Retirement plans including 401(k), 403(b) and others have become a staple at almost every organization. Prospective and current employees expect the company will actively participate in helping them save for retirement by offering a plan and making annual contributions or other payments. Although these plans offer a valuable tax-deferred method for retirement savings, they can also present compliance challenges for the employer/plan sponsor. As a plan grows and adds more participants, there are additional rules and regulations to follow, culminating in the need for a benefit plan audit. These audits are generally required for plans with over 100 active participants, but there are some exceptions. The most common is known as the 80/120 rule, which allows qualifying plans to “opt out” of an audit when certain conditions are met. To help clients, prospects and others understand the rule, JLK Rosenberger has provided a summary of key details below.
What is the 80-120 Rule?
This rules state that if the number of participants reported on Form 5500 is between 80 and 120 at the beginning of the plan year, the plan may elect to complete the current year’s Form 5500 in the same category (large or small plan) as was filed in the prior year. (Note that a large plan is defined as a plan that has 100 or more participants, and a small plan is one that has less than 100 participants.) As an example, at the beginning of a plan year there are 115 participants in the plan, and the prior year the plan filed as a small plan. In this case, the plan can elect to file in the current year as a small plan. Filing as a small plan would allow them to avoid the plan audit requirement. However, if the participant count is 121 at the beginning of the plan year, then an audit must be conducted.
Who Counts as an Eligible Participant?
To determine if your plan qualifies to forego an audit under the 80/120 rule, it’s important to understand how eligible participant calculations are made. Unfortunately, it’s not just a simple calculation of the number of employees making contributions to the plan. Generally, an eligible participant would be anyone who is eligible and participates as well as those who are eligible but choose not to participate. Aside from current employees, there are other eligible participants who need to be considered, including:
- Retired Employees – This includes a retired eligible employee who has a balance in their 401(k) or other benefit plan account on the first day of the plan year. While not active employees, these individuals have a financial connection to the plan and are therefore considered active participants.
- Terminated Employees – Any employee who was previously terminated but still has a remaining balance in the 401(k) or other benefit plan needs to be counted. Note that only those with a balance on the first day of the plan year should be considered when calculating the number of participants.
- Beneficiaries – Any beneficiary of a deceased employee who is entitled to receive or is receiving benefits needs to be included in the participant count.
Please be aware that dependents and alternate payees under court orders are not considered plan participants.
The rules governing when a benefit plan audit is required can be difficult to understand, especially if it’s your first time working with the rules and regulations for a growing plan. While there are exceptions that allow plans to forego an annual plan audit, it’s best to consult with a qualified professional to review your situation and provide guidance. If you have questions about the 80/120 rule or need assistance with your retirement plan audit, JLK Rosenberger can help. For additional information please call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.