EPCRS: REV. PROC

The Pension Library ERISA Newsletter Number 2013-1 EPCRS: REV. PROC. 2013-12 Table of Contents 1 Introduction... 2 2 Overview... 2 2.1 SCP.... 2 2.2 VCP.... 4 2.3 Audit CAP.... 5 2.4 Complete and appropriate correction.... 5 3 403(b) Plan Changes... 6 3.1 403(b) plan document failure, final 403(b) regulations.... 6 3.2 403(b) plan document failure, interim amendments.... 7 3.3 Other 403(b) correction distinctions.... 7 4 VCP Submission Changes... 8 4.1 Forms 8950 and 8951 required... 8 4.2 Streamlined VCP application.... 8 5 Improperly Excluded Employees... 9 5.1 Improperly excluded employee: Generally.... 9 5.2 Improperly excluded employee: ADP-tested 401(k) plan.... 9 5.3 Improperly excluded employee: safe harbor 401(k) plan correction.... 10 5.4 Improperly excluded employee: safe harbor QACA 401(k) plan correction... 11 5.5 403(b) universal availability correction.... 12 5.6 Failure to implement an employee election.... 12 6 Excess Amounts and Overpayments... 13 6.1 Excess amounts in general.... 13 6.2 Excess annual additions: employer contributions and forfeitures... 14 6.3 Excess annual additions: elective deferrals.... 15 6.4 Elective deferrals exceeding plan limit.... 16 6.5 Treatment of excess amounts.... 16 6.6 Overpayment failures.... 16 7 Other Issues... 18 7.1 Lost participants.... 18 7.2 Definition of QNEC.... 19 7.3 Possible future enhancements.... 19 8 Conclusion... 19

1 Introduction In 1998, the IRS first consolidated its programs for correction of qualified plan errors into the Employee Plans Compliance Resolution System ( EPCRS ). 1 Rev. Proc. 2013-12 is the latest restatement of the original EPCRS procedure. 2 The new procedure (referred to in this Newsletter as EPCRS or EPCRS 2013 ) generally is effective April 1, 2013. However, employers may apply the procedure beginning December 31, 2012. 3 EPCRS currently is available to sponsors of 403(b) plans, SEPs and SIMPLE IRA plans in addition to qualified plans. 4 For 403(b) plans, the definitions under Rev. Proc. 2008-50, the immediately preceding EPCRS version, apply to failures that occurred in taxable years beginning before January 1, 2009. 5 This Newsletter provides a brief overview of EPCRS, and then explains certain enhancements of EPCRS 2013 and common correction methods that apply to qualified plans and 403(b) plans. This Newsletter does not discuss EPCRS as it relates to defined benefit plans. 2 Overview EPCRS offers three correction programs: (1) self-correction by an employer without IRS involvement; (2) IRS approval of a proposed correction upon an employer s application to the IRS; and (3) requalification of a plan following discovery of a disqualifying error upon IRS audit. 6 2.1 SCP. An employer that has established practices and procedures designed to facilitate proper plan administration may self-correct, under the self-correction program ( SCP ), an insignificant operational error at any time. 7 An employer may correct an insignificant operational error even if the plan is under examination or the employer discovers the error during an IRS audit. If the plan has a favorable letter, 8 the employer 1 Rev. Proc. 98-22. This procedure incorporated the previously independent programs known as Audit CAP, the Voluntary Compliance Resolution ( VCR ) Program and the Administrative Policy Regarding Self-Correction ( APRSC ). These programs offered the three levels of correction that continue in the current procedure. 2 Rev. Procs. 99-31, 2000-16, 2001-17, 2002-47, 2003-44, 2006-27 and 2008-50 precede this Rev. Proc. 2013-12. This Newsletter refers to Rev. Proc. 2013-12, for purposes of footnote citations as EPCRS, and generally as EPCRS 2013. 3 EPCRS 16. 4 In addition, governmental 457(b) plans can file for relief under EPCRS through standards that are similar to EPCRS. They use the same forms as do qualified plans. EPCRS 2013 expanded this relief to limited situations for nongovernmental 457(b) plans, such as when a plan is erroneously established to benefit NHCEs and is operated similarly to a qualified plan. EPCRS 4.09. 5 January 1, 2009 is the effective date of the final 403(b) regulations. Rev. Proc. 2008-50 is well adapted to the 403(b) rules before the final regulations because it does not require a written 403(b) document. While the old definitions will control, the new procedures will be in effect even for pre-2009 years. 6 EPCRS states that the IRS may decline to make available one or more EPCRS correction programs in the interest of sound tax administration. EPCRS 4.01(5). 7 403(b) plans need not have established practices and procedures for failures occurring before January 1, 2010. EPCRS, 6.10(2). 8 A favorable letter is a current determination letter for an individually designed plan, a current favorable opinion letter if the plan has adopted an approved prototype plan, or a current favorable advisory letter for the employer s identical adoption of an approved volume submitter plan. Having a current favorable letter means the letter considers the EGTRRA law changes (if the plan s initial remedial amendment period under Rev. Proc. 2007-44 has SunGard, 2013 Page 2

may correct a significant operational error, provided the employer corrects the error by the last day of the second plan year following the plan year in which the failure occurred. 9 The correction period for a significant operational error ends when the plan is under examination by the IRS for the plan year of the error. 10 In very limited circumstances, an employer may self-correct an operational failure by a retroactive amendment to conform to the plan s actual operation. 11 The procedure provides a nonexclusive list of seven factors to consider in determining whether an error is significant. No one factor is determinative, and if multiple failures exist, they will be determined significant or insignificant in the aggregate. The factors to be evaluated include, but are not limited to: (1) whether other failures occurred during the period being examined (for this purpose, a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure); (2) the percentage of plan assets and contributions involved in the failure; (3) the number of years the failure occurred; (4) the number of participants affected relative to the total number of participants in the plan; (5) the number of participants affected as a result of the failure relative to the number of participants who could have been affected by the failure; (6) whether correction was made within a reasonable time after discovery of the failure; and (7) the reason for the failure (for example, data errors such as errors in the transcription of data, the transposition of numbers, or minor arithmetic errors). 