Participant Counts, the 80–120 Rule, and a Deficient Fidelity Bond
Summit Tool & Die sponsors a calendar-year 401(k) with 120 participants on January 1, 2025 (95 active eligible employees and 25 former employees with balances). Plan assets are $8.2 million, including $600,000 of employer stock. The plan had 118 participants on January 1, 2024 and filed a Form 5500-SF for 2024 on October 15, 2025. The plan's fidelity bond is $100,000. The owner wants to terminate the plan in 2026, use $25,000 of plan assets to pay the TPA's final termination fees, and pay himself $15,000 for the time he spent deciding to terminate the plan.
1. Was the plan eligible to file Form 5500-SF for 2025, and was an audit required? Explain the participant-count and 80–120 rules.
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Participant counts include active employees eligible to defer, former employees with account balances, and beneficiaries receiving benefits. The plan had 120 participants on January 1, 2025, so it exceeds the 100-participant threshold for a large plan and would ordinarily require a Schedule H and an independent audit. The CPA's explanation-that fewer than 100 participants existed on the first day-is wrong on these numbers.
The plan may still be eligible for the 80–120 exception in the Form 5500 instructions. A plan with at least 80 but not more than 120 participants at the beginning of the plan year may file as a small plan if it filed as a small plan for the prior year. Here, 120 is within the range and the 2024 filing was a Form 5500-SF, so the plan may elect small-plan status for 2025 and avoid the audit. The election is not automatic; the plan must meet the prior-year filing condition. The October 15, 2025 filing date for 2024 is timely only if an extension was obtained; otherwise it was late and should be evaluated for delinquent-filer relief.
2. Calculate the required ERISA fidelity bond and evaluate the $100,000 bond.
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ERISA §412 requires a fidelity bond of at least 10% of plan assets, with a minimum of $1,000 and a maximum of $500,000. The maximum is increased to $1,000,000 for a plan that holds employer securities. Here, 10% of $8.2 million is $820,000. Because the plan holds $600,000 of employer stock, the $1,000,000 cap applies, and $820,000 is below that cap. The required bond is therefore $820,000, not $500,000 and not $100,000.
The existing $100,000 bond is deficient by $720,000. The bond must be with a surety company and must cover fraud or dishonesty by persons who handle plan funds; it is not fiduciary liability insurance. A deficient bond is a compliance violation and exposes the plan and fiduciaries to DOL enforcement. The plan should obtain the correct bond amount retroactively if possible and document the correction.
3. Can the plan pay the $25,000 termination fees and the owner's $15,000? What termination steps and deadlines apply?
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Plan assets may pay reasonable expenses of administering the plan, including termination administration such as calculating distributions, preparing final notices, and filing the final Form 5500. The $25,000 TPA fee is likely payable from plan assets if it is reasonable and documented as plan administration. The $15,000 to the owner for deciding to terminate is a settlor expense-it relates to the employer's business decision, not plan administration-and generally cannot be paid from plan assets. Paying it would also raise §406 self-dealing and §408(c)(2) reasonable-compensation concerns.
Termination steps include a board resolution, a plan amendment, participant notices, a §402(f) distribution notice, a reasonable election period, and distribution of assets. The final Form 5500 is due seven months after the plan terminates (for a December 31, 2026 termination, July 31, 2027), with an extension available to October 15, 2027. If the plan is a large plan for its final year, a Schedule H and audit are required. The plan should also check for partial termination vesting if 20% or more of participants were terminated and confirm that all forfeitures and allocations are completed.