................................................................................................................................................ p. 154.02 Failure to properly provide the minimum top-heavy benefit under § 416 of the Code to non-key employees.....p. 154.03 Failure to satisfy the ADP test set forth in § 401(k)(3), the ACP test set forth in § 401(m)(2), or the

multiple use test of § 401(m)(9). ............................................................................................................................. p. 154.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). ....... p. 155.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more

plan years. .................................................................................................................................................................p. 155.06 Failure to timely pay the minimum distribution required under § 401(a)(9)........................................................ p. 155.07 Failure to obtain participant and/or spousal consent for a distribution subject to the participant and

spousal consent rules under §§ 401(a)(11), 411(a)(11), and 417.......................................................................... p. 155.08 Failure to satisfy the § 415 limits in a defined contribution plan. .........................................................................p. 155

APPENDIX B: CORRECTION METHODS AND EXAMPLES; EARNINGS ADJUSTMENT METHODS AND EXAMPLES

SECTION 1. PURPOSE, ASSUMPTIONS FOR EXAMPLES AND SECTION REFERENCES.01 Purpose. .....................................................................................................................................................................p. 156.02 Assumptions for Examples. ...................................................................................................................................... p. 156.03 Section References. .................................................................................................................................................. p. 156

July 22, 2002 135 2002–29 I.R.B.

SECTION 2. CORRECTION METHODS AND EXAMPLES.01 ADP/ACP Failures. ...................................................................................................................................................p. 156.02 Exclusion of Eligible Employees. .............................................................................................................................p. 157.03 Vesting Failures. ........................................................................................................................................................p. 161.04 § 415 Failures. ..........................................................................................................................................................p. 161.05 Correction of Other Overpayment Failures. ............................................................................................................p. 164.06 § 401(a)(17) Failures. ...............................................................................................................................................p. 164.07 Correction by Amendment Under VCP and SCP ....................................................................................................p. 164

SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES.01 Earnings Adjustment Methods. .................................................................................................................................p. 165.02 Examples....................................................................................................................................................................p. 167

APPENDIX C: VCP CHECKLIST ................................................................................................................................................p. 170

PART I. INTRODUCTION TOEMPLOYEE PLANS COMPLIANCERESOLUTION SYSTEM

SECTION 1. PURPOSE ANDOVERVIEW

.01 Purpose. This revenue procedureupdates the comprehensive system of cor-rection programs for sponsors of retire-ment plans that are intended to satisfy therequirements of § 401(a), § 403(a),§ 403(b), or § 408(k) of the Internal Rev-enue Code (the “Code”), but that have notmet these requirements for a period oftime. This system, the Employee PlansCompliance Resolut ion System(“EPCRS”), permits plan sponsors to cor-rect these failures and thereby continue toprovide their employees with retirementbenefits on a tax-favored basis. The com-ponents of EPCRS are the Self-Correction Program (“SCP”), the Volun-tary Correction Program (“VCP”), andthe Audit Closing Agreement Program(“Audit CAP”).

.02 General principles underlyingEPCRS. EPCRS is based on the followinggeneral principles:

• Sponsors and other administrators ofeligible plans should be encouragedto establish administrative practicesand procedures that ensure that theseplans are operated properly in accor-dance with the applicable require-ments of the Code.

• Sponsors and other administrators ofeligible plans should satisfy the appli-cable plan document requirements ofthe Code.

• Plan sponsors and other administra-tors should make voluntary and

timely correction of any plan failures,whether involving discrimination infavor of highly compensated employ-ees, plan operations, the terms of theplan document, or adoption of a planby an ineligible employer. Timely andefficient correction protects partici-pating employees by providing themwith their expected retirement ben-efits, including favorable tax treat-ment.

• Voluntary compliance is promoted byproviding for limited fees for volun-tary corrections approved by the Ser-vice, thereby reducing employers’uncertainty regarding their potentialtax liability and participants’ potentialtax liability.

• Fees and sanctions should be gradu-ated in a series of steps so that thereis always an incentive to correctpromptly.

• Sanctions for plan failures identifiedon audit should be reasonable in lightof the nature, extent, and severity ofthe violation.

• Administration of EPCRS should beconsistent and uniform.

• Plan Sponsors should be able to relyon the availability of EPCRS in tak-ing corrective actions to maintain thetax-favored status of their plans.

.03 Overview. EPCRS includes the fol-lowing basic elements:

• Self-correction (SCP). A plan sponsorthat has established compliance prac-tices and procedures may, at any time,correct insignificant Operational Fail-ures without paying any fee or sanc-tion. In addition, in the case of aQualified Plan that is the subject of afavorable determination letter fromthe Service or in the case of a 403(b)

Plan, the plan sponsor generally maycorrect even significant OperationalFailures without payment of any feeor sanction.

• Voluntary correction with Serviceapproval (VCP). A plan sponsor, atany time before audit, may pay a lim-ited fee and receive the Service’sapproval for correction. Under VCP,there are special procedures for cer-tain submissions involving onlyOperational Failures (Voluntary Cor-rection of Operational Failures(“VCO”)), and for certain submis-sions in which limited OperationalFailures are being corrected usingstandardized corrections (VoluntaryCorrection of Operational FailuresStandardized (“VCS”)). VCP alsoincludes a special procedure thatapplies to 403(b) Plans (VoluntaryCorrection of Tax-sheltered AnnuityFailures (“VCT”)), a special proce-dure for anonymous submissions(“Anonymous Submission Proce-dure”), a special procedure for groupsubmissions (Voluntary Correction ofGroup Failures (“VCGroup”)), and aspecial procedure that applies to SEPs(Voluntary Correction of SEP Failures(“VCSEPs”)).

• Correction on audit (Audit CAP). If afailure (other than a failure correctedthrough SCP or VCP) is identified onaudit, the plan sponsor may correctthe failure and pay a sanction. Thesanction imposed will bear a reason-able relationship to the nature, extentand severity of the failure, taking intoaccount the extent to which correctionoccurred before audit.

2002–29 I.R.B. 136 July 22, 2002

SECTION 2. EFFECT OF THISREVENUE PROCEDURE ONPROGRAMS

.01 Effect on programs. This revenueprocedure modifies and supersedes Rev.Proc. 2001–17, 2001–1 C.B. 589, whichwas the prior consolidated statement ofthe correction programs under EPCRS.The modifications to Rev. Proc. 2001–17that are reflected in this revenue proce-dure include:

• extending the duration of the self-correction period under SCP for sig-nificant operational compliance fail-ures where the Plan Sponsor assumesa plan in connection with a corporatemerger, acquisition, or other transac-tion. (section 9.02(2))

• extending the Anonymous Submis-sion Procedure indefinitely. (section10.13(3))

• expanding the Anonymous Submis-sion Procedure to permit the submis-sion of failures listed in Appendix Aand Appendix B. (section 10.13(1))

• expanding the Anonymous Submis-sion Procedure to VCGroup andVCSEP submissions . (sect ion10.13(1))

• expanding the definition of EmployerEligibility Failure to include theadoption of a 401(k) plan by anyinel igible employer. (sect ion5.01(2)(d))

• broadening the VCGroup proceduresto permit eligible organizations tosubmit operational and plan documentfailures in a single submission. (sec-tion 10.15(1))

• increasing the de minimis amountrelating to corrective distributions.(section 6.02(5)(b))

• providing a de minimis rule for cor-recting certain Overpayments. (sec-tion 6.02(5)(c))

• clarifying the date by which correc-tion of a failure related to TransferredAssets must be completed. (section12.08)

• clarifying that the correction of fail-ures in a terminated plan may bemade under VCP. (section 10.03)

• clarifying what items may beexcluded from the initial submissionunder the Anonymous SubmissionProcedure. (section 10.13(1))

• updating the definition of FavorableLetter. (section 5.01(4))

• modifying the correction procedurerelating to Excess Amounts underVCT and overcontributions underVCSEP. (sections 12.05(3) and12.07(2))

• clarifying the factors consideredunder Audit CAP for determining asanction amount. (section 14.02)

• revising the checklist in Appendix Cto include questions relating to Trans-ferred Assets and the waiver of theexcise tax under § 4974. (Appendix Citems 10 and 18)

In addition, the following sectionshave been modified for purposes of clari-fication: sections 4.05, 5.01(8), 5.02(3),6.02(3), 6.02(5)(d), 6.05(1), 6.05(2)(a)and (b), 9.05 Example 1, 10.06, 10.09,10.13(2), 10.15(2), 10.15(3)(b), 11.01,11.02(11), 11.03(4), 11.04(3), 11.04(4),11.05, 11.12, 12.01(1), 12.01(3)(a), 12.02,12.08, 13.02, 14.03, 15, 16, 17, AppendixA .05, Appendix B 2.01(b)(i) and 2.07(3),and Appendix C checklist item 26.

.02 Future enhancements. (1) It isexpected that the EPCRS revenue proce-dure will continue to be updated on aperiodic basis, including, as noted above,further improvements to EPCRS based oncomments previously received. In addi-tion, the Service and Treasury continue toinvite further comments on how toimprove EPCRS. Comments should besent to:

Internal Revenue ServiceAttention: T:EP:RA:VC1111 Constitution Avenue, NWWashington, D.C. 20224

(2) The Service and Treasury areconsidering expanding the proceduresunder EPCRS and are interested inreceiving comments regarding, amongother things, appropriate correction proce-dures for failures arising under SIMPLEIRAs (under § 408(p)) and § 457(b)plans. Submissions related to SIMPLEIRAs are currently being accepted by theService on a provisional basis outside ofEPCRS. Submissions relating to § 457(b)eligible governmental plans will beaccepted by the Service on a provisionalbasis outside of EPCRS. Submissionsrelating to other § 457(b) eligible plansmay be accepted outside EPCRS as

Employee Plans develops experience inthe § 457 area.

PART II. PROGRAM EFFECT ANDELIGIBILITY

SECTION 3. EFFECT OF EPCRS;RELIANCE

.01 Effect of EPCRS on QualifiedPlans. For a Qualified Plan, if the eligi-bility requirements of section 4 are satis-fied and the Plan Sponsor corrects aQualification Failure in accordance withthe applicable requirements of SCP insection 7, VCP in sections 10 and 11, orAudit CAP in section 13, the Service willnot treat the Qualified Plan as failing tomeet § 401(a). Thus, for example, if thePlan Sponsor corrects the failures inaccordance with the requirements of thisrevenue procedure, the plan will betreated as a qualified plan for purposes ofapplying § 3121(a)(5) (FICA taxes) and§ 3306(b)(5) (FUTA taxes).

.02 Effect of EPCRS on 403(b) Plans.(1) Income taxes. For a 403(b) Plan, if theapplicable eligibility requirements of sec-tion 4 are satisfied and the Plan Sponsorcorrects a failure in accordance with theapplicable requirements of SCP in section7, VCP in sections 10 and 11, or AuditCAP in section 13, the Service will notpursue income inclusion for affected par-ticipants, or liability for income tax with-holding, on account of the failure. How-ever, the correction of a failure may resultin income tax consequences to partici-pants and beneficiaries (for example, par-ticipants may be required to include ingross income distributions of ExcessAmounts in the year of distribution).

(2) Excise and employment taxes.Excise taxes, FICA taxes, and FUTAtaxes (and corresponding withholdingobligations), if applicable, that resultfrom a failure are not waived merelybecause the failure has been corrected.

.03 Effect of EPCRS on SEPs. For aSEP, if the eligibility requirements of sec-tion 4 are satisfied and the Plan Sponsorcorrects a failure to satisfy the require-ments of § 408(k) in accordance with theapplicable requirements of SCP in section7 (but only if the corresponding Qualifi-cation Failure is an insignificant Opera-tional Failure), VCP in sections 10 and11, or Audit CAP in section 13, the Ser-vice will not treat the SEP as failing to

July 22, 2002 137 2002–29 I.R.B.

meet § 408(k). Thus, for example, if thePlan Sponsor corrects the failures inaccordance with the requirements of thisrevenue procedure, the SEP will betreated as satisfying § 408(k) for purposesof applying § 3121(a)(5) (FICA taxes)and § 3306(b)(5) (FUTA taxes).

.04 Compliance Statement. If a PlanSponsor or Eligible Organization receivesa compliance statement under VCP, thecompliance statement is binding upon theService and the Plan Sponsor or EligibleOrganization as provided in section10.08.

.05 Other taxes and penalties. See sec-tion 6.07 for rules relating to other taxesand penalties.

.06 Reliance. Taxpayers may rely onthis revenue procedure, including therelief described in sections 3.01, 3.02, and3.03.

SECTION 4. PROGRAM ELIGIBILITY

.01 Programs for Qualified Plans and403(b) Plans. (1) SCP. Qualified Plansand 403(b) Plans are eligible for SCP.SCP is available only for OperationalFailures.

(2) VCP. Qualified Plans and403(b) Plans are eligible for VCP. VCPprovides general procedures for correc-tion of all Qualification Failures: Opera-tional, Plan Document, Demographic, andEmployer Eligibility.

(3) Audit CAP. Audit CAP is avail-able for correction of all failures found onexamination that have not been correctedin accordance with SCP or VCP.

.02 Eligibility for other arrangements.(1) A SEP that is maintained under a PlanDocument is eligible for SCP with respectto insignificant failures and is eligible forVCP (under the special VCSEP proce-dure). A SEP is also eligible for AuditCAP. For purposes of EPCRS, a failure tosatisfy § 408(k) is treated like the corre-sponding Qualification Failure. A failureto satisfy § 408(k) includes a failure tosatisfy the 50%-eligible-employees elec-tion requirement of § 408(k)(6)(A)(ii) anda failure to satisfy the 25-employee limitof § 408(k)(6)(B).

(2) The Service may extend EPCRSto other arrangements.

.03 Effect of examination. If the planor Plan Sponsor is Under Examination,VCP is not available. However, while theplan or Plan Sponsor is Under Examina-

tion, insignificant Operational Failurescan be corrected under SCP and, if cor-rection has been substantially completedbefore the plan or Plan Sponsor is UnderExamination, significant OperationalFailures can be corrected under SCP.

.04 Favorable Letter requirement.VCO and the provisions of SCP relatingto significant Operational Failures (seesection 9) are available for a QualifiedPlan only if the plan is the subject of aFavorable Letter.

.05 Established practices and proce-dures. In order to be eligible for SCP, thePlan Sponsor or administrator of a planmust have established practices and pro-cedures (formal or informal) reasonablydesigned to promote and facilitate overallcompliance with applicable Code require-ments. For example, the plan administra-tor of a Qualified Plan that may be top-heavy under § 416 may include in its planoperating manual a specific annual step todetermine whether the plan is top-heavyand, if so, to ensure that the minimumcontribution requirements of the top-heavy rules are satisfied. A plan docu-ment alone does not constitute evidenceof established procedures. In order for aPlan Sponsor or administrator to use SCP,these established procedures must havebeen in place and routinely followed, andan Operational Failure must haveoccurred through an oversight or mistakein applying them or because of an inad-equacy in the procedures. In the case of afailure that relates to Transferred Assetsor to a plan assumed in connection with acorporate merger, acquisition, or othersimilar employer transaction between thePlan Sponsor and sponsor of the transf-eror plan or the prior plan sponsor of anassumed plan, the plan is considered tohave established practices and proceduresif such practices and procedures are ineffect by the end of the first plan year thatbegins after the corporate merger, acqui-sition, or other similar transaction.

.06 Correction by plan amendment. (1)Availability of correction by plan amend-ment in VCP general procedures. A PlanSponsor may use VCP for a QualifiedPlan to correct an Operational Failure bya plan amendment to conform the termsof the plan to the plan’s prior operations,provided that the amendment complieswith the requirements of § 401(a), includ-

ing the requirements of §§ 401(a)(4),410(b), and 411(d)(6).

(2) Certain correction by planamendment permitted in SCP and VCO.A Plan Sponsor may use SCP or VCO fora Qualified Plan to correct an OperationalFailure by a plan amendment to conformthe terms of the plan to the plan’s prioroperations only to correct OperationalFailures listed in section 2.07 of Appen-dix B. These failures must be corrected inaccordance with the correction methodsset forth in section 2.07 of Appendix B.The amendment must comply with therequirements of § 401(a), including therequirements of §§ 401(a)(4), 410(b), and411(d)(6). SCP and VCO are not other-wise available for a Plan Sponsor to cor-rect an Operational Failure by a planamendment. Thus, if loans were made toparticipants, but the plan document didnot permit loans to be made to partici-pants, the failure cannot be correctedunder SCP or VCO by retroactivelyamending the plan to provide for theloans. However, if a Plan Sponsor cor-rects an Operational Failure in accor-dance with SCP or VCO, it may amendthe plan to the extent necessary to reflectthe corrective action. For example, if theplan failed to satisfy the average deferralpercentage (“ADP”) test required under§ 401(k)(3) and the Plan Sponsor mustmake qualified nonelective contributionsnot already provided for under the plan,the plan may be amended to provide forqualified nonelective contributions. Theissuance of a compliance statement doesnot constitute a determination as to theeffect of any plan amendment on thequalification of the plan.

.07 Submission for a determination let-ter. In a case in which correction of aQualification Failure includes correctionof a Plan Document Failure or correctionof an Operational Failure by plan amend-ment, as permitted under section 4.06,other than adoption of an amendment des-ignated by the Service as a model amend-ment or standardized prototype plan, theamendment must be submitted to the Ser-vice for approval using the appropriateapplication form (i.e., the Form 5300series or, if permitted, Form 6406) toensure that the amendment satisfies appli-cable qualification requirements.

.08 Availability of correction ofEmployer Eligibility Failure. A Plan

2002–29 I.R.B. 138 July 22, 2002

Sponsor may use VCP general proce-dures, VCT, or VCSEP to correct anEmployer Eligibility Failure. However,under sections 4.01, 4.02, and 10, SCP,VCO, and VCGroup are not available fora Plan Sponsor to correct an EmployerEligibility Failure.

.09 Egregious failures. SCP, VCO,VCGroup, and VCSEP are not availableto correct Operational Failures that areegregious. For example, if an employerhas consistently and improperly coveredonly highly compensated employees or ifa contribution to a defined contributionplan for a highly compensated individualis several times greater than the dollarlimit set forth in § 415, the failure wouldbe considered egregious. VCP is availableto correct egregious failures; however,these failures are subject to the feesdescribed in sections 12.01(4) and12.05(6).

.10 Diversion or misuse of plan assets.SCP, VCP, and Audit CAP are not avail-able to correct failures relating to thediversion or misuse of plan assets.

PART III. DEFINITIONS,CORRECTION PRINCIPLES, ANDRULES OF GENERALAPPLICABILITY

SECTION 5. DEFINITIONS

The following definitions apply forpurposes of this revenue procedure:

.01 Definitions for Qualified Plans.The definitions in this section 5.01 applyto Qualified Plans.

(1) Qualified Plan. The term“Qualified Plan” means a plan intended tosatisfy the requirements of § 401(a) or§ 403(a).

(2) Qualification Failure. The term“Qualification Failure” means any failurethat adversely affects the qualification ofa plan. There are four types of Qualifica-tion Failures: (a) Plan Document Failures,(b) Operational Failures, (c) DemographicFailures, and (d) Employer EligibilityFailures.

(a) Plan Document Failure. Theterm “Plan Document Failure” means aplan provision (or the absence of a planprovision) that, on its face, violates therequirements of § 401(a) or § 403(a).Thus, for example, the failure of a plan tobe amended to reflect a new qualification

requirement within the plan’s applicableremedial amendment period under§ 401(b) is a Plan Document Failure. Forpurposes of this revenue procedure, aPlan Document Failure includes anyQualification Failure that is a violation ofthe requirements of § 401(a) or § 403(a)and that is not an Operational Failure,Demographic Failure, or Employer Eligi-bility Failure.

(b) Operational Failure. The term“Operational Failure” means a Qualifica-tion Failure (other than an Employer Eli-gibility Failure) that arises solely from thefailure to follow plan provisions. A failureto follow the terms of the plan providingfor the satisfaction of the requirements of§ 401(k) and § 401(m) is considered to bean Operational Failure. A plan does nothave an Operational Failure to the extentthe plan is permitted to be amended retro-actively pursuant to § 401(b) or anotherstatutory provision to reflect the plan’soperations. However, if within an appli-cable remedial amendment period under§ 401(b), a plan has been properlyamended for statutory or regulatorychanges and, on or after the later of thedate the amendment is effective or isadopted, the amended provisions are notfollowed, then the plan is considered tohave an Operational Failure.

(c) Demographic Failure. Theterm “Demographic Failure” means afailure to satisfy the requirements of§ 401(a)(4), § 401(a)(26), or § 410(b) thatis not an Operational Failure or anEmployer Eligibility Failure. The correc-tion of a Demographic Failure generallyrequires a corrective amendment to theplan adding more benefits or increasingexisting benefits (cf., § 1.401(a)(4)–11(g)).

(d) Employer Eligibility Failure.The term “Employer Eligibility Failure”means the adoption of a plan intended tosatisfy the requirements of § 401(a) or§ 408(k) by an employer that fails to meetthe employer eligibility requirements toestablish a § 401(k) or § 408(k) plan. AnEmployer Eligibility Failure is not a PlanDocument, Operational, or DemographicFailure.

(3) Excess Amount. The term“Excess Amount” means (a) an Overpay-ment, (b) an elective deferral or employeeafter-tax contribution returned to satisfy§ 415, (c) an elective deferral in excess of

the limitation of § 402(g) that is distrib-uted, (d) an excess contribution or excessaggregate contribution that is distributedto satisfy § 401(k) or § 401(m), (e) anamount contributed on behalf of anemployee that is in excess of the employ-ee’s benefit provided under a SEP, (f) anexcess contribution that is distributed tosatisfy § 408(k)(6)(A)(iii), (g) an electivedeferral that is distributed to satisfy thelimitation of § 401(a)(17), or (h) anysimilar amount that is required to be dis-tributed in order to maintain plan qualifi-cation.

(4) Favorable Letter. The term“Favorable Letter” means, in the case ofa Qualified Plan, a current favorabledetermination letter for an individuallydesigned plan (including a volume sub-mitter plan that is not identical to anapproved volume submitter plan), a cur-rent favorable opinion letter for a PlanSponsor that has adopted a master or pro-totype plan, (standardized or nonstandard-ized), or a current favorable advisory let-ter and certification that the Plan Sponsorhas adopted a plan that is identical to anapproved volume submitter plan. A planhas a current favorable determination let-ter, opinion letter, or advisory letter if (a),(b), (c), (d), (e), (f), (g), or (h) below issatisfied:

(a) The plan has a favorable deter-mination letter, opinion letter, or advisoryletter/certification that considers GUST(GUST is an acronym for the UruguayRound Agreements Act (GATT), the Uni-formed Services Employment and Reem-ployment Rights Act of 1994 (USERRA),the Small Business Job Protection Act of1996 (SBJPA), the Taxpayer Relief Act of1997 (TRA ’97), the Internal RevenueService Restructuring and Reform Act of1998 (RRA ’98), and the CommunityRenewal Tax Relief Act of 2000 (CRA).)

(b) The plan (i) either has a favor-able determination letter, opinion letter, ornotification letter for a regional prototypeplan that considers the Tax Reform Act of1986 (“TRA ’86”) or was initiallyadopted or effective after December 7,1994, and, (ii) the Plan Sponsor has bythe later of February 28, 2002, or the lastday of the first plan year beginning on orafter January 1, 2001, either submitted anapplication for a determination letter onGUST, or has adopted or certified that itintends to adopt a master and prototype

July 22, 2002 139 2002–29 I.R.B.

plan (includes former regional prototypeplans) or volume submitter plan, that hasbeen submitted for a GUST opinion letteror advisory letter by December 31, 2000.

(c) The plan has a favorable deter-mination letter that considers the TaxReform Act of 1986 (“TRA ’86”) or wasinitially adopted or effective after Decem-ber 7, 1994, and the plan is a plan directlyaffected by the September 11, 2001, ter-rorist attack on the United States, (seeRev. Proc. 2001–55, 2001–49 I.R.B. 552)and the Plan Sponsor has by June 30,2002, submitted an application for adetermination letter request for GUST.

(d) The plan was timely amendedfor TRA ’86, the Unemployment Com-pensation Act of 1992 (“UCA”), and theOmnibus Budget and Reconciliation Actof 1993 (“OBRA ’93”) and the PlanSponsor has submitted an application fora determination letter on GUST by Sep-tember 3, 2002, in accordance with theprocedures set forth in Rev. Proc. 2002–35, 2002–24 I.R.B. 1187.

(e) The plan is initially adopted oreffective after February 28, 2002, and thePlan Sponsor timely submits an applica-tion for a determination letter within theplan’s remedial amendment period under§ 401(b).

(f) The plan is a governmentalplan or non-electing church plandescribed in Rev. Proc. 99–23, 1999–1C.B. 920, and has a favorable determina-tion, opinion, or notification letter thatconsiders the Tax Equity and FiscalResponsibility Act of 1982 (“TEFRA”),the Deficit Reduction Act of 1984(“DEFRA”), and the Retirement EquityAct of 1984 (“REA”), and the § 401(b)remedial amendment period for TRA ’86has not yet expired.

(g) The plan is terminated prior tothe expiration of the applicable GUSTremedial amendment period under§ 401(b) and the plan was amended toreflect the provisions of GUST.

(h) In the case of a SEP, the term“Favorable Letter” means (i) a validModel Form 5305–SEP or 5305A-SEPadopted by an employer in accordancewith the instructions on the applicableForm, (ii) a current favorable opinion let-ter for a Plan Sponsor that has adopted aprototype SEP which has been amendedin accordance with procedures set forth inRev. Proc. 94–13, 1994–1 C.B. 566, to

take into account any applicable changesin the law since the issuance of the opin-ion letter, or (iii) in the case of an indi-vidually designed SEP, a private letterruling that has been issued for the SEP.

(5) Maximum Payment Amount.The term “Maximum Payment Amount”means a monetary amount that is approxi-mately equal to the tax the Service couldcollect upon plan disqualification and isthe sum for the open taxable years of the:

(a) tax on the trust (Form 1041),(b) additional income tax resulting

from the loss of employer deductions forplan contributions (and any interest orpenalties applicable to the Plan Sponsor’sreturn), and

(c) additional income tax resultingfrom income inclusion for participants inthe plan (Form 1040).

(6) Overpayment. The term “Over-payment” means a distribution to anemployee or beneficiary that exceeds theemployee’s or beneficiary’s benefit underthe terms of the plan because of a failureto comply with plan terms that implement§ 401(a)(17), § 401(m) (but only withrespect to the forfeiture of nonvestedmatching contributions that are excessaggregate contributions), § 411(a)(3)(G),or § 415. An Overpayment does notinclude a distribution of any ExcessAmount described in section 5.01(3)(b)through (h).

(7) Plan Sponsor. The term “PlanSponsor” means the employer that estab-lishes or maintains a qualified retirementplan for its employees.

(8) Transferred Assets. The term“Transferred Assets” means plan assetsthat were received, in connection with acorporate merger, acquisition or othersimilar employer transaction, by the planin a transfer (including a merger or con-solidation of plan assets) under § 414(l)from a plan sponsored by an employerthat was not a member of the same con-trolled group as the Plan Sponsor prior tothe corporate merger, acquisition, or othersimilar employer transaction. If a transferof plan assets related to the sameemployer transaction is accomplishedthrough several transfers, then the date ofthe transfer is the date of the first transfer.

.02 Definitions for 403(b) Plans. Thedefinitions in this section 5.02 apply to403(b) Plans.

(1) 403(b) Plan. The term “403(b)Plan” means a plan or program intendedto satisfy the requirements of § 403(b).

(2) 403(b) Failure. A 403(b) Failureis any Operational, Demographic, orEmployer Eligibility Failure as definedbelow.

(a) Operational Failure. The term“Operational Failure” means any of thefollowing:

(i) A failure to satisfy therequirements of § 403(b)(12)(A)(ii)(relating to the availability of salaryreduction contributions);

(ii) A failure to satisfy therequirements of § 401(m) (as applied to403(b) Plans pursuant to § 403(b)(12)(A)(i));

(iii) A failure to satisfy therequirements of § 401(a)(17) (as appliedto 403(b) Plans pursuant to § 403(b)(12)(A)(i));

(iv) A failure to satisfy the dis-tribution restrictions of § 403(b)(7) or§ 403(b)(11);

(v) A failure to satisfy the inci-dental death benefit rules of § 403(b)(10);

(vi) A failure to pay minimumrequired distributions under § 403(b)(10);

(vii) A failure to give employ-ees the right to elect a direct rolloverunder § 403(b)(10), including the failureto give meaningful notice of such right;

(viii) A failure of the annuitycontract or custodial agreement to pro-vide participants with a right to elect adirect rollover under §§ 403(b)(10) and401(a)(31);

(ix) A failure to satisfy the limiton elective deferrals under § 403(b)(1)(E);

(x) A failure of the annuitycontract or custodial agreement to pro-vide the limit on elective deferrals under§§ 403(b)(1)(E) and 401(a)(30);

(xi) A failure involving contri-butions or allocations of Excess Amounts;or

(xii) Any other failure to satisfyapplicable requirements under § 403(b)that (A) results in the loss of § 403(b)status for the plan or the loss of § 403(b)status for one or more custodialaccount(s) or annuity contract(s) underthe plan and (B) is not a DemographicFailure, an Employer Eligibility Failure,or a failure related to the purchase of

2002–29 I.R.B. 140 July 22, 2002

annuity contracts, or contributions to cus-todial accounts, on behalf of individualswho are not employees of the employer.

(b) Demographic Failure. Theterm “Demographic Failure” means afailure to satisfy the requirements of§ 401(a)(4), § 401(a)(26), or § 410(b) (asapplied to 403(b) Plans pursuant to§ 403(b)(12)(A)(i)).

(c) Employer Eligibility Failure.The term “Employer Eligibility Failure”means any of the following:

(i) The adoption of a planintended to satisfy the requirements of§ 403(b) by an employer that is not a tax-exempt organization described in§ 501(c)(3) or a public educational orga-nization described in § 170(b)(1)(A)(ii);

(ii) A failure to satisfy the non-transferability requirement of § 401(g);

(iii) A failure to initially estab-lish or maintain a custodial account asrequired by § 403(b)(7); or

(iv) A failure to purchase (ini-tially or subsequently) either an annuitycontract from an insurance company(unless grandfathered under Rev. Rul.82–102, 1982–1 C.B. 62) or a custodialaccount from a regulated investmentcompany utilizing a bank or an approvednon-bank trustee/custodian.

(3) Excess Amount. The term“Excess Amount” means any contribu-tions or allocations that are in excess ofthe limits under § 415 for the year (andfor years prior to 1/1/02, the § 403(b)(2)exclusion allowance limit for the year).

(4) Plan Sponsor. The term “PlanSponsor” means the employer that offersa 403(b) Plan to its employees.

(5) Total Sanction Amount. Theterm “Total Sanction Amount” means amonetary amount that is approximatelyequal to the income tax the Service couldcollect as a result of the failure.

.03 Under Examination. (1) The term“Under Examination” means: (a) a planthat is under an Employee Plans examina-tion (that is, an examination of a Form5500 series or other Employee Plansexamination), or (b) a Plan Sponsor thatis under an Exempt Organizations exami-nation (that is, an examination of a Form990 series or other Exempt Organizationsexamination).