12 Example #1. Company maintains a 401(k) profit sharing plan that provides a 5% of compensation profit sharing contribution. Compensation for this purpose includes bonuses. The Company misapplied the definition of compensation and excluded bonuses not expired), the letter considers the changes incorporated in the plan under Rev. Proc. 2007-44 (i.e., the EGTRRArestated plan), the employer established the plan after 2001 and applies for a determination letter or adopts a preapproved plan within the plan s remedial amendment period, or the plan terminated and the employer takes appropriate amendatory action, as described in EPCRS, during the plan s remedial amendment period (e.g., the plan terminated before the expiration of the EGTRRA remedial amendment period, and was amended for EGTRRA and other law changes in effect when the plan terminated). EPCRS 5.01(4). A 403(b) plan is considered to have a favorable letter, until further guidance is issued, if either (1) the employer is an eligible employer and on or before December 31, 2009 the employer adopted a written 403(b) plan document intended to satisfy the final 403(b) regulations which is effective January 1, 2009, or (2) if the employer failed to timely adopt a written 403(b) plan document, the employer files a VCP submission to correct such a 403(b) plan document failure. EPCRS, 6.10(2). 9 EPCRS 1.03 and 9.02. For correction of a failure to satisfy the ADP or ACP test, the correction period is two years following the end of the statutory twelve-month correction period for correcting a test failure. Timely correction includes substantial completion of correction during the correction period. Substantial correction occurs if the employer, as provided in EPCRS, promptly initiates correction and completes correction within 120 days after the two-year correction period, or completes correction as to at least 65% of the participants and diligently completes correction thereafter. See EPCRS 9.04. 10 EPCRS 9.02(3). A plan is under examination if the plan (for the plan year of the failure) is under Form 5500 or other Employee Plans examination, the plan is under investigation by the Criminal Investigation Division of the IRS, the employer has submitted a determination letter application and an IRS agent notifies the employer of a possible qualification failure, or the employer receives written or verbal notification of an impending examination or referral for examination. EPCRS 5.07. The correction period also ends if the employer is a tax-exempt organization and the employer is under IRS examination for the plan year in which the error occurs. See EPCRS, 5.07(4). 11 EPCRS 4.05(2). 12 See EPCRS 8.02. SunGard, 2013 Page 3

when making its profit sharing contribution. Assume only one of 40 employees received a bonus that year and the bonus was only $2,000. That employee is entitled to a true up contribution of $100 (5% x 2,000) plus earnings. The IRS caught the failure on audit. The Company may still be able to correct under SCP if the failure is considered insignificant. Example #2. Assume the same facts in Example #1. except 35 of 40 participants received bonuses and the average bonus over the period of failure was $10,000 and the failure occurred over 5 years. The affected participants would be entitled to an aggregate true up contribution of $87,500 (35 x 10,000 x 5% x 5) plus earnings, allocated pro rata per bonuses. The IRS caught the failure on audit. The Company will not be able to correct under SCP if the failure is considered significant. 2.2 VCP. An employer, at any time before audit, may pay a compliance fee (generally from $750 to $25,000, depending on the number of participants 13 ) and receive IRS approval for a particular correction of a qualification failure or 403(b) failure (collectively, plan failures). 14 The employer must file an application with the IRS, disclosing the plan failure(s), either in the plan document or in the plan s operation, 15 that the employer wishes the IRS to consider. Upon reaching an agreement, the IRS will issue a compliance statement and the employer generally must complete the required correction within 150 days. 16 Subject to prescribed guidelines, the employer may submit the application anonymously, disclosing its identity only when the applicant reaches an agreement with the IRS. 17 VCP also is available to the sponsor of a pre-approved plan or to a plan 13 EPCRS 12.02. Different fee amounts apply in case of certain nonamender submissions, group submissions, egregious failures and certain required minimum distribution failures. The compliance fee for a submission that contains only a nonamender failure is reduced by 50% if submitted within one year after the expiration of the plan s remedial amendment period for complying with the change. Under EPCRS, the compliance fee for a submission that only contains a failure to adopt a timely interim amendment or optional amendment is $375. EPCRS 12.03. EPCRS also provides for a higher compliance fee if the failure is intentional (i.e., not the result of oversight or mistake), subjecting this character of failure to the same potential higher fee that would apply in the case of an egregious failure. EPCRS 12.06. Generally, the fee is based on the number of participants on the last day of the plan year reflected on the plan s most recently filed Form 5500. EPCRS 2013 as detailed rules to compute the number of participants for plans that do not file Form 5500 or plans that have terminated. EPCRS 12.08. 