Participant count and participant definition for 401(k) plan

[Guest steve47170]

Hi, I'm new here, just registered here to post a question. Here is the background. We are a privately owned small manufacturing business in the Midwest.

We have had a 401(k) plan dating back to the early 90's. I'm a volunteer 401(k) committee member. We are just now learning about the

recent rule changes raising the bar on fiduciary responsibility. We (the 401(k) committee) have actually done what I believe is the right thing in response, by ditching our

current annuity based expensive bundled plan and going with an open architecture plan with a fee-only adviser, which should minimize expenses as

the assets of the plan continue to grow. My background, I have no accounting or government form filling experience. I do however, have and will insist on doing

my own State and Federal taxes (for free) as long as the law will allow it. Back on track, in all prior years, we have been under the audit waiver provision

as provided for by DOL, EBSA ??. We conscientiously do our best to be compliant, while keeping expenses to the plan sponsor and plan participants

as low as possible. We have been hit with widely different estimates of the amount a plan audit would cost. That is a minor side question here too.

If the regs say we need to be audited, or will need to be in an upcoming year, so be it, but it seems to hinge on the number and hence, the definition of participant.

Incidentally this might have been a better fit in the 5500 Form section. Moderator, whatever you think.

Here is the question you've all waited for so patiently. My own search lead me to page 11 of the 2010 Instructions for Form 5500-SF. There, it states for

pension benefit plans (I think this is what a 401(k) falls under):

a participant is any of the 4 listed types, active, two kinds of retired, and deceased. The later ones are not where the issue lies. It all seems to boil down

to the active participant definition. Our plan has a safe harbor MATCH. But we do not have an automatic enrollment, or involuntary sponsor contribution of any kind.

The plan is strictly voluntary. If you don't sign up to contribute, you are out as far as any accruing of any benefit. So, are the non-participating eligible employees

included in the participant count?

Thanks for viewing. Looking forward to your replies.

[ESOP Guy]

short answer is "yes" they count.

long answer here is a quote from the instructions

1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit.

You will note all it takes is they are ELIGILBE TO ELECT. they don't have to make an election.

As an aside, you may say being someone who works for a TPA I have a conflict of interest. You may want to rethink they whole doing it for "free" ourselves way of thinking. If you get this wrong the penalties and other problems will quickly cost you thousands (and it is plural) of dollars. And this is just one thing that could go wrong.

edit small typos

[ETA Consulting LLC]

You still won't need an audit until this "count" exceeds 120. Are you that close?

[Guest steve47170]

You still won't need an audit until this "count" exceeds 120. Are you that close?

You could say we are on the brink. I guess it probably isn't a bad time to start making inquiries from accounts that according to the DOL website, are

versed in the auditing of benefit plans, otherwise from the way it reads, a bad audit might be worse than no audit at all.

[Guest steve47170]

short answer is "yes" they count.

long answer here is a quote from the instructions

1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit.

You will note all it takes is they are ELIGILBE TO ELECT. they don't have to make an election.

As an aside, you may say being someone who works for a TPA I have a conflict of interest. You may want to rethink they whole doing it for "free" ourselves way of thinking. If you get this wrong the penalties and other problems will quickly cost you thousands (and it is plural) of dollars. And this is just one thing that could go wrong.

edit small typos

ESOP Guy

You are in agreement with what our new TPA says as well. It seems like we are on the same page of the instructions, page 17, first column.

The phrase "ELIGIBLE TO ELECT to have employer make payments under a Code section 401(k) qualified cash or deferred arrangement" I feel could be interpreted by the word ELECT to mean available to the employee sans any commitment on their part to, in our owners vernacular, have any skin in the game. Could this phrasing not just be a reference to automatic enrollment type plans?

[Lou S.]

If they are eligible to make elective deferrals they are a participant in the Plan. Whether or not they have an account balance because they chose not to make elective deferrals is irrelevent. You still count them as a participant for purposes of Form 5500.

[K2retire]

Just to reinforce what others have said, the government considers an employee who has met the plan's eligibility requirements and passed a plan entry date to be a participant in the plan. For this purpose it makes no difference if the employee/participant ever has any money in the plan. That is different than what most employers (and some service providers) think of as a plan participant.

[ESOP Guy]

I second my first comment and Lou's

If you have handed them an election form they count. It doesn't not matter if they have money in the plan or not.

This is a well settled issue. (Don't take that last comment as a knock, if you are just starting to look at it you wouldn't know that. What I am saying is there is no wiggle room or any way to do it right and not count anyone who is eligible to contribute regardless if they are doing so or not.)

