5500 and independent audit required for cafeteria plan covering more t

[richard]

I've just reviewed last year's 5500 filing for a cafeteria plan. They files a 5500C/R and Schedule F. However, they had 119 employees eligible and 82 employees participating. Oops. (I'll presume they have similar numbers this year.)

1. Should they have filed a 5500, complete with audit, since the 100 participant test is based on eligible participants (like 401k's)?

2. While I forget the specifics of the corridor rule (where under certain circumstances, if you are slightly over 100 participants, you are allowed to file 5500C/R, does this corridor rule apply to cafeteria plans as well as pension plans? (I can check to see if the head counts work for us here).

3. If they blew it, does anyone have experience with this type of amended filing for cafeteria plans?

Any other ideas ...

[Guest BENEFISH]

If the filing is for a "cafeteria plan" only, meaning you did not check "welfare benefit plan" (Item 6a),then the filing of Form 5500 is a requirement under IRC Section 6039D only. Thus, the information required is very limited. In fact, the items required are exactly the same whether you file Form 5500 or 5500C/R; although, technically, Form 5500 is required if you have over 100 participants (employees for whom at least $1 has been withheld on a pre-tax basis). You won't even get to question 26a regarding the audit requirement, so obviously no audit is required. If you are filing for a plan which is both a "welfare benefit plan" and a "fringe benefit plan", the audit requirement only exists for "funded" plans. You may need help determining whether or not your plan is funded. The "coridor rule" applies the same (e.g. 80 to 120, can file same as last year). But, once again, it doesn't matter that much. You don't gain the same advantage as you do with a pension plan by being able to avoid audits, full Form 5500, etc. Richard, you may be blowing this whole thing out of proportion. A thorough reading of the instructions will likely provide all of the information you need.

[Guest Connie]

How does one determine if a welfare benefit plan is "funded"?

[Guest BENEFISH]

A “welfare fund” is defined within Section 419 of the Internal Revenue Code to be “any fund which is part of a plan of an employer, and through which the employer provides welfare benefits to employees or their beneficiaries”. While the Internal Revenue Service (IRS) does not require a welfare fund to utilize a trust in order to be considered a welfare fund, other enforcement agencies, such as the Department of Labor (DOL), generally require that plan assets be held in trust.

Trusts used to fund welfare benefits may be taxable or non-taxable. Taxes owed on taxable trust earnings are due and payable by the employer who sponsors the trust. Non-taxable trusts, often referred to in this context as “VEBAs” (Voluntary Employee Beneficiary Association), allow for the accumulation of asset earnings on a non-taxable basis. These non-taxable VEBAs are set up as separate non-taxable entities with tax identification status separate from the sponsoring employer.

Under enforcement of its “plan asset regulations”, the DOL requires that plan assets be held in trust. Often employers do not intend to maintain a “funded” plan and do not intend that there be “plan assets”. The DOL, however, deems certain practices to have the effect of creating a funded plan in spite of employer intentions. For example, participant contributions (after-tax) to a welfare plan are deemed to be “plan assets” and are required to be held in trust in many circumstances where self-insured benefits are provided. Also, certain language in the SPD may imply that plan assets exist, or that a trust exists, or that the plan is indeed "funded". Sometimes this is not what the employer intended, but they get burned by boiler plate language used by the insurance company or TPA.