14 A qualification failure is any of four types of failures: (1) operational; (2) plan document (i.e., the plan document fails to include required language); (3) demographic (i.e., a coverage, nondiscrimination or minimum participation failure that is not an operational failure or an employer eligibility failure); or (4) employer eligibility (i.e., an adoption of a plan with a cash or deferred feature that is not eligible to establish a 401(k) plan). EPCRS 5.01(2). A similar set of definitions apply to 403(b) plans. EPCRS, 5.02. 15 If the qualification failure is a document failure, the employer only may correct the failure under VCP, and not SCP, unless the failure is one of the four document failures correctible with a plan amendment. If the failure is an operational failure, the employer might use VCP, rather than SCP, if the failure is a significant operational error that occurred before the two-plan-year cutoff described above, or if the employer wishes to have the certainty of IRS approval regarding an operational error the employer could correct under SCP. 16 EPCRS 10.07(9). However, correction of a failure to adopt timely interim amendments or amendments for optional legal changes, must be made by the date of submission (i.e., the application should include the executed amendments). 17 EPCRS 10.10. An employer might make an anonymous submission if, for example, the employer fears the IRS might propose a very expensive correction scheme the employer is unwilling to implement. Of course, if the anonymous submitter does not disclose its identity, it either must correct the error, if authorized outside VCP, or remains open to disqualification if the IRS subsequently audits the plan. SunGard, 2013 Page 4

administrator to correct certain systemic failures for multiple adopters of the sponsor s plan. VCP is not available if the plan is under examination. 18 2.3 Audit CAP. If, upon audit, the IRS identifies a plan failure the employer has not corrected under either SCP or VCP, the employer may correct the failure, but must pay a sanction. 19 The sanction is a negotiated percentage of the amount of tax (including interest and penalties) the IRS could collect for all taxable years open under the statute of limitations since the plan first became disqualified, from the trust (on the trust income), the employer (as to lost deductions on non-vested plan contributions during the disqualified years), and the participants (on their vested interests, including any increases in vesting, during the open years in which the plan is disqualified or on participant loan failures). 20 However, the sanction will not be excessive and will bear a reasonable relationship to the nature, extent and severity of the failures, taking into account specified factors such as steps taken by the employer to identify failures that occurred and to ensure the plan had no failures, the number of nonhighly compensated employees ( NHCEs ) plan disqualification would affect adversely and the reason for the failure(s). 21 If one of the failures discovered on audit is the failure to amend for relevant legislation, EPCRS establishes a minimum sanction from $2,500 to $88,000, depending on the number of participants. 22 If the IRS and the employer do not reach an agreement regarding the correction and the amount of the sanction, the IRS will disqualify the plan. 23 2.4 Complete and appropriate correction. As a general guiding principle, correction of a plan failure should put the plan and the participants in the position they would have occupied had the failure not occurred. The employer generally must correct for all participants and for all taxable years, whether or not closed under the statute of limitations. 24 The correction must be reasonable and appropriate for the failure. 25 There may be more than one appropriate correction method for some failures. EPCRS provides specific correction methods for some failures. The IRS deems appropriate the employer s use of any specified correction method to correct the related failure. 26 EPCRS also establishes correction principles the employer must follow, either in correcting a failure not specified or in crafting an alternative correction method for a 18 EPCRS 4.02. 19 If the failure is an insignificant operational failure, the employer can self-correct the failure notwithstanding the examination. See 2.1, above. 20 EPCRS 5.01(5). 21 EPCRS 14.02. 22 EPCRS 14.04. This sanction amount would apply if the IRS discovers the nonamender failure during the determination letter application process not related to a VCP submission. A higher sanction would generally apply to a nonamender failure discovered outside a VCP submission. 23 EPCRS 13.04. 24 EPCRS 6.02. Limited exceptions to complete correction apply to use of reasonable estimates, corrective distributions of $75 or less, and excess amounts of $100 or less. EPCRS 6.02(5). 25 EPCRS 6.02(2). 26 Appendices A and B to EPCRS contain the prescribed correction methods. If the plan has a different but analogous failure to an Appendix A or Appendix B failure (e.g., failure to provide matching contributions by a governmental plan that is not subject to Code 401(m)), then the analogous correction method generally is acceptable. SunGard, 2013 Page 5

specified failure. 27 The correction principles are as follows: (1) the correction method, to the extent possible, should resemble one already provided in the Internal Revenue Code ( Code ), regulations or other guidance of general applicability (collectively referred to as applicable guidance ); 28 (2) the employer should correct nondiscrimination failures by providing benefits to the NHCEs; 29 (3) the correction method should keep assets in the plan, unless applicable guidance permits distribution or return of assets to the employer; 30 (4) the correction method should not violate another qualification requirement or a parallel provision of Title I of ERISA; 31 and (5) if another governmental agency has authorized a correction method for violation of a legal requirement within its interpretative authority, and that correction relates to a failure correctible under EPCRS, the IRS may consider that correction method. 32 3 403(b) Plan Changes The previous version of EPCRS had a limited structure for correcting 403(b) plans. EPCRS 2013 substantially improves 403(b) plan corrections, including adding many 403(b)-specific definitions. 