5500 Counts - definition of Participant in DC plan

[justanotheradmin]

Question is specific to defined contribution retirement plans only:

Assume a plan has eligible, active participants with no balance. Perhaps a deferral and match plan and they have never deferred. 

 

Please let me know your thoughts:

A large, well respected software provider is telling me that due to the update in how audit status/large filer status has changed to be based on number of participants with account balances, that the definition of who counts as a Participant for reporting on the Form 5500 /Form 5500-SF has changed. and that their reports will reflect the following:

Participants as of begin of year = Participants w/ balances as of begin of year

Participants as of end of year = Participants w/ balances as of end of year

Where the forms ask for "Total number of participants at the beginning of the plan year" and "Total number of participants at the end of the plan year" the provider is saying that only participants with balances are to be reported, and that the numbers on those line will be the same as the number on the other lines that ask "Number of participant with account balances as of the beginning of the plan year' and "Number of participants with account balances as of the end of the plan year" 

I disagree with them.

I have read the instructions to the updated forms and nowhere do I see that the general participant count as of the begin or end of year should only include people with balances. I really can't believe the software provider is taking that stance, but I thought I would ask the collective mind here for input. I've been doing this a long time and still learn new things, especially when the rules change, so perhaps I missed something. 

What say all of you? Do you think the numbers should be the same? or like me, think they should be different ?  Is this a gray area?

[CuseFan]

8 minutes ago, justanotheradmin said:

Where the forms ask for "Total number of participants at the beginning of the plan year" and "Total number of participants at the end of the plan year" the provider is saying that only participants with balances are to be reported, and that the numbers on those line will be the same as the number on the other lines that ask "Number of participant with account balances as of the beginning of the plan year' and "Number of participants with account balances as of the end of the plan year" 

The provider is claiming that the those different lines asking for different numbers are in fact asking for the same numbers, which makes no sense, otherwise there would be one set of beginning/ending counts. And clearly, collecting counts for both eligible participants and participants with balances would be a metric of interest to IRS/DOL.

[Paul I]

There is a difference in the instructions for the Form 5500 between

• Line 5 Total number of participants at the beginning of the plan year
• Line 6g(1) Number of participants with account balances as of the beginning of the plan year (only defined contribution plans complete this item)   

The 2023 instructions for the 5500 line 5 [lightly edited] say: "

For pension benefit plans, “alternate payees” entitled to benefits under a qualified domestic relations order are not to be counted as participants for this line.
For pension benefit plans, “participant” for this line means any individual who is included in one of the categories below:
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.
2. Retired or separated participants receiving benefits
3. Other retired or separated participants entitled to future benefits
4. Deceased individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan. "

The 2023 instructions for the 5500 line 6g(1) say: "Line 6g. Enter in line 6g(1) the total number of participants included on line 5 (total participants at the beginning of the plan year) who have account balances at the beginning of the plan year. Enter in line 6g(2) the total number of participants included on line 6f (total participants at the end of the plan year) who have account balances at the end of the plan year. "

Clearly Line 6g(1) is counts either a subset or all of the participants reported on Line 5.  Participants who are eligible to defer but who do not have a balance at the beginning of the plan year are NOT included on Line 6g(1), but they ARE included on Line 5.

The Form 5500-SF instructions are the same where Line 5a is the same as the Form 5500 Line 5 and Line 5c(1) is the same as the Form 5500 Line 6g(1).

Note there is an EFAST2 edit check which may be contributing to the confusion:

"Z-007 - WARNING - Fail when the total participant BOY count on Line 5 of the Form 5500, Line 5a of the Form 5500-SF, or Line 5a(1) of the Form 5500-EZ of the current submission does not match the total participant EOY count on Line 6f of the Form 5500,  Line 5b of the Form 5500-SF, or Line 5b(1) of the Form 5500-EZ from the previous year's submission."

 

[justanotheradmin]

Paul I and CuseFan, I agree with both of you and have tried to make those points, but so far they are sticking to their position that the correct counts are   

Participants = Participants with Balances. 

Paul I, thank you for mentioning the EFAST2 warning. I don't think that's a new one though? and it seems to be comparing Participant to Participants, not Participants to Part w/ balances. So I wonder what the software provider is thinking. 