(2) A plan that is under anEmployee Plans examination includesany plan for which the Plan Sponsor, or a

representative, has received verbal orwritten notification from Employee Plansof an impending Employee Plans exami-nation, or of an impending referral for anEmployee Plans examination, and alsoincludes any plan that has been under anEmployee Plans examination and is nowin Appeals or in litigation for issuesraised in an Employee Plans examination.A plan is considered to be Under Exami-nation if it is aggregated for purposes ofsatisfying the nondiscrimination require-ments of § 401(a)(4), the minimum par-ticipation requirements of § 401(a)(26),the minimum coverage requirements of§ 410(b), or the requirements of§ 403(b)(12), with a plan(s) that is UnderExamination. In addition, a plan is con-sidered to be Under Examination withrespect to a failure of a qualificationrequirement (other than those describedin the preceding sentence) if the plan isaggregated with another plan for purposesof satisfying that qualification require-ment (for example, § 402(g), § 415, or§ 416) and that other plan is UnderExamination. For example, assume PlanA has a § 415 failure, Plan A is aggre-gated with Plan B only for purposes of§ 415, and Plan B is Under Examination.In this case, Plan A is considered to beUnder Examination with respect to the§ 415 failure. However, if Plan A has afailure relating to the spousal consentrules under § 417 or the vesting rules of§ 411, Plan A is not considered to beUnder Examination with respect to the§ 417 or § 411 failure. For purposes ofthis revenue procedure, the term aggrega-tion does not include consideration ofbenefits provided by various plans forpurposes of the average benefits test setforth in § 410(b)(2).

(3) An Employee Plans examinationalso includes a case in which a PlanSponsor has submitted a Form 5310 andthe Employee Plans agent notifies thePlan Sponsor, or a representative, of pos-sible Qualification Failures, whether ornot the Plan Sponsor is officially notifiedof an “examination.” This would includea case where, for example, a Plan Spon-sor has applied for a determination letteron plan termination, and an EmployeePlans agent notifies the Plan Sponsor thatthere are partial termination concerns.

(4) A Plan Sponsor that is under anExempt Organizations examination

includes any Plan Sponsor that hasreceived (or whose representative hasreceived) verbal or written notificationfrom Exempt Organizations of animpending Exempt Organizations exami-nation or of an impending referral for anExempt Organizations examination andalso includes any Plan Sponsor that hasbeen under an Exempt Organizationsexamination and is now in Appeals or inlitigation for issues raised in an ExemptOrganizations examination.

.04 SEP. The term “SEP” means a planintended to satisfy the requirements of§ 408(k). For purposes of this revenueprocedure, the term SEP also includes asalary reduction SEP (“SARSEP”)described in § 408(k)(6), when appli-cable.

SECTION 6. CORRECTIONPRINCIPLES AND RULES OFGENERAL APPLICABILITY

.01 Correction principles; rules ofgeneral applicability. The general correc-tion principles in section 6.02 and rules ofgeneral applicability in sections 6.03through 6.10 apply for purposes of thisrevenue procedure.

.02 Correction principles. Generally, afailure is not corrected unless full correc-tion is made with respect to all partici-pants and beneficiaries, and for all tax-able years (whether or not the taxableyear is closed). Even if correction is madefor a closed taxable year, the tax liabilityassociated with that year will not be rede-termined because of the correction. In thecase of a Qualified Plan with an Opera-tional Failure, correction is determinedtaking into account the terms of the planat the time of the failure. Correctionshould be accomplished taking intoaccount the following principles:

(1) Restoration of benefits. The cor-rection method should restore the plan tothe position it would have been in had thefailure not occurred, including restorationof current and former participants andbeneficiaries to the benefits and rightsthey would have had if the failure had notoccurred.

(2) Reasonable and appropriatecorrection. The correction should be rea-sonable and appropriate for the failure.Depending on the nature of the failure,there may be more than one reasonableand appropriate correction for the failure.

July 22, 2002 141 2002–29 I.R.B.

For Qualified Plans, any correctionmethod permitted under Appendix A orAppendix B is deemed to be a reasonableand appropriate method of correcting therelated Qualification Failure. Any correc-tion method permitted under Appendix Aapplicable to a 403(b) Plan is deemed tobe a reasonable and appropriate methodof correcting the related 403(b) Failure.Whether any other particular correctionmethod is reasonable and appropriate isdetermined taking into account the appli-cable facts and circumstances and the fol-lowing principles:

(a) The correction method should,to the extent possible, resemble onealready provided for in the Code, regula-tions thereunder, or other guidance ofgeneral applicability. For example, forQualified Plans, the defined contributionplan correction methods set forth in§ 1.415–6(b)(6) would be the typicalmeans of correcting a failure under § 415.Likewise, the correction method set forthin § 1.402(g)–1(e)(2) would be the typicalmeans of correcting a failure under§ 402(g).

(b) The correction method for fail-ures relating to nondiscrimination shouldprovide benefits for nonhighly compen-sated employees. For example, for Quali-fied Plans, the correction method set forthin § 1.401(a)(4)–11(g) (rather than meth-ods making use of the special testing pro-visions set forth in § 1.401(a)(4)–8 or§ 1.401(a)(4)–9) would be the typicalmeans of correcting a failure to satisfynondiscrimination requirements. Simi-larly, the correction of a failure to satisfythe requirements of § 401(k)(3),§ 401(m)(2), or § 401(m)(9) (relating tonondiscrimination), solely by distributingexcess amounts to highly compensatedemployees would not be the typicalmeans of correcting such a failure.

(c) The correction method shouldkeep plan assets in the plan, except to theextent the Code, regulations, or otherguidance of general applicability providefor correction by distribution to partici-pants or beneficiaries or return of assetsto the employer or Plan Sponsor. Forexample, if an excess allocation (not inexcess of the § 415 limits) made under aQualified Plan was made for a participantunder a plan (other than a cash ordeferred arrangement), the excess shouldbe reallocated to other participants or,

depending on the facts and circumstances,used to reduce future employer contribu-tions.

(d) The correction method shouldnot violate another applicable specificrequirement of § 401(a) or § 403(b) (forexample, § 401(a)(4), § 411(d)(6), or§ 403(b)(12), as applicable), or § 408(k)for SEPs. If an additional failure is cre-ated as a result of the use of a correctionmethod in this revenue procedure, thenthat failure also must be corrected in con-junction with the use of that correctionmethod and in accordance with therequirements of this revenue procedure.

(3) Consistency Requirement. Gen-erally, where more than one correctionmethod is available to correct a type ofOperational Failure for a plan year (orwhere there are alternative ways to applya correction method), the correctionmethod (or one of the alternative ways toapply the correction method) should beapplied consistently in correcting allOperational Failures of that type for thatplan year. Similarly, earnings adjustmentmethods generally should be applied con-sistently with respect to corrective contri-butions or allocations for a particular typeof Operational Failure for a plan year. Inthe case of a VCGroup submission, theconsistency requirement applies on a planby plan basis.

(4) Principles regarding correctiveallocations and corrective distributions.The following principles apply where anappropriate correction method includesthe use of corrective allocations or correc-tive distributions:

(a) Corrective allocations under adefined contribution plan should be basedupon the terms of the plan and otherapplicable information at the time of thefailure (including the compensation thatwould have been used under the plan forthe period with respect to which a correc-tive allocation is being made) and shouldbe adjusted for earnings (includinglosses) and forfeitures that would havebeen allocated to the participant’s accountif the failure had not occurred. The cor-rective allocation need not be adjusted forlosses. See section 3 of Appendix B foradditional information on calculation ofearnings for corrective allocations.

(b) A corrective allocation to aparticipant’s account because of a failureto make a required allocation in a prior

limitation year will not be considered anannual addition with respect to the par-ticipant for the limitation year in whichthe correction is made, but will be consid-ered an annual addition for the limitationyear to which the corrective allocationrelates. However, the normal rules of§ 404, regarding deductions, apply.

(c) Corrective allocations shouldcome only from employer contributions(including forfeitures if the plan permitstheir use to reduce employer contribu-tions).

(d) In the case of a defined benefitplan, a corrective distribution for an indi-vidual should be increased to take intoaccount the delayed payment, consistentwith the plan’s actuarial adjustments.

(5) Special exceptions to full cor-rection. In general, a failure must be fullycorrected. Although the mere fact thatcorrection is inconvenient or burdensomeis not enough to relieve a Plan Sponsor ofthe need to make full correction, full cor-rection may not be required in certainsituations because it is unreasonable ornot feasible. Even in these situations, thecorrection method adopted must be onethat does not have significant adverseeffects on participants and beneficiariesor the plan, and that does not discriminatesignificantly in favor of highly compen-sated employees. The except ionsdescribed below specify those situationsin which full correction is not required.

(a) Reasonable estimates. If it isnot possible to make a precise calcula-tion, or the probable difference betweenthe approximate and the precise restora-tion of a participant’s benefits is insignifi-cant and the administrative cost of deter-mining precise restorat ion wouldsignificantly exceed the probable differ-ence, reasonable estimates may be used incalculating appropriate correction.

(b) Delivery of small benefits. Ifthe total corrective distribution due a par-ticipant or beneficiary is $50 or less, thePlan Sponsor is not required to make thecorrective distribution if the reasonabledirect costs of processing and deliveringthe distribution to the participant or ben-eficiary would exceed the amount of thedistribution.

(c) Recovery of small Overpay-ments. Generally, for a submission underVCP, if the total amount of an Overpay-ment made to a participant or beneficiary

2002–29 I.R.B. 142 July 22, 2002

is $100 or less, the Plan Sponsor is notrequired to seek the return of the Over-payment from the participant or benefi-ciary.

(d) Locating lost participants.Reasonable actions must be taken to findall current and former participants andbeneficiaries to whom additional benefitsare due, but who have not been locatedafter a mailing to the last known address.In general, such actions include use of theInternal Revenue Service Letter Forward-ing Program (see Rev. Proc. 94–22,1994–1 C.B. 608) or the Social SecurityAdministration Employer Reporting Ser-vice. A plan will not be considered tohave failed to correct a failure due to theinability to locate an individual if eitherof these programs is used; provided that,if the individual is later located, the addi-tional benefits must be provided to theindividual at that time.

(6) Reporting. Any distributionsfrom the plan should be properlyreported.

.03 Correction of an Employer Eligi-bility Failure (only available under VCPgeneral procedures, VCT, and VCSEP).(1) The permitted correction of anEmployer Eligibility Failure is the cessa-tion of all contributions (including salaryreduction and after-tax contributions)beginning no later than the date the appli-cation under VCP is filed. Pursuant toVCP correction, the assets in such a planare to remain in the trust, annuity con-tract, or custodial account and are to bedistributed no earlier than the occurrenceof one of the applicable distributionevents, e.g., for 403(b) Plans, the eventsdescribed in § 403(b)(7) (to the extent theassets are held in custodial accounts) or§ 403(b)(11) (for those assets invested inannuity contracts that would be subject to§ 403(b)(11) restrictions if the employerwere eligible). A Plan that is correctedthrough VCP will be treated as subject toall of the requirements and provisions of§ 401(a) for a Qualified Plan, § 403(b) fora 403(b) Plan, and § 408(k) for a SEP(including Code provisions relating torollovers).

(2) Cessation of contributions is notrequired if continuation of contributionswould not be an Employer EligibilityFailure (for example, a tax-exemptemployer may maintain a § 401(k) planafter 1996).

(3) Because a plan with anEmployer Eligibility Failure will betreated as subject to all of the applicableCode qualification requirements, the PlanSponsor must also correct all other fail-ures in accordance with this revenue pro-cedure.

.04 Correction by plan amendment. Inany case in which correction of a Quali-fied Plan failure includes correction of aPlan Document Failure or correction ofan Operational Failure by plan amend-ment as permitted under section 4.06,other than adoption of a model amend-ment or a standardized prototype plan, theamendment must be submitted to the Ser-vice for approval under the appropriateapplication form (i.e., Form 5300 seriesor Form 6406) to ensure that the amend-ment satisfies applicable qualificationrequirements.

.05 Special rules relating to ExcessAmounts . (1) Treatment of ExcessAmounts under Qualified Plans. A distri-bution of an Excess Amount is not eli-gible for the favorable tax treatmentaccorded to distributions from QualifiedPlans (such as eligibility for rolloverunder § 402(c)). To the extent that a cur-rent or prior distribution was a distribu-tion of an Excess Amount, distribution ofthat Excess Amount is not an eligible roll-over distribution. Thus, for example, ifsuch a distribution was contributed to anindividual retirement arrangement(“IRA”), the contribution is not a validrollover contribution for purposes ofdetermining the amount of excess contri-butions (within the meaning of § 4973) tothe individual’s IRA. A distribution of anExcess Amount is generally treated in themanner described in section 3 of Rev.Proc. 92–93, 1992–2 C.B. 505, relating tothe corrective disbursement of electivedeferrals. The distribution must bereported on Forms 1099–R for the year ofdistribution with respect to each partici-pant or beneficiary receiving such a dis-tribution. Where an Excess Amount hasbeen or is being distributed, the PlanSponsor must notify the recipient that (a)an Excess Amount has been or will bedistributed and (b) an Excess Amount isnot eligible for favorable tax treatmentaccorded to distributions from QualifiedPlans (and, specifically, is not eligible fortax-free rollover).

(2) Treatment of Excess Amountsunder 403(b) Plans. (a) Distribution ofExcess Amounts. Excess Amounts for ayear, adjusted for earnings through thedate of distribution, must be distributed toaffected participants and beneficiaries andare includible in their gross income in theyear of distribution. The distribution ofExcess Amounts is not an eligible roll-over distribution within the meaning of§ 403(b)(8). A distribution of ExcessAmounts is generally treated in the man-ner described in section 3 of Rev. Proc.92–93 relating to the corrective disburse-ment of elective deferrals. The distribu-tion must be reported on Forms 1099–Rfor the year of distribution with respect toeach participant or beneficiary receivingsuch a distribution. In addition, the PlanSponsor must inform affected participantsand beneficiaries that the distribution ofExcess Amounts is not eligible for roll-over.

(b) Retention of Excess Amounts.Under VCT and Audit CAP, ExcessAmounts will be treated as corrected(even though the Excess Amounts areretained in the 403(b) Plan) if the follow-ing requirements are satisfied. ExcessAmounts arising from a § 415 failure,adjusted for earnings through the date ofcorrection, must reduce affected partici-pants’ applicable § 415 limit for the yearfollowing the year of correction (or forthe year of correction if the Plan Sponsorso chooses), and subsequent years, untilthe excess is eliminated.

.06 Correction under statute or regula-tions. Generally, none of the correctionprograms are available to correct failuresthat can be corrected under the Code andrelated regulations. For example, as ageneral rule, a Plan Document Failurethat is a disqualifying provision for whichthe remedial amendment period under§ 401(b) has not expired can be correctedby operation of the Code through retroac-tive remedial amendment.

.07 Matters subject to excise taxes. (1)Except as provided in paragraph (3) ofthis subsection, excise taxes and addi-tional taxes, to the extent applicable, arenot waived merely because the underly-ing failure has been corrected or becausethe taxes result from the correction. Thus,for example, the excise tax on certainexcess contributions under § 4979 is notwaived under these correction programs.

July 22, 2002 143 2002–29 I.R.B.

(2) Except as provided in paragraph(3) of this section, the correction pro-grams are not available for events forwhich the Code provides tax conse-quences other than plan disqualification(such as the imposition of an excise tax oradditional income tax). For example,funding deficiencies (failures to make therequired contributions to a plan subject to§ 412), prohibited transactions, and fail-ures to file the Form 5500 cannot be cor-rected under the correction programs.However, if the event is also an Opera-tional Failure (for example, if the termsof the plan document relating to planloans to participants were not followedand loans made under the plan did notsatisfy § 72(p)(2)), the correction pro-grams will be available to correct theOperational Failure, even though theexcise or income taxes generally still willapply.

(3) As part of VCP, if the failureinvolves the failure to satisfy the mini-mum required distribution requirementsof § 401(a)(9), in appropriate cases, theService will waive the excise tax under§ 4974 applicable to plan participants.The waiver will be included in the com-pliance statement. The Plan Sponsor, aspart of the submission, must request thewaiver and in cases where the participantsubject to the excise tax is an owner-employee, as defined in § 401(c)(3), or a10 percent owner of a corporation, thePlan Sponsor must also provide an expla-nation supporting the request.

.08 Correction for SEPs. (1) Correc-tion for SEPs generally. Generally, thecorrection for a SEP is expected to besimilar to the correction required for aQualified Plan with a similar Qualifica-tion Failure.

(2) Special correction for SEPs.Under VCSEP, in any case in which cor-rection under section 6.08(1) is not fea-sible for a SEP or in any other case deter-mined by the Service in its discretion(including failures relating to §§ 402(g),415, and 401(a)(17), failures relating todeferral percentages, discontinuance ofcontributions to a SARSEP, and retentionof overcontributions for cases in whichthere has been no violation of a statutorylimitation), the Service may provide for adifferent correction. See section 12.07 fora special fee that may apply in such acase.

(3) Correction of failure to satisfydeferral percentage test. If the failureinvolves a violation of the deferral per-centage test under § 408(k)(6)(A)(iii)applicable to a SARSEP, there are severalmethods to correct the failure, similar tothe methods used in VCS and VCO. Thisfailure may be corrected in one of the fol-lowing ways:

(a) The Plan Sponsor may makecontributions that are 100% vested to alleligible nonhighly compensated employ-ees (to the extent permitted by § 415)necessary to raise the deferral percentageneeded to pass the test. This amount maybe calculated as either the same percent-age of compensation or the same flat dol-lar amount (regardless of the terms of theSEP).

(b) The Plan Sponsor may effectdistribution of excess contributions,adjusted for earnings through the date ofcorrection, to highly compensatedemployees to correct the failure. The PlanSponsor must also contribute to the SEPan amount equal to the total amount dis-tributed. This amount must be allocatedto (i) current employees who were non-highly compensated employees in theyear of the failure, (ii) current nonhighlycompensated employees who were non-highly compensated employees in theyear of the failure, or (iii) employees(both current and former) who were non-highly compensated employees in theyear of the failure.

(4) Treatment of undercontributionsto a SEP. (a) Make-up contributions;earnings. The Plan Sponsor should cor-rect undercontributions to a SEP by con-tributing make-up amounts that are fullyvested, adjusted for earnings creditedfrom the date of the failure to the date ofcorrection.

(b) Earnings adjustment methods.(i) The earnings rate generally is based onthe investment results that would haveapplied to the corrective contribution ifthe failure had not occurred.

(ii) Insofar as SEP assets areheld in IRAs, there is no earnings rateunder the SEP as a whole. If the PlanSponsor is unable to determine what theactual investment results would havebeen, a reasonable interest rate may beused.

.09 Confidentiality and disclosure.Because each correction program relates

directly to the enforcement of the Codequalification requirements, the informa-tion received or generated by the Serviceunder the program is subject to the confi-dentiality requirements of § 6103 and isnot a written determination within themeaning of § 6110.

.10 No effect on other law. Correctionunder these programs has no effect on therights of any party under any other law,including Title I of the Employee Retire-ment Income Security Act of 1974(“ERISA”).

PART IV. SELF-CORRECTION (SCP)

SECTION 7. IN GENERAL

The requirements of this section 7 aresatisfied with respect to an OperationalFailure if the Plan Sponsor of a QualifiedPlan, a 403(b) Plan, or a SEP satisfies therequirements of section 8 (relating toinsignificant Operational Failures) or, inthe case of a Qualified Plan or a 403(b)Plan, section 9 (relating to significantOperational Failures).

SECTION 8. SELF-CORRECTION OFINSIGNIFICANT OPERATIONALFAILURES

.01 Requirements. The requirements ofthis section 8 are satisfied with respect toan Operational Failure if the OperationalFailure is corrected and, given all thefacts and circumstances, the OperationalFailure is insignificant. This section 8 isavailable for correcting an insignificantOperational Failure even if the plan orPlan Sponsor is Under Examination andeven if the Operational Failure is discov-ered by an agent on examination.

.02 Factors. The factors to be consid-ered in determining whether or not anOperational Failure under a plan is insig-nificant include, but are not limited to: (1)whether other failures occurred during theperiod being examined (for this purpose,a failure is not considered to haveoccurred more than once merely becausemore than one participant is affected bythe failure); (2) the percentage of planassets and contributions involved in thefailure; (3) the number of years the failureoccurred; (4) the number of participantsaffected relative to the total number ofparticipants in the plan; (5) the number of

2002–29 I.R.B. 144 July 22, 2002

participants affected as a result of the fail-ure relative to the number of participantswho could have been affected by the fail-ure; (6) whether correction was madewithin a reasonable time after discoveryof the failure; and (7) the reason for thefailure (for example, data errors such aserrors in the transcription of data, thetransposition of numbers, or minor arith-metic errors). No single factor is determi-native. Additionally, factors (2), (4), and(5) should not be interpreted to excludesmall businesses.

.03 Multiple failures. In the case of aplan with more than one Operational Fail-ure in a single year, or Operational Fail-ures that occur in more than one year, theOperational Failures are eligible for cor-rection under this section 8 only if all ofthe Operational Failures are insignificantin the aggregate. Operational Failures thathave been corrected under SCP in section9 and VCP in sections 10 and 11 are nottaken into account for purposes of deter-mining if Operational Failures are insig-nificant in the aggregate.

.04 Examples. The following examplesillustrate the application of this section 8.It is assumed, in each example, that theeligibility requirements of section 4 relat-ing to SCP have been satisfied and that noOperational Failures occurred other thanthe Operational Failures identified below.

Example 1: In 1984, Employer X establishedPlan A, a profit-sharing plan that satisfies therequirements of § 401(a) in form. In 1999, the ben-efits of 50 of the 250 participants in Plan A werelimited by § 415(c). However, when the Serviceexamined Plan A in 2002, it discovered that, duringthe 1999 limitation year, the annual additions allo-cated to the accounts of 3 of these employeesexceeded the maximum limitations under § 415(c).Employer X contributed $3,500,000 to the plan forthe plan year. The amount of the excesses totaled$4,550. Under these facts, because the number ofparticipants affected by the failure relative to thetotal number of participants who could have beenaffected by the failure, and the monetary amount ofthe failure relative to the total employer contributionto the plan for the 1999 plan year, are insignificant,the § 415(c) failure in Plan A that occurred in 1999would be eligible for correction under this section 8.

Example 2: The facts are the same as in Example1, except that the failure to satisfy § 415 occurredduring each of the 1998, 1999, and 2000 limitationyears. In addition, the three participants affected bythe § 415 failure were not identical each year. Thefact that the § 415 failures occurred during morethan one limitation year did not cause the failures tobe significant; accordingly, the failures are still eli-gible for correction under this section 8.

Example 3: The facts are the same as in Example1, except that the annual additions of 18 of the 50

employees whose benefits were limited by § 415(c)nevertheless exceeded the maximum limitationsunder § 415(c) during the 1999 limitation year, andthe amount of the excesses ranged from $1,000 to$9,000, and totaled $150,000. Under these facts,taking into account the number of participantsaffected by the failure relative to the total number ofparticipants who could have been affected by thefailure for the 1999 limitation year (and the mon-etary amount of the failure relative to the totalemployer contribution), the failure is significant.Accordingly, the § 415(c) failure in Plan A thatoccurred in 1999 is ineligible for correction underthis section 8 as an insignificant failure.

Example 4: Employer J maintains Plan C, amoney purchase pension plan established in 1992.The plan document satisfies the requirements of§ 401(a) of the Code. The formula under the planprovides for an employer contribution equal to 10%of compensation, as defined in the plan. During itsexamination of the plan for the 1999 plan year, theService discovered that the employee responsiblefor entering data into the employer’s computer mademinor arithmetic errors in transcribing the compen-sation data with respect to 6 of the plan’s 40 partici-pants, resulting in excess allocations to those 6 par-ticipants’ accounts. Under these facts, the number ofparticipants affected by the failure relative to thenumber of participants that could have been affectedis insignificant, and the failure is due to minor dataerrors. Thus, the failure occurring in 1999 would beinsignificant and therefore eligible for correctionunder this section 8.

Example 5: Public School maintains for its 200employees a salary reduction 403(b) Plan (the“Plan”) that satisfies the requirements of § 403(b).The business manager has primary responsibility foradministering the Plan, in addition to other adminis-trative functions within Public School. During the1998 plan year, a former employee should havereceived an additional minimum required distribu-tion of $278 under § 403(b)(10). Another participantreceived an impermissible hardship withdrawal of$2,500. Another participant made elective deferralsof $11,000, $1,000 of which was in excess of the§ 402(g) limit. Under these facts, even though mul-tiple failures occurred in a single plan year, the fail-ures will be eligible for correction under this section8 because in the aggregate the failures are insignifi-cant.

SECTION 9. SELF-CORRECTION OFSIGNIFICANT OPERATIONALFAILURES

.01 Requirements. The requirements ofthis section 9 are satisfied with respect toan Operational Failure (even if signifi-cant) if the Operational Failure is cor-rected and the correction is either com-pleted or substantially completed (inaccordance with section 9.04) by the lastday of the correction period described insection 9.02.

.02 Correction period. (1) End of cor-rection period. The last day of the correc-tion period for an Operational Failure is

the last day of the second plan year fol-lowing the plan year for which the failureoccurred. However, in the case of a fail-ure to satisfy the requirements of§ 401(k)(3), 401(m)(2), or 401(m)(9), thecorrection period does not end until thelast day of the second plan year followingthe plan year that includes the last day ofthe additional period for correction per-mitted under § 401(k)(8) or 401(m)(6). Ifa 403(b) Plan does not have a plan year,the plan year is deemed to be the calendaryear for purposes of this subsection.

(2) Extension of correction periodfor Transferred Assets. In the case of anOperational Failure that relates only toTransferred Assets, or to a plan assumedin connection with a corporate merger,acquisition or other similar employertransaction, the correction period does notend until the last day of the first plan yearthat begins after the corporate merger,acquisition, or other similar employertransaction between the Plan Sponsor andthe sponsor of the transferor plan or theprior sponsor of an assumed plan.

(3) Effect of examination. The cor-rection period for an Operational Failurethat occurs for any plan year ends, in anyevent, on the first date the plan or PlanSponsor is Under Examination for thatplan year (determined without regard tothe second sentence of section 9.02). (Butsee section 9.04 for special rules permit-ting completion of correction after theend of the correction period.)

.03 Correction by plan amendment. Inorder to complete correction by planamendment (as permitted under section4.06) during the correction period, theappropriate application (i.e., the Form5300 series or Form 6406) must be sub-mitted before the end of the correctionperiod.

.04 Substantial completion of correc-tion. Correction of an Operational Failureis substantially completed by the last dayof the correction period only if therequirements of either paragraph (1) or(2) are satisfied.

(1) The requirements of this para-graph (1) are satisfied if:

(a) during the correction period,the Plan Sponsor is reasonably prompt inidentifying the Operational Failure, for-mulating a correction method, and initiat-ing correction in a manner that demon-strates a commitment to completing

July 22, 2002 145 2002–29 I.R.B.

correction of the Operational Failure asexpeditiously as practicable, and

(b) within 90 days after the lastday of the correction period, the PlanSponsor completes correction of theOperational Failure.

(2) The requirements of this para-graph (2) are satisfied if:

(a) during the correction period,correction is completed with respect to 85percent of all participants affected by theOperational Failure, and

(b) thereafter, the Plan Sponsorcompletes correction of the OperationalFailure with respect to the remainingaffected participants in a diligent manner.

.05 Examples. The following examplesillustrate the application of this section 9.Assume that the eligibility requirementsof section 4 relating to SCP have beenmet.

Example 1: Employer Z established a qualifieddefined contribution plan in 1986 and received afavorable determination letter for TRA ’86. During1999, while doing a self-audit of the operation ofthe plan for the 1998 plan year, the plan administra-tor discovered that, despite the practices and proce-dures established by Employer Z with respect to theplan, several employees eligible to participate in theplan were excluded from participation. The admin-istrator also found that for 1998 Operational Fail-ures occurred because the elective deferrals of addi-tional employees exceeded the § 402(g) limit andEmployer Z failed to make the required top-heavyminimum contribution. During the 1999 plan year,the Plan Sponsor made corrective contributions onbehalf of the excluded employees, distributed theexcess deferrals to the affected participants, andmade a top-heavy minimum contribution to all par-ticipants entitled to that contribution for the 1998plan year. Each corrective contribution and distribu-tion was credited with earnings at a rate appropriatefor the plan from the date the corrective contributionor distribution should have been made to the date ofcorrection. Under these facts, the Plan Sponsor hascorrected the Operational Failures for the 1998 planyear within the correction period and thus satisfiedthe requirements of this section 9.

Example 2: Employer A established a qualifieddefined contribution plan, Plan A, in 1990 andreceived a favorable determination letter for TRA’86. In April 2002, Employer A purchased all of thestock of Employer B, a wholly-owned subsidiary ofEmployer C. Employees of Employer B participatedin a qualified defined contribution plan sponsoredby Employer C, Plan C. Following Employer A’sreview of Plan C, Employer A and Employer Cagreed that Plan A would accept a transfer of planassets attributable to the account balances of theemployees of Employer B who had participated inPlan C. As part of this agreement, Employer C rep-resented to Employer A that Plan C is tax qualified.Employers A and C also agreed that such transferwould be in accordance with § 414(l) and§ 1.414(l)–1 and addressed issues related to costsassociated with the transfer. Following the transac-

tion, the employees of Employer B began participa-tion in Plan A. Effective July 1, 2002, Plan Aaccepted the transfer of plan assets from Plan C.After the transfer, Employer A determined that allthe participants in one division of Employer B hadbeen incorrectly excluded from allocation of theprofit sharing contributions for the 1998 and 1999plan years. During 2003, Employer A made correc-tive contributions on behalf of the affected partici-pants. The corrective contributions were creditedwith earnings at a rate appropriate for the plan fromthe date the corrective contribution should havebeen made to the date of correction and Employer Aotherwise complied with the requirements of SCP.Under these facts, Employer A has, within the cor-rection period, corrected the Operational Failures forthe 1998 and 1999 plan years with respect to theassets transferred to Plan A, and thus satisfied therequirements of this section 9.

PART V. VOLUNTARY CORRECTIONPROGRAM WITH SERVICEAPPROVAL (VCP)

SECTION 10. VCP GENERALPROCEDURES

.01 VCP requirements. The require-ments of this section 10 are satisfied withrespect to failures submitted in accor-dance with the requirements of this sec-tion 10 if the Plan Sponsor pays the com-pliance fee required under section 12 andimplements the corrective actions and sat-isfies any other conditions in the compli-ance statement described in section 10.07.

.02 Identification of failures. VCP isnot based upon an examination of theplan by the Service. Only the failuresraised by the Plan Sponsor or failuresidentified by the Service in processing theapplication will be addressed under theprogram, and only those failures will becovered by the program. The Service willnot make any investigation or findingunder VCP concerning whether there arefailures.

.03 Availability of correction of a ter-minated plan. Correction of QualificationFailures in a terminated plan may bemade under VCP.