Edit:

By the way another cheap way to stay under the 120 is to make sure you pay out your terminated w/ a balance as fast as you can. We have helped clients hold off an audit for 2-3 years by getting the terms paid out ASAP at times in the past.

[BG5150]

"Automatic enrollment" plans are plans that require someone to make a prescribed salary deferral unless they expressly elect not to do so.

It will have no bearing on the number of "Active" participants for 5500 count purposes.

Also, be careful of rehires. Many times, they are eligible for the plan as soon as they return back to work, rather than wait for some time and re-enter on the next plan entry date. Read the plan document carefully to see when rehires can re-enter the plan.

I always disliked the term "Active" pertaining to the 5500. To me, it fosters confusion with people who are actively contributing to the plan. And it seems counter-intuitive that an "active" participant could be someone who terminated 9 years ago, but still has a balance in the plan. But I doubt they'll change the terminology any time soon just to suit me and my tastes.

[ESOP Guy]

I am not related to these people so no conflict of interest here.

If you really want to learn more these people's classes cost in the $400-$450 range for a 1 day class. If your company wants to strike out on your own it might pay to go. If in a city close enough you don't need to pay tons of travel costs it is a good investment.

Sorry better link

http://www.relius.net/Events/events.aspx?Seminar

[Guest steve47170]

I am not related to these people so no conflict of interest here.

If you really want to learn more these people's classes cost in the $400-$450 range for a 1 day class. If your company wants to strike out on your own it might pay to go. If in a city close enough you don't need to pay tons of travel costs it is a good investment.

Sorry better link

http://www.relius.net/Events/events.aspx?Seminar

This is a general reply to all, thanks, (and nothing taken as a knock, I may be inclined to go on the cheap and risky side on my own personal affairs, but

not in the professional work role), and yes, I've come around to the "correct" definition our government has set for "active" participants as it applies to

the 5500 form and the audit waiver exemption.

So to the lesser question, for an organization just getting to the 120 or so participant mark and out of the audit waiver status, what should one expect to

pay for such a service?

[Guest steve47170]

I always disliked the term "Active" pertaining to the 5500. To me, it fosters confusion with people who are actively contributing to the plan. And it seems counter-intuitive that an "active" participant could be someone who terminated 9 years ago, but still has a balance in the plan. But I doubt they'll change the terminology any time soon just to suit me and my tastes.

And that someone who has worked at someplace 9 years, always checked "no thanks" on the 401(k) election form is considered an Active participant by the DOL also.

[Lou S.]

So to the lesser question, for an organization just getting to the 120 or so participant mark and out of the audit waiver status, what should one expect to

pay for such a service?

It varies quite a bit. And depends on a number of factors including but not limited to: if you have a smaller local auditing firm or one of the bigger shops do it, if you qualify for what is known as a "limited scope audit" or if you need a full scope audit, if you have non-traditional assets, if the auditors find "issues", etc.

[Bill Presson]

I am not related to these people so no conflict of interest here.

If you really want to learn more these people's classes cost in the $400-$450 range for a 1 day class. If your company wants to strike out on your own it might pay to go. If in a city close enough you don't need to pay tons of travel costs it is a good investment.

Sorry better link

http://www.relius.net/Events/events.aspx?Seminar

This is a general reply to all, thanks, (and nothing taken as a knock, I may be inclined to go on the cheap and risky side on my own personal affairs, but

not in the professional work role), and yes, I've come around to the "correct" definition our government has set for "active" participants as it applies to

the 5500 form and the audit waiver exemption.

So to the lesser question, for an organization just getting to the 120 or so participant mark and out of the audit waiver status, what should one expect to

pay for such a service?

Couple of items:

1. The TPA firm I run is owned by a CPA firm so I've seen both sides. I've seen audits done for as little as $7k and they generally aren't really worth much. Most of the audits our firm does (and the ones I've seen on the plans that we do the recordkeeping) run in the $12k+ range.

2. Assuming you didn't hit 120 on the first day of the current plan year, take a look at the terminated participants with small balances and see if your plan allows/requires you to force them out of the plan. Many times you can avoid an audit just by eliminating these participants.

Good luck.

[GMK]

Good audits aren't cheap, but they're probably the least expensive insurance (or at least assurance) that the 401(k) committee is running the Plan properly.

Formal outside review of the plan is good not only for the Plan (think qualified status, fines for errors, etc.), but also for your own peace of mind and assurance that you are doing the right things for the participants.

(I don't do audits. I run a couple plans, with help from the TPA's and auditors we hire.)