Starting with the 1999 Form 5500 filing season, the Department of Labor substantially changed the filing format of Form 5500 as well as how Form 5500 will be processed.
Definition of a Large Plan
A Large Plan is a pension (profit sharing, 401(k), 403(b), money purchase, etc.) Plan that has over 100 participants at the beginning of the Plan year. A participant is defined as follows:
Short Plan Year
If the Plan would qualify as a large Plan and its Plan year is seven months or less, the Plan sponsor may elect to defer the audit requirement to the following Plan year. In the subsequent year, if the Plan qualifies as a small Plan, the Plan sponsor will nevertheless be required to have the Plan audited for the short Plan year.
80 to 120 Participant Rule
If the number of participants reported in Part II, line 6, of Form 5500 is between 80 and 120 and a Form 5500 was filed in the prior year, the filer may elect to complete the current year’s Form 5500 in the same category (large or small Plan) as was filed in the previous year. For example, if the number of participants at the beginning of the Plan year is 110, and a Form 5500 was filed in the previous year as a small Plan (Schedule I was filed instead of Schedule H), the filer may elect to continue to file Schedule I and forego the audit requirement. However, if the participant count is 121, then regardless of what category of Plan was filed in the previous year, the current year’s form 5500 must include Schedule H and the Plan must be audited.
Since the audit requirement is solely dependent on the number of participants, an accurate participant count is critical. A Plan sponsor has the option of distributing participant account balances for inactive participants providing their vested account balance is $5,000 or less. Accordingly, if your participant count is such that you may be required to have the Plan audited, you may consider distributing inactive account balances under $5,000 to the participants prior to the end of the Plan year.