.04 Effect of VCP submission onexamination. Because VCP does not ariseout of an examination, considerationunder VCP does not preclude or impede(under § 7605(b) or any administrativeprovisions adopted by the Service) a sub-sequent examination of the Plan Sponsoror the plan by the Service with respect tothe taxable year (or years) involved withrespect to matters that are outside thecompliance statement. However, a Plan

Sponsor’s statements describing failuresare made only for purposes of VCP andwill not be regarded by the Service as anadmission of a failure for purposes of anysubsequent examination.

.05 No concurrent examination activ-ity. Except in unusual circumstances, aplan that has been properly submittedunder VCP will not be examined whilethe submission is pending. This practiceregarding concurrent examinations doesnot extend to other plans of the PlanSponsor. Thus, any plan of the Plan Spon-sor that is not pending under VCP couldbe subject to examination.

.06 Submission of determination letterapplication for plan amendments. In anycase in which correction of a QualifiedPlan failure includes correction of a PlanDocument Failure or correction of anOperational Failure by plan amendmentas permitted under section 4.06, otherthan adoption of an amendment desig-nated by the Service as a model amend-ment or a standardized prototype plan, thePlan Sponsor should submit a copy of theamendment, the appropriate applicationform (i.e., Form 5300 series or Form6406), and the appropriate user fee con-currently and to the same address as theVCP submission. The user fee for thedetermination letter application and thefee for a VCP submission which requiresan up-front fee, for example, a VCO orVCS submission, must be submitted onseparate certified or cashier’s checksmade payable to the U.S. Treasury.

.07 Processing of submission. (1)Screening of submission. Upon receipt ofa submission under VCP, the Service willreview whether the eligibility require-ments of section 4 and the submissionrequirements of section 11 are satisfied. Ifthe Service determines that a VCP sub-mission is seriously deficient, the Servicereserves the right to return the submis-sion, including any compliance fee, with-out contacting the Plan Sponsor.

(2) Review of submission. Once theService determines that the submission iscomplete under VCP, the Service willconsult with the Plan Sponsor or the PlanSponsor’s representative to discuss theproposed corrections and the plan’sadministrative procedures.

(3) Additional information required.If additional information is required, a

2002–29 I.R.B. 146 July 22, 2002

Service representative will generally con-tact the Plan Sponsor or the Plan Spon-sor’s representative and explain what isneeded to complete the submission. ThePlan Sponsor will have 21 calendar daysfrom the date of this contact to providethe requested information. If the informa-tion is not received within 21 days, thematter will be closed, the compliance feewill not be returned, and the case may bereferred to Employee Plans Examinations.Any request for an extension of the21-day time period must be made in writ-ing within the 21-day time period andmust be approved by the Service (by theapplicable group manager).

(4) Additional failures discoveredafter initial submission. (a) A Plan Spon-sor that discovers additional, unrelatedQualification or 403(b) Failures after itsinitial submission may request that suchfailures be added to its submission. How-ever, the Service retains the discretion toreject the inclusion of such failures if therequest is not timely, for example, if thePlan Sponsor makes its request when pro-cessing of the submission is substantiallycomplete.

(b) If the Service discovers anunrelated Qualification or 403(b) Failurewhile the request is pending, the failuregenerally will be added to the failuresunder consideration. However, the Ser-vice retains the discretion to determinethat a failure is outside the scope of thevoluntary request for considerationbecause it was not voluntarily broughtforward by the Plan Sponsor. In this case,if the additional failure is significant, allaspects of the plan may be examined andthe rules pertaining to Audit CAP willapply. (See sections 13 and 14.)

(5) Conference right. If the Serviceinitially determines that it cannot issue acompliance statement because the partiescannot agree upon correction or a changein administrative procedures, the PlanSponsor (generally through the PlanSponsor’s representative) will be con-tacted by the Service representative andoffered a conference with the Service.The conference can be held either in per-son or by telephone and must be heldwithin 21 calendar days of the date ofcontact. The Plan Sponsor will have 21calendar days after the date of the confer-ence to submit additional information insupport of the submission. Any request

for an extension of the 21-day time periodmust be made in writing within the21-day time period and must be approvedby the Service (by the applicable groupmanager). Additional conferences may beheld at the discretion of the Service.

(6) Failure to reach resolution. Ifthe Service and the Plan Sponsor cannotreach agreement with respect to the sub-mission, all aspects of the plan may beexamined, and the Service may refer thesubmission to Employee Plans Examina-tions.

(7) Issuance of compliance state-ment. If agreement is reached, the Servicewill send to the Plan Sponsor an unsignedcompliance statement specifying the cor-rective action required. Within 30 calen-dar days of the date the compliance state-ment is sent, a Plan Sponsor must sign thecompliance statement and return it andany compliance fee required to be paid atthe time that the compliance statement issigned (see sections 11.05 and 11.06regarding timing of payment of compli-ance fee). The Service will then issue asigned copy of the compliance statementto the Plan Sponsor. If the Plan Sponsordoes not send the Service the signed com-pliance statement (with the compliancefee) within 30 calendar days, the planmay be referred to Employee PlansExaminations for examination consider-ation.

(8) Timing of correction. The PlanSponsor must implement the specific cor-rections and administrative changes setforth in the compliance statement within150 days of the date of the compliancestatement. Any request for an extensionof this time period must be made inadvance and in writing and must beapproved by the Service.

(9) Modification of compliancestatement. Once the compliance statementhas been issued (based on the informationprovided), the Plan Sponsor cannotrequest a modification of the complianceterms except by a new request for a com-pliance statement. However, if therequested modification is minor and ispostmarked no later than 30 days after thecompliance statement is issued, the com-pliance fee for the modification will bethe lesser of the original compliance feeor $1,250.

(10) Verification. Once the compli-ance statement has been issued, the Ser-

vice may require verification that the cor-rections have been made and that anyplan administrative procedures requiredby the statement have been implemented.This verification does not constitute anexamination of the books and records ofthe employer or the plan (within themeaning of § 7605(b)). If the Servicedetermines that the Plan Sponsor did notimplement the corrections and procedureswithin the stated time period, the planmay be referred to Employee PlansExaminations for examination consider-ation.

.08 Compliance statement. (1) Gen-eral description of compliance statement.The compliance statement issued for aVCP submission addresses the failuresidentified, the terms of correction, includ-ing any revision of administrative proce-dures, and the time period within whichproposed corrections must be imple-mented, including any changes in admin-istrative procedures. The compliancestatement also provides that the Servicewill not treat the plan as failing to satisfythe applicable requirements of the Codeon account of the failures described in thecompliance statement if the conditions ofthe compliance statement are satisfied.Where current procedures are inadequatefor operating the plan in conformancewith the applicable requirements of theCode, the compliance statement will beconditioned upon the implementation ofstated administrative procedures. The Ser-vice may prescribe appropriate adminis-trative procedures in the compliancestatement.

(2) Compliance statement condi-tioned upon timely correction. The com-pliance statement is conditioned on (i)there being no misstatement or omissionof material facts in connection with thesubmission and (ii) the implementation ofthe specific corrections and satisfaction ofany other conditions in the compliancestatement.

(3) Authority delegated. Compli-ance statements (including any waiver ofthe excise tax under § 4974) are autho-rized to be signed by Area Managersreporting to the Director, Employee PlansExaminations, and managers withinEmployee Plans Rulings and Agreements,under the Tax Exempt and GovernmentEntities Operating Division of the Ser-vice.

July 22, 2002 147 2002–29 I.R.B.

.09 Effect of compliance statement onexamination. The compliance statement isbinding upon both the Service and thePlan Sponsor or Eligible Organization (asdefined in section 10.15(2)) with respectto the specific tax matters identifiedtherein for the periods specified, but doesnot preclude or impede an examination ofthe plan by the Service relating to mattersoutside the compliance statement, evenwith respect to the same taxable year oryears to which the compliance statementrelates.

.10 Processing of determination letterapplications not submitted under VCP.(1) The Service may process a determina-tion letter application submitted under thedetermination letter program (includingan application requested on Form 5310)concurrently with a VCP submission forthe same plan. However, issuance of thedetermination letter in response to anapplication made on a Form 5310 will besuspended pending the closure of theVCP submission.

(2) A submission of a plan underthe determination letter program does notconstitute a submission under VCP. Thus,a Plan Sponsor that discovers a Qualifica-tion Failure in its plan must make a sepa-rate application under VCP. If the failureis discovered by the Service in connectionwith a determination letter application,the agent may issue a closing agreementwith respect to the failures identified or, ifappropriate, refer the case to EmployeePlans Examinations. In either case, thefee structure in section 12, applicable toVCP, will not apply. Instead, the feestructure in section 14 relating to AuditCAP will apply. (See sections 13 and 14.)

.11 Special rules relating to VCO. (1)Under VCP, Operational Failures in aQualified Plan may be corrected underthe VCO rules in this subsection. VCO isavailable only if the plan’s identified fail-ures are all Operational Failures and onlyif the plan has a Favorable Letter.

(2) If the plan is not the subject ofa Favorable Letter, or if the submissioneither includes a failure other than anOperational Failure or includes an egre-gious failure described in section 4.09,the submission will be converted from asubmission under VCO to a submissionunder the VCP general procedures. Thecompliance fee will be retained and willbe applied to the compliance fee required

under the VCP general procedures. TheService retains the discretion to determinewhether a submission is outside the scopeof the special VCO rules even if the iden-tified failures are Operational Failuresand the plan has a Favorable Letter. Thediscretion will be applied only in rare andunusual circumstances.

.12 Special rules relating to VCS. (1)Under VCO, certain Operational Failuresin a Qualified Plan may be correctedunder the VCS rules in this subsection.VCS is available only if the plan’s onlyidentified Operational Failures are fail-ures addressed in Appendix A or Appen-dix B of this revenue procedure and thefailures are corrected in accordance withan applicable correction method set forthin Appendix A or Appendix B. Appropri-ate correction must be made for anyQualification Failure that results from theapplication of a VCS correction.

(2) The correction methods set forthin Appendix A and Appendix B arestrictly construed and are the only accept-able correction methods for failures cor-rected under VCS. If the Plan Sponsorwishes to modify a correction methodprovided in Appendix A or Appendix B orto propose another method, the PlanSponsor may not use VCS, but mayrequest a compliance statement under theVCO procedure.

(3) VCS is not available if the PlanSponsor has identified more than two fail-ures in a single VCS request. If there areone or two failures that can be correctedunder VCS and there are other failuresthat cannot be corrected under VCS, VCSis not available. The Service reserves theright to shift requests for considerationunder VCS into VCO if the Plan Sponsorsubmits a second VCS request withrespect to the same plan while the firstVCS request is being considered or dur-ing the 12 months after the first VCScompliance statement is issued. BothVCS requests may be shifted into VCO ifthe first VCS request is still being consid-ered.

(4) The Service will review a VCSrequest within 120 days of the date thesubmission is received and determined tobe complete. If the Service determinesthat the request is acceptable, the Servicewill issue a compliance statement on thePlan Sponsor’s proposed correction.

.13 Special rules relating to Anony-mous (John Doe) Submission Procedure.(1) The Anonymous Submission Proce-dure permits submission of a Qualified or403(b) Plan under VCP without initiallyidentifying the applicable plan(s), thePlan Sponsor(s), or the Eligible Organiza-tion. The requirements of this revenueprocedure relating to VCP, including sec-tions 10, 11, and 12, apply to these sub-missions. However, information identify-ing the plan or the Plan Sponsor may beredacted (and the power of attorney state-ment and the penalty of perjury statementneed not be included with the initial sub-mission). For purposes of processing thesubmission, the State of the Plan Sponsormust be identified in the initial submis-sion. Once the Service and the plan rep-resentative reach agreement with respectto the submission, the Service will con-tact the plan representative in writingindicating the terms of the agreement.The Plan Sponsor will have 21 calendardays from the date of the letter of agree-ment to identify the plan and Plan Spon-sor. If the Plan Sponsor does not submitthe identifying material (including thepower of attorney statement and the pen-alty of perjury statement) within 21 calen-dar days of the letter of agreement, thematter will be closed and the compliancefee will not be returned.

(2) Notwithstanding section 10.05,until the plan(s) and Plan Sponsor(s) areidentified to the Service, a submissionunder this subsection does not preclude orimpede an examination of the Plan Spon-sor or its plan(s). Thus, a plan submittedunder the Anonymous Submission Proce-dure that comes Under Examination priorto the date the plan(s) and Plan Spon-sor(s) identifying materials are receivedby the Service will no longer be eligiblefor either the Anonymous SubmissionProcedure or VCP.

(3) The Anonymous SubmissionProcedure is extended indefinitely.

.14 Special rules relating to VCT. AVCP submission for a 403(b) Plan isrequired to be made under the VCT pro-cedure. A VCT submission is subject tothe procedures of sections 10 and 11. A403(b) Plan is not eligible for VCO orVCS.

.15 Special rules relating to VCGroup.(1) General rules. An Eligible Organiza-tion may submit a VCP request for a

2002–29 I.R.B. 148 July 22, 2002

Qualified Plan or a 403(b) Plan under theVCGroup procedure for Operational andPlan Document Failures under this sub-section and may not submit an applicationunder VCO, VCS, or VCT.

(2) Eligible Organizations. For pur-poses of VCGroup, the term “EligibleOrganization” means either (a) a Sponsor(as that term is defined in section 4.09 ofRev. Proc. 2000–20, 2000–1 C.B. 553) ofa master or prototype plan, (b) an insur-ance company or other entity that hasissued annuity contracts or provides ser-vices with respect to assets for 403(b)Plans, or (c) an entity that provides itsclients with administrative services withrespect to Qualified Plans or 403(b)Plans. An Eligible Organization is not eli-gible for VCGroup unless the submissionincludes a failure resulting from a sys-temic error involving the Eligible Organi-zation that affects at least 20 plans andthat results in at least 20 plans imple-menting correction. If, at any time beforethe Service provides an unsigned compli-ance statement, the number of plans fallsbelow 20, the Eligible Organization mustnotify the Service that it is no longer eli-gible for VCGroup (and the compliancefee will be retained).

(3) Special VCGroup procedures.(a) A VCGroup submission is subject tothe same procedures as any VCP submis-sion in accordance with sections 10 and11, except that the Eligible Organizationis responsible for performing the proce-dural obligations imposed on the PlanSponsor under sections 10 and 11.

(b) When an Eligible Organizationunder VCGroup receives an unsignedcompliance statement on the proposedcorrection and agrees to the terms of thecompliance statement, the Eligible Orga-nization must return to the Service within120 calendar days not only the signedcompliance statement and any additionalcompliance fee under section 12.06, butalso a list containing (i) the employers’tax identification numbers for the PlanSponsors of the plans to whom the com-pliance statement may be applicable and(ii) the plans by name, plan number, typeof plan, number of plan participants, andtrust’s tax identification numbers, ifapplicable, along with (iii) a power ofattorney (which may be a limited powerof attorney) from each of the Plan Spon-sors authorizing the Eligible Organization

or its representative to act on the PlanSponsor’s behalf with respect to the itemsin the compliance statement and (iv) acertification that each Plan Sponsortimely filed the Form 5500 return foreach plan. Only those plans for whichcorrection is actually made within 240calendar days of the date of the signedcompliance statement (or within suchlonger period as may be agreed to by theService at the request of the EligibleOrganization) will be covered by thatstatement.

(c) Notwithstanding section 10.04,until the Eligible Organization providesthe Service with the information of sec-tion 10.14(3)(b)(i) through (iv) withrespect to a Plan Sponsor and its plan(s),a VCGroup submission does not precludeor impede an examination of the PlanSponsor or its plan(s).

(4) VCGroup implementation. TheVCGroup procedure is being imple-mented on a provisional basis, and theService and Treasury invite comments onthe operation of the VCGroup procedure.

.16 Special rules relating to VCSEP. AVCP submission for a SEP is required tobe made under the VCSEP procedure. AVCSEP submission is subject to the pro-cedures of sections 10 and 11. A SEP Planis not eligible for VCO or VCS.

.17 Multiemployer and multipleemployer plans. (1) In the case of a mul-tiemployer or multiple employer plan, theplan administrator (rather than any con-tributing or adopting employer) mustrequest consideration of the plan underthe programs. The request must be withrespect to the plan, rather than a portionof the plan affecting any particularemployer.

(2) If a VCP submission for a multi-employer or multiple employer plan hasfailures that apply to fewer than all of theemployers under the plan, the planadministrator may choose to have thecompliance fee (in section 12) or sanction(in section 14) calculated separately foreach employer based on the assets attrib-utable to that employer, rather than beingattributable to the assets of the entireplan. Thus, the plan administrator maychoose to apply the provisions of thisparagraph where the failure is attributablein whole or in part to data, information,actions, or inactions that are within thecontrol of the employers rather than the

multiemployer or multiple employer plan(such as attribution in whole or in part tothe failure of an employer to provide theplan administrator with full and completeinformation).

SECTION 11. APPLICATIONPROCEDURES FOR VCP

.01 General rules. The requirements ofthis section 11 are satisfied if the requestfor a compliance statement from the Ser-vice under VCP satisfies the informa-tional and other requirements of this sec-tion 11. In general, a request under VCPconsists of a letter from the Plan Sponsor(which may be a letter from the PlanSponsor’s representative) or EligibleOrganization (or representative) to theService that contains a description of thefailures, a description of the proposedmethods of correction, and other proce-dural items, and includes supportinginformation and documentation asdescribed below.

.02 Submission requirements. The let-ter from the Plan Sponsor or the PlanSponsor’s representative must contain thefollowing:

(1) A complete description of thefailures and the years in which the fail-ures occurred, including closed years(that is, years for which the statutoryperiod has expired).

(2) A description of the administra-tive procedures in effect at the time thefailures occurred.

(3) An explanation of how and whythe failures arose.

(4) A detailed description of themethod for correcting the failures that thePlan Sponsor has implemented or pro-poses to implement. Each step of the cor-rection method must be described in nar-rative form. The description must includethe specific information needed to sup-port the suggested correction method.This information includes, for example,the number of employees affected and theexpected cost of correction (both ofwhich may be approximated if the exactnumber cannot be determined at the timeof the request), the years involved, andcalculations or assumptions the PlanSponsor used to determine the amountsneeded for correction. See section 10.11for special procedures regarding VCS.

(5) A description of the methodol-ogy that will be used to calculate earnings

July 22, 2002 149 2002–29 I.R.B.

or actuarial adjustments on any correctivecontributions or distributions (indicatingthe computation periods and the basis fordetermining earnings or actuarial adjust-ments, in accordance with section6.02(4)).

(6) Specific calculations for eachaffected employee or a representativesample of affected employees. Thesample calculations must be sufficient todemonstrate each aspect of the correctionmethod proposed. For example, if a PlanSponsor requests a compliance statementwith respect to a failure to satisfy the con-tribution limits of § 415(c) and proposesa correction method that involves electivecontributions (whether matched orunmatched) and matching contributions,the Plan Sponsor must submit calcula-tions illustrating the correction methodproposed with respect to each type ofcontribution. As another example, withrespect to a failure to satisfy the ADP testin § 401(k)(3), the Plan Sponsor mustsubmit the ADP test results both beforethe correction and after the correction.

(7) The method that will be used tolocate and notify former employees andbeneficiaries, or an affirmative statementthat no former employees or beneficiarieswere affected by the failures or will beaffected by the correction.

(8) A description of the measuresthat have been or will be implemented toensure that the same failures will notrecur.

(9) A statement that, to the best ofthe Plan Sponsor’s knowledge, neither theplan nor the Plan Sponsor is UnderExamination.

(10) If a submission includes a fail-ure that refers to Transferred Assets andoccurred prior to the transfer, a descrip-tion of the transaction (including the datesof the employer change and the plantransfer).

(11) A statement (if applicable) thatthe plan is currently being considered in adetermination letter application. If therequest for a determination letter is madewhile a request for consideration underVCP is pending, the Plan Sponsor mustupdate the VCP request to add this infor-mation.

.03 Submission requirements underspecial procedures. The letter from thePlan Sponsor or the Plan Sponsor’s repre-sentative must also contain the following:

(1) VCS. In the case of a VCS sub-mission, a statement that it is a VCSrequest, a description of the applicablecorrection in accordance with AppendixA or Appendix B, and a statement that thePlan Sponsor proposes to implement (orhas implemented) the correction(s).

(2) VCT. In the case of a VCT sub-mission, a statement that the Plan Spon-sor has contacted all other entitiesinvolved with the plan and has beenassured of cooperation in implementingthe applicable correction, to the extentnecessary. For example, if the plan’s fail-ure is the failure to satisfy the require-ments of § 403(b)(1)(E) on elective defer-rals, the Plan Sponsor must, prior tomaking the VCT application, contact theinsurance company or custodian withcontrol over the plan’s assets to assurecooperation in effecting a distribution ofthe excess deferrals and the earningsthereon. An application under VCT mustalso contain a statement as to the type ofemployer (e.g., a tax-exempt organizationdescribed in § 501(c)(3)) submitting theVCT application.

(3) VCGroup. A VCGroup submis-sion must be signed by the Eligible Orga-nization or the Eligible Organization’sauthorized representative and accompa-nied by a copy of the relevant portions ofthe plan document(s).

(4) VCSEP. In the case of a VCSEPsubmission, a statement that it is aVCSEP request.

.04 Required documents. A VCP sub-mission must be accompanied by the fol-lowing documents:

(1) Form 5500 or similar informa-tion. (a) VCP. In the case of the generalprocedures under VCP, a copy of the mostrecently filed Form 5500 series return.

(b) VCO and VCS. In the case ofa VCO or VCS submission, a copy of thefirst page and a copy of the page contain-ing employee census information (cur-rently, line 7f of the 1999 Form 5500) anda copy of the page containing the totalamount of plan assets (currently, line 31fof the 1999 Form 5500) or the mostrecently filed Form 5500 series return.

(c) Anonymous submission. In thecase of a submission under the Anony-mous Submission Procedure, theemployee census and plan asset informa-tion may be redacted and replaced bynumbers that are rounded up.

(d) VCT. In the case of a VCTsubmission, if Form 5500 is inapplicable,the information generally included on thefirst two pages of Form 5500, includingthe name and number of the plan, and theemployer’s Employer Identification Num-ber.

(e) VCSEP. In the case of aVCSEP submission, if Form 5500 is inap-plicable, the information generallyincluded on the first two pages of Form5500, including the name and number ofthe plan, and the employer’s EmployerIdentification Number.

(2) Plan document. A copy of therelevant portions of the plan document.For example, in a case involvingimproper exclusion of eligible employeesfrom a profit-sharing plan with a cash ordeferred arrangement, relevant portions ofthe plan document include the eligibility,allocation, and cash or deferred arrange-ment provisions of the basic plan docu-ment (and the adoption agreement, ifapplicable), along with applicable defini-tions in the plan. If the plan is a 403(b)Plan and a plan document is not avail-able, written descriptions of the plan, andsample salary reduction agreements if rel-evant. In the case of a SEP, submit theentire plan document.

(3) Determination letter applica-tion. In any case in which correction of aQualified Plan failure includes correctionof a Plan Document Failure or correctionof an Operational Failure by plan amend-ment as permitted under section 4.06,other than adoption of an amendment des-ignated by the Service as a model amend-ment or a standardized or prototype plan,the Plan Sponsor must submit the amend-ment, the appropriate application form(i.e., Form 5300 series or Form 6406),and the appropriate user fee. The user feefor the determination letter applicationand the fee for a VCP submission whichrequires an up-front fee, for example, aVCO or VCS submission, must be sub-mitted on separate certified or cashier’schecks made payable to the U.S. Trea-sury.

(4) Copy of Favorable Letter forVCO, VCS, or VCSEP. In the case ofVCO, VCS, or VCSEP, a copy of aFavorable Letter.

.05 Date VCP fee due generally.Except as provided in section 11.06, theVCP fee under section 12 is due at the

2002–29 I.R.B. 150 July 22, 2002

time the compliance statement is signedby the Plan Sponsor and returned to theService. All fees must be submitted bycertified or cashier’s check made payableto the U.S. Treasury.

.06 Fee due earlier for VCO, VCS,Anonymous Submission, VCGroup, andVCSEP. In the case of a VCO or VCSsubmission, the appropriate fee describedin section 12.02 or 12.03 must beincluded with the submission. In the caseof a submission made under the Anony-mous Submission Procedure, VCGroup,or VCSEP, the initial fee described in sec-tion 12.04(1), 12.06, or 12.07(1), respec-tively, must be included with the submis-sion (and any additional fee is due at thetime provided in section 11.05).

.07 Signed submission. The submissionmust be signed by the Plan Sponsor or thesponsor’s authorized representative.

.08 Power of attorney requirements. Tosign the submission or to appear beforethe Service in connection with the sub-mission, the Plan Sponsor’s representa-tive must comply with the requirementsof section 9.02(11) and (12) of Rev. Proc.2002–4, 2002–1 I.R.B. 127.

.09 Penalty of perjury statement. Thefollowing declaration must accompany arequest and any factual information orchange in the submission at a later time:“Under penalties of perjury, I declarethat I have examined this submission,including accompanying documents,

and, to the best of my knowledge andbelief, the facts presented in support ofthis submission are true, correct, andcomplete.” The declaration must besigned by the Plan Sponsor, not the PlanSponsor’s representative.

.10 Checklist. The Service will be ableto respond more quickly to a VCP requestif the request is carefully prepared andcomplete. The checklist in Appendix C isdesigned to assist Plan Sponsors and theirrepresentatives in preparing a submissionthat contains the information and docu-ments required under this revenue proce-dure. The checklist in Appendix C mustbe completed, signed, and dated by thePlan Sponsor or the Plan Sponsor’s repre-sentative, and should be placed on top ofthe submission. A photocopy of thischecklist may be used.

.11 Designation. The letter to the Ser-vice should be designated “VCP”,“VCO”, “VCS”, “VCT”, “VCSEP”, or“VCGroup”, as appropriate, in the upperright hand corner of the letter. In addition,if the submission is an Anonymous Sub-mission, the letter should also be desig-nated “Anonymous Submission Proce-dure”.

.12 VCP mailing address. All VCPsubmissions should be mailed to:

Internal Revenue ServiceAttention: T:EP:RA:VCP.O. Box 27063

McPherson StationWashington, D.C. 20038

.13 Maintenance of copies of submis-sions. Plan Sponsors and their representa-tives should maintain copies of all corre-spondence submitted to the Service withrespect to their VCP requests.

SECTION 12. VCP FEES

.01 VCP general procedure compli-ance fee. (1) Compliance fee chart.Except as otherwise provided in this sec-tion 12, the compliance fee for an appli-cation under VCP is determined in accor-dance with the chart below. All fees mustbe submitted by certified or cashier’scheck made payable to the U.S. Treasury.The chart contains a graduated range offees based on the size of the plan and thenumber of participants. Each rangeincludes a minimum amount, a maximumamount, and a presumptive amount. Ineach case, the minimum amount is theapplicable VCO fee in section 12.02. It isexpected that in most instances the com-pliance fee imposed will be at or near thepresumptive amount in each range; how-ever, the fee may be a higher or loweramount within the range, depending onthe factors in paragraph (2) below.

VCP GENERAL PROCEDURES COMPLIANCE FEES

# of participants Fee range Presumptive Amount

10 or fewer VCO fee* to $4,000 $2,000

11 to 50 VCO fee* to $8,000 $4,000

51 to 100 VCO fee* to $12,000 $6,000

101 to 300 VCO fee* to $16,000 $8,000

301 to 1,000 VCO fee* to $30,000 $15,000

Over 1,000 VCO fee* to $70,000 $35,000

* Items marked by asterisk refer to the VCO compliance fee that would apply under section 12.02 if the plan had been submittedunder VCO.

(2) Factors considered. Except asprovided in section 12.01(3) with respectto nonamenders and section 12.01(4)relating to egregious failures, consider-ation of whether the compliance feeshould be equal to, greater than, or lessthan the presumptive amount will dependon factors relating to the nature, extent,

and severity of the failure. These factorsinclude: (a) whether the failure is a failureto satisfy the requirements of § 401(a)(4),§ 401(a)(26), or § 410(b), (b) whether theplan has both Operational and Plan Docu-ment Failures, (c) the period over whichthe violation occurred (for example, thetime that has elapsed since the end of the

applicable remedial amendment periodunder § 401(b) for a Plan Document Fail-ure), (d) the extent to which the plan hasaccepted Transferred Assets, and theextent to which the failures relate to theTransferred Assets and occurred beforethe transfer, and (e) whether the plan hasa Favorable Letter.

July 22, 2002 151 2002–29 I.R.B.

(3) VCP fee for nonamenders. TheVCP compliance fee for a submission thatincludes only a Plan Document Failurethat is solely a failure to amend the plantimely to comply with required tax lawchanges is determined in accordance withsection 12.01(1), as follows:

(a) GUST (for plans filed afterSeptember 3, 2002), UCA or OBRA ’93model amendments only — the fee is thehalfway point between the minimumamount and the presumptive amount ofthe applicable fee range.

(b) TRA ’86 — the fee is the pre-sumptive amount of the applicable feerange, and clause (a) does not apply.

(c) TEFRA, DEFRA, or REA —the fee is the halfway point between thepresumptive amount and the maximumamount of the applicable fee range, andclauses (a) and (b) do not apply.

(d) ERISA — the fee is the maxi-mum amount of the applicable fee range,and clauses (a), (b), and (c) do not apply.

(4) Egregious failures. In casesinvolving failures that are egregious (asdescribed in section 4.09), (a) the maxi-mum compliance fee applicable to theplan under the chart in 12.01(1) isincreased to 40 percent of the MaximumPayment Amount and (b) no presumptiveamount applies.

.02 VCO fee. Unless VCS is appli-cable, the VCO compliance fee dependson the assets of the plan and the numberof plan participants.

(1) The fee for a plan with assets ofless than $500,000 and no more than1,000 plan participants is $500.

(2) The fee for a plan with assets ofat least $500,000 and no more than 1,000plan participants is $1,250.

(3) The fee for a plan with morethan 1,000 plan participants but fewerthan 10,000 plan participants is $5,000.

(4) The fee for a plan with 10,000or more plan participants is $10,000.

.03 VCS fee. The VCS compliance feeis $350.

.04 Fee for Anonymous Submission.The compliance fee for the AnonymousSubmission Procedure is the fee appli-cable under other provisions of this sec-tion 12 (i.e., the fee under section 12.01for VCP general procedures, the fee undersection 12.02 for VCO, or the fee undersection 12.05 for VCT).

(1) The initial portion of the fee isthe amount determined under section12.02 (for the VCP general procedures orVCO) or 12.05(2) (for VCT).

(2) The additional fee, if any, is thefee determined under section 12.01 or12.05, if applicable, reduced by the fee insection 12.04(1).

.05 VCT Fee. (1) VCT compliance fee.The applicable VCT compliance feedepends on the type of failure and, gener-ally, the number of employees of theemployer.

(2) Fee for Operational Failures.Subject to section 12.05(3), the compli-ance fee for submissions that include onlyOperational Failures is as follows:

(a) The fee for an employer withfewer than 25 employees is $500.

(b) The fee for an employer withat least 25 and no more than 1,000employees is $1,250.

(c) The fee for an employer withmore than 1,000 employees but less than10,000 is $5,000.

(d) The fee for an employer with10,000 or more employees is $10,000.

