If reply is available on IRS letter, I'd reply with copy of filed 5558 with the notation from the 5558:"The application is automatically approved to the date in line 2 blah, blah, blah." We comply. Fix your system.
If you are a member of ASPPA, you may want to let them know. They're right on in championing the underdog.
As I understand it, if you are at or below 120, you can file the way you filed the previous year ... which in your case, means your future threshold is again 120.
see page 7:
http://www.dol.gov/ebsa/pdf/2012-5500inst.pdf