November 15, 2018

What is the 80/120 Rule for 401k Audits?

The rules and regulations surrounding the administration of 401(k) and other retirement plans can often be complex and confusing. Plan administrators need to ensure they are following the framework outlined in the plan documents while adhering to the broader regulations required by the IRS and Department of Labor (DOL). A key consideration many growing plans need to carefully consider is when they are required to receive an independent audit of the plan’s financial statements, also known as a benefit plan audit. The IRS requires that a plan with 100 or more participants (classified as a large plan) undergo an annual plan audit. However, as in the case with most things in life, there is an exception to this requirement known as the 80/120 rule. To help clients, prospects and others understand the rule and how it applies to their situation, Wilson Lewis has provided a summary of key details below.

What is the 80/120 Rule?

It is a rule that permits plans with between 80 and 120 eligible participants on the first day of the plan year to file as a small plan (less than 100 participants) if they filed as a small plan in the previous year. This means that a plan with 85 participants in year one and 110 in the following year is exempt from the annual audit requirement even though they exceed the IRS requirement mentioned above. In order to understand if your plan qualifies to take advantage of the rule, it’s essential to clearly identify the total number of participants in the plan.

Who is an Eligible Participant?

Eligible participants are those individuals that qualify to participate in a 401(k) or other retirement plan and are not limited to only those who choose to participate. While there are many types of eligible participants the most common include active participants, retirees receiving benefits, separated employees and beneficiaries. Below is a brief explanation of each participant type.

• Active Participants – These are current employees that are eligible to participate in the plan through elective contributions or employer matching and deferrals. These are the individuals most commonly identified as being a plan participant.
• Retirees Receiving Benefits – These are former employees that have since retired but are eligible to receive some benefits under the rules of the plan.
• Separated Employees – This includes those individuals that have left the company but still have an account balance within the plan. Despite the fact they don’t work for the company or contribute to the plan, regulations require plan administrators to count them as eligible participants for purposes of audit determination. (There are steps that a plan can take to ensure that former employees are not creating additional administrative issues by not rolling over their plan balances to their current employer’s plan).
• Beneficiaries – These are individuals that are currently or will one day be receiving benefits on behalf of a deceased participant. While not a participant in the traditional sense, regulations require plan administrators to include them as participants for audit determination purposes.

80/120 Decision Matrix

Below is a chart containing key information under what circumstances a plan can take advantage of the 80/120 rule.

Contact Us

The first time a 401(k) plan is required to have an audit can be a challenge for a company especially if the team has no prior experience with plan audits. The good news is you may be able to avoid an audit if your situation meets the criteria for the 80/120 rule. If you have questions about the rule or need assistance with your 401(k) or benefit plan audit, Wilson Lewis can help! For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.