Form 5500

[msmith]

If a Plan is reaching the 120 participant threshold, what do you think about the Employer adopting a new Plan to avoid the large plan audit? If possible, are there any unreasonable eligibility classifications to stay away from?

[Andy the Actuary]

Create a balance sheet. On the debit (asset side), put "cost of audit." On the credit (liability side), put 401(a)(4), 401(a)(26), 410(b), possible actuary's fees, attorney's fees, administrators fees, employee communication, confusion, miscommunication, doubling up on reporting, etc.

[msmith]

Create a balance sheet. On the debit (asset side), put "cost of audit." On the credit (liability side), put 401(a)(4), 401(a)(26), 410(b), possible actuary's fees, attorney's fees, administrators fees, employee communication, confusion, miscommunication, doubling up on reporting, etc.

They would be like plans, with separate trusts. TPA would handle all nondiscrimination testing.

[GMK]

TPA would handle all nondiscrimination testing.

That doesn't quite cover all of the points in Andy t A's excellent analysis.

[Tom Poje]

can you do it and get away with it, or perhaps would anyone at the DOL enforce the following. or even, is anyone aware of the following. (This is from an ASPPA Conference many moons ago, they must have had a DOL Q and A session, the few notes I have say this was 2000, and the example used would imply that as well). Never thought about this before in the context as presented.

Question 5: A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct?

Answer: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance--even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process.

[KJohnson]

I agree with Andy. I've been asked this question several times and said don't do it. Butsee below from the ABA’s Joint Committee on Employee Benefit’s 2009 Q&A session with the DOL. The ABA’s proposed answer was you couldn’t do this. The DOL, surprisingly, said that you could. Again, completely non-binding

Question 14: An employer has about 200 employees, and 160 of them are eligible for one of the employer’s two retirement plans. Except for a provision on which employees are eligible, the two retirement plans have identical provisions. Further, each plan provides that a participant directs investment among mutual funds of the same network. Each plan uses the same prototype document, and the two adoption agreements are identical except for the eligibility provision. The different eligibility provisions do not relate to different business lines or locations. Further, nothing in the terms of the eligibility provisions suggests any business purpose at all. Rather, all of the documents and other facts seem to suggest that the employer designed the two eligibility provisions so that each plan will have fewer than 100 participants. Under both plans, the employer is the administrator and the only named fiduciary.

Proposed

Answer 14: A fiduciary may not rely on a plan’s documents if doing so is inconsistent with ERISA. See ERISA § 404(a)(1)(D). In deciding whether ERISA requires a fiduciary not to rely on a plan’s documents, an administrator must act according to ERISA’s standard of care. ERISA § 404(a)(1)(B).

If a person acting “with the care, skill, prudence, and diligence” that ERISA requires would believe that the two plans really are one plan, the administrator must engage an independent qualified public accountant.

DoL

Answer 14: Under Title I of ERISA, employers have substantial discretion in designing the benefit plans they will offer to their employees, including decisions on whether to offer the benefits as a single plan or as separate plans. Whether an employer has established one or more than one ERISA plan depends on the facts and circumstances. In the staff’s view, in the absence of contrary annual reporting rule or requirement and assuming the structure of the arrangements is otherwise lawful (e.g., under the Internal Revenue Code), it would be reasonable for a fiduciary to look to the instruments governing the arrangement or arrangements to determine whether the benefits are being provided under separate plans and to treat the arrangement or arrangements for annual reporting purposes as separate plans to the extent the instruments establish them as separate plans and they are operated consistent with the terms of such instruments

[Guest Sieve]

Don't know if the DOL's informal responses are necessarily at odds. The first (post #5) deals with a plan already subject to audit, where the split is after the fact to prevent future audits. The second is where the plans apparently were established once one plan approached the audit level in order to prevent an audit from being necessary at all. The second situation apparently was OK, but the first required more scrutiny.

Also, the DOL responses are both dependent on whether the IRS would consider them lawfully 2 separate plans. The allocation of forfeitures, if any, probably is an important factor to consider, as well--if the 2 plans aggregate forfeitures & allocacate them among both plans' participants, then you probably only have a single plan for IRS purposes (and, perhaps, for DOL purposes).

[Guest wgibson]

Interesting question. Thank you Tom, KJ and Sieve for supplying an answer.