(3) Fee for certain Excess Amounts.Subject to section 12.05(6), the compli-

ance fee for Excess Amounts that are cor-rected pursuant to section 6.05(2)(b) isequal to the sum of (a) the applicable feedescribed in section 12.05(2), plus (b) tenpercent of the Excess Amounts, adjustedfor earnings through the date of the VCTapplication, contributed or allocated inthe calendar year of the VCT applicationand in the three calendar years priorthereto. If there is a failure to satisfy boththe § 403(b)(2) and § 415 limits withrespect to a single employee for a year,the fee will take into account only thelarger Excess Amount.

(4) Fee for Demographic and Eligi-bility Failures. (a) Subject to section12.05(6), the compliance fee for a 403(b)Plan with failures that include any Demo-graphic or Employer Eligibility Failure isdetermined in accordance with the VCPfee table in section 12.01(1), except that(i) the reference to VCO fees is changedto refer to the VCT compliance fee forOperational Failures in section 12.05(2)above and (ii) the fee is determined withreference to the number of employeesrather than participants.

(b) In addition to the types of fac-tors listed in section 12.01(2), factorsconsidered in determining the compliancefee for failures that include any Demo-graphic or Employer Eligibility Failureunder VCT include: (i) whether the fail-ures include a Demographic Failure, (ii)whether the 403(b) Plan has a combina-tion of two or more types of failures(Operat ional , Demographic , andEmployer Eligibility); and (iii) the periodof time over which the failure occurred.

(5) Fee for multiple failures. If cor-rection is requested for multiple failures,the compliance fee is determined inaccordance with the table below.

Multiple Operational Failures Fee described in section 12.05(2)

Multiple Demographic or Eligibility Failures Fee described in section 12.05(4)

Combination of Operational and Demographic orEligibility Failures Fee described in section 12.05(4)

Operational Failure(s) with section 6.05(2)(b)correction of Excess Amounts Fee described in section 12.05(3)

Demographic or Eligibility Failures and Operational Failuresincluding section 6.05(2)(b) correction of Excess Amounts

Fee described in section 12.05(3), substituting section12.05(4) fee for section 12.05(2) fee

2002–29 I.R.B. 152 July 22, 2002

(6) Fee for egregious failures. Incases involving failures that are egre-gious, the maximum VCT compliance feeapplicable to the plan is increased to 40percent of the Total Sanction Amount andno presumptive amount applies.

.06 VCGroup fees. The compliance feefor a VCGroup submission is based onthe number of plans to which the compli-ance statement is applicable. The initialfee is $10,000. In the case of a submis-sion with only corrections under Appen-dix A or B, an additional fee is due equalto the product of the number of plans inexcess of 20 times $125, up to a maxi-mum of $40,000; in any other case, theadditional fee is equal to the product ofthe number of plans in excess of 20 times$250, up to a maximum of $90,000.

.07 VCSEP fees. The applicableVCSEP compliance fee is the same as thefee for VCP in section 12.01, subject tothe following:

(1) In the case of a SEP with Opera-tional Failures only, the compliance fee isdetermined in accordance with the VCOfee schedule in section 12.02, except thatthe fee is determined solely on the basisof the number of plan participants.

(2) In any case in which a SEP cor-rection is not similar to a correction for asimilar Qualification Failure (as providedunder section 6.08(1)), the Service mayimpose an additional fee. If the failureinvolves an overcontribution to a SEPthat is not the result of a failure to satisfya statutory limit on contributions to a SEPand the Plan Sponsor retains the overcon-tribution in the SEP, a fee equal to at leastten percent of the overcontributionexcluding earnings will be imposed. Thisis in addition to the VCSEP compliancefee.

.08 Establishing amount of assets andnumber of plan participants. Compliancefees under this section 12 are calculatedby the Plan Sponsor using the numbersfrom the most recently filed Form 5500series to establish the fee. Thus, withrespect to the 1999 Form 5500, the PlanSponsor would use the number shown online 7(f) (or the equivalent line on theForm 5500 C/R or EZ) to establish thenumber of plan participants and woulduse line 31(f) (or the equivalent line onthe Form 5500 C/R or EZ) to establishthe amount of plan assets. If the submis-sion involves a plan with Transferred

Assets and no new incidents of the failureoccurred after the end of the second planyear that begins after the corporatemerger, acquisition, or other similaremployer transaction, the Plan Sponsormay calculate the amount of plan assetsand number of plan participants based onthe Form 5500 information that wouldhave been filed by the Plan Sponsor forthe plan year that includes the employertransaction if the Transferred Assets weremaintained as a separate plan. In the caseof a SEP not required to file a Form 5500,the Plan Sponsor may use other reason-able information to determine the amountof plan assets and the number of partici-pants.

PART VI. CORRECTION ON AUDIT(AUDIT CAP)

SECTION 13. DESCRIPTION OFAUDIT CAP

.01 Audit CAP requirements. If theService identifies a Qualification or403(b) Failure (other than a failure thathas been corrected in accordance withSCP or VCP) upon an Employee Plans orExempt Organizations examination of aQualified Plan, 403(b) Plan, or SEP, therequirements of this section 13 are satis-fied with respect to the failure if the PlanSponsor corrects the failure, pays a sanc-tion in accordance with section 14, satis-fies any additional requirements of sec-tion 13.03, and enters into a closingagreement with the Service.

.02 Payment of sanction. Payment ofthe sanction under section 14 generally isrequired at the time the closing agreementis signed. All sanction amounts should besubmitted by certified or cashier’s checkmade payable to the U.S. Treasury.

.03 Additional requirements. Depend-ing on the nature of the failure, the Ser-vice will discuss the appropriateness ofthe plan’s existing administrative proce-dures with the Plan Sponsor. If existingadministrative procedures are inadequatefor operating the plan in conformancewith the applicable requirements of theCode, the closing agreement may be con-ditioned upon the implementation ofstated procedures. In addition, for Quali-fied Plans, the Plan Sponsor may berequired to obtain a Favorable Letterbefore the closing agreement is signedunless the Service determines that it is

unnecessary based on the facts and cir-cumstances (for example, because theplan already has a Favorable Letter andno significant amendments are adopted).If a Favorable Letter is required, the PlanSponsor is required to pay the applicableuser fee for obtaining the letter.

.04 Failure to reach resolution. If theService and the Plan Sponsor cannotreach an agreement with respect to thecorrection of the failure(s) or the amountof the sanction, the plan will be disquali-fied or, in the case of a 403(b) Plan orSEP, will not have reliance on this rev-enue procedure.

.05 Effect of closing agreement. A clos-ing agreement constitutes an agreementbetween the Service and the Plan Sponsorthat is binding with respect to the taxmatters identified therein for the periodsspecified.

.06 Other procedural rules. The proce-dural rules for Audit CAP are set forth inInternal Revenue Manual (“IRM“) 7.2.2,EPCRS.

SECTION 14. AUDIT CAP SANCTION

.01 Determination of sanction. Thesanction under Audit CAP is a negotiatedpercentage of the Maximum PaymentAmount. For 403(b) Plans and SEPs, thesanction is a negotiated percentage of theTotal Sanction Amount. Sanctions willnot be excessive and will bear a reason-able relationship to the nature, extent, andseverity of the failures, based on the fac-tors below.

.02 Factors considered . Factorsinclude: (1) the steps taken by the PlanSponsor to ensure that the plan had nofailures, (2) the steps taken to identifyfailures that may have occurred, (3) theextent to which correction had progressedbefore the examination was initiated,including full correction, (4) the amountof the fee the Plan Sponsor would havepaid under section 12 for correcting thefailures, (5) the number and type ofemployees affected by the failure, (6) thenumber of nonhighly compensatedemployees who would be adverselyaffected if the plan were not treated asqualified or as satisfying the requirementsof § 403(b) or § 408(k), (7) whether thefailure is a failure to satisfy the require-ments of § 401(a)(4), § 401(a)(26), or§ 410(b), either directly or through§ 403(b)(12), (8) the period over which

July 22, 2002 153 2002–29 I.R.B.

the failure occurred (for example, thetime that has elapsed since the end of theapplicable remedial amendment periodunder § 401(b) for a Plan Document Fail-ure), and (9) the reason for the failure (forexample, data errors such as errors intranscription of data, the transposition ofnumbers, or minor arithmetic errors).Factors relating only to Qualified Plansalso include: (1) whether the plan is thesubject of a Favorable Letter, (2) whetherthe plan has both Operational and otherfailures, and (3) the extent to which theplan has accepted Transferred Assets, andthe extent to which failures relate toTransferred Assets and occurred beforethe transfer. Additional factors relatingonly to 403(b) Plans include: (1) whetherthe plan has a combination of Opera-tional, Demographic, or Employer Eligi-bility Failures, (2) the extent to which thefailure relates to Excess Amounts, and (3)whether the failure is solely an EmployerEligibility Failure.

.03 Transferred Assets. If the examina-tion involves a plan with TransferredAssets and the Service determines that nonew incidents of the failures that relate tothe Transferred Assets occur after the endof the second plan year that begins afterthe corporate merger, acquisition, or othersimilar employer transaction, the sanctionunder Audit CAP will not exceed thesanction that would apply if the Trans-ferred Assets were maintained as a sepa-rate plan.

PART VII. EFFECT ON OTHERDOCUMENTS; EFFECTIVE DATE;PAPERWORK REDUCTION ACT

SECTION 15. EFFECT ON OTHERDOCUMENTS

.01 Revenue procedure 2001–17 modi-fied and superseded. Rev. Proc. 2001–17is modified and superseded by this rev-enue procedure.

SECTION 16. EFFECTIVE DATE

This revenue procedure is effectiveJuly 22, 2002.

SECTION 17. PAPERWORKREDUCTION ACT

The collection of information con-tained in this revenue procedure has been

reviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number1545–1673.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid control number.

The collection of information in thisrevenue procedure is in sections 4.06,6.02(5)(c), 6.05, 10.01, 10.02, 10.05–10.07, 11.02–11.04, 11.07–11.13, 13.01,section 2.01–2.07 of Appendix B, andAppendix C. This information is requiredto enable the Commissioner, Tax Exemptand Government Entities Division of theInternal Revenue Service to make deter-minations regarding the issuance of vari-ous types of closing agreements and com-pliance statements. This information willbe used to issue closing agreements andcompliance statements to allow individualplans to continue to maintain their taxqualified and tax-deferred status. As aresult, favorable tax treatment of the ben-efits of the eligible employees is retained.The likely respondents are individuals,state or local governments, business orother for-profit institutions, nonprofitinstitutions, and small businesses or orga-nizations.

The estimated total annual reportingand/or recordkeeping burden is 56,272hours.

The estimated annual burden perrespondent/recordkeeper varies from .5 to42.5 hours, depending on individual cir-cumstances, with an estimated average of13.11 hours. The estimated number ofrespondents and/or recordkeepers is4,292.

The estimated frequency of responsesis occasional.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. § 6103.

DRAFTING INFORMATION

The principal authors of this revenueprocedure are Maxine Terry and CarltonWatkins of the Tax Exempt and Govern-ment Entities Division. For further infor-

mation concerning this revenue proce-dure, please contact the Employee Plans’taxpayer assistance telephone service at1–877–829–5500 between 8:30 a.m. and6:30 p.m., Eastern Time, Monday throughFriday (a toll-free number). Ms. Terry andMr. Watkins may be reached at (202)283–9888 (not a toll-free number).

APPENDIX A

OPERATIONAL FAILURES ANDCORRECTIONS UNDER VCS

.01 General rule. This appendix setsforth Operational Failures relating toQualified Plans and corrections underVCS in accordance with section 10.11. Ineach case, the method described correctsthe Operational Failure identified in theheadings below. Corrective allocationsand distributions should reflect earningsand actuarial adjustments in accordancewith section 6.02(4). The correctionmethods in this appendix are acceptableunder SCP and VCP (including VCS).Additionally, the correction methods andthe earnings adjustment methods inAppendix B are acceptable under SCPand VCP (including VCS but not VCT).

.02 Failure to properly provide theminimum top-heavy benefit under § 416of the Code to non-key employees. In adefined contribution plan, the permittedcorrection method is to properly contrib-ute and allocate the required top-heavyminimums to the plan in the manner pro-vided for in the plan on behalf of the non-key employees (and any other employeesrequired to receive top-heavy allocationsunder the plan). In a defined benefit plan,the minimum required benefit must beaccrued in the manner provided in theplan.

.03 Failure to satisfy the ADP test setforth in § 401(k)(3), the ACP test set forthin § 401(m)(2), or the multiple use test of§ 401(m)(9). The permitted correctionmethod is to make qualified nonelectivecontributions (QNCs) (as defined in§ 1.401(k)–1(g)(13)(ii)) on behalf of thenonhighly compensated employees to theextent necessary to raise the actual defer-ral percentage or actual contribution per-centage of the nonhighly compensatedemployees to the percentage needed topass the test or tests. The contributionsmust be made on behalf of all eligiblenonhighly compensated employees (to the

2002–29 I.R.B. 154 July 22, 2002

extent permitted under § 415) and musteither be the same flat dollar amount orthe same percentage of compensation.QNCs contributed to satisfy the ADP testneed not be matched. Employees whowould have been eligible for a matchingcontribution had they made elective con-tributions must be counted as eligibleemployees for the ACP test, and the planmust satisfy the ACP test. Under thisVCS correction method, a plan may notbe treated as two separate plans, one cov-ering otherwise excludable employeesand the other covering all other employ-ees (as permitted in § 1.410(b)–6(b)(3))in order to reduce the number of employ-ees eligible to receive QNCs. Likewise,under this VCS correction method, theplan may not be restructured into compo-nent plans (as permitted in § 1.401(k)–1(h)(3)(iii) for plan years before January1, 1992) in order to reduce the number ofemployees eligible to receive QNCs.

.04 Failure to distribute elective defer-rals in excess of the § 402(g) limit (incontravention of § 401(a)(30)). The per-mitted correction method is to distributethe excess deferral to the employee and toreport the amount as taxable in the yearof deferral and in the year distributed. Inaccordance with § 1.402(g)–1(e)(1)(ii), adistribution to a highly compensatedemployee is included in the ADP test; adistribution to a nonhighly compensatedemployee is not included in the ADP test.

.05 Exclusion of an eligible employeefrom all contributions or accruals underthe plan for one or more plan years. Thepermitted correction method is to make acontribution to the plan on behalf of theemployees excluded from a defined con-tribution plan or to provide benefit accru-als for the employees excluded from adefined benefit plan. If the employeeshould have been eligible to make anelective contribution under a cash ordeferred arrangement, the employer mustmake a QNC (as defined in § 1.401(k)–1(g)(13)(ii)) to the plan on behalf of theemployee that is equal to the actual defer-ral percentage for the employee’s group(either highly compensated or nonhighlycompensated). If the employee shouldhave been eligible to make employee con-tributions or for matching contributions(on either elective contributions oremployee contributions), the employermust make a QNC to the plan on behalf

of the employee that is equal to the actualcontribution percentage for the employ-ee’s group (either highly compensated ornonhighly compensated). Contributingthe actual deferral or contribution per-centage for such employees eliminatesthe need to rerun the ADP or ACP test toaccount for the previously excludedemployees. Under this VCS correctionmethod, a plan may not be treated as twoseparate plans, one covering otherwiseexcludable employees and the other cov-ering all other employees (as permitted in§ 1.410(b)–6(b)(3)) in order to reduce theamount of QNCs. Likewise, restructuringthe plan into component plans under§ 1.401(k)–1(h)(3)(iii) is not permitted inorder to reduce the amount of QNCs.

.06 Failure to timely pay the minimumdistribution required under § 401(a)(9).In a defined contribution plan, the permit-ted correction method is to distribute therequired minimum distributions. Theamount to be distributed for each year inwhich the failure occurred should bedetermined by dividing the adjustedaccount balance on the applicable valua-tion date by the applicable distributionperiod. For this purpose, adjusted accountbalance means the actual account balance,determined in accordance with § 1.401(a)(9)–5 Q&A F–3 of the regulations,reduced by the amount of the total missedminimum distributions for prior years. Ina defined benefit plan, the permitted cor-rection method is to distribute therequired minimum distributions, plus aninterest payment representing the loss ofuse of such amounts.

.07 Failure to obtain participantand/or spousal consent for a distributionsubject to the participant and spousalconsent rules under §§ 401(a)(11),411(a)(11) and 417. The permitted correc-tion method is to give each affected par-ticipant a choice between providinginformed consent for the distributionactually made or receiving a qualifiedjoint and survivor annuity. In order to usethis VCS correction method, the PlanSponsor must have contacted eachaffected participant and spouse (to whomthe participant was married at the annuitystarting date) and received responsesfrom each such individual before request-ing consideration under VCS. In the eventthat participant and/or spousal consent isrequired but cannot be obtained, the par-

ticipant must receive a qualified joint andsurvivor annuity based on the monthlyamount that would have been providedunder the plan at his or her retirementdate. This annuity may be actuariallyreduced to take into account distributionsalready received by the participant. How-ever, the portion of the qualified joint andsurvivor annuity payable to the spouseupon the death of the participant may notbe actuarially reduced to take intoaccount prior distributions to the partici-pant. Thus, for example, if in accordancewith the automatic qualified joint and sur-vivor annuity option under a plan, a mar-ried participant who retired would havereceived a qualified joint and survivorannuity of $600 per month payable forlife with $300 per month payable to thespouse upon the participant’s death butinstead received a single-sum distributionequal to the actuarial present value of theparticipant’s accrued benefit under theplan, then the $600 monthly annuity pay-able during the participant’s lifetime maybe actuarially reduced to take the single-sum distribution into account. However,the spouse must be entitled to receive anannuity of $300 per month payable forlife beginning at the participant’s death.

.08 Failure to satisfy the § 415 limitsin a defined contribution plan. The per-mitted correction for failure to limitannual additions (other than electivedeferrals and employee contributions)allocated to participants in a defined con-tribution plan as required in § 415 (evenif the excess did not result from the allo-cation of forfeitures or from a reasonableerror in estimating compensation) is toplace the excess annual additions into anunallocated account, similar to the sus-pense account described in § 1.415–6(b)(6)(iii), to be used as an employercontribution in the succeeding year(s).While such amounts remain in the unallo-cated account, the employer is not permit-ted to make additional contributions tothe plan. The permitted VCS correctionfor failure to limit annual additions thatare elective deferrals or employee contri-butions (even if the excess did not resultfrom a reasonable error in determiningthe amount of elective deferrals oremployee contributions that could bemade with respect to an individual underthe § 415 limits) is to distribute the elec-tive deferrals or employee contributions

July 22, 2002 155 2002–29 I.R.B.

using a method similar to that describedunder § 1.415–6(b)(6)(iv). Elective defer-rals and employee contributions that arematched may be returned, provided thatthe matching contributions relating tosuch contributions are forfeited (whichwill also reduce excess annual additionsfor the affected individuals). The forfeitedmatching contributions are to be placedinto an unallocated account to be used asan employer contribution in succeedingperiods.

APPENDIX B

CORRECTION METHODS ANDEXAMPLES; EARNINGS

ADJUSTMENT METHODSAND EXAMPLES

SECTION 1. PURPOSE,ASSUMPTIONS FOR EXAMPLESAND SECTION REFERENCES

.01 Purpose. (1) This appendix setsforth correction methods relating toOperational Failures under QualifiedPlans. This appendix also sets forth earn-ings adjustment methods. The correctionmethods and earnings adjustment meth-ods described in this appendix are accept-able under SCP and VCP (including VCS,but not VCT).

(2) This appendix does not apply to403(b) Plans or SEPs. Accordingly, spon-sors of 403(b) Plans or SEPs cannot relyon the correction methods and the earn-ings adjustment methods under thisappendix.

.02 Assumptions for Examples. Unlessotherwise specified, for ease of presenta-tion, the examples assume that:

(1) the plan year and the § 415 limi-tation year are the calendar year;

(2) the employer maintains a singleplan intended to satisfy § 401(a) and hasnever maintained any other plan;

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

(4) the Qualification Failures areOperational Failures and the eligibilityand other requirements for SCP, VCP orAudit CAP, whichever applies, are satis-fied; and

(5) there are no Qualification Fail-ures other than the described OperationalFailures, and if a corrective action wouldresult in any additional Qualification Fail-

ure, appropriate corrective action is takenfor that additional Qualification Failure inaccordance with EPCRS.

.03 Section References. References tosection 2 and section 3 are references tothe section 2 and 3 in this appendix.

SECTION 2. CORRECTIONMETHODS AND EXAMPLES

.01 ADP/ACP Failures.(1) Correction Methods. (a) VCS

Correction Method. Appendix A, section.03 sets forth the VCS correction methodfor a failure to satisfy the actual deferralpercentage (“ADP”), actual contributionpercentage (“ACP”), or multiple use testset forth in §§ 401(k)(3), 401(m)(2), and401(m)(9), respectively.

(b) One-to-One Correct ionMethod. (i) General. In addition to theVCS correction method, a failure to sat-isfy the ADP, ACP, or multiple use testmay be corrected using the one-to-onecorrection method set forth in this section2.01(1)(b). Under the one-to-one correc-tion method, an excess contributionamount is determined and assigned tohighly compensated employees as pro-vided in paragraph (1)(b)(ii) below. Thatexcess contribution amount (adjusted forearnings) is either distributed to thehighly compensated employees or for-feited from the highly compensatedemployees’ accounts as provided in para-graph (1)(b)(iii) below. That same dollaramount (i.e., the excess contributionamount, adjusted for earnings) is contrib-uted to the plan and allocated to non-highly compensated employees as pro-vided in paragraph (1)(b)(iv) below.Under this correction method, a plan maynot be treated as two separate plans, onecovering otherwise excludable employeesand the other covering all other employ-ees (as permitted in § 1.410(b)–6(b)(3)).Likewise, restructuring the plan into com-ponent plans under § 1.401(k)–1(h)(3)(iii)is not permitted.

(i i) Determination of theExcess Contribution Amount. The excesscontribution amount for the year is equalto the excess of (A) the sum of the excesscontributions (as defined in § 401(k)(8)(B)), the excess aggregate contribu-tions (as defined in § 401(m)(6)(B)), andthe amount treated as excess contribu-tions or excess aggregate contributionsunder the multiple use test pursuant to

§ 401(m)(9) and § 1.401(m)–2(c) for theyear, as assigned to each highly compen-sated employee in accordance with§ 401(k)(8)(C) and (m)(6)(C), over (B)previous corrections that complied with§ 401(k)(8), (m)(6), and (m)(9). SeeNotice 97–2, 1997–1 C.B. 348.

(iii) Distributions and Forfei-tures of the Excess Contribution Amount.(A) The portion of the excess contributionamount assigned to a particular highlycompensated employee under paragraph(1)(b)(ii) is adjusted for earnings throughthe date of correction. The amountassigned to a particular highly compen-sated employee, as adjusted, is distributedor, to the extent the amount was forfeit-able as of the close of the plan year of thefailure, is forfeited. If the amount is for-feited, it is used in accordance with theplan provisions relating to forfeitures thatwere in effect for the year of the failure.If the amount so assigned to a particularhighly compensated employee has beenpreviously distributed; the amount is anExcess Amount within the meaning ofsection 5.01(3) of this revenue procedure.Thus, pursuant to section 6.05 of this rev-enue procedure, the employer must notifythe employee that the Excess Amount wasnot eligible for favorable tax treatmentaccorded to distributions from qualifiedplans (and, specifically, was not eligiblefor tax-free rollover).

(B) If any matching contributions(adjusted for earnings) are forfeited inaccordance with § 411(a)(3)(G), the for-feited amount is used in accordance withthe plan provisions relating to forfeituresthat were in effect for the year of the fail-ure.

(C) If a payment was made to anemployee and that payment is a forfeit-able match described in either paragraph(1)(b)(iii)(A) or (B), then it is an Over-payment defined in section 5.01(6) of thisrevenue procedure that must be corrected(see sections 2.04 and 2.05 below).

(iv) Contribution and Alloca-tion of Equivalent Amount. (A) Theemployer makes a contribution to the planthat is equal to the aggregate amounts dis-tributed and forfeited under paragraph(1)(b)(iii)(A) (i.e., the excess contributionamount adjusted for earnings, as providedin paragraph (1)(b)(iii)(A), which doesnot include any matching contributionsforfeited in accordance with § 411(a)

2002–29 I.R.B. 156 July 22, 2002

(3)(G) as provided in paragraph(1)(b)(iii)(B)). The contribution must sat-isfy the vesting requirements and distri-bution limitations of § 401(k)(2)(B) and(C).

(B)(1) This paragraph (1)(b)(iv)(B)(1) applies to a plan that uses the cur-rent year testing method described inNotice 98–1, 1998–1 C.B. 327. The con-tr ibut ion made under paragraph(1)(b)(iv)(A) is allocated to the accountbalances of those individuals who wereeither (I) the eligible employees for theyear of the failure who were not highlycompensated employees for that year or(II) the eligible employees for the year ofthe failure who were not highly compen-sated employees for that year and whoalso are not highly compensated employ-ees for the year of correction. Alterna-tively, the contribution is allocated toaccount balances of eligible employeesdescribed in (I) or (II) of the precedingsentence, except that the allocation ismade only to the account balances ofthose employees who are employees on adate during the year of the correction thatis no later than the date of correction.Regardless of which of these four options(described in the two preceding sen-tences) the employer selects, the contribu-tion is allocated to each such employeeeither as the same percentage of theemployee’s compensation for the year ofthe failure or as the same dollar amountfor each employee. (See Examples 1, 2and 3.) Under the one-to-one correctionmethod, the amount allocated to theaccount balance of an employee (i.e, theemployee’s share of the total amount con-tributed under paragraph (1)(b)(iv)(A)) isnot further adjusted for earnings and istreated as an annual addition under § 415for the year of the failure for theemployee for whom it is allocated.

(2) This paragraph (1)(b)(iv)(B)(2) applies to a plan that uses the prioryear testing method described in Notice98–1. Paragraph (1)(b)(iv)(B)(1) isapplied by substituting “the year prior tothe year of the failure” for “the year ofthe failure”.

(2) Examples.

Example 1:

Employer A maintains a profit-sharing plan witha cash or deferred arrangement that is intendedto satisfy § 401(k) (“401(k) plan”) using the cur-rent year testing method described in Notice

98–1. The plan does not provide for matchingcontributions or employee after-tax contribu-tions. In 1999, it was discovered that the ADPtest for 1997 was not performed correctly. Whenthe ADP test was performed correctly, the testwas not satisfied for 1997. For 1997, the ADPfor highly compensated employees was 9% andthe ADP for nonhighly compensated employeeswas 4%. Accordingly, the ADP for highly com-pensated employees exceeded the ADP for non-highly compensated employees by more thantwo percentage points (in violation of§ 401(k)(3)). (The ADP for nonhighly compen-sated employees for 1996 also was 4%, so theADP test for 1997 would not have been satisfiedeven if the plan had used the prior year testingmethod described in Notice 98–1.) There weretwo highly compensated employees eligibleunder the 401(k) plan during 1997, Employee Pand Employee Q. Employee P made electivedeferrals of $8,000, which is equal to 10% ofEmployee P’s compensation of $80,000 for1997. Employee Q made elective deferrals of$9,500, which is equal to 8% of Employee Q’scompensation of $118,750 for 1997.

Correction:

On June 30, 1999, Employer A uses the one-to-one correction method to correct the failure tosatisfy the ADP test for 1997. Accordingly,Employer A calculates the dollar amount of theexcess contributions for the two highly compen-sated employees in the manner described in§ 401(k)(8)(B). The amount of the excess contri-bution for Employee P is $3,200 (4% of$80,000) and the amount of the excess contribu-tion for Employee Q is $2,375 (2% of$118,750), or a total of $5,575. In accordancewith § 401(k)(8)(C), $5,575, the excess contri-bution amount, is assigned $2,037.50 toEmployee P and $3,537.50 to Employee Q. It isdetermined that the earnings on the assignedamounts through June 30, 1999, are $407 and$707 for Employees P and Q, respectively. Theassigned amounts and the earnings are distrib-uted to 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 samedate, a corrective contribution is made to the401(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 cor-rective contribution is allocated to the accountbalances of eligible nonhighly compensatedemployees for 1997, pro rata based on theircompensation for 1997 (subject to § 415 for1997).

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 $6,689is allocated in an equal dollar amount to theaccount balances of eligible nonhighly compen-sated employees for 1997 who are employees on

June 30, 1999, and who are nonhighly compen-sated employees for 1999 (subject to § 415 for1997).

Example 3:

The facts are the same as in Example 1, exceptthat for 1997 the plan also provides (1) foremployee after-tax contributions and (2) formatching contributions equal to 50% of the sumof an employee’s elective deferrals andemployee after-tax contributions that do notexceed 10% of the employee’s compensation.The plan provides that matching contributionsare subject to the plan’s 5-year graded vestingschedule and that matching contributions areforfeited and used to reduce employer contribu-tions if associated elective deferrals or employeeafter-tax contributions are distributed to correctan ADP, ACP or multiple use test failure. For1997, nonhighly compensated employees madeemployee after-tax contributions and no highlycompensated employee made any employeeafter-tax contributions. Employee P received amatching contribution of $4,000 (50% of$8,000) and Employee Q received a matchingcontribution of $4,750 (50% of $9,500).Employees P and Q were 100% vested in 1997.It is determined that, for 1997, the ACP forhighly compensated employees was not morethan 125% of the ACP for nonhighly compen-sated employees, so that the ACP and multipleuse tests would have been satisfied for 1997without any corrective action.

Correction:

The same corrective actions are taken as inExample 1. In addition, in accordance with theplan’s terms, corrective action is taken to forfeitEmployee P’s and Employee Q’s matching con-tributions associated with their distributedexcess contributions. Employee P’s distributedexcess contributions and associated matchingcontributions are $2,037.50 and $1,018.75,respectively. Employee Q’s distributed excesscontributions and associated matching contribu-tions are $3,537.50 and $1,768.75, respectively.Thus, $1,018.75 is forfeited from Employee P’saccount and $1,768.75 is forfeited fromEmployee Q’s account. In addition, the earningson the forfeited amounts are also forfeited. It isdetermined that the respective earnings on theforfeited amount for Employee P is $150 and forEmployee Q is $204. The total amount of theforfeitures 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 1999and subsequent years.

.02 Exclusion of Eligible Employees.(1) Exclusion of Eligible Employ-

ees in a 401(k) or (m) Plan. (a) CorrectionMethod. (i) VCS Correction Method forFull Year Exclusion. Appendix A, section.05 sets forth the VCS correction methodfor the exclusion of an eligible employeefrom all contributions under a 401(k) or(m) plan for one or more full plan years.(See Example 4.) In section 2.02(1)(a)(ii)

July 22, 2002 157 2002–29 I.R.B.

below, the VCS correction method for theexclusion of an eligible employee fromall contributions under a 401(k) or (m)plan for a full year is expanded to includecorrection for the exclusion of an eligibleemployee from all contributions under a401(k) or (m) plan for a partial plan year.This correction for a partial year exclu-sion may be used in conjunction with thecorrection for a full year exclusion.

