Audit or no audit in initial year

[legort69]

A plan was set up with a start date of 5/1/2015 for purposes of processing a plan transfer in from a multiple employer plan (MEP). However, per the document, contributions were stated to start deductions on 6/1/2015.

This plan had only 15 participants transfer money from their former plan under an MEP. The plan has > 150 people eligible on 6/1/15 (even though maybe 10 people actually contribute).

Would this plan qualify as a large plan and therefore have to have an independent audit for 2015, or do we say its a small plan for the initial year by using the 5/1/15 start date?

Thanks for any feedback.

[rcline46]

Look to the Form 5500 instructions about combining a short year with a full year to do one audit.

[Mike Preston]

Last I checked, the short year had to be 7 months or less to be combined, so if that hasn't changed I don't think it will help very much.

I see nothing wrong with being hyper-technical. So look to the exact language in the plan to determine the first day of the plan year (probably 5/1/2015) and to determine exactly who is eligible on that date. You are probably stuck with an audit, but who knows?

[rcline46]

Life could get interesting, and of course we do not have the document. So on 5/1 the only ones eligible are those who rolled their funds into the plan (one could say), On 6/1 everyone else became eligible since that is the first time they could defer. Just saying.

[Mike Preston]

I find your hypothetical to be highly unlikely. Just saying.

[BG5150]

Plan eligibility and the deferral start date can be two different things..

[thepensionmaven]

Slightly different question.

New plan effective 1/1/15, over 100 participants by end of year

Since this is the 1st year, would the 80-120 apply, there were -0- participants at the beginning of the year.

Instructions do not specify. Could we file 5500-SF?

If not, is the Auditor's report mandatory for the 1st year of a plan?

[Mike Preston]

Prove no participants at BOY.

[RatherBeGolfing]

Slightly different question.

New plan effective 1/1/15, over 100 participants by end of year

Since this is the 1st year, would the 80-120 apply, there were -0- participants at the beginning of the year.

Instructions do not specify. Could we file 5500-SF?

If not, is the Auditor's report mandatory for the 1st year of a plan?

80-120 rule does not apply because since it is the first year, the plan has never been eligible to file a small plan. 80-120 rule allows you to elect to continue to file as a small plan if you were eligible in the past.

But that doesn't really matter since your example had 0 participants on the first day of the plan year. Therefore, no audit required for the first year. But like Mike said, be prepared to prove that the plan had no participants at the beginning of the year.

[Flyboyjohn]

No such thing as having zero participants at the beginning of the year. Until you have at least 1 participant you don't have an employee benefit plan subject to ERISA & 5500s. Need to determine number of folks eligible on the inception date to determine if an audit is needed form 2015.

[Belgarath]

"No such thing as having zero participants at the beginning of the year."

I'm not sure I understand this. Say you install a new plan, effective 1/1/2016, for a new business with an incorporation date of 1/1/2016. Say you have 3-month eligibility. How is this not zero participants at the beginning of the Plan Year?

[Flyboyjohn]

I would argue the initial plan year doesn't begin until you have eligible participants, otherwise why wouldn't you always use this as a loophole to avoid initial year audits, even for very large companies with possibly thousands of employees?

[Belgarath]

Interesting. So you have a document that specifies the effective date of the plan as 1/1/2016. Ignoring audits - let's say there are only 30 employees anyway - when you file the initial 5500, you are putting whatever - say 4/1/16 to 12/31/16 as the plan year?

I've never run across this approach, but I have seen documents specify 4/1 as the EFFECTIVE date of the plan in this situation, with 3-month eligibility so they enter the first day of the plan.

[BG5150]

I would argue the initial plan year doesn't begin until you have eligible participants, otherwise why wouldn't you always use this as a loophole to avoid initial year audits, even for very large companies with possibly thousands of employees?

Maybe you've found a new space in the QP world...

[thepensionmaven]

Another client received an IRS Notice because for an "initial return" we checked off 3 participants at beginning of year.

IRS was looking for Form 5500 for the prior year (of course there was no prior year) because we had noted the "initial year" of filing.

A woman at IRS informed us that in order to file "initial return" there must be -0- participants on the first day of the plan year.

[My 2 cents]

Another client received an IRS Notice because for an "initial return" we checked off 3 participants at beginning of year.

IRS was looking for Form 5500 for the prior year (of course there was no prior year) because we had noted the "initial year" of filing.

A woman at IRS informed us that in order to file "initial return" there must be -0- participants on the first day of the plan year.

That can't be correct. Just not possible. An "initial return" should be filed for the plan year beginning on the effective date of the plan, even if there are participants who become such as of the effective date.

[Belgarath]

I'm shocked, shocked I say, that someone from the IRS would give incorrect information! We could probably all fill volumes about some of these trials and tribulations...

[TPApril]

I seem to be more familiar with new plans allowing for immediate participation for existing employees.

Assuming there are over 100 participants on that initial start date of the plan, then, assuming plan year is over 7 months, my understanding is that an audit needs to be performed.