33 Generally, correction of a 403(b) plan is expected to be the same as the correction required for a qualified plan with the same failure. 34 Most correction methods described in this Newsletter apply equally to 403(b) plans as they do to qualified plans. Despite the desire for uniformity there are some differences between 403(b) and qualified plans which carryover to corrections. This section 3 explains a few of those differences. 3.1 403(b) plan document failure, final 403(b) regulations. In 2008, when the IRS released the prior version of EPCRS, tax law did not require 403(b) plans to have a plan document. With the issuance of the final 403(b) regulations, effective in 2009, a 403(b) 27 EPCRS 6.02(2). Although the employer may correct a specified failure other than by a deemed appropriate correction method, the employer risks that on audit, the IRS will find the employer did not correct the error, and therefore must correct under the auspices of the IRS, and at a greater price, in Audit CAP. 28 EPCRS 6.02(2)(a). For example, correction of excess deferrals not timely distributed still would be a corrective distribution. The requirement to follow existing guidance to the extent possible limits an employer s ability to interpret what is reasonable and appropriate where such guidance exists. 29 EPCRS 6.02(2)(c). For example, the plan must provide some benefits to NHCEs, rather than merely distributing excess contribution to HCEs to correct a late failure of the ADP or ACP test. EPCRS Appendices A and B describe alternative correction methods that include providing QNECs to NHCEs or combining corrective distributions with an additional contribution for NHCEs under a one-to-one correction method. See EPCRS Appendix B, 2.01(1)(b). 30 EPCRS 6.02(2)(b). For example, the employer would correct an improper matching contribution allocation by reallocating or treating as a future matching contribution, rather than by distributing benefits. 31 EPCRS 6.02(2)(d). If following an EPCRS correction creates another failure, the employer also must correct the additional failure. 32 EPCRS 6.02(e). For example, for a failure in an abandoned plan which may be terminated under the DOL s abandoned plan regulations (DOL Reg. 2578.1), the permitted EPCRS correction is to terminate the plan and to distribute the assets in accordance with standards and procedures substantially similar to those in the DOL abandoned plan regulations. However, this correction must satisfy four conditions set forth in EPCRS 6.02(2)(e)(ii), including determining the applicability of the joint and survivor rules and if applicable, taking reasonable steps to comply with those rules, and providing participants a 402(f) notice. 33 EPCRS, 5.02. 34 EPCRS, 6.10(1). SunGard, 2013 Page 6

plan was required to have a good faith written plan document intended to comply with the final 403(b) regulations adopted by January 1, 2009. 35 To accommodate the change in the law, EPCRS 2013 had to provide a correction method plan sponsors that failed to comply with the new written plan document requirement. EPCRS 2013 permits correction of a failure to timely adopt a 403(b) plan document to comply with the final 403(b) regulations in a similar manner as a failure to timely adopt a restatement for a qualified plan. A VCP submission is required. 36 The VCP fee to correct a 403(b) document failure will be reduced by 50% if the filing is made on or before December 31, 2013. 37 Thereafter, the normal VCP fee applies. 3.2 403(b) plan document failure, interim amendments. A 403(b) plan may have a perpetual remedial amendment period until the IRS develops a prototype or determination letter programs. The IRS indicated that employers that adopt an approved prototype or obtain a determination letter (when available) would receive the benefit of a remedial amendment period to correct plan document failures, going back to January 1, 2010. 38 Therefore, 403(b) plans need not be updated for interim amendments until the prototype and determination letter programs are established and then only as those programs provide. 3.3 Other 403(b) correction distinctions. Generally, 403(b) failures are corrected in the same manner as the same failure would be corrected in a qualified plan. However, a few distinctions are noteworthy. A 403(b) failure may be corrected by treating an affected contract as a 403(c) contract. 39 Effectively, this permits an employer to selectively disqualify a participant s 403(b) contract without disturbing the remaining unaffected 403(b) contracts. A qualified plan has no such option. Another distinction of 403(b) plans is when filing a VCP submission the employer must contact and receive assurance of cooperation by the 403(b) plan vendors to assist in the proposed correction to the extent needed. 40 This requirement may prove difficult in certain circumstances. Insurance companies and other 403(b) custodians may be subject to additional State law requirements to complete a 403(b) plan correction (e.g., the insurance company may need the consent of each affected participant before making 35 Treas. Reg. 1.403(b)-3(b)(3). Under the final 403(b) regulations, the deadline for adopting a written plan was the first day of the first taxable year beginning after 2008. Treas. Reg. 1.403(b)-3(b)(3) and 1.403(b)-11. For virtually all employers, that meant the deadline was January 1, 2009. Rev. Proc. 2007-71, 6. However, in Notice 2009-3, the IRS extended the written plan deadline to December 31, 2009, subject to the following conditions: (1) plan sponsor adopted a good faith plan document by January 1, 2009, (2) the plan operationally complied with the final 403(b) regulations and (3) the plan sponsor corrected under EPCRS any operational deficiencies by the end of 2009. 36 A streamlined VCP submission is available. Use EPCRS 2013, Appendix C, Part II, Schedule 2. 37 ECPRS, 12.02(5). 38 See IRS Announcement 2009-89 and EPCRS, 6.10(3). 39 EPCRS, 6.10(2). 40 EPCRS, 11.03(11). SunGard, 2013 Page 7

