Client's 401k plan is under examination. IRS agent correctly identifies an error previously unknown to the employer; namely due to a problem attributable to the transmission of payroll data, TPA did not count certain non-contributing employees in the ADP and ACP tests. Obviously, this throws the annual testing out of whack.

Does anyone have a sense of how receptive the agent should be/will be to the notion that this is an "insignificant" operational violation that can be corrected via SCP (and, therefore, not subject to any audit CAP sanctions)? Rev. Proc. 2006-27 seems to leave this kind of determination wide open.

I have heard the IRS say that they will allow an SCP to be done even while under exam. I never had it come up, so I don't know how easily they allow it, though.

From Rev Proc 2006-27, Section 8.01, Self-Correction Program:

This section 8 is available for correcting an insignificant Operational Failure even if the plan or Plan Sponsor is Under Examination and even if the Operational Failure is discovered on examination.

Only if you get the IRS agent to agree it's an insiginificant failure. He/She may call it significant.