I don’t want to grow up, I want to be a small plan!

Posted by Stacey Snyder

Practitioners in the retirement plan industry are well aware of the fact that most small plans don’t have to undergo an audit by an independent qualified public accountant, while large plans do. When determining the size of a plan, sponsors must look at the number of participants on the first day of the plan year. The general rule is that if this number is greater than 100, the plan should be filed as a large plan – Form 5500, Schedule H with an Independent Qualified Public Accountant audit.

What many practitioners and plan sponsors don’t know is that there is an opportunity to delay the audit just a little bit longer when a qualified retirement plan goes over the 100-participant threshold for the first time. This rule is called the 80-120 rule.

The DOL created the 80-120 rule so that plans that tend to have slight fluctuations in the number of participants from year to year do not have to change their filing status from small to large due to these minor fluctuations. This rule is referred to as the 80-120 rule, simply because it only applies to plans that have a number of participants within this range on the first day of the plan year. However, the rules are not that simple and have been causing a lot of confusion – which is probably why you are reading this!  The rule permits plans that have at least 80 and not more than 120 participants on the first day of the plan year to file the same type of Form 5500 that was filed on behalf of the Plan in the previous year.

To take advantage of this rule, the plan sponsor must have filed a Form 5500 in the previous year, so the opportunity is not available for plans in their initial year, nor to self-funded or fully insured welfare plans that did not have a filing requirement as a small plan in the previous year.  These plans must follow the general rule and file as a large plan on the first year that the number of participants is 100 or more on the first day of the plan year.    In addition, welfare plans are not required to have an audit unless they are funded with a trust, as in the case of a VEBA.

This rule applies when participation is expanding or contracting but most employers would not want to continue to file the Schedule H after the participant counts drops below 100 because it would require a plan audit when one is not otherwise required.  For example, plan sponsors could use the rule to continue to file as a large plan until the number of participants decreases to fewer than 80, but that would not make sense, since it would be easier not to file. The following chart illustrates a practical application of the 80-120 rule for a calendar year plan:

YEAR

# OF PARTICIPANTS ON JANUARY 1st

SMALL OR LARGE PLAN FILING

2007

75

Small

2008

100

Small
Can file as Large

2009

110

Small – unless filed as Large in the previous year or can file as Large

2010

121

Large

2011

110

Large

2012

85

Small
Can file as Large

As the example above illustrates, the 80-120 rule is not a one-time opportunity; plan sponsors can elect to apply this rule for as many years as their number of participants falls in the appropriate range.  The definition of participants for this purpose includes all employees eligible to participate in the plan, regardless of whether they choose to do so, plus participants and their beneficiaries who are no longer employed by the plan sponsor but still maintain an account balance in the plan.

In a nutshell, it behooves every plan sponsor and third-party administrator to know this rule well so that they can help their plan be like a Toys R Us kid that never wants to grow up.

Contact Us

If you have questions or seek additional information on this subject, please contact our Employee Benefit Plan Team.

Maria T. Hurd, CPA
Director/Shareholder
Retirement Plan Audit Services
mhurd@belfint.com
302.573.3918

 

Chris J. Ciminera, CPA, QKA
Manager – Accounting & Auditing
cciminera@belfint.com
302.573.3953

Stacey I Snyder, CPA, QKA, TGPC
Supervisor – Accounting & Auditing
ssnyder@belfint.com
302.573.4137

Photo by sokabs (License)

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