(ii) Expansion of VCS Correc-tion Method to Partial Year Exclusion.(A) In General. The correction method inAppendix A, section .05 is expanded tocover an employee who was improperlyexcluded from making elective deferralsor employee after-tax contributions for aportion of a plan year or from receivingmatching contributions (on either electivedeferrals or employee after-tax contribu-tions) for a portion of a plan year. In suchcase, a permitted correction method forthe failure is for the employer to satisfythis section 2.02(1)(a)(ii). The employermakes a corrective contribution on behalfof the excluded employee that satisfiesthe vesting requirements and distributionlimitations of § 401(k)(2)(B) and (C).

(B) Elective Deferral Failures.The appropriate corrective contributionfor the failure to allow employees tomake elective deferrals for a portion ofthe plan year is equal to the ADP of theemployee’s group (either highly or non-highly compensated), determined prior tocorrect ion under this sect ion2.02(1)(a)(ii), multiplied by the employ-ee’s plan compensation for the portion ofthe year during which the employee wasimproperly excluded. The corrective con-tribution for the portion of the plan yearduring which the employee was improp-erly excluded from being eligible to makeelective deferrals is reduced to the extentthat (1) the sum of that contribution andany elective deferrals actually made bythe employee for that year would exceed(2) the maximum elective deferrals per-mitted under the plan for the employeefor that plan year (including the § 402(g)limit). The corrective contribution isadjusted for earnings. (See Examples 5and 6.)

(C) Employee After-tax andMatching Contribution Failures. Theappropriate corrective contribution for thefailure to allow employees to makeemployee after-tax contributions or to

receive matching contributions becausethe employee was precluded from makingemployee after-tax contributions or elec-tive deferrals for a portion of the planyear is equal to the ACP of the employ-ee’s group (either highly or nonhighlycompensated), determined prior to correc-tion under this section 2.02(1)(a)(ii), mul-tiplied by the employee’s plan compensa-tion for the portion of the year duringwhich the employee was improperlyexcluded. The corrective contribution isreduced to the extent that (1) the sum ofthat contribution and the actual totalemployee after-tax and matching contri-butions made by and for the employee forthe plan year would exceed (2) the sum ofthe maximum employee after-tax contri-butions permitted under the plan for theemployee for the plan year and thematching contributions that would havebeen made if the employee had made themaximum matchable contributions per-mitted under the plan for the employeefor that plan year. The corrective contri-bution is adjusted for earnings.

(D) Use of Prorated Compensa-tion. For purposes of this paragraph(1)(a)(ii), for administrative convenience,in lieu of using the employee’s actualplan compensation for the portion of theyear during which the employee wasimproperly excluded, a pro rata portionof the employee’s plan compensation thatwould have been taken into account forthe plan year, if the employee had notbeen improperly excluded, may be used.

(E) Special Rule for Brief Exclusionfrom Elective Deferrals. An employer isnot required to make a corrective contri-bution with respect to elective deferrals,as provided in section 2.02(1)(a)(ii)(B),(but is required to make a corrective con-tribution with respect to any employeeafter-tax and matching contributions, asprovided in section 2.02(1)(a)(ii)(C)) foran employee for a plan year if theemployee has been provided the opportu-nity to make elective deferrals under theplan for a period of at least the last 9months in that plan year and during thatperiod the employee had the opportunityto make elective deferrals in an amountnot less than the maximum amount thatwould have been permitted if no failurehad occurred. (See Example 7.)

(b) Examples.

Example 4:

Employer B maintains a 401(k) plan. The planprovides for matching contributions for eligibleemployees equal to 100% of elective deferralsthat do not exceed 3% of an employee’s com-pensation. The plan provides that employeeswho complete one year of service are eligible toparticipate in the plan on the next January 1 orJuly 1 entry date. Twelve employees (8 non-highly compensated employees and 4 highlycompensated employees) who had met the oneyear eligibility requirement after July 1, 1995,and before January 1, 1996, were inadvertentlyexcluded from participating in the plan begin-ning on January 1, 1996. These employees wereoffered the opportunity to begin participating inthe plan on January 1, 1997. For 1996, the ADPfor the highly compensated employees was 8%and the ADP for the nonhighly compensatedemployees was 6% . In addition, for 1996, theACP for the highly compensated employees was2.5% and the ACP for the nonhighly compen-sated employees was 2% . The failure to includethe 12 employees was discovered during 1998.

Correction:

Employer B uses the VCS correction method forfull year exclusions to correct the failure toinclude the 12 eligible employees in the plan forthe full plan year beginning January 1, 1996.Thus, Employer B makes a corrective contribu-tion (that satisfies the vesting requirements anddistribution limitations of § 401(k)(2)(B) and(C)) for each of the excluded employees. Thecontribution for each of the improperly excludedhighly compensated employees is 10.5% (thehighly compensated employees’ ADP of 8% plusACP of 2.5% ) of the employee’s plan compen-sation for the 1996 plan year (adjusted for earn-ings). The contribution for each of the improp-er ly excluded nonhighly compensatedemployees is 8% (the nonhighly compensatedemployees’ ADP of 6% plus ACP of 2% ) of theemployee’s plan compensation for the 1996 planyear (adjusted for earnings).

Example 5:

Employer C maintains a 401(k) plan. The planprovides for matching contributions for eachpayroll period that are equal to 100% of anemployee’s elective deferrals that do not exceed2% of the eligible employee’s plan compensa-tion during the payroll period. The plan does notprovide for employee after-tax contributions.The plan provides that employees who completeone year of service are eligible to participate inthe plan on the next January 1 or July 1 entrydate. A nonhighly compensated employee whomet the eligibility requirements and should haveentered the plan on January 1, 1996, was notoffered the opportunity to participate in the plan.In August of 1996, the error was discovered andEmployer C offered the employee an electionopportunity as of September 1, 1996. Theemployee made elective deferrals equal to 4% ofthe employee’s plan compensation for each pay-roll period from September 1, 1996, through

2002–29 I.R.B. 158 July 22, 2002

December 31, 1996 (resulting in elective defer-rals of $500). The employee’s plan compensa-tion for 1996 was $36,000 ($23,500 for the firsteight months and $12,500 for the last fourmonths). Employer C made matching contribu-tions equal to $250 for the excluded employee,which is 2% of the employee’s plan compensa-tion for each payroll period from September 1,1996, through December 31, 1996 ($12,500).The ADP for nonhighly compensated employeesfor 1996 was 3% and the ACP for nonhighlycompensated employees for 1996 was 1.8% .

Correction:

Employer C uses the VCS correction method forpartial year exclusions to correct the failure toinclude the eligible employee in the plan. Thus,Employer C makes a corrective contribution(that satisfies the vesting requirements and dis-tribution limitations of § 401(k)(2)(B) and (C))for the excluded employee. In determining theamount of corrective contributions (both for theelective deferral and for the matching contribu-tion), for administrative convenience, in lieu ofusing actual plan compensation of $23,500 forthe period the employee was excluded, theemployee’s annual plan compensation is prorated for the eight-month period that theemployee was excluded from participating in theplan. The failure to provide the excludedemployee the right to make elective deferrals iscorrected by the employer making a correctivecontribution on behalf of the employee that isequal to $720 (the 3% ADP percentage for non-highly compensated employees multiplied by$24,000, which is 8/12ths of the employee’s1996 plan compensation of $36,000), adjustedfor earnings. In addition, to correct for the fail-ure to receive the plan’s matching contribution,a corrective contribution is made on behalf ofthe employee that is equal to $432 (the 1.8%ACP for the nonhighly compensated group mul-tiplied by $24,000, which is 8/12ths of theemployee’s 1996 plan compensation of$36,000), adjusted for earnings. Employer Cdetermines that $682, the sum of the actualmatching contribution received by the employeefor the plan year ($250) and the corrective con-tribution to correct the matching contributionfailure ($432), does not exceed $720, the maxi-mum matching contribution available to theemployee under the plan (2% of $36,000) deter-mined as if the employee had made the maxi-mum matchable contributions. In addition tocorrecting the failure to include the eligibleemployee in the plan, Employer C reruns theADP and ACP tests for 1996 (taking intoaccount the corrective contribution and plancompensation for 1996 for the excludedemployee) and determines that the tests weresatisfied.

Example 6:

The facts are the same as in Example 5, exceptthat the plan provides for matching contributionsthat are equal to 100% of an eligible employee’selective deferrals that do not exceed 2% of theemployee’s plan compensation for the plan year.Accordingly, the actual matching contributionmade by Employer C for the excluded employee

for the last four months of 1996 is $500 (whichis equal to 100% of the $500 of elective defer-rals made by the employee for the last fourmonths of 1996).

Correction:

The correction is the same as in Example 5,except that the corrective contribution made forthe first 8 months of 1996 to correct the failureto make matching contributions is equal to $220(adjusted for earnings), instead of the $432(adjusted for earnings) in Example 5, becausethe corrective contribution is limited to themaximum matching contributions availableunder the plan for the employee for the planyear, $720 (2% of $36,000), reduced by theactual matching contributions made for theemployee for the plan year, $500.

Example 7:

The facts are the same as in Example 5, exceptthat the error is discovered in March of 1996 andthe employee was given the opportunity to makeelective deferrals beginning on April 1, 1996.The amount of elective deferrals that theemployee was given the opportunity to makeduring 1996 was not less than the maximumelective deferrals that the employee could havemade if the employee had been given the oppor-tunity to make elective deferrals beginning onJanuary 1, 1996. The employee made electivedeferrals equal to 4% of the employee’s plancompensation for each payroll period from April1, 1996, through December 31, 1996, of $28,000(resulting in elective deferrals of $1,120).Employer C made a matching contribution equalto $560, which is 2% of the employee’s plancompensation for each payroll period from April1, 1996, through December 31, 1996 ($28,000).The employee’s plan compensation for 1996was $36,000 ($8,000 for the first three monthsand $28,000 for the last nine months).

Correction:

Employer C uses the VCS correction method forpartial year exclusions to correct the failure toinclude an eligible employee in the plan.Because the employee was given an opportunityto make elective deferrals to the plan for at leastthe last 9 months of the plan year (and theamount of the elective deferrals that theemployee had the opportunity to make was notless than the maximum elective deferrals that theemployee could have made if the employee hadbeen given the opportunity to make electivedeferrals beginning on January 1, 1996), underthe special rule set forth in section2.02(1)(a)(ii)(E), Employer C is not required tomake a corrective contribution for the failure toallow the employee to make elective deferrals.In determining the amount of corrective contri-bution with respect to the failure to allow theemployee to receive matching contributions, inlieu of using actual plan compensation of $8,000for the period the employee was excluded, theemployee’s annual plan compensation is prorated for the three-month period that theemployee was excluded from participating in theplan. Accordingly, a corrective contribution is

made on behalf of the employee that is equal to$160, which is the lesser of (i) $162 (a matchingcontribution of 1.8% of $9,000, which is 3/12thsof the employee’s 1996 plan compensation of$36,000), and (ii) $160 (the excess of the maxi-mum matching contribution for the entire planyear, which is equal to 2% of $36,000, or $720,over the matching contributions made afterMarch 31, 1996, $560). The contribution isadjusted for earnings.

(2) Exclusion of Eligible Employ-ees In a Profit-Sharing Plan.

(a) Correction Methods. (i) VCSCorrection Method. Appendix A, section.05 sets forth the VCS correction methodfor correcting the exclusion of an eligibleemployee. In the case of a defined contri-bution plan, the VCS correction methodis to make a contribution on behalf of theexcluded employee. Section 2.02(2)(a)(ii)below clarifies the VCS correctionmethod in the case of a profit-sharing orstock bonus plan that provides for non-elective contributions (within the mean-ing of § 1.401(k)–1(g)(10)).

(ii) Clarification of VCS Cor-rection Method for Profit-Sharing Plans.To correct for the exclusion of an eligibleemployee from nonelective contributionsin a profit-sharing or stock bonus planunder the VCS correction method, anallocation amount is determined for eachexcluded employee on the same basis asthe allocation amounts were determinedfor the other employees under the plan’sallocation formula (e.g., the same ratio ofallocation to compensation), taking intoaccount all of the employee’s relevantfactors (e.g., compensation) under thatformula for that year. The employermakes a corrective contribution on behalfof the excluded employee that is equal tothe allocation amount for the excludedemployee. The corrective contribution isadjusted for earnings. If, as a result ofexcluding an employee, an amount wasimproperly allocated to the account bal-ance of an eligible employee who sharedin the original allocation of the nonelec-tive contribution, no reduction is made tothe account balance of the employee whoshared in the original allocation onaccount of the improper allocation. (SeeExample 8.)

(iii) Reallocation CorrectionMethod. (A) In General. Subject to thel imitat ions set forth in sect ion2.02(2)(a)(iii)(F) below, in addition to theVCS correction method, the exclusion ofan eligible employee for a plan year from

July 22, 2002 159 2002–29 I.R.B.

a profit-sharing or stock bonus plan thatprovides for nonelective contributionsmay be corrected using the reallocationcorrection method set forth in this section2.02(2)(a)(iii). Under the reallocation cor-rection method, the account balance ofthe excluded employee is increased asprovided in paragraph (2)(a)(iii)(B)below, the account balances of otheremployees are reduced as provided inparagraph (2)(a)(iii)(C) below, and theincreases and reductions are reconciled,as necessary, as provided in paragraph(2)(a)(iii)(D) below. (See Examples 9 and10.)

(B) Increase in Account Balanceof Excluded Employee. The account bal-ance of the excluded employee isincreased by an amount that is equal tothe allocation the employee would havereceived had the employee shared in theallocation of the nonelective contribution.The amount is adjusted for earnings.

(C) Reduction in Account Bal-ances of Other Employees. (1) Theaccount balance of each employee whowas an eligible employee who shared inthe original allocation of the nonelectivecontribution is reduced by the excess, ifany, of (I) the employee’s allocation ofthat contribution over (II) the amount thatwould have been allocated to thatemployee had the failure not occurred.This amount is adjusted for earnings tak-ing into account the rules set forth in sec-tion 2.02(2)(a)(iii)(C)(2) and (3) below.The amount after adjustment for earningsis limited in accordance with section2.02(2)(a)(iii)(C)(4) below.

(2) This paragraph (2)(a)(iii)(C)(2)applies if most of the employees withaccount balances that are being reducedare nonhighly compensated employees. Ifthere has been an overall gain for theperiod from the date of the original allo-cation of the contribution through the dateof correction, no adjustment for earningsis required to the amount determinedunder section 2.02(2)(a)(iii)(C)(1) for theemployee. If the amount for the employeeis being adjusted for earnings and theplan permits investment of account bal-ances in more than one investment fund,for administrative convenience, the reduc-tion to the employee’s account balancemay be adjusted by the lowest earningsrate of any fund for the period from the

date of the original allocation of the con-tribution through the date of correction.

(3) If an employee’s account bal-ance is reduced and the original allocationwas made to more than one investmentfund or there was a subsequent distribu-tion or transfer from the fund receivingthe original allocation, then reasonable,consistent assumptions are used to deter-mine the earnings adjustment.

(4) The amount determined in sec-tion 2.02(2)(a)(iii)(C)(1) for an employeeafter the application of section2.02(2)(a)(iii)(C)(2) and (3) may notexceed the account balance of theemployee on the date of correction, andthe employee is permitted to retain anydistribution made prior to the date of cor-rection.

(D) Reconciliation of Increasesand Reductions. If the aggregate amountof the increases under sect ion2.02(2)(a)(iii)(B) exceeds the aggregateamount of the reductions under section2.02(2)(a)(iii)(C), the employer makes acorrective contribution to the plan for theamount of the excess. If the aggregateamount of the reductions under section2.02(2)(a)(iii)(C) exceeds the aggregateamount of the increases under section2.02(2)(a)(iii)(B), then the amount bywhich each employee’s account balanceis reduced under section 2.02(2)(a)(iii)(C)is decreased on a pro rata basis.

(E) Reductions Among MultipleInvestment Funds. If an employee’saccount balance is reduced and theemployee’s account balance is invested inmore than one investment fund, then thereduction may be made from the invest-ment funds selected in any reasonablemanner.

(F) Limitations on Use of Reallo-cation Correction Method. If anyemployee would be permitted to retainany distribution pursuant to section2.02(2)(a)(iii)(C)(4), then the reallocationcorrection method may not be used unlessmost of the employees who would be per-mitted to retain a distribution are non-highly compensated employees.

(b) Examples.

Example 8:

Employer D maintains a profit-sharing plan thatprovides for discretionary nonelective employercontributions. The plan provides that theemployer’s contributions are allocated toaccount balances in the ratio that each eligible

employee’s compensation for the plan year bearsto the compensation of all eligible employees forthe plan year and, therefore, the only relevantfactor for determining an allocation is theemployee’s compensation. The plan provides forself-directed investments among four investmentfunds and daily valuations of account balances.For the 1997 plan year, Employer D made acontribution to the plan of a fixed dollar amount.However, five employees who met the eligibilityrequirements were inadvertently excluded fromparticipating in the plan. The contributionresulted in an allocation on behalf of each of theeligible employees, other than the excludedemployees, equal to 10% of compensation. Mostof the employees who received allocations underthe plan for the year of the failure were non-highly compensated employees. No distributionshave been made from the plan since 1997. If thefive excluded employees had shared in the origi-nal allocation, the allocation made on behalf ofeach employee would have equaled 9% of com-pensation. The excluded employees began par-ticipating in the plan in the 1998 plan year.

Correction:

Employer D uses the VCS correction method tocorrect the failure to include the five eligibleemployees. Thus, Employer D makes a correc-tive contribution to the plan. The amount of thecorrective contribution on behalf of the fiveexcluded employees for the 1997 plan year isequal to 10% of compensation of each excludedemployee, the same allocation that was made forother eligible employees, adjusted for earnings.The excluded employees receive an allocationequal to 10% of compensation (adjusted forearnings) even though, had the excludedemployees originally shared in the allocation forthe 1997 contribution, their account balances, aswell as those of the other eligible employees,would have received an allocation equal to only9% of compensation.

Example 9:

The facts are the same as in Example 8.

Correction:

Employer D uses the reallocation correctionmethod to correct the failure to include the fiveeligible employees. Thus, the account balancesare adjusted to reflect what would have resultedfrom the correct allocation of the employer con-tribution for the 1997 plan year among all eli-gible employees, including the five excludedemployees. The inclusion of the excludedemployees in the allocation of that contributionwould have resulted in each eligible employee,including each excluded employee, receiving anallocation equal to 9% of compensation. Accord-ingly, the account balance of each excludedemployee is increased by 9% of the employee’s1997 compensation, adjusted for earnings. Theaccount balance of each of the eligible employ-ees other than the excluded employees isreduced by 1% of the employee’s 1997 compen-sation, adjusted for earnings. Employer D deter-mines the adjustment for earnings using theearnings rate of each eligible employee’s excess

2002–29 I.R.B. 160 July 22, 2002

allocation (using reasonable, consistent assump-tions). Accordingly, for an employee who sharedin the original allocation and directed the invest-ment of the allocation into more than one invest-ment fund or who subsequently transferred aportion of a fund that had been credited with aportion of the 1997 allocation to another fund,reasonable, consistent assumptions are followedto determine the adjustment for earnings. It isdetermined that the total of the initially deter-mined reductions in account balances exceedsthe total of the required increases in account bal-ances. Accordingly, these initially determinedreductions are decreased pro rata so that thetotal of the actual reductions in account balancesequals the total of the increases in the accountbalances, and Employer D does not make anycorrective contribution. The reductions from theaccount balances are made on a pro rata basisamong all of the funds in which each employ-ee’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 employeeswhose account balances are being reduced arenonhighly compensated employees, for adminis-trative convenience, Employer D uses the earn-ings rate of the fund with the lowest earningsrate for the period of the failure to adjust thereduction to each account balance. It is deter-mined that the aggregate amount (adjusted forearnings) by which the account balances of theexcluded employees is increased exceeds theaggregate amount (adjusted for earnings) bywhich the other employees’ account balances arereduced. Accordingly, Employer D makes a con-tribution to the plan in an amount equal to theexcess. The reduction from account balances ismade on a pro rata basis among all of the fundsin which each employee’s account balance isinvested.

.03 Vesting Failures.(1) Correction Methods. (a) Contri-

bution Correction Method. A failure in adefined contribution plan to apply theproper vesting percentage to an employ-ee’s account balance that results in forfei-ture of too large a portion of the employ-ee’s account balance may be correctedusing the contribution correction methodset forth in this paragraph. The employermakes a corrective contribution on behalfof the employee whose account balancewas improperly forfeited in an amountequal to the improper forfeiture. The cor-rective contribution is adjusted for earn-ings. If, as a result of the improper forfei-ture, an amount was improperly allocatedto the account balance of another

employee, no reduction is made to theaccount balance of that employee. (SeeExample 11.)

(b) Reallocation CorrectionMethod. In addition to the contributioncorrection method, in a defined contribu-tion plan under which forfeitures ofaccount balances are reallocated amongthe account balances of the other eligibleemployees in the plan, a failure to applythe proper vesting percentage to anemployee’s account balance which resultsin forfeiture of too large a portion of theemployee’s account balance may be cor-rected under the reallocation correctionmethod set forth in this paragraph. A cor-rective reallocation is made in accordancewith the reallocation correction methodset forth in section 2.02(2)(a)(iii), subjectto the limitations set forth in section2.02(2)(a)(iii)(F). In applying section2.02(2)(a)(iii)(B), the account balance ofthe employee who incurred the improperforfeiture is increased by an amount equalto the amount of the improper forfeitureand the amount is adjusted for earnings.In applying section 2.02(2)(a)(iii)(C)(1),the account balance of each employeewho shared in the allocation of theimproper forfeiture is reduced by theamount of the improper forfeiture thatwas allocated to that employee’s account.The earnings adjustments for the accountbalances that are being reduced are deter-mined in accordance with sections2.02(2)(a)(iii)(C)(2) and (3) and thereductions after adjustments for earningsare limited in accordance with section2.02(2)(a)(iii)(C)(4). In accordance withsection 2.02(2)(a)(iii)(D), if the aggregateamount of the increases exceeds theaggregate amount of the reductions, theemployer makes a corrective contributionto the plan for the amount of the excess.In accordance with section 2.02(2)(a)(iii)(D), if the aggregate amount of thereductions exceeds the aggregate amountof the increases, then the amount bywhich each employee’s account balanceis reduced is decreased on a pro ratabasis. (See Example 12.)

(2) Examples.

Example 11:

Employer E maintains a profit-sharing plan thatprovides for nonelective contributions. The planprovides for self-directed investments amongfour investment funds and daily valuation ofaccount balances. The plan provides that forfei-

tures of account balances are reallocated amongthe account balances of other eligible employeeson the basis of compensation. During the 1997plan year, Employee R terminated employmentwith Employer E and elected and received asingle-sum distribution of the vested portion ofhis account balance. No other distributions havebeen made since 1997. However, an incorrectdetermination of Employee R’s vested percent-age was made resulting in Employee R receivinga distribution of less than the amount to whichhe was entitled under the plan. The remainingportion of Employee R’s account balance wasforfeited and reallocated (and these reallocationswere not affected by the limitations of § 415).Most of the employees who received allocationsof the improper forfeiture were nonhighly com-pensated employees.

Correction:

Employer E uses the contribution correctionmethod to correct the improper forfeiture. Thus,Employer E makes a contribution on behalf ofEmployee R equal to the incorrectly forfeitedamount (adjusted for earnings) and EmployeeR’s account balance is increased accordingly. Noreduction is made from the account balances ofthe employees who received an allocation of theimproper forfeiture.

Example 12:

The facts are the same as in Example 11.

Correction:

Employer E uses the reallocation correctionmethod to correct the improper forfeiture. Thus,Employee R’s account balance is increased bythe amount that was improperly forfeited(adjusted for earnings). The account of eachemployee who shared in the allocation of theimproper forfeiture is reduced by the amount ofthe improper forfeiture that was allocated to thatemployee’s account (adjusted for earnings).Because most of the employees whose accountbalances are being reduced are nonhighly com-pensated employees, for administrative conve-nience, Employer E uses the earnings rate of thefund with the lowest earnings rate for the periodof the failure to adjust the reduction to eachaccount balance. It is determined that theamount (adjusted for earnings) by which theaccount balance of Employee R is increasedexceeds the aggregate amount (adjusted forearnings) by which the other employees’account balances are reduced. Accordingly,Employer E makes a contribution to the plan inan amount equal to the excess. The reductionfrom the account balances is made on a pro ratabasis among all of the funds in which eachemployee’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 amountsbeing paid in excess of the limits of

July 22, 2002 161 2002–29 I.R.B.

§ 415(b) may be corrected using thereturn of Overpayment correction methodset forth in this paragraph (1)(a)(i). Theemployer takes reasonable steps to havethe Overpayment (with appropriate inter-est) returned by the recipient to the planand reduces future benefit payments (ifany) due to the employee to reflect§ 415(b). To the extent the amountreturned by the recipient is less than theOverpayment, adjusted for earnings at theplan’s earnings rate, then the employer oranother person contributes the differenceto the plan. In addition, in accordancewith section 6.05 of this revenue proce-dure, the employer must notify the recipi-ent that the Overpayment was not eligiblefor favorable tax treatment accorded todistributions from qualified plans (and,specifically, was not eligible for tax-freerollover). (See Examples 15 and 16.)

(ii) Adjustment of Future Pay-ments Correction Method. (A) In Gen-eral. In addition to the return of overpay-ment correction method, in the case ofplan benefits that are being distributed inthe form of periodic payments, Overpay-ments as a result of amounts being paid inexcess of the limits in § 415(b) may becorrected by using the adjustment offuture payments correction method setforth in this paragraph (1)(a)(ii). Futurepayments to the recipient are reduced sothat they do not exceed the § 415(b)maximum limit and an additional reduc-tion is made to recoup the Overpayment(over a period not longer than the remain-ing payment period) so that the actuarialpresent value of the additional reductionis equal to the Overpayment plus interestat the interest rate used by the plan todetermine actuarial equivalence. (SeeExamples 13 and 14.)

(B) Joint and Survivor AnnuityPayments. If the employee is receivingpayments in the form of a joint and survi-vor annuity, with the employee’s spouseto receive a life annuity upon the employ-ee’s death equal to a percentage (e.g.,75% ) of the amount being paid to theemployee, the reduction of future annuitypayments to reflect § 415(b) reduces theamount of benefits payable during thelives of both the employee and spouse,but any reduction to recoup Overpay-ments made to the employee does notreduce the amount of the spouse’s survi-vor benefit. Thus, the spouse’s benefit

will be based on the previous specifiedpercentage (e.g., 75% ) of the maximumpermitted under § 415(b), instead of thereduced annual periodic amount payableto the employee.

(C) Overpayment Not Treated asan Excess Amount. An Overpayment cor-rected under this adjustment of futurepayment correction method is not treatedas an Excess Amount as defined in sec-tion 5.01(3) of this revenue procedure.

(b) Examples.

Example 13:

Employer F maintains a defined benefit planfunded solely through employer contributions.The plan provides that the benefits of employeesare limited to the maximum amount permittedunder § 415(b), disregarding cost-of-livingadjustments under § 415(d) after benefit pay-ments have commenced. At the beginning of the1998 plan year, Employee S retired and startedreceiving an annual straight life annuity of$140,000 from the plan. Due to an administra-tive error, the annual amount received byEmployee S for 1998 included an Overpaymentof $10,000 (because the § 415(b)(1)(A) limit for1998 was $130,000). This error was discoveredat the beginning of 1999.

Correction:

Employer F uses the adjustment of future pay-ments correction method to correct the failure tosatisfy the limit in § 415(b). Future annuity ben-efit payments to Employee S are reduced so thatthey do not exceed the § 415(b) maximum limit,and, in addition, Employee S’s future benefitpayments from the plan are actuarially reducedto recoup the Overpayment. Accordingly,Employee S’s future benefit payments from theplan are reduced to $130,000 and furtherreduced by $1,000 annually for life, beginningin 1999. The annual benefit amount is reducedby $1,000 annually for life because, forEmployee S, the actuarial present value of abenefit of $1,000 annually for life commencingin 1999 is equal to the sum of $10,000 and inter-est at the rate used by the plan to determineactuarial equivalence beginning with the date ofthe first Overpayment and ending with the datethe reduced annuity payment begins. Thus,Employee S’s remaining benefit payments arereduced so that Employee S receives $129,000for 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 pay-ments correction method to correct the § 415(b)failure, by recouping the entire excess paymentmade in 1998 from Employee S’s remainingbenefit payments for 1999. Thus, Employee S’sannual 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 toreceive annual benefit payments of $130,000.

Example 15:

The facts are the same as in Example 13, exceptthat the benefit was paid to Employee S in theform of a single-sum distribution in 1998, whichexceeded the maximum § 415(b) limits by$110,000.

Correction:

Employer F uses the return of overpayment cor-rection method to correct the § 415(b) failure.Thus, Employer F notifies Employee S of the$110,000 Overpayment and that the Overpay-ment was not eligible for favorable tax treatmentaccorded to distributions from qualified plans(and, specifically, was not eligible for tax-freerollover). The notice also informs Employee Sthat the Overpayment (with interest at the rateused by the plan to calculate the single-sum pay-ment) is owed to the plan. Employer F takesreasonable steps to have the Overpayment (withinterest at the rate used by the plan to calculatethe single-sum payment) paid to the plan.Employee S pays the $110,000 (plus therequested interest) to the plan. It is determinedthat the plan’s earnings rate for the relevantperiod was 2 percentage points more than therate used by the plan to calculate the single-sumpayment. Accordingly, Employer F contributesthe difference to the plan.

Example 16:

The facts are the same as in Example 15.

Correction:

Employer F uses the return of overpayment cor-rection method to correct the § 415(b) failure.Thus, Employer F notifies Employee S of the$110,000 Overpayment and that the Overpay-ment was not eligible for favorable tax treatmentaccorded to distributions from qualified plans(and, specifically, was not eligible for tax-freerollover). The notice also informs Employee Sthat the Overpayment (with interest at the rateused by the plan to calculate the single-sum pay-ment) is owed to the plan. Employer F takesreasonable steps to have the Overpayment (withinterest at the rate used by the plan to calculatethe single-sum payment) paid to the plan. As aresult of Employer F’s recovery efforts, some,but not all, of the Overpayment (with interest) isrecovered from Employee S. It is determinedthat the amount returned by Employee S to theplan is less than the Overpayment adjusted forearnings at the plan’s earnings rate. Accordingly,Employer F contributes the difference to theplan.

(2) Failures Relating to a § 415(c)Excess.

(a) Correction Methods. (i) VCSCorrection Method. Appendix A, section.08 sets forth the VCS correction methodfor correcting the failure to satisfy the§ 415(c) limits on annual additions.

