Posted by Maria T. Hurd, CPA
In a time when nonprofit organizations are facing higher demand for their services with fewer financial resources available to them, maintaining compliance with the ever-changing landscape of regulatory requirements is becoming increasingly difficult. As a result, it’s no surprise that we are seeing more and more organizations fall victim to noncompliance with DOL regulations regarding retirement plan audits.
Every year, we become aware of at least one organization that needs several years of plan audits because the participant count was not performed accurately. Inevitably, a plan official or service provider failed to count a group of participants that they did not THINK should be included. Unfortunately, the participant count is not a matter of opinion. For a defined contribution retirement plan, such as a 401(k) or a 403(b) plan, the rules are clear. The number of participants reported on the Form 5500 must include:
1-Any employee who is ELIGIBLE to participate in the plan, regardless of actual participation
2-Terminated or retired employees who have left their account balance in the plan
In many cases, the preparer of the Form 5500 erroneously counts only participants whose accounts were allocated a contribution during the year, or participants who have account balances. Both methods are incorrect and result in an inaccurate participant count. In many cases, the understated participant count results in a small plan filing, when the plan is actually a large plan that would have been required to attach audited financial statements for the plan to the Form 5500.
Plan officials who annually submit census information to the plan’s third-party administrator should ensure that all employees are listed, including employees that are not yet eligible, and employees who are eligible but not participating. A good way to verify the completeness of the census information is to reconcile the number of employees listed on the census with the number of W-2s and/or K-1s. Reporting all employees is especially important for 403(b) plan sponsors such as schools, which may have a substantial number of employees who are eligible due to the universal availability rules, but who do not choose to make any elective contributions to the plan. Universal availability rules for 403(b) plans are discussed in a previous post in our Employee Benefit Plan Audit Blog, 403b Plans: Universal Availability Exclusions.
After ensuring that all employees are listed in the census, plan officials must make sure they submit a list of participants who have separated from service due to termination of employment, retirement, disability, or death, but still have an account balance in the plan. Once an accurate participant count is achieved, plan sponsors can refer to I don’t want to grow up, I want to be a small plan, also from our firm’s sister blog, to determine whether prior small plan filings need to be amended to attach a financial statement audit. If so, our blog archive includes several entries to assist with the selection of a qualified retirement plan auditor.
Contrary to popular belief, counting participants is not as easy as 1,2,3, but with practice, the process becomes much more intuitive and plan sponsors can file accurate Form 5500 information returns before learning the hard way as a result of an IRS or a DOL audit.