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Pre-Examination Retirement Plan Compliance Program Is Tested by the IRS

IRS Employee Plans announced a “pre-examination retirement plan compliance program” (Pre-Examination Program) experiment starting in June 2022 in its employee plans newsletter from June 3, 2022.

By the program, the Pre-Examination Program notification letter gives the plan sponsor a 90-day window to carry out a self-examination of one or more targeted aspects of the plan’s documentation and administration to identify and correct any failures and report the results of the self-examination to the IRS.

This is done in place of immediately starting a retirement plan audit.

The IRS may do one of three things according to how it views the plan sponsor’s report:

Decide that no more action is required and send a letter terminating the audit without further interaction.

Enter into a closure agreement that addresses any mistakes found during the self-examination that cannot be fixed on your own.

Open a limited or full-scope audit if the IRS decides that a more thorough examination of the retirement plan is required.

If the plan sponsor doesn’t reply to the Pre-Examination Program notification within the allotted 90 days, the IRS will schedule the plan for an audit.

Observation: Although there are few details in the introduction of the pilot Pre-Examination Initiative, it is obvious that the program will give plan sponsors a useful chance to perhaps avoid the time-consuming—and frequently expensive—the process of a full-scope retirement plan audit.

A plan sponsor should get in touch with knowledgeable legal counsel right away and start working on the self-examination after receiving a Pre-Examination Program notice from the IRS.

Any chance to potentially close the audit on accelerated terms will be lost if a plan sponsor doesn’t reply to a Pre-Examination Program letter within the allotted 90 days.
prevailing practice

Normally, the IRS chooses a retirement plan for inspection, starts the audit right once, and the plan sponsor has no chance to stop the audit or restrict its scope. Instead, the IRS normally issues a lengthy document production request.


Additionally, a plan sponsor’s capacity to find and proactively repair problems on advantageous terms is severely constrained once they receive the audit notification from the IRS.

That is, the Employee Plans Compliance Resolution System (EPCRS), the IRS’s correction program for tax-qualified retirement plans, states that once a plan sponsor receives notice from the IRS that the plan will be audited, they may only use the Self Correction Program (SCP) component of EPCRS to “substantially complete” or “self-correct” significant operational failures.

Additionally, plan sponsors are prohibited from using the EPCRS’s Voluntary Correction Program (VCP) to voluntarily repair errors that aren’t otherwise qualified for SCP.

Because of this, operational and plan document deficiencies that are either discovered but not yet repaired under EPCRS or discovered during the audit frequently can only be fixed under the Audit Closing Agreement Program (Audit CAP) component of EPCRS.

Additionally, due to possible additional penalties from the IRS, fixes under Audit CAP might be much more expensive (over and above the cost of effecting any correction).
Pilot Project Process

However, the IRS is giving plan sponsors the chance to self-identify and address issues on more benevolent terms through its experimental Pre-Examination Program:

Complete Use of SCP to Fix Eligible Errors According to the Pre-Examination Program, plan sponsors are permitted to make full use of SCP to self-correct any eligible failures discovered during the 90-day self-examination window (including any significant failures that occurred during the SCP correction period, even if correction is not “substantially completed”).

The plan sponsor is required to submit paperwork to the IRS outlining the shortcomings found during the self-examination and the actions taken to address those shortcomings.

Observation: According to the IRS newsletter and the initial Pre-Examination Program letters we have seen, the IRS anticipates that any identified deficiencies will be fully corrected within the 90-day window. Furthermore, according to the Pre-Examination Program letters, any self-correction must adhere to “the corrective standards specified in [EPCRS].”

Nevertheless, depending on the severity or kind of any faults detected, complete operational failure rectification may be difficult or impossible (for example, corrections that require locating former participants, participant elections, etc.).

It is also unclear whether the IRS would accept notice of the deficiencies and the plan sponsor’s anticipated method of correction in certain circumstances without requiring full correction within the allotted 90 days.

It is possible that a failure won’t qualify for SCP if a self-correction isn’t finished within the allotted 90 days and will instead be resolved through a closing agreement under the Pre-Examination Program (as discussed below concerning failures that cannot be corrected through SCP).

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Plan sponsors may request a closing agreement from the IRS for any operational or plan document failures discovered during the 90-day self-examination window that are ineligible for SCP, and the Pre-Examination Program further stipulates that the sanctions under the closing agreement will be based on the user fees applicable under VCP.

According to the VCP, plan sponsors can apply to the IRS for review and approval of the actions they took to address operational failures.

The applicable user fees are scaled based on the asset size of the affected plan, with the highest user fee currently set at $3,500 for a plan with more than $10 million in assets (see EPCRS user fee schedule).

The IRS may impose consequences to address errors under Audit CAP, but they are often much less severe than these small and regulated user costs.

Similar to the SCP repairs mentioned above, the plan sponsor must submit evidence to the IRS outlining the deficiencies and the correction.

Observation: Because of this, a plan sponsor who is working to fix operational issues or prepare a VCP at the time the plan sponsor is notified of the examination may find the Pre-Examination Program to be of special help (as the plan sponsor otherwise would then be unable to file the VCP submission).

The plan sponsor would be able to ask for a closing agreement in connection with the VCP submission that is currently in process under the Pre-Examination Program.

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