[Peter Gulia]

Does the software provider’s license agreement include a warranty that using the software as specified results in legally correct reporting?

And if so, does the provider have enough financial strength to pay on breaches of its warranty?

[ESOP Guy]

I am happy to be told I am wrong but wasn't there a recent changed announced that is like this?

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/changes-for-the-2023-form-5500-and-form-5500-sf-annual-return-reports

 

I quote (bold mine):

Change in Participant-Count Methodology for Small Plan Simplified Reporting Options

Phase III revises the counting methodology for determining the 100-participant threshold for certain small plan simplified reporting alternatives, including the conditional waiver of the IQPA annual audit. The counting methodology for defined contribution retirement plans will be based on the number of participants with account balances, rather than the current method that counts individuals who are eligible to participate even if they have not elected to participate and do not have an account in the plan. This change is intended to reduce expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees.

 

Once again feel free to tell me I am wrong.  I have NOT studied this at all.  I just remember seeing something in my email box mentioning this so I did a quick search.

Hope this helps.

[justanotheradmin]

Yes, ESOP guy you are correct, that was the change. 

There were lines added to the Form 5500 series to address the additional information needed. There are now lines for Begin and End participant counts, as well as Begin and End of year participants with balances count. 

The software provider's reports and programming are ignoring any participants (active, eligible) if they don't have an account balance. And I agree that is correct for the "With Balances" line, I disagree with that for the more general Participant Count lines. They disagree with me. 

For now we are going to be doing our own extract and counts for those lines, but it is still frustrating because their pre-programmed extracts / reports are correct for 2022 and earlier years. They have changed it because of the update to the audit size rule. I wonder if any of their other clients have started noticing this. 

[RatherBeGolfing]

36 minutes ago, justanotheradmin said:

The software provider's reports and programming are ignoring any participants (active, eligible) if they don't have an account balance. And I agree that is correct for the "With Balances" line, I disagree with that for the more general Participant Count lines. They disagree with me. 

They are clearly incorrect.  The instructions to the 2023 5500-SF states that participant includes those  ELIGIBLE TO DEFER

Quote

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.

It also differentiates total participants and participants with a balance.  If the instructions say that participant with a balance in 5(c) are those participants from 5(a) with a balance, it also follows that 5(a) includes those WITHOUT a balance, because otherwise 5(c) isn't needed.

Quote

Line 5. Enter in element (a) the total number of participants at the beginning of the plan year. Enter in element (b) the total number of participants at the end of the plan year. Enter in element (c)(1) the total number of participants included on element (a) (total participants at the beginning of the plan year) who have account balances as of the beginning of the plan year. Enter in element (c)(2) the total number of participants included on element (b) (total participants at the end of the plan year) who have account balances at the end of the plan year.

This isn't rocket surgery, I would push for answers from someone higher up.  If they are only counting Ps with balances for 5(a), they are clearly wrong.

[WDIK]

Is it inappropriate to share the name of the "large, well respected software provider" on a forum like this?

[justanotheradmin]

2 minutes ago, WDIK said:

Is it inappropriate to share the name of the "large, well respected software provider" on a forum like this?

I would rather not since I am still hopeful they will come around to my understanding of the counts for 5500 purposes. Before I continued to push back I wanted to make sure I wasn't completely misunderstanding something. With the responses here I've pushed back again and am awaiting a response. I am hopeful, and otherwise have had a good experience with this software.

[Peter Gulia]

justanotheradmin, I suspect your way of letting the software provider find its error without embarrassment, and instead through internal processes, seems likelier to be effective.

[RatherBeGolfing]

3 hours ago, Peter Gulia said:

justanotheradmin, I suspect your way of letting the software provider find its error without embarrassment, and instead through internal processes, seems likelier to be effective.

Agreed.  I don't see a problem with pushing a service provider to see the error of their ways, but public shaming is not the way.

[david rigby]

On 1/11/2024 at 11:53 AM, RatherBeGolfing said:

This isn't rocket surgery, ...

Please do not do surgery on any rockets.  😉

[justanotheradmin]

Thank you everyone for the comments. The software company has decided to update their reports! They do understand the rule, turns out that was not the issue.  

