Form 5500, Audit requirement

[Guest cfspr]

Hoping someone can help!!

If a 401(k) plan is over 120 participants because of record keepers errors is there a mechanism to avoid filing as a large plan and thus avoiding the expense of having the plan audited???

Situation: I'm the employer who sponsors a 401(k) plan. The plan year is the calendar year. The plan record keeping was initially done by "A". "A" got out of the business and 'sold' their responsibilty to "B". "B" was then acquired by "C". We then moved the plan to record keeper "D". Without the following 'errors' the plan has never exceeded 120 participants and thus would still qualify as a small plan and not be required to have an audit of the plan performed.

Record keeper "A" missed distributing a piece of Forfeiture dollars (~$2,200) from 1999. (Forfeitures are allocated to all active participants employed as the last day of the year.) The error was corrected but not distributed until December 28th, 2000. Fifteen (15) individuals who had previously received full distributions from the plan (after termination of employment) ended up with minimal balances ($200 or less) and thus ended up being included in year end head count for 2000, pushing the participant count to 127. (Participant count would have been 112 without the late Forfeiture distribution.) There were no additional entrants on January 1st, 2001 thus 112/127 was the head count at the start of 2001. In 2001 "A" got out of the business and sold their record keeping responsibilities to "B". In 2001 "B" was aquired by "C". The problem was discussed with "C" and "C" adjusted the beginning head count for 2001 on the Form 5500 filing for 2001 and filed as a small plan. Now, at the end of 2001, "C" was instructed via letter and fax to force out 22 participants who had balances less than $5000. "C" forgot to do the force outs and finally processed them in January of 2002 but once again left a head count issue at the close of 2001 - 130 versus the 108 it should have been. There were no additional entrants on January 1st, 2002 thus 108/130 was the head count at the start of 2002. In 2002 we moved record keeping responsibilties to "D" (you're not asking why after all of this, are you?? lol) "D" is now requesting an audit be performed based on the 130 head count at the start of 2002. (Head count at the conclusion of 2002, start of 2003 is 106.) The problem has been discussed with "D" and "D" has agreed to file as a small plan for 2002 with a letter from me, the plan sponsor stating that we will hold them harmless.

I don't mind sending the letter but I sure would feel better if I knew I had a 'leg to stand on' in case of an ERISA audit. Anybody have any case law or something that would support my position of filing as a small plan and not having the plan audited? My actual preference would be to address directly and include a letter of explanation with the 2002 Form 5500 filing but I have been advised that that would surely solve nothing and basically 'force' an ERISA audit. Anybody have thoughts or ideas here????

[goldtpa]

According to the 5500 instructions, if a Sched I was filed for the 2001 plan year, and the number of ee's entered on line 6 of the 2002 Form 5500 is between 100 to 120, then you may elect to complete the 2002 Form 5500 and file a schedule I.

Thus I would look at the 2002 5500 and see if you show less than 120 on line 6. If not, then you would need an audit.

[david rigby]

... and possibly some legal advice.

[Guest PORTE]

If you have over 120 participants at the beginning of the year, then you need an audit. If you feel it is the mistake of the TPA, and they disregarded your instructions, and because of this you are required to have an audit, then I would force them to agree to pay for the audit or take legal action. I think you would rather take a legal action against your TPA(or at least threaten it) than risk having the DOL reject your 5500 because you don't have the proper attachments( An Audit!). Hve you had quotes for the audit? How much are we talking to be safe?

[Guest nls]

What if you filed on an accrual basis and report the distributions to these participants as a liability? Would that bring their balances to 0 and and allow you to Not have to count them in the beginning of year participant count?

[Blinky the 3-eyed Fish]

I don't agree that that would be permissible.

[E as in ERISA]

Even ignoring the participant level reporting issues, you don't report benefit distributions from a retirement plan as liabilities unless they have been approved and processed for payment as of year end (i.e., you've done everything short of mailing out the payments as of year end).