certain corrective distributions). Nevertheless, 403(b) sponsors must comply with this requirement. Uncooperative 403(b) vendors may need to be dismissed, if possible. 4 VCP Submission Changes 4.1 Forms 8950 and 8951 required. EPCRS revamps the VCP submission procedures. The previous version of EPCRS provided two appendices including a sample VCP application, which was completed by using a check the box and fill in the blank format for much of the application. The same ease is carried over under EPCRS 2013. Appendix C is now the VCP model compliance statement and together with the new tax Forms 8950 and 8951 they replace the old submission procedures. 41 Forms 8950 and 8951 are required with each VCP submission. Form 8950 includes identifying information and an optional checklist to help ensure the applicant has included all necessary materials. Form 8951 reflects the computation of the VCP compliance fee. While new forms must now be submitted with each VCP submission, the substantive disclosure requirements and penalty of perjury statements have not significantly changed. The new tax forms provide the IRS a standard VCP submission format for ease of review. 42 Practitioners hope this will reduce the IRS s turn-around time for VCP submissions. 4.2 Streamlined VCP application. EPCRS 2013 also revamps the Streamlined Application procedure under VCP. Substantively, Streamlined Applications require the same information as the previous EPCRS did for nine listed qualification failures, 43 including: (1) failure to adopt timely an interim (required) amendment or an amendment to implement an optional change the employer applied; (2) failure to administer loans consistent with the statutory loan limits, where the failure relates solely to employees who are neither key employees nor self-employed individuals; (3) failure to distribute excess deferrals on a timely basis; and (4) various failures in a SIMPLE IRA plan. One substantive change to the Streamlined Application procedure under EPCRS 2013 relates to (1) above, the IRS now wants a list of each missed interim amendment, a short description of the purpose of the amendment and the section or page number where the amendment can be found. Appendices C, D, E and F under the previous EPCRS, have been changed. To use the Streamlined Application procedure, the employer must now use the schedule provided in Appendix C, Part II of EPCRS 2013. The application consists of Forms 8950 and 8951, the Appendix C, Part I Model Compliance Statement, the appropriate schedule for the 41 EPCRS, 11.04. 42 Forms 8950 and 8951 may be found at http://www.irs.gov/retirement-plans/correcting-plan-errors---revenue- Procedure-for-Correcting-Plan-Errors-and-Fill-in-Appendices. 43 Interestingly, Form 8950 has check boxes for 12 schedules. It is possible that the IRS considered expanding the availability of Streamlined Applications to additional types of failures but ultimately decided against it. SunGard, 2013 Page 8

failure described in Appendix C, Part II, 44 and documents required by the applicable schedule (e.g., the amendment in case of a failure to amend timely). Appendix C, Part II and the schedules are essentially pre-printed forms the applicant simply may copy and use, or may reproduce electronically. 45 An application may include one or more of the Appendix C, Part II schedules. Inclusion of multiple schedules does not affect the submission fee. There is no special fee schedule for a Streamlined Application submission, so the otherwise applicable compliance fee applies. 46 5 Improperly Excluded Employees 5.1 Improperly excluded employee: Generally. If a 401(k) plan improperly excludes an employee who should have been able to defer, EPCRS provides an employer a standard correction methodology: (1) determine the amount of the missed deferrals; (2) compute, as applicable, the missed deferral opportunity, the missed match, and the missed safe harbor contribution; (3) contribute a QNEC equal to the missed deferral opportunity plus the missed safe harbor contribution (if any); (4) contribute a corrective nonelective contribution equal to the missed match. The missed deferral opportunity is 50% of the missed deferral. The missed match is the matching contribution the plan would have allocated to the participant had the participant made the missed deferral. Note that the missed match is based on the missed deferral itself, rather than on the 50% missed deferral opportunity. The missed safe harbor contribution is similarly based on the safe harbor nonelective contribution or the safe harbor matching contribution the plan would have allocated to the participant based on the missed deferral. 47 EPCRS 2013 removed the requirement that the corrective matching contribution had to be contributed as a QNEC, except for fully vested safe harbor contributions. 48 The employer may apply a vesting schedule and permit broader distribution events for the corrective matching contribution as a result. This is the correction method, whether or not the plan permits Roth deferrals. Each of these contributions is adjusted for earnings 5.2 Improperly excluded employee: ADP-tested 401(k) plan. If a 401(k) plan (other than a safe harbor plan) excludes an eligible employee, the employee s missed deferral is deemed to be the ADP for the employee s group (highly compensated [ HCE ] or 44 There are nine schedules associated with the nine failures described in Appendix C, Part II. 45 Fillable pdf versions of these forms are available on the IRS web site. 46 EPCRS 12. As discussed earlier, there are several modifications to the basic fee schedule based on the number of plan participants, such as a 50% reduction for certain participant loan failures and certain nonamender failures, and a set fee of $375 for a submission that contains only a failure to adopt timely interim amendments or amendments required to implement optional law changes. See EPCRS 12.02(3) and 12.03. These reduced fees would apply equally to a Streamlined Application submission. 47 See generally EPCRS, Appendix A.05, Appendix B 2,02. 48 See EPCRS, Appendix A.05(2)(c). SunGard, 2013 Page 9