2002–29 I.R.B. 162 July 22, 2002

(i i) Forfeiture CorrectionMethod. In addition to the VCS correc-tion method, the failure to satisfy§ 415(c) with respect to a nonhighly com-pensated employee (A) who in the limita-tion year of the failure had annual addi-tions consisting of both (I) either electivedeferrals or employee after-tax contribu-tions or both and (II) either matching ornonelective contributions or both, (B) forwhom the matching and nonelective con-tributions equal or exceed the portion ofthe employee’s annual addition thatexceeds the limits under § 415(c)(“§ 415(c) excess”) for the limitationyear, and (C) who has terminated with novested interest in the matching and non-elective contributions (and has not beenreemployed at the time of the correction),may be corrected by using the forfeiturecorrection method set forth in this para-graph. The § 415(c) excess is deemed toconsist solely of the matching and non-elective contributions. If the employee’s§ 415(c) excess (adjusted for earnings)has previously been forfeited, the§ 415(c) failure is deemed to be cor-rected. If the § 415(c) excess (adjustedfor earnings) has not been forfeited, thatamount is placed in an unallocatedaccount, similar to the suspense accountdescribed in § 1.415–6(b)(6)(iii), to beused to reduce employer contributions insucceeding year(s) (or if the amountwould have been allocated to otheremployees who were in the plan for theyear of the failure if the failure had notoccurred, then that amount is reallocatedto the other employees in accordance with

the plan’s allocation formula). Note thatwhile this correction method will permitmore favorable tax treatment of electivedeferrals for the employee than the VCScorrection method, this correction methodcould be less favorable to the employee incertain cases, for example, if theemployee is subsequently reemployedand becomes vested. (See Examples 17and 18.)

(iii) Return of OverpaymentCorrection Method. A failure to satisfy§ 415(c) that includes a distribution of the§ 415(c) excess attributable to nonelec-tive contributions and matching contribu-tions may be corrected using the return ofoverpayment correction method set forthin this paragraph. The employer takesreasonable steps to have the Overpayment(i.e., the distribution of the § 415(c)excess adjusted for earnings to the date ofthe distribution), plus appropriate interestfrom the date of the distribution to thedate of the repayment, returned by theemployee to the plan. To the extent theamount returned by the employee is lessthan the Overpayment adjusted for earn-ings at the plan’s earnings rate, then theemployer or another person contributesthe difference to the plan. The Overpay-ment, adjusted for earnings at the plan’searnings rate to the date of the repayment,is to be placed in an unallocated account,similar to the suspense account describedin § 1.415–6(b)(6)(iii), to be used toreduce employer contributions in suc-ceeding year(s) (or if the amount wouldhave been allocated to other eligibleemployees who were in the plan for the

year of the failure if the failure had notoccurred, then that amount is reallocatedto the other eligible employees in accor-dance with the plan’s allocation formula).In addition, the employer must notify theemployee that the Overpayment was noteligible for favorable tax treatmentaccorded to distributions from qualifiedplans (and, specifically, was not eligiblefor tax-free rollover).

(b) Examples.

Example 17:

Employer G maintains a 401(k) plan. The planprovides for nonelective employer contributions,elective deferrals, and employee after-tax contri-butions. The plan provides that the nonelectivecontributions vest under a 5-year cliff vestingschedule. The plan provides that when anemployee terminates employment, the employ-ee’s nonvested account balance is forfeited fiveyears after a distribution of the employee’svested account balance and that forfeitures areused to reduce employer contributions. For the1998 limitation year, the annual additions madeon behalf of two nonhighly compensatedemployees in the plan, Employees T and U,exceeded the limit in § 415(c). For the 1998limitation year, Employee T had § 415 compen-sation of $60,000, and, accordingly, a§ 415(c)(1)(B) limit of $15,000. Employee Tmade elective deferrals and employee after-taxcontributions. For the 1998 limitation year,Employee U had § 415 compensation of$40,000, and, accordingly, a § 415(c)(1)(B) limitof $10,000. Employee U made elective deferrals.Also, on January 1, 1999, Employee U, who hadthree years of service with Employer G, termi-nated his employment and received his entirevested account balance (which consisted of hiselective deferrals). The annual additions forEmployees T and U consisted of:

T U

Nonelective

Contributions $7,500 $4,500

Elective

Deferrals 10,000 5,800

After-tax

Contributions 500 0

Total Contributions $18,000 $10,300

§ 415(c) Limit $15,000 $10,000

§ 415(c) Excess $3,000 $300

Correction:

Employer G uses the VCS correction method tocorrect the § 415(c) excess with respect to

Employee T (i.e., $3,000). Thus, a distributionof plan assets (and corresponding reduction ofthe 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 correctionmethod to correct the § 415(c) excess with

July 22, 2002 163 2002–29 I.R.B.

respect to Employee U. Thus, the § 415(c)excess is deemed to consist solely of the non-elective contributions. Accordingly, EmployeeU’s nonvested account balance is reduced by$300 (adjusted for earnings) which is placed inan unallocated account, similar to the suspenseaccount described in § 1.415–6(b)(6)(iii), to beused to reduce employer contributions in suc-ceeding year(s). After correction, it is deter-mined that the ADP and ACP tests for 1998 weresatisfied.

Example 18:

Employer H maintains a 401(k) plan. The planprovides for nonelective employer contributions,matching contributions and elective deferrals.The plan provides for matching contributionsthat are equal to 100% of an employee’s electivedeferrals that do not exceed 8% of the employ-ee’s plan compensation for the plan year. For the1998 limitation year, Employee V had § 415compensation of $50,000, and, accordingly, a§ 415(c)(1)(B) limit of $12,500. During thatlimitation year, the annual additions forEmployee V totaled $15,000, consisting of$5,000 in elective deferrals, a $4,000 matchingcontribution (8% of $50,000), and a $6,000 non-elective employer contribution. Thus, the annualadditions for Employee V exceeded the § 415(c)limit by $2,500.

Correction:

Employer H uses the VCS correction method tocorrect the § 415(c) excess with respect toEmployee V (i.e., $2,500). Accordingly, $1,000of the unmatched elective deferrals (adjusted forearnings) are distributed to Employee V. Theremaining $1,500 excess is apportioned equallybetween the elective deferrals and the associatedmatching employer contributions, so EmployeeV’s account balance is further reduced by dis-tributing to Employee V $750 (adjusted for earn-ings) of the elective deferrals and forfeiting$750 (adjusted for earnings) of the associatedemployer matching contributions. The forfeitedmatching contributions are placed in an unallo-cated account; similar to the suspense accountdescribed in § 1.415–6(b)(6)(iii), to be used toreduce employer contributions in succeedingyear(s). After correction, it is determined that theADP and ACP tests for 1998 were satisfied.

.05 Correction of Other OverpaymentFailures.

An Overpayment, other than onedescribed in section 2.04(1) (relating to a§ 415(b) excess) or section 2.04(2) (relat-ing to a § 415(c) excess), may be cor-rected in accordance with this section2.05. An Overpayment from a definedbenefit plan is corrected in accordancewith the rules in section 2.04(1). AnOverpayment from a defined contributionplan is corrected in accordance with therules in section 2.04(2)(a)(iii).

.06 § 401(a)(17) Failures.(1) Reduction of Account Balance

Correction Method. The allocation ofcontributions or forfeitures under adefined contribution plan for a plan yearon the basis of compensation in excess ofthe limit under § 401(a)(17) for the planyear may be corrected using the reductionof account balance correction method setforth in this paragraph. The account bal-ance of an employee who received anallocation on the basis of compensation inexcess of the § 401(a)(17) limit isreduced by this improperly allocatedamount (adjusted for earnings). If theimproperly allocated amount would havebeen allocated to other employees in theyear of the failure if the failure had notoccurred, then that amount (adjusted forearnings) is reallocated to those employ-ees in accordance with the plan’s alloca-tion formula. If the improperly allocatedamount would not have been allocated toother employees absent the failure, thatamount (adjusted for earnings) is placedin an unallocated account, similar to thesuspense account described in § 1.415–6(b)(6)(iii), to be used to reduce employercontributions in succeeding year(s). Forexample, if a plan provides for a fixedlevel of employer contributions for eacheligible employee, and the plan providesthat forfeitures are used to reduce futureemployer contributions, the improperlyallocated amount (adjusted for earnings)would be used to reduce future employercontributions. (See Example 19.) If a pay-ment was made to an employee and thatpayment was attributable to an improp-erly allocated amount, then it is an Over-payment defined in section 5.01(6) of thisrevenue procedure that must be corrected(see sections 2.04 and 2.05).

(2) Example.

Example 19:

Employer J maintains a money purchase pensionplan. Under the plan, an eligible employee isentitled to an employer contribution of 8% ofthe employee’s compensation up to the§ 401(a)(17) limit ($160,000 for 1998). Duringthe 1998 plan year, an eligible employee,Employee W, inadvertently was credited with acontribution based on compensation above the§ 401(a)(17) limit. Employee W’s compensationfor 1998 was $220,000. Employee W received acontribution of $17,600 for 1998 (8% of$220,000), rather than the contribution of$12,800 (8% of $160,000) provided by the planfor that year, resulting in an improper allocationof $4,800.

Correction:

The § 401(a)(17) failure is corrected using thereduction of account balance method by reduc-ing Employee W’s account balance by $4,800(adjusted for earnings) and crediting that amountto an unallocated account, similar to the sus-pense account described in § 1.415–6(b)(6)(iii),to be used to reduce employer contributions insucceeding year(s).

.07 Correction by Amendment UnderVCP and SCP.

(1) § 401(a)(17) Failures. (a) Con-tribution Correction Method. In additionto the reduction of account balance cor-rection method under section 2.06 of thisAppendix B, an employer may correct a§ 401(a)(17) failure for a plan year undera defined contribution plan under VCPand SCP (in accordance with the require-ments of sections 8, 10, and 11) by usingthe contribution correction method setforth in this paragraph. The employercontributes an additional amount onbehalf of each of the other employees(excluding each employee for whomthere was a § 401(a)(17) failure) whoreceived an allocation for the year of thefailure, amending the plan (as necessary)to provide for the additional allocation.The amount contributed for an employeeis equal to the employee’s plan compen-sation for the year of the failure multi-plied by a fraction, the numerator ofwhich is the improperly allocated amountmade on behalf of the employee with thelargest improperly allocated amount, andthe denominator of which is the limitunder § 401(a)(17) applicable to the yearof the failure. The resulting additionalamount for each of the other employees isadjusted 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 VCP usingthe contribution correction method by (1)amending the plan to increase the contributionpercentage for all eligible employees (other thanEmployee W) for the 1998 plan year and (2)contributing an additional amount (adjusted forearnings) for those employees for that plan year.To determine the increase in the plan’s contribu-tion percentage (and the additional amount con-tributed on behalf of each eligible employee),the improperly allocated amount ($4,800) isdivided by the § 401(a)(17) limit for 1998($160,000). Accordingly, the plan is amended toincrease the contribution percentage by 3 per-centage points ($4,800/$160,000) from 8% to

2002–29 I.R.B. 164 July 22, 2002

11% . In addition, each eligible employee for the1998 plan year (other than Employee W)receives an additional contribution of 3% multi-plied by that employee’s plan compensation for1998. This additional contribution is adjusted forearnings.

(2) Hardship Distribution Failures.(a) Plan Amendment Correction Method.The Operational Failure of making hard-ship distributions to employees under aplan that does not provide for hardshipdistributions may be corrected under VCPand SCP using the plan amendment cor-rection method set forth in this paragraph.The plan is amended retroactively to pro-vide for the hardship distributions thatwere made available. This paragraph doesnot apply unless (i) the amendment satis-fies § 401(a), and (ii) the plan as amendedwould have satisfied the qualificationrequirements of § 401(a) (including therequirements applicable to hardship dis-tributions under § 401(k), if applicable)had the amendment been adopted whenhardship distributions were first madeavailable. (See Example 21.)

(b) Example.

Example 21:

Employer K, a for-profit corporation, maintainsa 401(k) plan. Although plan provisions in 1998did not provide for hardship distributions, begin-ning in 1998 hardship distributions of amountsallowed to be distributed under § 401(k) weremade currently and effectively available to allemployees (within the meaning of § l.401(a)(4)–4). The standard used to determine hardship sat-isfied the deemed hardship distribution standardsin § 1.401(k)–1(d)(2). Hardship distributionswere made to a number of employees during the1998 and 1999 plan years, creating an Opera-tional Failure. The failure was discovered in2000.

Correction:

Employer K corrects the failure under VCP byadopting a plan amendment, effective January 1,1998, to provide a hardship distribution optionthat satisfies the rules applicable to hardship dis-tributions in § 1.401(k)–1(d)(2). The amendmentprovides that the hardship distribution option isavailable to all employees. Thus, the amendmentsatisfies § 401(a), and the plan as amended in2000 would have satisfied § 401(a) (including§ 1.401(a)(4)–4 and the requirements applicableto hardship distributions under § 401(k)) if theamendment had been adopted in 1998.

(3) Inclusion of Inel igibleEmployee Failure. (a) Plan AmendmentCorrection Method. The Operational Fail-ure of including an ineligible employee inthe plan who has not completed the plan’sminimum age or service requirements

may be corrected under VCP and SCP byusing the plan amendment correctionmethod set forth in this paragraph. Theplan is amended retroactively to changethe eligibility provisions to provide forthe inclusion of the ineligible employee toreflect the plan’s actual operations. Theamendment may change the eligibilityprovisions with respect to only thoseineligible employees that were wronglyincluded, and only to those ineligibleemployees, provided (i) the amendmentsatisfies § 401(a) at the time it is adopted,(ii) the amendment would have satisfied§ 401(a) had the amendment beenadopted at the earlier time when it iseffective, and (iii) the employees affectedby the amendment are predominantlynonhighly compensated employees.

(b) Example

Example 22:

Employer L maintains a 401(k) plan applicableto all of its employees who have at least sixmonths of service. The plan is a calendar yearplan. The plan provides that Employer L willmake matching contributions based upon anemployee’s salary reduction contributions. In2001, it is discovered that all four employeeswho were hired by Employer L in 2000 werepermitted to make salary reduction contributionsto the plan effective with the first weekly pay-check after they were employed. Three of thefour employees are nonhighly compensated.Employer L matched these employees’ salaryreduction contributions in accordance with theplan’s matching contribution formula. EmployerL calculates the ADP and ACP tests for 2000(taking into account the salary reduction andmatching contributions that were made for theseemployees) and determines that the tests weresatisfied.

Correction:

Employer L corrects the failure under SCP byadopting a plan amendment, effective foremployees hired on or after January 1, 2000, toprovide that there is no service eligibilityrequirement under the plan and submitting theamendment to the Service for a determinationletter.

SECTION 3. EARNINGSADJUSTMENT METHODS ANDEXAMPLES

.01 Earnings Adjustment Methods. (1)In general. (a) Under section 6.02(4)(a) ofthis revenue procedure, whenever theappropriate correction method for anOperational Failure in a defined contribu-tion plan includes a corrective contribu-tion or allocation that increases one ormore employees’ account balances (now

or in the future), the contribution or allo-cation is adjusted for earnings and forfei-tures. This section 3 provides earningsadjustment methods (but not forfeitureadjustment methods) that may be used byan employer to adjust a corrective contri-bution or allocation for earnings in adefined contribution plan. Consequently,these earnings adjustment methods maybe used to determine the earnings adjust-ments for corrective contributions or allo-cations made under the correction meth-ods in section 2 and under the VCScorrection methods in Appendix A. If anearnings adjustment method in this sec-tion 3 is used to adjust a corrective con-tribution or allocation, that adjustment istreated as satisfying the earnings adjust-ment requirement of section 6.02(4)(a) ofthis revenue procedure. Other earningsadjustment methods, different from thoseillustrated in this section 3, may also beappropriate for adjusting corrective con-tributions or allocations to reflect earn-ings.

(b) Under the earnings adjustmentmethods of this section 3, a correctivecontribution or allocation that increasesan employee’s account balance isadjusted to reflect an “earnings amount”that is based on the earnings rate(s)(determined under section 3.01(3)) for theperiod of the failure (determined undersection 3.01(2)). The earnings amount isallocated in accordance with section3.01(4).

(c) The rule in section 6.02(5)(a)of this revenue procedure permitting rea-sonable estimates in certain circum-stances applies for purposes of this sec-tion 3. For this purpose, a determinationof earnings made in accordance with therules of administrative convenience setforth in this section 3 is treated as a pre-cise determination of earnings. Thus, ifthe probable difference between anapproximate determination of earningsand a determination of earnings under thissection 3 is insignificant and the adminis-trative cost of a precise determinationwould significantly exceed the probabledifference, reasonable estimates may beused in calculating the appropriate earn-ings.

(d) This section 3 does not applyto corrective distributions or correctivereductions in account balances. Thus, forexample, while this section 3 applies in

July 22, 2002 165 2002–29 I.R.B.

increasing the account balance of animproperly excluded employee to correctthe exclusion of the employee under thereallocation correction method describedin section 2.02(2)(a)(iii)(B), this section 3does not apply in reducing the accountbalances of other employees under thereallocation correction method. (See sec-tion 2.02(2)(a)(iii)(C) for rules that applyto the earnings adjustments for suchreductions.) In addition, this section 3does not apply in determining earningsadjustments under the one-to-one correc-t ion method described in section2.01(1)(b)(iii).

(2) Period of the Failure. (a) Gen-eral Rule. For purposes of this section 3,the “period of the failure” is the periodfrom the date that the failure beganthrough the date of correction. Forexample, in the case of an improper for-feiture of an employee’s account balance,the beginning of the period of the failureis the date as of which the account bal-ance was improperly reduced.

(b) Rules for Beginning Date forExclusion of Eligible Employees fromPlan. (i) General Rule. In the case of anexclusion of an eligible employee from aplan contribution, the beginning of theperiod of the failure is the date on whichcontributions of the same type (e.g., elec-tive deferrals, matching contributions, ordiscretionary nonelective employer con-tributions) were made for other employ-ees for the year of the failure. In the caseof an exclusion of an eligible employeefrom an allocation of a forfeiture, thebeginning of the period of the failure isthe date on which forfeitures were allo-cated to other employees for the year ofthe failure.

(ii) Exclusion from a 401(k) or(m) Plan. For administrative convenience,for purposes of calculating the earningsrate for corrective contributions for a planyear (or the portion of the plan year) dur-ing which an employee was improperlyexcluded from making periodic electivedeferrals or employee after-tax contribu-tions, or from receiving periodic match-ing contributions, the employer may treatthe date on which the contributions wouldhave been made as the midpoint of theplan year (or the midpoint of the portionof the plan year) for which the failureoccurred. Alternatively, in this case, theemployer may treat the date on which the

contributions would have been made asthe first date of the plan year (or the por-tion of the plan year) during which anemployee was excluded, provided that theearnings rate used is one half of the earn-ings rate applicable under section 3.01(3)for the plan year (or the portion of theplan year) for which the failure occurred.

(3) Earnings Rate. (a) General Rule.For purposes of this section 3, the earn-ings rate generally is based on the invest-ment results that would have applied tothe corrective contribution or allocation ifthe failure had not occurred.

(b) Multiple Investment Funds. Ifa plan permits employees to direct theinvestment of account balances into morethan one investment fund, the earningsrate is based on the rate applicable to theemployee’s investment choices for theperiod of the failure. For administrativeconvenience, if most of the employees forwhom the corrective contribution or allo-cation is made are nonhighly compen-sated employees, the rate of return of thefund with the highest earnings rate underthe plan for the period of the failure maybe used to determine the earnings rate forall corrective contributions or allocations.If the employee had not made any appli-cable investment choices, the earningsrate may be based on the earnings rateunder the plan as a whole (i.e., the aver-age of the rates earned by all of the fundsin the valuation periods during the periodof the failure weighted by the portion ofthe plan assets invested in the variousfunds during the period of the failure).

(c) Other Simplifying Assump-tions. For administrative convenience, theearnings rate applicable to the correctivecontribution or allocation for a valuationperiod with respect to any investmentfund may be assumed to be the actualearnings rate for the plan’s investments inthat fund during that valuation period. Forexample, the earnings rate may be deter-mined without regard to any specialinvestment provisions that vary accordingto the size of the fund. Further, the earn-ings rate applicable to the corrective con-tribution or allocation for a portion of avaluation period may be a pro rata por-tion of the earnings rate for the entirevaluation period, unless the application ofthis rule would result in either a signifi-cant understatement or overstatement of

the actual earnings during that portion ofthe valuation period.

(4) Allocation Methods. (a) In Gen-eral. For purposes of this section 3, theearnings amount generally may be allo-cated in accordance with any of the meth-ods set forth in this paragraph (4). Themethods under paragraph (4)(c), (d), and(e) are intended to be particularly helpfulwhere corrective contributions are madeat dates between the plan’s valuationdates.

(b) Plan Allocation Method.Under the plan allocation method, theearnings amount is allocated to accountbalances under the plan in accordancewith the plan’s method for allocatingearnings as if the failure had notoccurred. (See Example 23.)

(c) Specific Employee AllocationMethod. Under the specific employeeallocation method, the entire earningsamount is allocated solely to the accountbalance of the employee on whose behalfthe corrective contribution or allocation ismade (regardless of whether the plan’sallocation method would have allocatedthe earnings solely to that employee). Indetermining the allocation of plan earn-ings for the valuation period during whichthe corrective contribution or allocation ismade, the corrective contribution or allo-cation (including the earnings amount) istreated in the same manner as any othercontribution under the plan on behalf ofthe employee during that valuationperiod. Alternatively, where the plan’sallocation method does not allocate planearnings for a valuation period to a con-tribution made during that valuationperiod, plan earnings for the valuationperiod during which the corrective contri-bution or allocation is made may be allo-cated as if that employee’s account bal-ance had been increased as of the last dayof the prior valuation period by the cor-rective contribution or allocation, includ-ing only that portion of the earningsamount attributable to earnings throughthe last day of the prior valuation period.The employee’s account balance is thenfurther increased as of the last day of thevaluation period during which the correc-tive contribution or allocation is made bythat portion of the earnings amount attrib-utable to earnings after the last day of theprior valuation period. (See Example 24.)

2002–29 I.R.B. 166 July 22, 2002

(d) Bifurcated Allocation Method.Under the bifurcated allocation method,the entire earnings amount for the valua-tion periods ending before the date thecorrective contribution or allocation ismade is allocated solely to the accountbalance of the employee on whose behalfthe corrective contribution or allocation ismade. The earnings amount for the valu-ation period during which the correctivecontribution or allocation is made is allo-cated in accordance with the plan’smethod for allocating other earnings forthat valuation period in accordance withsection 3.01(4)(b). (See Example 25.)

(e) Current Period AllocationMethod. Under the current period alloca-tion method, the portion of the earningsamount attributable to the valuationperiod during which the period of the fail-ure begins (“first partial valuationperiod”) is allocated in the same manneras earnings for the valuation period dur-ing which the corrective contribution orallocation is made in accordance section3.01(4)(b). The earnings for the subse-quent full valuation periods ending beforethe beginning of the valuation period dur-

ing which the corrective contribution orallocation is made are allocated solely tothe employee for whom the required con-tribution should have been made. Theearnings amount for the valuation periodduring which the corrective contributionor allocation is made (“second partialvaluation period”) is allocated in accor-dance with the plan’s method for allocat-ing other earnings for that valuationperiod in accordance with section3.01(4)(b). (See Example 26.)

.02 Examples.

Example 23:

Employer L maintains a profit-sharing plan thatprovides only for nonelective contributions. Theplan has a single investment fund. Under theplan, assets are valued annually (the last day ofthe plan year) and earnings for the year are allo-cated in proportion to account balances as of thelast day of the prior year, after reduction for dis-tributions during the current year but withoutregard to contributions received during the cur-rent year (the “prior year account balance”).Plan contributions for 1997 were made onMarch 31, 1998. On April 20, 2000, Employer Ldetermines that an operational failure occurredfor 1997 because Employee X was improperlyexcluded from the plan. Employer L decides tocorrect the failure by using the VCS correction

method for the exclusion of an eligibleemployee from nonelective contributions in aprofit-sharing plan. Under this method,Employer L determines that this failure is cor-rected by making a contribution on behalf ofEmployee X of $5,000 (adjusted for earnings).The earnings rate under the plan for 1998 was+20% . The earnings rate under the plan for1999 was +10% . On May 15, 2000, whenEmployer L determines that a contribution tocorrect for the failure will be made on June 1,2000, a reasonable estimate of the earnings rateunder the plan from January 1, 2000, to June 1,2000 is +12%.

Earnings Adjustment on the Corrective Contri-bution:

The $5,000 corrective contribution on behalf ofEmployee X is adjusted to reflect an earningsamount based on the earnings rates for theperiod of the failure (March 31, 1998, throughJune 1, 2000) and the earnings amount is allo-cated using the plan allocation method.Employer L determines that a pro rata simplify-ing assumption may be used to determine theearnings rate for the period from March 31,1998, to December 31, 1998, because that ratedoes not significantly understate or overstate theactual earnings for that period. Accordingly,Employer L determines that the earnings rate forthat period is 15% (9/12 of the plan’s 20% earn-ings rate for the year). Thus, applicable earningsrates under the plan during the period of thefailure 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 contributionhad been contributed for Employee X onMarch 31, 1998, (1) earnings for 1998would have been increased by the amountof the earnings on the additional $5,000contribution from March 31, 1998,through December 31, 1998, and wouldhave been allocated as 1998 earnings inproportion to the prior year (December31, 1997) account balances, (2) EmployeeX’s account balance as of December 31,1998, would have been increased by theadditional $5,000 contribution, (3) earn-ings for 1999 would have been increasedby the 1999 earnings on the additional$5,000 contribution (including 1998 earn-ings thereon) allocated in proportion tothe prior year (December 31, 1998)account balances along with other 1999earnings, and (4) earnings for 2000 wouldhave been increased by the earnings onthe additional $5,000 (including 1998 and1999 earnings thereon) from January 1 to

June 1, 2000, and would be allocated inproportion to the prior year (December31, 1999) account balances along withother 2000 earnings. Accordingly, the$5,000 corrective contribution is adjustedto reflect an earnings amount of $2,084($5,000[(1.15)(1.10)(1.12)–1]) and theearnings amount is allocated to theaccount balances under the plan alloca-tion method as follows:

(a) Each account balance that shared inthe allocation of earnings for 1998 isincreased, as of December 31, 1998, byits appropriate share of the earningsamount for 1998, $750 ($5,000(.15)).

(b) Employee X’s account balance isincreased, as of December 31, 1998, by$5,000.

(c) The resulting December 31, 1998,account balances will share in the 1999earnings, including the $575 for 1999earnings included in the corrective contri-bution ($5,750(.10)), to determine the

account balances as of December 31,1999. However, each account balanceother than Employee X’s account balancehas already shared in the 1999 earnings,excluding the $575. Accordingly,Employee X’s account balance as ofDecember 31, 1999, will include $500 ofthe 1999 portion of the earnings amountbased on the $5,000 corrective contribu-tion allocated to Employee X’s accountbalance as of December 31, 1998($5,000(.10)). Then each account balancethat originally shared in the allocation ofearnings for 1999 (i.e., excluding the$5,500 additions to Employee X’saccount balance) is increased by itsappropriate share of the remaining 1999portion of the earnings amount, $75.

(d) The resulting December 31, 1999,account balances (including the $5,500additions to Employee X’s account bal-ance) will share in the 2000 portion of theearnings amount based on the estimated

July 22, 2002 167 2002–29 I.R.B.

January 1, 2000, to June 1, 2000, earningsincluded in the corrective contributionequal to $759 ($6,325 (.12)). (See Table1.)

TABLE 1

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation Period

Earnings

15% 7501 All 12/31/1997, Account

Balances4

1999 Earnings 10% 5752 Employee X ($500)/

All 12/31/1998, Account

Balances ($75)4

Second Partial Valuation Period

Earnings

12% 7593 All 12/31/1999, Account

Balances (including Employee

X’s $5,500)4

Total Amount Contributed $7,084

1 $5,000 x 15%2 $5,750 ($5,000 +750) x 10%3 $6,325 ($5,000 +750 +575) x 12%4 After reduction for distributions during the year for which earning are being determined but without regard to contributions received during the year for which

earnings are being determined.

Example 24:

The facts are the same as in Example 23.

Earnings Adjustment on the Corrective Contribu-tion:

The earnings amount on the corrective contribu-tion is the same as in Example 23, but the earn-ings amount is allocated using the specific

employee allocation method. Thus, the entireearnings amount for all periods through June 1,2000 (i.e., $750 for March 31, 1998, to Decem-ber 31, 1998, $575 for 1999, and $759 for Janu-ary 1, 2000, to June 1, 2000) is allocated toEmployee X. Accordingly, Employer L makes acontribution on June 1, 2000, to the plan of$7,084 ($5,000(1.15)(1.10)(1.12)). EmployeeX’s account balance as of December 31, 2000, is

increased by $7,084. Alternatively, EmployeeX’s account balance as of December 31, 1999, isincreased by $6,325 ($5,000(1.15)(1.10)), whichshares in the allocation of earnings for 2000, andEmployee X’s account balance as of December31, 2000, is increased by the remaining $759.(See Table 2.)

TABLE 2

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:

Corrective Contribution $5,000 Employee X

First Partial Valuation Period

Earnings

15% 7501 Employee X

1999 Earnings 10% 5752 Employee X

Second Partial Valuation Period

Earnings

12% 7593 Employee X

Total Amount Contributed $7,084

1 $5,000 x 15%2 $5,750 ($5,000 +750) x 10%3 $6,325 ($5,000 +750 +575) x 12%

2002–29 I.R.B. 168 July 22, 2002

Example 25:

The facts are the same as in Example 23.Earnings Adjustment on the Corrective Contribu-tion:

The earnings amount on the corrective contribu-tion is the same as in Example 23, but the earn-ings amount is allocated using the bifurcated

allocation method. Thus, the earnings for thefirst partial valuation period (March 31, 1998, toDecember 31, 1998) and the earnings for 1999are 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’saccount balance as of December 31, 1999, is

increased by $6,325 ($5,000(1.15)(1.10)); andthe December 31, 1999, account balances ofemployees (including Employee X’s increasedaccount balance) will share in estimated January1, 2000, to June 1, 2000, earnings on the correc-tive contribution equal to $759 ($6,325(.12)).(See Table 3.)

TABLE 3

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:Corrective Contribution $5,000 Employee XFirst Partial Valuation Period

Earnings

15% 7501 Employee X

1999 Earnings 10% 5752 Employee XSecond Partial Valuation Period

Earnings

12% 7593 12/31/99, Account Balances

(including Employee X’s

$6,325)4

Total Amount Contributed $7,084

1 $5,000 x 15%2 $5,750 ($5,000 +750) x 10%3 $6,325 ($5,000 +750 +575) x 12%4 After reduction for distributions during the 2000 year but without regard to contributions received during the 2000 year.

Example 26:

The facts are the same as in Example 23.Earnings Adjustment on the Corrective Contribu-tion:

The earnings amount on the corrective contribu-tion is the same as in Example 23, but the earn-ings amount is allocated using the current periodallocation method. Thus, the earnings for thefirst partial valuation period (March 31, 1998, toDecember 31, 1998) are allocated as 2000 earn-

ings. Accordingly, Employer L makes a contri-bution on June 1, 2000, to the plan of $7,084($5,000 (1.15)(1.10)(1.12)). Employee X’saccount balance as of December 31, 1999, isincreased by the sum of $5,500 ($5,000(1.10))and the remaining 1999 earnings on the correc-tive contribution equal to $75 ($5,000(.15)(.10)).Further, both (1) the estimated March 31, 1998,to December 31, 1998, earnings on the correc-tive contribution equal to $750 ($5,000(.15)) and(2) the estimated January 1, 2000, to June 1,

2000, earnings on the corrective contributionequal to $759 ($6,325(.12)) are treated in thesame manner as 2000 earnings by allocatingthese amounts to the December 31, 2000,account balances of employees in proportion toaccount balances as of December 31, 1999(including Employee X’s increased account bal-ance). (See Table 4.) Thus, Employee X is allo-cated the earnings for the full valuation periodduring the period of the failure.

