Wrong Participant Count, No Audit Filed Ever, Want to Terminate

I think I probably know how this is likely to have to play out but welcome any suggestions from the leaned group here.

Company has had a 401(k) plan for a few years now.  They have over 300 eligible employees / "participants" but have never had more than 50 active participants in the plan in a particular year.  They have timely filed 5500s (well--actually 5500-SFs) for all the years but misconstrued how "participants" are determined and counted and so reported only active participants.  As a result, audits have never been conducted / filed for the plan.  With even fewer people participating due to COVID and the employer facing financial issues, they have decided the plan is not worth the expense and want to terminate altogether.  Then, some helpful soul early on in the termination process noted the need to file a final Form 5500 and audit in connection with terminating which got them asking "what audit."

Without that helpful notation of the audit requirement, they likely would have terminated the plan, filed a 5500 as in the past with no audit and rolled along without obvious issues and been blissfully ignorant.  Now that they know the errors of their ways, however, nobody can sign the final Form 5500 without an audit without perjuring themselves.  And they'll need to get audits for the prior years in order to get an audit for the 2020 final year.  Which is, of course, all going to be very expensive for a company that headed down this path because of financial concerns.

Oh, and my suspicion is that, like the mistake in counting participants, there are likely to be some other "issues" that may get surfaced as the result of any audit.

Any ideas for coming at this in an appropriate but most efficient and least costly manner?

Did they do their own admin and 5500, as in no TPA?  If there was a service provider involved, what did the service agreement look like?

I find it hard to believe that a 50 participant plan didn't have a service provider who found it strange that they had 100% participation or compared reported payroll to a W-3 or something along those lines...

Thanks.  Yes, there is a service provider of sorts involved although I've not seen the service agreement and it's a bit unclear how involved they were with the 5500 but the employer very much agrees with you that they should have flagged this before.  I'm not sure how much recourse we may have against them but that will be part of the analysis as well.

There isn't a good solution.  The correct answer is get the audits done. 

Any other answer is the wrong one.   You might be able to get a prior TPA on something but my guess it will take expensive litigation.  

This is just bad.  

From prior experience, agree going against the TPA is likely to be a long and expensive road.

17 hours ago, ESOP Guy said:

There isn't a good solution.  The correct answer is get the audits done. 

Any other answer is the wrong one.   You might be able to get a prior TPA on something but my guess it will take expensive litigation.  

This is just bad.  

This is my answer, too.

18 hours ago, RatherBeGolfing said:

Did they do their own admin and 5500, as in no TPA?  If there was a service provider involved, what did the service agreement look like?

I find it hard to believe that a 50 participant plan didn't have a service provider who found it strange that they had 100% participation or compared reported payroll to a W-3 or something along those lines...

I always question 100% participation.  Especially with groups of more the 8 or 10.

Thanks to all.  This is where I am too.

Not my idea but employer has questioned whether they might just leave the erroneously filed 5500s as-is and simply do a 2020 final 5500 with correct numbers and include an audit for just that year.  My initial reaction is I'm not sure a reputable auditor would or could just do an audit for the 2020 short year under the facts here and, even if they did, seems there will be a big discrepancy in year-end 2019 numbers and beginning of year 2020 5500 numbers.  I assume that might trigger some automatic question or investigation but I'm not sure how the 5500 matching may work.  If it did trip something, however, seems that likely means they could be subject to significant liability for failure to file correct / complete 5500s in the past and possibly not permitted to get audits done and amended /corrected 5500 filings if an audit / inquiry were initiated.  Any experience or additional thoughts / risks to note to try and steer them away from this possible approach?

2 hours ago, 401 Chaos said:

  Any experience or additional thoughts / risks to note to try and steer them away from this possible approach?

Not the same set of facts but the one experience that comes close to your situation is the following.

Many years ago a client of the firm I worked for back in those days was audited by the DOL.   It was determined the counts were done wrong for years and they should have had been doing audits for years.    The DOL's position was get the audits done for all years.  They showed no interest in compromise or any flexibility. 

Based on that very small sample size I have to say if the government figures out the audits are missing they are going to take a hard line on getting them done. 

15 minutes ago, ESOP Guy said:

Not the same set of facts but the one experience that comes close your situation is the following.

Many years ago a client of the firm I worked for back in those days was audited by the DOL.   It was determined the counts were done wrong for years and they should have had been doing audits for years.    The DOL's position was get the audits done for all years.  They showed no interest in compromise or any flexibility. 

Based on that very small sample size I have to say if the government figures out the audits are missing they are going to take a hard line on getting them done. 

I have had similar experiences.

58 minutes ago, 401 Chaos said:

employer has questioned whether they might just leave the erroneously filed 5500s as-is and simply do a 2020 final 5500 with correct numbers and include an audit for just that year. My initial reaction is I'm not sure a reputable auditor would or could just do an audit for the 2020 

Correct.  No reputable auditor would.  In fact, if you find an IQPA who is willing to ignore prior years, run the other way.

1 hour ago, 401 Chaos said:

there will be a big discrepancy in year-end 2019 numbers and beginning of year 2020 5500 numbers.  I assume that might trigger some automatic question or investigation but I'm not sure how the 5500 matching may work. 

Almost guaranteed that you will get caught.  Might take a few years, but they will come knocking.

1 hour ago, 401 Chaos said:

subject to significant liability for failure to file correct / complete 5500s in the past and possibly not permitted to get audits done and amended /corrected 5500 filings if an audit / inquiry were initiated.

Their position will probably be that the 5500s for past years have never been timely filed because they were incomplete.  And you might not be eligible for DFVCP.  As a service provider, I think you have take the hard line approach and tell them to do it right, or find someone else to help them.  If they agree to do it right, get paid up front.

Thanks again to all.  Very helpful.

Agree with Rather be Golfing and ESOP Guy-- incomplete returns are forever open to review in risk terms. The only ray of sunshine I can see is if the last short year is < 6 months, you could do the two audits in one visit rule , but that is a small plus in an otherwise difficult situation.