Active Participant count in a terminated plan

[buckaroo]

I have a 401(k) plan that (during 2004) has adopted a resolution to terminate. I have a number of employees who were eligible for the plan (prior to the resolution) and made no 401(k) deferrals and have no account balances. They are still actively employed. The question is: Should they be included in the participant count in question number 7 on the Form 5500 or can they be considered as having received a distribution (deemed distribution) and removed from the counts? I know that they should be included in the count for question 6.

Any referral or cite would be a great help.

[Bird]

Interesting question; I'm not sure it matters. It boils down to when they are deemed to be distributed, and I would, or could, argue that that occurs at the point of plan termination. Otherwise, going forward in time, I don't see any other definitive point at which to declare them non-participants, except for the time that the very last person with a balance is paid out, and that seems arbitrary.

[Guest moltengater]

Question: 5500 line 6 - A 401(k) plan with a 10-31-2005 plan year end is terminated as of 10-31-2005 - final payouts occurred in November 2005.

How do you detemine the count for line 6 in the plan year that starts on 11-01-2005? The plan was audited in the 2004 plan year but only because there were a large number of 401(k) participants who did not contribute.

If the plan is terminated on 10-31-2005 - those employees who were eligible to contriute but chose not to - may no longer contribute and have no balance in the plan. Are they still considered participants as of 11-01-2005 for line 6 purposes for the new plan year - thus triggering an audit. Are they NOT counted on 11-01-05 becuase they are no longer elgible to accrue a benefit?

[WDIK]

It boils down to when they are deemed to be distributed.

I would recommend reviewing the plan document for language regarding deemed distributions.

[KateSmithPA]

Returning to a question posted in 2005.

Employer terminates plan effective 12/31/2006. On the 2006 Form 5500, final participant count is 114; 66 active, 48 termed wtih a balance. However, there are only 79 account balances at 12/31/2006.

Would my beginning participant count for 2007 be 114, or 79? I know that my ending count will be zero active and 6 terms with a balance. If the employees remaining on 12/31/2007 are not considered active, why would they be active on 1/1/2007? That is, the ones without account balances?

Thank you.

[Guest Robin.Wolf]

I run into this situation often in terminated plans which are awaiting IRS determination letters. Traditionally I have always reported participants as active in a terminated plan as long as 1) they had entered the Plan prior to its termination and 2) remain employed. (This assumes that they have not been paid out.) I base this on the 5500 Preparer's Manual which says:

"LINE 7a

Active participants include all those currently in employment covered by the plan or earning or retaining credited service under the plan. This category includes:

l Employees who are eligible to be in the plan even if they have no account balance because the employer has not made a contribution for plan years in which the employees were eligible;

l Employees who are eligible to make salary deferrals under a Section 401(k) qualified cash or deferred arrangement;

l Employees who are eligible to participate in the plan but choose not to participate.

This category does not include:

l Employees who are participants only with regard to rollover contributions and who are not otherwise eligible under the plan.

l Retired or separated former participants.

l Any alternate payees entitled to benefits under a qualified domestic relations order (QDRO)."

I am assuming that these participants are "retaining credited service under the Plan." They are not retired or separated, so there isn't really any other plan to put them, and I am sure it would be a red flag to have a Plan that reports more participants on line 7g than on 7f.

[KateSmithPA]

I appreciate the response, and tend to agree with you with just one additional question;

how could these employees be covered by the plan when the plan has been terminated? How could you ever stop counting them?

[JanetM]

Distribute the assets until count is zero and file final 5500.

[KateSmithPA]

That is certainly true, but not my point. What if the plan did not distribute all assets within 12 months which, although it should not happen, has certainly been known to happen. Do all employees of the employer who were eligible on 12/31/2006 stay eligible as of 1/1/2008? I do not think so. In fact, I do not think they would be listed as active as of 12/31/2007. So, I guess I am just wondering what changes between 1/1/2007 and 12/31/2007?

I imagine I am beating a dead horse, I just don't know why they meet the definition of an active participant on 1/1/2007.

[JanetM]

I would list 0 active and those with account balances as deferred. If the plan is terminated and simply in state of being paid out, you have no one in state of active participation.