nonhighly compensated [ NHCE ]), 49 multiplied by the employee s compensation for the period of exclusion. 50 Example #3. Partial year exclusion. X s 401(k) plan permits employees to elect either Roth or pre-tax deferrals. Jane, an NHCE, should have entered the plan on July 1, 2013. However, X misapplied the plan s eligibility conditions and did not permit Jane to commence deferrals until November 2013 (i.e., with respect to her November 2013 compensation). Jane earns $4,000 per month during 2013. The NHCE ADP for 2013 is 3%. The plan improperly excluded Jane for a period of 4 months. Jane s excluded compensation during the period of exclusion is $16,000. Jane s missed deferral amount is deemed to be $480 ($16,000 x 3%). Therefore, to correct the failure, X must contribute to the plan a QNEC for Jane in the amount of $240 ($480 x 50%), plus earnings. Whether Jane would have elected pre-tax or Roth deferrals is irrelevant to X s correction method. Example #4. Make-up match. Assume in the previous example the plan provides a match of 100% of deferrals not exceeding 4% of compensation. Also assume the average ACP for the NHCEs for 2013 is 2%. Since Jane s improper exclusion caused her not to receive a match, the employer must correct the failure. The corrective contribution by X Jane would be entitled to receive as a match based on her deemed deferral amount. Based on the plan s match formula applied to her deemed deferrals of 3% of compensation, Jane would be entitled to a 100% match on her deemed deferrals of 3% (not 100% of missed deferral opportunity of 50% of the deemed deferrals). Therefore, X must contribute a corrective nonelective contribution for Jane in the amount of $480, plus earnings. The corrective nonelective contribution may be subject to the plan s vesting schedule and distribution events applicable to employer contributions. Again, the fact that the deemed missed deferrals might have been either Roth deferrals or pre-tax deferrals is irrelevant. 5.3 Improperly excluded employee: safe harbor 401(k) plan correction. If the 401(k) plan that excludes an eligible employee satisfies the ADP test safe harbor, the correction amount depends upon whether the plan uses the 3% nonelective contribution or a matching contribution to satisfy the ADP safe harbor. If the plan uses the safe harbor 3% nonelective contribution, the missed deferral is deemed to be 3% of compensation. The employer therefore must make a QNEC equal to 50% of the deemed missed deferral, plus 49 Note that the plan uses the ADP for the excluded employee s group for the plan year of the exclusion, without regard to whether the plan uses current year testing or prior year testing to perform the ADP test for the plan year. EPCRS Appendix A,.05(2)(b). Also note that before correcting for improperly excluded employees, the plan must correct other qualification failures, such as the ADP or ACP test. However, EPCRS provides that in determining whether the plan passed the ADP or ACP test, the plan may rely on a test performed for the eligible employees who were provided the opportunity to make elective deferrals (or after-tax employee contributions) and to receive an allocation of matching contributions under the plan, and may disregard the employees who were excluded improperly. EPCRS Appendix A,.05(2)(g) and.05(4)(b) 50 EPCRS Appendix A,.05(2). The employer reduces the deemed deferral to the extent necessary to satisfy any plan or statutory limit. For example, if the missed deferral for an age 40 excluded employee for the 2013 plan year is calculated to be $3,000, but during the period the employee actually deferred $16,500, the plan would reduce the deemed missed deferral to $2,000 in order not to exceed the 402(g) limit. The missed deferral opportunity would be one-half of the reduced missed deferral. SunGard, 2013 Page 10

the 3% nonelective contribution the plan otherwise would require. If the plan also has a matching contribution formula that would satisfy the ACP test safe harbor, the employer must make a contribution equal to the match (plus earnings) the employee would be entitled to receive based on the match formula. 51 If the plan uses a safe harbor match, the deemed missed deferral is the participant s compensation times the greater of 3% or the maximum deferral percentage for which the plan provides at least a 100% match. The employer then must make a QNEC equal to 50% of the deemed missed deferral, plus a QNEC equal to the ADP safe harbor match the employee would have received based on the deemed missed deferral. 52 Example #5. Safe harbor nonelective plan. R s 401(k) plan permits employees to elect either Roth or pre-tax deferrals. The plan is a safe harbor plan using the 3% nonelective contribution to satisfy the ADP safe harbor. Earl is excluded improperly for 6 months during 2013, and receives compensation of $5,000 per month for 2013. Earl s excluded compensation is $30,000. Earl s missed deferral is deemed to equal $900 ($30,000 x 3%). To correct the failure, R must contribute a QNEC for Earl equal to $900, the 3% nonelective he is entitled to receive for the period of exclusion, plus a QNEC of $450, 50% of his missed deferral, for a total of $1,350, plus earnings. Example #6. Additional match. Assume in the previous example, the plan also provides a fixed match of 50% of deferrals not exceeding 6% of compensation. R must contribute an additional $450 as corrective nonelective contribution (not a QNEC) for Earl as the match he is entitled to receive based on his deemed deferral of $900. Example #7. Safe harbor match plan. Assume instead that R s safe harbor 401(k) plan uses an enhanced match of 100% of deferrals not exceeding 4% of compensation to satisfy the ADP test, and does not provide any additional match. Earl s missed deferral is $1,200, 4% of his excluded compensation, which is the maximum percentage for which the plan provides at least a 100% match, and is greater than 3%. To correct the failure, R must make a QNEC equal to $600, 50% of the deemed deferral, plus $1,200, the 100% match on his deemed deferral, for a total of $1,800, plus earnings. Example #8. Stacked match. Assume again that the plan also provides a fixed match of 50% of deferrals not exceeding 6% of compensation. Because of the additional match formula, Earl also would receive a corrective nonelective contribution for an additional match of $600, based on his deemed deferral of $1,200. The corrective nonelective contribution need not be a QNEC. 5.4 Improperly excluded employee: safe harbor QACA 401(k) plan correction. If a qualified automatic contribution arrangement ( QACA ) safe harbor 401(k) plan improperly excludes an eligible employee, the missed deferral depends on the plan s automatic escalation and the participant s years of participation. For improper exclusions that occur within the first year the participant should have been permitted to defer, the 51 Although EPCRS is less than clear on this point, it appears that the correction of the additional match could be in the form of a corrective nonelective contribution, which could have a vesting schedule. 52 These percentages are mandatory. EPCRS does not authorize a safe harbor plan to use the lesser of these percentages or the ADP for the excluded employee s group. SunGard, 2013 Page 11

