How Do I Count Participants to Determine Whether My Plan Requires an Audit?
Only large plans with 100 or more participants need to file a plan audit with the Form 5500, but determining the number of participants isn’t as straightforward as it sounds.
You can always check your current participant account by visiting your Vestwell portal. However, please note that this count will be as of the current date (not the beginning of the plan year) and will not include terminated participants with balance (see below point 4).
For a more detailed report, you can also download your eligibility report from the Reports tab. You will need to filter the sheet to include terminated participants with balances and participants that have entry dates on or before the first day of the plan year in question. Please note that the entry dates for terminated participants do not show on this report, but it will give you an approximate participant count. For an exact participant count as of the beginning of the plan year, email firstname.lastname@example.org and request a custom report.
How to count the number of participants:
- Consider retroactive entry dates. The general practice is to consider the retroactive entry date as establishing the individual’s rights to plan benefits for the plan year for which the annual report is being filed and therefore counting them.
- Remember to make the determination on all employees as of the first day of the plan year.
- An employee is a participant in a 401(k) plan if s/he has the right to defer compensation under the plan, regardless of whether s/he actually makes a deferral election.
- Don’t forget about terminated participants. If a terminated participant has no vested rights in their benefit, participant status will cease after the participant incurs a one-year break in service rule. For example, if the terminated participant is zero percent vested in the employer-derived benefit but has made elective deferrals because of a 401(k) arrangement also included in the plan, participant status would not terminate after a one-year break in service unless by that time the elective deferrals had been fully distributed since the elective deferrals are 100% vested.
- Missing participants are not included, even if they have a vested balance if their balance has already been turned over as a forfeiture.
Some additional special rules for certain kinds of plans:
- Plans with between 80-120 participants. If a plan that has been filing the forms required for a small plan filer has its participant level rise above 99, but not above 120, it may continue to treat itself as a small plan filer and therefore avoid the plan audit requirement. So long as the participant count does not rise above 120, there is no limit on the number of years an employer can use this exception as long as the small plan filer rules were applied in the year before. This exception is not applicable to a new plan that starts with a participant count above 99. A plan must have at least one year with a participant count below 100, where it is eligible to file as a small plan filer before it can use this exception when the participant count rises above 99. If for any year that the participant count is above 99 but not above 120, the employer elects to be treated as a large plan filer, then it must file as a large plan filer for all subsequent years unless the participant count drops below 100.
- Employers that sponsor two or more plans. Each plan determines its filing status separately, based on the participant count in that plan. The fact that plans are permissively aggregated for coverage testing does not affect their filing status for Form 5500 purposes. However, if the two or more employers are in a controlled group or an affiliated service group, they may maintain a single plan and one audit. As such, the employer should add the total number of participants to determine whether or not it must undergo a large plan audit. To be a single plan, the assets of the plan must be available on an ongoing basis to pay all benefits of the plan. This requirement can be confusing for defined contribution plans. For example, where participants in a defined contribution plan direct their own investments, only the investments chosen by a participant are available to pay that participant's benefits. The right of participants to direct their own investment should not alone cause the plan to fail to be a single plan. Rather, the manner in which the plan would deal with non-directed investments must be examined.
- Non-related employers maintaining a single plan (such as multiple employer plans (MEPs)). Two or more employers that do not constitute a controlled group or an affiliated service group are permitted to maintain a single plan in certain circumstances, and it may be possible to have only one annual return to cover all employers. As such, a plan is considered to have more than 100 participants if the aggregate number of participants in the MEP equals 100 or more.
Additional resources from other sources:
- DOL: Selecting An Auditor for Your Employee Benefit Plan
- AICPA: The Importance of Hiring a Quality Auditor