OUR THOUGHTS ON:

The 80-120 Rule: Does Your Retirement Plan Require an Audit?

ERISA

By Lara Fuller

The economy continues to have its ups and downs. Whether your company is growing and you are adding employees or if you are downsizing and possibly considering eliminating your benefit plan, the number of participants in your plan can significantly fluctuate from year to year. As a result, you may now be required to have an audit of your plan or, maybe your plan is small enough that and audit is no longer required.

In order to determine the audit and filing requirements for qualified retirement plans, it is necessary to be aware of what has become known as the 80-120 Participant Rule. In general, plans covering 100 or more participants at the beginning of a plan year are called “large plans” and require an audit, while plans covering fewer than 100 participants at the beginning of a plan year are called “small plans” and do not require an audit. The 80-120 Participant Rule is an exception to the general rule and allows the plan administrator to elect to complete the annual return/report in the same category (“large plan” or “small plan”) as was filed for the prior year return/report. Therefore, until the retirement plan’s participant count at the beginning of a plan year goes above 120, the plan can continue to file as a “small plan” and would not require an audit. Once the retirement plan’s participant count at the beginning of a plan year exceeds 120, the plan will be classified as a “large plan” and would require an audit for that year, as well as for each subsequent year until the beginning of the year participant count decreases to 99.

For example, ABC, Inc. 401(k) Plan (ABC), a calendar year plan, had 98 participants on January 1, 2010. For the 2010 plan year, ABC filed Form 5500 as a “small plan” and was therefore not required to attach an audited financial statement to the annual Form 5500 filing. Participation increased during the year, and as of January 1, 2011, the plan had 112 participants. ABC can elect to file as a “small plan” for the 2011 plan year since participation did not increase to over 120. Thus, for the 2011 plan year, although there are more than 100 participants as of the beginning of the plan year, the plan is not subject to the audit requirements faced by “large plans.” Once participation reaches 121 or greater at the beginning of the plan year, ABC will be required to attach an audited financial statement to the annual Form 5500 filing. Assuming participation in ABC reaches more than 120 participants as of the beginning of a plan year, ABC will be required to attach an audited financial statement to the annual Form 5500 filing for that plan year, and all subsequent plan years, until participation at the beginning of the plan year decreases to 99 or less.

For Form 5500 purposes, a “participant” is an individual in one of the following categories: 

  1. Active Participant – An individual currently in employment who is earning credited service under the plan. An individual who is eligible to participate in a 401(k) plan but has opted not to defer any money is considered an active participant.
  2. Retired or Separated Participant – Individuals who are retired or separated from employment and are receiving benefits under the plan or have an account balance in the plan.
  3. Other Retired or Separated Participants Entitled to Future Benefits – Individuals who are retired or separated from employment and who are entitled to begin receiving benefits under the plan in the future.
  4. Deceased Participants – Individual who has one or more beneficiaries who are receiving or entitled to receive benefits under the plan.

© 2013 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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