McKay Hochman Company, Inc.

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For Form 5500 purposes, are participants with plan balances the only ones who are counted?
Rev. 04/16/04, E-mail Alert 2004-8

No. The participant count used for purposes of coverage testing is the count to be used for the Form 5500. Therefore, the number of participants who have an actual balance in the plan may not be the correct number to use. For example, in a 401(k) plan, employees who are eligible to defer but do not defer, are to be counted as participants for purposes of the coverage test and the Form 5500 count of participants. Thus, the number is not restricted to only those who have an account balance.

The number of participants is determined as of the first day of the plan year. DOL Regulation 2510.3-3(d) defines the methodology to use. Employees who satisfy the eligibility requirements and enter the plan prior to or on the first day of the plan year, are included in the participant count. Thus, beware to also include those employees who actually enter the plan on the first day of the plan year. In addition, terminated vested participants remain in the participant count until their entire vested benefit is distributed in full from the plan.

Example of Participant Counting in a 401(k) Plan

As of January 1, 2009: Employees with an account balance on 12-31-08	68
Employees entering plan on 1-1-09	17
Participants eligible to defer but who have not deferred	30
Terminated employees with a vested account balance	15

Total participant count for the Form 5500	130

Thus, in this example, the plan would not qualify as a small plan and would have to file as a large plan and would be subject to the Independent Qualified Public Accountant audit.

Bill Grossman, QPA

DOL Regulation 2510.3-3(d):

(d)	Participant covered under the plan,
(1)	(i)	An individual becomes a participant covered under an employee welfare benefit plan on the earlier of:
		(A)	The date designated by the plan as the date on which the individual begins participation in the plan;
		(B)	The date on which the individual becomes eligible under the plan for a benefit subject only to occurrence of the contingency for which the benefit is provided; or
		(C)	The date on which the individual makes a contribution to the plan, whether voluntary or mandatory.
	(ii)	An individual becomes a participant covered under an employee pension plan —
		(A)	In the case of a plan which provides for employee contributions or defines participation to include employees who have not yet retired, on the earlier of:
			(1)	The date on which the individual makes a contribution, whether voluntary or mandatory, or
			(2)	The date designated by the plan as the date on which the individual has satisfied the plan's age and service requirements for participation, and
		(B)	In the case of a plan which does not provide for employee contributions and does not define participation to include employees who have not yet retired, the date on which the individual completes the first year of employment which may be taken into account in determining—
			(1)	Whether the individual is entitled to benefits under the plan, or
			(2)	The amount of benefits to which the individual is entitled, whichever results in earlier participation.
(2)	(i)	An individual is not a participant covered under an employee welfare plan on the earliest date on which the individual—
		(A)	Is ineligible to receive any benefit under the plan even if the contingency for which such benefit is provided should occur, and
		(B)	Is not designated by the plan as a participant.
	(ii)	An individual is not a participant covered under an employee pension plan or a beneficiary receiving benefits under an employee pension plan if—
		(A)	The entire benefit rights of the individual:
			(1)	Are fully guaranteed by an insurance company, insurance service or insurance organization licensed to do business in a State, and are legally enforceable by the sole choice of the individual against the insurance company, insurance service or insurance organization; and
			(2)	A contract, policy or certificate describing the benefits to which the individual is entitled under the plan has been issued to the individual; or
		(B)	The individual has received from the plan a lump-sum distribution or a series of distributions of cash or other property which represents the balance of his or her credit under the plan.
(3)	(i)	In the case of an employee pension benefit plan, an individual who, under the terms of the plan, has incurred a one-year break in service after having become a participant covered under the plan, and who has acquired no vested right to a benefit before such break in service is not a participant covered under the plan until the individual has completed a year of service after returning to employment covered by the plan.
	(ii)	For purposes of paragraph ( d )(3)(i) of this section, in the case of an employee pension benefit plan which is subject to section 203 of the Act the term “year of service” shall have the same meaning as in section 203(b)(2)(A) of the Act and any regulations issued under the Act and the term “one-year break in service” shall have the same meaning as in section 203(b)(3)(A) of the Act and any regulations issued under the Act.

To learn more, call 973-492-1880 or e-mail info@mhco.com.