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Counting ineligible participants with balance


TPApril

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Employee incorrectly made 401k contributions during year and had a balance at eoy.

This was found after year end and returned timely.

For 5500 count purposes -they are not a participant but they have a balance. But count with balances can't exceed eoy participant count.

So I'm guessing, treat them as a participant for 5500 count purposes.

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The Instructions for a 2023 Form 5500 report include this:

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. For example, for a Code section 401(k) plan, the number entered on line 6g(2) should be the number of participants counted on line 6f who have made a contribution, or for whom a contribution has been made, to the plan for this plan year or any prior plan year. Defined benefit plans do not complete line 6g.

https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2023-instructions.pdf

Perhaps a reading of that text is that either count includes only a person who fit both conditions: she had an account balance and, at the specified time, was a participant.

A few potential lines of reasoning:

Even if a person has an account balance, that does not make her a participant.

That an amount is mistakenly credited does not mean the individual had (in the sense of possessed) an account balance.

That an employer paid a contribution into the plan’s trust does not mean that any portion of that contribution was for a person who was not a participant.

This discussion is not advice to anyone.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Agreed, and personally, I would not include.

Parallel question - if plan accepts rollovers from employees before becoming participants and an employee does such a rollover but was not a participant as of EOY, would you include them?

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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If a plan accepts an individual’s rollover contribution and credits the amount to the individual’s account, she is a participant, at least within ERISA § 3(7)’s meaning.

That an individual has not met the plan’s conditions for sharing in a nonelective contribution or matching contribution, or even for eligibility to elect an elective-deferral contribution, does not mean that the individual is not a participant.

A textualist, but acontextual, reading of the line 5 instructions might support a different finding for Form 5500 reporting.

But caution suggests counting an individual who has an account balance, even if she has not entered the plan for anything other than the rollover contribution.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I believe such "limited participants" do not count - I used to use a report that would count up the number of balances, but then would indicate people who had weird status affecting their inclusion in the 5500 count.  Pre-participation rollovers and alternate payees were usually what it would catch, or the occasional ineligible person who got let in too early.

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I express no view about who is or isn’t a participant for Form 5500 reporting.

The line 5 instructions include this:

“Participant” for purpose of lines 5a–5c(2) means any individual who is included in one of the categories below.

1. Active participants (for example, any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan) including:

. . . . , and

Any nonvested individuals who are earning or retaining credited service under the plan.

. . . .

https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2023-instructions.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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19 hours ago, CuseFan said:

Parallel question - if plan accepts rollovers from employees before becoming participants and an employee does such a rollover but was not a participant as of EOY, would you include them?

You make them a participant by accepting the rollover, so I would argue that  "not a participant as of EOY" is incorrect.  They are a participant who has not met eligibility for contributions other than rollover.  

 

 

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I agree with @RatherBeGolfing that an individual who has not yet satisfied the plan's eligibility requirements to make elective deferrals, receive a match or receive an NEC, but who is permitted under the plan to make a rollover contribution and does so should be considered in the participant account.  This individual's rollover account will be subject to all other plan provisions regarding rollovers.  For example, there are (very few) plans that restrict the availability of rollovers for in-service withdrawals.

The situation in the original post was an account that was created because the "employee incorrectly made 401k contributions during the year" and ultimately they were "returned timely".  We don't know all of the circumstances.  Keeping in mind technically, an employee doesn't make a contribution but rather elect to have the employer reduce the employee's paycheck and the employer makes the actual contribution to the plan.  We don't know as examples:

  • if the employee was not eligible at the time the 401(k) deferrals were made.
  • if the employee was eligible and elected not to make deferrals.
  • if this was purely a payroll error that started deferrals for the employee who was not eligible.
  • if this was a recordkeeper error that sent an instruction to payroll to begin taking deferrals for the employee was eligible when the employee was not eligible.
  • if the amounts that were "returned timely" were treated as excess amounts and had associated income returned, or if only the amounts of the original deferrals returned.

The point of these types of questions is to determine if the deferrals were ever treated under the terms of the plan as belonging to the employee as a participant in the plan.

I think this type of situation is more nuanced if the plan is an EACA.  Given that SECURE 2.0 calls for plans adopted after 12/29/2022 must be EACAs starting in 2025 (subject to grandfather rules and certain small plan exemptions), there is a more fun ahead of us as we sort out the boots-on-the-ground, operational details.

 

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Paul - thought I'd respond to your questions with clarity on original question.

The employee had not yet made eligibility at all for the plan but apparently made an election that was withheld in payroll.

Incidentally the reason they thought the employee was eligible was merely because they were married to the owner and started to receive W-2.

This was one of many problems with the plan uncovered after taking over from an unresponsive former TPA.

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