Participant count for new plans at beginning of year

[pbarrett]

We established a new 401(k) plan effective 1/1/99. According to the way our software counts (quantech), we had 131 participants at the beginning of the year. We were hoping to put -0- and avoid the audit because of the new plan status and no assets in the plan as of the first day of the year, has anyone seen any hard and fast rules on this? I have received differing opinions as to whether or not we can put -0-. I would appreciate any thoughts or guidance on this matter. Thanks.

[Guest]

I do not believe you are going to avoid the audit requirement.

You have stated that your initial participant count on the first day of the plan year is 131. Reg. 2520.103-1 requires the audit as an alternative method of compliance with the reporting requirements.

There is an administrative relief for plans with more than 100 but less than 120, which you do not qualify for.

The factual question is how many participants are in the plan on day one. Determine this by how many employees are eligible to defer on day one.

If all 131 are eligible to defer or are actually deferring, then you do not have a reasonable basis to put -0- as the first day of the plan year.

[Guest Jim Hunzelman]

You have brought up a question that has been around for the 30+ years I have worked in this area; how should participants who enter the plan on the first day of the first plan year be counted? I have yet to see a definitive answer and the instructions for the 5500 are of no help. I have usually looked to IRS form 5310, which has a 6-year listing of participants who enter or leave the plan. I complete a 5310 by counting participants who enter on the first day of the plan year as a participant who entered during that plan year. Thus, my beginning participant count for a given year is the same as the ending count for the prior year.

The problem with this method is what do you for the first plan year? If 50 participants entered the plan on its effective date, did you start with zero and add 50 participants, or did you start with 50 participants? You will get very strong opinions on both sides of this question.

Taking into account how I complete form 5310, I generally consider the number of participants at the end of one year to be the beginning number for the next year. Thus, participants who enter on the first day of the year are considered new participants in this count. The only exception to this is the first plan year when I consider those participants who enter on the first day of the plan year to be the number of participants as of the beginning of the year. I don't recall ever seeing any guidance from the IRS on this matter, but hopefully some of the other members of this forum will have information.