TABLE 4

CALCULATION AND ALLOCATION OF THE

CORRECTIVE AMOUNT ADJUSTED FOR EARNINGS

Earnings Rate Amount Allocated to:Corrective Contribution $5,000 Employee XFirst Partial Valuation Period

Earnings

15% 7501 12/31/99, Account Balances

(including Employee X’s $5,575)4

1999 Earnings 10% 5752 Employee XSecond Partial Valuation Period

Earnings

12% 7593 12/31/99, Account Balances

(including Employee X’s $5,575)4

Total Amount Contributed $7,084

1 $5,000 x 15%2 $5,750 ($5,000 +750) x 10%3 $6,325 ($5,000 +750 +575) x 12%4 After reduction for distributions during the year for which earnings are being determined but without regard to contributions received during the year for which

earnings are being determined.

July 22, 2002 169 2002–29 I.R.B.

APPENDIX C

VCP CHECKLISTIS YOUR SUBMISSION COMPLETE?

INSTRUCTIONS

The Service will be able to respond more quickly to your VCP request if it is carefully prepared and complete. To ensure that yourrequest is in order, use this checklist. Answer each question in the checklist by inserting yes, no, or N/A, as appropriate, in theblank next to the item. Sign and date the checklist (as taxpayer or authorized representative) and place it on top of your request.

You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with yourrequest, substantive consideration of your submission will be deferred until a completed checklist is received.

TAXPAYER’S NAME

TAXPAYER’S I.D. NO.

PLAN NAME & NO.

ATTORNEY/P.O.A.

The following items relate to all submissions:

1. Have you included a complete description of the failure(s) and the years in which the failure(s) occurred (includingthe years for which the statutory period has expired)? (See section 11.02(1) of Rev. Proc. 2002–47.) (Hereafter, all sec-tion references are to Rev. Proc. 2002–47.)

2. Have you included an explanation of how and why the failure(s) arose, including a description of the administrativeprocedures for the plan in effect at the time the failure(s) occurred? (See section 11.02(2) and (3).)

3. Have you included a detailed description of the method for correcting the failure(s) identified in your submission?This description must include, for example, the number of employees affected and the expected cost of correction (bothof which may be approximated if the exact number cannot be determined at the time of the request), the years involved,and calculations or assumptions the Plan Sponsor used to determine the amounts needed for correction. In lieu of pro-viding correction calculations with respect to each employee affected by a failure, you may submit calculations withrespect to a representative sample of affected employees. However, the representative sample calculations must be suf-ficient to demonstrate each aspect of the correction method proposed. Note that each step of the correction method mustbe described in narrative form. (See section 11.02(4).)

4. Have you described the earnings or interest methodology (indicating computation period and basis for determiningearnings or interest rates) that will be used to calculate earnings or interest on any corrective contributions or distribu-tions? (As a general rule, the interest rate (or rates) earned by the plan during the applicable period(s) should be usedin determining the earnings for corrective contributions or distributions.) (See section 11.02(5).)

If you inserted “N/A” for item 4, enter explanation:

5. Have you submitted specific calculations for each affected employee or a representative sample of affected employ-ees? (See section 11.02(6).)

6. Have you described the method that will be used to locate and notify former employees or, if there are no formeremployees affected by the failure(s) or the correction(s), provided an affirmative statement to that effect? (See section11.02(7).)

7. Have you provided a description of the administrative measures that have been or will be implemented to ensure thatthe same failure(s) do not recur? (See section 11.02(8).)

8. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the plan is not currently under anEmployee Plans examination? (See section 11.02(9).)

2002–29 I.R.B. 170 July 22, 2002

9. Have you included a statement that, to the best of the Plan Sponsor’s knowledge, the Plan Sponsor is not under anExempt Organizations examination? (See section 11.02(9).)

10. If the submission includes a failure related to Transferred Assets, have you included a description of the relatedemployer transaction, including the date of the employer transaction and the date the assets were transferred to the plan?

11. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable) relevant to

the failure(s) and method(s) of correction? (See section 11.04(2).)

12. Have you included a copy of the plan’s most recent Favorable Letter and/or the required applicable document(s)?(See section 11.04(4).)

13. Have you included the appropriate voluntary compliance fee due with the submission? (See section 11.06.)

14. Have you included the original signature of the sponsor or the sponsor’s authorized representative? (See section11.07.)

15. Have you included a Power of Attorney (Form 2848)? Note: representation under VCP is limited to attorneys, cer-tified public accountants, enrolled agents, and enrolled actuaries; unenrolled return preparers are not eligible to act asrepresentatives under VCP. (See section 11.08.)

16. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the Plan Sponsor?(See section 11.09.)

17. Have you designated your submission as a VCP, VCO, VCS, VCT, VCSEP, VCGroup, or Anonymous SubmissionProcedure, as appropriate? (See section 11.11.)

18. If you are requesting a waiver of the excise tax under § 4974 of the Code, have you included the request, and, ifapplicable, an explanation supporting the request for any affected owner-employee or 10 percent owner? (See section6.07(3).)

19. Have you submitted an application for a determination letter? (See section 10.06.)

20. If the plan is currently being considered in a determination letter application, have you included a statement to thateffect? (See section 11.03(1).)

The following items relate only to submissions under VCO (including VCS):

21. Have you included a copy of the first page, the page containing employee census information (currently line 7f ofthe 1998 Form 5500), and the information relating to plan assets (currently line 31f of the 1998 Form 5500) of the mostrecently filed Form 5500 series return? Note: If a Form 5500 is not applicable, insert N/A and furnish the name of theplan, and the census information required of Form 5500 series filers. (See section 11.04(1)(b).)

22. Have you proposed a time period of correction that is limited to 150 days (240 days for VCGroup) from the datethe compliance statement is issued? (See sections 10.06(8) and 10.14(3)(b).)

The following items relate only to submissions under VCS:

23. Are each of the failures you have identified eligible for correction under VCS? (See Appendix A and Appendix B.)

24. Have you identified no more than two VCS failures? (If more than two failures were identified, VCS is not avail-

able, but you may make a submission under VCO.) (See section 10.11(3).)

25. Have you proposed to correct the failure(s) identified in your request using the permitted correction method(s) setforth in Appendix A or Appendix B? (See Appendix A and Appendix B.)

The following item relates only to submissions under VCGroup:

26. Have you submitted a certified or cashier’s check for the initial fee of ten thousand dollars ($10,000) made payableto the U.S. Treasury?

July 22, 2002 171 2002–29 I.R.B.

The following item relates only to submissions under the general procedures of VCP:

27. Have you included a copy of the most recently filed Form 5500? (See section 11.04(1)(b).)

Signature Date

Title or Authority

Typed or printed name of person signing checklist

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also Part I, §§ 61, 451, 1001)

Rev. Proc. 2002–49

SECTION 1. PURPOSE

This revenue procedure sets forth amanner in which an electric utility com-pany may treat a transaction in which theutility is issued a financing order by aState agency authorizing the recovery ofcertain costs incurred by the utility.

SECTION 2. BACKGROUND

In general, State public utility commis-sions set rates for public utility companiesthat are calculated to allow for the recov-ery of prudently incurred costs. In thecase of capital expenditures, rates are setto allow recovery of costs over anextended period of time. With the adventof restructuring and a competitive mar-ketplace, these rates are no longer guaran-teed. Thus, the recovery of previouslyincurred costs associated with generationfacilities that have market values belowtheir book value, as well as costs associ-ated with contracts to purchase electricityat above-market prices, have becomeuncertain. Some States have enacted leg-islation to allow the recovery of thesecosts through a non-bypassable surchargeto customers upon their consumption ofelectricity within the utility’s historic ser-vice area. These statutes, which also

authorize securitization of the surcharge,are unique to the regulated utility indus-try. Accordingly, the law and analysisapplied to these transactions is peculiar tothis situation.

SECTION 3. SCOPE

This revenue procedure applies toinvestor-owned public utility companiesthat, pursuant to transition legislation,receive an irrevocable financing orderfrom an appropriate State agency deter-mining the amount of transition costs theutility will be permitted to recoverthrough qualifying securitization of anintangible property right created underthe transition legislation.

SECTION 4. DEFINITIONS

.01 PUBLIC UTILITY COMPANYFor purposes of this revenue proce-

dure, the terms “public utility” or “utility”refer to a utility company that is subjectto the regulatory authority of the Statepublic utility commission or other appro-priate State agency.

.02 TRANSITION LEGISLATIONFor purposes of this revenue proce-

dure, transition legislation is legislationthat:

(1) is enacted by a State to facilitatethe conversion from a wholly regulatedpublic utility regime to a competitiveenvironment caused by restructuring ofthe public utility industry within theState;

(2) authorizes the utility to applyfor, and authorizes the public utility com-mission or other appropriate State agencyto issue, a financing order determiningthe amount of transition costs the utilitywill be allowed to recover;

(3) provides that pursuant to thefinancing order, the utility acquires anintangible property right to charge, col-lect, and receive charges in a fixedamount necessary to provide for the fullrecovery of the transition costs deter-mined to be recoverable, and assures thatthe charges are non-bypassable and willbe paid by customers within the utility’straditional service territory who receiveelectricity through the utility’s transmis-sion and distribution system, even if thosecustomers elect to purchase electricityfrom a third-party generator;

(4) guarantees that neither the Statenor any agency thereof has the authorityto rescind or amend the financing order,to revise the amount of transition costs, orin any way to reduce or impair the valueof the intangible property right, except asmay be contemplated by periodic adjust-ments authorized by the transition legisla-tion;

(5) provides procedures assuringthat the sale, assignment or other transferof the intangible property right from theutility to a financing entity will be per-fected under State law as an absolutetransfer of the utility’s right, title andinterest in the property; and

(6) authorizes the securitization ofthe intangible property right to recover

2002–29 I.R.B. 172 July 22, 2002

the fixed amount of transition coststhrough the issuance of bonds, notes, cer-tificates of participation or beneficialinterest or other evidences of indebted-ness issued pursuant to an indenture, con-tract or other agreement of an electricutility or a financing entity.

.03 TRANSITION COSTSFor purposes of this revenue proce-

dure, transition costs are the utility’s non-economic costs caused by restructuringand the introduction of a competitivemarketplace for electric services, andsuch other related costs that the State leg-islature may deem appropriate.

.04 QUALIFYING SECURITIZA-TION

For purposes of this revenue proce-dure, qualifying securitization is an issu-ance of any bonds, notes, certificates ofparticipation or beneficial interests orother evidences of indebtedness—

(1) secured by the intangible prop-erty right to collect charges for the recov-ery of transition costs and such otherassets, if any, of the financing entity;

(2) initially capitalized by the utilitywith at least 0.5 percent of the total prin-cipal amount of each series of evidencesof indebtedness issued; and

(3) providing for self-amortizinglevel payments of interest and principalon a quarterly or semiannual basis.

SECTION 5. APPLICATION

.01 The utility will be treated as notrecognizing gross income upon:

(1) the receipt of a financing orderthat creates an intangible property right inthe amount of transition costs that may berecovered through securitization;

(2) the receipt of cash or other valu-able consideration in exchange for thetransfer of that property right to a financ-ing entity; or

(3) the receipt of cash or other valu-able consideration in exchange for securi-tized evidences of indebtedness issued bythe financing entity.

.02 The securitized evidences ofindebtedness described in Section 4.04will be treated as obligations of the utility.

.03 The non-bypassable charges aregross income to the utility recognizedunder the utility’s usual method ofaccounting.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effectiveJuly 22, 2002.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Thomas Preston of theOffice of the Associate Chief Counsel(Financial Institutions and Products). Forfurther information regarding this revenueprocedure, contact Mr. Preston at (202)622–3940 (not a toll-free call).

Rev. Proc. 2002–50

26 CFR 1.6045–1: Returns of Information of bro-kers and barter exchanges.(Also Part III, §§ 83, 421, 422, 423, 1001, 1011,3121, 3306, 3401, 3402, 6041, 6051.)

SECTION 1. PURPOSE

This revenue procedure provides anexception from reporting on Form1099–B, “Proceeds From Broker andBarter Exchange Transactions”, for trans-actions involving an employee, formeremployee, or other service provider (a“service provider”) who has obtained astock option in connection with the per-formance of services. Where the serviceprovider purchases stock through theexercise of the stock option and sells thatstock on the same day through a broker,the broker executing such a sale is notrequired to report the sale on Form1099–B, provided certain conditions aremet.

SECTION 2. BACKGROUND

.01 Tax treatment of stock options.Section 83 of the Internal Revenue Codegoverns the tax treatment of nonstatutorystock options granted in connection withthe performance of services. Sections 421through 424 govern the tax treatment ofstatutory stock options, i.e., incentivestock options described in § 422(b) andoptions granted under an employee stockpurchase plan described in § 423(b). Astock option is not taxable when granted,provided the option either lacks “a readilyascertainable fair market value” asdefined in § 1.83–7(b) of the Income Tax

Regulations or meets the requirements of§ 422 or § 423.

For nonstatutory stock options thatlack a readily ascertainable fair marketvalue, the service provider generally rec-ognizes income at the time of the exerciseof the options, in an amount generallyequal to the fair market value of the stockreceived (disregarding lapse restrictions)minus the amount paid for that stock. See§ 83(a) and § 1.83–7. The time for recog-nizing this income and for determiningthe fair market value of the stock is thefirst day that the transferee’s rights in thestock are “substantially vested”, i.e.,transferable or not subject to a substantialrisk of forfeiture. Where the individualexercising such options is an employee,the taxable compensation income gener-ated by § 83(a) constitutes wages for pur-poses of §§ 3121, 3306, and 3401.

For statutory stock options, if the indi-vidual receiving the statutory stock optionsatisfies the employment requirements of§ 422(a) or § 423(a), the exercise of thestock option produces taxable incomeonly when the stock acquired pursuant tothe exercise of the option is sold or dis-posed of. If that stock is sold in a dis-qualifying disposition (i.e., prior to thelater of the date that is one year after theexercise of the option and two years afterthe grant of the option), certain amountswill be taxable compensation incomeunder § 83(a). In addition, pursuant to§ 423(c), where the holding periods aresatisfied, and where the stock optionsunder an employee stock purchase planare offered at an exercise price below thefair market value of the stock at the dateof grant, certain amounts may be includedas compensation income at the time ofdisposition of the stock acquired at exer-cise of the option.

Notice 2002–47, 2002–28 I.R.B. 97,provides, in part, that until the TreasuryDepartment and the Internal Revenue Ser-vice issue further guidance, in the case ofa statutory stock option, the Service willnot assess the Federal Insurance Contri-butions Act (FICA) tax or Federal Unem-ployment Tax Act (FUTA) tax, or applyfederal income tax withholding obliga-tions, upon either the exercise of theoption or the disposition of the stockacquired by an employee pursuant to theexercise of the option.

July 22, 2002 173 2002–29 I.R.B.

Section 1001 dictates the tax conse-quences when substantially vested stockobtained through the exercise of an optionis sold. Pursuant to § 1001(a), the gainfrom sale of the stock is the amount real-ized minus the adjusted basis provided in§ 1011, and the loss is the adjusted basisprovided in § 1011 minus the amountrealized. For this purpose, the adjustedbasis of the stock includes the amountincluded in gross income under § 83(a)upon exercise of an option that did nothave a readily ascertainable fair marketvalue at grant.

.02 Information reporting — FormW–2 and Form 1099. Section 6051 pro-vides generally that an employer mustannually report to each of its employeesthe total wages paid to the employee.Compensat ion income const i tutes“wages” for purposes of this reportingobligation. Form W–2 is used to reportthe information required by § 6051.

Section 6041 provides that where aperson engaged in a trade or businessmakes payments in the course of the tradeor business to another person of compen-sation of $600 or more in a taxable year,the person must render a return, in accor-dance with such regulations as the Secre-tary may prescribe, that sets forth theamount of the income, and the name andaddress of the recipient of the payment.Forms in the 1099 series are generallyused to report the information required by§ 6041 where the compensation incomedoes not constitute wages, such as wherethe service provider does not provide theservices as an employee of the servicerecipient.

.03 Information reporting — Form1099–B. Section 6045(a) provides thatbrokers, when required to do so by theSecretary, must make a return in accor-dance with such regulations as the Secre-tary may prescribe regarding transactionsthey carry out for customers.

Section 1.6045–1(c)(2) of the regula-tions states, in general, that each brokermust make a return of information withrespect to each sale by a customereffected by the broker.

Section 1.6045–1(d)(2) provides, inpart, that a broker must report the grossproceeds of a stock sale.

Section 1.6045–1(d)(5) provides thatthe broker may, but is not required to,take commissions and option premiums

into account in determining gross pro-ceeds provided the treatment chosen isconsistent with the books of the broker.Form 1099–B is used to report the infor-mation required by § 6045 and the regu-lations thereunder.

Section 1.6045–1(c)(3)(ii) states thatno return of information is required withrespect to a sale effected by a broker fora customer if the sale is an excepted sale.This regulation defines an “exceptedsale” as one so designated by the InternalRevenue Service in a revenue ruling orrevenue procedure published in the Inter-nal Revenue Bulletin.

SECTION 3. SCOPE

.01 Applicability. The exception pro-vided by this revenue procedure appliesto a sale of stock acquired by a serviceprovider through the exercise of an optionif:

(1) the sale is executed for the ser-vice provider on the same daythat the stock being sold isacquired through the exercise ofan option;

(2) the option was granted in con-nection with the performance ofservices, such that the federaltax consequences of the transac-tions are governed by section 83of the Code (e.g., an exercise ofa nonstatutory stock optiongranted in exchange for servicesor an exercise of a statutorystock option followed by a dis-qualifying disposition of thestock acquired pursuant to theexercise);

(3) the service recipient certifies inwriting to the broker that theservice recipient will report anycompensation income generatedby the exercise of the option, ordisposition of the stock acquiredpursuant to the exercise of theoption, in accordance with sec-tion 6041 (Form 1099) or sec-tion 6051 (Form W–2), as appli-cable; and

(4) the broker either:(a) does not charge a commission

or other fee on the transaction;or

(b) does charge a commission orother fee on the transactionand furnishes to the service

provider the written statementdescribed in section 4.03 ofthis revenue procedure.

.02 Inapplicability. The exception pro-vided by this revenue procedure does notapply if the service recipient uses anamount other than the sale price of theshares to calculate the compensationincome generated to the service providerby the option exercise. This revenue pro-cedure also does not apply to the exerciseof a stock option if, at the date of grant,the stock option had a readily ascertain-able fair market value as defined in§ 1.83–7(b).

SECTION 4. PROCEDURE

.01 General. A broker may treat a saleas an “excepted sale” for purposes of§ 1.6045–1(c)(3)(ii) if an employee,former employee or other service pro-vider obtains substantially vested sharesof stock from the exercise of an optionand on the same day sells the sharesthrough a broker.

.02 Statement to broker. To determinewhether the service provider exercisedthe option and sold the underlying shareson the same day, the broker may rely ona receipt or written statement provided bythe service recipient or the service pro-vider showing the date of exercise. Todetermine whether the service recipientuses the sale price of the shares to calcu-late the compensation income generatedto service providers by the option exer-cise, the broker may rely upon a writtenstatement from the service recipient certi-fying that it follows that practice.

.03 Statement to customer. Under thecircumstances described in section3.01(4)(b) of this revenue procedure, thebroker must furnish the service providerwith a statement containing the followinginformation:

(1) the gross sales price withrespect to the shares sold through the bro-ker;

(2) the commissions or other feescharged by the broker on the sale; and

(3) a description of how gain or losswith respect to shares obtained throughthe option exercise is calculated and themanner in which such gain or loss shouldbe reported on a federal income taxreturn. The description need not be an

2002–29 I.R.B. 174 July 22, 2002

independent document, but may be incor-porated in a document such as a settle-ment sheet provided to the broker’s cus-tomer in connection with the sale.

SECTION 5. EXAMPLES

.01 Example 1. An employee holds an option for100 shares of Company A stock at an exercise priceof $20 per share. When granted, the option had noreadily ascertainable fair market value. Theemployee exercises the option on January 15, 2003,receives substantially vested shares and immediatelysells the shares for the fair market value of $30 pershare. The sale is executed by a broker rendering itsservices to Company A employees through a con-tractual arrangement with Company A. The brokercharges no commissions or other fees to theemployee in connection with the sale of the shares.Company A uses the sale price of the shares to cal-culate the compensation income of the employeereported as wages on Form W–2.

Under these facts, the employee has compensa-tion income of $10 per share under § 83(a) ($30 fairmarket value minus $20 exercise price). Company Acertifies in writing to the broker that it will report$1,000 as wages of the employee, and includes thatamount on the employee’s Form W–2. The employ-ee’s basis is $30 per share ($20 cost of exercisingthe option plus $10 taxable income recognized).Because the employee’s amount realized on the saleof the stock ($30 per share) equals his basis, theemployee has no capital gain or loss on the sale. Thebroker is not required to report the proceeds of thesale on Form 1099–B.

.02 Example 2. Assume the same facts asExample 1, except that the employee pays a com-mission of $.05 per share to the broker. The employ-ee’s compensation income is $10 per share ($30 fairmarket value of stock received minus $20 exerciseprice). Company A reports $1,000 as wages on theemployee’s Form W–2 (as in Example 1), sincecommission expense does not reduce the incomegenerated by the exercise. The employee has a lossof $5.00 ($.05 per share times 100 shares). Becausethe employee realizes a loss, “excepted sale” treat-ment will apply only if the broker provides the state-ment required by section 4.03 to the employee.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective forsales of stock occurring after December31, 2001.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Nathan Rosen of the Officeof the Associate Chief Counsel (Proce-dure & Administration), AdministrativeProvisions and Judicial Practice Division.For further information regarding thisrevenue procedure, contact Mr. Rosen at(202) 622–4910 (not a toll free call).

Note: This revenue procedure will be reprinted as the next revision of IRS Publication 1223, General Rules and Specificationsfor Substitute Forms W–2c and W–3c.

Rev. Proc. 2002–51

TABLE OF CONTENTS

Section 1 — Purpose

Section 2 — Nature of Changes

Section 3 — Filing Forms W–2c and W–3c on Magnetic Media or Electronically

Section 4 — General Requirements for Substitute Paper Copies of Forms W–2c (Copy A) and W–3c That Payers Submit to SSA

Section 5 — Requirements for Substitute Privately-Printed Forms W–2c (Copies B, C, and 2) Furnished to Employees

Section 6 — Instructions for Employers

Section 7 — OMB Requirements for Substitute Forms

Section 8 — Reproducible Copies of Forms

Section 9 — Effect on Other Revenue Procedures

Section 10 — Exhibits

Section 1 — Purpose.

.01 The purpose of this revenue procedure is to state the requirements of the Internal Revenue Service (IRS) and the SocialSecurity Administration (SSA) relating to substitutes for Form W–2c, Corrected Wage and Tax Statement, and Form W–3c,Transmittal of Corrected Wage and Tax Statements, for:

• Preparing acceptable substitutes of the official IRS forms to file information returns with the IRS and SSA, and

July 22, 2002 175 2002–29 I.R.B.

• Using official or acceptable substitute forms to furnish information to recipients..02 The official IRS Form W–2c is a six-part form and the official IRS Form W–3c is a one-part form. Paper substitutes con-

forming to the specifications contained in this document may be privately-printed without the prior approval of the IRS orthe SSA.

Note: Both paper substitute forms filed with the SSA and those furnished to employees that do not conform totally to thesespecifications are not acceptable. Forms W–2c (Copy A) and Forms W–3c that do not conform may be returned. In addition, pen-alties may be assessed.

.03 Forms should not be submitted to either the IRS or the SSA for specific approval. If you are uncertain of any specifi-cation and want it clarified, you may submit a letter citing the specification, state your understanding and interpretation of thespecification, and enclose an example of the form (if appropriate) to:

Internal Revenue ServiceAttn: Substitute Forms ProgramW:CAR:MP:FP:S:SP1111 Constitution Ave., NWRoom 6411 IRWashington, DC 20224

You may also contact the Substitute Forms Program Unit via e-mail at *taxforms@irs.gov. Please enter “Substitute Forms” onthe Subject Line.

Note: Allow at least 45 days for the IRS to respond.

Section 2 — Nature of Changes.

.01 The following changes have been made since the last revision (March 1995) of Publication 1223:• The text and exhibits have been extensively updated throughout the publication.• A new checkbox, “Third-party sick pay,” has been added to box 13 of Form W–2c and box c, “Kind of Payer,” on Form W–3c.• A Form W–3c is required to be included whenever you file a Form W–2c with the Social Security Administration (SSA), even

if you are only filing Form W–2c to correct an employee’s name and/or social security number (SSN).• Copy A of Form W–2c and Form W–3c must be printed on 8.5–inch by 11 inch paper using the revised formats and nonre-

flective black ink. Form identification numbers “44444” and “55555”, respectively, were added to the top of Forms W–2c andW–3c.

• Filers are instructed to use 12-point Courier font (SSA-preferred) for data entries in order to facilitate processing.

Section 3 — Filing Forms W–2c and W–3c on Magnetic Media or Electronically

.01 Employers with less than 250 Forms W–2 to be corrected are encouraged to file electronically or use magnetic media forfiling Forms W–2c (Copy A) with the SSA. Employers must use magnetic or electronic media for filing with the SSA if they file250 or more Forms W–2c (Copy A) during a calendar year.

.02 To submit Forms W–2c on magnetic media or electronically, contact the Employer Service Liaison Officer (ESLO) for yourstate. Call 1–800–772–6270 for your ESLO’s phone number. Specifications for filing Form W–2c on magnetic media or electroni-cally are contained in SSA’s MMREF–2, Magnetic Media Reporting and Electronic Filing of W–2c Information. As noted above,employers filing less than 250 Forms W–2c are not required to file on magnetic media or electronically. However, doing so willenhance the timeliness and accuracy of forms processing.

.03 You can also get information from the SSA’s Business Services Online (BSO). You can access BSO by visiting the SSAWebsite at www.ssa.gov/employer or by calling 410–966–4105 (not a toll-free number). Call the SSA at 1–888–772–2970 if youexperience problems using BSO. Information available includes Forms W–2c magnetic media filing instructions, information onelectronic filing, selected IRS and SSA forms and publications, and general topics about information reporting. BSO can also beused to ask questions about those same items.

Section 4 — General Requirements for Substitute Paper Copies of Forms W–2c (Copy A) and W–3c That Payers Submitto SSA

.01 Include the OMB Number on Forms W–2c (Copy A) and Form W–3c in the same location as on the official form.

.02 The words “For Privacy Act and Paperwork Reduction Act Notice, see separate instructions.” must be printed on all FormsW–2c (Copy A) and Form W–3c.

.03 The Government Printing Office (GPO) symbol must not be printed on substitute Forms W–2c (Copy A) and Form W–3c.

.04 The Catalog Number (Cat. No.) shown on the forms is used for IRS distribution purposes and should not be printed on anysubstitute forms.

2002–29 I.R.B. 176 July 22, 2002

.05 The SSA addresses must be printed on the front of Form W–3c below the body of the form (see Exhibit B). They are:If you use the U.S. Postal Service:

Social Security AdministrationWilkes-Barre Data Operations

CenterP.O. Box 3333Wilkes-Barre, PA 18767–3333.

If you use a carrier other than the U.S. Postal Service:Social Security AdministrationWilkes-Barre Data Operations

CenterAttn: W–2c Process1150 E. Mountain DriveWilkes-Barre, PA 18702–7997.

.06 The sequence for assembling the copies of Form W–2c is:Copy A — For Social Security AdministrationCopy 1 — For State, City, or Local Tax DepartmentCopy B — To Be Filed With Employee’s FEDERAL Tax ReturnCopy C — For EMPLOYEE’S RECORDSCopy 2 — To Be Filed With Employee’s State, City, or Local Income Tax ReturnCopy D — For Employer

.07 Substitute form printers are required to include their Employer Identification Numbers (EINs) to the left of “Department ofthe Treasury” in the lower right of Forms W–2c and W–3c in place of “Cat. No.”

.08 Employers may file privately-printed Forms W–2c (Copy A) and Form W–3c with the SSA. The substitute form must be anexact replica of the IRS-printed form with respect to layout and content.

.09 The back of substitute Forms W–2c (Copy A) and Form W–3c must be free of all printing.

.10 In addition:• Hot wax and cold carbon spots are not permitted on any of the internal form plies.• Color and paper quality for Copy A (cut sheets and continuous pinfeed forms) as specified by JCP Code 0–25, dated Novem-

ber 29, 1978, must be white 100% bleached chemical wood, optical character recognition (OCR) bond.Note: Reclaimed fiber in any percentage is permitted provided the requirements of this standard are met.

• Chemical transfer paper is permitted for Copy A only if:(a) chemically-backed;(b) you do not use carbon-coated forms; and(c) chemically-transferred images are black.

• All copies must be clearly legible. Interleaved carbon should be black and must be of good quality to assure legibility onall copies and to avoid smudging. Fading must be minimized to assure legibility.

• All copies should be legible and able to be photocopied.• The contractor must initiate or have a quality control program to assure OCR ink density. The forms must be printed in non-

reflective black ink..11 Type must be substantially identical in size and shape to the official form. All rules are either 1/2-point or 3/4-point. Rules

must be identical to those on the official IRS form.Note: The form identifying number must be nonreflective carbon-based black ink in OCR A font..12 Two official Forms W–2c or one W–3c are contained on a single page that is 8.5 inches wide (exclusive of any snap stubs)

by 11 inches deep. The width of a substitute form must be 7.5 inches. See Exhibits A and B..13 Forms W–2c (Copy A) of privately-printed, continuous substitute forms must be perforated at each 11” page depth. No per-

forations are allowed between the forms on a single page of Copies A.Note: Perforations are required between all the other individual copies (Copies 1, B, C, 2, and D).

Section 5 — Requirements for Substitute Privately-Printed Forms W–2c (Copies B, C, and 2) Furnished to Employees

.01 All employers (including those who file on magnetic media or electronically) must furnish employees with at least two cop-ies of Form W–2c (three or more for employees required to file a state, city, or local income tax return).

.02 The paper for all copies must be white and printed in black ink. The substitute Copy B (or its equal), which employees areinstructed to attach to their federal income tax returns, must be at least 12-pound paper (basis 17 x 22-500). Other copies furnishedto the employee must be at least 9-pound paper (basis 17 x 22-500).

.03 Interleaved carbon and chemical transfer paper for employee copies must be clearly legible, have the capability to be pho-tocopied, and not fade to such a degree as to preclude legibility and the ability to photocopy.

July 22, 2002 177 2002–29 I.R.B.

.04 Type must be substantially identical in size and shape to that on the official form.

.05 Substitute forms for employees need to contain only the payment boxes and captions that are applicable. These boxes, boxnumbers, and box titles must, when applicable, match the IRS-printed form. In all cases, the employee name, address, and SSNmust be present.