missed deferral is 3% of compensation. For years after the first, the missed deferral opportunity is the automatic enrollment deferral percentage in effect for the year of improper exclusion. 53 Plus, where applicable, the employer must make a contribution equal to the QACA safe harbor contribution the employee would have received based on the deemed missed deferral. It is less than clear whether this contribution must be a QNEC, or can be a corrective nonelective contribution. 5.5 403(b) universal availability correction. If a nonexcludible employee 54 was not provided the opportunity to make elective deferrals to a 403(b) plan, the employer must correct under procedures similar to a safe harbor 401(k) plan. The missed deferral is the greater of 3% or the maximum deferral percentage for which the plan provides at least a 100% match. 55 Plus, where applicable, the employer must make corrective nonelective contribution equal to the match the employee would have received based on the full missed deferral. The corrective nonelective contribution need not be a QNEC. 5.6 Failure to implement an employee election. EPCRS specifics a correction method for the failure to implement an employee s deferral election. 56 The correction method is similar to the correction for improper exclusion of an eligible employee, and applies whether the employee elected to make pre-tax or Roth deferrals. 57 The employer determines the missed deferral 58 by multiplying the employee s elected deferral percentage by the employee s compensation. If the employee elected a dollar amount of 53 EPCRS, Appendix A,.05(2)(d)(ii). 54 For purposes of applying the universal availability requirement, the plan may exclude certain categories of employees. The excludible categories are: (1) employees with an effective opportunity to defer to the employer s eligible governmental 457(b) plan of the employer; (2) employees with an effective opportunity to defer under a 401(k) plan or another 403(b) plan of the employer; (3) nonresident aliens without any U.S. source income (described in Code 410(b)(3)(C)); (4) students performing services described in Code 3121(b)(10); and (5) employees who normally work fewer than 20 hours per week. With regard to categories (4) and (5), if any employee in a category has the right to defer, the plan may not exclude any employee in that category. Treas. Reg. 1.403(b)- 5(b)(4). All other employees must be permitted to defer into a 403(b) plan. 55 EPCRS, Appendix A,.05(6) and Appendix B 2.02. 56 EPCRS Appendix A,.05(5)(a). The same correction methodology applies to correct a failure to implement an employee s after-tax employee contribution election, except that as in the case of correcting an improper exclusion of an employee from making after-tax employee contributions, the missed opportunity for after-tax employee contributions, for which the employer must make a QNEC, is equal to 40% (not 50%) of the employee s missed after-tax contributions. EPCRS Appendix A,.05(5)(b). 57 EPCRS Appendix B, 2.02(1)(i) makes clear that the correction of failure to implement an employee s deferral election described in Appendix A,.05(5), includes the failure to implement a Roth deferral election. Although EPCRS provides the same correction method for either a pre-tax only 401(k) plan or a Roth 401(k) plan, the IRS requests comments regarding possible alternative correction methods for Roth 401(k) plan failures. EPCRS 2.02(3). For example, if a plan failed to implement an employee s election to make Roth deferrals, but instead made pre-tax deferrals for the employee and reduced the employee s compensation accordingly, would an appropriate correction be for the employer to ask the employee whether the employer should correct by transferring the deferrals (with earnings) to a Roth account, with income inclusion of the transferred amount in the employee s compensation in the year of the transfer (rather than the year of the failure)? It is certain that EPCRS will continue to evolve as the IRS further considers Roth deferral issues. Note, however, that recent legislation provides a straight-forward method to address this issue. If the plan permits in-plan Roth transfers, the participant can convert the corrective contributions into Roth by including the contributions in income in the year of conversion. 58 Note that the correction here is based on the missed deferral, rather than a deemed missed deferral, since the employee actually made a deferral election, so that the missed deferral is a known amount. SunGard, 2013 Page 12

deferral, the missed deferral would be the specified dollar amount. 59 In addition, if the employee would have been entitled to a matching contribution based on the missed deferral, the employer must contribute a corrective nonelective contribution for the affected employee equal to the matching contribution the employee would have received based on the missed deferral. 