Participant Count on Form 5500 Considering new Excluded Class of Employees

[RPP2001]

A 2014 calendar year plan is amended to begin excluding a class of employees as of 7/1/14. If this occurs and there are employees that had previously met the plan's eligibility and entry requirements and were previously considered "participants" in the plan even though they do not have account balances, are they considered participants in the plan effective 7/1/14 due to the amendment? This plan requires an audit for 2014, but, depending on this answer, it may drop below 100 participants as of 1/1/15 which would allow the plan to not have an audit requirement for 2015. So, the question is definitely with regards to how a participant is defined for Form 5500 purposes.

[My 2 cents]

My opinion:

Any members of the newly-excluded class who were already participants would remain participants at least until no longer employees of the controlled group, whether vested or not. While the amendment can exclude service after July 1, 2014 for benefit accrual purposes for people in the excluded class, it can neither deny recognition of service for vesting purposes to people already participating in the plan who remain in employment with any member of the controlled group nor treat them as no longer being participants in the plan. As there was no distributable event (such as separation from service), they would have to be retained as plan participants, even if accruing no additional benefits.

If the question concerns people who would otherwise have become participants on July 1, 2014 except for the amendment, if the amendment is properly worded and timely, they can probably be kept out of the plan even if they had completed the age and service requirements for participation prior to adoption of the amendment..

[Tom Poje]

This should depend on the document. The ERISA Outline Book points out (Chapter 2, section VI, Part E, 3) [emphasis mine]

Just because an employee qualifies as a participant in the plan does not guarantee the employee the right to participate in the plan for the rest of his employment with the employer. In Chapter 3B, Section X, we discuss issues relating to the protection of accrued benefits, including the prohibition against reducing an employee's accrued benefit by plan amendment (known as the anti-cutback rule). The anti-cutback rule under IRC §411(d)(6) only protects the employee's benefits that are already accrued. It does not guarantee the right to accrue additional benefits in the future. In Chapter 6, Section III, Part D, we discuss the requirement to protect optional forms of benefit in the plan. Again, this protection guarantees that the employee's payment options regarding accrued benefits are protected. The right to continue to participate in a plan is not a protected benefit. Accordingly, an employee's status as an active participant in the plan can be eliminated by modifying the eligibility requirements in a way that the employee is no longer satisfying the requirements for participation. When active participant status is eliminated, the participant's accrued benefit is protected (see 3. below), but the employee will not accrue additional benefits until he or she first re-establishes the right to participate in the plan under the modified eligibility requirements.

here is language from one document that basically says, doesn't matter we amended to exclude people like you going forward...you are still in

(a) Eligibility. Any Eligible Employee shall be eligible to participate hereunder on the date of such Employee's employment with the Employer. However, any Employee who was a Participant in the Plan prior to the effective date of this amendment and restatement shall continue to participate in the Plan

[RPP2001]

Thank you very much. The ERISA Outline Book in Chapter 2, section VI, Part E in its Example of a 401(k) feature seemed to imply that anyone employee in this situation that does not have an account balance would not be considered a participant for Form 5500 purposes. But, I took a look at an FT William document and it appears that these employees would still be "in" as you say Tom - not only to be included in the participant count but even that they would be able to continue 401k contributions after the amendment.

[BG5150]

here is language from one document that basically says, doesn't matter we amended to exclude people like you going forward...you are still in

(a) Eligibility. Any Eligible Employee shall be eligible to participate hereunder on the date of such Employee's employment with the Employer. However, any Employee who was a Participant in the Plan prior to the effective date of this amendment and restatement shall continue to participate in the Plan

To me, that looks like standard restatement stuff meaning you won't have to re-satisfy eligibility requirements just because there was a restatement.

The OP states that there will be an amendment excluding a class of people. As we all know, eligibility is not a protected class. You can take someone's eligibility away. And unless the amendment specifically says that it only applies to new people, it applies to anyone in that class.

To me, they (those with no balances) are no longer participants in the plan.

The first definition of an active EE for 5500 purposes is someone who is covered under the plan AND is earning service credit.

I would venture to say that people in the now-excluded class who have a balance is "covered" AND they are earning service credit. Those without a balance are earning service credit but are NOT covered under the plan, so they will no longer be counted in the 5500 count.

[Tom Poje]

but the language says

"If you were a participant prior to the amendment (e.g. excluding a division)

you will continue to be a participant"

so I would lean towards saying unless the amendment specifically states anyone on that group is now excluded including those prior to the amendment date, you have to treat them as participants.

[BG5150]

Tom, your language comes from the restatement (for ERISA probably). It doesn't say anything about subsequent amendments.

In the OP's case, I would think there is no excluded class in the plan doc at the moment. So everyone who was eligible as/of the restatement date continues to be eligible. However, come 7/1/14, everyone in "Division A" is excluded, that amendment trumps what was in the document signed 5 years ago.

[AmyR]

I have a somewhat related question. Has anyone worked with a plan that split in order to avoid an audit? The plan year end is 6/30. We are creating a 2nd plan that mirrors all provisions in the first plan, but each plan will be mutually exclusive for eligibility - old plan - all employees hired prior to 7/1/XX and new plan, all participants hired after that date. We will spin-off the assets to the new plan for the employees who will move to that plan. We are wondering whether we need to have an effective of 6/30/14 and have a very short plan year for the new plan, or whether that can be done on 7/1 and still be able to exclude the employees moving to plan 2 for purposes of determining if plan 1 is a large plan for the plan year starting 7/1/14.