Beginning of year participant count.

[Guest PLHart]

Should beginning of year participant account match up to end of prior year participant count? If so, we are not including participants who became eligible at beginning of current year. Is that correct? Does this also mean that we are to pur down 0 participants at the beginning of year for a new plan? The reason I ask is I have heard conflicting answers form various administrators. Thanks to anyone willing to help.

[Chester]

The beginning of year participant count should not match up to the prior year ending participant count due to the new participants who enter the plan at the beginning of the plan year.

[Fredman]

I agree that the count at the beginning of the year does not have to equal the count at the end of the prior year. Sometimes it will, sometimes it won't. Check out the instructions to Form 5500 to see who should be included.

For new plans, it depends. If a plan's effective date is the first day of the plan year and with the right eligibility requirements, you could have participants at the beginning of the year.

[John A]

I don't think there's only one answer to this question and I'm pretty sure people do this differently.

Some people would say that the counts should be the same end of prior year and beginning of current year. The argument would be that (taking a calendar year plan as an example), the end of the prior year was midnight December 31, and the beginning of the current plan year is midnight December 31. Taking that view, no new participants have entered as of "the beginning of the plan year." Any new entrants on January 1 would be additions during the year.

The other view is that (again taking a calendar year plan as an example), the "beginning of the plan year" is January 1, and anyone that became a participant January 1 should be included in the count at the "beginning of the plan year."

I do not think I have ever read any guidance that clearly said one of the 2 above ways was correct, and I think either way might be o.k. as long as it is used consistently. I have not found anywhere in the 5500 instructions that clearly said one of the 2 above ways was correct or incorrect.

The first view makes more sense to me as it corresponds better to beginning of current year assets equaling end of prior year assets. (If new assets January 1 are not counted, why should new participants January 1 be counted?)

If the IRS or DOL has ever indicated a preference in formal or informal guidance, I'd appreciate it if someone would share it.

[Chester]

Well, John that is an original and creative explanation. I would doubt very much that the IRS would buy that reasoning. If participants enter the plan on the first day of the plan year, why would you not want to include these people in your BOY count? I know we have been instructed at prior EA meetings from IRS personnel to include people who enter the plan on the first day of the plan year. So, if you are not currently doing that, I would politely advise you to start doing so!

[richard]

Literally speaking, the number of participants at 1/1 can be different from the previous 12/31; the difference being the number who entered (or who left) on 1/1 (and similarly for non-calendar year plans).

For those who have followed this rigorously, has the IRS or DoL objected to there being a difference? In particular, has anyone received a computer-generated letter from the IRS (or DoL) asking why the counts are different?

For the flip side, on audit, has the IRS or DoL challenged a 5500 that excluded participants who enter on 1/1 from the beginning of year count?

[John A]

Chester, you said, "Well, John that is an original and creative explanation."

Only in our employee benefit world would it be considered "creative" to argue that the ending count for a prior period should equal the beginning count for the current period. In most worlds, having the numbers be different would be the "creative" way to count.

You also said, "I would doubt very much that the IRS would buy that reasoning."

You're probably correct. The IRS' way of doing things does not necessarily have to be reasonable, so they probably would not buy reasonable reasoning.

You ask, "If participants enter the plan on the first day of the plan year, why would you not want to include these people in your BOY count?"

I would ask you, if assets are added on the first day of the plan year, why would you not want to include those assets in your BOY assets? And my answer to your question would be that I would not want to include the new entrants because including them forces the completely illogical result of having a beginning count of the current period different than the ending count of the prior period.

You say, "I know we have been instructed at prior EA meetings from IRS personnel to include people who enter the plan on the first day of the plan year."

I appreciate the information. I had not heard that the IRS had provided any type of guidance on this. Do you happen to know of a particular transcript that contains the guidance?

You say, "So, if you are not currently doing that, I would politely advise you to start doing so!"

I appreciate your being polite. Our firm does currently include entrants on the first day in the beginning of year count, but I still believe it is illogical to have a beginning of period count not equal the end of the prior period count.

Do you agree with richard that participants who leave on the first day should be excluded from the count (for example - 10 participants on April 30, the end of the plan year, no new participants May 1, 1 participant paid a lump sum on May 1, beginning of year participant count would be 9)?

I'd also like to know if anyone has ever had the DOL or IRS reject or challenge a 5500 that excluded entrants on the first day of the plan year from the participant count.

[Chester]

Sorry John, I don't have a tape, just my pleasant memories! I don't understand why you think the numbers need to match up--there is nothing illogical with having the prior plan year end number be different than the current year beginning number. We have been filing 5500 forms this way for a long time and the IRS has never considered this to be a problem. If you have been filing this way and have not encountered any problems, then maybe the IRS truly accepts both methods (or doesn't monitor this).

[John A]

Chester, we disagree about whether or not it's logical and that's o.k. The IRS agrees with you and that is obviously much more important than my humble opinion on the mattter. But I truly would be interested in knowing whether you exclude participants who were paid lump sums on the first day of the plan year from your beginning of year participant count - do you?

[Chester]

We have a computer that crunches the numbers and I do not know what the computer does. Sorry that I can't give you a definitive answer.

[Disco Stu]

This is certainly not the first time this question has come up in these forums. My personal view on the issue is that the new entrants on the 1st day of the PY should be in the BOY count.

There have however been an number of past postings from contributors to these boards that indicate the IRS has told them that they need the BOY count to match last year's ending. They claim that this is an edit check in their system.

I'm not exactly sure what to make of these claims. I've done plenty of 5500s where the BOY count didn't match last years ending. I've never had a client get anything from the IRS on the subject.

Unless the IRS comes up with something more specific, I don't plan on changing my approach.

[BeckyMiller]

On this point, remember, the main reason for this being an issue is the determination of whether or not the plan is subject to an audit. This is a DOL issue, not IRS.

The DOL regulations specifically refer to the number of participants at the beginning of the year, not the last day of the prior year. ERISA Reg. Section 2520.103-1(B)(1) includes the filing instructions to Form 5500 as part of the DOL's authoritative guidance on this matter.

Having said that, however, I am not aware of any situation where the DOL has questionned the need for an audit where the plan had fewer than 100 (120) participants on the last day of the prior plan year, but more than 100 (120) on the first day of the current plan year.

I just point out the fact that they have the authority to question it, should they choose to do so.