Employers maintaining qualified retirement plans are generally required to file an annual Form 5500 regardless of the number of participants in the plan, except for one-participant plans with less than $250,000 in assets.

Employers who sponsor welfare benefit programs, such as medical, dental, vision, short-term disability, long-term disability, group term-life insurance programs, employee assistance and severance plans are required to file a Form 5500 when there are more than 100 participants as of the first day of any plan year. Insurance carriers should automatically provide information on a Form Schedule A, identifying the number of participants as of the end of each plan year. However, such information doesn't always determine the number of participants on the first day of each plan year. For example, assume a company had 98 employees in a health plan on Dec. 31, 2010, and received a Schedule A reporting 98 participants. The Schedule A would not be accurate for the number of participants on Jan. 1, 2011, if five new employees enrolled as of Jan. 1, increasing the number of participants to 103.

The above rules sound simple. But how does an employer determine who is a participant? Here are some guidelines.


Retirement plans

An employee is deemed to be a participant in a qualified retirement plan if the employee is eligible to elect to reduce their salary to participate in the 401(k) plan, or is eligible for a contribution under a discretionary profit-sharing plan. Employees are also participants in defined benefit plans if they are eligible to receive a benefit accrual during a plan year. Vesting is irrelevant to counting participants. So if an individual is eligible to participate, even if they elect not to contribute and/or forfeit any employer contributions, an individual is still considered to be a participant.

For example, assume an employer has 120 employees, and 110 are eligible to participate in the 401(k). Only 60 employees actually elect to contribute a portion of their salary to the plan since the employer doesn't provide for any matching contribution and doesn't anticipate making a profit-sharing contribution. Under these facts, the plan has 110 participants, not 60.

Counting participants is particularly important for qualified retirement plans, since an annual audit is required if there are more than 100 participants as of the beginning of a plan year.


Welfare benefit plans

For purposes of medical, dental, group term-life insurance and other welfare benefit plans, the determining factor is whether somebody is an "actual participant" in the plan, as opposed to someone who is "eligible" to participate in a plan. The instructions for a Form 5500 provide that an individual becomes a participant covered under an employee welfare benefit plan on whichever of the three following dates comes earliest:

1. The date designated by the plan as the date on which the individual begins participation in the plan.

2. 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.

3. The date on which the individual makes a contribution to the plan, whether voluntary or mandatory.

Let's assume an employer has 110 employees. All employees are eligible to participate in an HMO or a PPO health plan, with a 20% employee cost for participation paid on a pretax basis under a Section 125 plan. If 60 employees elect to participate in the PPO and 50 employees elect to participate in the HMO, more than 100 participants do not exist for purposes of filing a welfare benefit plan Form 5500 if each health plan is assigned a separate plan number.

However, let's assume that the 60 employees who participate in the PPO have spouses and dependents. What would happen if the employer received a Schedule A from the insurance carrier for the PPO identifying 130 "covered persons" as of Dec. 31, 2010, including spouses and dependents? Would the employer be required to file a Form 5500 for the 2011 plan year, since over 100 participants would exist as of Jan. 1, 2011? The answer is no. The instructions to a Form 5500 provide that the number of participants is based upon active employees, exclusive of spouses and dependents who may be eligible for coverage.

The Schedule A nevertheless requires the number of "covered persons" to be identified. Thus, employers who have around 100 employees must carefully monitor the actual number of participants as of the first and last day of each plan year to document whether or not a Form 5500 is required to be filed. Billing statements will document the number of employees, as well as spouses and dependents. Retaining them will protect an employer if the Employee Benefit Security Administration issues a notice requesting a Form 5500 for a plan year during which no Form 5500 is required to be filed. This action is prudent, since the penalties for failing to file an annual Form 5500 are $15,000 per year to the Internal Revenue Service and $1,100 per day to the Employee Benefit Security Administration, a division of the Department of Labor.

If an employer determines that one or more Form 5500s were required to be filed, an employer may file late Form 5500s under the Delinquent Filer Voluntary Compliance program. The DFVC program was established by the EBSA in cooperation with the IRS. Under this program, the maximum penalties are substantially reduced.Assume that an employer with 50 employees fails to file a Form 5500 for a Section 401(k) plan for four years. The penalty is $750 per year, with a maximum penalty of $1,500. Further assume an employer did not file a welfare benefit plan for four years, where there were over 100 participants. Under these facts, the penalty for each late Form 5500 for a larger plan with 100 participants is $2,000 per plan year. However, the maximum penalty is $4,000 for all late Form 5500s filed for a single plan.

The DFVC program is popular with employers who have failed to file Form 5500s, and we commend the IRS and DOL for their efforts in establishing and supporting such programs. The area of employee benefits is complex. But having reasonable programs to correct innocent errors is a significant benefit to employers. -F.P.

Contributing Editor Frank Palmieri, CPA, JD, LL.M (Taxation) is a partner with the law firm of Palmieri & Eisenberg, with offices in Princeton, N.J., and Alexandria, Va. He is a national speaker and writer on employee benefits issues and is a fellow in the American College of Employee Benefits Counsel.

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