Audit Count - Participants with balances

[austin3515]

110 people have account balances at 12/31/2023.  100 people get a profit sharing contribution after year-end, including 20 who do not have accounts presently so if I could the receivable only participants, there are 130 participants.

Has the DOL gone to trouble of defining what they mean by "account balance" and whether or not it includes receivables?  Obviously it's the difference between an audit and no audit.

[justanotheradmin]

are you asking about potential audit for 2024?

"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."

So if completing the 2024 Form 5500, I interpret that to mean the 2024 BOY part w/ balances count should include those 20. So the BOY would be 130, and yes and audit would be required for the 2024 plan year. 

[Peter Gulia]

The Form 5500 Instructions states:

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.  . . . .

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

I’m unaware of any Labor department guidance that further explains whether an account balance (whether as at an end-of-year, or as of a beginning-of-year) includes an allocation from a contribution receivable (or of a distribution payable).

I could interpret the instruction several different ways. Also, some aspects of those interpretations might vary with whether the plan provides or omits participant-directed investment.

To show only one partial path: The instruction’s nonrestrictive illustration refers to whether “a contribution has been made[.]” Perhaps made and owing mean different things.

As always, it’s the plan administrator’s decision, with whatever advice the administrator considers.

But a service provider might make business decisions about what services it offers or provides.

[austin3515]

Seems to me there should be one standard that we're all using to decide if our clients have to spend $20,000 on an audit.  Man I hope someone clarifies this...  I feel like ARA or ASPPA needs to get an opinion.  Without clarity I take the very reasonable position of whatever is best for my client. 

Shameful the the DOL did not realize that this was an obvious question to be answered. 

[austin3515]

54 minutes ago, justanotheradmin said:

"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."

Ahh, I see this now (I didn;t see yours at first).  The key thing is "or for whom a contribution has been made to the Plan for this plan year or any prior plan year." It does not say when that contribution has been funded.  So I do think counting receivable only people is a clear and direct interpretation of what they said...

[Paul I]

There has been no official guidance that I have seen.  There is a comment on ERISApedia that the DOL informally has said the plan should use the accounting method that is consistent with the accounting method used in preparing the plan's financial information.  Following this approach, the plan could determine the participant on a cash basis, an accrual basis, or a modified cash basis. 

On a cash basis, if there are no assets in the account then participant is not counted regardless of any amounts allocable to the account after plan year end.  On an accrual basis, the participant is counted if there is an amount allocable to the account after plan year end.  A modified cash basis most likely would follow the accrual basis approach.

In the instance of cash basis accounting, the instruction that refers to a contribution that has been made could reasonably be interpreted to mean that a participant with only an unfunded contribution is not counted.

There is some logic to this alleged informal counting method, but it would be better to have something more official than a whisper down the lane from the DOL. 

 

[Peter Gulia]

Before one suggests asking the Labor department to clarify what “with a balance” means, consider the proverbial saying: “Be careful what you wish for, . . . .”

Or another practical caution: “Don’t unnecessarily ask a question if you’re not sure you’ll get the answer you’d like.”

[austin3515]

Ordinarily I would agree but the fact that there is debate about something so stupid is a perposterous waste of time. Do tbey need an audit or not? Should be simple. I have enough complexity to deal with 👍.

now that being said I am convinced that the text is clear an unambiguous.  Does anyone even see a gray area in that text? I see no ambiguity. Do I wish they used the words “count people with receivables only?” Yes I do. But I really think that’s only interpretation of the words they did choose

[Peter Gulia]

Whatever the instruction might mean, imagine a big recordkeeper might not apply it with an allocation receivable in generating draft Form 5500 reports. Imagine a recordkeeper counts participants with an account balance by looking to what “the system” says was the balance actually credited on December 31.

If the participants-with-balances count in a draft Form 5500 report suggests the plan’s administrator need not engage an independent qualified public accountant, often the administrator will accept that assumption.

An administrator that assumes its plan was, for a to-be-reported year, a small plan often has not engaged a CPA firm to audit the plan’s financial statements; so no auditor probes any count of participants. Administrators of these plans might not think to ask a lawyer for advice. Not every plan’s administrator has engaged a TPA other than the recordkeeper. So for many plans, an administrator might have no one questioning the recordkeeper’s counts.

After considering those possibilities (some might say likelihoods), how many 2023 Form 5500 reports will be filed using a with-a-balance count that omitted participants with only an allocation receivable?

Then, imagine the Labor department, lobbied by big businesses, publishes revised instructions to clarify that with-a-balance means a balance actually credited on the applicable date, and need not consider an allocation receivable.

If austin3515 suggested a plan’s administrator count as with-a-balance a participant with only an allocation receivable, might your small-business client be displeased with what some might perceive as your overly cautious advice?

Even when a client prefers not to be bothered with questions it expects a professional to resolve, is it safer at least to ask one’s client its choice about something that involves spending, as you put it, an extra $20,000?

[austin3515]

All super valid points.  

1 hour ago, Peter Gulia said:

If austin3515 suggested a plan’s administrator count as with-a-balance a participant with only an allocation receivable, might your small-business client be displeased with what some might perceive as your overly cautious advice?

Well I couldn't have made my point any better than you have for me.  Whether a plan needs an audit or not should not be based on how a TPA happens to interpret the 5500 instructions.  Thanks for making my point!  By the way the alternative of hirng a $500 an hour ERISA attorney to answer this question for my clients is likely not going to impress than much either.

[Peter Gulia]

I concur with your observation that, ideally, the government agencies could have done better work on their rulemaking. I believe those who worked on the project sincerely did the best they could, facing constraints on their time and attention and the limits of language. Life is imperfect.

We observe together that many clients don’t like spending money for a lawyer to parse text interpretation on what a client imagines ought to be a straightforward question with a simple answer.

But let it be the client that decides not to spend money on advice (beyond whatever advice you provide without seeking an incremental fee).

And with or without advice, let it be the client that owns the consequences of its choices, whichever choices it makes.

Observe that for the underlying question we remark on, there is at least one risk in either direction. Deciding that with-a-balance omits an allocation receivable risks that the administrator doesn’t engage an audit when ERISA required it. Deciding that with-a-balance counts an allocation receivable risks that the administrator spends money—which might be the employer’s money, or some participants’ money—on an audit ERISA didn’t require.

Governments often write ambiguous laws, rules, and instructions. An adviser tries to help her client deal with an ambiguity. But that help need not relieve an advisee’s responsibility for choosing.

[Gilmore]

I'm wondering if the fact that the DOL changed the beginning count methodology to account balances rather than account balances and non-participating eligible employees lends some weight to counting actual account balances as of the first day of the plan year and not account balances that might not show up in the plan until nine months later?