60 Example #9. Employee s pre-tax deferral election. X s 401(k) plan permits employees to elect either Roth or pre-tax deferrals. Mark, an NHCE, entered the plan on July 1, 2013. For 2013, Mark earned $4,000 per month, and elected to defer 5% of his compensation ($200 per month). Due to an administrative oversight, X failed to implement Mark s election during 2013. Mark s missed deferral is $1,200 ($200 per month times 6 months). To correct the failure, X must contribute to the plan a QNEC for Mark in the amount of $600 ($1,200 x 50%), plus earnings. Example #10. Employee s Roth deferral election. Assume in the previous example that Mark had elected to make Roth deferrals. The correction is exactly the same as in the previous example. Notice that the QNEC is automatically a pre-tax contribution. If the plan permits in-plan Roth transfers, Mark can convert the QNEC to Roth by including the $1,200, plus earnings, in income. Example #11. Make-up match. Assume in the previous two examples the plan provides a match of 100% of deferrals not exceeding 4% of compensation. Since the failure to implement Mark s deferral election also caused him not to receive a match, X must correct the match failure. The corrective contribution by X is in the amount Mark would be entitled to receive as a match based on his missed deferral amount. Based on the plan s match formula applied to his missed deferrals of 5% of compensation, Mark would be entitled to a 100% match on his missed deferrals not exceeding 4% of his compensation (not 100% of missed deferral opportunity of 50% of the missed deferrals). Therefore, X must contribute a corrective nonelective contribution for Mark in the amount of $960 ($24,000 x 4%, since Mark deferred at least that amount), plus earnings. Again, the result is the same whether Mark elected pre-tax or Roth deferrals. 6 Excess Amounts and Overpayments 6.1 Excess amounts in general. EPCRS provides for correction of excess amounts, generally defined as a contribution or allocation made on behalf of a participant in excess of the maximum amount permitted to be contributed or allocated under the plan, or that exceeds a statutory or regulatory limitation. 61 However, the procedure distinguishes between excess amounts for which the Code or regulations provide a corrective mechanism (such as excess deferrals, excess contributions and excess aggregate contributions), and Excess Allocations, for which there is not such a statutory or 59 As in the case of correction of an improperly excluded employee, the employer reduces the deemed deferral to the extent necessary to satisfy any plan or statutory limit. 60 EPCRS Appendix A,.05(5)(c). 61 EPCRS 5.01(3). SunGard, 2013 Page 13

regulatory corrective mechanism, (such as excess annual additions under Code 415). 62 EPCRS provides specific rules for correcting Excess Allocations. 63 This section 6 discusses corrections prescribed for certain Excess Allocations, and then discusses corrections for overpayment failures. 6.2 Excess annual additions: employer contributions and forfeitures. The EPCRS rules for correcting Excess Allocations will apply to the correction of excess annual additions. (The rules apply equally to correction of other types of Excess Allocations, such as an allocation based on compensation exceeding the statutory compensation limit. 64 ) The method for correcting excess annual additions which are employer contributions or forfeitures is as follows: 65 (1) reduce the participant s account by the excess amount (adjusted for earnings); (2) if the excess amount would have been allocated to other participants in the year of the failure had the failure not occurred, reallocate the amount (adjusted for earnings) to those participants in accordance with the plan s allocation formula; (3) if the excess amount would not have been allocated to other participants had the failure not occurred, place the amount (adjusted for earnings) in a separate unallocated account established to hold excess amounts, adjusted for earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or in succeeding years. While any amount remains in the unallocated account, the employer may not make contributions to the plan other than elective deferrals. 66 If the Excess Allocations result from deferrals or after-tax employee contributions, the correction is to distribute the excess deferral or contribution to the participant. 67 Example #12. Reallocated excess amount. Assume the 2013 415 limit is $51,000. Bob is a participant in the X profit sharing plan. Bob receives a $51,000 allocation of X s profit sharing contribution for 2013. During February 2014, the plan allocates a 2013 forfeiture amount of $6,000 to Bob s account. In October 2014, the plan administrator discovers the 2013 excess annual addition of $6,000. To correct the error, the plan 62 EPCRS 5.01(3)(b). 63 EPCRS 6.06(2). 64 Code 401(a)(17). See EPCRS 5.01(3)(a). 65 EPCRS 6.06(2). The correction method described in this paragraph applies for limitation years beginning on or after January 1, 2009. Presumably, this means for excess annual additions that arise (and not for corrections that occur) in limitation years beginning on or after January 1, 2009. For limitation years beginning before January 1, 2009, the permitted correction method for excess annual additions (other than elective deferrals and after-tax employee contributions) is to place the excess amounts in an unallocated account, similar to the suspense account described in Treas. Reg. 1.415-6(b)(6)(iii) prior to the 2007 final 415 regulations (but without regard to whether the excess resulted from an allocation of forfeitures or a reasonable error in estimating compensation), to be used as an employer contribution (other than elective deferrals) in the succeeding year(s). 66 How does the employer decide whether to allocate the excess amounts in the current plan year or in the succeeding plan year? The limiting factor appears to be the rule stated in this sentence of text. If the employer discovers the failure during a plan year and immediately corrects, and if the employer must or wishes to make any other contribution for the year, the no contributions rule would seem to require the employer to use the unallocated account in the current year before any other employer contribution is permissible. On the other hand, if the employer discovers the error after the employer has made a contribution for the plan year and does not need or wish to make any additional contribution for the year, or the employer decides not to make a contribution for the plan year, then the employer either could direct the trustee either to allocate the unallocated account for the current year, or to hold the unallocated account for allocation in a succeeding year. 67 EPCRS 6.06(2). See 6.3, below. SunGard, 2013 Page 14