diff --git a/compiler/frontend/src/org/jetbrains/kotlin/resolve/VarianceChecker.kt b/compiler/frontend/src/org/jetbrains/kotlin/resolve/VarianceChecker.kt
index 8472e86a8ad..215496fe1ea 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/resolve/VarianceChecker.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/resolve/VarianceChecker.kt
@@ -66,13 +66,19 @@ class VarianceCheckerCore(
             if (!checkClassHeader(klass)) return false
         }
         for (member in klass.declarations + klass.getPrimaryConstructorParameters()) {
-            member as? KtCallableDeclaration ?: continue
             val descriptor = when (member) {
                 is KtParameter -> context.get(BindingContext.PRIMARY_CONSTRUCTOR_PARAMETER, member)
-                is KtCallableDeclaration -> context.get(BindingContext.DECLARATION_TO_DESCRIPTOR, member)
+                is KtDeclaration -> context.get(BindingContext.DECLARATION_TO_DESCRIPTOR, member)
                 else -> null
-            } as? CallableMemberDescriptor ?: continue
-            if (!checkMember(member, descriptor)) return false
+            } as? MemberDescriptor ?: continue
+            when (member) {
+                is KtClassOrObject -> {
+                    if (!checkClassOrObject(member)) return false
+                }
+                is KtCallableDeclaration -> {
+                    if (descriptor is CallableMemberDescriptor && !checkMember(member, descriptor)) return false
+                }
+            }
         }
         return true
     }
@@ -103,7 +109,7 @@ class VarianceCheckerCore(
             Visibilities.isPrivate(descriptor.visibility) || checkCallableDeclaration(context, member, descriptor)
 
     private fun TypeParameterDescriptor.varianceWithManual() =
-            if (manualVariance != null && this == manualVariance.descriptor) manualVariance.variance else variance
+            if (manualVariance != null && this.original == manualVariance.descriptor) manualVariance.variance else variance
 
     fun recordPrivateToThisIfNeeded(descriptor: CallableMemberDescriptor) {
         if (isIrrelevant(descriptor) || descriptor.visibility != Visibilities.PRIVATE) return
diff --git a/idea/testData/inspections/addVarianceModifier/innerClass.kt b/idea/testData/inspections/addVarianceModifier/innerClass.kt
new file mode 100644
index 00000000000..95787bb3cde
--- /dev/null
+++ b/idea/testData/inspections/addVarianceModifier/innerClass.kt
@@ -0,0 +1,16 @@
+
+abstract class TestOut<T> {
+    abstract fun test(): T
+
+    abstract inner class InnerTest {
+        abstract fun innerTest(test: T)
+    }
+}
+
+abstract class TestIn<T> {
+    abstract fun test(test: T)
+
+    abstract inner class InnerTest {
+        abstract fun innerTest(): T
+    }
+}
\ No newline at end of file