.06 The dimensions of these copies (Copies B, C, and 2), but not Copy A, may be expanded from the dimensions of the officialform to allow space for conveying additional information. Also, on these copies (Copies B, C, and 2), the size of the boxes maybe adjusted. This may permit the employer to eliminate other statements or notices that would otherwise be furnished to employ-ees.

.07 The maximum allowable dimensions for employee copies of Form W–2c are no more than 6.5 inches deep by 8.5 incheswide. The minimum allowable dimensions for employee copies of Form W–2c are 2.67 inches deep by 4.25 inches wide.

Note: These maximum and minimum size specifications are subject to future change..08 Either horizontal or vertical format is permitted for substitute employee copies of Forms W–2c. That is, the width of the

form may be either greater or less than the depth of the form..09 All copies of Form W–2c must clearly show the form number and the form title prominently displayed together in one area

of the form. It is recommended (but not required) that this be located on the bottom left of Form W–2c. The reference to the“Department of the Treasury — Internal Revenue Service” must be on all copies of Form W–2c. It is recommended (but notrequired) that this be located on the bottom right of Form W–2c.

.10 If the substitute Forms W–2c are not labeled as to the disposition of the copies, then written notification must be providedto each employee as specified below:

• The first copy of Form W–2c (Copy B) is filed with the employee’s federal tax return.• The second copy of Form W–2c (Copy C) is for the employee’s records.• If applicable, the third copy (Copy 2) of Form W–2c is filed with the employee’s state, city, or local income tax return.If the substitute Forms W–2c are labeled, the forms must contain the applicable description as stated on the official form..11 Instructions similar to those on the back of Form W–2c (Copy C) of the official form must be provided to each employee.

Section 6 — Instructions for Employers

.01 Privately-printed substitute Forms W–2c are not required to contain a copy to be retained by employers (Copy D). However,employers must be prepared to verify or duplicate this information if the IRS or the SSA requests it. Paper filers who do not keepCopy D of Form W–2c should be able to generate a facsimile of Form W–2c (Copy A) in case of loss.

.02 If Copy D is provided for the employer, instructions contained on the back of Copy D of the official form must appear onthe back of the substitute form. If Copy D is not provided, these instructions must be furnished to the employer on a separate state-ment.

.03 Only originals or compliant substitute copies of Forms W–2c and Forms W–3c may be filed with the SSA. CARBON COP-IES AND PHOTOCOPIES ARE NOT ACCEPTABLE.

.04 Employers should type or machine print entries on non-laser generated forms whenever possible and provide good qualitydata entries by using a high quality type face, inserting data in the middle of blocks that are well separated from other printing andguidelines, and taking any other measures that will guarantee clear, sharp images.

.05 Because employers must file a machine-scannable Form W–2c, be aware of the following requirements. Use 12-point Cou-rier (SSA-preferred) font for data entries. Proportional-spaced fonts are unacceptable. You must refrain from printing any data inthe top margin of the forms

.06 The employer must also furnish payee copies of Forms W–2c (Copies B, C, and 2) that are legible and capable of beingphotocopied (by the employee).

.07 When Forms W–2c or W–3c are typed, black ink must be used with no script type, inverted font, italics or dual-case alphacharacters.

.08 The filer’s Employer Identification Number (EIN) must be entered in box e of Form W–3c and is a preferred entry inbox e of Form W–2c.

.09 The employer’s name, address, EIN, and state ID number may be preprinted.

Section 7 — OMB Requirements for Substitute Forms

.01 The Paperwork Reduction Act (the Act) of 1995 (Public Law 104–13) requires that:• The OMB approves all IRS tax forms that are subject to the Act.• Each IRS form contains (in or near the upper right corner) the OMB approval number, if any. (The official OMB numbers may

be found on the official IRS printed forms and are also shown in the exhibits.)• Each IRS form (or its instructions) states:

1. Why the IRS needs the information,2. How it will be used, and3. Whether or not the information is required to be furnished to the IRS.

2002–29 I.R.B. 178 July 22, 2002

.02 This information must be provided to any users of official or substitute IRS forms or instructions.

.03 The OMB requirements for substitute IRS forms are:• Any substitute form or substitute statement to a recipient must show the OMB number as it appears on the official IRS form.• For Form W–3c and Copy A of Form W–2c, the OMB number must appear exactly as shown on the official IRS form.• For any copy other than Copy A, the OMB number must use one of the following formats.

1. OMB No. XXXX-XXXX (preferred) or2. OMB # XXXX-XXXX (acceptable).

.04 All substitute Forms W–3c and Copy A of Form W–2c must state, “For Privacy Act and Paperwork Reduction Act Notice,see separate instructions.” If no instructions are provided to users of your forms, you must furnish them the exact text of the Pri-vacy Act and Paperwork Reduction Act Notice.

Section 8 — Reproducible Copies of Forms

.01 You can order official IRS forms and information copies of federal tax materials by calling the IRS Distribution Center at1–800–829–3676. Other ways to get federal tax material include:

• The Internet.• CD-ROM.• GPO Superintendent of Documents Bookstores.Note: Several IRS forms are provided electronically on the IRS Website and on the federal tax forms CD-ROM, but Form W–3c

and Copy A of Form W–2c downloaded from these sources cannot be used for filing because fileable forms must comply withspecifications contained in this publication. These forms contain special scannable requirements.

.02 You can access the IRS Website on the Internet via:• File Transfer Protocol (FTP) using ftp.irs.gov or• World Wide Web by using www.irs.gov.03 The IRS also offers an alternative to downloading electronic files and provides current and prior-year access to tax forms

and instructions through its federal tax forms CD-ROM. Order Pub. 1796, IRS Federal Tax Products CD-ROM, by using the IRS’Internet Website at www.irs.gov/cdorders or by calling 1–877–CDFORMS (1–877–233–6767).

Section 9 — Effect on Other Revenue Procedures

.01 Revenue Procedure 95–18, 1995–1 C.B. 657 (reprinted as Publication 1223, Rev 3–95), is superseded.

Section 10 — Exhibits

July 22, 2002 179 2002–29 I.R.B.

2002–29 I.R.B. 180 July 22, 2002

July 22, 2002 181 2002–29 I.R.B.

Part IV. Items of General Interest

Golden Parachute Payments;Correction

Announcement 2002–65

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correction to notice of pro-posed rulemaking and notice of publichearing.

SUMMARY: This document containscorrections to a notice of proposed rule-making and notice of public hearing(REG–109114–90, 2002–9 I.R.B. 576)that was published in the Federal Regis-ter on Wednesday, February 20, 2002 (67FR 7630) that will clarify the applicationof section 280G of the Internal RevenueCode to deny a deduction to a corporationfor any excess parachute.

FOR FURTHER INFORMATION CON-TACT: Erinn Madden at (202) 622–6060(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemakingand notice of public hearing that is thesubject of these corrections are under sec-tion 280G of the Internal Revenue Code.

Need for Correction

As published, the notice of proposedrulemaking and notice of public hearing(REG–209114–90, 2002–9 I.R.B. 576)contains errors that may prove to be mis-leading and are in need of clarification.

Correction of Publication

Accordingly, the publication of thenotice of proposed rulemaking and noticeof public hearing (REG–209114–90),which is the subject of FR Doc. 02–3819,is corrected as follows:

1. On page 7630, column 1, in the pre-amble under the caption “SUMMARY:”,fourth line from the bottom of the para-graph, the language “may rely on the1989 regulations for any” is corrected toread “may rely on the 1989 proposedregulations for any”.

2. On page 7630, column 2, in the pre-amble under the caption “FOR FUR-THER INFORMATION CONTACT:”,line 2, the language “Madden at (202)622–6030 (not a toll” is corrected to read“Madden at (202) 622–6060 (not at toll-”.

3. On page 7630, column 2, in the pre-amble under the paragraph heading“Background”, second paragraph, line 9,the language “section 312(v)(2)(A),which relates to” is corrected to read“section 3121(v)(2)(A), which relates tothe.”

4. On page 7630, column 2, in the pre-amble under the paragraph heading“Background”, second paragraph, line 14,the language “FR 19390 on May 5, 1989(the 1989” is corrected to read “FR 19390on May 5, 1989 and corrected in 54 FR25879 (June 20, 1989) (the 1989”.

5. On page 7631, column 1, in the pre-amble under the paragraph heading “Dis-qualified Individuals”, second paragraph,line 7, the language “1989 regulationsprovides a de minimis” is corrected toread “1989 proposed regulations providesa de minimis”.

6. On page 7634, column 2, in the pre-amble under the paragraph heading “Rea-sonable Compensation”, first full para-graph from the top of the column, line 2from end of paragraph, the language“show to be reasonable compensation” iscorrected to read “shown to be reasonablecompensation”.

7. On page 7635, column 3, in the pre-amble under the paragraph heading “Tim-ing of the Payment of Tax under Section4999”, paragraph 1, line 2, the language“section 312(v) and § 1.3121(v)–1(e)(4)”is corrected to read “section 3121(v) and§ 31.3121(v)(2)–1(e)(4)”.

8. On page 7635, column 3, in the pre-amble under the paragraph heading “Pro-posed Effective Date”, line 4, the lan-guage “control occurring on or afterJanuary 1,” is corrected to read “controlthat occurs on or after January 1,”.

§ 1.280G–1 [Corrected]

9. On page 7638, column 2,§ 1.280G–1, paragraph (g) of A–6:,Example 4., line 10, the language “appli-cation of the excemption described in” iscorrected to read “application of theexemption described in”.

10. On page 7638, column 2,§ 1.280G–1, paragraph (g) of A–6:,Example 5., line 9, the language “pays oraccrues a payment that would” is cor-rected to read “that would”.

11. On page 7638, column 3,§ 1.280G–1, paragraph (b)(1) of A–7:,line 9, the language “A–7, the vote can beno less than the” is corrected to read“A–7, the vote can be on less than the”.

12. On page 7640, column 1,§ 1.280G–1, paragraph (e) of A–7:,Example 7., line 16, the language “thepayments of $400,000 to X; $600,000 to”is corrected to read “and describing thepayments of $400,000 to X; $600,000to”.

13. On page 7640, column 1,§ 1.280G–1, paragraph (e) of A–7:,Example 8., line 8, the language “thenature of the payments to X, Y, and Zare” is corrected to read “the nature andamount of the payments to X, Y, and Zare”.

14. On page 7641, column 1,§ 1.280G–1, paragraph (c) of A–11:, lines18 and 19 from the top of the column, thelanguage “under section 3121(v) and§ 1.312(v)–1(c)(4) or payment related tohealth” is corrected to read “under section3121(v) and § 31.3121(v)(2)–1(e)(4) ofthis chapter, or a payment related tohealth”.

15. On page 7641, column 2,§ 1.280G–1, paragraph (a) of A–13:, lines13 and 14, the language “value of anoption with an ascertainable fair marketvalue at the time the option” is correctedto read “value of an option at the time theoption”.

16. On page 7642, column 1,§ 1.280G–1, Q–17:, line 3, the language“purposes of paragraph (a)(1) of Q/A–15”is corrected to read “purposes of para-graph (a)(1) and (b) of Q/A–15”.

17. On page 7642, column 3,§ 1.280G–1, paragraph (c) of A–18:, line16, the language “defined in Q/A–20 ofthis section). If the” is corrected to read“defined in Q/A–20 of this section). Thenumber of employees is determined withregard to the rules in Q/A–19 (c). If the”.

18. On page 7642, column 3,§ 1.280G–1, paragraph (a) of A–19:, line13, the language “A–21 of this section)

2002–29 I.R.B. 182 July 22, 2002

paid during the” is corrected to read“A–21 of this section) earned during the”.

20. On page 7644, column 1,§ 1.280G–1, paragraph (c) of A–22:, line7, the language “that is closely associatedand materially” is corrected to read “thatis closely associated with and materially”.

21. On page 7646, column 3,§ 1.280G–1, paragraph (f) of A–24:,Example 4., line 3 from the bottom of thecolumn, the language “would been onJanuary 15, 2011. The” is corrected toread “would have been on January 15,2011. The”.

22. On page 7648, column 1,§ 1.280G–1, paragraph (c) of A–26:, line13, the language “of section 129); or ano-additional-cost” is corrected to read“of section 129); a no-additional-cost”.

23. On page 7648, column 1,§ 1.280G–1, paragraph (c) of A–26:, line15, the language “132(b)) or qualifiedemployee discount” is corrected to read“132(b)) qualified employee discount”.

24. On page 7648, column 1,§ 1.280G–1, line 16, the language“(within the meaning of section 132(c));”is corrected to read “(within the meaningof section 132(c)) qualified retirementplanning services under section 132(m);”.

25. On page 7649, column 1,§ 1.280G–1, paragraph (d) of A–27:,Example 4., lines 11 through 22, the lan-guage “Corporation P shareholders alsoowned Corporation O stock (overlappingshareholders) with a fair market value of5 percent of the value of Corporation Ostock. The overlapping shareholders con-sist of Mutual Company A Growth Fund,which prior to the transaction owns 3 per-cent of the value of Corporation O stock,Mutual Company A Income Fund, whichprior to the transaction owns 1 percent ofthe value of Corporation O stock, and B,an individual who prior to the transactionowns 1 percent” is corrected to read“Corporation O shareholders also ownedCorporation P stock (overlapping share-holders) exchanged for O stock with afair market value of 5 percent of the valueof Corporation O stock. The overlappingshareholders consist of Mutual CompanyA Growth Fund, which prior to the trans-action owns P stock that is exchanged for3 percent of the value of Corporation Ostock, Mutual Company A Income Fund,which prior to the transaction owns Pstock that is exchanged for 1 percent of

the value of Corporation O stock, and Ban individual who prior to the transactionowns P stock that is exchanged for 1 per-cent”

26. On page 7651, column 1,§ 1.280G–1, A–32:, line 12, the language“24 and 35 of this section. However, for”is corrected to read “24 and 31 of thissection. However, for”.

27. On page 7655, column 1,§ 1.280G–1, paragraph (c) of A–42:,Example 3., line 4, the language “servicesto Corporation N, when and if,” is cor-rected to read “services to Corporation N,when and if”.

28. On page 7656, column 2,§ 1.280G–1, A–48: is corrected to read asfollows:

§ 1.280G–1 Golden parachute payments.

* * * * *

A–48: This section applies to any pay-ments that are contingent on a change inownership or control that occurs on orafter January 1, 2004. Taxpayers can relyon these rules after February 20, 2002, forthe treatment of any parachute payment.

* * * * *

Cynthia E. Grigsby,Chief, Regulations Unit,Associate Chief Counsel

(Income Tax and Accounting).

(Filed by the Office of the Federal Register on June20, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for June 21, 2002, 67 F.R.42210)

Foundations Status of CertainOrganizations

Announcement 2002–66

The following organizations havefailed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing ofnotices under section 508(b) of the Code.This listing does not indicate that theorganizations have lost their status as

organizations described in section501(c)(3), eligible to receive deductiblecontributions.

Former Public Charities. The follow-ing organizations (which have beentreated as organizations that are not pri-vate foundations described in section509(a) of the Code) are now classified asprivate foundations:

7-12 Model Aviation Youth Academy,Long Beach, CA

A-Home, Inc., New Orleans, LAAcadian Memorial Foundation, Inc.,

St. Martinville, LAAdventures in Art, Inc., Ft. Worth, TXAfrican-American Community

Entrustment, San Francisco, CAAfrican American Portrait Collection,

Inc., Sacramento, CAAha Mele ’O Ho ’Omau, Honolulu, HIAlberta Street Apartments Preservation,

Inc., Wilsonville, ORAlianza Deministerios Evangelicos

Nacionales, Costa Mesa, CAAloha Park Preservation, Inc.,

Wilsonville, ORAlpha Community Housing

Development, Inc., New Orleans, LAAlpha Reading & Tutorial Services,

Royal Palm Beach, FLAlumni Basketball Camp, Inc.,

Norman, OKAngels Anonymous of Horizon Hospice,

Inc., Meridian, IDAnimal Welfare Council,

Weatherford, TXArc Marion New Hope Foundation, Inc.,

Ocala, FLAromas San Juan Bautista Community

Schools Foundation,San Juan Bautista, CA

Ascension Theatre, Inc., New York, NYAutumn Glow Alzheimers Care Home,

Inc., San Francisco, CAAxumite Community Development

Corporation, Stockton, CAB. J. Hill and Associates, Inc.,

Fayetteville, NCBabes and Tots Child Care, Inc.,

Mountain Home, ARBackdoor Institute of Disability Enabling

Resources & Services, Inc.,Sacramento, CA

Baltimore County Health Council,Towson, MD

Barbour County Family ResourceNetwork, Inc., Phillippi, WV

Barcap of Florida, Inc., Sarasota, FL

July 22, 2002 183 2002–29 I.R.B.

Beaufort County Cities in Schools, Inc.,Hilton Head, SC

Behavioral Impact Counseling Services,Inc., Mission Hills, CA

Benedictus, El Cajon, CABethel High School Band Boosters Club,

Spanaway, WABethlehem Partners in Prevention,

Spartanburg, SCBig Brothers Big Sisters of the Tulorosa

Basin, Inc., Alamogordo, NMBoston Islamic School, Inc., Boston, MABound for Freedom, Inc., Charlotte, NCBoys and Girls Club of Fauquier, Inc.,

Warrenton, VABoys & Girls Club of Lake County,

Clearlake, CABrazos Valley Youth Corporation,

College Station, TXBrendas Full House, Columbia, MOBrookhollow Tenant Association,

Incorporation, Kerrville, TXBusiness for Progress Economic

Development Corporation,Hawaiian Gardens, CA

Butte Libraries Foundation, Chico, CACalabash Hawaii, Honolulu, HICalifornia Institute for Biodiversity,

Walnut Creek, CACanine Service Corps, Wimberley, TXCantilever Network, Incorporated,

Chicago, ILCanyon Creek Narrow Guage Railway,

Georgetown, CACaregivers Solutions, Inc.,

Oklahoma City, OKCasper Storm AAU Basketball Club,

Inc., Evansville, WYCatholic Christian Community for

Justice, Inc., Vallejo, CACenter for Christian-Jewish Dialogue,

Colorado Springs, COCenter for Multicultural Wellness and

Prevention, Inc., Winter Park, FLCentral California Arts Foundation,

Tulare, CACentral Coast Theater Works, Inc.,

Santa Cruz, CACentral High Choral Booster Bunch,

Inc., Phoenix, AZCentral Valley Youth Services, Inc.,

Stockton, CACharles Apartments Housing

Corporation, Gilroy, CACharleston Rotary Fund, Charleston, SCChesapeake Bay Educators, Weems, VAChild Safety Net of Southern California,

Los Angeles, CA

Children and Family Network, Inc.,Silt, CO

Chillicothe Quarterback Club,Chillicothe, OH

Chinese Cultural Foundation of DiabloValley, Danville, CA

Cleveland County Friends of theFairgrounds, Inc., Norman, OK

Clover Hill Area Teen Center, Inc.,Midlothian, VA

Coastal Health & Fitness, Inc.,Camarillo, CA

Coleville High School PTSO,Coleville, CA

Collective Theatre Company,Winston Salem, NC

Colorado Inhalant Abuse Program, Inc.,Denver, CO

Colquitt County Senior Consortium, Inc.,Moultrie, GA

Columbus Metabolic Foundation, Inc.,Columbus, GA

Communities in Schools of Asheville,Asheville, NC

Communities in Schools of the Valley ofthe Sun, Inc., Phoenix, AZ

Community Health Center of Glendale,Sylmar, CA

Community in Action, Inc.,Gulfport, MS

Community Learning and InformationNetwork of the Tri-State, Inc.,Huntington, WV

Community Supporters of the AtlantaSymphony Orchestra, Atlanta, GA

Conejo Oaks Symphony, Inc.,Thousand Oaks, CA

Connecticut Valley Soccer Club, Inc.,Claremont, NH

Consortium for Learning & Research inAging, Sacramento, CA

Contact Point Productions, Inc.,Shelbyville, KY

Contemporary Asian Theatre Scene,San Jose, CA

Covenant Word Ministries, Inc.,Dallas, TX

Coyote Trail PTF, Tucson, AZCrawford Center, Inc., Miami, FLCrime Prevention Boosters,

Nashville, TNCrossroads Riding Center, Inc.,

Alexandria, LACuarto Centennial Project Corporation,

Albuquerque, NMCuban Cultural Group, Inc., Miami, FLCultural Movement, Inc., Goldsboro, NC

Cumberland Regional ImprovementCorporation, Fayetteville, NC

Cypress and Senior Care Homes, Inc.,Antioch, CA

Cypress Gardens Housing Corporation,Gilroy, CA

DARE Georgia, Inc., Decatur, GADe Mano A Mano Spanish Language

Hotline, Santa Barbara, CADecro Kappa Corporation,

Anaheim Hills, CADeming Soccer League, Deming, NMDesert Legacy Employment Solutions,

Inc., Phoenix, AZDesoto County Domestic Violence

Council, Arcadia, FLDwight R. Means Foundation,

Dallas, TXE. E. Brownell Academy of Humanities

and Fine Arts Parents Club,Gilroy, CA

East Lincoln Middle School Parents-Teachers Organization,Iron Station, NC

Eden Economic DevelopmentCorporation, Eden, TX

Educational Concepts, Sacramento, CAEl Paisano Educational Resource Center,

Inc., Albuquerque, NMEllenton Lions Foundation, Inc.,

Palmetto, FLEnsemble Theatre, Scottsdale, AZEnvironmental Resourcing Association,

Olympia, WAEvansville Fc-Soccer League,

Evansville, INF Q Story Block Watch Association,

Phoenix, AZFairmont Private Schools Parent

Association, Anaheim, CAFamilies for Children of Oregon,

Portland, ORFamilies for Inclusive Education,

Jefferson, LAFannie Bush Teacher Organization of

Winchester Kentucky, Winchester, KYFannin County High School Tip-Off

Club, Inc., Mineral Bluff, GAFew-Fund for Education Research and

Training, Washington, DCFirst Night Phoenix, Inc., Tempe, AZFive Forks Commemorative Committee,

Prince George, VAFlorence County Association of

Educational Office Professionals,Lake City, SC

Focus on Children, Inc., Durham, NC

2002–29 I.R.B. 184 July 22, 2002

Folsom St. Interchange,San Francisco, CA

For the Children, Mountain View, MOFoundation for Students Education,

Easton, MAFourth of July Celebration at Hansen

Dam, Sun Valley, CAFriends of Mallory Square, Inc.,

Key West, FLFriends of Santa Clara Soccer Park,

Santa Clara, CAFriends of the Civic Arts Plaza,

Thousand Oaks, CAFriends of the Fairfax City Library,

Fairfax, VAFriends of the Ma Rainey Museum of

the Blues, Inc., Columbus, GAFriends of the National Kidney

Association, San Francisco, CAFSUS Sigma Chi Educational

Foundation, Inc., Tallahassee, FLGardngs Favrp, Inc., Ft. Lauderdale, FLGate Parents Group of the San Mateo

Union High School District,San Mateo, CA

Gateway Apprenticeship Program,Boulder, CO

Geneseo High School Soccer Boosters,Geneseo, IL

Georgia Community-BasedDevelopment, Inc., Atlanta, GA

Georgia Mountains Private IndustryCouncil, Inc., Gainesville, GA

Get Well Soon Day Care Program,Aloha, OR

Glenoak Golden Eagel Kick Off Club,Inc., Canton, OH

Gods Kitchen, Inc., Boynton Beach, FLGolden Starfish Buddy Program,

Medina, WAGolden Triangle Deacon & Deaconess

Council, Beaumont, TXGreat American Museum of History,

Carson City, NVGroup Opportunity, Inc., Richmond, CAGulf Shore Literary Society, Inc.,

Naples, FLH & L Charities, Nashville, TNHarbison West Elementary Parent

Teacher Organization, Columbia, SCHawaii Power Builders, Inc.,

Honolulu, HIHaywood County Agricultural &

Activities Center Association,Waynesville, NC

Help-Out, Texas City, TXHelper Intermountain Theatre,

Helper, UT

High Peaks Educational Group, Inc.,Boulder, CO

Highland Park Community DevelopmentCorporation, Pasadena, CA

Hilo Medical Center Foundation,Hilo, HI

Historic Entertainment and RepertoryOrganizational Society,Morrisville, NC

Hmong International Culture Reunion,Inc., Fresno, CA

Homebound Remembered, Inc.,Lubbock, TX

Hope Connection, Mission Hills, CAHousing Effort, Inc., Louisville, KYHouston Enhanced Enterprise

Community Governance Board,Houston, TX

Hub City Community Hospice,Compton, CA

Hui Kauhale, Inc., Honolulu, HIImani House, Winston Salem, NCInner City Youth, San Francisco, CAInstitute for Behavior and Research, Inc.,

Daphne, ALIntegrity Youth Enterprises, Inc.,

Santa Maria, CAInternational Baccalaureate Foundation

of Choctawhatchee H.S.,Fort Walton, FL

Irby Adult Resources Center, Inc.,Pascagoula, MS

Irene Cardenas Memorial ScholarshipFund, Del Rio, TX

J. W. Williams Neighborhood Center,Memphis, TN

Jeffco First Steps for Children WithSpecial Needs, Golden, CO

JLWP Adult Day Care Center, Inc.,Humphrey, AR

Juvenile Drug Diversion Program,Capitola, CA

Kami Educational Corporation,Fairbanks, AK

Keep the Kids Busy Foundation,Jackson, MS

Kent High Schools PTSA, Tacoma, WAKolours Dance, Inc., Atlanta, GAKorean Artist Association of Southern

California, Los Angeles, CALa Cheim Psychological Treatment

Services, Inc., Oakland, CALa Joya Middle School PTC,

Visalia, CALabor Museum & Learning Center of

Michigan, Flint, MILakers Premier Soccer Club, Inc.,

Mandeville, LA

Las Vegas Vecindario De EsperanzaResident Council, Las Vegas, NM

Latino American Economic DevelopmentInstitute, Hollywood, CA

Latinos Unidos for Alcohol and DrugServices of Monterey County,Castroville, CA

Leland College DevelopmentCorporation, Baton Rouge, LA

Liberty Bells Group, Hopewell, VALife Care Institute, Inc., Boseman, MTLife Net Ministries, Richmond, VALincoln County Housing Coalition, Inc.,

Davenport, WALiteracy Initiatives & Family Endeavors,

San Antonio, TXLiving Classrooms of Florida, Inc.,

Riviera, FLLos Molinos Educational Endowment

Foundation, Los Molinos, CALouisiana Lacrosse Association,

Shreveport, LALove Memorial Parent Teacher

Organization, Lincolnton, NCLovell Wyoming Educational

Foundation, Inc., Lovell, WYLower Umpqua Volunteers Luv, Inc.,

Reedsport, ORLyons Elementary Parent Teacher

Organization, Lyons, COMarc Carr Evangelistic Association, Inc.,

Sarasota, FLMarin People Care, San Rafael, CAMaryland Parent Teacher Organization,

Phoenix, AZMaui Tongan Association, Kahului, HIMcKendree Vilage Home Health, Inc.,

Hermitage, TNMDC Today Foundation,

Oklahoma City, OKMead High PTSA, Tacoma, WAMen of Moral Consciousness,

Wilson, NCMerchants Development, Inc.,

Birmingham, ALMid-Ohio Community Information

Network, Newark, OHMid-South Interventions & Solutions

Institute, Inc., Natchitiches, LAMiddletown Educational Foundation,

Middletown, CAMiracles Recovery Center, Inc.,

Houston, TX

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or asa private operating foundation, the Inter-nal Revenue Service will issue a ruling or

July 22, 2002 185 2002–29 I.R.B.

determination letter with the revised clas-sification as to foundation status. Grant-ors and contributors may thereafter relyupon such ruling or determination letteras provided in section 1.509(a)–7 of theIncome Tax Regulations. It is not thepractice of the Service to announce suchrevised classification of foundation statusin the Internal Revenue Bulletin.

2002–29 I.R.B. 186 July 22, 2002

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as“rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it

applies to both A and B, the prior rulingis modified because it corrects a pub-lished position. (Compare with amplifiedand clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over aperiod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this case,the previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear inmaterial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Intemal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.

PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

July 22, 2002 i 2002–29 I.R.B.

Numerical Finding List1

Bulletin 2002–26 through 2002–28

Announcements:

2002–59, 2002–26 I.R.B. 282002–60, 2002–26 I.R.B. 282002–61, 2002–27 I.R.B. 722002–62, 2002–27 I.R.B. 722002–63, 2002–27 I.R.B. 722002–64, 2002–27 I.R.B. 72

Notices:

2002–42, 2002–27 I.R.B. 362002–43, 2002–27 I.R.B. 382002–44, 2002–27 I.R.B. 392002–45, 2002–28, I.R.B. 932002–46, 2002–28 I.R.B. 962002–47, 2002–28 I.R.B. 972002–50, 2002–28 I.R.B. 98

Proposed Regulations:

REG–248110–96, 2002–26 I.R.B. 19REG–110311–98, 2002–28 I.R.B. 109REG–103823–99, 2002–27 I.R.B. 44REG–103829–99, 2002–27 I.R.B. 59REG–103735–00, 2002–28 I.R.B. 109REG–106457–00, 2002–26 I.R.B. 23REG–107524–00, 2002–28 I.R.B. 110REG–115285–01, 2002–27 I.R.B. 62REG–126024–01, 2002–27 I.R.B. 64REG–122564–02, 2002–26 I.R.B. 25REG–123305–02, 2002–26 I.R.B. 26

Revenue Procedures:

2002–43, 2002–28 I.R.B. 992002–44, 2002–26 I.R.B. 102002–45, 2002–27 I.R.B. 402002–46, 2002–28 I.R.B. 105

Revenue Rulings:

2002–38, 2002–26 I.R.B. 42002–39, 2002–27 I.R.B. 332002–40, 2002–27 I.R.B. 302002–41, 2002–28 I.R.B. 752002–42, 2002–28 I.R.B. 762002–43, 2002–28 I.R.B. 852002–44, 2002–28 I.R.B. 84

Treasury Decisions:

8997, 2002–26 I.R.B. 68998, 2002–26 I.R.B. 18999, 2002–28 I.R.B. 789000, 2002–28 I.R.B. 87

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2002–1 through 2002–25 is

in Internal Revenue Bulletin 2002–26, dated July 1, 2002.

2002–29 I.R.B. ii July 22, 2002

Finding List of Current Actionson Previously Published Items1

Bulletin 2002–26 through 2002–28

Announcements:

98–99Superseded byRev. Proc. 2002–44, 2002–26 I.R.B. 10

2000–4Modified byAnn. 2002–60, 2002–26 I.R.B. 28

2001–9Superseded byRev. Proc. 2002–44, 2002–26 I.R.B. 10

Revenue Procedures:

2002–9Modified and amplified byRev. Proc. 2002–46, 2002–28 I.R.B. 105

2002–13Modified byRev. Proc. 2002–45, 2002–27 I.R.B. 40

Revenue Rulings:

94–76Amplified byRev. Rul. 2002–42, 2002–28 I.R.B. 76

1 A cumulative list of current actions on previously published

items in Internal Revenue Bulletins 2002–1 through 2002–25 is

in Internal Revenue Bulletin 2002–26, dated July 1, 2002.

July 22, 2002 iii 2002–29 I.R.B.