Large Plan or Small Plan?

[Guest Amy Harle]

I'm pretty sure I know the answer to this one, but wanted to see if anyone can back me up...

First plan year for a 401(k) PS Plan - they have 118 eligible ee's at the beginning of the Plan Year. Can we get away with doing a Schedule I?

[jaemmons]

Were all 118 eligible participants at the BOY? If so, I would say yes you can, but it should be expected that the participant count will go above 120. If I ever take on a plan with over 100 eligibles, I just have the employer file as a large plan to help them budget for the audit expense (assuming they are paying for it and the plan is not).

[2muchstress]

The instructions to the 5500 Schedule H are below. The schedule H must be filed for your plan w/ 118 participants in the first plan year because the 5500 was not filed in the prior year. The 80/120 rule only applies to existing plans.

If the number of participants is between 80 and 120 and a Form 5500 was filed for the prior plan year, the employer may elect to complete the current year Form 5500 in the same category (large plan or small plan) as was filed for the prior year Form 5500. This rule appears to create an anomaly if the number of plan participants increases from below 100 in year 1 to between 100 and 120 in year 2 and subsequent years. For example, a qualified retirement plan with 95 participants in year 1 files as a small plan filer; and, in year 2, if the plan has 105 participants, it may again file as a small plan filer. Each year thereafter, if the plan has between 100 and 120 participants, the plan may file as a small plan filer for each such year. [DOL Reg § 2520.103-1(d); 2001 Instructions for Form 5500]

[2muchstress]

On this same topic: I am looking for a citation that states when a plan must be audited. I have found many citations regarding the 80/120 rule and which schedule to file, but nothing that states that a large plan must be audited. Could sure use some help.

Thanks.

[Guest Amy Harle]

This is from the Pension Answer Book (2002) Q.20:17

"Must a plan engage an independent accountant when it files its Form 5500 series return/report?

If a plan is a large plan filer (see Q 20:2), a certified public accountant or licensed public accountant (or an individual certified by DOL) must, in most cases, conduct an audit of the plan’s books and records and issue an opinion, which is to be included in the annual report, covering:

1. The financial statements and schedules covered by the annual report;

2. The accounting principles and practices reflected in the report;

3. The consistency of the application of those principles and practices; and

4. Any changes in accounting principles having a material effect on the financial statements.

[ERISA §§ 103(a)(3), 109(B); DOL Reg § 2520.103-1(B)(5)]

If a plan is a small plan filer (see Q 20:2), an accountant’s audit and opinion are not required. [DOL Reg § 2520.104-46] A tax-sheltered annuity (TSA) that is subject to Title I of ERISA (see Q 35:51) is not required to include an accountant’s opinion with its Form 5500. [DOL Info Ltr (Nov 15, 1996)]"

I see that it says "in most cases" but then doesn't go into detail on what the exception may be...

[2muchstress]

Keeping this train of thought, I have a plan that has always filed as a small plan. We have scrutinized every employee and have come up with a count of 120 at the beginning of the year. The 80/120 rule reads "between 80 and 120". Would you interpret the "between" to include 120?

I would probably encourage them to have the audit under normal circumstances, but they recently liquidated part of the business and will never be close to having this many participants again. So the chances of becoming a large plan in the future are very very slim.

[Guest Amy Harle]

I would think, given the circumstances, that you are fine to file as a small plan.

In any case, however, I read the instructions as up to/including 120 participants.

[JohnCheek]

2much:

The 2001 instructions on page 7 says "between 80 and 120" , but goes on to give an example, "if the number on line 6 is 100 to 120."

The instructions to Schedule H say "fewer than 120."

The AICPA audit guide says "between 80 and 120 (inclusive)."

Seems any amount up to and including 120 would qualify.