One Participant plan - participant count?

[Guest Emiman]

Need some assistance. We have a situation where a sole proprietor setup a 401(k) plan for herself. During 2003 she hired 2 part-time employees, (one quit during the year, the other was hired in fall and still with the company as of 12/31/2003) in which the position will never exceed 500 hours per year. This position will never be eligible for 401(k) deferrals due to the requirements the owner has placed on the plan.

Does the plan still fall under the "One-Participant" plan exemption? Or by having one employee on the books who is not a spouse or an owner force the plan into filing a regular 5500? The definitions given on the 5500 for "Participant" include, Active, Retired or separated receiving benefits, Other retired or separated or Deceased individuals with beneficiaries receiving benefits. None of these definitions fit the case of an employee who will never become eligible. If the instructions stated "Employee count" vs. "Participant count" I feel it would be justified to file the 5500.

The plan does not have over $100,000 in assets, so this is a question of whether or not a filing is required.

Thank you!

[WDIK]

Line 14 of Form 5500-EZ asks for information about employees other than the individual and the individual's spouse as well as whether or not the plan passes the coverage test.

If no other employee is eligible, Form 5500-EZ may be filed, and if assets are less than $100,000, no filing is required.

Be careful that the other employee(s) are not actually eligible. I would keep careful records of hours worked, etc.

[Guest Emiman]

Great suggestion! Thanks WDIK!

[Lame Duck]

While the filing of the 5500-EZ is not required for plans with less than $100,000, it is still a good idea to file. The three year statute of limitations under IRC 6501 begins with the filing of Schedule P to the 5500. If the Schedule is not filed, the statute of limitations does not begin.

[Guest anonymous coward]

I like to play Devil's Advocate, so bear with me here...

How are the eligibility rules worded as far as service requirements go? You could argue that if it is loosely worded they could still be seen as retaining credited service under the plan (even if very unlikely to actually meet the eligibility requirement). Thus, forcing their inclusion in the count if the 5500 instructions are followed to the letter.

My example,

Eligibilty requires 1000 hours/year to be eligible to defer. Employee only works average of 500/yr. Yes, they will never be eligible if that average is maintained, but those 500 hrs are still a credited service to that employee.

[WDIK]

Credited service to the employer, but not to the plan until they meet the eligibility requirements under the plan. At least in my opinion.

[Guest anonymous coward]

Aha!

In my head, I somehow misplaced that distinction.

Carry on, nothing to see here folks.