401(k) Participant Count for Audit Requirement

I have a client who is hoping their audit requirement is eliminated for 2021.  The active/eligible participants plus inactive with a plan balance as of 1/1/2021 are 98.  A fixed match true-up was calculated and funded in 2021 for those eligible in 2020.  Included in the true-up were 3 participants who terminated in 2020 and had no plan balance as of 1/1/2021.  So their plan balance was zero on 1/1/2021, then the small match true-up was deposited in mid-2021 and then they had that paid out as well.  So they had no plan balance as of 1/1/2021 unless you count their true-up A/R.  If we count them as participants with a balance as of 1/1/2021, then the count is 101.  The plan reports on the 5500 and audit on a cash basis.  

I suspect everyone will say get the audit to be sure and that is what I wil tell them.  I did look at 1/1/2022 as well which is clearly 98 and so 2021 will be the last year (for now) which I guess is the silver lining.

Just curious about comments at this point.  I will tell the client to get the audit.

Tom

20 hours ago, Tom said:

The plan reports on the 5500 and audit on a cash basis.

On this basis I would argue a 1/1 count of 98 and no audit. Even on an accrual basis you could argue that if the residual contribution true-up was an accrued contribution as of the prior 12/31 that the payment thereof was a distribution payable as of 12/31 - so still not participants at 1/1, IMHO.

I think the 3 terminated participants that received a contribution in 2021 are considered terminated participants with a vested balance at 12/31/21.  Just because the plan didn't fund it until 2021 doesn't mean it can be ignored for 2020 since it was based on 2020 compensation.

Is the audit on a modified cash basis?  If yes, this method could still record contributions receivable.

No one has mentioned the 80-120 rule so far.

Please see below as the information also applies to 2021 years.

But wait, there is an exception…the 80-120 participant rule. This exception provides some level of relief for plan sponsors to avoid having to change filing categories. Included in the Department of Labor (“DOL”) Regulation 2520.103-1(d), “plans with between 80 and 120 participants (inclusive) at the beginning of the current plan year may elect to complete the current year return using the same category (that is, “large” plan or “small” plan) that was used in the previous year.”

The Department of Labor (“DOL”) has graciously provided this exception in the instructions to the Form 5500. As it relates to the determination of the necessity of a 2020 plan audit, the DOL states, “if the number of participants reported on line 5 is between 80 and 120, and a Form 5500 Annual Return/Report was filed for the prior plan year, you may elect to complete the return/report in the same category (‘‘large plan’’ or ‘‘small plan’’) as was filed for the prior return/report. Thus, if a Form 5500-SF or a Form 5500 Annual Return/Report was filed for the 2019 plan year as a small plan, including the Schedule I if applicable, and the number entered on line 5 of the 2020 Form 5500 is 120 or less, you may elect to complete the 2020 Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing the Form 5500-SF instead of the Form

Bob the Swimmer beat me to it... I was thinking the same thing.  If your client could file the Form 5500 as a small plan filer for 2020 (with Schedule I), then they can once again file as a small plan filer for 2021 since the count at the BOY was 120 or less... hence, no audit requirement.

The way I read the OP they have been filing as a large plan and doing the audit, so filing the same as last year would be filing as a large plan and therefore an audit is required.  (Assuming you agree that the 3 receiving a true up "count" in the count)

On 4/8/2022 at 6:14 PM, ESOPMomma said:

Bob the Swimmer beat me to it... I was thinking the same thing.  If your client could file the Form 5500 as a small plan filer for 2020 (with Schedule I), then they can once again file as a small plan filer for 2021 since the count at the BOY was 120 or less... hence, no audit requirement.

Not "could file", but "did file".

As of 12/31/2020, they are due to be paid a benefit, regardless of the measurement basis.  Look at it from the perspective of a pension plan, if they aren't in pay status, no other participant has an amount that belongs to them, just the promise to be paid in the future; yet those participants would all be included.

And I have never seen an auditor use anything other than a receivable amount, unless it was not a deductible allocation related to the same taxable period.

I don't see how you can say they are not a participant on 12/31 and they are a participant on 1/1.  I don't think cash vs. accrual has anything to do with it.

If the true-up were going to be offset by a payable, then I'd say there would have had to be 1099s for those amounts issued before they were even deposited.

update to Nate's emoji:  I just meant that if the claim is that they have a contribution receivable but also that amount as a corresponding payable, in an attempt to "deem them no longer a participant as of 12/31", then that payable should have generated a 1099-R for the same year, so that the participant indeed is deemed to have a zero balance from the offsetting receivable/payable.