cpc0506

Splitting Plans to avoid audit

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We are in the process of splitting a plan into 2 plans so that there is no longer an audit.

The intent is that the effective date of the new plan and the amendment to the old plan (removing some employees) is 1/1/19.

We know that audits are determined based on the number of eligible employees in the plan at the beginning of the plan year.  So if count on 2018 Form 5500 at end of year is 130 and on 1/1/19, 60 of these participants are now participants of plan 002 and no longer participants of plan 001, am I correct that as of 1/1/19 the counts in both plans are now less than 100 and no audit is required? 

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It is based on the number of participants at the beginning of the plan year (which is broader than "eligible employees").

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Not sure what you mean?  I know that participants include eligible and those terminated/beneficiaries with balances.  My counts are still accurate in my breakdown.

What I am concern about is what the true count of Plan 001 would be and that it falls below the 100 threshold, as it was an audited plan in 2018 and needs to go below 100 to avoid audit for 2019.

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A colleague of mine had a plan that was under IRS audit a number of years ago. The IRS agent insisted that the BOY count on the 5500 should be equal to the prior year 5500 EOY, regardless of any new entrants/class exclusions that were effective on the first day of the year.

This "rule" is not in writing anywhere so maybe you can take your chances and use a different BOY count from the prior EOY.

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2 minutes ago, C. B. Zeller said:

A colleague of mine had a plan that was under IRS audit a number of years ago. The IRS agent insisted that the BOY count on the 5500 should be equal to the prior year 5500 EOY, regardless of any new entrants/class exclusions that were effective on the first day of the year.

This "rule" is not in writing anywhere so maybe you can take your chances and use a different BOY count from the prior EOY.

I have had this argument with the IRS as well, but I have always prevailed after insisting that the BOY has to be established on its own merits, and that unless they can show me a rule or reg saying otherwise, I would like to get it reviewed by someone higher up than the person I am dealing with.

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43 minutes ago, cpc0506 said:

We are in the process of splitting a plan into 2 plans so that there is no longer an audit.

The intent is that the effective date of the new plan and the amendment to the old plan (removing some employees) is 1/1/19.

We know that audits are determined based on the number of eligible employees in the plan at the beginning of the plan year.  So if count on 2018 Form 5500 at end of year is 130 and on 1/1/19, 60 of these participants are now participants of plan 002 and no longer participants of plan 001, am I correct that as of 1/1/19 the counts in both plans are now less than 100 and no audit is required? 

Here is my issue for 2019:

You have 130 participant in the plan as of 12/31/2018. As of 1/1/2019, 60 of them are no longer eligible for 001, but are eligible for 002. How many account balances do you have on 1/1/2019 for 001?  Lets assume that all 130 have an account balance.  Do the 60 participants who are now no longer eligible for 001 still have their account balance in 001 as of 01/01/2019?  If so, they are still a participants in 001, and participant AND active participant in 002.  Audit would still be required for 2019.

If you have participants without a balance, you could end up with less than 100 in 001 as of 1/1/2019.

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14 minutes ago, RatherBeGolfing said:

Here is my issue for 2019:

You have 130 participant in the plan as of 12/31/2018. As of 1/1/2019, 60 of them are no longer eligible for 001, but are eligible for 002. How many account balances do you have on 1/1/2019 for 001?  Lets assume that all 130 have an account balance.  Do the 60 participants who are now no longer eligible for 001 still have their account balance in 001 as of 01/01/2019?  If so, they are still a participants in 001, and participant AND active participant in 002.  Audit would still be required for 2019.

If you have participants without a balance, you could end up with less than 100 in 001 as of 1/1/2019.

To resolve that issue, draft the split effective December 31, 2018 along with the transfer agreement.  Effective at that time, those balances will become assets of the new plan (that are merely housed in plan 001 until transferred).  You can actually, then, reflect that appropriate portion of the year end balances on the Form 5500 as a transfer out of plan 001 and a transfer in to plan 002.

Good Luck!

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35 minutes ago, ETA Consulting LLC said:

To resolve that issue, draft the split effective December 31, 2018 along with the transfer agreement.  Effective at that time, those balances will become assets of the new plan (that are merely housed in plan 001 until transferred).  You can actually, then, reflect that appropriate portion of the year end balances on the Form 5500 as a transfer out of plan 001 and a transfer in to plan 002.

Good Luck!

Thanks ETA!

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52 minutes ago, ETA Consulting LLC said:

To resolve that issue, draft the split effective December 31, 2018 along with the transfer agreement.  Effective at that time, those balances will become assets of the new plan (that are merely housed in plan 001 until transferred).  You can actually, then, reflect that appropriate portion of the year end balances on the Form 5500 as a transfer out of plan 001 and a transfer in to plan 002.

Good Luck!

Would you have responded differently if the original plan in question is a safe harbor plan and the newly established spin off is only effective for 1 day?

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We recently had a similar situation.  Called DOL/EBSA to get their opinion.  Using your example, with a spinoff effective date of 1/1/19, they said that 001 had ALL participants and related assets at the beginning of 1/1/19.  The spinoff then occurs *in* 1/1/19, when assets and participants are spun off.  So your 1/1/19 count for 001 is 130, and needs an audit.

As ETA said, if the effective date of the spinoff was 12/31/18, you would not have this issue on 1/1/19 since the 002 participants and assets would have left 001 by 12/31/18 and will not be there in 001 on 1/1/19.

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4 hours ago, RatherBeGolfing said:

I have had this argument with the IRS as well, but I have always prevailed after insisting that the BOY has to be established on its own merits, and that unless they can show me a rule or reg saying otherwise, I would like to get it reviewed by someone higher up than the person I am dealing with.

I agree with this analysis.  However, if you are really concerned (of if the auditors for the company do not agree), make the amendment effective 12/31/18.  You count as of 12/31 is everybody.  Your count on 1/1 doesn't include the ones kicked out on 12/31/18 at midnight of that day.  Not my preferred way of doing it, but if you have that concern......

 

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Oh my God make this effective 12/31/18.  Someone botched that one in my opinion, and you have 3 days to fix it, can I get a "Hallelujah!"  A day makes all the difference in the world in one sense (by eliminating even a shadow of doubt), and no difference at all in another sense (because really what practical/logistical difference does it make?).

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On 12/28/2018 at 8:14 PM, austin3515 said:

can I get a "Hallelujah!"  

Hallelujah!

 

I'll throw in an entire Hallelujah Chorus!!!!!

 

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The times we've done it, the split was effective 12/31 and the original plan's end of year participant counts on Form 5500-SF reflected the counts after the split.  The new plan was effective 12/31 and we prepared a 5500-SF for the new plan's one day initial year.  I don't know if the IRS/DOL views a drop in the participant count between 12/31 and 1/1 as an audit flag, but it would sure look strange to me.  Besides, it only takes a few minutes to do the 5500-SF for the one day. We also make sure the assets are split by 12/31 so the DOL can't claim that a single asset account on 1/1 means a single plan on 1/1. 

 

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