Turns out the EFAST system/filing software will give a STOP error if the beginning of year total participant count is above 120, but is being filed on an SF, or if using a Form 6600 but there is no Sch H + audit report.  Even though under the new rules and instructions there shouldn't be an error for that.  So the filing system hasn't caught up with the updated rules. 

So if you have plans that under the old rule would have been required to have an audit, but under the new rule are not required to have one, just be aware you may not be able to file the Form 5500 as you'd like until the filing system is updated. The vast majority of plans will not fall into this category, they will either be squarely audit or non-audit, so I do think its better to have the reports correct, and then the small minority of plans that end up with a filing issue can decide on an individual basis how they want to file as they approach the filing deadline. By then hopefully the filing system has been updated to align with the new rule. 

It is errors P-230 and P-230SF if anyone is that technical and wants to look them up. 

If others have already encountered either of those specific errors and want to share how they are handling them, I'd be curious. I know we are early in the tax season so I know not many 2023 Form 5500 for regular year ends have been filed yet. 

[RatherBeGolfing]

43 minutes ago, justanotheradmin said:

Form 6600

Oh Lord are they giving us a new Form to file as well!?! 😏

[RatherBeGolfing]

@justanotheradmin thanks for the update.  This makes a lot more sense.

[Peter Gulia]

Just curious:

How does the system handle a situation in which a § 401(a) plan has more than 120 participants (and more than 120 with an account balance), but all participants are self-employed individuals?

That can happen if a firm separates retirement plans—a plan distinctly for working partners (and no employee), and a separate plan for employees.

A plan that covers no employee is not ERISA-governed.

[Paul I]

Short answer - a plan covering only working partners would file a Form 5500-EZ.  I am not aware of any EFAST2 edits for the 5500-EZ that test the entry on line 5a(1) Total number of participants at the beginning of the plan year against the 120 threshold.

The instructions to the Form 5500 say:

Do Not File a Form 5500 for a Pension Benefit Plan That Is Any of the Following:  ...

11. A “one-participant plan,” as defined below. However, certain one-participant plans are required to file the Form 5500-EZ, Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan. ...For more information on filing Form 5500-EZ, see the Instructions for Form 5500-EZ, or go to www.irs.gov. For this purpose, a “one-participant plan” is:
    a. a pension benefit plan that covers only an individual or an individual and their spouse who wholly own a trade or business, whether incorporated or unincorporated; or
    b. a pension benefit plan for a partnership that covers only the partners or the partners and the partners’ spouses (treating 2% shareholder of an S corporation, as defined in Code section 1372(b), as a partner).

The instructions to the Form 5500-EZ say:

Who Must File Form 5500-EZ
You must file Form 5500-EZ for a retirement plan if the plan is a one-participant plan or a foreign plan that is required to file an annual return under section 6058(a).
A one-participant plan means a retirement plan (that is, a defined benefit pension plan or a defined contribution profit-sharing or money purchase pension plan), other than an Employee Stock Ownership Plan (ESOP), which:
1.    Covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated); or
2.    Covers only one or more partners (or partners and their spouses) in a business partnership (treating 2% shareholder of an S corporation, as defined in IRC §1372(b), as a partner); and
3.    Does not provide benefits for anyone except you (or you and your spouse) or one or more partners (or partners and their spouses).

 

[Paul I]

In case anyone is interested in seeing the messages @justanotheradmin references, they are:

 

Note that the Last Updated dates are respectively from 15 and 6 years before the 2023 form was made available to software developers. 

The P-230 tests a 5500 and should (but doesn't) check against Line 6a(1) for defined contribution plans as determined by the pension codes on Line 8a, and Line 5 for other plans.

The P-230SF tests a 5500-SF and should (but doesn't) check against Line 5c(1) for defined contribution plans as determined by the pension codes on Line 9a, and Line 5a for other plans.

 

[Patricia Neal Jensen]

When just out of law school and the only entity who hired women was the IRS who did hire me, we were soundly instructed to look at the law, not at the instructions to forms.  Still a good rule to remember.

[thepensionmaven]

For our clients,  that sponsor safe harbor matching contributions,  Form 5500-SF (2022) included participants, both beginning of year and end of year, that were eligible to contriubte, but in fact, elected not to.

