What to do if the wrong 5500 is filed without an audit and correct Sch

[pbarrett]

We have a takeover plan. The period ending 12/31/01 should have been audited and the Schedule I versus H should have been prepared etc.. (It closed in the 2000 year with more than 120 participants.)

We're going to break the news it must be audited for 2002. What about the 2001 year? I suppose the proper thing to do would be an amended return. What are the penalties?

I'm thinking this new client will simply want to "roll the dice" and see if IRS ever picks up on it. The are not going to be happy at all about the audit and having to pay for one. It's a 401 k plan with a 2 month eligibility. The have over 200 employees and only 40 actually defer and receive match. The other TPA firm only counted the ones who participated and said all other elected to opt out of the plan. I know they can't do that for acp/adp but I've never had that issue come up on the 5500 count. I'm thinking we have to count everyone who had the opportunity to defer regardless of whether the employer had them sign a form to "opt out". Am I losing it here? Also, if the client "rolls the dice" will my beginning number of participants be a red flag (it will really vary with the closing from last year.)

Help!

[Guest james moyna]

I believe you are correct in that the participant count used to determine if an audit is needed would include eligible participants that declined to defer into the plan.

I work for a national CPA firm, specialize in qualified plan audits, and would be happy to provide you or the client with a proposal to audit the plan.

[jaemmons]

pbarrett,

Did the employees sign timely irrevocable waivers to opt-out of participation in the plan or did they just indicate that they did not want to participate on an enrollment form? Also, does the employer contribute any additional funds besides 401k and m $'s?

If no other contributions are available within the plan, AND a timely irrevocable waiver from plan participation, pursuant to Treas Regulation 1.401(k)-1(g)(4)(ii) and 1.401(m)-1(f)(4)(ii), are not eligible employees and are thus excluded as eligible participants for purposes of 401k and 401m plan participation.

If the participation waivers meet Regulation requirements, you disregard these employees as plan participants for purposes of 5500 and plan purposes.

[pbarrett]

The plan document allows for profit sharing contributions. To date, the employer has only matched the deferrals.

My guess would be waivers (not to participate) would be somewhat informal and could be revoked at any time, but I will certainly find that out. I was under the assumption non-highlys could not opt out at all so thank you for educating me.

The ACP/ADP test fails. It was my understanding I had to leave the "waived participants" in the test. I took them out of the test and they still fail. Refunds may be done tomorrow or they may opt to go with Qnec/Qmac contributions.

I'm getting a headache over this already.

Any additional thoughts or ideas would greatly be appreciated.

Pat

[jaemmons]

Pat,

Most waivers are revocable because they are indicated on an enrollment form. These do not constitute "irrevocable" consent to participate, in the eyes of the IRS, and as such these employees are treated as eligible (assuming they met the plan's eligibility requirements) and counted in with the adp and acp testing.

Assuming the waiver sare revocable, these ee's are counted in determining plan participants, and if participant count is over 120 at the beginning of the plan year (plan sponsor may exercise the 80/120 rule for determining a large plan filing) you may need to go through the DFVC program, as the plan filing may be treated as incomplete and kicked back to the employer and an unfiled 5500, subject to late fees.

[pbarrett]

I'm still working on large versus small plan. I use the Quantech reporting system. The ACP/ADP test reports 128 participants. The 401(a) (26) reports 128 non-excludable as does the 401(A) (4) (number used for Schedule T) The 5500 Count Report (that we use for the 5500) line 7f gives 109.

I am now up against the 80/120 issue. Do I use the 109 # or the 128#???

[Mike Preston]

You use the right number. ;-)

That number is the number of plan participants on the first day of the year. How many is that? FORGET WHAT THE SYSTEM IS TELLING YOU.

[pbarrett]

Gosh, sounds like I pushed you over the edge. Thanks for your help.

[Mike Preston]

Nah, it is just a source of mild amusement to me. Counting seems to be a lost art. (gg)

[Guest RJM]

Mike, "counting" isn't a lost art, "Determining what to count" is the art.

The numbers on lines 6 & 7 in the 5500 may resemble - but ain't always the same as - the numbers in the ADP/ACP or 410b (Schedule T) Tests.

Lines 6&7 could easily be the DOL version of the "Who's on First" routine.

Sadly, though, Line 6 is the determining factor for whether or not a Schedule H or Schedule I is filed.

Pat: For Line 6:

1. Add every Employee eligible for Plan on 1st day of plan year. Include those entering on 1st day of plan year. Do not include those entering after the 1st day. (If a 401k plan and a employee can defer as of 1st day - he/she must be included.)

2. Add every former participant who has a balance on the 1st day of the Plan Year. (Note: It's the former participant count that often kills the Schedule I.)

RJ

[Mike Preston]

RJ, you got my drift. The ADP/ACP tests and the 410(B) tests are almost never the same as the "beginning of year participant counts." The beginning of year counts are much easier. You just use your fingers and count everybody who is employed that is a participant on the first day of the year and then you use your toes and count everybody else that has an account balance.

What I do not subscribe to is the old theory that held you also count those people who had a non-vested account who do not have a break in service as of the first day of the year. I'm not sure when they changed the instructions to eliminate that method, but it was quite a while ago, I think.

There once was a pretty good pension consultant who thought that the proper count for this purpose was the participant count as of the end of the prior year. I've since convinced him that the proper count is the participant count on the first day of the year (that is, add in the people who become a participant on January 1 in the case of a plan with a January 1 entry date).

In essence, I agree with you.