The IRS Issued My Plan a 90-Day Pre-Examination Letter. Now What?

The IRS launched a new pilot program this month that will greatly benefit employee benefit plan sponsors if they act quickly. The new 90-day Pre-Examination Compliance Pilot Program not only gives plan sponsors an opportunity to correct plan errors prior to an IRS examination, but may reduce sanctions levied by the IRS or reduce the scope of an IRS examination. However, this program is only beneficial if you are aware of the program and are able to respond within a 90-day window.

Prior to the June announcement, plan sponsors that received a notice of an upcoming IRS Examination would be cut-off from correcting plan errors through the EPCRS self-correction program (“SCP”) or submitting a new application through the EPCRS voluntary correction program (“VCP”). The only remaining available correction option is the EPCRS Audit Closing Agreement Program (“Audit CAP”). The Audit CAP permits plan sponsor to enter into a closing agreement with the IRS regarding plan failure instead of facing plan disqualification, but this came with an unpredictable Audit CAP sanction. The IRS bases Audit CAP sanctions on the relevant facts and circumstances, such as the number and type of employees affected by the failure, the period of time over which the failure occurred, the reason for the failure, etc., but penalties were often significant.

The new pilot program gives plan sponsors several benefits. Plan sponsors now have a 90-day window to review their plan’s document and operations if it receives a letter that their retirement plan was selected for an upcoming examination. Any errors discovered on review can still be corrected through SCP if corrected in the 90-day window. If the error cannot be corrected through SCP, the plan sponsor can request a closing agreement. Instead of the uncertain Audit CAP penalty, the VCP fee structure will be used to determine the sanction amount (based on the plan’s size and capped at a max of $3,500).

Plan Sponsors that correct through the pilot program must respond to the pre-examination letter with the required documentation to support the correction. The IRS will review the correction, and either issue a closing letter or conduct either a limited or full scope examination. The IRS has not disclosed their procedures on determining when a closing letter or examination will be issued after corrections, but any chance at receiving a pass on a full scope examination is a chance to save the plan sponsor time and money.

The benefits of the pilot program are great for plan sponsors, but only if they act quickly. If you receive the 90-day pre-examination letter, you should contact any of our employee benefits attorneys to begin a review of your plan document and operations. We have a wealth of knowledge and experience when it comes to IRS audits. We know the common qualification errors that are turned up in an IRS examination, so we can assist you with discovering any potential errors and resolving these errors prior to the close of the 90-day window.

We also provide this service even if you don’t receive a letter.  An error is almost always less costly the earlier it is discovered, so please reach out if you would like us to proactively due a compliance check-up of your plan.  While large plans are subject to an annual independent audit of their financials, the audit is on the financials and not intended to pick up all operational errors.

The pilot program does not have a stated end date, but the IRS will review the effectiveness of the program and determine if it will continue permanently as part of its overall compliance strategy. If you have any questions regarding plan corrections, please contact any Graydon’s employee benefits attorneys.

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