For 2023, we count only participants with account balances in 5a and 5b

If only counting participants that are contributing, would not 5a and 5b of form 5500-SF be repeated in c(1) and (c2)?

Also, obviously the end of year participants on the 2022 includes those who are eligible, how would you reconcile 2022 with 2023 when the end of 2022 and the beginning of 2023 are not the same?

Carr the number through to 2023 and make the adjustment there?

[RatherBeGolfing]

14 hours ago, thepensionmaven said:

For 2023, we count only participants with account balances in 5a and 5b

2023 Form 5500 Lines 5a and 5b should report all ELIGIBLE PARTICIPANTS, even without a balance.  Participants with a balance at BOY and EOY are reported on lines 5c(1) and 5c(2).  So if you had 50 eligible participants at EOY 2022, you report 50 participants at BOY 2023 in 5a (unless you have a new entry at BOY).  5c on the 2022 Form 5500 had participants with a balance at EOY, that is your number to use for 5c(1) on the 2023 Form 5500.

[thepensionmaven]

Please see attached.changes-for-the-2023-form-5500-and-form-5500-sf-annual-return-reports.pdfchanges-for-the-2023-form-5500-and-form-5500-sf-annual-return-reports.pdf

OK, page 4, the exactly what is the change?

This is a?DOL fact sheet.

[RatherBeGolfing]

5 minutes ago, thepensionmaven said:

OK, page 4, the exactly what is the change?

The change is how you count participants for the audit threshold.  You now count participants with a balance.  Eligible participants without a balance are still participants, you just get to exclude them for purposes of determining whether the plan needs an audit. 

[Peter Gulia]

If you prepare or assemble more than a few Form 5500 reports consider A. Paul Protos’s 5500 Preparer’s Manual.

[thepensionmaven]

Got it, thanks.

There's really no change for my plans, as I always count eligible participants, whether they defer or not.

 

[RatherBeGolfing]

16 hours ago, Peter Gulia said:

If you prepare or assemble more than a few Form 5500 reports consider A. Paul Protos’s 5500 Preparer’s Manual.

This is a great product.  I highly recommend it.  It goes line by line and includes commentary and practitioner notes.

[Belgarath]

Similar to the 5500 preparer manual that Janice Wegesin used to do?

[RatherBeGolfing]

Same 5500 manual @Belgarath,  I have the 2014 authored by Janice and the 2023 by Protos on my bookshelf.

[justanotheradmin]

I still use some of the things from Janice Wegesin and as long as its not something where the rule changed, they still hold up so well. I loved her webinars and publications, always so helpful and technical and practical for people who actually do the work! 

[RatherBeGolfing]

57 minutes ago, justanotheradmin said:

I still use some of the things from Janice Wegesin and as long as its not something where the rule changed, they still hold up so well. I loved her webinars and publications, always so helpful and technical and practical for people who actually do the work! 

Janice was great, I worked with her on a bunch of ASPPA/ARA projects over the years, and she was always super generous with her time.  I used the 2014 edition of the book until my rep gave me a new edition last year, and a lot of the commentary still held up after all these years. 

[thepensionmaven]

17 hours ago, justanotheradmin said:

I still use some of the things from Janice Wegesin and as long as its not something where the rule changed, they still hold up so well. I loved her webinars and publications, always so helpful and technical and practical for people who actually do the work! 

 

16 hours ago, RatherBeGolfing said:

Janice was great, I worked with her on a bunch of ASPPA/ARA projects over the years, and she was always super generous with her time.  I used the 2014 edition of the book until my rep gave me a new edition last year, and a lot of the commentary still held up after all these years. 

She was a wonderful person and a great instructor.  Met her in person when she came to White Plains on her way to see family, I assume before she passed.  Looked up the new version, as mentioned.

Subscription for $1,000 a bit steep, but thanks for the suggestion.  I need to digest the instructions, no one needs an IRS "love letter".

[RatherBeGolfing]

3 hours ago, thepensionmaven said:

Subscription for $1,000 a bit steep, but thanks for the suggestion.

95% of the book does not change from year to year.  You can find a good condition older edition for a lot less than $1,000.  You can probably get a 2018-2019 edition for about $100, and the vast majority of the information will still be useful.