5500 audit requirement first year

[Tom]

This plan is our CPA client not our TPA client.  The TPA is now indicating the plan needs an audit for 2024 which of course will not be done by Oct 15.  The 2023 5500 shows 125 participants with an account balance as of 12/31/2023.  So presumably there would be 125 as of 1/1/2024 which would mean an audit.  The plan never crossed the 120 threshhold under the old or new counting rules until now.

Why this is coming up now I don't know.   But it got us thinking - does account balance mean actual money deposited into ones account or does an accrued contribution count.  This employer likely funds the 3% nonelective and profit sharing contributions for 2023 sometime in 2024.  So some employees have an accrued plan balance as of 12/31/2023 but not an actual plan balance.  I believe admin systems count the accrual when determining the count for 5500 purposes.

Also, I know this has been commented on but I don't remember what the consequences are of filing a 5500 without the audit report, and adding it later as an amended 5500.

Thoughts? Thank you,

Tom

[Lou S.]

I haven't done it but you can search prior threads hear on B-link as this has come up a number of times.

I believe the two theories were -

1 - file now without an audit if you are sure you can get an audit done before the DOL letter of deficient filing requiring the audit be submitted in 30 (?) days.

2 - wait until you have the audit and file late under DFVC.

Which is better, I couldn't really say. In  the "old days" filing without the audit and attaching it later seemed to be the prevailing wisdom, but with DOL auto-match on e-filings, I believe you have to be prepared for a quick letter from the DOL so unless your audit ducks are in a row, you could be left scrambling with option 1.

Present the options to the client and let them make the call.

[CuseFan]

Regarding account balances, I personally believe in accrual based accounting but I know lots of others use cash-based and I think the instructions say you can use either but likely need to be consistent with your method from year to year. I'm long removed from 5500 world so hopefully other and more knowledgeable 5500 practitioners should be able to confirm or correct my response.

[Peter Gulia]

Even if the plan’s administrator reports the plan’s financial statements with accrual accounting:

To determine whether an individual participant “ha[d] [an] account balance[]” as the instructions for Form 5500 line 6g and other elements describe that construct, might it make sense to interpret the instruction considering what the participant would have seen had she looked up her individual account in the recordkeeper’s system on the relevant day?

Many individual-account retirement plans are administered using systems and services that have no facility for recording an accrual in an individual’s account.

Even if a service provider’s system counts in an individual’s account the individual’s share in the plan’s contribution receivable, does that by itself mean the plan’s administrator adopted accrual accounting for individuals’ accounts?

This is not advice to anyone.

[Tom]

We will push back on the TPA to make a decision about this.  I believe cash basis makes sense.  The participant sees no account balance as of 1/1/2024.  

To add to this - I just learned that 8 participants were 100% distributed but then residual earnings remained anywhere from $.02 to $.35.  I see record keepers writing these off at times.  It will be up to the TPA but it seems reasonable to count these individuals as zero balance as of 1/1/2024.  This will eliminate the audit.

Tom

[Peter Gulia]

Although many retirement plans’ administrators often rely, practically, on a third-party administrator or other service provider, deciding how to present a Form 5500 report is the plan administrator’s (typically, the employer’s) decision.

[David D]

This would definitely be the employers decision. And it would seem you would need to have the 2023 Form 5500 amended if you want to reflect participants with account balances to be less than 120 at the end of the year.

[austin3515]

5500 Instructions for 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.
 

A Safe Harbor Nonelective receivable is a "contribution that has been made to the plan for this plan year or any prior plan year."  The rub here is that it doesn't specify WHEN you determine if the the contribution has been made.  Is it implied that it is as of 12/31/2024?  I think that is one reasonable interpretation personally.  Note that they could have specified but did not. Worth noting that a safe harbor nonelective contribution is not due to be funded until the last day of the next plan year.  So the funding theoretically might not even be done by the time the 5500 is filed, let alone by the last day of the plan year.  Let's say the Plan indicates that the Safe Harbor is discretionary for the HCE's and that decision is made on December 15, 2025 (calendar year plan).  What would I enter for participants with account balances as of the last day of the Plan Year for 12/31/2024 when I file my 5500 tomorrow, even if I wanted to count "receivable only" people as participants?  My logic here assumes that the participants with account balances reported at the end of the year and the beginning of the year are the same.  So really the counts of participants with balances is the count as the ball drops in Times Square (if you are on the East Coast). 

And I also use logic and ask myslef, is _____________actually counting receivable only participants when they are doing a cash basis 5500??  (Fill in the blank with any number of large plan providers out there.).  I mean the answer is just for sure no.  I've never asked ________ but I'm reasonably confident of the answer, which I guarantee is more based on systems limitations than a divine understanding of the 5500 instructions.  

[austin3515]

Follow up:  How do you guys feel about a participant whose vested account balance is $0 (0% in profit sharing only) on a recordkeeping platform where the forfeiture has not been processed.  Terms of the plan say this participant is "Deemed to have received a distribution which triggers the forfeiture."  I say they are not counted.  Exhibit A in my legal brief  is that if this was a pooled/trustee directed plan we wouldn't even ask the question, so using a recordkeeper should not change the answer.

[ESOP Guy]

On 10/3/2025 at 11:04 AM, Tom said:

Also, I know this has been commented on but I don't remember what the consequences are of filing a 5500 without the audit report, and adding it later as an amended 5500.

Thoughts? Thank you,

Tom

The other topics/questions seem pretty well covered so I am going to reply to just this part.  

This comes up in the ESOP world a lot.  I have 4 12/31/2024 ESOPs that are audited plans and still don't have their 12/31/2024 stock price yet.  Obviously they aren't going to be ready to file a complete 5500 by the 15th.  

Up  until a few years ago we wouldn't hardly bat an eye at the idea of put a pdf letter saying the auditor's is ready we will file an amended return once it is ready.  

Not anymore, our firm's rule is a hard we will only file with that attachment if the client or auditor writes that attachment and gives us written instructions to file that way.  Our only recommendation is file late an DFVCP.  Management is very clear on this. 

Why? 

It hasn't happened a lot but it has happened a few times the government has taken the position a 5500 without an audit report is an incomplete return and said the amended return wasn't an amended return but the first legit, and late, filing.   They have sent a penalty notice with a very large number on it.   So far we have gotten them to waive the penalty by writing a letter.  The simple fact is while the odds of that happening seems very low the cost is very high.  The DOL penalty is a few grand/day with no cap!  On the other hand the worst you pay under the DFVCP is $4,000.  

The risk of getting hit with that DOL penalty is just not worth it regardless how small you think the odds are.  Our management will not allow us to put our firm at risk of having to pay that kind of money by a client saying, "but xyz firm told us it was ok".   

 

Just thought I would add that to this discussion. 

 

See

https://www.newfront.com/blog/form-5500-updates-participant-count-win-and-large-plan-filer-warning

 

I quote:

 

There have been rumblings in the retirement plan industry of informal DOL comments suggesting that the ability to “negotiate” the penalty is going to be much more difficult going forward. Apparently, the DOL intends to crack down on the “file without the audit” approach unless the amended return is filed with the complete IQPA attached before the Rejection Letter is issued (for those keeping track – that is before the 30th day after the extended filing deadline). If the employer is not 100% certain that the IQPA is going to be completed by the end of October or first week of November (for calendar year filers), be aware that this approach may start costing significantly more than Option 2 and there will be little room to negotiate down the initial assessment.